Category Archives: Business

Why Steve Forbes is wrong about BitCoin

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In an editorial written yesterday, Steve Forbes argues that BitCoin is not a currency.

I’m actually willing to reserve judgement on whether or not Bitcoin is a “real” currency for now (although I’ve personally made a number of small transactions in BitCoin in recent months). Maybe it is something else entirely – a value store, a speculative instrument of some kind, some other kind of animal. I don’t believe this is the case, but I’m willing to wait and see how things pan out in a few years.

I’ve also written far too much about BitCoin lately, and I’m going to switch topic entirely in the very near future. However, before I do, I wanted to point out why Mr Forbes’ arguments about BTC are not at all correct.

The editorial basically makes two points: that exchange rates between BTC and fiat currencies are extremely volatile (true, but irrelevant), and that BTC is somehow lacking in transparency (false, and also irrelevant), and that those two points somehow automatically preclude it from being considered a “real” currency.

There are many countries in which large transactions (i.e. property purchases) are always denominated in US Dollars, regardless of whether the local currency is actually used in payment. This is because those local fiat currencies are too volatile themselves to use for this purpose.

Similarly, most people using BitCoins agree on a price in the local fiat currency, and then use a calculator to determine the quantity of BTC to hand over at the point in time that the purchase is completed. Most people have calculators on their phones these days (editorial aside: sarcastic statement).

Anyone in the world can look up (in enormous detail) exactly how BitCoins are created or used. The code itself is open source, well defined, and understood by millions of participants. Transactions themselves are as simple and “transparent” to conduct as physical cash, with the added provisions that BTC cannot be forged, and that a transaction cannot be recalled once it has been made (unlike with credit cards or PayPal for that matter). You know exactly what you are getting, every single time.

I understand where Mr Forbes is coming from. He believes in the gold standard. I happen to disagree vehemently with the gold standard, and I’ve written about why in the past (here, for example). Both of us are obviously entitled to our opposing positions, and neither of us are likely to change them.

I do wish though that he would check his facts first; there are enough negative statements that one could make about BTC that are actually true – starting with the poor quality of existing exchanges.

Update:

I debated whether to put this part in. I’m not a confrontational guy. I’d like to issue a small challenge to Mr Forbes. If you know him, feel free to send this to him.

I own a small amount of gold. I don’t believe the gold hypothesis at all, but I’m always willing to allow myself to be proven wrong.

I’d like to challenge Mr Forbes to purchase a small amount of BitCoin – say a few hundred dollars worth.

If I’m wrong, the worst case scenario is that he’d be out the price of a nice dinner for two. Basically no real risk at all. Heck, I’d even make it up to him personally. If I’m right though, he’d make a lot of money, and would probably be quite happy about being wrong.

Is BitCoin Arbitrage Feasible?

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BitCoin has been in the news lately with its rapid rise in exchange value, its huge fluctuations in intra-day value, and the susceptibility of services using it to hacking attacks.

It should be obvious to any observer that a position (in the investment term, not opinion) in BTC is speculative in nature, and carries any number of risks that are hard to evaluate.

There may be a way for investors to make money on BTC through arbitrage though – with relatively well-defined and calculable risks. Continue reading →

Google, Mobile, Bandwidth and Cost-Per-Click

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In case you didn’t hear, Google just missed on estimates for the quarter. There’s a good analysis on Breakout (here). What it boils down to is that mobile traffic is growing rapidly, and mobile users pay a lot for bandwidth, so are less likely to click on ads.

I’ve written previously that several factors are going to push big tech companies into the telco industry. The exorbitant cost of mobile bandwidth is another one to add to the list.

There is a  chasm opening between existing telcos – who make their money selling bandwidth – and manufacturers of mobile devices, who largely make money from their users consuming that bandwidth.

If Google makes money selling ads, and the cost of connecting to the internet via a cellphone prevents users from clicking on those ads, then Google is going to be under pressure to reduce the cost of connecting. A similar factor holds true for Apple and its App Store – yes, you can connect to WiFi from home, but the overall usability of mobile devices improves dramatically if you can use it everywhere, transparently.

I suspect a few things are going to happen:

  • More open feuding between device manufacturers and telcos
  • Some new joint ventures between them, particularly with smaller telcos (maybe Softbank isn’t crazy?)
  • Possibly a big tech company actually buying a telco (although how that would get through antitrust, I don’t know)
  • A big push to find other ways for users to connect to the internet.

Stay tuned. It should be interesting.

Why I’m bearish on big tech

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The following short post contains some medium-term (2 – 5 years) predictions that are completely contrary to what many well-known market analysts think.

As a result, I’m going to put some weasel-words here first:

  • I have absolutely no idea what stock prices for any given company will be, in any time-frame.
  • My comments below cover a fundamental issue, and barring specific catalysts, may not have any bearing on share prices anyhow.
  • The companies concerned could very well adjust their strategies, making my comments irrelevant.
  • If you trade based on anything I say, I bear no responsibility whatsoever!

I’m currently rather bearish on large cap technology companies, over the course of the next few years. The technology industry itself will probably do pretty much as it always does – various people will innovate, new products will come on the market, and there will be winners and losers – as always. This pertains primarily to the dozen or so very large, well known technology companies that are well covered by market analysts.

My thesis is as follows:

  • The success of Apple has resulted in virtually all of these companies getting “hardware envy”. Examples include Google, Microsoft, Amazon and likely several others too.
  • As a result, they’re all planning on building mobile devices, and it looks like many of them are betting the farm on their success.
  • Hardware is a very different business to software and services, and it tends to have much larger capital requirements, and much lower margins. It is somewhat like the auto industry that way.
  • Mobile devices in particular tend to be sold via telcos, who have significant power in setting prices. Even Apple is discovering that fact.
  • Mobile devices are also heavily regulated. Anybody can assemble a PC and sell it, or build software or sell stuff online. The cellphone industry has to work with government regulators.
  • The mobile market is currently divided into high end devices that make most of the margins (i.e. iPhone for now, previously folks like Nokia, and possibly Samsung in the future), and low end devices that have razor-thin margins, and require massive volume. There’s deflationary pressure on both markets as well, driving prices (and profits) downwards.
  • Pretty much everybody who wants a cellphone now has one. The new device market is currently focused on the upgrade cycle (people tend to get a new phone every 2-3 years or so, unless they’re me), and on moving people with old-style handsets to smartphones. This has been a high growth industry, but I’m fairly sure that at some point it will grow at the same rate as GDP or population growth.
  • There’s really only room for a few winners in this market. Ask RIM or Nokia.

Adding this all up: currently the big tech companies do compete with each other to some extent, but they also have niches of their own that have provided them with relatively high margins. The push into mobile is going to turn all of them into direct competitors, with all that this implies.

There are going to be some interesting side-effects.

Many of these companies have been purchasing wireless frequency bandwidth for years. Amazon has recently got into that game, probably in order to be able to deliver better service to their Kindle devices in a fragmented telco market.

I believe that the push into mobile will force many of these companies to also become cellular service providers, largely in order for them to regain control over their own pricing structures.

This is a bad thing.

There’s a name for a company that is a software publisher, a consumer electronics company and a telco: conglomerate.

That word has had unpleasant connotations since the 70’s. Its awfully hard to run a single successful business. Running several different businesses under the same roof, each with their own (very different) business cycles, margins, capital requirements etc is a mug’s game.

Add in the recent run-up in stock prices, partially due to bullish overflow from Apple, and partially due to the flight to perceived safety, plus the resulting lower profitability from this strategy, and I suspect that the result will be a sustained period of poor results for this sector.

What will cellphones look like in 5 years time?

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What will cellphones and other mobile devices look like in five years time? I’ve been pondering this question for a while now, and this post has gone through numerous iterations.

It would be very hard to determine what mobile gadgets will be like over a longer period, but given the current rate progress (and market adoption), the following points of speculation might be valid in five year’s time:

  • The rise of head-mounted displays like Google Glass means that mobile devices won’t need to have large screens (or possibly any screens), which means they will no longer be forced into the flat, rectangular packaging of today’s pads and cellphones. A screenless gizmo that connects wirelessly to your glasses could look like anything – a belt buckle, an old-school Walkman, or something completely new.
  • Battery life will no longer be a major concern. Between improvements in batteries that are close to market availability, Apple’s patenting of tiny fuel cells for phones (not sure I’d want hydrogen in my pocket, but anyhow), and several competing wireless energy technologies, I suspect that how your devices are powered will change rapidly in the next few years. This is a good thing. Batteries haven’t changed much in a hundred years, and they’re one of the least reliable technologies in use.
  • We’re likely to see more experimentation with input devices. I don’t think keyboards and mice are going “away” just yet, but better verbal input, gesture recognition and other experiments are likely to be available in the market.
  • The performance gap between laptops and their smaller cousins will close. New chip technology seems to be focused heavily on power consumption, so it is likely that the types of chips used in mobile gadgets will be similar (or possibly identical) to those used in laptops. One implication may be that fully-fledged operating systems will win out over less powerful, specifically mobile ones. That could mean, for example, that iOS and OSX will converge, and that Microsoft may actually be crazy like a fox. In the longer term, there are still many companies that would prefer to push processing power into “the cloud”, and have mobile devices primarily act as dumb terminals, but I think the short term will see things largely going the other way.
  • We may see some new form factors – if most of what you need can be built into a pair of glasses, and only some people need things like more storage, or faster co-processors, there may be a market for small add-on devices that communicate via Bluetooth with a primary device, and that contain things like SSD hard drives, or high-powered GPUs.
  • We may see a further move away from cellular technology to “WiFi plus Voip”. I already use Skype and Google Voice more frequently than I use my cellphone’s phone number. If free (or merely very cheap) WiFi becomes ubiquitous, why pay for cellular service? If the ENUM system takes off (it is still largely experimental), you’ll pay a few bucks per year for your phone number (similar to domain registration), and forward it however you want, to whatever devices you wish. I suspect this will further erode the customer base of cellular service providers (to the benefit of companies like Apple).

What does this all mean?

  • It would take a lot for me to be able to do serious work from a mobile device. A full-sized keyboard and mouse are rather useful when writing code, or typing up a lengthy document. If my cellphone had a docking station, that might change, but I suspect that (for certain kinds of users) laptops aren’t going away any time soon.
  • The companies that will win in this space are going to be the ones that bring the full power of a laptop to this smaller form factor. The ability to do – for example – professional graphic design requires several things: a really good screen, dextrous interface device(s), lots of processor power, lots of storage space, great software, and sufficient battery life to not be tied to a wall socket (although Starbucks is usually helpful in this regard). You can almost do that now on an iPad, and I could imagine a designer in a few year’s time standing in the middle of a park, wearing a pair of Google Glasses and an input glove, and generally looking like they were conducting an orchestra.
  • Increased competition between companies in the mobile space means that there’s likely to be a lot of experimentation over the next few years, in order to try to find niches that are profitable. Expect the rate of change to accelerate, and lots of oddball products that ultimately wind up being dead ends. This looks similar to the early days of the “luggable” computer to me.
  • Expect some amazing new collaborative software for these new, powerful mobile devices. The future is not big transparent multi-touch screens like in Minority Report; instead it will be 3D collaborative spaces that are viewed via, and interacted with by multiple people wearing glasses.

First time pitching

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I spoke yesterday with Frank Chen at Andreessen Horowitz.

It wasn’t a “real” pitch. More like a “here’s my idea, now am I a complete idiot or should I go and make a real pitch” pitch.

The information I got back was invaluable. Some of it may only apply to A/H, but I think there’s a lot of general purpose detail here. Take notes.

1. A/H’s first concern is defensible intellectual property. If there’s real hard technology work going on, that’s good. On the other hand, a quick mobile app that somebody can churn out a copy of quickly, isn’t. It isn’t clear to me whether having a lot of existing traffic trumps this consideration – i.e. something that is easy to duplicate, but is already a market leader.

2. Total addressable market. That doesn’t mean “how big is the overall sector market”. Instead, they want companies to have a very good idea of what specific sector of the market they’re actually targeting, its size (both number of customers and annual dollar value), and also the likelihood of a specific potential customer in this market segment actually making a purchase. I think this means real market research, or minimally going out and getting anecdotal evidence from prospects. A/H look for a minimum addressable market of $100 million per year.

3. Reputation. VCs are extremely sensitive to their reputation. That means they won’t touch any company with even the slightest possibility of tarnishing their rep, regardless of profitability. Frank gave me an example of an online pawn broker that pitched them recently. Their whole justification is creating transparency for a sector that has a justifiably bad reputation – but A/H couldn’t touch them due to their being in that market. I believe this is because VCs primarily raise their funds from large institutional investors, such as teacher’s pension funds. That means they need to report back to their investors with regards to their portfolio, which in turn forces them to be somewhat conservative on this topic. If there’s any question whatsoever, they won’t invest. Frank also told me something interesting – this is often not the case with large angel investors. He recommended pitching to them first in this sort of situation.

4. Size of investment. Every VC is obviously different here. It sounds like A/H’s sweet spot is to make investments that are at least $10 million in size, and which are likely to return at least $100 million. I’m guessing that their having raised nearly $3 billion in the last couple of years is going to push their minimum investment higher, in order for them to achieve a decent rate of return. This will eventually push them out of certain kinds of industries, almost by default.

Interesting, eh?

This is great info to keep in mind when actually writing a pitch “deck”.

The other thing I’ve noticed is that VCs by nature are really friendly people – they actually like chatting with people, and they rely on third-party referrals to build their “funnel”. Frank was almost effusive – after we discussed my idea, he repeatedly asked if there was anything else he could help me with, and said that he would love to hear of any other ideas that I come up with in the future. This makes sense in retrospect, but its a different experience than I’ve had with other kinds of high profile (and very busy) people in the past.

All in all, a fascinating experience.

Why I don’t upgrade my cellphone

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True story: a while back I walked into a cellphone store. The rep behind the counter was yapping with a couple of her friends. After fifteen minutes of patiently waiting, I asked her if I could ask a few questions about their phone line-up. She brusquely informed me that she was busy, and then went back to chatting with her friends about clothing. I walked out.

There are thirteen cellphone stores in the mall by my house. I counted. Each one uses slightly different combinations of primary colors in their logos. What I have to say here could apply to any of them, and I’m not going to name names. None of them are typically busy either, so I find this confounding. Continue reading →

First batch of Wahooly startups

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Wahooly is still working on releasing their Beta, but they’ve posted up a list of the first batch of startups, and I went and kicked the tires, so to speak. Here are some first impressions. Continue reading →

Various updates

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Its going to be an interesting week in the technology universe.

Wahooly is launching on Tuesday. More on them below. Then the Facebook IPO will apparently be happening on Wednesday, which could potentially start off another big round of startup frothiness.

The overall level of excitement in tech is as boisterous as I’ve seen it in a number of years. Whether it has “legs” remains to be seen, but there appears to be a definite shortage of qualified people to go around. Over the past few months, the number of resumes sent my way has slowly dropped, and instead I’ve been receiving calls from head hunters and startups (although typically they haven’t bothered actually checking what I actually DO). It will be interesting to see whether things actually pick up economically (or even just in the tech world) over the course of the year.

Wahooly is an interesting riff on startup incubators, crowd-funding and viral marketing. The amount of attention that they’ve achieved in the past couple of months is larger than anything I’ve personally encountered. The basic idea is that startups give them a small amount of equity, which they then “share” among their users, in exchange for which the users promote the startup. The amount of “equity” given to each user depends on how effective the users are in helping to market the company in question, according to some internal formula. To avoid market regulations, it looks like they’re giving some kind of virtual equity to the users, rather than actual shares, and the users will only profit directly if there is some kind of liquidity event. Remains to be seen whether it will work (and whether they can keep it on the right side of legality), but there’s already a large number of users who have registered, and approximately 50 to 60 startups to begin with. My approach is to view it as a combination of an interesting source to find out about new startups (i.e. pure entertainment value), a possible deal flow source, and maybe, just maybe a couple of bucks on the side, somewhere down the road. In the meantime, I’ve been chatting with other users on two groups (here and here) that have been started on Facebook, and its been fun.

I’ll be posting regular updates with regards to Wahooly (and particularly the startups that are launching via their system) over the next few months. Also, two startups I’ve been working with are gradually getting closer to Beta launch, and I will have more to say about them as that time approaches.

Who wants to be a Trillionaire?

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One standard piece of advice given to startups is to pick an industry that will permit scale, so that it is at least feasible that somebody in that industry at some point in time could build a large company doing it.

I saw a video on Yahoo Finance a while back where somebody claimed that Apple will be the first trillion dollar company (barring a brief stint by Cisco during DotCom).

Obviously it is hard to tell right now whether that’s true or not, but an industry that can support a trillion dollar company sounds like a good place to start, doesn’t it?

We know that this is possible in consumer electronics then, but what other industries would make this feasible? The goal here is to list industries that are big enough to support large companies (possibly even trillion dollar ones), and yet are still at least somewhat feasible for startups (potentially requiring substantial – but not unfeasible – capital). Continue reading →