Cisco and the CRS-3 Hype

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

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

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

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

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

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

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

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

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

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

Politician Salaries

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

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

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

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

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

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

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

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

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

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

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

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

Growing the Wireless Market

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

End of the Credit Crisis

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

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

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

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

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

By-election in Ottawa West-Nepean

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

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

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

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

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

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

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

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

Revenue By Any Other Name Is Still Revenue

There was a short rant in the National Post on Monday that I found interesting. It makes a very good point, that whenever the government hands out money it distorts the market. There are of course a great deal of issues with all such programs -- political, economic and philosophical -- which inspire a lot of heated debate. Rather than argue the fine points of all these programs, which usually translate into tax credits or similar corporate incentives, let's look at it from the perspective of a typical business.

First, we have to deal with an ethical dilemma: is it right to apply for and receive funds from the government? In most cases, the applying company has nothing to do with getting the government program created; it does happen (think GM) but those tend to be the exception, not the rule. For most of us out in the real world trying to make our businesses successful, there is no need to feel guilty, or at least no more than if a store advertises a sale -- where you benefit from making a purchase at large discount -- should you feel guilty about the loss accruing to the store's owners.

Therefore, ethics aside, what is a business owner to do? The program and the money are there, and whether or not you choose to apply for funds (assuming your business qualifies and the application is honestly made), the program will continue to exist and the funds will be disbursed. If not to you, then some other more or less deserving business, and quite often your competitors.

If you have ever worked in company and have been within sight of the finance department's activities, you will know that these government programs are on every CFO's radar. I have even been roped into helping write some of these program applications in more than one company. When I was younger I was somewhat bothered by what I was doing even though it was all perfectly legal and above board: I was never asked to tell any untruths. Later on, having gained more business maturity, I stopped worrying about it. I did so for good reason.

When we think of company revenue it is natural to think of sales; that is, money from paying customers. This is too narrow a perspective. What matters to a company's financial health, and therefore the shareholders' interest, is more money coming in than going out (net positive cash flow). There are no asterisks put against a dollar residing in a company's bank account. No matter where that dollar came from, it is an equivalent asset. It is certainly true that the dollar can have an attendant obligation, such as rolling out a product based on R & D subsidized by a grant, but that is true of every incoming dollar. For example, dollars from customers obligates the company to deliver and support product, and dollars from investors obligate the company to deliver on specified financial and business objectives. These sources of dollars may not be called revenue, but the bank balance increases identically, dollar for dollar.

A company is obliged to acquire every profitable bit of revenue it can if it is to fulfill the prime objective of any private corporation: to deliver the best possible return to shareholders. In other words, a CFO who declines to apply for legitimate government funds on the basis of ethics or other personal beliefs deserves to be fired. I don't remember seeing any CFO fired for this reason, and that's because they always made the right decision.

The proper way to deal with government money (that's our money) going to corporations is to take it up with the government, not private businesses. If it's bad policy -- and it very often is -- tell the government to stop, through the ballot box if necessary.

You Can't Not Invest

With the conclusion of RRSP season on the way, there is a lot of information and misinformation floating about in advertising and in the media. The big question is about whether to invest or use the money to pay debts or for some other purpose. The thing is, there is a false dichotomy pervading the discussion. No matter what you choose to do, or not, with every dollar, is an investment activity. I wonder how the government's attempt to increase financial literacy will deal with this.

Take the simplest case: there is cash in your pocket and you decide to keep it there. First, if you can avoid the temptation to spend it on something transitory -- with no enduring or resale value, like a Sens ticket -- the value of the money is continually in flux. Even if your intent is to spend the money on goods or services, the price of those goods and services will change. Manufactured goods that are imported will at the very least change with the loonie's exchange rate; domestic goods with foreign inputs will similarly see price shifts. If you think our dollar will increase in value, parking the cash while you delay your purchase is a form of investment.

The other big impact on cash is inflation. Since cash is completely unshielded from inflation, as the dollar declines in value all cash move downward an equal amount. The effect today is mild but that is not assured to continue for long. Unfortunately and for the same reason, putting the money is a chequing or savings account is no better since the interest rate you earn may be zero or negligible.

That's about all you can do with cash, if your objective is to hold on to the high liquidity of the wealth that cash represents. There are other ways to invest cash without losing a lot of liquidity, such as GICs and T-bills, but there is the friction of buying and selling, and there may be transaction costs associated with early withdrawals. This will be a common theme in cash investments, that higher interest rates are offered if you cede some or all control over those funds for a period of time. Like anything in life, there's no free lunch: if you want more, you have to give more, even if the 'more' is an intangible item.

The above investments, or any investment vehicle, can be done on a cash basis or as part of a government-recognized plan that has certain tax implications. This is where RRSPs and other programs enter the scene. These programs are neither better nor worse than cash investments, just different. Assessing those differences is key to deciding if they are beneficial to each individual. All I can say about this if you are unclear on how to decide whether to invest via one of these programs is to suggest that you visit a professional financial planner.

Then there's the debt option, where you use that cash to reduce the principle and, in consequence, future interest charges. In general, the interest on debt is always higher than savings. This is no surprise since this is how banks base much of their business: the charge more on the money they lend than they pay on the money they borrow (from you!) to cover operating costs, risk (some proportion of loans go bad) and profit for shareholders. If you are both a saver (e.g. RRSP) and a debtor (e.g. mortgage) you can only win at this game when the interest rate is changing rapidly, and in your favour. I think that it is arguable that no consumer should attempt this game. In any case it's pointless now since interest rates are static and likely to remain so for a time.

The usual argument for choosing between paying off debt and investing in an RRSP is if you can accurately forecast the long-term wealth differential between the two. This can be very difficult. Many assumptions must be made, which include but are not limited to: job and income security, inflation, comparison of current and future tax brackets and rates, investment risk, likelihood of family tragedies, and so on. For example, while it's true that if you use the cash to reduce a mortgage there can be a large difference in the long-run cost of the mortgage, if there is any chance that you might need that cash in the not too distant future, you will either have to renegotiate the mortgage or take out a loan: both can be financially injurious. That's just one example of a difficult investment decision and, make no mistake, it is an investment decision: you are deciding where to place a portion of your total wealth to best serve your future needs, or, more simply, to achieve the largest possible future return on that wealth.

Non-cash investments are most often found in the stock market. When you buy a share in a company, whether directly or via a mutual fund, you become a part-owner of that company and subject to the same risks and potential returns of any business owner. That risk, which is rarely quantified with any accuracy or under your control, is inseparable from returns that can be very high in comparison to predictable returns of cash instruments. Even if you choose mutual funds -- as most do, especially for RRSPs -- equity investing requires a strong stomach and a firm hand. Every day you should be asking what a stock, fund manager or financial advisor has done for you today. Be ruthless about it; loyalty to a company or a manager is folly. It's your money and your future at stake.

Of course you can always live for today and spend the cash in your pocket, and let tomorrow take care of itself. This is not necessarily a bad thing if it fits with your lifestyle, provided that you don't rue tomorrow what you did yesterday, or if you have dependants. Hedonism and allowing oneself to be blown about by the winds of change are investment strategies that do work for some people. Even pessimists can benefit by this if they truly believe that disasters that await us in the future will render any investment worthless. If this philosophy works for you, reading blog posts about investing is a waste of time: get out there and have some fun with your money.

Nortel Patents Still Have Legs

It seemed that the last time I wrote about Nortel and their wireless patents that I'd never again have reason to mention that company. They are after all in the process of being dismembered and disbursed to others. I saw little reason to think that the patents would still have any independent life apart from being parcelled off with the business lines. I was not the only one to think that.

Now I see that the situation was not quite as simple as I thought. If this article is correct, Ericsson agreed to short-term rights on a patent portfolio that would appear to impact on their business assets purchase.

"According to sources, wireless giants such as Nokia Corp. and Telefon AB LM Ericsson have privately expressed interest in acquiring the patents to protect their purchases last year of various Nortel wireless assets. It is believed that the new owners have short-term licensing rights to the patents."

On the surface, this situation would appear to confound the calculation of the price Ericsson paid since it would be uncertain how much they would have to separately pay over the long run for those patents to get the value out of the products they now own. I can only conclude that I simply do not know enough about the dynamics that are playing out in this never-ending saga. However, I can make a guess.

When there is carrier business on the table, vendors with the requisite technology and products jockey for position to win the business. The wireless sector is hot so there is a lot of money at stake, so every vendor wants the lion's share of the business. The carriers, all of which are pretty sharp at this game, do all they can to avoid single-sourcing, either by explicitly demanding a multi-vendor solution or citing standards compliance in the RFP, and often both; keeping two or more vendors on the hook is used as leverage to negotiate lower prices and more features.

This is a game that has played out many times in the telecommunications business, and I've been a part of it more than I care to remember. When there is no urgency to roll out services, this game can go on for years. When there is urgency -- when the carriers feel compelled, for whatever reason, to roll out services quickly -- the game proceeds much faster since vendors avoid spending time and resources fighting each other when there's big money on the table. How it all plays out generally looks something like what follows:

1. Each vendor has its own unique technology and patent base that it promotes as the best. They try to have the carriers write their RFPs in such a way as to favour their own technology.
2. The carrier points to an industry forum or standards body to hash out a common technology base and feature set, which they would then reference in their RFP. Carriers with similar interests will typically cooperate under the auspices of that forum or standards body to the extent that they all push vendors in the desired direction.
3. Vendors work hard to skew the standard to incorporate their own technology's features, hoping to slow their competitors' ability to bring their own products into compliance. If they are successful, they can also hope to reap patent licensing royalties from other vendors, either directly (if those vendors successfully win bids) or indirectly (by making their competitors' products too expensive to win bids).
4. Vendors and carriers block adoption of standards -- they're typically consensus bodies -- until the company holding relevant patents agrees to sensible royalty rates or waives them entirely. Many standards bodies make it a condition of participation -- legally binding, usually -- that this must be done.

In the case of wireless infrastructure equipment, including LTE, relevant patents are held by all of the largest vendors. Since these same companies often enter into global or sector-specific bilateral cross-licensing agreements among themselves, there may not be a serious issue with which of these vendors ultimately buys this batch of Nortel patents. Even if Nortel were to stay in business as an NPE (non-practicing entity) -- licensing patents as its primary business -- there may not be an issue; however this latter scenario is unlikely since creditors rarely agree to take an equity position in the bankrupt company, preferring to sell and put the proceeds towards the debts. Where the matter gets interesting is if the patent portfolio is sold to a company that is not one of the cabal of wireless infrastructure vendors.

For example, if the patents go to RIM, since they are not in that infrastructure business today, they have no incentive to cross-license and would most likely choose to build a royalty business or litigate against LTE vendors. From, say, Ericsson's point of view, they may not value the portfolio highly if it were to go to Alcatel-Lucent -- where by high value I mean make a higher-priced bid for the portfolio -- but they might do so if RIM were to bid. Either way, I doubt that the federal government will get involved if a non-Canadian company bids on the patents.

While I have no idea if this is the way it will play out, it seems to me a likely outcome in comparison to some others. The situation is interesting enough that I'll pay some attention to see if I've gotten it right.

Common Mobile App Platform

This is the week of the Mobile World Conference in Barcelona. With mobile technology having become so dominant, this event has become a major venue for carriers and vendors to trot out the latest gadgets and to announce new deals. The press releases have been coming fast and thick since the weekend.

One curiosity is the Wholesale App Community, an alliance of phone vendors and carriers around the world, to jointly build a vendor-independent platform for software app development. This would allow an app developer to write an app once and it will successfully run on any smart phone OS platform, on any mobile device and on any network. This is no mean feat, which any app developer knows, since they're the ones that have to write and rewrite app software if they are to run on iPhone, Blackberry, Android, and other platforms, and also deal with the diverse form and features of mobile devices using each of those platform. Here it is in the words of this new alliance:

"For the developer, particularly small developers, the alliance will create an environment in which they can flourish and create applications in a straight-forward and effective manner. Today, the route to market for developers is challenging requiring them to approach multiple operators. The alliance will provide a single gateway for developers to access a vast potential customer base (over two billion with limited cost to the developer and this in turn will provide the maximum possible return on investment for them.

In addition, the alliance will utilise existing technical standards, rather than creating new ones to allow developers to access operators’ assets, for example network capabilities or API’s (Application Programming Interfaces) more easily. In practice this means that developers will only have to create one version of their application and this can be used on multiple types of devices and operating systems (such as Symbian, Android, Windows etc) which is not the case today."

Sounds great, although the details are at best sparse. The announcement itself is unsurprising since it's been telegraphed by many of the alliance members for quite some time. The thing is, is it feasible? Technically, sure it's feasible, but it is more important to ask how they will go about it and whether it will gain market traction. An example of a similar success is the world-wide web, courtesy of standard HTML and compliant browsers; it can be done.

As to how they'll do it, that will be interesting to see. One of the important reasons to have native apps -- those that are tuned to a device platform's OS and environment -- is to make use of all the services and technology that is local to the phone: GPS, accelerometer, orientation sensor, audio streams, camera, file system, and so on. A successful alliance initiative would need to achieve a common platform while providing local access to many device features. The challenge is increased by rapidly-evolving smart phone technology; a too-static common app layer will fail if it can't keep pace with the underlying mobile device feature set.

Can a common app development layer diminish the preeminence of the platform decision when developers produce an app? Certainly there will be a shake-out among mobile platforms since there are too many. This is going on even now with the announcement that Moblin and Maemo will be merging, reducing the number of Linux-based variants; this will not be a typical outcome: each of the rest will either survive or die. This, too, could happen to the alliance's initiative.

After a few moments of thought, I have an idea what a common app layer needs to achieve if it is to have the kind of success the web browser has achieved. In fact, it may be a variant of the web browser.

• HTML5-based app language that can run within a browser, providing a common user interface
• Cloud (server) APIs to access carrier-provided network services
• Javascript virtual machine to execute app code on the device
• Javascript APIs to access mobile device features

This is pure guesswork and probably wrong. I just want to give a flavour of what is needed. Others are guessing as well, and it does seem that games must stay native for now. The carriers will have full control of the network APIs, but need device and platform OS providers to cooperate on the device side software. The browser will become so heavyweight that it may take another generation of mobile phone technology to make it run well, but that will be no impediment if the initiative is planned as a long-term strategy.

I wish the alliance luck, even though I will not hold my breath. Then once it gets into the wild, my bet is that we'll see the first serious malware, designed specifically for the new app platform, appear within one week.

Musketeer as Entrepreneur (Part 7): Conclusion

In the previous installment, I left D'Artagnan and his newly-formed team at a port on the English Channel as they prepared to start their venture. It is a long, convoluted and entertaining story that has some parallels to the typical life of a tech startup.

Early in the story, I mentioned that one of three musketeers, Athos, would be a competitor to D'Artagnan's efforts to restore Charles II. They don't encounter each other until mid-way through the adventure at a time when Athos was in peril of losing his objective and also his life, and D'Artagnan was sure he had failed and was not assured of his own safety.

In the case of D'Artagnan, the reason for this low point was that, while he and his team brilliantly achieved the first objective of making off with Monk, Charles II did not respond to the "gift" as he expected. In other words, the customer wasn't buying what he was selling, despite its obvious great value. What startup hasn't dealt with this very problem? Despite feeling in his heart that the customer was making a grave error, he had little choice to behave as if the customer was right -- and they're always right, or so it's said. Instead of accepting the "product" D'Artagnan wished to sell, Charles instead demanded that D'Artagnan provide a custom "service". Products and services are very different things, and D'Artagnan knew this, but he needed to salvage something or risk losing his and Planchet's capital.

I am being deliberately vague on what actually transpired since I don't want to give any spoilers to those who might want to read the book. Suffice it to say, that the service D'Artagnan was asked to provide was successful, and much to his surprise he did eventually generate revenue that was in line with his revenue plan. That last fact alone tells us that this story is fiction; no startup meets its revenue plan, missing either on the low side, getting the time-frame wrong or, in the minority of cases, exceeding their wildest expectations. But getting it exact? No way.

Planchet's faith in the D'Artagnan was amply rewarded, and so both investor and entrepreneur did quite well in the venture. The employee mercenaries did well, too, according to their modest expectations, but then D'Artagnan never did reveal just how much the venture actually netted. He made sure that none of them were around when he collected and then carried home the cash. This, too, is typical. No, not the secrecy, but that employees do not get rich in startups; the salary they earn is in lieu of risky equity. Founders and investors also conspire to keep the lion's share of the winnings.

So with that I'll end this lengthy series. I'll leave you with a passage from Dumas that sums up the qualities of D'Artagnan and Planchet. Perhaps he did so as counterpoint to the comedy he made of their behaviour and interactions in telling their story, and from which I liberally quoted in this series. Dumas gets the last word.

They who have pronounced Don Quixote mad because he rode out to the conquest of an empire with nobody but Sancho his squire, and they who have pronounced Sancho mad because he accompanied his master in his attempt to conquer the said empire, - they certainly will have no hesitation in extending the same judgment to D'Artagnan and Planchet. And yet the first passed for one of the most subtle spirits among the astute spirits of the court of France. As to the second, he had acquired by good right the reputation of having one of the longest heads among the grocers of the Rue des Lombards; consequently of Paris, and consequently of France. Now, to consider these two men from the point of view from which you would consider other men, and the means by the aid of which they contemplated to restore a monarch to his throne, compared with other means, the shallowest brains of the country where brains are most shallow must have revolted against the presumptuous madness of the lieutenant and the stupidity of his associate. Fortunately, D'Artagnan was not a man to listen to the idle talk of those around him, or to the comments that were made on himself. He had adopted the motto, "Act well, and let people talk." Planchet, on his part had adopted this, "Act and say nothing." It resulted from this, that, according to the custom of all superior geniuses, these two men flattered themselves, _intra pectus_, with being in the right against all who found fault with them.