Nepean Mix

Signing Off

2011-01-31T07:04:00.001-05:00

All things come to an end, and now it is time for this blog to end. I surprised myself by lasting for 2-1/2 years, which was never my intent, but as long as the ideas came and I was willing to spend the time to rattle away on the keyboard, it just kept humming along. Mind you, I did not sustain the rapid rate of articles as in those first months when I had more enthusiasm for this small venture.

The reason why I am ending it is very much is resonance with why I started this blog. Like many people I saw that I had some things to say and a blog is a good outlet for that sort of thing. I had (and have) no illusions about getting a large readership, nor was that my objective. I do not promote this blog in any way and the lack of ads shows that it isn't for the money!

Which brings me to the question of why I blogged at all. It's a question I never really touched on in any article. It's a modest reason: to improve my writing skills and to practice communicating insights, even minor ones that I have on topics of the day that tweak my interest in some way. I have, for the most part, shied away from topics I know little about, which explains the predominance of articles about telecommunications and technology, which are topics I know quite well.

I made a conscious decision to not focus solely on subjects I know a lot about. This was to exercise my ability to think thoroughly on topics on which I am not an expert but that interest me in some special way. Another, subtler reason was that to focus too much on topics I know well would inevitably, over time, peel away at my anonymity. Many is the time that I've avoided interesting and timely topics since to write about them effectively would provide a glimpse under my disguise for anyone who knows me or my work. While regrettable, I always chose the path that preserved my anonymity.

But why be anonymous? No, I am not anyone particularly noteworthy with a reputation to protect, although I am known by many people in my domains of expertise here in Ottawa and elsewhere. Identifying myself would not bring undue attention or cause me any harm, and it would have freed me to write more about subjects with which I am closely connected. I also have avoided using anonymity as a shield from behind which I could rant to my heart's content or to smear any individual. I have spoken harshly of some people in the public eye from time to time, but only regarding their actions and positions, and not as an attack on the person (no ad hominems here). My true reason for staying anonymous is a dull one: I like to compartmentalize the separate roles I play in life, whether it be family, business, social, or...as a blogger. It's a quirk, though one that matters a great deal to me.

I end this blog with a long list of untouched topics for which I intended to eventually write articles. Except that I no longer particularly care to do so. With respect to the reason why I started this blog, the 80-20 rule has come into play since I have achieved the 80% of the benefit that comes from 20% of the effort. I have reached the point of rapidly diminishing returns. Taking time for this blog is not the relevant thing here since, as the truism goes, time is something you make, not something you have; that is, you always have the time if you set your priorities accordingly. This is always true except when physically impeded by some external force. The many responsibilities of any adult member of society are not a straight-jacket that fate has wrapped around us; they are ones that we choose not to abandon, although we could do so at any time.

And so I have chosen to allocate my time elsewhere. For those of you who have been reading for some or all of the past couple of years, or even just popped in here from a link or from a search, thanks for stopping by. Your numbers aren't huge but more than I at one time would have expected.

This site will stay up with its full complement of over 370 searchable articles. I imagine that over the months that the traffic will decline as the material gets increasingly stale. That's merely the way of all things, and that includes every one of us, so there is no cause for regret.

Take care and so long.

The 15% Solution

2011-01-27T07:05:00.052-05:00

Every time the CRTC's decision on usage-based billing (UBB) comes up you see the usual talking points from the usual parties. This week's revision to the decision was no exception. What you get is a lot of faux outrage from the ISP community, consumers ranting about evil, money-grubbing corporations, and the incumbents trying to convince everyone how badly the CRTC is hurting them, and the jobs of hard-working Canadians. The media makes sure to give all of them a few lines in the inevitable follow-on articles, giving a bit of free distribution to their public relations departments.

The thing is that this 15% fee reduction by the CRTC changes not much at all. The decision still holds, as does the March 1 implementation date. There was no possibility for a reconsideration of the decision at all, and implying that there was is nothing more than a talking point by those who wish to shift blame onto the CRTC by claiming they've blown another so-called opportunity to do the right thing, where the right thing is whatever it is that most benefits whichever side is speaking.

From all the media coverage I've seen, that appears to have been successful since the CRTC is pretty much without any supporters on this matter. However, I don't see that they've failed at their task at all; they are doggedly, if somewhat clumsily, going about implementing policy, which is pushing the industry toward facilities-based competition. They are trying to make it sound attractive to those paying the price today, although that attempt seems futile.

As to the specifics of that 15% wholesale price reduction, the media generally gets it wrong, as in this Globe and Mail article:

The regulator, as it usually does, has attempted to find middle ground.

No, that's not it. Let's read what the CRTC itself has to say about that 15%:

7. The competitors and MTS Allstream submitted that wholesale UBB rates should be discounted relative to comparable retail UBB rates. The competitors generally submitted that discounted wholesale rates would provide a margin from which competitors can recover additional costs associated with wholesale UBB, including activities related to customer inquiries and potential discrepancies between carrier usage bills and competitor records. The competitors also generally noted that, because retail UBB charges are not prepaid, there is a risk that customers will not pay them. In general, the competitors submitted that the financial risk is more significant for competitors than for carriers because unlike carriers, whose retail UBB rates are not cost-based, competitors must pay wholesale UBB rates to carriers as a direct cost.

This is interesting since you might almost expect that the GAS-dependent ISPs would pass the price straight through onto their customers' bills without any value added, much as they might with government taxes such as the hated HST. I find it funny that they'd argue that suddenly these fees would add such a burden to their cost of operations. While I'm sure there could be some tense moments when a few high-usage customers open their April bills and have an attack of sticker shock, the real impact almost certainly will be less than 15%.

8. The competitors also generally submitted that discounted wholesale UBB rates would permit continued retail service differentiation. They argued further that allowing a discount would reduce what they characterized as an anti-competitive cross-subsidy from competitors to carriers that results from wholesale UBB rates not being cost-based. The competitors generally submitted that GAS and TPIA services are one input among others they use to provide retail Internet services, that these wholesale services are not resale versions of the carriers’ retail Internet services, and therefore that symmetrical wholesale UBB charges are not appropriate. The Canadian Network Operators Consortium (CNOC) proposed that wholesale UBB rates be discounted by a minimum of 50 percent relative to retail rates, to redress various disadvantages faced by competitors relative to carriers.

I'm not surprised that a request for this 50% reduction was rejected by the CRTC since they made it quite clear in their decision and stated policy that the CRTC is not particularly interested in forcing differentiated pricing for the ISPs use of incumbent facilities since they want to promote facilities-based competition. At the bottom of my last article on UBB I noted that the ISPs were finally accepting this point.

Now we come back again to that 15% figure and how the CRTC arrived at it. As referenced above, to some it is a compromise between the ISPs' request for 50% reduction and the incumbents' desire for 0% or, better, a price increase. Let's now look at how the CRTC arrived at 15%.

10. However, the Commission considers that, for competitors, carriers’ wholesale UBB rates are an additional, direct, and unavoidable cost that competitors will need to recover from rates paid by their retail customers. The Commission also considers that wholesale UBB charges will result in additional customer care costs for competitors, including a review of the relevant carrier’s wholesale usage records and associated UBB charges.
...
13. Regarding the amount of the wholesale UBB discount, the Commission considers that if it is too large, the effectiveness of UBB as an economic ITMP will be reduced, while if it is too small, competitors’ capacity to recover costs will be undermined.

14. The Commission concludes that a discount of 15 percent for carriers’ wholesale UBB rates relative to their retail UBB rates recognizes these considerations appropriately.

Somehow I strongly suspect that no one at the CRTC sweated for weeks over detailed spreadsheet financial models in an attempt to calculate or forecast the true costs to the ISPs of passing through UBB fees or the true network costs of the incumbents. Unlike what I said up above, it may actually be that 15% really is a compromise of sorts, since it certainly isn't based on any real analysis of costs. I can just imagine them talking among themselves, concluding with something like:

[Hmm, 25% is half way between 0% and 50%, but for policy reasons we want to dissuade use of incumbents' network. So lets swing the value a little bit in the incumbents' favour.]

Although I've completely made up this conversational snippet it sure seems to be closer to the truth than anything else I've heard in the past day or two.

So get ready to pay these fees starting 5 weeks from now. According to my calculations in that last article, I calculated the overage fees for going beyond 25 GB starts at $2/GB (it declines at higher volumes). I am assuming that the retail pricing stays as is since that 15% discount will not be passed on to consumers. If the ISPs were to do so they would be seen as having been dishonest in their CRTC submissions where they claimed to need an even greater discount to break even on UBB.

Now compare this to the woes south of the border where the dispute between Level 3 and Comcast continues to rage, leading Netflix to say in a financial disclosure document:

...at $1 per gigabyte over wired networks, it would be grossly overpriced.

Keep in mind that Comcast customers pay UBB after 250 GB, not 25 GB, so that half-price deal looks particularly appealing in comparison to the situation here.

In the US the carriers and service providers also have, and frequently make use of, the ability to take the FCC to court. This is now beginning with Verizon and at least one other company on the closely-related topic of the new network neutrality rules. In Canada the options are more limited.

Tuesday’s ruling is being considered the regulator’s final say on the matter. So any service providers who remain unsatisfied with the new pricing model will likely now have to take their concerns directly to Parliament.

Well, Parliament might care, but the government most certainly will not. They, too, have taken actions in the past to promote facilities-based competition, and despite having little love for the CRTC no one should expect that Stephen Harper is about to jump into this shark tank. This is too minor an issue for them to take the risk in what may be an election year. Besides, I suspect they would far rather be silent to ensure that all of the criticism falls on the Commissioners' heads.

It Takes a Lawyer to Shop at Canadian Tire

2011-01-19T11:47:00.000-05:00

If the title of this post makes you think that you're about to read a rant against Canadian Tire, right up front I'll say that this isn't the case. Actually this is about something that happened that caused me to laugh and wonder about the marketing smarts of this retail giant and, for that matter, some of their competitors. Let's begin with a bit of make-believe.

Imagine that your favourite retailer tells you that it has opened a new store. This one is closer, offers a wider selection and promises a convenient shopping experience. Enthusiastic about this welcome development, you make your way over to this new store to check it out.

When you arrive at the store you see a confused mass of people near the entrance which is blocked by a line of burly security guards. You move closer, curious about what's is going on. On the wall above the guards is a large billboard display with a lot of text in small typeface. Most of the faces are looking up at it with looks that range from bewilderment and boredom to anger. You sensibly pay no attention to all of this and move through the small crowd. A guard blocks your path and hands you a slip of paper.

He tells you that you must sign the piece of paper before entering the store. His demeanour brooks no argument. You soon see that the paper contains the same text that is up on the billboard, and it contains a lengthy legal agreement. Skimming the text you see a lot of legalistic language about what you are and are not allowed to do in the store, various privileges that you grant to the store over you and your private information, and so forth.

It's all a bit much to read and to understand, and especially not now that you are here at the store and ready to spend your money. You are a long-standing customer of this retailer so you have some loyalty but you also are annoyed at this encumbrance. So what do you do: toss the paper on the ground and leave or sign it without really reading it and go about exploring the store? You notice that most people in the crowd make their decisions quite quickly, by signing the paper and walking through the entrance.

This story is just a bit bizarre, yet it is exactly what happens when you attempt to use the Canadian Tire app on the Android Market. If you don't accept the enormous legal agreement and all of its terms and conditions, the app exits and denies you the opportunity to shop at Canadian Tire. This is a peculiar way of doing business for a retailer, especially since the market is very competitive, and is about to become even more competitive now that Target, the US retail giant, is moving into Canada. It's astounding to me just how oddly many companies behave on the web or in the newer mobile app world; they either have a terribly low opinion of their customers or they value internal corporate processes more than reaching out to their customers.

Speaking of Target, I decided to check out their app and that of a few other large retailers to see if they were any better. Target does not force you to agree to terms and conditions when you enter the app; they are available to view at your convenience. Well, almost but not quite. When I attempted to do so the app froze during the download. It did this every time I tried. So much for quality.

Best Buy did better, being more welcoming and not misbehaving, but they scored poorly on geographical awareness. It was funny how they successfully used my location to correctly determine my postal code, but when it tried to find the nearest store it choked because it only understood US zip codes. This is clearly only intended for the US market. That's fine if that's their intention, although they should have considered putting a geographical restriction of the app in the Android Market -- which is supported -- to avoid consumers a substantial number of potential customers.

I don't use mobile phone apps for shopping so all of these inconveniences don't impact me. I downloaded the Canadian Tire app to do some research on smart phone apps for my own business reason. That reason was enough to get me to finally agree to their conditions; the research requirement was of greater importance than worrying about the terms and conditions. Although I got what I came for, I am still left shaking my head at Canadian Tire's clumsy entrance into the mobile app world.

Usage-Based Billing as Distribution Fee

2011-01-13T20:37:00.001-05:00

The internet has been a-buzz this week with the news that the CRTC-approved usage-based billing tariff has been approved and is slated for introduction on February 1. I won't repeat what was said (and re-said again and again) elsewhere so that I can focus on a perspective that is being incompletely reported elsewhere. This is the idea that UBB is going to be used as a content distribution fee by the ISP. This is not unlike the stratification that we are seeing in other household utilities (electricity and natural gas) where the delivery fee is scaled to, but separate from, the content (kWh and m3, respectively).

In the case of natural gas, Enbridge has exclusive rights to delivery while competing with others on the content (and on gas-powered appliances). In a similar fashion, Bell Canada has rights, but not exclusive rights, to deliver internet broadband service, competes with other ISPs on a range of connectivity services layered on that basic service (Sympatico), and, in competition with companies world-wide, content. Unlike Enbridge, Bell Canada does not have exclusive rights on broadband service since they compete with Rogers and others for both wired and wireless broadband. The difference is important since they are not a monopoly and that is, apparently, sufficient for looser, or at least more permissive regulation. Thus, UBB.

Putting aside for the moment the Bell Canada's true costs and their justification for their rates, let's look at what they are in effect charging for content distribution. However, we should first not that there is a type of exemption for what are purportedly the majority of broadband DSL users, those whose usage is below the threshold for UBB.

Currently, only a small percentage of users download enough data to hit these new caps. But many fear these fees will soon apply to everyone as the internet becomes more video based.

Since I am a customer of Primus I directly received the widely-reported email that they sent to their customers to outline the new fee schedule, partly to inform us but also I believe to add some fire to the brewing public relations battle. Here is their description of the new fee schedule

Your existing High Speed Internet plan will now have 25GB of monthly usage included
For the minority of customers who exceed this amount, additional usage up to 300GB will be charged at $2.00/GB to a maximum of $60.00/month. Usage in excess of 300GB per month will be charged an additional $1.10/GB
Additional Usage Plans can be purchased starting at $5/month for an additional 40GB

Of course most people have at best a vague understanding of the relationship between traffic volume and content, and until now they haven't had to give it much thought. That is, although video streaming has a large impact on traffic volume, far more so than for voice and music, outside of Canada, even in the US, the caps tend to be much higher than 25 GB.

The service [Netflix] launched here in September, offering movies and TV shows streamed over the Web for a monthly subscription fee of about $8...
...
Video streaming eats up a lot of bandwidth. This isn’t a problem for Netflix in the U.S., where one of the strictest plans is Comcast Corp.’s, which limits users to 250 gigabytes per month. That’s still enough to watch eight hours of Netflix per day. In Canada, Internet providers have capped bandwidth use much more aggressively.

This seems to agree with what I've heard first-hand from Netflix users that one hour of video content is about 1 GB: 1 GB x 8 hours x 30 days = 250 GB. Therefore to stay under the 25 GB cap here in Canada limits Netflix users to under one hour per day. Of course this is misleading since other uses of broadband would already be eating up a substantial amount of that 25 GB. This is especially true in households with several people, including children, where their current usage may already be enough to incur UBB fees.

Therefore let's assume that all Netflix usage is subject to UBB fees. As shown above, Primus will pass along a charge of $2/GB, which translates to $2/hour of Netflix. Since the fee is capped at $60/month, this is 30 hours of content, or one hour per day. If you consume more than 8 hours, and provided you stay under 300 GB/month, the hourly rate will therefore decline in proportion to hours of content. For example, watch 2 hours/day and the effective UBB fee is $1/hour of content. Nevertheless, for that $8/month Netflix subscription you can easily pay far more, $60/month, to the distributor, Bell Canada. Nice, eh?

As a private company Bell Canada certainly has a right to run a profitable business that provides a financial return to their investors while offering a legal set of services that customers value and will pay for. Since they are not a monopoly the regulator is justified in avoiding micro-management of their business, or those of their competitors. However, as we all know too well, competition is limited and is not enough to drive costs down to those of comparable companies in other markets. With effective competition not only would prices come down but customer service would improve and they would use every business and technology trick-of-the-trade to drive down costs even further so that they can lower prices further.

As matters stand, their profits are not outrageous but they are misleading since they have limited incentive to lower costs through increased productivity. For those of us outside of Bell Canada (and even for most within the company!) getting a true picture of costs, and of costs that can be well-correlated with any one or several specific services, is nigh impossible. Yet that doesn't stop many commentators from declaring that Bell's costs are really much lower than they are saying, even though Bell doesn't break this out in their financial reports (and probably couldn't do so if they wanted). The CRTC does see some detailed service costing information, which is kept confidential for good reason, but this is almost certainly massaged to Bell's best advantage while still appearing credible. The CRTC's ability to challenge those figures is limited, even though they are sometimes foolish enough to think they should.

This brings us to CRTC telecommunications policy, a subject I've covered many times in the past, which is focused on promoting facilities-based competition, not retail competition layered on incumbents' networks, as the appropriate way to achieve true competition and market-driven pricing. Interestingly, this point is finally striking its mark, just as the CRTC (and the government for that matter) have intended.

Andrew Day, the chief executive officer of Primus Telecommunications Canada Inc., says that, taken together, the CRTC’s recent decisions provide a clear view of the future, including what it would cost to own and compete over more of its own facilities; in short, becoming what is known in the industry as a “facilities-based” competitor that owns its own network, such as Bell or Rogers Communications Inc. “It gives clarity to competitors on how to make investments going forward,” says Mr. Day. “You now have perfect information to put forward a facilities-based business case.”

Unfortunately, as I've also said before, facilities-based competition is neither quick nor cheap, so don't hold your breath. Wireless competition will help but only in part. We'll have to wait to see if CRTC's policy will truly create effective alternatives across the country, even if only in some urban centres. Everyone will benefit, including Bell Canada and the other incumbents in the long term as they adjust their cost structures to industry norms.

Congestion, Content Buffering and Complexity

2011-01-10T07:46:00.017-05:00

Just as a chain is only as strong as its weakest link, a network connection can only be as fast as its slowest link. An IP network is comprised of many connections and routers, and the path that each packet takes can be change during the duration of a connection (such as downloading a web page). Depending on congestion and routing the effective transfer rate can greatly vary during a connection. Usually the weakest link for many users is the speed of their ISP access service, and is therefore where congestion is most likely.

[As an aside there is also a lot going on under the hood, so to speak, to make internet data communication work, and can also bear on congestion. The ISPs and carriers employ many network design and operations staff, automated and manual network management, and all the hardware and software (and real estate) to keep things flowing smoothly. Data transport below the IP layer -- which can include, among other things, DSLAMs, multiplexors, ATM and MPLS -- and applications above the IP layer -- HTTP, SIP, RTSP,etc. -- are unconcerned with all of this network-layer stuff, and so I will ignore it all in this article.]

Congestion is a large topic which I will not attempt to cover in this article. What I do want to discuss is one aspect of congestion management, and that is network content caching. This is, in brief, the technique of reducing network congestion by placing content closer to the user. This is accomplished with a cache of files or other popular content that the network will redirect to when requests are received. Sometimes it is explicity accomplished with mirror sites, which you have likely encountered in the past, or implicitly in a manner that is transparent to the user.

I was reminded of this when I read this article in Ars Technica about buffering. There are a few things that bother me about this article, although it is generally pretty good, since it blends together topics such as congestion, buffering, latency and caching as if they were the same rather than the closely linked but separate items that they are. I don't want to dwell on the article too closely except to, I hope, add some clarity with the following observations:

Bit-km as the network loading metric: The object of mirror and cache sites is, in large part, to reduce the overall load on the internet across all of its component networks. If we exclude data compression -- the largest downloads are media files, which are already compressed -- we can only reduce network load by reduced the distance between the user and the content. If you are in Ottawa and you want to download a movie, the bit-km is lower if the content is cached, say, in Toronto rather than Los Angeles. The content is transferred to each cache once, and each local user doesn't tie up transcontinental network capacity.
Congestion has a time-frame: Imagine you are at the supermarket and you are looking for a cashier. If there is one free you would rush over there, avoid congestion for your transaction. If they're all busy, with other customers queued up at every cashier, you encounter congestion. Come back a few minutes later and you may find there is, again, a free cashier. This is an example of periodically high short-term congestion but low long-term congestion. The grocer's challenge is to engineer an acceptable amount of short-term congestion (long-term congestion is almost always bad) to optimize their economic outcome by balancing their costs and your continued patronage. Networks are similar, where there is some tolerance for short-term congestion as long as long-term congestion is kept under control.

When we talk about buffering in general it is about those line-ups, whether it be for cashiers or routing to the next link in a network data path. This is more about the impact on latency since caches and mirrors don't really affect congestion in the long run. The reason is that the network operators follow good engineering economics practice by only provisioning enough capacity to meet the demand; caches and mirrors reduce the overall demand and therefore the required amount of equipment and transmission capacity. Similarly, the grocer doesn't like cashiers sitting around doing nothing since it costs money, although as a customer you certainly prefer it that way. However all customers potentially benefit in both cases since with lower costs there can be lower prices.

Unfortunately all this efficiency has its own costs. Grocers have to do manage employee numbers and schedules against predicted -- never certain -- customer demand, just as network operators have to manage choice and placement of caches against predicted demand for that content. That complexity isn't free and therefore must be carefully assessed in every situation. All these systems add complexity to the network and create a need for specialized skills to manage the complexity. This is not only costly but also creates more failure modes. There have to be compelling cost reductions before taking on the risk of going down that path.

Against that complexity is the relative simplicity of adding more network capacity. This is a less-risky choice since it means doing more of the same thing: equipment, staff and processes. In addition, the costs are more predictable if, possibly, higher. Oftentimes throwing more capacity at the problem of both short-term and long-term congestion is the superior solution, at least until the pain of doing so becomes financially unacceptable.

If you want to come up against this first hand, try to sell a network operator on installing a new type of equipment into their network to solve the congestion problem. Should you succeed, congratulate yourself on achieving a monumentally difficult objective. More often you will fail but rarely turned away cold; the person you are selling to may know the potential benefit of what you're selling but will also know the risk to them (both personal and to their employer) of choosing unwisely. It is tempting to instead call up the Cisco sales rep and order a few more blades for those routers that are already running the network just fine.

User-transparent caching (or buffering, if you prefer) sounds good in theory but can be very costly in practice. Beware discussions of this topic that fail to mention complexity, cost versus alternatives, and reliability.

New Year Market Reversions

2011-01-07T07:39:00.005-05:00

Thursday was a peculiar day for me on the stock markets because pretty much my entire portfolio went up, and in some cases by a ridiculous amount. In one case the stock price climbed after an earnings warning. This is all very nice, but nothing to get excited about since there have also been days when the reverse happened. It did however get me thinking once more of some of the pricing peculiarities that can happen in the days before and after the turning of the calendar.

You may be familiar with tax-loss selling, where you sell shares of stocks before year-end to capture the loss to offset current or future capital gains. This effect can drive the price of a stock down further in December when it is already in a marked downtrend. If only one could reliably know that a stock price is being artificially depressed by tax loss selling there is an opportunity to make a quick profit in January. The theory being that the stock will rise once more when the selling pressure ends at December 31 (minus 3 market days to account for trade settlement). I have seen a few losers in my portfolio rise substantially this week, but I have no idea if this is the reason.

The other new year effect is selling winners in early January. These are the stocks that have had a good run and investors want to realize some of their profit. You would choose to sell now because the gains are realized in the new year, and therefore capital gains taxes are (usually, but not always, depending on how closely CRA is watching you) paid in the subsequent years. In this case, 2012. Therefore we expect a tendency for stocks in an uptrend to suffer a setback in January and recover thereafter. Again, I have seen examples of this in my portfolio but I cannot claim that this is the reason.

For example, gold has just suffered a persistent decline all this week (as have the gold miners) after reaching new records in December. Perhaps this is a case of selling winners or perhaps people are truly bullish on the economy and no longer see an advantage of holding too much gold.

In my case I sold about half my holdings in a gold miner just before the new year, thus violating the January rule I outlined above. Here we see another effect that acts as a counterweight: RRSP. Since the gains (income, really) of stocks in an RRSP account are not realized until deregistered (explicitly or mandated subsequent to retirement) there is no advantage to watching the calendar too closely to make those buys and sells. Except, that is, to capture the benefit of others trading to their capital gains and losses: buying winners that dip in January or buying losers that dip further in December.

My own sale of that gold miner stock was done to capture the uptrend in advance of what I believe is an ongoing bull market in stocks and a corresponding decline in gold later in 2011, not about capital gains or losses.

Of course this discussion is not terribly useful now because most of the new year pricing impacts have already taken place. It is still useful to keep in mind eleven months from now. What you can do now, however, is review the past few weeks of price movements in your favourite stocks and see if you can spot examples of new year reversions, both losers and winners. It could be very educational.

Disclosure: I prefer to avoid mentioning specific stocks in my portfolio even though I highly doubt that would ever affect the stock mentioned. Therefore, no companies are named in this post.

Skype Outage Changes Nothing

2011-01-05T07:16:00.030-05:00

Skype suffered a wide-scale outage recently and it doesn't matter one bit since it will keep being used, will keep adding new features and will in fact keep growing. Does this seem counter-intuitive? If it does, it may be because of falling into the trap of comparing Skype (or similar services) to wire telephony service where reliability remains a key metric. The media, even the technology trade media, has largely fallen into that very trap. This is the wrong way to assess Skype's episodic woes.

A good indication of what I see going on is by comparing the Skype outage to this week's woes of the iPhone and its new year alarm glitch. Even though Apple at first responded in the same negligent manner as they did when their antenna problems came to light earlier last year -- by saying that the problem would self correct in a couple of days, which it reportedly did not -- I would imagine that no one expects that iPhone users are about to jump ship and buy Android phones. It just won't happen, nor should it.

Skype, like the iPhone, has a tremendous amount of consumer acceptance -- an emotional attachment -- that is very tolerant of occasional failures or even persistent problems. In their eyes, the benefits are so overwhelming that the negatives do nothing to change their views. Indeed, they will even rush to defend their favourite product or service when it comes under attack during these inevitable screw-ups.

One bit of link bait I read (which I won't link to!) claimed that Skype's outage could irreparably harm its increasing acceptance among business users. I and many of the people I work with are Skype users and although the outage was annoying I heard not one peep from my Skype contacts about how angered and upset they were about it. In fact no one said much of anything. The media, too, has gone quiet, or at least they merely moved on to the iPhone alarm problem as the next great headline fodder.

No one seriously compares Skype to their wired phone from Bell Canada or other telephone companies. They are instead seen as complementary, and also complementary in some respects to mobile phones. The reason is that Skype is really good at doing some important things that the humble and oh-so-reliable telephone cannot:

Cheap: I can make long international calls (which I do for business) at zero cost.
Features: Conference calls are a breeze to set up and manage, I can check on a person's availability at either a glance or with a quick text message, the audio quality is good, there's video and more features that I are nice to have even if I don't use them much or at all.
Convenience: It works like a good-quality speakerphone or I can attach a headset to the PC for even better quality.

It works so well that I even use it for local business calls, despite the flat rate on the home phone. But what is more pertinent is that when Skype fails I still have several alternatives to reach people, including both real time communications and non-real time messaging. That is, I don't depend on Skype the way we once were utterly dependent on a monopoly-operated telephone system. In the case of the iPhone, I doubt that anyone this week couldn't similarly find several devices that would wake them up.

Conversely, Skype and its ilk are not about to render the phone company obsolete, or at least not so fast that the carrier industry can't adapt. They did it with wireless and the internet, and they could do it again, despite the distraction of cord cutters. However this is not to say that there is not a real threat that causes concern in some quarters.

Experts say companies like Skype operate in a legal grey area and that the notice is a warning to them not to grow too big or to challenge the state-owned telecoms...“This notice is actually protecting the telecoms' traditional voice services,” said Mr. Kan, [a director of China VoIP & Digital Telecom Inc., a company that has offered Internet phone services] who is also a professor at the Beijing University of Post and Telecommunications.

This is also why Skype and Google Voice had to scale back their mobile phone apps on carrier-locked smart phones, achieving an uneasy and unstable compromise between keeping users connected and protecting (to a degree) carrier voice revenue. It is unstable because the marginal cost of voice minutes is very low, and getting lower, and more people are realizing that simple truth.

Ofcom also found that cost, more than anything, determined how long people talk for and whether they prefer a landline or a mobile call.
...
Less talking does not necessarily mean less phone use. According to Nielsen the number of paid texts per subscriber has grown rapidly over the same period, recently surpassing 700 per month.
...
Skype, the internet phone service, is growing rapidly. In the first half of 2010 users racked up 95 billion minutes in voice and video calls.

For the present, Skype will continue to grow, as too will Apple and Google, among others. They will do so despite episodic glitches and outages since their perceived value is high. The carriers will continue to generate profits for their shareholders, but without the same enormous growth or even any growth at all. Of course the landscape could change sooner rather than later since it is a market ripe for massive disruption by the persistent march of technology.

On Reading Orders by Telecommunications Regulators

2010-12-31T07:18:00.010-05:00

Going by this site's web statistics, the most popular of my posts are those regarding CRTC rulings and orders. I suspect this is because of the relatively scarcity of in-depth discussion (from what I've found) on the web of actions of the Canadian telecommunications regulator. This is in contrast to the FCC in the US where every slightest movement on their part is analyzed -- whether rigourously or superficially -- by hordes of bloggers and more-mainstream media outlets. I wish there were more attention paid to the CRTC.

For the public, or at least those that pay more than the most casual and passive attention to regulator actions, there is a dilemma: to get beyond superficial, and sometimes misleading, reporting it is necessary to go the source and read the orders and rules that they publish. It seems that not many do this, other than the companies directly subject to those orders and rules. These companies -- typically telecommunications carriers and service providers, but sometimes their major suppliers and customers -- not only read what the regulators publish but are deeply involved in the process and have many specialists and contracters that understand the process and the network of people to influence to achieve their business objectives.

One big reason that few among the public get involved or even just read the material is that it is time-consuming. It is somewhat surprising that there is more of this avoidance in Canada since, in comparison to FCC orders, those by the CRTC are not difficult to digest. The reason is that the CRTC has more latitude than the FCC to both set policy and establish regulations. The US telecommunications regulation process is more politicized and by dint of the governing statutes there are many avenues to take the FCC to court to dispute the legality of their regulations; Congress writes telecom laws that go into an unusual level of technical detail regarding what the FCC is required and permitted to do. This is why the FCC is replete with staff lawyers and far more lawyers are employed by the industry.

A good case in point is the recent FCC Report and Order on network neutrality: FCC 10-201. This is a big document weighing in at 194 pages. It is far easier for the public to wait and read the summaries and analyses in the media and on the web. Unfortunately a number of these analyses are less than ideal since the writer may have an agenda, whether to influence the public or to stir up controversy in an effort to gain readers (aka link bait) and without some knowledge it can be difficult to know whom to trust. (Whether I am trustworthy on that score is moot since, because I see little in the Report and Order I want to comment on, I will not be providing any analysis of it.)

Beyond the mere page count, the core content of the FCC document where staff analyzes the issues and assessing the balance between their objectives, the law and the positions of intervening parties, is full of detailed legal references and written in a manner that is meant to withstand the gauntlet of the justice system. On the positive side, the core content of the document is far less than those 194 pages. That is fairly typical of FCC Reports and Orders. Here's my page count of the various parts of the network neutrality document:

Table of contents: 1 page
Discussion and determinations (the core of the document): 83 pages
Procedural matters: 2 pages
Rules: 9 pages
List of commenting parties: 16 pages
More discussion: 22 pages
Statements of Commissioners: 60 pages

So there you have it: 9 pages out of 194, or less than 5%, contain rules. This is dwarfed by the 60 pages of Commissioner statements, which are mostly from the Republican dissenters. Unless you are enthralled by the political angle of telecom regulations you will most likely not miss much by skipping these 60 pages. Even less enthralling are the 16 pages of lists of people and companies that participated in the process (such as it was in this instance).

In fact the really interesting stuff isn't actually the rules themselves but the main body of discussion regarding how the FCC reached its determinations. While this is still 83 pages, a very rough guess on my part is that close to 40% of that is footnotes. For the casual (!) reader it is fairly safe to skip those, which leaves about 50 pages of text. This is a less-daunting chore since we have managed to exclude almost 3/4 of the document. A deeper reading of the document, unfortunately, will require reading some of those footnotes, but only the ones that provide background and not those that are legalese that are intended to buttress the FCC's legal position. That isn't so bad.

Although it is possible clear the clutter to reduce the quantity of reading one must do, it does help to understand the unwritten rules of the regulatory and political games underlying the proceeding, and a bit of history regarding how these things tend to unfold. That is one advantage I have since, although years ago, I once participated in these types of US regulatory proceedings. Even so, my guess is that a careful and intelligent reader who is not prone to irrationally clinging to preconceived notions will get a lot more out of the network neutrality debate, or any other contentious regulatory issue, by going to the source and reading the material published by the regulator rather than relying on others; these others may have biases or filters of convenience that distort their reporting or analysis.

The downside is the modest time and effort required to read these documents. My experience tells me that the learning curve isn't steep, so after the first one or two it gets much easier -- there is even a sort of primer in the case of the network neutrality order in the form of a 5 page press release. If you care deeply about network neutrality, usage-based billing or one of the many other current issues being considered by US and Canadian telecom regulators, reading the core content of these publications can be time well spent.

Plausible Deniability in Telemarketing

2010-12-22T07:05:00.023-05:00

By now I'm sure that everyone has heard about the fines levied by the CRTC for do-not-call registry violations by Bell Canada, Telus and various firms that they contracted. The only real surprise to me in this matter is that the CRTC took enforcement action of any significant degree.

Although the CRTC claims that these fines -- $1.3M in the case of Bell Canada -- will hurt these firms, it really does not. Not only are these amounts very small relative to their overall business, considering the degree and duration of these violations it is also quite possible they made a net revenue gain after paying the fines. The only company that may have been hurt badly is Xentel, which was fined $500,000 since it is a far smaller company.

The style of enforcement is interesting since it resembles the actions taken in the US by the FCC when they began enforcement of their DNC regulations. First, they targetted large companies, including carriers like AT&T, and also DBS (direct broadcast satellite) providers, and they timed and bundled enforcement actions to maximum media impact. This is an effective tactic to combat public unhappiness with ongoing DNC violations. Going after the biggest companies, especially those that are dominant in their sectors, also works well since there is always an undercurrent of distrust and dislike of these companies that we are often unable to avoiding giving our business. The CRTC might therefore have adopted their own tactics in hopes of achieving the same positive public relations impact.

There is also the simple fact that large companies, if only because of the size of their businesses, are going to show up in the list of top offenders.

...the wireless sector had the distinction of taking the top three spots with Rogers and Telus ranking second and third respectively. There were also hundreds of complaints against Canada's top financial institutions and retailers including RBC, CIBC, Scotiabank, TD Canada Trust, and Sears.

Regarding the companies themselves, it is not unusual for companies like Bell Canada and Telus to outsource what they would consider non-core functions. It allows them to maintain business flexibility by contracting services as needed without building up an in-house telemarketing operation -- including the bad optics of then laying them off.

It also has a further advantage of giving them plausible deniability when the CRTC comes knocking. This allows them to claim that the contracted companies were renegades that (plausibly) violated the DNC regulations without explicit direction from themselves.

On Monday, Bell said it had terminated contracts with two telemarketing companies and suspended “several others” as a result of the investigation. Like Telus, Bell pledged to stiffen guidelines for telemarketing practices.

The deniability is plausible, but I simply do not believe that they did not know of or contribute to the violations by the contracted companies. I am not implying that they gave their contractors explicit directions to ignore the DNC registry, only that I can easily imagine there was a bit of "nudge, nudge, wink, wink" going on in parallel with the more formal instructions. Consider these points:

The duration of the violations.
The reputation of some of these firms is not always the best. They are often known to be aggressive in their methods for their other customers, such as charities. They would also have known which numbers were most likely to get a positive response from their historical database, although I of course don't know if they used that data in their contracts with the telcos. I can only suspect the possibility.
Many of the numbers from which the telemarketers won business for the telcos must have been on the DNC list, and telcos should have known it. I'll bet they were careful not to cross-check the two lists.
Worse, many of those numbers must have also been on the companies' own opt-out lists of people that explicitly requested that they not be contacted. The CRTC mentioned this point, though not quite in the same context.

Although plausible deniability does not excuse Bell Canada and Telus from paying fines and making other restitution -- and I doubt that they would have ever thought it would -- it does help them smooth over the inevitable public outrage by (as shown above) promising to do better in their contracting practices in future. In other words, they take responsibility while also shifting the ultimate blame to others. I think it is more likely that they knew exactly what they were doing and set things up so they could offer the plausible deniability excuse when trouble struck. The script they're following looks too perfect to support their innocence. However this is only my speculation, not an accusation.

Lunar Eclipse and Overwrought Coincidences

2010-12-21T07:44:00.024-05:00

Lunar eclipses are delightful to watch. I've witnessed the more awesome spectacle of a solar eclipse, but lunar eclipses win in the long run because they're more frequent, are visible to half the planet, last a long time and are pretty and safe for viewing.

This one is being aggressively promoted in the media as special because it coincides almost exactly with the solstice. Since the advance of the lunar nodes (the azimuth of where the Moon crosses the ecliptic) is not in resonance with Earth's orbit around the sun, this particular coincidence is no more or less probable, or interesting, than an eclipse falling on any chosen calendar date. All this coincidence really tells us is that we can finally look forward to increasing hours of daylight and solar insolation (although the weather doesn't start warming up until February).

One coincidence that isn't a coincidence is that this eclipse occurs at a full moon. This "insight" comes from an interview with some new-agey sort of person that I heard on the radio. Well, duh! I suppose we can also add the, um, coincidence that we see the eclipse occuring at night. These facts are about as coincidental as a flipped coin that lands head's-up showing an impression of Her Royal Highness. It is also why this eclipse will not be visible from anywhere in Antarctica -- the explanation of which I'll leave as an easily-solved puzzle for the geometrically inclined.

Apart from the obvious things about lunar eclipses, there are a couple of items that are less widely considered. The first is that when we see a lunar eclipse, if someone is on the moon (anywhere on the hemisphere facing Earth) they will be simultaneously viewing a solar eclipse.

...the view from the moon during the eclipse, with the Earth in front of the sun, would be a spectacular red ring in the black sky.

It should be no surprise that the colour of the scattered sunlight from the Earth's atmosphere (from its visible circumference) is brownish-red (or copper) since that is the tint the moon takes on during the lunar eclipse. In similar fashion, the frequency of solar eclipses for Moon dwellers is the same as lunar eclipses for Earth dwellers. From the Moon, the apparent diameter of the Earth is quite a bit larger than the Moon appears from Earth and so is more likely to cover the sun.

However, there are no "terran" eclipses when the Earth is full (Moon between the Earth and sun) since the Moon's shadow never covers more than a small area on Earth's surface. That occurs when we on Earth see a solar eclipse.

The second interesting thing about lunar eclipses I want to mention refers back to an earlier post of mine that talked about why the full moon always passes high overhead during the winter months at higher latitudes, like here in Ottawa (also at high southern altitudes such as southern Chile); however that, too, is no coincidence. What this means is that the best lunar eclipses are those that occur around the winter solstice, just like the one this week, because the Moon will pass high overhead for optimal viewing.

Unfortunately this is also what I have always hated about lunar eclipses, because the best ones occur when you have to endure cold winter nights if you want to watch them properly. They're never quite so nice when seen through a window, which in any case will be difficult since in many houses the Moon will be so high as to be blocked by the eaves of the roof. In other words, to stay warm while watching this eclipse you'll probably have to deal with window-glass distortion and an uncomfortable viewing angle.

Despite having said all this, my plan (I am actually writing this the night before) is to stay warm and in bed and pass on the joy and the cold. Anticipation for this event by people here in Ottawa may be for naught in any case since it now looks as if clouds are going to spoil the event. Well, there's always the internet so I'm sure there will be lots of photos making the rounds on astronomy blogs Tuesday morning.

Central Banks vs. Public Debt

2010-12-17T07:07:00.027-05:00

Imagine that there is a car in front of you that is suffering from a range of mechanical ills: wheels out of alignment; needs an oil change; transmission won't reliably shift into reverse; and so on. Someone then places a tool in your hand and tells you to get to work. You look down and what you see is that you're holding an impact wrench. It's a very powerful tool but wholly inappropriate for most of the work ahead of you. However, it's all you have so, good luck, and give it your best shot.

Central banks are often in a similar dilemma: the economy can suffer from a variety of ills due to many and complex causes and inter-relationships, yet they must attempt to get the economy back on track with pretty much one tool, that of monetary policy. They are often smart enough to do the best they can with the tools they have but without access to a wrench and other useful tools there is a limit to what they can realistically accomplish. Often they must resort to leveraging the grand stature of their institution by giving speeches and influencing those holding the proper tools -- industry, consumers and government -- to effect desired outcomes.

Consider this quote from Peter Foster's opinion piece in the Financial Post:

“Cheap money is not a long-term growth strategy,” warned Mr. Carney during a speech in Toronto on Monday. But where did this cheap money originate? Also, from what I can remember of economics 101, cheapness is a signal to purchasers to buy, and that includes buying money. People are acting entirely rationally. The only problem is that they are likely not aware that they may have been lured into a cul-de-sac by delusions of macro management.

And this one by Maxime Bernier, also in the Financial Post:

Mr. Carney offers us three “lines of defence” that are clearly an admission of impotence.

Here we have Bernier, a government MP and former cabinet minister, complaining about the BOC's impotence when it is the government which sets the BOC's powers. It is amusing that he then goes on to complain as follows, in effect the pot calling the kettle black. For his part, Foster blames Mark Carney for only having, and then using, the limited toolkit he's been provided with by the government (elsewhere in the piece, he also seems to be confused about the respective roles and powers of the BOC and the federal government).

It is the government, not the central bank, that has the better toolkit for repairing the economy. This starts with building confidence among the true economic players: citizens, both as consumers and business owners. They could also use their powers over taxation which can be used to more accurately target problem areas than is possible with the central bank's interest rate policies. For example, the government could lower corporate tax rates, which would have the affect of encouraging private sector investment and hiring similar to lower interest rates, but without simultaneously encouraging borrowing. That is, leave more capital in the hands of those entities that can give the economy the push it needs.

There have been attempts by the BOC and the government to blame the banks since they are the ones we go to for our borrowing needs. This is unfair: the banks lend money as a business proposition and make loan decisions based on risks associated with both the broader economy and the individual borrower. Ed Clark, CEO of TD Bank has quite rightly deflected the criticism right back at the government. The points he raises in this article are spot on in my opinion. If the government, for example, wants to rein in low-quality mortgage risk -- most commonly associated with the longest-terms with their lower monthly payments but high interest costs -- they should prohibit them.

Speaking of blame, we should also beware playing the blame game when it comes to the US Federal Reserve or the Bank of Canada. It is easy to point fingers and they are tempting targets. Yet they would have an impossible task if they are the only institution expected to right what everyone else has set wrong. They can ease interest rates lower to make it less expensive for consumers and businesses to spend and invest, but that policy can spark investment bubbles and inflation. Go the other way and, as happened so famously following the 1929 crash, and we can be pushed into a deep depression. Finding an optimal middle ground, if it even exists, is more than a little challenging for a central bank.

Even so, Mark Carney is not being entirely forthright regarding debt and, as I will come to, neither is the government. The Governor's warning goes something like this:

When rates do begin to rise again, Carney said, the repercussions may be fierce and have the potential to catch many with debt loads they can no longer afford.

This is true and, although there are words of agreement from Flaherty, there is no mention of the government's own debt problem. They tell us, as individuals and as business owners, to be careful not to take on debt that we cannot easily repay when interest rates rise once more, while at the same time the federal government is taking on over $50B of debt in the current fiscal year. That is not really government debt; that is public debt. On our behalf the government is borrowing money against the wealth and wealth-production capacity of the Canadian public. That debt, too, could easily become difficult to repay when interest rates rise.

There is a measure of hypocrisy when they fail to discuss government-incurred debt, debt which is also our debt and subject to the same risks. I do not mean to criticize the government having used this debt to smooth over the worst impacts of the economic air pocket we've just been through, just that they should not avoid lecturing themselves at the same time they lecture us. The lecture is a good one for both the private and the public sectors.

The thing is that Flaherty does intend to rein in spending, eventually, and so he has missed an excellent opportunity to lead by example and explain how both types of debt are due to public borrowing. Perhaps he is being cynical in an attempt to retain some flexibility to keep spending, and taking on more public debt, for a while longer.

The question is even more pertinent in the United States where Federal Reserve Chairman Bernanke is thinking of the extreme government debt policies he has been pushing, including financial sector bail-outs, which very much depend on keeping interest rates low at least until some of that debt can be extinguished. We had all better hope that he does a good job of juggling interest rates and debt policies since if he or the US government stumbles the Canadian economy will also suffer.

Cord Cutters: Small Numbers Matter

2010-12-14T07:57:00.009-05:00

One of the more-recent terms being tossed about in the telecom trade press is that of cord cutters. It is being applied in particular to cable customers that terminate their cable service, including TV and broadband, in preference for some alternative. There are not many alternatives. For TV it is OTA (over the air) broadcast, satellite and, in a minority of cases, telco fibre such as Verizon FiOS.

The questions are whether the phenomenon is real and, if it is real, is it significant? To date the number of these cord cutters is deemed to be small since the quarter-to-quarter downward move is vanishingly small. Yet it is not this small drop that is the question, since it could be a statistical blip or a temporary impact of the recession, but rather that the growth has vanished. Growth matters since that is what investors want, generally preferring that (if the choice must be made) over flat but reliable dividends.

Cable TV has certainly reached market saturation years ago, so that it can only move higher as the population grows; it can also rise if service were to be extended to more rural areas, but this is unlikely to ever occur. In other words, it is the cable companies' business to lose, just as telephony has played the same role for the telephone companies. With growth in raw subscriber numbers stalled, cable growth must come from increased ARPU (average revenue per user). The required growth has at different times in the past been satisfied with incremental channel tiers, PPV (pay per view), broadband and telephony. PPV is under threat from the likes of Netflix streaming entertainment, telephony continues to grow a slow place, while fibre, DSL and especially wireless are increasingly meeting the needs of bandwidth-hungry consumers. It appears that this is one of Comcast's motivations in their current dispute with Level 3, even as it pushing to consummate the deal to purchase NBC Universal to gain control over the content their competitors need.

Unfortunately for them, simply raising rates, either directly or by usage-based billing, only makes competitive alternatives look more attractive. Although the alternatives are not many and not particularly cheaper, every upward tick in the price does drive a small percentage of subscribers to defect. This is an important signal for a couple of reasons. First, every dollar of revenue lost falls almost immediately to the bottom line -- profit -- since many of their costs are not elastic, or at least cannot be reduced quickly.

Second, and perhaps more importantly, demand can fall far more precipitously than it rises. That is, like an avalanche, one modest snowfall or a quick thaw can trigger a sudden dislocation of the snow cover. The cable companies are treating their customers like the proverbial frog in a pot of heating water, except that people are (usually) smarter than frogs and will jump out when the heat becomes uncomfortable. This is more likely to occur when the market, like theirs, is saturated. For a comparable situation you should read this nicely done analysis of RIM's woes.

To conclude, it is not the small number of cord cutters that matter but the trend and the increasing motivation of their customers to defect en masse. We can only know that this is truly occurring after the fact in a retrospective analysis. Nevertheless, whether we are cable company investors or customers it is a situation that could reward close attention over the coming year.

Influencing Network Neutrality Outcomes

2010-12-07T07:20:00.040-05:00

One thing you will likely notice when you pay close attention to any public policy discussion is that every party to the discussion will attempt to steer the outcome in a direction that serves their own interests. This is especially evident when there are different and divergent views. A common technique is to frame (or spin) the very definitions of the foundational ideas and catch-phrases to align with their preferred mode of thinking about the issues. This is equally true when it comes to network neutrality.

I my previous article I drew attention to this definitional issue. The issue exists because there is no broadly-accepted or legal definition of the term network neutrality; the legal definition is the more important of the two since it will persist and be enforcable even when discussion becomes confused. In the article before that one I listed a few major alternative, but not necessarily mutually-exclusive meanings of network neutrality. Every party to the discussion tends to list of wants in their particular definition of the term, and this is true whether it is consumers, carriers, content providers, the FCC and politicians. Even academics and industry analysts need to watched carefully since many are not neutral on neutrality; many have identifiable interests or ideological perspectives that can bias what they say, and the media tends to highlight those with the more extreme views.

Interested parties are therefore angling for influence and see the public relations battle as one where they want the prevailing understanding of network neutrality to align with their interests. It is also important to note that in addition to defining network neutrality, they also wish to define what it is not. For example, a network owner with media interests (such as Comcast or Bell Canada) might like to exclude equal traffic priority for other content providers from the network neutrality debate.

When these companies wish to create public support for their ideas they will target their messages accordingly. For the peoples' representatives in political office they will talk of (and exaggerate) the number of jobs and economic activity, including taxes, for which their industry is directly and indirectly responsible. However they will often choose to not mention the future potential for economic growth if other industries and business models are enabled by forms of network neutrality that are less friendly to their business interests. Being well-established with deep pockets they also have the capacity to contribute to politician and party campaign funds, and that gets them a degree of access and influence that may not be available to others.

They will also stoop lower to get the public support they need. For example, they might announce that if they can't throttle, otherwise manage or charge extra for heavy-duty downloaders -- which network neutrality, they say, will make impossible -- the pipes will get blocked up and you, dear user, will have trouble downloading dancing baby videos from YouTube. "Oh noes!" You might say to yourself, that's unthinkable, so of course network neutrality shouldn't allow that from happening:

Fourth: Network management. ISPs need incentives to run their networks, and we want those networks to be the “freest and fastest in the world.” Therefore, “reasonable network management" will be allowed in order to deal with harmful traffic, congestion, and other network problems. Again, we'll need to wait for the rules to see what might count as reasonable and what might not, and who decides.

The regulator itself is a party which has its own self-interest to protect. It is said that the first priority of any bureaucracy is to continue its existence. Therefore in the coming meeting we should expect the FCC to promote a view of network neutrality that requires FCC oversight, ensuring their continued relevance for years to come. Their task isn't easy since they must navigate the obstacle course of unfriendly politicians and industry power to develop policies and regulations that also maximize consumer interest and the national interest. All you have to do is read through last week's statement by FCC Chairman Genachowski. Consider, for example, the following sentence:

Informed by the staff’s additional legal analysis and the extensive comments on this issue over the past year, the proposal is grounded in a variety of provisions of the communications laws, but would not reclassify broadband as a Title II telecommunications service.

Notice how they've backtracked on reclassifying broadband as a telecommunications service, and therefore the non-discrimination aspects of common carrier law, to appease voices in Congress that want to assert their own power to determine policy. Statements like these are a good way to keep score regarding how successfully the various interests are wielding influence.

It isn't just the FCC that has to navigate the minefield: the same applies to the industry players themselves. Think back a couple of months to when Verizon and Google published a joint position on network neutrality. The predominating reaction that I noticed was one of outrage from the public, and even some of the companies that compete with one or both of these behemoths. The FCC itself was more circumspect. At the time I mentioned that this was one was to promote progress on a contentious public policy debate since the regulator and the government are potentially freed from having to (unavoidably) upsetting the status quo, creating both winners and losers; if the contenders agree up-front, that can create the conditions for an acceptable compromise.

The reality of joint-company proposals such as that by Verizon and Google are unfortunately less than they may seem. It is most enlightening to actually read the statement. I recommend doing so although it's a painful document to peruse. The reason that it is painful is not because the joint proposal is so terrible, but because it is so vague. Ultimately it is almost useless since it gives little of concrete value for the FCC to deal with. Let me pick one pseudo-random passage to highlight this point:

Additional Online Services: A provider that offers a broadband Internet access service complying with the above principles could offer any other additional or differentiated services. Such other services would have to be distinguishable in scope and purpose from broadband Internet access service, but could make use of or access Internet content, applications or services and could include traffic prioritization. The FCC would publish an annual report on the effect of 2 these additional services, and immediately report if it finds at any time that these services threaten the meaningful availability of broadband Internet access services or have been devised or promoted in a manner designed to evade these consumer protections.

Take a moment and try to parse that text. This is vague beyond reason and is wholly unsuitable as guidance on effective regulatory enforcement. It wouldn't, for example, stop Comcast from favouring its (coming soon) NBC Universal content by applying "traffic management" if it were to make the sort of charges it recently made against Level 3, and therefore Netflix, a competing content provider. Even their recommendations on FCC enforcement provisions are weak by making them conditional and fines which are (for the companies involved) inexpensive. A lesson here is that companies that compete to some degree are often not much better than a third party, including regulators, to find a middle ground that most would at least grudgingly accept; disparate and competing interests are inherently unresolvable if the objective is winner-take-all. I don't believe anyone should worry overmuch about how much impact the joint Verizon-Google will have.

When there is a joint proposal, or at least some grudging agreement among competitors, sometimes it does matter. Although it is fair game for companies to attempt to directly influence the regulator through the formal process -- you can't oppose this speech just because you don't like their message -- there is (at least) one way in which it can be judged as less than fair. To show this I have to backtrack a bit on something I said last month:

...the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them...

Joint company proposals to the regulator (the CRTC in the above case) when they come from competitors can, in one sense, be seen as promoting progress on a controversial topic such as network neutrality. However, sometimes when competitors agree they do so to give the impression that the issue is resolvable since the regulator should not have to deal with the tricky issue of balancing the interests of competitors, large and small, new and incumbent. This is normally the minefield where the regulator often makes the mistake of choosing favourites among technologies and business models in an attempt to promote competition without unduly giving anyone an advantage.

The potential trouble is when the joint company position, if adopted by the regulator, has the effect of further entrenching those companies in a way that disadvantages consumers, other competitors or the greater public good. For example, if Bell Mobility and Rogers Wireless were to propose a (hypothetical) CRTC-mandated "network improvement fee" of $100/month on every subscriber's bill, they would achieve network parity, massively increase their revenue and make fruitless the lower prices of new wireless carriers. While this is of course a pretty extreme example that would never happen, it helps to illustrate the possible threat represented by the more-nuanced one to the FCC by Google and Verizon on network neutrality.

The machinations and vague threats that are now coming more and more frequently will not abate during the coming FCC meeting and subsequent rule-making process. It's terribly irritating but also important. Unfortunately the voices of the large companies and their interests are likely to drown out the quieter, more dispersed voices of the public, at least those in the public who can afford to pay attention and see past the spin.

The effect will be to manufacture what will be called the public good rather than focusing on what is good for the public. Of course the debate itself would be superfluous if there were more competitive choices since the companies would have to serve the public interest to avoid losing customers. Failing that, regulation is the second choice, poor though as it so often is.

Comcast vs. Level 3 vs. Network Neutrality

2010-12-01T07:25:00.031-05:00

My preceding article on the bafflegab that follows the network neutrality debate like a malevolent black cloud only briefly touched on the brewing dispute between Comcast and Level 3. Within hours it has blown up into a widely-covered issue that, in the spirit of the bafflegab I talked about, is being used by many to trumpet their own entrenched position in the internet food chain. I had intended today to build upon the theme I introduced in yesterday's post, but this dispute simply provides too good opportunity to highlight a few key items in these companies' war of words that fit well with the theme I introduced.

First off, I do not intend to do what others are already doing; there are a few (maybe more) excellent articles that dig deeper into what the dispute is really about, but that may get drowned out in the flood of media coverage. There is one in particular I want to recommend, which was published by Ars Technica, that is short, lucid and does a good job of covering off the deeper nuances of the dispute and also provides references to some more comprehensive background material. If you want to learn more rather than merely pick sides in the fight, go read it.

There is only one sentence that I want to mention here since it goes to the heart of just what network neutrality is all about:

The DC group Public Knowledge blasted Comcast's stance as a net neutrality violation.

I like this since it is such pure nonsense. The thing is, there is no commonly-accepted definition of network neutrality when it comes to the internet -- which includes access, transport and services -- and there is certainly no law on the books that anyone is violating. That statement is mere misdirection with the apparent intent to sway others towards Public Knowledge's position.

To understand this more deeply we need to look at just how the internet is assembled -- the Ars Technica article provides better references so look there if you want more than the following brief and somewhat superficial description. The internet was originally constructed of autonomous systems that interconnected by mutual agreement for the mutual benefit of their users, irrespective of each system's size, public or private or government, using data connections whose cost was either shared in some fashion or covered by one of the two parties. The telco monopolies, which were common carriers, that provided those long-haul and short-haul transport facilities had no interest whatsoever in what was being carried; they billed for the transport and never even saw what was inside those pipes. This is peering in its simplest form.

As the internet opened to the public, the structure had to evolve. First, ISPs came on the scene with their racks full of modem banks and oodles of telco business lines that users dialed to access the internet and local ISP services like email. Those phone lines were subscribed by public tariff and were subject to the telco's common carrier responsibilities; that is, the telco had no choice but to offer those business lines as long as their network equipment wasn't harmed. At first this was good business since it brought a lot of new revenue, both from the ISP lines and all the second lines that residential customers installed for their computers.

The ISPs negotiated peering agreements with other ISPs to mutually terminate traffic to their customers, which included both users and services, and to route traffic to other ISPs further removed, even across the globe. The industry moved toward more stratification between access ISPs that served users, backbone providers that only provided transport and routing between access ISPs and other backbone providers, and service providers that provided the content that users wanted to access.

Backbone providers found it easy to peer among themselves since their traffic flows tended to be similar in both directions, and not charging for that traffic made sense since the burden of accounting could be dispensed with and the monthly net tended towards zero. The traffic differential between access ISP and backbone providers increasingly became unbalanced since as users accessed services that utilized the increasing access bandwidth they did not transmit much data upstream. Besides, since the backbone providers could not cover their business costs by peering, they charged the access ISPs for their services; but not for the raw transport, which the ISP alone was responsible for by contracting with a telecommunication provider, which was usually a telco or a raw transport provider such as MCI.

Notice that in none of this did I mention regulation once. That's because there was none. The data transport facilities that everyone used came from common carriers of one sort or another, but while the common carriers were tightly regulated the users of their transport services were not. It's the same whenever you pick up the phone and call someone; the telco provides a tariffed service as a common carrier but you are not regulated. The common carrier does not and, importantly, must not concern itself with how you are using that tariffed service. If they do get involved then they are almost certainly breaking one or more conditions of their licenses or even the law.

Because unlike network neutrality, common carrier has a definition in law and is enforced through government licensing and oversight, complete with penalties for non-compliance. However there is a benefit to the common carriers because even if you use a common carrier service to commit a crime (such as making a drug deal or arranging a murder) the carrier is protected by law from any liability; you can't sue Bell Canada because someone used their services to commit a criminal or civil offense that causes you harm. Similar legal protections have been extended to ISPs and related services in the US for nearly 15 years by means of Section 230 of the Communications Act, although they are not common carriers.

Getting back to the evolution of the internet, as the business potential grew large and broadband replaced dial-up, through a multi-year frenzy of mergers, acquisitions and emergence of new business models, we now have the carriers in an enviable dominant position where they have the power to dictate terms to others. They have a pretty solid lock on access and transport, wireline and wireless, where they are (as Broadband Reports puts it) the "troll-under-the-bridge. They almost always stand between end users and web-based services, and they are unencumbered by common carrier regulations: the regulations are not applied to corporate entities, but selectively to each line of business that provides those particular services. For example, Verizon is a common carrier but also an ISP. The same applies to Level 3 with their transport and telephony services distinct from their routing and CDN services.

This last point is where an important nuance comes up in the dispute between Comcast and Level 3. Level 3 has a financial advantage over pure CDNs like Akamai since they can "sell" transport and routing between business units at a discount to what they offer to other companies. This may have helped them win Netflix business from Akamai. From Comcast's perspective, they do have a legitimate issue with regard to peering with Level 3 since, due to their CDN business, we would expect the traffic imbalance to be greater than with other backbone providers and ISPs.

Now, Level 3 proposes to send traffic to Comcast at a 5:1 ratio over what Comcast sends to Level 3, so Comcast is proposing the same type of commercial solution endorsed by Level 3. Comcast is meeting with Level 3 later this week for that purpose. We are happy to maintain a balanced, no-cost traffic exchange with Level 3. However, when one provider exploits this type of relationship by pushing the burden of massive traffic growth onto the other provider and its customers, we believe this is not fair.

Of course there is already an imbalance that any pure access ISP like Comcast will see since the bulk of their customers are end users that primarily download from content served by other ISPs. There is nothing to stop Comcast from getting into the content hosting business, it just isn't what they've chosen to do. The traffic imbalance is not due to any nefarious action on Level 3's part, just a natural consequence of Comcast's and Level 3's respective business priorities. Recall that none of this is regulated; while each company does have some FCC regulated business (Comcast's cable TV business and Level 3's transport business) their internet and broadband businesses are pretty much unanswerable to government regulators. Each company chooses its business activities as it sees fit with regard to internet.

To be more blunt, this dispute, which has nothing to do with network neutrality and where peering is optional not mandated by law, is almost entirely a private commercial contract negotiation between two companies. Neither is above slinging around terms like network neutrality, monopoly and fairness if doing so wins them political and public allies to buttress their side of the negotiations. Here's part of what Level 3 has to say:

John Ryan, Assistant Chief Legal Officer of Level 3 Communications, Inc.: "...the fundamental issue is whether Comcast, as the largest cable company in the country with absolute control over access to its cable TV and broadband access subscribers, has the right to unilaterally set a 'price' for that access that effectively discriminates against competitors of Comcast’s cable and Xfinity content..."

Notice how Level 3 tries to drag in Comcast's regulated business activities by insinuating that there is "leakage" between their regulated and unregulated business units which, if true, would justifiably draw government investigation.

The stakes for Comcast are quite high in this game of brinkmanship. While they do have a dominant position as gatekeeper to a huge body of internet access customers, just as they do for TV content distribution, and they are making inroads against the telcos by winning away telephony business, they are in fact surprisingly vulnerable. First, there is the talk about "cord cutters", which are customers, especially 20- and 30-somethings, that are showing signs of abandoning cable services -- TV, broadband and telephony -- since prices keep rising, customer service is awful, and their services are increasingly redundant with wireless voice and data. In other words, why pay for both if you favour internet media over TV and one device, the smart phone, gives you everything you need everywhere you go? Comcast doesn't have a wireless business. Further, even at the high prices charged for tethering, it can be the superior and cheaper choice to connect a PC or netbook to the internet (when a larger screen makes sense) in comparison to paying two broadband bills.

Even worse for Comcast is if the FCC and Congress feels that companies like Comcast are becoming overly aggressive their broadband billing and content practices for a service that is now seen as a pretty essential utility. Political influence goes only so far, and that is when the voters start shouting for Comcast's blood and want the government to take action.

Once they complete the acquisition of NBC Universal, if they continue to jack up cable and broadband rates, offer poor service and use their growing control over content, both TV and internet-based, to their own advantage, they might find they've painted themselves into a corner they can't their way out of. Not only is it more likely that the FCC will pursue turning broadband into a common carrier service, they may get the Congressional support that they need and currently lack. Worse, it is even conceivable, if still very unlikely, that the FCC could invoke Title VI of the Communications Act and mandate "must carry" for internet media content (Hulu, YouTube, Netflix, etc.) in a manner similar to cable channels if Comcast is too aggressive in prioritizing content of those willing to pay them a premium. Companies with a dominant or monopoly position providing an essential service do have to take care to not cross that invisible and shifting line in the sand that will signal an end to government indifference.

Ultimately it is the consumer that will pay for all of this since all business costs are passed along in one way or another to end user, and governments know this:

This is a problem the Congress and regulators cannot ignore. Just as in the recent retransmission fights in the pay TV world, these rumblings between giant companies leaves consumers in the lurch, even though they’ve actually paid for access to the Internet — that is, the whole Internet, not one approved by Comcast or some other company. The problem, of course, is lack of competition in the broadband markets.

Network neutrality is just a word (or two), and no matter how much it is used to misdirect and obfuscate and attack a company's competitors, the real metric is when the howls of the public become audible in Washington. This is about politics and voter dissatisfaction; network neutrality is a definitional sideshow that should not distract our attention from the real issues at stake in disputes such as that between Comcast and Level 3.

Tactical Misdirection in the Network Neutrality Debate

2010-11-30T07:38:00.048-05:00

As the FCC proceeding on network neutrality gets closer to a critical point it is interesting to witness how the contending parties are attempting to influence the regulator, Congress and the public. These generally fit within the following categories:

Obfuscate the issue so that it becomes difficult to impossible to discern what network neutrality actually is and, when confusion is successfully established, offer a clear and simple solution which coincidentally (!) benefits the proposing party or at least is disadvantageous to its competitors.
Obfuscate another's obfuscation of the core issues (see previous point) and then offer a clear and simple solution which... well, you can fill in the rest.
Disentangle and clarify the core issues so that everyone can have a clear understanding of the numerous technical and business aspects of network neutrality. Sometimes this is done in an effort to facilitate the discussions but can sometimes be used to promote an agenda. The agenda may be to maximize the public good, but that is still an agenda.

Perhaps a simpler way of saying this that everyone has an agenda and will do what it takes to promote that agenda, even if occasionally one must go so far to even resort to the truth! Unfortunately the volume and quantity of proposals, attacks, misdirections and often poorly-informed reporting makes it difficult for the targets of all this (mis)information to understand anything other than what the best-placed voices want them to conclude. In other words, the public discourse on network neutrality is not only a mess, it's a political mess.

The FCC is quite used to putting up with attacks from the public, industry and Congress. While some of it is justified, it is also true that there are many competent people on staff that understand the issues perfectly well. With perception being reality (as the saying goes) they end up spending much of their time fending off the attacks rather than crafting good public policy that is in accord with the letter and spirit of the law. That, of course, is the objective of those attacks; while the FCC gets knocked around the key players, those that stand to gain or lose from what the FCC ultimately decides are busy influencing the politicians who are in a position to make their interests take precedence in the FCC's deliberations. Politics and regulations are inseparable, whether the industry is telecommunications, resource extraction, banking or pharmaceuticals. This isn't going to change.

Despite the sorry state of affairs, allow me to briefly describe what I believe are a few of the key industry issues that get bundled under the network neutrality banner, since they are so often obfuscated, conflated, misrepresented or otherwise mangled by so many of the antagonists.

Carrier control over vertical services: It is always in the carrier's interest to be the provider of all services offered to the public over their networks. Vertical services -- value-added services over and above raw carriage -- have higher margins than transporting bits. This should be apparent if you think about it, although I went so far as to calculate the added benefit years ago when the array of services was much smaller than today. Even better is if the carrier not only offer these services but also can exclude others from offering these services over their networks. This is why the FCC's intent to reclassify broadband under common carrier regulations is bringing out the big guns in political lobbying. This is also why Bell Canada is so opposed to GAS-enabled 3rd-party ISPs and why Bell Canada toyed with building a content empire, including CTV, and Comcast is acquiring NBC. However it is possible to push too hard and suffer what Australian government has just done to Telstra by splitting wholesale (network utility) from retails (vertical services). Yes, sometimes governments really do try to favour consumers over major corporations.
Traffic management: Every carrier requires mechanisms to manage network performance so that no one user sees more their share of service degradation; network capacity is always finite -- even though it is expandable, within the bounds of reasonable capital expenditures -- and there is always the risk of one user's activity impacting the service quality of other users. This is especially true for broadband, more so than telephony, because there is a wide range in volume and timing of traffic demand across the user base. The problem comes when traffic management is surreptitiously employed to favour the carrier's own business interests over that of other services that their broadband users choose to access, even if they are not directly competitive with equivalent services offered by the carrier. It has been surreptitious or even misrepresented because blatant discrimination can result in serious political fallout and harm their long-term interests if the government feels compelled to quell voter outrage with some heavy-handed market intervention. Traffic management will remain an issue even if broadband falls under common carrier regulation because it is so much of a cat-and-mouse game where the carrier has all the control and outsiders are hard-pressed to prove a solid pattern of discrimination.
Volume and speed pricing: When control over vertical services and traffic management are prohibited or otherwise fail to glean the revenue and market control the carriers would like, they can in the end resort to pricing strategies. These fall into the categories of usage-based billing (UBB) and speed tiers where the more data you consume and the higher the access speed you desire, the more you pay. If (and I mean if) the carriers are truly relegated to the role of broadband utility with no competitive vertical services and no ability to throttle selected applications, it can be reasonably argued that pricing should be in proportion to network load. Where this crosses the line into the realm of network neutrality is when they price by volume and speed in a manner that is implicitly discriminatory, especially if they pursue this strategy in parallel with offering competitive vertical services. This has come up time and time again in the CRTC proceedings on Bell Canada's GAS technology coverage and traffic management practices where the accusation is that if they do not similarly throttle or price their own retail services then they are ensuring 3rd-party ISPs offer an inferior service. Also telling is how carriers position and promote volume and speed tiers that can inherently place a monetary burden (or at least allegedly) on users that subscribe to services such as Netflix, where there is in effect an extra charge to the user for downloading a movie or other bandwidth-intensive media. That is, even if the carrier isn't or is prohibited from these high-value vertical services, by pricing broadband with surgical precision they directly derive revenue from those services. Precision is required since if the price-volume boundaries are too aggressive, the majority of users will be hit even though these types of services currently have low penetration (although this will change) or, in the other direction, they will fail to garner the desired revenue from carriage of those services. That is, they want to get paid but without attracting unwanted attention from the regulator. This is the reason they make a public show of all the pain they feel when a (current) minority of users use these services. If successfully executed, the regulator doesn't act and their revenue will climb substantially in the coming years. Of course if they offer competitive media services they can even double dip.

Apart from the tactics I listed at the beginning of this article I was planning to say a bit more about how the US carriers are manipulating the regulatory proceedings and political process on network neutrality to get what they want, but I've run out of time. I'll come back to this in a day or two.

To end this article I will repeat a point that I (and many others) have stated: in a truly competitive market there is no need for regulations over company business practices and services since market forces alone will compel all companies to lower prices and offer more and better services if they intend to survive and maximize shareholder value. We are still a long way from achieving that in the telecommunications industry despite what many of dominant carriers would like us to believe. There are few enough choices for consumers to reach the content and services they desire that all these political games do have a major impact. The fight for and against network neutrality will be with us for years to come.

White Gold

2010-11-25T07:17:00.025-05:00

With the ubiquitous attention on gold's rise it is easy to forget that there are other commodities doing very well. Gold also benefits from an allure that dates from antiquity. Yet when you look at the mundane fact of price and return on investment, it is less compelling. Priced in US dollars, gold's price has increased about 25% from the beginning of the year. This is nice except that when measured in Canadian dollars the rise is less: around 20%.

This was brought home to me when I spoke recently with someone in an industry that depends on cotton. This commodity makes gold look like a value laggard in comparison. While it is particularly volatile right now, it has appreciated about 60% since the beginning of the year, and peaked recently at 100% (all in USD). Not being someone who follows cotton at all, this nonetheless surprised me since I would have at least expected it to get more media attention. Except that the media, like me, can't seem to tear its eyes away from gold.

Although I have no intention of investing in cotton or cotton producers, and it may be in a bit of a bubble right now, it is interesting to look at some of the factors driving it higher. However please keep in mind that my understanding is not deep.

It seems that a large part of the problem is in Asia, especially China, where higher labour costs are causing disruption in the industries where cotton is a major input, such as clothing. As their ability to compete with other countries declines due to higher wages leading to lower margins, manufacturers resort to hording. This may start simply enough, with inventory building up due to slower production, but as supply gets tied up the price rises and leads to more hording. The theory here seem to be that there is a greater return to the manufacturers from holding onto the physical commodity until the price rising even further, and then selling it to other manufacturers, that uses it now in production.

This is not sustainable since unlike gold, cotton is not used as a global hedge against currency depreciation; it is pretty much only valuable as a raw material to make clothing, bedding and other marketable products. When used to speculate, the result is hording:

China’s leaders promise to hunt down and punish hoarders and speculators. According to Andy Rothman of CLSA, a broker, some traders are taking possession of agricultural commodities in the hopes that prices will rise.

It seems that hording is a common feature of Chinese business and is not limited to cotton and other globally-traded commodities. It is happening with perishables such as tomatoes and may also be partly the case with rare-earth metals.

Considering that it takes a warehouse and freight transport to horde and trade a monetarily-significant quantity of cotton, I imagine that ordinary speculators must rely on ETFs and futures contracts. Don't go looking to empty your closets of old clothes to profit from the cotton bubble.

Similarity Of Political Polls and Markets

2010-11-22T07:45:00.007-05:00

As I skimmed through this National Post article about the resurgent popularity of French President Sarkozy, I was reminded of the more than passing similarity between politics and markets. At first blush this may seem an odd comparison but not, I think, on closer examination.

Both politics and markets probes human sentiment, and are therefore both subject to the same attributes of human psychology, especially that of large groups. In particular, they quantify human sentiment.
Opinions are often strongly influenced by what others are saying or doing. If you think gold is in a bubble, you are likely beginning to doubt yourself by all the people selling jewelry for its melt value and the "gold is going to the moon" headlines in the edgy investment media outlets. The same is true if you keep hearing how good (or bad) a job a politician is doing and you had voted against (or for) them last election.
When the mob gets enough momentum you get a transitory bubble in the market, and in politics you get Trudeau-mania or Obama-mania. Of course this also works in the other direction to push the market into a tailspin, such as in late 2008, or to oust a political leader, as Gordon Campbell of B.C. recently discovered.
Opinions are unstable between elections just as are views on companies and commodities leading up to an investments decision. Opinion polls and pontificating on markets are easy since people have no skin in the game.
Opinions can be entirely different once an election occurs, just as when a buy or sell decision is executed. People then become invested in their choice for a time, often rationalizing their choice to themselves and others, even when it goes wrong. The shouts of denial can get quite loud when the elected do what the voter does not agree with, just as when an investment goes sour. Just look to any pro-Obama or Sarkozy voter, or any gold short.

The particular reason why the new about Sarkozy's popularity struck me is that the polls remind of a dead-cat bounce in the market. If you are unfamiliar with that pattern, it is when a terminally-ill security crashes to the ground and then has a feeble bounce off the pavement before staying down for good. This uptick in Sarkozy's numbers could be just that.

Of course this isn't certain until the opinion cycle completes and we know for sure whether the decline resumes or if his reputation is on the mend. This, too, is true in the markets. If it were possible to bet on his future popularity it would be just like trading on pure technical analysis, rather than fundamentals, to those like me who know little of French politics. Both are bets on the behaviours of masses of other people.

Nokia Continues to Spin Its Wheels

2010-11-19T07:49:00.050-05:00

Two months ago I (and many, many others) speculated or hoped that the changes in Nokia's top management augured well for a change in strategy. In particular, I wondered how they might now respond to the challenge from iPhone and Android. The choice is stark: Symbian is old and difficult to upgrade to compete on features in a timely fashion or switch to Android. Those aren't the only choices since even Windows is now showing some promise. However they haven't diverged too far from their previous trajectory by banking on MeeGo.

The question I have to ask is how exactly does this decision help them? They know they have to do something, and fast, but I suspect that pursuing MeeGo will only delay their ability to effectively compete. MeeGo remains feature poor in comparison to iOS and Android, and those platforms continue on a fast development pace. Yet their stated reason for sticking with a unique platform is to differentiate themselves from others.

There was an interesting article in the Wall Street Journal this week on Nokia's current direction that is well worth reading. I'll quote a few lines from that article in this post.

Though the go-it-alone strategy puts Nokia in competition with an increasingly powerful Google, the rise of smartphones has forced cellphone makers to differentiate their products and generate profits increasingly through the software they offer. Using Android or another platform would likely leave Nokia in the steadily lower margin business of hardware.

Alberto Torres, Nokia's executive vice president for MeeGo computers, argues it also would tie its hands in distinguishing its smartphones with new innovations, ultimately benefitting Google's search business at Nokia's expense.

Referring to other handset makers that have adopted Android, he said in an interview at the Dublin developers meeting this week: "Frankly, some of these alternatives in the market are not necessarily providing a lot of opportunity for innovation, and that is what we hear from people who are using those platforms at the moment."

Nokia has said this before and I still don't buy it since they are not at all clear at stating just what it is that will demonstrate their innovation. That is, what will MeeGo allow them to do that Android cannot? Innovation does not just mean different, it has to mean something unique or better. Instead we hear again about the Ovi store, their developer community and proprietary applications.

Nokia also has spent heavily to catch up to the iPhone and Android with its own platform and set of software services, under the brand Ovi. Those investments include its $8.1 billion acquisition of digital map maker Navteq in 2007, which competes directly with Google Maps.

Pairing with Google at this point would mean negating all of those investments, said Roberta Cozza, an analyst with Gartner. "Putting everything into Google's hands would mean all the work on Ovi would be gone, and I am not sure what that would change for them," she added.

This is misleading since it is certainly possible to put their maps applications onto Android and still keep their Ovi brand. They can even negotiate with carriers to choose their proprietary apps over Google's for the Android devices they market. I am left wondering if they are feeling uncertain about competing head-to-head with Google and prefer to use platform lock-in to promote their apps while also barring others.

The danger is that they could lose both the phone and software business if Nokia smart phone products continue to lag and the carriers simply go with the platforms, and device vendors, that give their customers what they want. As time goes on, that list is less likely to include Nokia, with or without MeeGo and Ovi. App developers will continue to make the same decision, leaving Ovi with a growing application gap.

Nokia's decision to push MeeGo over Android stems in part MeeGo's capability to support not only smartphones, but a variety of products consumers use including tablets, televisions and even automobiles, [Gartner] says.

This is obviously false, and I am astonished to hear it from anyone, especially an analyst that follows the industry. By next year the market will be awash in Android tablets and a growing list of other devices. In contrast, MeeGo is still in catch-up mode.

Nokia has to seriously -- and I do mean seriously -- determine how they can be different with a compelling platform and portfolio of products and services. One can only hope that they do know and are choosing to play it close in their public statements for the present. Nokia is a good company so when the new management team comes to a point where they are able to implement major changes, they may do so. To succeed they need good hardware, user interfaces and a few innovative apps and services, all of which are within their ability. However none of this requires Symbian or MeeGo.

Economic Impacts of Spectrum Auctions

2010-11-17T07:55:00.023-05:00

Radio spectrum is a peculiar asset. It exists, it is continuously renewable, under certain circumstances it can even be shared. If its use is uncontrolled there is ample opportunity for impairment of services which exploit the resource. There is good reason to believe that eventually -- but not anytime soon -- that with more agile and intelligent technology, sharing and optimization can be largely automated. For the present we need regulations and licensing to allocate spectrum to specific users and how it's used.

Up until the mid-1990s the commercial and technological requirements for mobile phone spectrum was quite modest. The number of users was comparatively small and analogue voice technology was amenable to fairly uncomplicated channel management protocols. Governments tended to assign spectrum licenses to a select group of companies, and used those licenses as a tool to either further strengthen incumbent carriers -- some that were owned in part by the same governments -- or to foster competition by splitting spectrum among several companies with the demonstrated wherewithal to build a sustainable business.

Then came the idea that spectrum is a national asset that can be assigned a market price and can therefore be leased to competing entities by means of open auctions. Always ready to open the treasuries to new revenue streams, especially revenue not derived from broad-based taxes, the politicians listened and made it so. This idea was implemented with enthusiasm in the US, where they raised many billions of dollars. Canada and other countries picked up on the idea and spectrum auctions spread across the globe. Governments enjoyed the windfall of the wild bidding wars that ensued, and their populations liked the idea that taxes could be avoided even while expanding public services with this new revenue source. Of course nothing is ever that clean and simple: there is a public cost, even though it is sufficiently disguised to fool many people.

Besides the specific problems that they raise, spectrum fees share one big problem with auctions: They can too easily be used as cash cows. Experience shows that the government always needs more money, in booms and in recessions. Nearly $6-billion has already been earned by the federal government in auction proceeds, and $130-million is paid in annual spectrum fees at current rates.

Even at $130M annually these annual spectrum fees are not onerous. If we assume 24M mobile phone users in Canada, that works out to about $0.50/month/subscriber. That isn't much, even if it is annoying, and it is hidden in the price of service. Yes, you and I are paying those spectrum fees indirectly since, as with all input expenses, they are calculated into the price of the service.

This is fair; the carriers are businesses and they should be free to recover their expenses and earn a profit. Except that what we have here is a type of hidden government tax, where the government charges the carrier that then recovers the cost from subscribers. Unlike the fake fees the carriers are so fond of loading onto phone bills, this is a real cost of doing business that is imposed by the government. Unlike manufacturers and excise taxes that were replaced by the GST two decades ago, in part to make explicit to consumers those previously "hidden" taxes, spectrum fees are a current hidden tax on us.

While the annual spectrum license fees are small, that is not true of the basic licenses themselves. As the article pointed out, this amounted to a one-time fee of $6B. That works out to $250/subscriber (this is a grossly simplified model, though sufficient for the present discussion). This is amortized over a longer term than the annual fees so that, assuming a 10-year term (for planning purposes), it works out to $2/month/subscriber. This is beginning to become a significant portion of the prices we pay, and it get worse. First, the $6B must be paid up front once the auction is concluded (or sometimes in payments over a year or two) and in most cases the winning carriers must borrow to pay for the licenses. Just like with mortgages, the final cost can be substantially more than the original spectrum license fee. This is accounted for in the carriers' actuarial calculations so that the prices they charge us also cover their borrowing costs.

There is more. The way in which the government conducts the auction affects the development of competition, or the lack of it. This happens in two distinct ways, which I'll cover in turn. First up, which companies can bid for spectrum.

Rogers Communications Inc. chief executive Nadir Mohamed urged Ottawa to speed up plans on a key auction for new airwaves while saying federal officials must ensure the bidding does not disadvantage "made-in-Canada companies" like Rogers.

"In the last spectrum auction, the government restricted who could bid . . . existing customers were disadvantaged and unable to bid on certain blocks of this spectrum. This can't happen again," he told business leaders during an address to the Economic Club of Canada on Wednesday.

Here we see how governments restrict which companies can bid in spectrum auctions in order to enable competition. Unlike with wired telecommunications where incumbents have a dreadful advantage over new entrants, the playing field in wireless is fairly amenable to policies of this sort. An additional benefit of restricted auctions of this type is that the winning bid is likely to be lower. When the financially-stronger incumbents are kept out, the new companies are less likely to run up the price in a bidding frenzy; they all have somewhat similar financial realities and can be expected to bid in accordance with that reality. This keeps the spectrum license fees lower and, at least in theory, allows the new entrants to keep their prices lower than older companies that may have paid more in open auctions.

Yet even so not all is well, as we discovered back in the 1990s. New entrants such as Microcell (the original Fido) were eventually acquired by the incumbents, and the same can occur again. Lower spectrum license fees due to a restricted auctions are only relatively lower; they are still very expensive for a company starting with no revenue and about to embark on an expensive network construction project. All of this must be financed and it leaves these companies vulnerable to business hiccups, increasing interest rates and revenue downturns due to price competition.

If the incumbents are allowed to bid on new spectrum, the new entrants will typically find themselves paying more for the licenses they do win. We should expect that the hungry and stronger incumbents will bid aggressively. They win whether they win or lose the auctions: if they win the auction, competition is avoided and they can raise prices to their captive market to recover the cost of the newly-acquired licenses; if they lose the auction, they have driven up the license fees by participating in the auctions so that their competitors are thus more likely to fail or to fail sooner due to the increased financial burden. We lose because, no matter which carrier wins the auctions, we will be charged higher prices to compensate for their spectrum costs.

[Pierre Peladeau, CEO of Quebecor says,] Predictably, the same incumbent voices that opposed an equitable distribution of spectrum in the last auction can once again be heard calling for an auction devoid of any rules that could hamper their dominant role in the market.

The second impact of spectrum auctions is a little more subtle, but just a little. Although the carriers must pass on their license fees to customers, there is also a limit to how much they can load our bills in a competitive market. Higher costs due these auctions led to higher prices and, importantly I think, slower network builds. There is only so much capital intensity a company can withstand before compromises must be made. If you can't raise prices you must slow network investment. If you do raise prices, you slow the pace of customer acquisition or you market service more toward business subscribers. Gaining subscribers when you are new to market and are in the midst of building a network is never easy as, for example, Wind Mobile and Quebecor are discovering.

I believe this is one of the reasons why Europe, Japan and some other countries were able to grow their wireless markets faster than the US and Canada in the previous decade and a half. Saddled with heavy debt from both capital expenditures and spectrum licenses, new carriers here have a disadvantage to create competition. In the absence of healthy competitors, the incumbents can keep prices high and not particularly care about rapid innovation or expansion.

As far as public policy goes on spectrum auctions, the government is sacrificing telecommunications infrastructure and the economic activity it would create for the immediate gratification of money in the treasury. As citizens, we have largely bought into this bad bargain, and we are paying the price. Except that the price is extracted from us in the form of high mobile phone bills rather than direct taxation.

I recall one time, many years ago, I inadvertently stumbled into this debate in a meeting with senior FCC staff. It turned out that the most senior person there had been deeply involved in selling the idea of spectrum auctions to Congress. Let's just say that I quickly discovered the political investment that the government had put into this policy instrument and that they didn't take kindly to criticism. The thing is that at first blush it really does seem like a good policy, but I believe as fervently now as I did then that it is a bad policy that costs all of us more money and poorer services and choices than alternatives.

Gold, Reserve Currencies and Global Trade

2010-11-12T07:24:00.002-05:00

Imaging that you wake up in the morning and you hear about an unbelievable cataclysmic event that has occurred overnight. As you struggle to clear the fog from your head you think you heard on the clock radio that due to some mysterious cosmic event everything is now exactly half the size it was yesterday.

What a crazy thing you might say to yourself. But how would you convince yourself that this extraordinary occurrence is true or false? You look around and you notice that everything appears the same as before. Then it hits you that if everything is half the size, including yourself, you might be unable to tell the difference. Think about it a little more and you wonder if by 'everything' that really does include everything or just some fraction of the world or cosmos.

You vaguely recall from high school science that if you halve linear dimensions then volume, and therefore mass, will decline by the cube. So you jump onto the bathroom scale and see that it gives the same reading as before. It would seem that whatever occurred with the foundations of physical laws the springs and levers in the scale also seem to be responding in a proportionate manner. You might then consider looking at the sun or moon to see if they've changed, but then you remember that even if you are smaller that if these heavenly bodies are still the same size and at the same distance they would also have the same appearance. Of course there may follow catastrophic astronomical events if their mass stayed the same while that of the Earth decreased, but, well, it all gets very complicated very quickly. All you know is (if it's really true) that there must be something detectable to scientists or they would not know that this peculiar event had occurred and it would not have made the morning's news.

Now imagine instead a slightly (but just slightly) more believable news story. Instead of a change in physical laws, imagine that overnight the Governor of the Bank of Canada announced that effectively immediately the loonie is worth exactly half its previous value. At first you're shocked, but then you notice that little has actually changed. The money in your pocket and bank account are unchanged, and price of goods and services are, at least at first, either unchanged or randomly altered due to general confusion among the public. The intrinsic value of things and labour is no different, so perhaps this makes sense. Or perhaps not, as we will see.

When you are lost at sea and the sky is cloudy you search for a reference point to position yourself. It is the same with currencies (and the laws of physics): you can only make sense of the new value of the loonie by comparing it to something else. What else, after all, could the Bank of Canada have meant except that the loonie is half its previous value in comparison to some reference. For several decades now the world has most often used the US dollar at a reference point. Before then it was gold. Once we left the gold standard -- opting for floating currencies -- the size and resilience of the US economy made that choice only natural. We are now witnessing what happens when their economy becomes unhinged. Pushing the earlier analogies a bit further, this is like discovering that the spit of land you've spied is itself floating freely on the sea's surface, leaving you feeling lost once more.

In the case of the hypothetical devaluation of the loonie, the existence of the US dollar serves us well as a reference since our economies are so inextricably linked and the US economy is so much larger. Declaring, by fiat, that the loonie is now worth US$0.50 is insupportable unless we at the same moment sever all financial and trade ties to the US. If we don't, there will be a rush of capital across the border and abrupt shifts in business relationships that would seek a new equilibrium point, one that (if we ignore the disaster such a rapid change would entail) will restore the loonie to its previous level.

However if the US and Canada jointly halved their respective currencies the impact would be slower if even more monumental, with the loonie getting tossed around like a leaf in the wind as the world comes to terms with the change. The US Federal Reserve is pursuing a policy very much like this at the moment, and many currencies, not just ours, are getting tossed around.

Bank of England Governor Mervyn King said ...“There needs to be a genuine recognition that there is a collective interest in the path along which the current-account imbalances unwind,” King said. “Unless we recognize that, then we will face a situation where more and more countries will resort to policy instruments that will be damaging to everyone.”

If they persist we will likely see increased momentum to remove the US dollar as a common reserve currency in favour of, most likely, a basket of other currencies. Interestingly this is not too unlike the policy China follows in setting the value of the yuan, which they do not allow to float freely. Other, usually small countries, have tied their currencies in this manner to the US dollar, except in China's case there are some serious impacts on global competitiveness and trade. This makes the currency dispute between the US and China of such global import, and why it is getting so much attention at the present G-20 meeting.

“We will never seek to weaken our currency as a tool to gain competitive advantage and to grow the economy,” Treasury Secretary Timothy Geithner told CNBC in response to Mr. Greenspan's commentary
...
Mr. Geithner had proposed resolving the currency dispute by setting limits on current account balances, which measure trade-and-investment flows.

Ahead of the crisis, the U.S.'s current-account deficit swelled as households consumed imports with borrowed money, ...

Mr. Geithner's bid for current-account targets fell flat amid the anger over the Fed's monetary policy.

Here we see a reference to debt, much of which is being purchased by China. They are obviously interested in maintaining the value of their investment in the US economy, which would suffer is either the US dollar is devalued or, equivalently, the yuan is raised. China isn't budging so the US is initiating a sort of currency war.

Other countries are not willing to sit on the sidelines while this dispute unfolds, perhaps in a manner that will disrupt the functioning of the global economy. Since we live in a world where all national economies are so intricately tied together that currency volatility can quite easily disrupt international business patterns and send all of us into a deep recession: currency stability is needed to allow business investment, today, to proceed by removing the risk of value destruction, tomorrow.

A likely mechanism to replace the reserve currency model might be a basket of major currencies with some type of common asset base to make it workable. Although gold is being brought forward once more as a possible asset base, this is unlikely.

World Bank's Robert Zoellick, says he didn't propose a full return to a gold standard. His objective, he said, was to point out that the gold price is sending a message that the policy fundamentals within the G20 are rotten.

However, gold is not really a suitable standard in the present ear since it no more stable in value than any other commodity; that is, gold does not have any intrinsice value, just scarcity and and short-term appeal to those searching for hedges against currency devaluation and economic disruption. Here's Zoellick again:

The point on gold, and this is the golden elephant in the room, whether people recognize it or not, it is being used as an alternative monetary asset. So I'm not saying return to the gold standard as a control of money stock. But what I'm saying is the price of gold has been telling people is that there is a lack of confidence in some of the fundamental growth policies. So gold in that sense is a reference point, it's an indicator. Now people might wish it wasn't so. But I'm describing the facts as they see it and saying to policymakers: "You have to recognize what this says about the fundamentals of the policy you are pursuing." [You can't achieve confidence with] exchange rates and rebalancing alone.... You want to get the private sector back engaged. The time of government fiscal expansion and programs has run its course.

His viewpoint seems perfectly sensible. Gold, in fact, only has the value that we ascribe to it. The combination of scarcity and demand make it a risking asset class, but one that could reverse tomorrow. Its price is just as volatile as the currencies to which some would seek to tie themselves. Gold isn't even a very liquid asset, for a variety of practical and legal reasons, and for the majority of people it is merely an abstraction underlying the variety of financial instruments that derive from real stores of the metal.

Whether currencies or metals, investing in either is nothing more than betting on human belief systems, and what those beliefs are likely to be in the future. We should leave betting to the poker table and manage the global economy more deterministically. Like it or not, depending on one's political outlook or financial interests, some measure of coordinated monetary policy is necessary to keep our economies, jobs and trade reliably functional.

The US has less than 5% of the planet's population, but it no longer has 30% of the global economic activity. As more populous countries like China and India, not to mention Brazil, Indonesia and many more, continue to rapidly grow their economies and, of course, the well-being of their peoples, it is a question of when not if the US will lose it position as the world's leading economic engine. As Brazilian Finance Minister Guido Mantega said this week:

“The U.S. economy used to reign absolute, it was the strongest economy in the world and stood out from the others,” Mantega told reporters. “Today that is no longer the case.”

The faltering of that engine over the past two years only brings that time closer. As they become one among several dominant economic giants it is only sensible to move away from the US dollar as a reserve currency.

It's replacement will not be gold. Gold's price will continue to move up and down as currency volatility continues, and that volatility is enough to drive investor interest. I don't believe there is anything to be gained in thinking that the gold standard will return, ever.

Rural Broadband: CRTC Decision 2010-805

2010-11-08T07:22:00.067-05:00

With the number of articles I've written recently on CRTC actions you might imagine that I follow them quite closely. In actuality I don't. Typically I peruse the major online news media and trade publications on a regular basis, and if I notice an article related to Canadian telecommunications (an interest of mine) I may then skim it for any potentially interesting content. If it's interesting enough I may search for related material, and if it looks worth commenting on I will go to the source -- the CRTC documents -- to see what they're up to. (The CRTC does have a what's new page but I don't read it and, as far as I can see, they don't supply an RSS feed.)

It was in this fashion that I came across CRTC Decision 2010-805 on rural broadband last week. Although this is an important topic in its own right, it isn't one that especially interests me; it was something else about the decision that caught my eye since it said something about how the CRTC operates.

I'll come to that in a moment, but first let's briefly look at what the decision itself is about. Much of rural Canada is (using CRTC parlance) in high-cost serving areas (HCSA). The density is low, the wires are long and even wireless captures fewer customers per tower. Once you leave towns and cities, and are not on a major transportation corridor, not only do you often not have access to broadband service or cable, you are also very often without cell phone service. This is quite a challenge to any objective to extend broadband services to these areas. In light of this, and a pool of over $300M that was slated be rebated to overcharged Bell Canada customers, the CRTC would like to see this used to extend broadband service to 112 rural communities in Ontario and Quebec.

9. In Telecom Decision 2010-637, the Commission indicated that the Bell companies’ original proposal to use HSPA wireless technology to provide broadband services in the approved communities (the original proposal) did not satisfy the Commission's requirements as set out in the deferral account decisions. Specifically, the Commission indicated that the original proposal did not offer features comparable to broadband service in urban areas such as (i) a variety of service options, including various speeds and usage caps, (ii) an option for a greater than 2 gigabyte (GB) monthly usage allowance, and (iii) an insurance option that would provide an extra 40 GBs of usage for $5 per month. The Commission also considered that the original proposal would not represent the use of least-cost technology. The Commission therefore approved the use of wireline DSL technology and fixed the amount of funds available for broadband expansion at $306.3 million to serve all of the approved communities.

This is in fact our money (if you're a Bell Canada telephony customer in these provinces) since it should never have gone to Bell Canada in the first place. However that doesn't terribly concern me since, while it sounds like a lot of money, that $306.3M is only about $15 per person or perhaps $40 per average household. Despite the modest amount of money involved, it does worry me that the CRTC would use their power over the telcos to decide that money (our money) should be used to further a broader policy objective. This ought to be a political policy decision rather than a regulatory directive to Bell Canada to invest it elsewhere. Even if we concede that the initiative is worthy of this use of our money, it is still only a fraction of what it will cost to truly extend broadband throughout rural Canada.

Mr. Garneau's remarks before the commission are important mainly because significant broadband policy, from the regulator or from Parliament, would require hundreds of millions of dollars, possibly billions, from the federal government...MTS Allstream, a Winnipeg-based service provider, suggested during the hearing last week that this could cost upwards of $7-billion.
...
“If telecom providers are permitted to pick and choose customers and areas they want to serve, all efforts to achieve universal, affordable broadband are doomed,” said John Lawford, counsel with the Public Interest Advocacy Centre, an Ottawa-based consumer advocacy group.

The carriers will, quite reasonably, target service for areas and customers where there is profit to be made. Where it isn't profitable or insufficiently profitable in comparison to making the same investment elsewhere, it is good business to not invest in rural broadband. If the government decides, for policy reasons, that rural broadband is desirable, it should be funded from the public purse -- the general tax base -- like any other program. That is, the government pays the carriers to deploy rural broadband. These types of programs can easily turn into a morass if not handled properly, as evidenced by the corruption-plagued USF (universal service fund) in the US. We don't want to repeat that here.

By now you are thinking that this is what caught my interest about CRTC Decision 2010-805, but it isn't. Instead it is an inconsistency between this decision and an earlier one on high-speed wholesale: CRTC Decision 2010-632, which I wrote an article on, and another on the comments of one of the commissioners. Here is the passage of that earlier decision that I found contradictory to the present one:

Competition drives innovation and provides consumers with a choice of service providers and service characteristics. The Commission notes that ILECs and cable carriers are offering their retail Internet services at increasingly higher speeds. The Commission considers that, at present, retail Internet service competition results primarily from services provisioned using wireline facilities. Other retail Internet services, such as those offered using wireless and satellite facilities, are not generally substitutes for wireline facilities at this time.

In that decision, CRTC said that wireless was not a suitable alternative for wired broadband service, cable or DSL. This was a point of contention in 2010-805, where Bell Canada pushed for HSPA+ (wireless) service as the appropriate technology to extend broadband for those 112 communities. The CRTC agreed! Not only did they agree, they further departed from their earlier decision by requiring third-party ISPs access to that technology using GAS.

11. Bell Canada indicated that it would also file a tariff to provide access to wholesale HSPA+ wireless broadband services under similar terms of service characteristics as the Bell companies’ existing Gateway Access Service (GAS),[5] in order to allow competitive providers the ability to offer retail broadband services to end-users.[6]

The reasoning presented by the CRTC in 2010-805 does not make clear why wireless is appropriate for these rural communities and for GAS and, further, they make no reference to 2010-632. This is quite interesting. What it really exemplifies to me is the CRTC latitude to make poorly-reasoned and inconsistent decisions without any political consequences. The situation is very different in the US where FCC decisions are frequently and vociferously criticized by members of Congress and even other branches of the government, and their rulings often end up in federal court. It is not surprising that the FCC employs many lawyers to carefully argue their decisions on the basis of legal statutes.

Unlike is another recent decision, this time the cable companies were very critical of Bell Canada proposal to use HSPA+ for rural broadband.

13. Barrett, EastLink, RCI, and Videotron opposed the revised proposal. These parties submitted that, while they supported the principle of technological neutrality, the Bell companies should deploy a wireline DSL solution as originally directed by the Commission.

14. RCI and Videotron submitted that HSPA services are now, or are expected to be, available from Bell Canada, RCI, and Videotron in most of the approved communities. As such, they argued that it would be inconsistent with the deferral account decisions to approve the revised proposal in order to fund broadband service where such services are already offered.

15. Barrett also argued that the Bell companies should be required to provide access to individual components of the wholesale HSPA+ service, rather than the proposed aggregated solution.

16. EastLink and Videotron argued that approving the revised proposal would result in the subsidization of Bell Canada’s mobile voice service. They indicated that it would be inconsistent with the Policy Direction[7] to distort the competitive market for mobile voice services in the approved communities by funding a technology that could provide both voice and data services.

17. Barrett, RCI, and Videotron submitted that the revised proposal does not adhere to other principles in the deferral account decisions, as it does not represent the use of least-cost technology to deploy broadband services. These parties argued that alternative broadband service providers could provide a comparable service at significantly less cost than Bell Canada, and submitted that if the Commission approves the revised proposal, it should allow for competitive bidding to see whether other companies could provide the HSPA+ service at less cost.

I suspect they are right to level these criticisms. It does seem unfair that Bell Canada can, with money that ought to be rebated to customer, fund the deployment of network equipment that competes with cable and mobile services from other carriers. It is also interesting that Commissioner Katz, a former executive of Rogers, wrote a dissenting opinion in CRTC Decision 2010-637 to argue in favour of wireless for these rural communities, which was subsequently accepted in 2010-805.

I fail to see the logic in limiting the Bell companies' ability to use alternative technologies that meet or exceed the requirements imposed in the deferral account decisions.

Although I applaud Commissioner Katz's view that the CRTC should focus on service objectives and not specific technologies, I believe the cable companies have a valid argument that DSL could be just as cost-effective for these rural communities. For both DSL and HSPA+ there is a need to back-haul the traffic, from either the central office or tower, respectively, to their core network. Locally, the copper already exists, so the primary economic comparison is between DSLAMs and HSPA+ base stations (towers). Unfortunately, as is routine in these matters, Bell Canada's network costing figures are confidential. All we know is that the CRTC reviewed the submitted material, but not how persuasive it was or if it bore any resemblance to the true costs.

23. With respect to the proposals to allow for competitive bidding in order to ensure the use of least-cost technology, the Commission notes that it rejected this idea both in Telecom Decisions 2006-9 and 2007-50, since it would add a significant layer of complexity, delay the implementation of broadband expansion, and result in substantial administrative and regulatory burden. The Commission considers that these reasons continue to be valid.

24. In light of all of the above, the Commission finds that Bell Canada’s HSPA+ wireless broadband proposal is consistent with its determinations in the deferral account decisions. The Commission therefore approves the revised proposal.

Once again we see the capriciousness of an opaque regulator in our telecommunications market. We all need to keep a close eye on the CRTC and similar regulatory bodies if we are to ever see an end to invasive and poorly-justified distortions of the free market. This should worry everyone, including those individuals and companies that benefitted from these recent decisions; today's winners could easily become the losers in CRTC's next decision.

We Need Good Cabinet Ministers

2010-11-05T08:17:00.000-04:00

Effective governments require many things: leadership, ideas, structure and process, and communication, among other things. Yet when you boil it down to its essentials it really comes down to people; good, competent people are the key ingredient of good government. The same is true in business, which is why venture capitalists pay such close attention the founding team of start-ups. With good people you can navigate uncertain waters and recover from missteps, since good people will respond effectively in all situations, including bringing in others when needed to make up for skill gaps.

Those with long memories will remember the bumbling incompetence of Ontario's only NDP government under Bob Rae. Although that government was saddled with a massive deficit left over from the previous government, his real problem was a lack of good people. When it came to forming a cabinet there was little talent in the pool of MPPs in his caucus. It seemed at the time that, because up until around the time of the election call there was a poor prospect of an NDP victory, little attention was paid to getting strong candidates to run on the NDP ticket. Rae himself wasn't half bad as Premier, but his cabinet ministers... ugh!

With this thought in mind, I am just a little bit worried about the resignation this week of Jim Prentice from the federal government. From all accounts, even from the opposition parties, he is held in high regard and has striven to do some good things. While true that he also had the long form census file, which was arguably botched, as far as I can see this was far more likely to have been Harper's initiative. This also seems true of some of our more bizarre actions in international fora on the environment.

Nevertheless, I believe the evidence favours him being a strong talent and who has been conscientious about fulfilling his responsibilities within the bounds of the power he has been permitted by the Prime Minister. This is the nub of the problem as I see it. It is also visible elsewhere, such as with Tony Clement. A good manager or leader knows the importance of bringing strong talent onto his or her team. Once you have them, you set objectives and let them apply themselves to the job at hand. Harper is too often loathe to do so. Not being able to read his mind, I have no idea if Prentice resigned for the reasons he stated or he was disappointed in the control the PMO exercised over him and his cabinet colleagues.

I would think that anyone reading this can think of examples, perhaps many examples, of times when your boss micro-managed your activities and would not allow you to do what you knew to be the best thing to achieve the common objective. A penchant for excessive control is a common management flaw. Even if the manager does not trust an employee to do a job properly, that is also the manager's fault since they are responsible for hiring and firing people so that the team is composed of good, competent people, people who can get the job done.

Losing Prentice is unlikely to damage Harper's chances for re-election and may not even make a large difference in the government's performance. He still has some excellent bench strength to replace departing ministers. But if this turns into a trend where, when an election is eventually called, more unduly-restrained, talented ministers choose to escape the yoke and not run, he could have a problem. Or rather, we will have a problem. It is us who will have a less capable government running the country's affairs.

I am of course assuming that the Conservatives will win the election, which polls support and which I expect will happen unless the Liberals make some radical changes to either their leader, their policies or their public relations efforts.

Counting Watts and Technology Literacy

2010-11-03T07:47:00.012-04:00

I wasn't surprised to read that many people have some difficulty appreciating the impact of their daily lives on the amount of electrical power they use. I my experience, not many people have an intuitive feel for this sort of thing. It was why, for example, in my article on solar insolation I avoided units like watts per square meter, choosing instead a more arbitrary unit, zenith-hours, that I hoped would resonate with the majority.

From the content of this blog you should not be surprised that I do not have this difficulty. With a strong technology background and a post-graduate science degree I have no trouble understanding machines, software and how many of the now-common and sophisticated devices work. There are also a great many things I don't understand, especially outside of technology; one person can't, or even want to know everything. I take care never to criticize another person's lack of understanding or their lack of interest in understanding.

Instead I have a curiosity about what most people actually do understand, or believe, about science and technology. I am often surprised by what I hear. It is also why I wrote an article about signal strength indicators on mobile phones after the iPhone "antennagate" issue went mainstream because of all the people I encountered that didn't understand the relationship between the indicator and phone performance yet wanted to know if or even why it mattered. That article continues to show up in my web stats as one of my most popular articles, which I'll take as a positive indication that there are people out there who do want to understand more about what makes modern technology tick.

As a side note, another misconception I have encountered, and may be widespread, is how GPS navigation devices work. Everyone seems to get that there is some sort of triangulation going on with one or more satellites that allows the device to determine its position. However there are people who believe that the satellites also download the maps and navigation information to the device. This is despite the fact that these units are clearly advertised with the world region modules and functions that they support. Then I discovered Google's mapping app on Android that does download the maps in real-time, except that it download over conventional terrestrial wireless networks, and is therefore pretty useless on many roads away from cities and major thoroughfares.

Getting back to the subject of counting watts, I have noticed a correlation between the perceived energy consumption of an electrical appliance and the appliance's position on dominance in the home or office. Apart from electrical heating -- which pretty well everyone understands is a major consumer of electrical power -- my non-scientific survey of people informs me that the big-screen television is the major electrical power expense in the home. I suppose it's because it's so present in most people's lives, it's big and it radiates a lot of light and sound. However that's just a supposition on my part because, when I do ask, I don't get any clear reason why they believe this.

Another blind spot is all appliances that produce heat: kettles, coffee makers, microwave ovens, ranges, refrigerators, and even clothes dryers, which are significant power consumers. Of course the totality of the energy they consume is limited by their non-continuous usage. The same goes for devices with large motors, including lawn mowers and washing machines. These are far from universal beliefs, it's just a pattern in what people tell me.

While this is a challenge for the government and the utilities it is perhaps less severe because of our cold climate. The reason is that all the waste heat from our appliance-filled homes heats our homes, in effect lowering the load on the furnace. Electrical heating often costs more than fossil fuel heating, but the differential isn't too large and therefore isn't a great concern most of the time, in my opinion. That is, between the months of October and April; summer is another matter since the additional heat is not only an unrecoverable cost but will, in homes with air conditioning, increase the electrical consumption even more in order to remove that heat.

Although the net impact is perhaps not exceptional, it does have an impact on public policy and electrical power generation. Summertime air conditioning is almost entirely done with electricity (there is no fossil fuel alternative as there is for home heating) which contributes to maximum power consumption occurring at that time of year. Lowering the heat from other appliances (even televisions!), including lighting, is particularly important in the summer in order to both reduce the load on power plants. While the fuel for the power generators can be reduced at off-peak periods, the generating plants themselves must be designed for peak usage, including additional capacity to deal with any temporary failures and downtime for maintenance. We pay for those capital costs since they are amortized over time with increased consumption-based rates.

Asymmetric Pricing: CRTC UBB Decision 2010-802

2010-11-01T07:48:00.046-04:00

While we all waited to go trick-or-treating on Sunday evening, the telcos did theirs a few days early. Dressed as little angels they knocked on the door of the CRTC then held out their bags and smiled. When Konrad Von Finckenstein answered the door he looked surprised and worried because he hadn't yet stocked up on candy to pass out to the little ones. Looking around the offices he found something even better: CRTC Decision 2010-802. Hiding their nasty smirks behind their angel masks, the telcos made their way back home to look over their loot. Then the press releases and media articles began appearing.

Bell Canada and other telcos got what they wanted in CRTC Decision 2010-802, giving them flexibility, though not free reign, to charge overage fees (usage-based billing, or UBB) to retail users of their wholesale GAS ISP customers. This does not surprise me, notwithstanding the attitude of at least one CRTC Commissioner, since the CRTC is attempting to allow market forces to work in the broadband sector. ISPs understandably don't like what the CRTC has allowed, and neither do their heavy-usage customers. Although all of us users of broadband have reason to gripe about the potential for paying more, after reading through the Decision I believe the CRTC has struck an appropriate balance. Like a lot of balancing acts it is unstable and will almost certainly require follow-on action in the future as intent and reality drift apart.

Media reports necessarily gloss over the details, instead focussing on news releases, interviews and complaints, which is unfortunate since the actual Decision contains what really matters for those with a strong interest in the matter. As I've done with some previous CRTC actions, I will provide some commentary on those details.

9. The Bell companies proposed a new grandfathering arrangement whereby they be allowed to implement economic ITMPs for GAS ISPs’ non-grandfathered retail customers, provided that the grandfathering practices are applied on an equivalent basis to the Bell companies’ retail customers. Under the Bell companies’ proposed arrangement, flat monthly rates for unlimited usage would continue to apply for GAS ISPs’ grandfathered retail customers, while the UBB regime would apply for GAS ISPs’ non-grandfathered retail customers.

This is what we get when the regulator gets too involved in a market. The equitable pricing argument is a good one since, now that the CRTC has intruded as far as it has, it has to level the playing field insofar as it wishes to avoid asymmetric mandates among competitors. In their view, however, the telco competitors are the cable companies, not the ISPs; the CRTC sees the ISPs as customers of the telcos, not competitors.

12. TELUS Communications Company (TCC) and the cable carriers supported the Bell companies’ proposals.
...
35. The Bell companies requested that the Commission vary Telecom Decision 2010-255 to approve the principle, consistent with what is currently being applied by cable carriers, of a UBB component and an excessive usage charge with a cap at equivalent rates to those imposed on the Bell companies’ retail services, instead of a 25 percent discount.

36. TCC and the cable carriers supported the Bell companies’ request.

Then again, it is very interesting that the cable companies supported the telco interventions on both UBB and UBB caps. That does not sound like the action of competitors. I would have expected them to either remain silent or to make some bland comments, as is typical in these matters; they don't want to appear either disinterested or too supportive of measures that negatively impact their competitors. I solved this mystery -- or merely my own confusion -- by reading the cable companies' submission on the telcos' request for variance. The answer was there:

Conclusion
14. In conclusion, the Cable Carriers reiterate their support for regulatory symmetry as regards the application of ITMPs to wholesale services, and reaffirm their view that their existing TPIA UBB practices are already fully consistent with a policy of ensuring that UBB terms and conditions are applied no less favourably to wholesale as to retail customers.
15. The Cable Carriers agree with the Bell Companies that it should not matter that some retail customers are grandfathered without UBB, provided equivalent grandfathering opportunities are made available to wholesale customers. Similarly, it should not matter that UBB is applied to some service tiers but not others, or that UBB is applied to residential offerings but not business offerings, provided that when a given offering is made available at wholesale it incorporates the same UBB terms as are applied at retail. Furthermore, to protect against draconian results that could arise from an excessively rigid application of the equivalent treatment rule, it is entirely appropriate and of no offense to the principle of competitive equity to allow for de minimus exceptions to the rule.
16. The Cable Carriers agree with the Bell Companies that the Decision 2010-255 prohibition on waiving UBB charges on a promotional basis is an unjustified interference with the effective functioning of market forces in the internet access market. The Cable Carriers further agree with the Bell Companies that an equitable and effective application of economic ITMPs requires that the same UBB rates and caps be applied to wholesale as to retail customers

With the CRTC so focused on treating the telcos and cable companies equitably in this matter, the cable companies had to support the telcos so that the CRTC would be encouraged to choose the option that most benefited them; that is, the option that would give them the maximum flexibility to increase revenue and reduce ISP competitiveness with respect to TPIA, the cable equivalent to GAS.

10. With respect to how to apply this proposal, the Bell companies stated that they have implemented a grandfathering arrangement for their retail customers and no longer offer flat-rate unlimited usage retail plans as of 1 February 2007. In their application, the Bell companies submitted that, consistent with their retail practices, a GAS ISP’s grandfathered retail customer would be a retail customer who was with that ISP before 1 February 2007 and whose service has continued without any changes.

11. The Bell companies further stated that, rather than actively migrating retail customers to usage-based plans, their retail divisions have implemented an approach of increasing rates periodically for customers on unlimited plans to incent customer migration. They requested that the Commission approve a similar principle of applying an unlimited usage plan premium charge for GAS ISPs’ grandfathered retail customers.
...
16. The Commission considers that, if an appropriate grandfathering arrangement is established for Residence GAS, the requirement of equivalent treatment for wholesale GAS and retail Internet services would be met in a minimally intrusive manner and, consequently, it would not be necessary for the Bell companies to charge UBB rates to all their retail customers prior to implementing UBB for GAS.

http://www.cbc.ca/technology/story/2010/10/28/crtc-usage-based-billing-internet.html
This is the sweetener that appears to have helped sell the proposal to the CRTC, by stating that they will, over time, strive to migrate their own unlimited plan retail customers to similar UBB plans. This point about grandfathering and telco retail customer migration was not made clear in the CBC article I came across, though perhaps other media did better when reporting this.

Now that they need to act even-handed with respect to the competitors -- in the CRTC's judgment -- they feel compelled, by the law, to withdraw the UBB overage charge restriction so that the cable companies are not handed a competitive advantage by the CRTC. In this situation, the CRTC is behaving in a manner similar to a strong labour union. What a union achieves over time is near-equal salaries and benefits for each trade or profession they represent across entire industries, without regard to individual merit or the market forces that the affected companies must operate under. I care for neither since these are overt and excessive interferences in the free market.

30. The Commission considers that requiring the Bell companies to extend the same UBB promotions to GAS ISPs that they offer to their retail customers would unduly interfere with their operations in the retail Internet services market.

This point on tying GAS UBB rates to the telcos' own retail promotions seems fair to me, if it is only for limited-time promotions and not done as a matter of course as a means to drive the ISPs out of the market. Every company should be able to use this tool of competitive marketing. The ISPs can do the same if they wish. These promotions do have an impact on costs, but that is true of both the telcos and the ISPs. The cable companies strongly supported this point, as can be seen in the passage I quoted earlier.

45. The Commission notes that, in response to a Commission interrogatory, the Bell companies submitted revised cost information based on an Ethernet growth solution that included the missing cost elements described above. After evaluating the revised cost information, the Commission considers that the Ethernet growth solution would include significant reductions to switching and transmission costs that would offset the additional conversion and traffic migration costs suggested by the Bell companies.

In an earlier article on UBB I talked about the bizarre situation where the CRTC is making determinations on network and engineering costs to determine the basis for retail and wholesale service prices. They've done it again, with no explicit justification, by rejecting the (non-disclosed) cost calculations of the telco with respect to ATM and Ethernet access networks. Although I, too, would be wary of the figures submitted by these companies, the CRTC is unqualified to make the criticism on these fine details. I doubt that this decision will have much real impact on the telcos, it just annoys me to see the CRTC so intrusive and cavalier on these business matters.

As for the ISPs themselves, they can complain about the granting of the variance to the CRTC order all they like -- and they are! -- but this is the price they, and we their customers, must pay. As I've said before, the broadband ISPs live at the pleasure of the CRTC and their policies because only the CRTC can mandate their access to the facilities of the incumbent service providers. For now they will continue to live. How long the CRTC will support their existence remains to be seen. My guess is that when (if?) there is sufficient facilities-based competitive alternatives they will sunset GAS and TPIA.

Rogers, the Telecom Cannibal

2010-10-27T06:52:00.058-04:00

One of the most difficult choices that an established and very profitable company must make when faced with a small and nimble competitor, one that has everything to gain and nothing to lose, is lowering their prices or investing in new technology to address the new competition. They quite sensibly will put off these decisions for as long as possible. The delay will be criticized, and even ridiculed by the competition, yet it is still the right choice. Rarely is the decision so urgent that a company will forgo current profits to chase what may turn out to be a mirage. That is, they will strive to avoid cannibalizing profitable businesses -- by lowering prices, offering new services or investing in new technology -- until it becomes unavoidable.

The reasons why delay if often the best business decision are several:

The new competitors, especially in the telecom business, must invest heavily to deploy a new network. The massive debt load when combined with lower prices (to differentiate from the incumbents) and what may turn out to be a slow acquisition of customers can derail or destroy the competition, even when the incumbents make no changes to their prices or products. Time is often on the side of the incumbents.
It is not unusual that new technology, while dazzling to customers and the media, is not adopted rapidly by customers. Consider VoIP as a good example of this phenomenon. Rapid investment in the new technology that competitors are also deploying can often be done at a slower pace when combined with good marketing. In effect, telling the market that the technology is being deployed (which is true) while doing so quite gradually.
Lowering prices does not guarantee customer retention. First, even if prices are held steady, many customers will no switch since they will be more conservative in their choice, opting to go with, for example, good wireless coverage and service dependability. Second, customers preparing to switch will often do so even if the incumbent lowers their prices since there are other factors in their decision, such as escaping poor customer service.
Investors may rebel or will at least defect (sell their shares) as the incumbent damages short-term profitability by lowering prices and increasing capital expenditures, even though they may understand the reasons for the company's decision. It is no certainty that the competitors will be irreparably harmed by the company's actions, or how long it will take. Yet for the present they must tolerate a lower company valuation, due to lower profits, and therefore lower share prices; the company's share price in part reflects investor expectation that company profitability be sustained or increased.

With this background, let's look at yesterday's quarterly results from Rogers. As recently as this summer I wrote that Rogers was still looking good since there was unlikely to be any near-term impacts on their financial state due to new competitors such as Wind and Mobilicity. It would take time for them to build out their networks to become a credible alternative and take a significant bite out of Rogers' subscriber base. This appears to be the case, despite some analyst warnings to the contrary.

The new landscape includes a handful of upstart wireless firms, such as Wind Mobile and Mobilicity, that are building traction with consumers through discounted pricing, simplified agreements and aggressive marketing campaigns.

And this one:

...Dvai Ghose, a telecom analyst with Canaccord Genuity, in a research note earlier this month. “In our view, the market is ignoring reprice pressure in Canadian wireless, both from new entrants and incumbents.”

Nevertheless, Rogers did respond with their flank brand, chatr, to mimic Wind's pricing to compete with them without threatening their core wireless business. That has, in part, had an impact on their quarterly results.

The modest year-over-year increase in net subscriber additions for the quarter primarily reflects increased prepaid subscriber additions offset by an increase in the level of postpaid churn associated with heightened competitive intensity. The increase in prepaid subscriber additions was the result of Wireless' launch of its urban zone-based unlimited voice and text 'chatr' product and also its continued offering from earlier in the summer of prepaid wireless service plans for Apple's recently introduced touch screen tablet computer, the iPad. In addition, Wireless introduced prepaid Rocket stick wireless data plans that offer the same speed and reliability as existing postpaid plans but designed for customers seeking the convenience of prepaid online credit card activation.

Although Rogers has taken steps to restrict new chatr plans to the areas when competition is now ongoing, they are to some extent -- thought it is not really possible to say how much -- cannibalizing their own business when their existing customers switch to chatr. It is also interesting that their subscriber growth is slowing despite the additional services they are offering for new devices such as the iPad and internet access for PCs and netbooks.

The number of new Smartphone subscribers was the second highest ever in a quarter. This resulted in subscribers with smartphones, who typically generate ARPU nearly twice that of voice only subscribers, representing 37% of the overall postpaid subscriber base as at September 30, 2010, up from 28% as at September 30, 2009.

This is another impact on their results which is not only a sign of future growth and not at all related to competition. When you buy a smartphone from Rogers -- iPhone, Android or BlackBerry -- they must purchase the phone from the supplier at full price while selling it to you at a heavy discount. They make it up over the contract term(including data plan), but account for the expense in the current quarter. Yet these subsidies, and current quarter losses, indicate future revenue and profit.

Some analysts feel that smart phone upgrades, as opposed to pure subscriber growth, is a more important indicator of success in the industry as wireless data revenue – which was up 28 per cent in the quarter – becomes more important than revenues from voice services.

That is, a ramp in these subsidies is a good indicator of future profits and corporate health. We should also note that they are not only on the receiving side of competitive pressures, they are taking telephony market share from Bell Canada and other incumbent telcos.

Cable telephony lines in service grew 9% from September 30, 2009 to September 30, 2010. At September 30, 2010, cable telephony lines represented 27% of the homes passed by our cable networks and 43% of television subscribers.

Although Rogers B-class shares lost 7.7% on Tuesday in response to their quarterly results, I do wonder if this is either an overreaction or a overly-negative interpretation of their earnings decline. I don't like Rogers as a customer, and I am not currently either a customer of theirs or a shareholder, but I would not write them off just yet. I would also suggest that they may be too aggressive in cannibalizing their wireless business, even though they've segregated budget pricing to the chatr brand. Perhaps they really are running scared, though that does not seem likely to me. More likely is that they hope to hurt the competition now while they're still at the critical market-entry phase and very sensitive to meeting subscriber and revenue objectives.

As consumers, not shareholders, we do have some choices even if their coverage and options are still limited. That can't be bad. There is even good news for Rogers shareholders since, if my guess is right, this drop in share price could turn into a buying opportunity for those willing to hold for another quarter or two.

Chasing Currencies: Smart vs. Dumb Money

2010-10-25T07:42:00.024-04:00

Currency watching seems to have become a big deal recently with the emergence of QE2 in the US and the increasing glitter of gold. More injection of money into the market by the US Federal Reserve effectively devalues the US dollar and, if truly a hedge instrument, the price of gold rises -- at least when measured in USD. Devaluation is however a relative sort of thing, so you do have to specify just what it is that the USD is being compared.

In addition to gold, US investors watch the currencies of other major economies, in particular the Euro, the British pound and the yen. The Canadian loonie is only of secondary interest to them. Despite the huge trade between our countries, our economy is relatively small and, like Australia, our currency is often seen as little better than a proxy for mineral commodities (which is largely true).

Aside from the high-stakes currency games in play across the globe, there are many people in Canada -- those that do not actively participate in the markets -- that see the CAD:USD exchange rate as a type of sports match; they cheer the home team (the loonie) when it is near par with the USD and are distressed when it declines. This is silly since par has no economic meaning, or at least no more than any other exchange rate. It can even infect those who ought to know better. I once had a CEO who one morning was all giddy about the strength of the currency. I quietly reminded him that our major market was the US and the currency appreciation was making our products more expensive for our customers and therefore less competitive. Worse, our parts costs were fixed in local currency even though many were imported from the US so we couldn't benefit on product costs on the other side of the ledger.

While we keep our laser focus on the linear threshold that represents the par value of the CAD:USD chart (adjacent), and the US compares their dollar to other currencies, there are still others who compare the USD to gold and even to stocks. That last one really puzzled me, as you can see in this October 15 article in the Wall Street Journal. Here we have someone not only comparing the USD to domestic stock indices but then saying that there is an investing opportunity when they diverge, as if there is some fundamental measure of fair value that proclaims they ought to be closer together. In other words, if the USD is declining when the market is rising there will soon come a revaluation of the market lower, in concert with the USD, as a type of reversion to the mean.

Even if we assume for the moment that there is a mean (fair value) to which the market will revert, there is no reason to assume that the market will move. We can get reversion by the USD rising, the USD and market both rising and both falling, or meeting somewhere in the middle. Yet we are to believe that the "smart money" -- by this the author means financial professionals, not you and me -- will bet on the market falling if the USD rises. That doesn't sound so smart to me. One fundamental reason is that as the USD declines, the competitive position of exporting US companies is improved which will be reflecting in their share price and therefore the market. There is perhaps a better argument to be made for the divergence to be a positive feedback loop that will (to a degree) drive the USD and market further apart. So who's dumb and who's smart?

This also impacts the loonie and Canada since there is tension between an increasing need for Canadian resources due to renewed economic expansion in the US and their higher cost of importing our resources. It's this sort of conundrums that keep the talking heads yapping in the media. It also reinforces the point that investing can be a perilous venture for the likes of us when major economies play power games with each other.

Robocalls From O'Brien and Other Politicians

2010-10-21T07:45:00.046-04:00

Robocalls cover several categories of automated, mass calling systems. Perhaps the most benign of the bunch (if there is such a thing) is the type that appears to have used by the O'Brien campaign. This is were a list of numbers in the targetted demographic or geographic area are machine dialed, and when the call is answered a prerecorded message is played. Very convenient and (importantly) inexpensive for the campaigner but terribly annoying in most cases for the rest of us.

There are other, more-insidious varieties of robocalls, and it is perhaps no surprise that they have, in general, been banned in countries like Canada and the US, and a growing list of others. Unfortunately, calls from campaigning politicians are excluded from the Do-Not-Call registry even if they are robocalls rather than if the auto-dialer connects you to a live human operator. It likely wouldn't matter in any case since the CRTC is not terribly aggressive in pursuing DNC violators, despite reports to the contrary:

According to the CRTC's rules, candidates can't ask for money or volunteers, but they can ask for votes. Auto-dialing must only be used during reasonable daytime and evening hours, and messages must start by identifying the caller as well as a mailing address and a phone number where the candidate can be reached.

None of the robocalls made during Winnipeg's civic election campaign appear to have included the candidate's campaign office address or phone number at the beginning of the message, though most candidates left a phone number at the end.

Officials with the Canadian Radio-television and Telecommunications Commission say they're looking into a small handful of complaints over the last couple of weeks, at least one related to robocalls made by Mayor Sam Katz as part of his re-election bid.

Katz's campaign staff say their telemarketing provider double-checked with the CRTC and was told the ADAD rules do not apply to political campaigns.

But two separate CRTC officials confirmed Tuesday that candidates must comply with the ADAD rules.

This activity is also going on in other cities because it can be so effective, such as in our biggest city, Toronto:

The company called 10,000 people in Vaughan’s Ward 3, collated from municipal electoral rolls.

• About 2,000 people “connected” and stayed on for varying periods, from a few seconds to a few minutes.

• 770 stayed on for a “sustained” period, 8 to 22 minutes.

• An astonishing 550 stayed on for a full hour, asking Del Duca questions about everything from local issues to high car insurance rates. It would be hard to achieve anything like that degree of contact through the time-honoured methods of door-knocking and doorstep-chatting.

Of course this is why they do it: it works. It works because enough people bite to make the campaign effective. This is the same reason that email spam and commercial telemarketing continue despite the fact that they annoy the majority.

There are scattered cases of worse robocalling behaviour by political campaigns south of the borders. In the 2006 and 2008 election years some people were getting upward of 10 or 20 calls per day from the candidates. Often they violated the blackout periods (such as late evening) that apply even to these DNC-exempt callers. Worse, some voters got calls in the middle of the night.

It turned out that these repeated or late-night calls were usually from opposing parties who would splice out of context or fictional messages from the other candidate in the hope that it would turn them against that candidate. By all reports it actually had that effect, since it was only later, after the election when the damage had already been done, that most of the truth came out. As far as I know this type of fraud hasn't yet occurred in Canada.

One puzzling report regarding the O'Brien robocalls is that some people claim they can't hang up on the calls:

Several recipients said they couldn't hang up and use their phones for another call once the taped message started. A YouTube video shows a man apparently trying in vain for more than 20 minutes to hang up on a telephone "town hall" meeting, basically a massive conference call featuring O'Brien.

This type of network behaviour pretty well disappeared in the 1970s when the first stored program controlled switching equipment was widely deployed. On older electromechanical switches it was indeed very possible for a caller to hold the circuit by remaining off-hook when the called party hung up. While it had valid uses -- such as going on hook on the main phone to pick it up from an extension phone in a bedroom -- it was often abused by stalkers, collection agencies and others.

I suspect that in the above report these people didn't go on hook long enough (a couple of seconds) before going off hook again, or another phone on the same line was off-hook or their phones were defective. Nowadays it is typically only 911 operators that have the required network feature to keep a line active when the other party disconnects.

NDA Should Come After the First Disclosure

2010-10-19T10:51:00.001-04:00

Many Android application developers have recently been bombarded by emails from Amazon. Regrettably, the way they have gone about this guarantees that this development firm will not be responding. The critical passage in the email is this:

Once you agree to and return the nondisclosure agreement we can begin speaking with you in greater detail about the opportunity.

Requiring an NDA as a prerequisite to the recipient of a business proposal is a good way to kill the opportunity in the bud. It isn't so far removed from telemarketing scams that begin by telling you that you've just won a trip to some tropical resort, and then say: "please send us $500 to cover administrative expenses which we'll refund later." In both cases the unsuspecting recipient of a proposition is asked to ante down before being able to properly assess the merits and costs of the proposition. The correct response in such a case is typically to say nothing, do nothing and walk away.

In the case of any business proposition, the reasons to not sign an NDA are much the same as why a venture capital firm will not sign an NDA with the companies that pitch to it:

You may be legally bound to not discuss with anyone else what you have learned in the disclosure even if it becomes public knowledge. In other words, you are being co-opted to protect the other party's pricing, features, business practices and other information. This can include not being able to tell, for example, another supplier or service provider what price they will have to beat to earn your business, even if you do not name the competing company or product.
Regardless of the novelty or uniqueness of matters disclosed to you, you may find yourself in legal chains in your further use of these matters. For example, if you are shown an as yet not well known method for indexing a database, but is one that would not (or should not) meet the "not obvious" criterion to be patented, you may find yourself unable to use that method even if independently implemented by one of your own staff. Regrettably, the same can apply to business methods or other so-called trade secrets that are generally considered to be pretty ordinary.

There are of course valid reasons to sign an NDA in the above cases, but never as a matter of routine. There should always be a strong justification, known and discussed up front, before signing and before each disclosure. The proper way to make progress in these situations is to disclose the opportunity in broad terms before delving into details which expose trade secrets or sensitive intellectual property. Only after a further milestone is reached, and once mutual trust has been firmly established, should either party go further in what they disclose.

In the rare case where more must be disclosed up front, this requires more due diligence in establishing the good reputation (or not) of the party receiving proprietary information. Few companies or individuals are in a position to do well from recourse to the courts after the information is abused by the recipient. The objective is to avoid this if at all possible.

So then, what is Amazon going to disclose that makes the signing of an NDA so important, to them and to us? The rumour is that they plan to launch an Android app store in competition with Google, although I can't know for sure since we have not engaged Amazon on their proposal, even though it is being widely discussed.

I believe they will have eventually have to open up more publicly if they are to gain the volume of developers and apps that they would need on board if they are to be successful. Only then would we consider getting involved. However, their opening sally has put us on our guard because they feel a need to tie our hands or silence our mouths that is greater than their need to openly discuss terms, unlike Google's Android Market.

For us, an Android developer, the risks are greater than any opportunity we can see. That precludes the possibility of our signing an NDA with Amazon at this point, or at any time in the future.

Disclosure: Warning! I am not a lawyer, so please keep that in mind when reading this article.

China's Muscle Flexing

2010-10-18T13:14:00.000-04:00

My reaction on reading Paul Krugman's article on China exploiting its globally-dominant position in rare-earth metals was an interesting one: laughter. While I have no especial reason to side with China in this or other trade disputes, I can only smile as they use tactics that other countries have used themselves for decades or even centuries, and in particular the US, which is unsurprisingly where Krugman is located.

The thing is, countries which have a strong military or economic position tend to exploit it to their own advantage. Trade is merely one aspect of that power relationship. The US used its power to do everything from opening up Japan to international trade in the 19-th century to creating the so-called banana republics in Central America to gain favorable access to tropical produce to imposing advantageous (to them) rules on exports of softwood lumber from Canada. This is simple power politics. Yet we are still able to maintain a positive overall impression of the US.

When a new power comes on the scene it is expected that the old powers will squirm at least a little bit. It is good for China, and us, that its per-capita wealth is growing and that the country is now in a position to trade with other countries on a more equal basis. Trade goes both ways, so while we import products from them, we also have a new, large export market. For Canada the situation is not too far different from the one with the US since in both cases the trade partner is big, aggressive and wealthy. Whether it is US petroleum money in Alberta's oil patch or China mulling over Saskatchewan's potash industry, the concerns for us are pretty equivalent.

In regards to the recent dust-up between Japan and China over sea rights, Krugman extends the threat to that which China could exercise over rare-earth metals:

On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

I would suggest that China is no more trigger happy in these sort of dispute that the US has been in the past century; it is simply that China has some newly-acquired muscle and they are not afraid to use it. They are certainly being aggressive, but they are not going to war with anyone. In diplomatic circles this is called "sending a message". I say that it worked: China has succeeded in waking up some sleepyheads around the world, and in Washington in particular.

This sort of muscle flexing by China will continue, and it will be felt in all areas of trade and international business. This ranges from their wide-ranging mining and resource activities throughout Africa -- too often ignored by others -- to what I believe will be an assault on the the high-value end of the economic spectrum as evidenced by their growing pursuit of patents.

The bottom line is that China is a major world power that is increasingly in a position to flex its muscle. Like other powers that came before, they will naturally find that balance point between passiveness and aggressive expansionism since its optimizes their net benefit. That is, they refuse to be exploited as they have so often been in the past, nor will they overuse their military prowess to become an international pariah.

Their muscle-flexing causes perhaps more qualms than would another country since their government does not express the same fundamental themes of individual freedom and democracy. We could ourselves do better at this, yet China clearly does worse. There is good reason to believe that they will do better in the future. I am hopeful that China will in time become a more gentle giant than they are currently exhibiting as their growing pains create frictions with those they rub up against.

Police State Languages, and Businesses

2010-10-14T07:15:00.029-04:00

In George Orwell's "1984" the totalitarian state government has created a new language, one based on ordinary English, called Newspeak. They are just beginning to introduce it to the population in the time period in which the novel's story takes place. It is not an optional language; it is positioned to become the state's official language and, over perhaps a generation, it will be the only language to be spoken.

Newspeak, as Orwell describes it, complete with examples, is restricted in both form and vocabulary. It is designed to make it difficult to say things which the state deems to be bad, and conversely making it easy to say the things of which they are likely to approve. Further, since we think in language, people will supposedly find it difficult to have thoughts that are contrary to the state's interests. If successful, the change in language would solidify the state's control over its citizens' minds and lives.

Despite some problems with the realization of such an outrageous idea, it is one that is a common topic in software engineering. Computer languages are strictly formal, with syntax and often semantics firmly based on propositional logic, with any deviation causing errors. Those errors must be corrected for a program to run. This fact makes computer language design quite similar to Orwell's Newspeak. One of the key questions a language designer must consider is whether to accommodate software designers' whims or creativity, or tie the structure down in a way that compels them to design software that meets the language designer's objectives.

This concept was first forcefully introduced to me by Robert Dewar, one of the creators of the Spitbol programming language (a version of Snobol) during a seminar he gave when he visited my university. With a nod to Orwell, he called computer languages that forced programmers to avoid a wide range of common, if sloppy practices as police state languages. The distinction is that in police state languages (which Spitbol most definitely was not) the objective was to make it difficult for the programmer to write "bad" software. Not impossible, just difficult, so that there was a greater likelihood that "good" software would be written. Modern object oriented languages such as Java can be classified as police state languages since they rigourously enforce a data structure and flow of control that is inconvenient (and often pointless) to avoid.

Conversely, non-police state languages make it easy to write "good" programs and "bad" programs; it's up to the designer to make appropriate choices. Languages such as C are in this category. However, the dividing line between these police state languages and others is fuzzy, and the differences are sometimes subtle.

Beyond philosophical differences there are other advantages and disadvantages to both categories of computer languages that I won't get into here. Suffice it to say that most software designers use both at different times for different purposes.

There are ample analogous situations that can be found in all aspects of human endeavour. A bureaucratic company, and especially the civil services, is rife with police state modes of operation. It seems that the most trivial task requires the filling out of forms, the request for approval from one's manager (who may then seek the same from his or her manager), documenting how every hour of every day is spent, and so forth. These are organizations that make it very difficult to do bad things. They also suck the life out of their employees by destroying creativity, initiative and productivity.

Presumably these organizations are perfectly satisfied with the trade-off. Private sector organizations of this type (think of insurance companies and even, though to a lesser extent, the old Nortel) are vulnerable to competition or a rapid evolution in their markets.

Entrepreneurial companies that are aggressively growing are of the other category. These companies harness the energies of their employees in ways that are a joy to see and experience (everyone ought to have this opportunity at least once in their careers). A couple of local (to Ottawa) examples with which I am familiar were Mitel circa 1980 and Newbridge in its first decade. On the down side there is often total chaos, including frequent changes in direction, such as the trashing of one nascent product or market for something supposedly better or more promising, and no sense that the organization is able to function as a unified entity. The resulting inefficiencies are in one sense horrifying, except that the energies released can still result in prodigious results.

These non-police state businesses make it easy to do both good things and bad things, and there is a lot of individual discretion given to employees to make that choice. It is common in these companies to find few formal processes (just find someone with formal authority to sign a purchase order, as an example), nothing that could be properly called a budget, and often products that get shipped have surprising features that were never specified in advance.

As with computer languages there are market sectors that favour each category of business. Oftentimes a formerly free-wheeling organization will, when times get tough, adopt many of the practices of police state companies. Regrettably we rarely see companies move in the opposite direction, away from police-state practices. Instead they tend to die off.

For a manager in a free-wheeling company, it can be very challenging to maintain any sort of control over delivering to objectives. There is often the desire to institute controls. If you are ever in this situation I suggest avoid the easy out -- creating controls that prohibit bad behaviour -- and instead learn to better direct and maintain the team's energy level -- encourage and reward good behaviour. People aren't computers and trying to police behaviour to too great a degree, even with laudable objectives, is rarely the right choice. Leave police-state languages and practices to the computer language practitioners.

Patent Wars

2010-10-07T07:49:00.029-04:00

Von Clausewitz famously wrote that "war is state policy by other means." We can go further and say that economics is war by other means; wealth is power that a country can use to fulfill state policy without mobilizing its military forces. The wealth of corporations, by use of corporate law and trade agreements, complements direct government action in these policy endeavours. In effect the state operates through the private sector by proxy much as two world powers have often funded other countries as proxies to fight their fights in furtherance of their own policies.

Patents and patent law are important parts of economic warfare. It is often a means to extract wealth from other countries by using international agreements to prevent cheaper competitive products that these countries would either import or manufacture themselves. Think of generic pharmaceuticals, genes, machinery, GMOs, among many others. It all works in a manner similar to the way Britain once forced its colonies to import products from British factories even though they could manufacture these themselves from the same raw materials that they exported to Britain. For example, Indian cotton and clothing.

Patents can only be used in this fashion by a country when its citizens and corporations have more and better patents than those countries it wishes to target. This ration can be improved by combining a low standard for granting patents and a judicial system that is loathe to question weak patents. By also allowing corporations a means to request import restrictions by the government on products that are alleged to violate patents, the power of domestic patents is increased. The US today does all of these things.

For this reason I was quite interested to read in The Economist that China is finally catching up to the US with its patent portfolio. The chart they show (from WIPO data) clearly demonstrates the trend. With China's rapid growth, large population and strong national desire to elevate their status among the great countries of the world, this is wholly unsurprising. A good example is their space program. Since the end of the cold war the US space program has drifted, having no clear objective for exploration beyond science. In contrast, China recently announced a new unmanned Moon mission that failed to make more than a small media ripple in this part of the world. The US and Russia are no longer one-upping each other to get to the Moon and beyond, but China is aggressively advancing their space program in a manner somewhat similar to what we saw in the 1960s and 1970s. They feel they have something to prove, and perhaps they do.

With respect to modernization and technological advancement, China is catching up, and patents are only one measure of their progress.

The question for America is not the influx of cheap but what do we do when cheap is gone and China starts to make the expensive stuff, too.

With let up in the trend, the quality and quantity of Chinese patents will pass Europe and the US very soon. As the innovation balance gradually shifts east there will be some profound impacts on the US and Europe, and their private sectors. As this article began, if patents are a battlefield the advantage will shift east as well. Patent law, which currently favours the US due to their larger and stronger portfolio, will, perhaps as soon as 2020, begin to benefit the China more often. Since old patents expire and the majority of new patents will belong to Chinese companies, the winner of more and more patent lawsuits will be won by Chinese companies.

When this happens I think we may finally see patent reform. At first in the US and then, if they negotiate wisely, internationally. If the bar is not set higher so that weak patents cannot be used as weapons in the court, US companies will suffer. Until this happens I suspect that Congress will not change course. However, this is a large ship that changes course only very slowly. Even so it is unlikely to change the outcome, especially so if the US continues to turn out fewer engineers and scientists, or just at a slower rate of growth than the competition.

The Straw That Broke the Market's Back

2010-10-04T07:28:00.018-04:00

If you follow the markets you may have noticed the release late last week of the SEC's investigation of May 6th's "flash crash". That was the day the S&P 500 and Dow Jones Industrial Index dropped something like 700+ points in mere minutes. I remember that quite vividly since I happened to call up a market screen in the midst of that event. I quite naturally assumed that there was a data feed error or some other misquote, but the problem persisted and was visible on other quoting services, and began to appear in live market commentary.

As the report notes (here's a short, readable summary) there was a lot of downward pressure that day for various legitimate reasons. However, this sort of drop should not be possible, or at least very improbable, due to the many checks and balances built into the market and quoting systems. Clearly this was insufficient. The transaction trail led back to the trigger, which was a large E-mini futures trade by a respectable firm that runs mutual funds as a large part of its business. The futures contract was reportedly a hedge against its longer-term investments.

E-Mini S&P, often abbreviated to "E-mini" and designated by the commodity ticker symbol ES, is a stock market index futures contract traded on the Chicago Mercantile Exchange's Globex electronic trading platform. The notional value of one contract is US$50 times the value of the S&P 500 stock index.

It was introduced by the CME on September 9th, 1997, after the value of the existing S&P contract (then valued at $500 times the index, or over $500,000 at the time) became too large for many small traders. The E-Mini quickly became the most popular equity index futures contract in the world. The original ("big") S&P contract was subsequently split 2:1, bringing it to $250 times the index. Hedge funds often prefer trading the E-Mini over the big S&P since the latter still uses the open outcry pit trading method, with its inherent delays, versus the all-electronic Globex system. The current average daily implied volume for the E-mini is over $140 billion, far exceeding the combined traded dollar volume of the underlying 500 stocks.

Although I can't pretend to know or understand the intricacies of the markets events which led to this, I am dissatisfied with this summary. Let me explain my basic reasoning. Think of a sports match such as a hockey game between the Leafs and the Sens. It's a hard fought 58 minutes where the sides take turns scoring, and there are controversial calls and a lot of penalty minutes on both sides. There are heroes and there are goats, which the crowd cheers and boos. Then two minutes before the buzzer, with the Sens having one-man advantage, a quick passing play through the Leafs' defense leads to a Sens' goal and they go on to win 5 to 4 two minutes later.

The question is: who caused the Leafs to lose or, conversely, the Sens to win? Commentators and fans scramble to lay the blame and praise (depending on whose side they're on). Was it the Leaf player who grabbed a jersey in the dying minutes and got a penalty? Perhaps it was the goalie or a defender that made the wrong move? It gets far worse when you broaden your scope further. After all, there were 59:30 minutes of action, both good and bad plays, goals and penalties, before the seminal event. Doesn't any of that count? And what about the final two minutes of play: shouldn't the Sens' time killing tactics get praise or the Leafs' failure to get a shot on goal be panned?

Yet we still focus on the goal scorer and the goalie who failed to stop the shot, which is perhaps just one of a hundred key points during the game. I feel that the SEC did much the same thing by focussing attention on that one trade in their report. As Bloomberg reports:

Jeffrey Hopson, an analyst at Stifel Nicolaus & Co. in St. Louis, said the report is unlikely to damage the company in the long term.

“It’s not ideal PR, but the activity didn’t represent anything unusual,” Hopson said in a telephone interview.

Futures options are typically asset-backed derivatives. Unlike a bet at the track that does not affect the performance of the racehorses, an option does impact the market. Someone, somewhere has to cover the asset that the option is on. If it's on the S&P 500, the asset is likely an index fund which contains a large inventory of real shares in the company that are in the S&P 500. A large futures trade will move the market.

“One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account,” according to the report from the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission.

There are two points here. First, when you trade either an illiquid security or the trade size is a significant portion of the average daily trading volume of that security you are foolish to not use a limit order. This goes for individual investors buying or selling shares of a small technology company, but all large financial firms trading billions of dollars of shares of the world's largest companies. What the purported initiator of that E-mini trade did was in this regard foolish but not improper.

The second and what I believe is the more important point, there were lots of sellers waiting in the wings. That these sellers were programs lurking just below the market quotes does not much matter. The thing is that when the market is going down, conservative investors and also active traders sells when the market goes down, just as they are wont to buy when the market is going up. This is the opposite of many small and inexperienced investors that choose to buy when the market is down and buy when it is up. It is of course more complicated than this -- actual trading strategies are infinitely more nuanced and focussed, even for small investors -- but there is some excellent rationale behind this trading style. It's about momentum: as with a ball that starts rolling downhill, if the market sentiment is negative, it will pick up speed.

That is why all those sell orders were lurking below. Programs had set thresholds on volume and velocity of selling (and the phase of the moon for all I know) that it used to determine downward momentum, and started selling. The selling drops the price, which causes more selling, and so forth on to the bottom of the crash.

The global economy and recent news events played a key role in setting the parameters behind the programs and the mindset of manual trading activity. We should not forget that, just as we should not forget the programs selling that dug the hole deeper. Focussing on any one trade, whether this one or another one, is a distraction. It may have been important, especially since it was a large market order (no price limit) on a high-leverage index, but it wasn't the only player in the game and it was not the only play that day.

I would hope that the real lesson learned is on how to improve the market's circuit breakers -- the real-time checks and balances -- or on better trading constraints before an anomalous event, whether or not they are executed by programs. We need the markets to be more robust than a house of cards.

Autumnal Fading of the Insolation

2010-09-30T07:14:00.035-04:00

The waning of summer has now been replaced by the rapid decline of the autumn as the sun passes the equinox. This is the time of year when the daily rate of change in sunlight -- the interval between sunrise and sunset -- is at its greatest. As we all know, as the days grow shorter and the sun gets lower in the sky the amount of energy we receive from the sun decreases. The why of it is pretty straight-forward although perhaps it is less clear just how great is the difference.

When I was a child and I first learned these facts I can clearly remember standing outside in the frigid winter air and looking at the sun hanging low in the south. It was cold but the sun seemed just as bright (or even brighter due to all the reflecting snow on the ground). I knew that the sun was no further away in the winter -- it's actually closer in the northern hemisphere winter -- and since I was facing it full on the energy I received should also be identical. This is in fact close to the truth, excepting the attenuation due to the longer path sunlight took through the atmosphere to reach my face.

The energy we receive from the sun by facing it, unfortunately, does not hold when you consider the wider expanse of the Earth's surface, both land and sea, which is what counts when it comes to weather and the seasons. At lower elevation angles, the energy is spread over a larger area, which directly lowers the flux. This is called solar insolation, and it is usually measured in watts per square meter, as power crossing a surface. Integrate by time and you get the energy, which matters when you have to take into account length of day.

This is all very qualitative and probably tells no one anything they don't already know. However I like to look into the details since it is intuitive that there are some interesting dynamics at play. For example, during the summer at higher latitudes the days are long, far longer than in the tropics, and the sun is high enough in the sky that the effect of sunlight spreading should be minimal. It should also be evident that at both equinoxes the total daily insolation should only depend on latitude, decreasing as one moves away from the equator, since daylight is 12 hours everywhere on the globe. In winter, the cooling effect due to latitude should be accentuated, and especially so in the arctic and antarctic which for a time has not daylight at all.

It is actually quite easy to do the calculation if you have a little bit of trigonometry at your fingertips. All you need to do is figure out when during the day the sun is in the sky and track its elevation between sunrise and sunset. If, like me, your trigonometry lessons are lost in the dim past you turn to the internet. If you do this you will quickly locate the equations for the sun's declination -- its angular displacement from the celestial equator -- and for the solar elevation angle. One then plugs these equations into a spreadsheet, enters a date and a latitude and spit out the numbers. Except that there are a couple of complications we need to deal with.

First, there is the matter of calculus since a proper calculation requires integrating the solar elevation angle over the time between sunrise and sunset. I took the easy way out and did a numerical integration with half-hour steps, which is a simple operation on a spreadsheet. The second is accounting for all the confounding factors if you want to achieve accuracy: the Earth's elliptical orbit, atmospheric scattering at various incidence angles, local terrain, and so forth. I opted for simplicity by discarding all these items and reduced the significant digits to two. The numerical integration adds its own inaccuracies but this is only a few percent.

With a tip of the hat to the prodigal spherical cow I proceeded to calculate. A summary of some interesting results is in the following table. Since watts and joules and all that stuff is not intuitive to most people I opted to normalize daily solar insolation where a value of 1.0 represents one hour of insolation with the sun standing still at the zenith. That is, directly overhead.

If you peruse the table you should notice some items of interest. One is that the loss of insolation in winter (it's at a minimum at the solstice, give or take a few days) is dramatic once you get to higher latitudes. I chose Iqaluit for my northernmost location since it's just south of the Arctic Circle. Edmonton gets only half the insolation of Ottawa, and Iqaluit gets only one-tenth of that, being only about 1.5% that Quito on the equator received on that same date.

The second interesting item is that at this same date Quito does not get its maximum insolation despite being on the equator. This is because the sun is in the northern sky by just enough to drop the insolation by about 10% from when it is at a maximum, both equinoxes. These are the two dates on which the sun crosses the zenith.

For me, the most striking result is the insolation at the summer solstice. All of these Canadian cities have a higher insolation than anywhere in the tropics. Even Iqaluit gets about the same amount as us southerners. This is of course due to the extra long summer days, when the sun barely gets below the horizon during the brief night, and compensates nicely for the lower solar elevation angle. More interesting is that the daily insolation gets even higher as you go north. This is because the daylight is 24 hours yet the sun is high enough in the sky to have half the intensity at the zenith even at the northern tip of Ellesmere Island, our most northerly point of land. But you have to time your visit to there just right because the warm sun doesn't last for long.

Only about 80 more days until we get our 2.0 zenith-hours of insolation here in Ottawa. I can hardly wait...until the day after.

Mayor is Not an Entry-Level Job

2010-09-28T07:09:00.015-04:00

Although politics is not the most popular topic on this blog (if I can believe the web stats) I'll go out on a limb and a make a second consecutive post on politics (but there won't be a third). This time it's Ottawa municipal politics, but my chosen topic is relevant to other locales: that is, qualifications for the job of mayor.

Elections are a bit like job interviews where there are many hiring managers and a few applicants. After perusing the resume of a well-dressed candidate seated across from us we would quite understandably want to ask why someone with either no job experience at all or none that is relevant to the advertised position would take the trouble to even show up. This is especially true for a position where those candidates with ample and relevant experience are so unlikely to have a chance at winning the position, a position that is high profile and requires a great breadth of inter-personal, management and public relations skills.

It is of course possible for someone with minimal experience to make a good mayor (or CEO or any top-level position) but there is a terrible lack of evidence to believe it; while some people do have natural talent that can surprise, voting should not be an outright gamble on the unknown. Out of the 20 candidates for mayor there are just 4 with a notable profile. Of the remaining 16 -- none of whom has any conceivable chance of winning the election -- few appear to have much experience relevant to someone aspiring to become mayor.

This is not to say they have nothing of value to say, and indeed some have made good points. In a way I wish some of them were more electable since the 4 front-runners do not appeal to me at all. O'Brien invents his platform seeming at random based on whatever pops into his head -- such as his proposal to write the city budget himself -- while Watson has a glib tongue with no notable accomplishments to his favour, and a previous tenure of mayor that is mostly forgettable. Doucet seems to have a mix of reasonable and bizarre points in his platform, and Haydon is an angry man with good reason to be angry, but no clear platform that makes any sense. Of course the choice will in actuality be between O'Brien and Watson which only saddens me since they are the only two that appear to resonate with the entire population, in both positive and negative senses. Of the two, Watson has an unfortunate advantage in that all he has to do is call attention to O'Brien's peculiar policy proposals.

As to the other 16, I suggest they aim for a lower office where they can demonstrate their grasp of municipal issues and an ability to get things done. They should focus so much on working but rather on leading; a mayor, or any corporate manager for that matter, succeeds by effectively directing the efforts of others and by wise allocation of capital and time. There are lots of positions in community associations, special events, charitable organizations, and even on council, where they can publicly put themselves out there and demonstrate they have what it takes to be mayor.

I know that some of them are only running because they see the election coverage as a platform to promote specific issues that they feel strongly about. That's their right, but it is also my right to ignore them.

For myself, all I can say is how annoyed I am that Alex Cullen is off the ticket. He would have lost, which is what I wanted, and also not returned as my representative in Bay ward. I can now only hope that by flip-flopping between running for mayor, council and (allegedly) MLA next year, he has suitably tarnished his credibility with his base that we get some new blood in council. With a few years experience, perhaps that person will even become a future mayoral candidate.

Wedge Politics Need a Better Wedge

2010-09-24T07:36:00.007-04:00

Splitting large logs for firewood is takes more than simply whacking away with an axe. You need to identify the weak point and focus on it. There is a tool for that: a splitting wedge. Once you have a narrow opening in the log you insert the wedge. You then take a sledgehammer to it, driving it deeper. It digs in and not only holds its place, it pushes the sides apart. This is a great tool if you rely on muscle power alone.

Wedge politics is similar. You need a good wedge to succeed at sundering the electorate. But is the long gun registry the right sort of wedge and is it being properly wielded. I don't think so. First, it is an issue near and dear to groups on either side of the debate: most gun owners and gun control advocates. Both sides have their reasons and arguments (they aren't always the same) but I won't attempt to judge them.

The reason I won't judge is because from my perspective this issue is a poor wedge: I just don't care enough. I can't help but see all the media coverage and all the arguments and political posturing, but I not only don't have a position, I don't hold a strong position. If you ask me my opinion on Tuesday I might say one thing, then on Friday I'll sway over to the other side. It may annoy or infuriate those with strong opinions on the matter -- since they are often so eager to get others to adopt their positions -- but my opinion is weak and wavering, and is likely to remain so. The why of it is because the benefits of the registry seem vague or uncertain at best, while on the other hand it costs some money, but not an onerous amount, to keep it going. Although I know many gun owners I don't own one myself so it's no burden on me, and it doesn't seem like much of a burden on them, as least so far as I can tell. Sure I could be completely wrong, but I don't care enough to worry about it much. It may do some good and the cost is modest so I just wish the issue would go away so that the government can get back to important tasks like tackling the economy and the deficit.

To be an effective wedge an issue must purchase a hold on people's attention, just like that wedge working at a log. Except that this wedge keeps slipping and popping out, making the job of splitting the wood laborious. If most people are like me, and I strongly suspect they are, the task may indeed be futile. In the few moments between inserting the wedge (again) and picking up the sledgehammer, the wedge has fallen out or will spring out sideways at the first blow. The woodsman may curse, pointlessly inspect the wedge one more time, and try again, but it doesn't help: the same thing occurs time after time. He can't seem to see that the wedge is defective or not the right one for the task at hand.

Soon the issue will fade for most people except those in swing ridings the Conservatives will keep hammering away at, hoping that the wedge will work on that sort of log. There are few of that sort of log in the wood pile, but if that's the only wedge you have or are willing to use then that's what you do, if you're them.

Eventually there will be an election and I suppose the registry will pop up again as an issue the Conservatives will desperately wield once more. I think they need to find another wedge if splitting wood -- I mean the electorate -- is their objective.

University Admissions and Selection Bias

2010-09-22T07:02:00.015-04:00

I'm at the age where I see many teenagers, both relatives and children of friends, heading off to university this fall. As all students and parents know, it is quite a challenge to find the best or most appropriate school. However this comes after having made applications to the preferred institutions, some or most of which are rejected. One of the criteria used is a measure of student performance.

The better the school, or often just the better the reputation, the highest the admission standards. When universities are ranked, it should be no surprise that the higher those standards, the higher the achievement of its graduates. This is entirely expected from a purely statistical perspective, reflecting the selection bias of the admission standards. In other words, unless the university is truly awful, good students ensure good graduates. It does not necessarily reflect the superior ability of the school to educate.

As a hiring manager in the technology industry this attribute of these schools has always posed a dilemma. Some managers will unabashedly skew their preferences toward graduates from those schools, and especially if that school was also their alma mater. Yet this is unfair to other candidates since they are often of higher quality. There are a couple of reasons for this. One is that not all high-achievers are interested in or can afford to attend these schools, and may for financial reasons stick to where the cost is low. They may choose, for example, to live with their parents and attend the school in their home town.

The second reason has two parts: the quality of the learning environment and the ability of cream to always rise to the top. A consequence of selection bias is that it can hide a mediocre learning environment. Good, intelligent students will do well often in spite of the environment, in any school. This should not be surprising since that is likely what they've already done in high school: they've learned to productively learn at their own initiative. That initiative will continue to serve them well in university and beyond.

We should expect that a good school which admits an A student will, several years later, produce an A graduate. Anything less should be a travesty providing the student's life has not taken an abrupt turn in the interim. But a good school, no matter their standards, will also turn a B student into an A graduate, and even raise a C student into at least a B graduate. If you only admit A students, the grade point averages of the graduating class tells little on its own about the ability of the school to educate.

All the selection bias (high admission standards) of a school tells us is that the student has already proven himself or herself to be a high-achieving high school graduate. The standards themselves add nothing to this evaluation. Yet those standards do have one important value that is undeniable: they ensure that students are surrounded by other high-achieving students. Anyone who has gotten a science or engineering degree will know that some of the best learning comes from rubbing shoulders with intelligent peers. This alone can make up for many deficiencies in the formal teaching environment.

It is possible to ignore the high-admission standards of brand name institutions if they can meet just a few important performance metrics. Here is my list:

Professors should be known to be good teachers and accomplished in their fields of study. A good proportion of them should have experience outside of academia, especially in the private sector. Many excellent professors can be found in lesser institutions since there are only so many positions in the select few top schools, and so good people are found in other places.
The admission standards should be just high enough to ensure that a proportion of the students are high-achievers, to help create the needed learning environment. The sad truth is that even in schools with low standards, that proportion will increase after the freshman year since the poor students will not progress.
Good facilities are needed to make research, studying and living both convenient and reasonably comfortable. Happily this is easier today than when I attended university since the internet adds tremendous ability to ensure that current research and communication with experts is much the same from any school.

There are of course other important attributes, although I tend to dislike those measured in most surveys. Use what you will, but just don't get blinded by the selection bias of high admission standards.

Stock Panics, Rational Pricing and Level 3

2010-09-17T12:41:00.000-04:00

Every morning as part of my routine I check the markets for interesting activity and news. This goes wider than my portfolio since I want to get the big picture view. Every day you will find one or more stocks (usually more) that are poised to make a big up or down move -- or already have if there's an active pre-market -- due to significant news about the company. This may be scheduled earning, unscheduled earnings forecast changes, mergers and acquisitions, debt issues, win or loss of a major deal, and so forth.

Usually I ignore most of these events since they rarely affect my portfolio. Sudden pressures on a stock's price also attracts the attention of day traders (which I am not) since they can profit from the short-term volatility and trading volume that these events often initiate. For example, this morning RIM became "trader bait" after announcing their quarterly results. If you check out their stock chart you'll also notice that the price was at a precarious point where it was poised to make a monumental move up off support or down to new intermediate-term lows. As of this writing, it is bouncing higher, but that could change. It is also no coincidence that the price was at that decision point since it is fully reflective of the uncertainty of holders of the stock and anticipation from potential buyers and short-sellers.

However my interest today is to talk about another company that popped onto my screen earlier this week when they announced unexpected news, and how that affected the share price: Level 3. I hesitated when I saw their name show up in the pre-market news on Tuesday since, being the telecom I am, I knew the company and wondered what was going on. It turned out they were issuing $175M in convertible debt instruments to raise funds for general operations. This moved the market because that represented ~11% of their market cap at the time of the announcement and Level 3 has a sad history of carrying a disproportionate debt burden that has bled the company of operating income. The interest rate and conversion price also promised to pressure the stock downward.

The question then becomes, just how much should the stock price move in response to this news, assuming that there is some rationality in the market. Yet you won't learn this from the stock's subsequent moves. Like throwing an electrical switch, the circuit's change from one voltage level to another is fast, but not instantaneous, and there are confounding high-frequency transients, overshooting, undershooting, ripple and, finally, damping before the voltage settles in to its new level. News like that from Level 3 is much like throwing that switch, except that the ultimate post-news share price level is not nearly as predictable as in an electrical circuit. The combination of uncertainty, company history, size of the debt offering and lots of trader interest promised a wild ride. This is just what happened.

The increase of trade volume was enormous on Tuesday, and was somewhat lower on Wednesday as it entered its "damping" phase. Further contributions to my switch analogy are the slight rise before Monday close (before the announcement was made), two sharp spike downs (at the open and close on Tuesday) and a ripple that gradually subsided, but is still ongoing to a degree. There is no natural or rational new price level just as there was none before the announcement. Everyone, except the day traders, is calculating and guessing, and also wondering what everyone else thinks the price ought to be.

Even if one were to assume that, in the long-term, that the "convertible senior notes" are fully dilutive to the stock, this would lower the share price by that amount, which in this case is that aforementioned 11%. If you are very bold, or naive, and assume that Monday's closing price of $1.16 is a rational price that reflects all aspects of the company's assets, debt and enterprise value, Tuesday's close should have been about $1.05. It actually closed at $0.95. By the end of Thursday, two days later, the price did rise to $1.00 but this is still low by 5%. It seems there is doubt in the minds of investors and traders that the previous $1.16 price represented fair value.

I am not going to attempt to justify any particular price for Level 3 shares: it is beyond my competence and interest, and would in any case be highly unreliable, just like Level 3's business prospects. This is a damaged company that has been fighting its self-created devils for the past decade. I've been to their Broomfield, Colorado offices numerous times and it can be a bit spooky since there are hall after hall of empty dark offices that reminded me of a ghost town. They have a real business, but one that is still suffering a hangover from the dot-com era.

It is also worthwhile to understand where all that sudden trading volume comes from. There is a certain amount coming from natural buyers and sellers -- investors and institutions that hold their shares for an extended period -- but a lot of the volume comes from short-term traders, many or most of whom start and end the trading day in cash. They may each make numerous trades during the day, lured by volatility and volume to eke out a few points per trade, but they will hold zero shares by the close or shortly thereafter. This is a good reason that, if you are more interested in a long-term investment, to ignore the intra-day activity and focus on the closing price since that is more reflective of investor activity. You will likely find that in the majority of those intra-day transaction that one or both parties are traders; in effect they are acting as intermediaries between natural buyers and sellers, and attempting to profit from doing so.

Getting back to Level 3 itself, I have no idea what the share price ought to be now, and I had no idea what it ought to have been before the news. The price activity tells me that others are in the same boat. Some investors hope for better times while others believe the company is ultimately doomed by its debt burden or perhaps by competition from Akamai among others. This is a stock that is heavily infused with strong beliefs on both sides, fueled by enormous uncertainty. These are treacherous waters for small investors such as myself.

CRTC Decision 2010-632: Commissioner Denton's Dissenting Opinion

2010-09-14T07:03:00.048-04:00

Last week I promised to follow up with a critique of Commissioner Timothy Denton's dissenting opinion on the CRTC's recently released Telecom Regulatory Policy 2010-632 on High-speed Wholesale Access. Luckily I only answer to myself when I miss a deadline, but be assured that I gave myself a stern talking to regarding my tardiness. I promised myself that I'd do better in future, but I have some doubts about my sincerity on that score.

So let's get right into it. You can read along in the actual CRTC decision to see the full text since I will only show selected extracts from Denton's opinion. I'll just mention right now that I really dislike most of what he said in his opinion so that you know what to expect.

This is a good decision, which does not go far enough. It keeps independent ISPs (Internet service providers) somewhat competitive, in the interests of the Canadian consumers and businesses. Yet it does not overcome the ambivalence that lies at the heart of the Commission’s decision-making in regard to the independent ISP sector. It neither eliminates them nor allows them the scope to compete effectively. It maintains them in a kind of regulatory limbo.

It has to be said up front that the only reason the 3rd-party ISP business even exists is because of regulatory intervention in the market. To speak of regulatory limbo is a ludicrous statement in this context. Further, this limbo he speaks of is that middle ground between allowing the unfettered free market to operate as it will -- which would eliminate those ISPs -- and having the government micro-managing the internal business operations of private corporations to make them serve every desire of their natural competitors.

While there is ample room for opinion and debate, at least the CRTC is attempting to strike a reasonable balance between oligopolistic market practices which would harm consumers and forcing the carriers into becoming public utilities, which would the harm the health of their businesses -- impacting employees and shareholders, among others -- and handicap them in the global market: such as when foreign companies, that are not so fettered, set up shop in Canada or our carriers seek to extend their operations in other countries. In these difficult matters it helps to try to see both sides and not be swayed by personal interests which might favour one party over the other.

As regards the eventual elimination of wholesale services, I have doubts about whether wireless based alternatives will ever be sufficiently cheap and capacious to justify their elimination. This is a future state of affairs on which it would be superfluous to speculate, and I let the matter rest for the unfolding of events.

On this point I strongly agree with Denton. As I mentioned in my article last week, the CRTC is not only at odds with the government on whether wireless could be competitive with wired broadband service, but they also appear blind to the technological trajectory. Wireless remains the least capital intensive way to build networks and is therefore best positioned to deliver competition that does not require government intervention in the market. On this point I believe the government has it right and the CRTC is wrong.

Where I depart from my friends on the panel is in relation to a technical arrangement called CO-based ADSL access service.[46] The advantage of such an arrangement, if it were brought into being, would be to allow an independent ISP to get behind the traffic management measures imposed by the incumbent carrier. The effect of doing so would be to allow substantial service innovations, so that the lessee of the wholesale service could rearrange the technical characteristics of the signal without harming the underlying network, and which would allow it to offer quality of service guarantees, different bit rates, capacities and prices...

My concern is that the Commission is not engaging the steps that would be consistent with allowing significant service innovation, and doing so on rather flimsy grounds that it knows better than industry participants what the difficulties might be. It has done this both in relation to CO-based ADSL access service, and with regard to local head-end-based cable access service. It has not investigated the matter in depth, in the sense of spending extra time investigating these matters. It has relied in part upon cost figures from the parts of the industry opposed to these possibilities. I think the Commission would have been better off looking into these assertions in greater depth than we did.

The ellipsis is where I skip over a lengthy, and in my mind simplistic and naive, history lesson on the benefits of open networks and the innovation that comes from small, entrepreneurial companies, which I feel is so condescending as to be insulting to the industry players participating in this proceeding; I think these companies and their leadership teams don't need lessons from a regulator on obvious business dynamics.

I might have forgiven him for this, considering that he may have been attempting in a way to educate members of the public of these matters, until he went on to suggest that the CRTC is better than the business they regulate at understanding the sophisticated business practices, technologies and engineering practices they employ. It is of course right that the CRTC ought to inquire deeply enough that they can challenge the network engineering and financial analyses that the carrier present to support their positions, but to suggest that they can do better? Perhaps Mr. Denton is in the wrong line of business and ought to apply for a management position in one of these companies.

Although I can believe that he is an intelligent and thoughtful individual, from the bio of him posted on the CRTC web site I can see nothing that would qualify him for a senior position in a telecommunications company other than perhaps in a government relations role where he can interact with...the CRTC. Interestingly, however, he was counsel to CAIP back in 1990s. In his opinion he does wax poetic about the heady days when ISPs flourished, before broadband replaced dial-up, so perhaps that is why he has some attraction to the current plight of the retail, 3rd-party ISPs.

I shudder at the thought of Mr. Denton or the CRTC attempting to suggest or mandate reconfiguration or equipment investment in the carriers' networks. However, I am pretty sure that this goes beyond the CRTC's power, for which we can all be thankful.

The large carriers have the inclination and ability to convey their messages to the public and the political class relentlessly and effectively. That message can be reduced to the simple proposition that they should at all times be allowed to maximize profits because only then can they make the investments they need to keep Canada internationally competitive. No matter what the profit margins are on leased equipment, wholesale services are always deemed to undermine profit maximization. It is a message constantly heard by the Commission and we have repeatedly found it to be without merit.

Networks are private property and derogations from the full rights of ownership are deeply suspect. In this view, those who lease equipment and services, regardless of the profit margins allowed by regulation, ought in principle not to exist, or if allowed to exist, they should have no rights to lease services at tariffed rates, but should have to negotiate the price.

Wow! I find it difficult to believe he could say something so obviously false about profit maximization and to imagine that the government has an obligation to not merely dictate what services the carriers are _required_ to offer, but to also allow their competitors a role in setting the prices. It's one thing to find a compromise, a middle ground between the public interest and private interest, but to hear the Commissioner willing to discard private interests entirely is a way out of line.

Contrary to his contention, there is a also very simple reason why wholesale reduces telco profitability: it enables more competition for the higher-value, higher-margin retail services that the telco sells. He, and indeed many others, may not care about telco profitability, but the impact can be substantial. I wrote about these internal telco business unit dynamics over two years ago when this blog was still very new.

Now imagine you are the executive in charge of wholesale products at Bell Canada. You are responsible for selling products that enable outside businesses, including competitors, to add value to Bell Canada's transport of bits. Every other executive in the company wants you to fail since you are enabling their competitors and therefore damaging their ability to meet their own business objectives. There is some fierce internal competition in these companies. Pity the unfortunate wholesale business head, fought and ostracized by his or her peers.

I have known some of these very executives in my time. No, not at Bell Canada, but in the US. When I say it's a dreadful job, I know first-hand from talking and working with them. Turnover was high since the entire corporate team did what they could to make wholesale fail. The smart or young ones left. Others rode the downward slide until they got a golden parachute or retired.

Commissioner Denton is either posturing or displaying an ignorance of what it takes to run a successful business. Just because Bell Canada and other carriers are big, profitable and dominant does not make them evil; they, like any business, have a responsibility to their employees and shareholders, and sometimes, unfortunately, that means they would prefer to not offer some services or to at least have the pricing power to generate profits.

The result is that the possibility for service innovation was turned down, without sufficient consideration, in my estimation. The current ambivalence about the role and legitimacy of smaller carriers continues. They are allowed to exist but denied the means to innovate. In a business with as much uncertainty as this, turning down the possibility for technical and business innovation seems a riskier move than letting it go ahead. To that extent, I dissent.

Denton has this completely wrong. It is not for him or the CRTC to decide which companies are the ones with the duty to innovate and move the industry forward: no regulator should be in the business of picking winners and losers, and then explicitly changing the ground rules to favour their preordained choice. Innovation does not have to come from small, non-facilities based ISPs.

In fact I would argue that they are not the innovators, but merely (though important) enablers of access to the real service innovators. These include companies like Google, Skype, Salesforce and Ebay, to pick a few prominent names, but also a plethora of small companies located around the globe, including right here in Canada and in Ottawa. Perhaps Mr. Denton would benefit from a trip a few kilometers west to meet with some of these innovators. He appears to not only be cavalier about protecting the tenets of Canada's free market economy and the reasonable rights of Canadians, including protecting the assets of the companies they invest in and operate, but he is also out of touch if he believes ISPs are the true innovators.

We do need those ISPs and healthy competition for internet access services since they contribute to the success and innovations of new Canadian businesses that depend on those networks to reach their customers both at home and around the world. As a consumer of internet access services and other internet-based services that broadband enables I do want healthy competition. I also know that an overly-interventionist regulator or government will inappropriately favour the easing of short-term consumer pain over the uncertain promise of enabling long-term business success stories. Because I strongly believe this level of CRTC intervention to be against Canada's wider interests I am appalled by many of the views expressed by Commissioner Timothy Denton in his dissenting opinion on CRTC decision 2010-632.

Digging Nokia Out of a Hole

2010-09-13T07:59:00.025-04:00

Can a company regain its dominant position by changing its CEO? This is a common theme in business, with new examples nearly every day, although we usually only notice those companies that are especially prominent (or if they are in our investment portfolios). Nokia is now trying the same trick.

I have to wonder if the frequent fixation we have on the person at the top of a hierarchy is deeply-rooted in the human psyche. Whether it be president, CEO, dictator, general or heroic action figure, the fixation of our attention on the archetypal alpha male (or female) figure distracts us from the many thousands or millions of individuals in the hierarchy that contribute to the organization success or failure. This does not mean that a CEO change is unimportant, in fact it can be crucial, but whether it can have a positive impact depends on many, many factors. We sometimes have an almost comic book view of power and power structures since the majority of people, as employees, have rarely wielded real power in an organization. Those that have done so know just how difficult it can truly be.

A CEO often has substantial power, but it is never unlimited. When anyone is give the responsibility and accountability to achieve a lofty goal it is incumbent on those assigning the objective to give the person the necessary tools to get it done. When that person is the CEO, the giver of the tools is the board of directors. The toolkit includes capital and authority. The CEO combines those tools with his or her own skills, connections and other assets to do the job.

One immediate challenge is that business operations cannot be changed quickly. That alone is responsible for the company's existence -- its customers and revenue -- and provides a base, and the time, for the CEO to redirect and invigorate the business. Nokia is blessed in this respect since it has a strong base business, although one that is losing share in the high-end, high-margin, high-growing smart phone market. More importantly, its product pipeline appears to be running on inertia with little coming to market that is likely to change the situation. Elop, the new CEO, has quite the challenge on his hands.

To give an example of how an ailing, large technology company can fail even with a new, capable CEO, we need look no further than Nortel. By all accounts Mike Zafirovski is a talented and capable CEO. Yet he failed utterly at the task of renewing Nortel. There were many reasons for this but to my mind there were a couple that stand out: the product and technology decline had gone on for so long that not only were customers abandoning the company, there was nothing substantial in the product pipeline; and, the culture in senior management was out of touch and internally-focused on its own difficulties, not those of customers. There is also some question as to whether the board gave Zafirovski the authority he needed to solve these monumental problems or if they impeded his attempts to change management and inject capital into the areas where it was needed. Big holes like the ones that Nortel and Nokia have dug themselves into took a lot of digging by many hands, not only that of the CEOs.

One thing that a company's investors can fixate on, especially those that come on board when the pain is most acute, is that if the new CEO achieves any measure of success the returns will be enormous. One extraordinary example is Apple: looks what Steve Jobs accomplished, and how far they've come from the $7 share price before iPod and iTunes began to conquer the world. Any investor in a sick but formerly great company can dream of such out-sized returns. However the reason that share prices go down to such depths is that it is uncommon for the turnaround to succeed; often the shares either go to $0 (like Nortel) or the company is liquidated.

Apart from its still-dominant global position in the mobile phone market, Nokia has some definite talents when it come to phone technology and design. Unfortunately their typically excellent radio performance is not recognized by customers, who will often not notice or overlook if the product draw is strong. The recent very public airing of Apple's difficulties in this regard demonstrate that very nicely. Assuming that Nokia's design talent hasn't all left the company, there is an opportunity for the new CEO to empower their designers to take some chances, to make a few mistakes in the hope that they can come up with phones and other mobile or portable devices that are unique, attractive and can inspire.

As many have noted, however, a deeper technology problem is their dependence on Symbian as the platform OS. It is old and difficult to modernize, with next generation versions coming too late and lagging in features. There are also the business structures and partnerships that are dependent on Symbian, where if they make drastic changes they stand to risk disrupting their ongoing business by alienating the carriers, users and app developers. However if they don't change all of them will abandon Symbian, and therefore Nokia as well, if they do not make a bold move.

This is another critical area where the new CEO can have a major and positive impact. I believe that they will have little choice in their corporate renewal in leaving Symbian behind since they stand to gain more than they will lose. In my opinion it is very likely that within several months Nokia will announce their shift to Android for their future high-end phones. They may delay publicizing the fact until the first phone is closer to release. I just don't see any other way they can move quickly to become a contender in the smart phone market. Symbian can continue to be used for the other, lower-end products for some time, so that the move is not too disruptive, but it is likely that a strategy shift of this magnitude will ultimately doom Symbian.

What I now want to see is whether Nokia board is ready for this degree of change and risk, and whether Elop can successfully steer this large company and its culture onto a new trajectory. Unlike Nortel, I think Nokia has an excellent chance of pulling this off, by exploiting their many strengths, if they make the necessary commitment. If they don't do it, I fear they will soon be relegated to selling low-margin $25 phones (but lots of them!) to new users in developing countries.

Update: An opposing viewpoint regarding Nokia switching to Android, but agreeing on other points.

Apple Offers App Developers Some Certainty

2010-09-10T07:53:00.028-04:00

As someone involved in mobile application development, Apple's policies and practices regarding app development have always made me uncomfortable, as it has many, many others. One of the most unacceptable from a purely business perspective has been their app approval process. Not only has been little certainty whether, after you've put in your investment, they will permit your app onto their market (the only legitimate way to distribute to iPod and iPhone owners), you can never be sure it's due to some unwritten policy, the reviewer being in a particularly bad mood that day, or because your app may competitive with a current or future strategic initiative of their own.

Despite this dreadful uncertainty, Apple has been enormously successful in attracting a large stable of app developers, both small shops (including individual hobbyists) and some of the world's largest companies, many of whom are making a decent business of it. In other words, despite the criticism Apple had lots of reason not to make changes since their policy to this point has worked very well indeed.

Yet Apple is now officially loosening some of their more restrictive policies and coming clean on their app approval criteria. Uncertainty is one of those terrible things that can scare off any investor or businessman, so the change can only be a good thing. Less uncertainty means more predictability and less arbitrariness in those that might choose to develop apps for iOS products. As John Gruber says in his Daring Fireball blog:

**The existence of this document is a very welcome change, and it goes a long way to answering much of the criticism regarding prior controversial App Store rejections, by putting in writing the rules that are actually used by the reviewers.**

Regrettably the new policy is not public, only becoming available after you've paid your money and signed up to their developer agreement, which is not really as transparent as they ought to be. Of course this does not mean that it will not end up becoming widely available (there are far too many potential points of leakage), and in fact it already has. Apple's non-legalistic summary language is a fun read:

We have over 250,000 apps in the App Store. We don’t need any more Fart apps.
If your app doesn’t do something useful or provide some form of lasting entertainment, it may not be accepted.
If your App looks like it was cobbled together in a few days, or you’re trying to get your first practice App into the store to impress your friends, please brace yourself for rejection. We have lots of serious developers who don’t want their quality Apps to be surrounded by amateur hour.
We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.
If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

Of course the actual agreement text (including the above summary) goes into lengthy specifics, which you can find on the Wired site (hopefully this link remains valid for a while). Despite the disclosure of these criteria, Apple retains a great deal of latitude in rejecting apps, so there is no reason to believe that the situation will now be much different for many developers.

Still, it’s an important step. By publishing the guidelines, Apple mobile customers will be able to know what they can and can’t get on an iOS device versus, say, an Android phone. Also, third-party programmers will have a clearer sense of whether or not to invest in developing an app, whereas before they were subject to rejection without knowing what they weren’t allowed to do. However, some developers think parts of the guidelines could be more clear.

“By no means is what they put out today perfect,” said Justin Williams, developer of Second Gear software, who quit iPhone development last year. “There are some vague areas. But compared to where we were yesterday, it’s a big improvement.”

As some of the commenters on this Techcrunch article correctly note, the terms of service regarding use of user data continue to be a bone of contention. Privacy sounds good, and in general it is, there does have to be a balance between user privacy and reasonable commercial practices. This is an area where Google and other mobile ad companies had concerns with Apple since much of the sellable value of ad space is lost if the advertisers can't know as much about users as they can on other mobile platforms or on traditional web browsers.

I've gone and lost the link now, but Google did issue a statement that they can work with Apple's new policy on user data privacy. Presumably they believe that they have enough access to non-identifying user data to meet advertisers' needs.

Apart from my concerns about the practice as a user, I have also had concerns as a developer because of the personal data that mobile ad companies demand that Android app developers such as myself get from their users. For example, disclosing location and unique device identifiers to enable user tracking. I don't particularly care for this as either a user or as a developer, though I also know that most smart phone users are simply not concerned about it. The qualms come from not knowing how the advertisers or mobile ad distributers are using this data, while having to take responsibility for asking users to give their permission to disclose this data.

It is interesting to watch the different approaches taken on iOS and Android on user privacy and app approvals. I can't say that Apple is really out to protect users with their stronger stance on app and ad content. They have their own commercial interests in exploiting their control over the entire eco-system they control, but they also know that they must treat their customers better than they treat developers and advertisers if they are to retain their still dominant position in smart phones.

I have to wonder how much of their policy changes on app approvals, mobile ad services and 3rd-party app development tools has to do with their increasing comfort with the reins of control they enjoy or with the increasing thunder of the advancing Android army. The battle continues.

CRTC Decision 2010-632 on High-Speed Wholesale

2010-09-07T07:38:00.045-04:00

It seems that I just can't help being fascinated with the ongoing series of decisions from the CRTC on access of 3rd-party ISPs to the incumbents access networks. One reason is that I have in the past been a bit of a professional telecommunications policy wonk, though mostly focused on the US. I also enjoy the dynamics of policy development on the part of regulators and legislators, which are so often at odd. Of course I am also a customer of broadband service, and in particular a 3rd-party ISP utilizing wholesale DSL from Bell Canada.

The telecom regulatory dynamics in Canada are particularly interesting at this time since the current government is not happy with the CRTC and its Commissioners and decisions since the CRTC is interventionist more than it is free-market oriented. This is a delicate balancing act since the broadband access networks are essentially monopolies, and it is reasonable to therefore expect the owners of those networks to exercise their market power to the extent they are permitted, but to be too overbearing on what they are required to do to promote competition and innovation impacts not only economic ideologies but also employees and shareholders of the incumbents, and that can have negative consequences for even those people that don't care about these matters. In other words, this is about politics, perhaps more than telecommunications policy regarding broadband competition.

Before moving on to the decision itself -- which I finally had a chance to read over the long weekend -- let's recall something I said recently about how politics and telecommunications regulation connect in the US:

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.

In Canada's parliamentary system we do not give Commissioners the heave-ho after every election, their terms being unconnected to changes in government. Instead the government, if particularly unhappy with regulators, have to construct some justification for removal and then deal with the consequences in the House of Commons. The present government is no exception as we've seen on numerous occasions recently: nuclear safety, veterans' ombudsman, RCMP oversight, gun registry, among others, but not the CRTC. There have been some sniping back and forth in public statements of the Von Finckenstein and Cabinet ministers, but he's still in the CRTC and, as we'll see in a moment, still guiding the CRTC in opposition to the government's wishes.

Now it is time to review the basics of how the present decision, 2010-632 on high-speed wholesale access, ties into CRTC policy. As the CRTC nicely lays out in the opening paragraphs it is about promoting competition and consumer choice, but doing so (as mentioned above) with due regard to the business interests of the incumbents that are being ordered to provide access to all broadband speeds that they offer their own retail customers.

Competition drives innovation and provides consumers with a choice of service providers and service characteristics. The Commission notes that ILECs and cable carriers are offering their retail Internet services at increasingly higher speeds. The Commission considers that, at present, retail Internet service competition results primarily from services provisioned using wireline facilities. Other retail Internet services, such as those offered using wireless and satellite facilities, are not generally substitutes for wireline facilities at this time.

The Commission therefore finds that, at present, there is a continued need to require ILECs and cable carriers to make their existing wholesale high-speed access services – aggregated asymmetric digital subscriber (ADSL) access service and third-party Internet access (TPIA) service, respectively – available subject to a speed-matching requirement. Otherwise, in the Commission’s view, retail Internet service competition would not be sufficient to protect consumers’ interests...

The Commission expects that at a future date, competition among wireline-, wireless-, and satellite-based retail Internet service providers will be sufficient to protect consumers’ interests. At that time, the Commission will apply its essential services framework to the ILECs’ aggregated ADSL access services and the cable carriers’ TPIA services to determine whether they should no longer be mandated.

Back in an earlier decision on usage-based billing (UBB), 2010-255, they chose to limit resale in an effort to encourage facilities-based competition. In my opinion that was an odd place to draw the line on what services they were mandating the incumbents to wholesale. I think where things get really interesting in the present decision is that the CRTC is stating quite explicitly that wireless is not sufficient, at least not now, to offer sufficient competitive choices to consumers. This seems very much in conflict with the government which had overruled the CRTC to get Wind Mobile into the market since they see wireless as the proper vehicle to deliver competition, voice and data, by creating more facilities-based competitors. That is, getting more networks built, not ordering the incumbent carriers to compete with service providers to whom they must open their own networks.

52. In the Commission’s view, however, the pricing considerations and capacity limitations associated with retail Internet services provisioned using wireless and satellite facilities make them less attractive as large-scale substitutes for wireline retail Internet services in geographic areas where these wireline services are available. The Commission notes, for example, that current prices for wireless- and satellite-based retail Internet services generally significantly exceed wireline retail Internet service prices for comparable service and that speed issues can occur as those systems’ capacities are approached.

The CRTC provides some history to their decision by describing how ISPs created a vibrant, competitive market for internet services back when dial-up was the only realistic choice for the vast majority of consumers.

7. When the Commission made these decisions, competitive retail Internet service providers were able to provide their services on a dial-up basis, using the customer’s retail telephone service. Therefore, they did not need to use the incumbents’ facilities on a wholesale service basis. As the retail Internet service market began to evolve to higher speed retail Internet services, to ensure these services remained subject to competition sufficient to protect consumers’ interests, the Commission required that the ILECs and cable carriers make some of their high-speed access facilities available as wholesale services for competitors to use as inputs in the provision of retail Internet services.[8]

In other words, when broadband came onto the market, the telcos and cable companies had an unassailable competitive advantage because it was impossible for those ISPs to offer broadband services without access facilities of their own. With dial-up they exploited ordinary, and tariffed, business line services to reach their customers and the telcos, as common carriers, could do nothing about it except watch a burgeoning business opportunity get away from them. They knew that what they had in broadband was a superb tool to recapture those customers who had no reason to subscribe to a relatively poor service from the incumbents, such as Sympatico provided. It is no surprise that they would fight to retain the competitive advantage they have from the network they have built and is owned by their shareholders (that likely includes you if you are invested in a mutual fund).

No matter the economic and political forces, the CRTC is quite clear on what they see as their mission:

16. On 10 December 2009, the Governor in Council issued Order in Council P.C. 2009-2007 (the Order in Council). The Order in Council directed the Commission to reconsider its determinations in the speed-matching decisions that (a) ILECs must provide their aggregated ADSL access services at speeds that match the speeds they provide for their retail Internet services, and (b) the speed-matching requirement is not limited to the ILECs’ end-to-end copper access facilities, and includes aggregated ADSL access services provisioned using hybrid copper-fibre facilities.

17. The Order in Council directed that the Commission specifically consider whether

(a)    the speed-matching requirements unduly diminish the incentives to invest in new network infrastructure in general and, in particular, in markets of different sizes;

(b)   in the absence of the speed-matching requirements there would be sufficient competition to protect the interests of users;

(c)    the respective wholesale obligations imposed on incumbent telephone and cable companies are equitable or represent a competitive disadvantage; and

(d)   the impact of these wholesale requirements unduly impairs the ability of incumbent telephone companies to offer new converged services, such as Internet Protocol television (IPTV).

As the CBC reports in this article, the CRTC, incumbents and ISPs have disparate opinions and reasons for those opinions:

The CRTC is sticking to its guns and ordering big phone network owners such as Bell and Telus to offer smaller wholesale companies higher internet speeds, despite previous disagreement from the government...

"The CRTC’s approach will entrench the duopolistic nature of the communications wireline services industry in many important markets and stifle the ability of competitors to provide new and innovative services," said Teksavvy's chief technology officer Marc Gaudrault in a statement...

Bell said the decision discourages investment in its networks and shows there is a lack of clarity in public policy...

"We need to know, which is it? Do we want as much network investment in Canada as possible, or not? Last year, cabinet sent this issue back to the CRTC for reconsideration. Clearly, this isn’t the decision cabinet was looking for."

Over the next 3 months, which takes us to the end of November, the incumbents have to file fee proposals for these high-speed services and, importantly, the government has an opportunity to intervene and possibly overrule the CRTC once again. Such a turn of events would certainly be in keeping with government policy and would, with some real probability, threaten the tenure of Von Finckenstein at the head of the CRTC; it is difficult to continue making decisions that are rejected by the government and retain any credibility with the industry and the public.

Yet as I think about the situation further I have to wonder if Von Finckenstein is thinking that this time he is free to tweak the government's nose without much risk to himself or the other Commissioners. The reason is that the government is at present in a precarious position in the polls and much move with some caution as the new sitting of Parliament gets under way shortly. Unlike some other decisions, this one hits the wallets of the majority of the electorate thanks to the near ubiquity of broadband service. It is also true that there is widespread hatred and disgust with the incumbents, telcos and cable companies alike, with prices and service quality for all types of telecommunications services.

Canadians (although perhaps not shareholders) gladly accepted a foreign-owned Wind Mobile for this reason, and this worked in the government's favour when they acted contrary to the CRTC. However if they overrule the CRTC this time, for the same pro-facilities based competition policy, it will be seen -- likely with the Liberals' help -- as pro big, unliked monopoly and anti-consumer. I think the government will hesitate and think long and hard about this.

Before ending this article, I do want to draw attention to a few interesting aspects of the decision. The first is that the CRTC (as has been widely reported) would not order the incumbents to reconfigure their networks to provide fewer interconnection points (that would have lowered 3rd-party ISP costs) or allow the ISPs to get around throttling controls and to make it easier for consumers to switch ISPs and services on demand. In my opinion this is reasonable since I dislike the idea of the CRTC ordering technology investments of this sort. I oppose it since I believe this to be an unwarranted intrusion by government in a private-sector business. I state this despite the fact that as a consumer I would benefit from such an order.

Here are those sections that I believe are worth skimming:

Paragraphs 23-27: Essential services argument that wireline is still an effective monopoly and since wireless is being excluded as a competitive alternative, equitable access wired broadband is required to protect consumers.
Paragraphs 62-74: Tortuous argument that line sharing doesn't impact ILEC provisioning of IPTV.
Paragraphs 143-149: How policy objectives are met with this ruling.

If I have the time I hope to write a separate article on the dissenting opinion of Commissioner Timothy Denton. He wanted to have the CRTC intervene more intensely in the affairs of the incumbents and he lays out in some detail, and clarity, why he believes this to be appropriate. If the subject of broadband competition interests you, I highly recommend you read these several pages. I intend to tear apart some of his arguments.

Conservatives Don't Lose; Liberals Don't Win

2010-09-03T07:41:00.049-04:00

As political polls get trotted out one after another one gets the impression that all we've been seeing is little more than statistical noise fluctuations that contain about as much information as pure white noise. That is, none at all. In this most recent poll by Ekos, as reported by the CBC, Ignatieff has this rationalization for the current noise fluctuation that has the Conservatives and Liberals in a dead heat:

Ignatieff has claimed his party has seized momentum from the Conservatives following a summer-long bus tour across Canada that featured the Liberal leader speaking unscripted and taking questions from audience members.

This is nothing more than an empty attempt Ignatieff to claim that the poll result is due to his efforts over the summer, which in reality few people paid attention and resulted in nothing new in the Liberal platform or did little, if anything, for his appeal to voters. It's merely the sort of empty rhetoric we get from the majority of our politicians.

The Liberal party is not gaining much traction with voters, but rather I suspect that the poll, if it means anything at all, tells us two things: the Conservative party is making a steady series of policy blunders that each alienates some segment of the country's population; and, the sponsorship scandal is passing into history, and is increasingly not being considered by voters when they consider their preference. None of this is impacted by Ignatieff's presence.

Each small blunder by the Conservative government reflects badly on Harper's leadership since, rightly or wrongly, they each get laid by his feet since he is so clearly the primary decision maker. This is, for him, a disadvantage of the degree of control he exercises over his cabinet and caucus, in that by not delegating authority he also cannot deflect blame. My perception is that he does not seem to understand that what he considers as minor policy decisions meant to incrementally progress his political agenda are cumulative irritants over the large body of the electorate.

Perhaps Igantieff can exploit this beyond immediate polling figures, not by attacking Harper but by crafting better governance structures as a policy objective. Writing in the Globe and Mail, Lawrence Martin describes this tremendous opportunity for Ignatieff and the Liberal party to reverse the centralization of power.

Ever since Pierre Trudeau started overcentralizing the power structure four decades ago, we’ve been regressing into what former Quebec Superior Court justice John Gomery, who headed up the federal sponsorship inquiry, described as “one-man government.”

Both major parties have followed the same unwritten policy, much to the detriment of our democracy. It is now a large flaw that cannot even be swayed by our votes. We all know that our elected representative no longer represent us (other than a few mavericks like Cadman and Casey) since their votes are dictated by a small cabal of power brokers around the Liberal and Conservative leaders, and sometimes the leader alone. It's gotten to the point that more and more of us know how ineffectual our vote can be in getting what we want, which I believe is leading to unreliable polling data: voting preferences are volatile since we don't trust those vying for our votes.

If not governance, the economy is no longer Ignatieff's policy card. Going back in this blog's archive, almost one year ago I declared that it was already too late because the economy was bottoming and an election during the inevitable upturn would favour the government, even though the government can take little of the credit.

The truth is that neither the Conservatives nor the Liberals are responsible for either the recession or the coming economic resurgence. The economic cycle is almost entirely due to what is going on in the United States. With our economy so closely dependent on commodities exports to the US, we are simply going along for the ride. The Liberals hope to ride this wave to renewed popularity and a majority government by 2011.

This is even more true today since everyone can see that we are on the first steps of a long-term economic recovery. Sure, there are many bumps along the road and risk of a relapse, but with every passing day it becomes increasing likely that the worst is truly behind us.

The finance minister, Jim Flaherty, is now beginning to attract the degree of respect that Paul Martin had in that role a decade and more in the past. Even more so than the sponsorship scandal, the Liberal party's reputation for fiscal responsibility is becoming a historical event, and not something to which the Liberal party of today can lay claim. The nail in the economic policy coffin for the Liberals was this pronouncement by Stephen Harper:

"All the signs are that the economic action plan has been effective, but if we want to be effective in the future, the next step will be to get some of our deficits down and make sure that we're providing good incentives to the private sector to continue to move the economy forward."

Of course the Conservatives are not any more fiscally responsible than the Liberals, it just that they spend and cut differently: Conservatives cut taxes and trim social programs and spend on the military, while Liberals have tended to keep taxes and social programs steady, and cut the military. The specifics are in reality more nuanced than my simple description, but the fact is that if you want overall spending controls there is little reason to prefer one of these parties over the other since both must operate in within the constraints of the country's overall economic health.

In closing this post, I don't expect either Harper or Ignatieff to rush to the polls anytime soon. Both know they have poor prospects of forming a majority and therefore an election would doom either or both leaders' positions. Coming back to governance, we should be thankful for the prospect of continuing minority governments so that neither party can behave as a five-year dictatorship. Even more than the polling split, who we really have to thank for this state of affairs is Quebec and the Bloc Quebecois.

I don't say this facetiously; I really mean it. With 15% to 20% of the country's seats out of reach of both of both the Conservative and Liberal parties for the present, it would take a wild swing in the polls for a majority to be possible for either of them. They may endlessly bemoan and threaten us over this state of affairs, but without some real governance reforms -- which could require constitutional changes, and are unlikely at this time -- minority governments serve us better than majorities. They are also more entertaining.

RIM and Cisco Pursue Lateral Expansion

2010-08-31T08:05:00.001-04:00

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

2010-08-30T07:37:00.027-04:00

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

2010-08-25T07:22:00.020-04:00

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

2010-08-23T07:23:00.032-04:00

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

2010-08-19T14:38:00.000-04:00

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?

2010-08-18T10:52:00.000-04:00

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

2010-08-17T07:51:00.066-04:00

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

2010-08-12T15:05:00.000-04:00

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

2010-08-10T07:32:00.016-04:00

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

2010-08-09T07:26:00.045-04:00

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

2010-08-05T07:30:00.017-04:00

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

2010-08-03T10:00:00.000-04:00

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.

Meaning of Signal Strength Bars

2010-07-30T07:32:00.051-04:00

Apple's antennagate controversy is now growing old and a bit stale. The company has come out with a half-hearted response to dealing with the problem, but it appears increasingly likely that this will prove sufficiently satisfying to their customers, especially since most have not experienced the problem of fringe-area performance. There has even been some talk about the antenna being the reason for delaying release of the white iPhone 4, or then again maybe not.

Although I've already touched on this issue, there is one aspect that I think is worthy of another blog post. It comes about from a few subsequent discussions I've had with people, including iPhone 4 users with the product in question. This has to do with a fundamental misunderstanding of how cell phones are internally engineered. I often take it for granted that in this modern age when it seems everyone is conversant with the high-tech products and services that they use every day, that there is also some basic understanding of that technology. This is frequently untrue. Rather than seeing the cell phone for what it is, internally -- a collection of modular building blocks that are essentially independent and communicate over interfaces -- some (most?) people see the cell phone as a monolithic device. That is the impression I get as to why there is still so much confusion between the dependence of the iPhone 4's antenna performance on how it's held and the number of bars on the signal strength display.

But touching the hot spot doesn’t always ruin the call, even if it lowers the number of bars. In several cases, when I was already on a call with three or four bars showing, I deliberately covered the hot spot with my hand, and the call continued normally, strong and clear, even though the bars dropped to one or two.

On that basis I decided to break down the problem into its component parts so that the relationship is more clearly illustrated, and in particular why the number of bars of signal that is displayed can be so distinct from fringe-area performance. Hopefully someone will benefit from this. To those who do understand the technology well, please forgive me for any errors due to my coarse description of the technology details.

First however, let's look more closely at weak-signal performance, where the received signal strength is close to the minimum for a usable signal. This is determined by the signal's field strength -- which is independent of the phone -- and the phone's antenna and radio module. As can be seen in the diagram, the gray area where performance is marginal is wider for the now-obsolete analogue technology (such as AMPS) than for digital. Degradation as an analogue signal weakens is more gradual, and is manifested with increasing noise and distortion until the other person's voice becomes completely unintelligible, and finally descends into silence and call termination.

With digital, degradation may not be noticed until the bit error rate is high enough to cause drop-outs. From there it takes only a little less signal to reach the condition where the bit stream cannot be decoded, resulting in silence and then call termination. In other words, the gray area of received signal strength where the signal is distorted or subject to drop-outs is narrower for modern digital phone transmission. As mentioned in my earlier article, this is one reason why the number of bars can be uncorrelated with reception quality: at any level above the minimum signal strength to achieve a low bit error rate, digital reception is pretty much perfect.

With that out of the way, let's return to the above diagram. The radio module is a self-contained unit, with reception dependent on no other component other than than the antenna system. If the antenna efficiency is impaired (or the signal from the carrier's base station is reduced by terrain or obstructions, or there is interference from another source) the signal that the receiver has to work with is reduced. There are differences among phone in their antenna designs and placement, and some variation in the performance of radio modules from component manufacturers, but for any one phone there are no other factors we need to be concerned about. The antenna plugs in one end, and audio in and out plugs in the other end, plus various control lines and power.

One thing the radio module produces is an indication of signal level (using an internal signal sampler) that can be read and used by other modules. This is typically to be interpreted on a relative scale where zero is approximately the level where communication with the network base station (or tower, if you like) is marginal or lost. On the Nexus One phone, the relative scale goes from 0 to 31, where 0 is referenced to -113 dBm and 31 is -51 dBm. Below and above these signal strengths will produce 0 and 31, respectively. On other phones the granularity may be less (less than 32 values) and the interval between values may be non-constant (it's a constant 2 dB on Nexus One). However, these are at best nominal values and could vary, perhaps even quite a lot, since there is no real technical need to ensure accuracy.

Whatever the granularity and range, these values are mapped by software to something that is displayed for the convenience of the phone's user. The mapping can be linear (as shown) or any function at all that maps from the signal strength value to the indicator icon. The important part here is that the mapping is arbitrary. I've shown it as mapping the signal strength to one of 5 different displays -- 0 to 4 bars on the screen icon -- because that is a common format.

When Apple talked of making a software change, it was this mapping function they were discussing; they proposed changing one arbitrary mapping to another arbitrary mapping, one where the number of bars would be higher for lower signal strength values. If by chance this wasn't clear before, you should now be able to see that this mapping function has nothing whatsoever to do with the performance of the antenna system and radio module; the mapping function does not impact reception quality so modifying it does not solve the iPhone 4 antenna problem.

Of course changing the mapping function so that it shows more bars at lower signal strengths doesn't hurt. It may even be reassuring to those who worry that a call will be interrupted, or never begun, when there is just one bar displayed. This really isn't a terrible idea since, as described earlier and in the previous article, performance is probably just fine at that signal strength on a digital network so why not remove the source of worry. The thing Apple should not do is claim that this change solves the problem, since it clearly does no such thing.

There is also the matter of the phone's transmission performance since it, too, is equally dependent on the antenna; antennas are in general reciprocal in receive and transmit usage, so a reduction of antenna performance affects transmission (from the phone to the base station/tower) equally. Since that process is a story by itself, I'll stop here, having covered the reception issue which is the larger problem.

Paid For Unethical Acts

2010-07-28T13:00:00.000-04:00

Rather than be annoyed or outraged by Minister Clement's behaviour in the long form census discussion, I am instead saddened. This Globe and Mail article shows very clearly the curious juxtaposition of two seemingly incompatible versions of the same person: one who immediately reacts to save another human being's life at no small risk to himself, and the other a stone-faced political robot who is immune to reason and good sense in the pursuit of maintaining an absurd public position.

I can only wonder how one person can rationalize this degree of inconsistent behaviour. Tony Clement is clearly an intelligent and sensible person, and so I am sure he must struggle with this to a degree in at least the privacy of his own thoughts. There is a real dilemma here that is not easily resolved: how does a person with a strong ethical foundation justify and deal with having to act unethically in pursuit of a paycheque or other life goals? Surely if he were to back down from his stance on the census he would may get some immediate applause for a principled decision but his political career, or more, could end up lying in ruins.

He is hardly alone when dealing with this. I am willing to bet that anyone reading this has not once but numerous times found themselves instructed to obfuscate, mislead or even outright lie by the company or institution paying your salary. In most cases you will do so, even if you do so with your insides in a knot of shame or disgust. Some can manage it without any qualms whatsoever, even when they are their own boss. It's common.

As one example, a customer service supervisor at Rogers explicitly lied to me over the phone about the nature of a long-standing service problem and what they were doing to expeditiously solve the problem. I had been transferred to her when, after many days of unsatisfactory action on their part, I demanded to cancel my service entirely. I didn't know she had lied until a few hours later when I got the real back-story from another Rogers employee who was also upset at not getting the support needed to get my problem resolved.

I can imagine that she is in every other respect a fine individual. But when told how to perform her job, in order to continue earning a salary and advance her career, she shoved her ethical values into a back pocket and did as she was told to do. It can be very easy for any of us to do the very same thing. I am myself less than innocent in this respect; many times I found myself promising customers what I knew very well the company I was representing could not possibly deliver. The way I compensated for this was by afterward pounding on others within the company to somehow get the job done. Even so I always felt soiled by the experience.

Minister Clement is now in this very position. Hopefully he can find a comfortable middle position that will allow him to feel he's done his job while also resolving the ethical dilemma. A bigger question may well be, will Stephen Harper allow him to do so.

Corporate Profit Revival and the Stock Market

2010-07-27T07:42:00.045-04:00

In the ordinary course of my investing activity, I regularly try to figure out market sentiment: whether the larger population of investors are positive or negative on share prices moving forward. There are many technical indicators and surveys of fund managers that attempt to quantify sentiment, which all have their pros and cons. There is of course no certain way to know the future no matter how much data you look at.

One big question many are asking right now is whether the economy is truly on a course of sustainable recovery or if there another decline in the offing: the so-called double-dip recession. Out of all the many economic and market indicators that are being paid close attention are corporate profits. They've been rising. Under other circumstances this would give investors some confidence that the recovery is on track and there is therefore reason to be confident of rising stock prices. Unfortunately it isn't quite so simple.

Much of the profit recovery appears to be due to cost cutting, not a resurgence of demand. As any corporate manager knows, the quick route to immediate profitability is to reduce expenses since (to simply greatly) revenue minus expenses equals profit. Not any expense can be cut since produces revenue always have unavoidable expense. If you sell a motorcycle, for example, you need to buy or build the parts, assemble them, advertise, ship product to dealers and provide service.

What you need to do is reduce expenses that don't affect current operations. Some choices include marketing, research and development, defer capital expenditures, and reduce salaries, bonuses, travel and even office supplies. In other words, gamble with the company's future success. If the same pressures apply to a company's competitors, due to broader or global market conditions (such as now) the risk may be muted. Getting it right is no easy task since the company may miss the economic turn or some new innovation and therefore be poorly positioned during the recovery. Failure to invest in employees or production capacity runs risks incurring loss of talent and production interruption due to equipment failures. That, in an ideal world, is why senior managers are paid the big bucks, to make these critical decisions.

From the outside, as ordinary shareholders, we have to ask if the last quarter's profit rise is sustainable or an anomaly due to expense reduction that cannot be repeated. More precisely, if the recession continues, profits and share prices may very well decline again within another quarter or two. Believing that, it would make sense to sell into the current market rally. However if we instead believe that the recession is ending it makes sense to buy, or at least hold positions, since prices are bound to rise throughout the remainder of the year and beyond. Indeed, share prices may be jet-fueled by a combination of lower expense and increased revenue. But only until companies are convinced the recovery will stick and they increase employment and resume capital expenditures.

On purely technical factors I admit to feeling bullish on the market, even in the middle of the summer doldrums and their low trading volumes. When I pored over numerous charts on Monday -- some that I own but most that I follow and I believe act as useful indicators -- I noticed that many stocks, but certainly not a large majority, are near or testing their 50-day exponential moving averages. This proves nothing except that, for these stocks at least, they are at a decision point. Or more precisely, investors in those stocks are at a decision point.

Banks mainly look good, but not all. Gold looks poor (unfortunately I hold a miner in my portfolio), while many staid industrials and more-exciting technology stocks look set to run higher. This is very much a non-rigourous view of the market, just my impressions from lightly skimming over some of the mass of market data.

I don't know what will happen next except that it will be important. August may provide more definitive answers as the nascent trends are either confirmed or fail.

Statistical Sampling and the Long Form Census

2010-07-26T08:34:00.021-04:00

In the ongoing controversy over the federal government's intention to make the census long form optional there is an exceptionally high noise level over issues of governance, political interference in the civil service, tax burden, privacy, value of the long form to government and outside agencies, and much more. I will talk about none of that, and will thus casually sweep from the table all politically-related issues encompassed by the discussion. I do this so that I can focus on the technical aspects of the issue, in particular whether the long form census delivers reliable statistical data when it is mandatory, and when it is optional. The political questions are interesting of course, but these are not my focus in this post.

Stats Can has three broad options on how to go about the long form census:

Mandatory
Optional
Scrap it entirely

From here it is possible to formulate a few simple questions about the entire census exercise:

Is the mandatory census, as conducted in 2006 and earlier, delivering valuable data? That is, are the results sufficiently reliable to be useful?
To what extent does making it optional lower the reliability, and will its results meet the test of being sufficiently reliable to be useful?
Are there good alternatives to the long form which deliver similar results with acceptably high reliability?

If the answer to the first question is negative, the utility of the long form census is highly questionable, raising the possibility of scrapping it entirely. In the case of the second question (assuming that the answer to the first question is positive), it is reasonable to assume that the reliability will be lower (based solely on sampling theory), but we must now determine just how much less reliable it is to determine whether it is worth doing at all. The third question is particularly interesting since some countries do manage to do this pretty well without a long form, however the manner in which it is accomplished is important.

Let's start with the current long form and its reliability. There are two questions to be considered: is the sampling done in a way to meet the target statistical confidence in the conclusions derived therefrom, and; is the data collected accurate? If this question interests you, I suggest you read this article in the National Post since it gives a flavour of the problem of collecting high-quality data before continuing.

As the article shows, whenever you involve humans in any survey there is an issue of quality. It is important to understand that this is entirely independent of the sample size and selection methodology. Humans can lie, be negligent, or simply be wrong no matter what they are being asked. The problem can be managed in part by making the census form easy to use, easy and quick for the responder to get right, and avoiding hot button issues that make people uncomfortable (e.g. tell us about your undiscovered criminal acts and your favourite kinky sex acts). The question about natural gas spending is a good example of a question that will often produce poor data.

The same difficulty is perhaps more obvious in political polls that ask which way you'd vote if an election were held today. These are carefully reported complete with statistical confidence levels, nationally, provincially, and by other responder characteristics (e.g. age and sex). This is all very mathematically rigourous but still totally wrong. The methodology used to calculate the confidence levels (e.g. plus or minus 3.8%, 19 times out of 20) assumes that responders are equivalent to coloured balls in a bag that are randomly drawn; if you have a bag of 100 balls and you draw 10 balls at "random" and you get 5 white and 5 red ones, there is a tried and true mathematical process to say something rigourous about the entire population of 100 balls. Not so with people. Some misunderstand the question, say whatever they believe the questioner wants to hear, lies in an attempt to skew the poll, or would never vote anyway.

Remember, we're still talking about a mandatory long form census. Stats Can spends a lot of effort to make the sample (who is sent the long form) both sufficiently random yet suitable to the types of analysis to which the collected data will be put, and it is not enough. Even the force of law to ensure that the sample integrity is assured isn't good enough. Stats Can knows this and they will apply many supplemental filters to the data in an attempt to tidy it up a bit, if their assumptions about how the data is skewed by human and other factors are reasonably close to the mark. However, they can never be certain.

If we now degrade the data by making the long form census optional, it becomes even more difficult to filter the data. As Minister Clement has stated, an expected reduction in the response rate will be compensated by increasing the sample size. That's nice, but it doesn't help Stats Can all that much. The thing is there is no good way to know who is opting out and why. There is an unknowable selection bias. Even if they know the location of each responder (this requirement is apparently also in doubt, in addition to who does or does not respond) the additional unknown selection bias degrades any analysis of the collected data. Are people's reasons political, privacy related, education or comprehension, availability, or other factors? Stats Can can't know. They may also not have the ability to compare the 2011 and 2006 samples to determine what new filters to apply to the data.

At this point there is some question as to whether the long form census should be done at all if the data and its analysis are degraded by some unknowable amount, especially in advance of the census being conducted. If the quality is deemed likely to be too low for its intended purposes, both by government and other organizations at large, it may be appropriate to scrap it entirely. The cost of an optional long form may even turn out to be higher than a mandatory form: more forms sent out and potentially processed, plus more filter analysis to recover some of the lost data quality, countered by lower costs of enforcing compliance.

If the results of the long form census are still deemed to be important even though it is untenable due the loss of quality, there are alternatives, but perhaps not ones that are doable. Some countries maintain databases that integrate all the data that all government departments know about the country's citizens. This super-database can be good enough to make a long form census superfluous. Except, and (in my opinion) fortunately, this isn't done in Canada. We have set some pretty strong barriers between government departments and agencies which make it very difficult to share and integrate data across those barriers. As an example, reporting income to CRA that was obtained in, shall we say, peculiar means, does not end up in the hands of the RCMP or other police forces. CRA can't even give your identity to Elections Canada without your consent. These barriers are actual respected and so can generally be trusted, which encourages more honestly when dealing with branches of the government. It is highly unlikely that Stats Can's needs would supersede the necessity and enforcement of those barriers. In other words, super-databases are not in the cards, and for which I am most thankful.

I don't know how this will eventually shake out since it has become a political hot potato that has already resulted in the resignation of the head of Stats Can (presumably regarding a perception of political interference) and is generating a surprisingly heated debate across the country. In closing I will note that our Mayor, Larry O'Brien, says that the City of Ottawa will if necessary replicate what the long form census produces by some means. It will be amusing to see how he proposes to do this since, as a minimum, the City does not have the funding to do a local "census" and does not have the federal government's power to force compliance in responding to any questionnaire the city sends to a sample of residents.

What a weird issue this is that has captured so much of the country's attention. Who would have thought it.

Sing Along to the Giant Hogweed Invasion

2010-07-25T07:21:00.034-04:00

First it was the invasion of purple loosestrife that we panicked about as it filled the ditches and fields, replacing native weeds with themselves, the foreign weed. The invasion continues while the panic has long since subsided. More recently it is zebra mussles and Asian carp that are the invading fauna (rather than flora) that threaten our lakes and streams. Now it is the turn of the giant hogweed.

It's like something out of a horror film: A pretty plant that was once the darling of backyard gardens has escaped to wreak havoc on a community near you. It grows tall enough to dwarf adults and is armed with toxic sap that burns human flesh.

The unwelcome spread of this noxious plant is nothing new. It is an ancient invasion, human mediated, much like rabbits in Australia. In fact it brought to mind a song written 40 years ago that I remember well, and is tucked away in my dusty collection of LPs and cassette tapes. It was written by none other than the band Genesis, and release on their Nursery Cryme album of 1971. This was very much in its early days when Peter Gabriel was the leading personality in the group and Phil Collins had just joined as their new drummer. It was the heady days of art rock, a genre in which Genesis was a rising star.

Peter Gabriel's lyrics to "The Return of the Giant Hogweed" tell an apocalyptic story about a "regal hogweed" being brought from Russia by a Victorian explorer to the Royal Gardens at Kew. Later, after being planted by country gentlemen in their gardens, the hogweeds take on a life of their own and spread their seed throughout England, preparing for an onslaught. The citizens attempt to assault the hogweeds with herbicide, but the plants are immune. After a brief instrumental (subtitled "The Dance of the Giant Hogweed"), the song ends in a crashing climax where the hogweed reigns victorious over the human race.

I know, it sounds so apocalyptic, but the song is actually quite decent and is quite humourous in its way. In my opinion it has aged not at all badly in the intervening decades although I listen to it only rarely nowadays. Here are the closing words of the song lyrics to give you a taste (but beware of pop-ups and other junk you'll pull up if you click on any song lyric site). Even the species of hogweed is the same as in the current crisis.

Mighty Hogweed is avenged.
Human bodies soon will know our anger.
Kill them with your Hogweed hairs
Heracleum Mantegazziani

Giant Hogweed lives!

One thing that puzzles me is that the song is titled The Return rather than The Revenge of the Giant Hogweed. Reminds me of a long-ago minor controversy that saw the original title of the Star Wars film changed to Return of the Jedi from Revenge of the Jedi, supposedly by Steven Spielberg himself.

Lucas changed the title, saying "revenge" could not be used, as it is not a Jedi concept.

However, I doubt very much that anybody got on Genesis back about the title choice, and, unlike the principled Jedi, revenge is very much the theme of the giant hogweeds in the song.

So dust off the old record collection or download the MP3, and then play the song the next time someone starts on about how we are all doomed by this majestic though nasty weedy invader. Just perfect for a lazy summer Sunday.

Catching the Smart Phone Market Wave

2010-07-22T07:41:00.002-04:00

Antennagate is not hurting iPhone sales, nor should we expect that it will. Once the market decides that it loves a product it takes a lot of pain to sever that relationship. While Apple's release of quarterly results this week do not reflect loss of sales due to antenna problems -- the quarter ended before the issue became public -- there are ample indications that there is no business problem.

[Interviewer] Any changes in demand since antennagate?

Cook: “Let me be perfectly clear: We are selling every unit we can make, currently.”

Follow up: So you haven’t seen any slowdown in order rates, or any increase in returns?

Cook: “My phone is ringing off the hook with calls from people who want more supply.”

This is not unique to iPhone as even Toyota found out this year. When Toyota's sales dropped precipitously there was real concern that the company would suffer a blow it would not easily, or ever, recover from. Yet their sales have recovered quite nicely. Unfortunately I don't have the reference at hand, there was a survey of car shoppers done at the height of the public crisis over uncontrolled acceleration and Toyota's apparent malfeasance and negligence. What the survey found was that buyers that were considering Toyota before the crisis arose were still considering Toyota.

Rather than buying a vehicle from another manufacturer they were content to wait for Toyota to solve the problem and, importantly, for the recession to end: all vehicle manufacturers were deeply hurt by loss of consumer confidence and the resulting deferral of big-ticket purchases. If customer loyalty survived a product defect that could kill you, I imagine that a malfunctioning antenna and public relations missteps would not seriously hurt Apple.

A recent survey by IDC found that 66 percent of people who own older iPhones are holding off on upgrades, and 25 percent of new buyers are now delaying their [purchases].

...barring any other foul-ups with the iPhone or other products in the near future, Apple should escape this fiasco with its reputation intact. "The best defense against it is to have a strong cushion of good will already established. Apple has that," Bernstein said.

Apple is not unique with smart phone product defects. As I mentioned previously, the Nexus One built by HTC for Google has an almost identical problem. Then there's Droid X with its own problems. The fact is that all smart phones suffer from a host of defects, most small but some that are large: user interface peculiarities, speed, multi-tasking, networking, screen and camera glitches, and so forth.

The sad thing about this is that it is not unexpected; product releases with known defects is a necessary evil that manufacturers accept when there is a new market category -- smart phones -- that becomes enthusiastically adopted by consumers who can not buy the phones fast enough. Just consider all the new phones that have rapidly sold out or even had people lining up to buy them the first day, including every iPhone version, Droid X and HTC Evo.

There is money on the table right now, and only a foolish company would delay products to fix every last defect since gaining market share and riding the market wave demand that products are released early and often. If this is not done at the now critical phase of smart phone adoption, there is real risk of losing the market to competitors, not just this week or this quarter but forever. Not every smart phone platform will survive and survival requires maintaining market share and customer loyalty. Non-catastrophic defects can always be resolved in the next release (hardware defects, such as iPhone's antenna problem) or downloaded to customers' phones (software defects). Customer loyalty in this environment is sustained with a rapid release cycle that delivers new features and, we hope, defect resolution.

Get used to dealing with defects for some time to come, and even Android "fragmentation" for that matter. The nature of the smart phone market ensures that this mode of operation will continue for at least the next one to two years. Eventually the market will stabilize, the quantity of platforms and variants will settle down to a workable number, and the manufacturers will have some leisure -- but not much! -- to fix their products before you buy them.