Sunday, November 30, 2014

As Oil Prices Fall, What Happens Next?

  • Last week, the Organization of the Petroleum Exporting Countries (OPEC)announced that, while global oil supply may be exceeding demand, it would not cut production.
  • The news triggered a significant decline in the price of oil, dropping over 12% last week and down over 30% for 2014. The news also negatively affected the stocks and bonds of a broad set of global energy players.
  • Leonid Fedun, vice president and board member at OAO Lukoil in Russiasaid, “The [U.S] shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish” and “in 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,”
  • Note: OPEC (whose members include IraqKuwaitIranSaudi Arabia,United Arab Emerites and Venezuela) accounts for about 40% of global oil production.
MY TAKE
  • The price of oil is driven by a complex mix of geopolitical and economic dynamics.
  • It is likely that OPEC (led by Saudi Arabia) has several objectives for driving oil prices down including 1) the desire to cripple U.S. shale/ fracking production efforts, 2) punishing Russia, whose economy is very sensitive to the price of oil for its invasive efforts in Ukraine, and 3) destabilizing ISIS, which finances much of its operations from the sale of oil.
  • Lower oil prices will likely have a negative impact on U.S. oil-producing states such as Texas and North Dakota, and other oil dependent economies such as ColombiaVenezuela and Norway.
  • However, declining oil prices can lead to lower gasoline prices and provide an economic boost to many consumers and lower input costs for products that include oil based components
  • Bottom line – a prolonged period of depressed oil prices may increase stress on energy sector business models (including alternative energy) and lead to industry restructuringUnexpected collateral damage may also occur

Sunday, November 23, 2014

The NSA, the Freedom Act and Privacy Rights

  • Last week, the U.S. Senate voted 58-42 for the Freedom Act (60 votes were needed for the bill to pass).  The act’s intent is to 1) end the National Security Agency’s efforts to collect the phone records of millions of Americans not suspected of a crime, 2) require government disclosure of the number of people whose data have been collected and report how many were American citizens and 3) create a panel of privacy and civil liberties advocates to review spying requests submitted to the Foreign Intelligence Surveillance Court.
  • Supporters of the bill included the Obama administration and technology companies such as Apple, Dropbox, Facebook, Google, LinkedIn, Microsoft, Twitter and Yahoo
  • Senate Judiciary Committee Chairman Patrick Leahy (and co-sponsor of the bill) said, after its defeat "If we do not protect our Constitution, we do not protect our country and we do not deserve to be in this body."
  • Senate Minority Leader Mitch McConnell said "At a moment when the United States is conducting a military campaign to disrupt, dismantle and defeat (the Islamic State), now is not the time to be considering legislation that takes away the exact tools we need to combat (the Islamic State)."
  • Senator Marco Rubio said "As the rise of ISIL has demonstrated, the world is as dangerous as ever, and extremists are being cultivated and recruited right here at home…This legislation would significantly weaken and, in some cases, entirely do away with some of the most important counter-terrorism capabilities at our disposal, which is why I will not support it.”
MY TAKE
  • While the bill was weaker than most supporters had hoped for, its passage would have been the first time a law was in place to curb the NSA’s spying activities.
  • It is likely that many technology companies, U.S. citizens and global trading partners will continue to be concerned about the NSA’s reach. This will likely also drive demand for encryption and other privacy related solutions.

Sunday, November 16, 2014

Hey, Whose Internet is it Anyway?

  • Last week, U.S. President Obama said, “An open Internet is essential to the American economy, and increasingly to our very way of life. By lowering the cost of launching a new idea, igniting new political movements, and bringing communities closer together, it has been one of the most significant democratizing influences the world has ever known.”  In addition, “the time has come for the FCC to recognize that broadband service is of the same importance and must carry the same obligations as so many of the other vital services do. To do that, I believe the FCC should reclassify consumer broadband service under Title II of the Telecommunications Act.” 
  • In response, AT&T’s CEO  Randall Stephenson said it would slow down its investments in high-speed fiber-optic broadband networks and “We can’t go out and invest that kind of money deploying fiber to 100 cities not knowing under what rules those investments will be governed.” Comcast CEO Brian Roberts said, "We're trying to work with the FCC, Congress and the administration to forge an outcome all stakeholders can live with and doesn't harm the innovation cycle." Cisco System CEO John Chambers "It would be a very disappointing end result if we moved back to regulation of the Internet like we did voice many decades ago…If [Internet Service providers] can't make money on broadband, they won't build it out." 
MY TAKE
  • The lack of satisfaction with U.S.  Internet service providers and the diminishing competition in this market has triggered significant debates and, among other things, led to the popular video “Last Week Tonight with John Oliver: Net Neutrality (HBO)” http://bit.ly/1rBJsP4. 
  • It is likely that oversight under Title II will be more benign than its supporters and detractors predict. 
  • While the Internet’s origins come from U.S. government funded projects, the road ahead will likely be driven by business interests - unless there is either increased consumer activism or a major disruption of service that would increase pressure for government intervention.

Sunday, October 12, 2014

As Ebola Concerns Increase

  • In 1994, Richard Preston’s best-selling book “The Hot Zone: The Terrifying True Story of the Origins of the Ebola Virus” increased awareness of this highly infectious and deadly virus that first appeared in a central African rain forest.
  • From 1976 (when Ebola was first identified) through 2013, the World Health Organization reported 1,716 total cases.
  • The 2014 West African Ebola outbreak, which is affecting GuineaSierra Leone and Liberia has resulted in over 8,000 cases and about 4,000 deaths.
  • Last week, Tom Frieden, director of the Centers for Disease Control and Prevention said "In my 30 years in public health, the only thing that has been like this is AIDS," and "We have to work now so that this is not the world's next AIDS."
  • Jim Yong Kim, President of the World Bank Group said, “With Ebola’s potential to inflict massive economic costs on Guinea, Liberia, and Sierra Leone and the rest of their neighbors in West Africa, the international community must find ways to get past logistical roadblocks and bring in more doctors and trained medical staff, more hospital beds, and more health and development support to help stop Ebola in its tracks.”
  • Note: A World Bank report (Oct. 9, 2014) said, “If … the epidemic spreads into neighboring countries, some of which have much larger economies, the cumulative two-year impact could reach US$32.6 billion by the end of 2015 – almost 2.5 times the combined 2013 GDP of the core three countries. “
MY TAKE
  • While there are many factors enabling the spread of Ebola including 1) a lack of medical infrastructure in the initially affected countries, 2) risky burial practices and 3) insufficient monitor of the virus, early stage responses by the international community have been insufficient.
  • Let’s hope the recent calls to action will be quick and effective.

Sunday, September 28, 2014

Is your Software too Secure, or not Secure Enough?


  • Last week, it was reported that a significant software vulnerability exists on many computing and communication devices around the world. The problem, called “Shell Shock”, is associated with software originally written in 1987 and is today a part of variations of the UNIX operating system, including Apple’s operating system for desktop and laptop computers, smart phones using Google’s Android and many Internet web servers.  A U.S. Department of Homeland Security alert said the vulnerability was rated as “High” on impact (scoring 10 out of 10) and “Low” on complexity, which means hackers can easily take advantage of the problem and control a computer. Note: the problem does not affect Apple's iOS on the iPhone and iPad, or systems running Microsoft Windows.
  • Separately, FBI Director James B. Comey is concerned about  Apple's and Google’s recent efforts to provide encryption technology on their smart phones that will increase the difficulty of accessing data.  He said  "I like and believe very much that we should have to obtain a warrant from an independent judge to be able to take the content of anyone's closet or their smart phone,” but "The notion that someone would market a closet that could never be opened — even if it involves a case involving a child kidnapper and a court order — to me does not make any sense."
MY TAKE
  • Regarding “Shell Shock” - because the vulnerability has been in the market for over 20 years, it is likely that there has already been damage.  However, many technology savvy organizations will  address this problem quickly, but it is likely many devices and systems subject to less stringent security oversight will remain vulnerable to hacker attaches for years to come.
  • Regarding Comey’s comments – As law enforcement groups continue to face the increased lack of trust resulting from the NSA’s aggressive data gathering efforts, it is likely that the use of encryption technology will expand across many forms of computing infrastructures in the future.  

Sunday, September 21, 2014

Life after the Alibaba IPO

  • Jack Ma, a former English teacher, founded Alibaba Group Holding with a $60,000 investment in 1999 and started out in his one bedroom Hangzhou apartment . Today, Alibaba is the world’s largest e-commerce company.  After a global road show to share the firm’s story with investors, the company priced its shares in an initial public offering (IPO) at $68 this past Thursday. On Friday, the shares began trading on the New York Stock exchange at $92.70, and closed up 38% for the day.  The price values the company at $231 billion and made Jack Ma, the richest person in China, worth about $17 billion.
  • Alibaba’s on-line retail sites Taobao MarketplaceTmall, and Juhuasuan account for about 83% of revenue.  Other services include Alibaba.com, China’s largest global online wholesale marketplace and AliExpress, a global consumer marketplace that provides cloud-computing services.
  • Its partnerships include Alipay (payment and escrow services); Zhejiang Cainiao Supply Chain Management Co., Ltd. (shipping and logistics services), UCWeb (developer of a mobile web browser). Alibaba investments include $202 million investment in Shoprunner (U.S. shipping services similar to Amazon Prime), $217 million in 1stDibs (on-line luxury ecommerce site) and Lyft (ride sharing service)
MY TAKE
  • With the upside for the Alibaba story dependent on expansion both within China, (Internet penetration within the country is less than 50%) and abroad, it is likely that some of that potential is factored into Friday’s 38% price increase.
  • At the same time, the firm’s global aspirations will likely increase completion with smaller players such as AmazonBaiduEBay and Tencent.
  • The most significant risk for the firm is likely that economic growth in China slows down.
  • Bottom Line: In addition to building the world’s largest internet franchise, Jack Ma may also turn out to be one of the best market-timers of all time as well.

Sunday, September 7, 2014

The Disruptive Force of Uber

  • As online transportation company Uber expands globallyconflicts with some regulatorscompetitorsunionized workers and drivers have increased.  Concerns include: 1) Uber is operating without the same licensing and insurance as traditional taxis services, 2) it is trying to lure drivers away from alternative services, such as Lyft, 3) it is changing the terms for drivers operating on its platform and 4) it is placing and then canceling pick-up requests with competitors to disrupt their service.  
  • In addition, last week, as the German government sought to limit Uber’s activities, Anja Floetenmeyer, a representative for Taxi Deutschland, said, “Uber has never observed German law. This is Wild West capitalism without consumer rights.”
  • Some background Uber started in San Francisco during 2009 to provide an alternative to the city’s mediocre taxi service.  Unlike many taxi services, Uber does not own any vehicles. Its platform includes a smartphone app to connect users with drivers, a navigation system and a fare collection and payment system.  Passengers payUber, and Uber pays its drivers about 80% of the fare (there is no requirement to tip the driver). Drivers must pass a background check, provide their own vehicle and comply with service commitment levels, such as the minimum hours per week that they will drive. Estimates vary about the firm’s net revenue (possibly greater than $1 billion), but CEO Travis Kalanick said revenue is doubling every 6 months.
MY TAKE
  • Uber, and similar services, provide a refreshing alternative to many mainstream taxi offerings.
  • Its positive business momentum and investor support, has allowed the firm to broaden its services and establish partnerships with organizations such as OpenTableUnited AirlinesStarbucks,TripAdvisor, and Hyatt Hotels
  • With regulatory oversight increasing, compliance with new rules is becoming a business requirement. Also, the interaction with unions (in the U.S. the Teamsters and AFL-CIO are becoming more involved), will likely affect the cost structure of these services. 
  • While Uber's growth may slow and conflicts with drivers may increase, passengers will likely continue to benefit from this disruptive business model.  

Sunday, August 31, 2014

As Apple Approaches the Mobile Payments Market

  • Last week, several media sources reported that Apple would introduce mobile payment services when it launches the iPhone 6 on September 9. The device could support near-field communication (NFC), which supports payment transactions by passing the device near registers that support NFC.
  • In recent years, Apple’s U.S. Patent and Trademark Office filings have included many areas within payments and consumer purchasing, including an iWallet.
  • Note: Nokia introduced the first phone to support NFC in 2006, and firms such as SamsungSony and LG Electronics have provided NFC support for several years. To date, the technology has had positive momentum in EuropeChina and Japan, but has been less successful in the U.S. 
MY TAKE
  • Success in the mobile payment market will likely requires solutions that are secure, user-friendly, and interact with varied transaction networks.
  • If Apple does introduce a payment service on September 9, it will leverage a 1) a broad portfolio of patents, 2) over 800 million iTunes users and 3) its tight integration of hardware and software. Competition will likely drive innovation from players including AmazonGooglePayPalSquareAlibabaTen-cent, mobile telecom providers and Bitcoin and digital currency offerings.
  • The battle for market share will likely be protracted with advantage driven by: 1) providing a solid customer experience, 2) leveraging a preexisting customer base and 3) supporting a diverse set of technology platforms. 

Sunday, August 10, 2014

Making Bubbles and Income Inequality - According to Two Central Bankers

  •  Last week, during a CNBC interview, Dennis Lockhart, President & CEO of the Federal Reserve Bank of Atlanta responding to a question about increasing income inequality in the U.S. and economic gains flowing to the 1% said -  “as a monetary policy maker, monetary policy can deal with the expansion of the pie, but can’t do much about the distribution of the pie…I’m concerned as a citizen that the trends that we have seen now literally over decades have seen income more concentrated in the top 10% of income earners and even within the 10%, income concentrated in the top 1%.  To the extent, those trends continue, and they could affect the economy by weakening the consumer… I am concerned.  But it is not something as a policy maker that I can easily address.”   
  • Separately, in a July 16 speech at the University of Southern CaliforniaRichard W. Fisher, President and CEO of Federal Reserve Bank of Dallas said, “I believe we are experiencing financial excess that is of our own making” and “the money we have printed has not been as properly circulated as we had hoped. Too much of it has gone toward corrupting or, more appropriately stated, corrosive speculation.”  Fisher also quoted a New York Times article by Neil Irwin that said, “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.”

MY TAKE
  • Regarding Lockhart – His comments reinforce the view that the actions by the Federal Reserve address the needs of the financial sector and Wall Street, rather than Main Street and the broader U.S. population.
  • Regarding Fisher – Justifiably, he continues to believe that the Federal Reserve's actions have been too aggressive and may have moved beyond the point of diminishing returns.
  • Regarding market bubbles – valuations many be extended, but investor demand for positive returns could drive markets higher.  However, signs of a weakening consumer or increased global conflicts could result in continued market volatility.

Sunday, August 3, 2014

Argentina, an Electronmagnetic Pulse and the U.S. Economy - From Paul Singer (Elliott Management)

Paul Singer
Last week Paul Singer, the high profile founder of investment firm Elliott Management, shared the following views in his quarterly letter:  
  • On Elliott’s actions against the Republic of Argentina - “it is difficult to estimate the likelihood of a near-term resolution of the debt dispute, despite Argentina’s losing on every one of its flawed and desperate arguments in the courts of law to which it agreed to submit.”
  • On an electromagnetic pulse (EMP) - “EMP fries electronic devices, including parts of electric grids. In 1859, a particularly strong solar disturbance (the “Carrington Event”) caused disruption to the nascent telegraph network. It happened again with similar disruptions in 1921, before our modern power grid came into existence. A NASA studyconcluded these events have typically occurred around once per century. A repeat of the Carrington Event today would cause a massive disruption to the electric grid, possibly shutting it down entirely for months or longer, with unimaginable consequences.”
  • On the U.S. Federal Reserve and Employment - “We continue watching with amazement the Fed’s magic act as it attempts to use quantitative easing and zero interest rate policy (QE and ZIRP) to create apparently healthy economic growth in the face of very poorly designed political, economic and fiscal policies” and “those [employment] numbers are significantly distorted and paint an overly optimistic picture. For starters, workers are not counted as unemployed after they stop looking for work. Retirees aside, millions of Americans have exited the job market in discouragement after extended periods of unemployment following the financial crisis, thus distorting the statistics.”
MY TAKE
  • Regarding Argentina - As the government moves toward its second default in 13 years, commentary has focused on the greed of investors and the corruption and poor management by the government.  Unfortunately, the big losers are the citizens of Argentina.
  • Regarding an electromagnetic pulse - It is likely that some government and business leaders are studying the problem.  Plans to prepare for or address the impact of on an EMP are less clear.
  • Regarding the U.S. Fed and employment – asset prices for stocks and real estate have improved in recent years, but the positive impact to the broader economy have been more muted.  

Sunday, July 27, 2014

Droughts in California and other Regions

  • Last week, the California Department of Water Resources reported that water levels at 10 of the state's 12 major reservoirs had dropped below 50% of their total capacity, with several nearing the 20% level.  According to the National Oceanic and Atmospheric Administration. 80% of California is in a state of either an Exceptional or Extreme drought level, with 18% at Severe level. In addition, the recently released study Economic Analysis of the 2014 Drought for California Agriculture said “California is enduring its third driest year on record as agricultural, urban and environmental demands for water are at an all-time high” and “the total statewide economic cost of the 2014 drought is $2.2 billion, with a total loss of 17,100 seasonal and part-time jobs.” 
  • Across the contiguous U.S, 31% of the country is in a moderate to extreme level of drought. Globally, Asia drought has intensified on the Indian sub-continent, in north-central Russia, in Japan, and in the Middle East.  In Africa, drought has increased in equatorial AfricaMadagascar and South Africa. In South America, drought persists around the equator and in areas of Brazil. In Australia, it is spreading to cover more of the East.  
MY TAKE
  • Unlike hurricanestornados and earthquakes, drought is a natural disaster that evolves over an extended period of time.  While they generate fewer new headlines, a drought's social, economic and environmental impact can affect a region for years.
  • Unless conditions improve in California and elsewhere, conflicts may increase between those seeking water uses for swimming pools; fountains, golf courses and lawn care and those seeking to grow agricultural crops and raise livestock.  
  • As some communities consider ways to reduce unnecessary water use, a nice green lawn may become a sign that you are part of the problem, rather than part of the solution.
  • Conservation is important!

Sunday, July 6, 2014

Clinton, Blair and Santos at the ”Third Way” Summit in Cartagena, Colombia

Last week, former U.S. President Bill Clinton and former British Prime Minister Tony Blair attended the”Third Way” summit in Cartagena, Colombia.  President Juan Manuel Santos focused on his peace efforts with the Marxist Revolutionary Armed Forces of Colombia (FARC) rebels. Clinton said "you will never get to the final reconciliation of your country if you don't finish this peace process" and "there will always be specific things that you would still have to work out over the years ahead.”  Blair said peace "means genuinely giving up on violence and a genuine embracing of peace" Note: Interpretations of what the “Third Way” is vary. Santos's view is that the “extreme center” is better than leaning to the left or the right.

MY TAKE

Colombia has experienced significant economic growth in recent years, but unresolved issues with the FARC remain an on-going challenge.  Santos was recently re-elected to a second term as President but his popularity is not broad based.  His “Third Way” aspirations will likely require significant work and compromise.  Note: unresolved issues with the FARC include 1) the surrender of weapons, 2) compensation for victims and 3) how a final agreement would be ratified.

Bitcoin and Alternative Currencies in California

  • California Governor Jerry Brown signed the California Alternative Currencies Act which removes outdated laws, in place since 1849, which barred payment systems including digital currencies such as bitcoin, reward point systems such as airline frequent flyer milesAmazon Coins and Starbucks Stars and  community currencies such as Davis Dollars and Bernal Bucks.  The bill’s sponsor Assemblyman Roger Dickinson said ”this bill is intended to fine-tune current law to address Californians' payment habits in the mobile and digital fields.”
  • Also, venture capitalist Tim Draper was the high bidder in U.S. Marshals Service’s auction for 30,000 bitcoins that were seized from on-line service Silk Road.  Draper said the Bitcoins will be used to support the efforts of exchange provider Vaurum, who’s investors include Draper, Steve Case (founder of AOL)Battery VenturesCrosslink Capital and RRE VenturesNote: the government is still in possession of 144,000 bitcoins which will be auctioned at a later date.
MY TAKE
  • Regarding Bitcoins in California -   The removal of outdated laws by Brown and the California legislature acknowledges 1) the value of alternative currencies currently in use and 2) the potential for future innovation.
  • Regarding Draper’s purchase – It is another example of a high profile investor putting his money to work to support the early stage development of  the digital currency market.  

Sunday, June 29, 2014

Smartphones, TV and the U.S. Supreme Court

  • In 2007, David Riley was arrested for allegedly selling drugs from his car. While he was in custody, the police found information on his smartphone that linked Riley to gang-related crimes.  Last week, in the case Riley v. California, the U.S. Supreme Court ruled that cellphones and smartphones cannot be searched by police without a warrant during arrests.  Writing in support of the court’s 9-0 decision, Justice Roberts said “A decade ago officers might have occasionally stumbled across a highly personal item such as a diary, but today many of the more than 90% of American adults who own cell phones keep on their person a digital record of nearly every aspect of their lives” and “with all they [smartphones] contain and all they may reveal, they hold for many Americans theprivacies of life. The fact that technology now allows an individual to carry such information in his hand does not make the information any less worthy of the protection for which the Founders fought.” Roberts also noted that “We cannot deny that our decision today will have an impact on the ability of law enforcement to combat crime.”
  • Separately, the Supreme Court ruled against Internet streaming service Aereo in the case American Broadcasting Companies Inc. v. Aereo.  The service, which was launched in February 2012 in New York City and expanded to 11 markets, used small antennas to access local over-the-air TV broadcasts and stream it across the Internet to its subscribers. The plaintiff’s concern was that Aereo did not pay fees to the broadcasters and infringed on their copyright.  Justice Breyer, in his majority opinion for the court. said “Aereo’s behind-the-scenes technological differences do not distinguish Aereo’s system from cable systems”. Barry Dillar of IAC and a major investor in Aereo conceded defeat when he said “we did try, but it’s over now.”
MY TAKE
  • Regarding smartphones – While the court’s decision clarifies that the Fourth Amendment of U.S. Constitution, which prohibits unreasonable searches and seizures, includes information stored on smartphones, there will likely 1) be follow-up litigation related to other types digital content such as GPS tracking, 2) additional questions about theNational Security Agency’s surveillance efforts on U.S. citizens.
  • Regarding broadcast TV – While the Aereo’s approach was clever and innovative, it assumed that broadcast TV content is free. Because the court’s ruling was based on a 6-3 decision, there are diverse views on how to interpret the Copyright Act of 1976, which seeks to address the impact of changing technologies on television, motion pictures, audio recording content.  Consumer demand for alternative content distribution will likely continue to drive innovations..

Sunday, June 22, 2014

Amazon and T-Mobile: Agents of Change

  • After years of speculation, last week Amazon CEO Jeff Bezos announced its Fire mobile phone which 1)integrates its media services (including e-books, Prime Instant Video and Prime Music streaming), 2) provides a new 3-D display and 3) uses Firefly image-recognition which can identify items in a 70 million product database as well as scan phone numbers, web addresses and email addresses on printed material.  Note: because the device is a modified version of Android, customers cannot access the Google Play store.
  • Separately, T-Mobile CEO John Legere announced that 1) its wireless carrier customers would no longer incur data usage charges when using music streaming from PandoraSpotifyiTunes RadioiHeartRadioSlacker,Rhapsody and Samsung's Milk Music (other music services may be added later) and 2) a new program called “Test Drive” would allow potential customers to try out its network with a loan of an Apple iPhone 5SNote:  A probable merger of T-Mobile will Sprint is part of Softbank CEO Masayoshi Son’s efforts to expand its U.S. presence.
 MY TAKE
  • Regarding Amazon – For years, as Bezos and his team introduced new services and entered new markets, the firm’s profitability has been meager.  However, their efforts have reshaped markets and benefited both consumers and investors. While some critics suggest the Fire is too expensive and gimmicky, it is likely that 1) the functionally of the product will evolve, 2) its integration will the firm’s cloud services will increase and 2) lower priced phones will be introduced.
  • Regarding T-Mobile – Since Legere became CEO in September 2012, initiatives that have delivered positive results include 1) eliminating wireless service contracts, 2)  introducing an early upgrade program, 3) removing international data roaming charges, and 4) covering early termination fees of customers when the move from rival carriers. If he becomes CEO of the merged Sprint/T-Mobile entity, competition among U.S. wireless players will likely increase and consumers should benefit as well

Sunday, May 11, 2014

As China's Alibaba Moves toward an IPO

  • Last week, China based Alibaba Group Holding Limited moved forward with its initial public offering (IPO) process when it filed a registration with the U.S. Securities and Exchange Commission. The firm was founded in 1999 and its largest owners are Jack Ma (its founder) 8.9%, SoftBank 34.4% and Yahoo 22.6%.  In addition, the firm is overseen by the Alibaba Partnership that has 28 members (22 from management and 6 from the management of related companies and affiliates). Note: Alibaba has not disclosed the members of the partnership.
  • The firm’s Internet services are among the largest in the world.  Its on-line retail sites Taobao MarketplaceTmall, and Juhuasuan account for about 83% of revenue.  Other services include Alibaba.com, China’s largest global online wholesale marketplace and AliExpress, a global consumer marketplace that provides cloud-computing services.
  • Their ecosystem of partnerships include Alipay (payment and escrow services); Zhejiang Cainiao Supply Chain Management Co., Ltd. (shipping and logistics services), UCWeb (developer of a mobile web browser).  Alibaba investments include $202 million investment in Shoprunner (U.S. shipping services similar to Amazon Prime), $217 million in 1stDibs (on-line luxury ecommerce site) and Lyft (ride sharing service).

MY TAKE
  • Last week’s registration starts an SEC review process that will likely result in a listing in the U.S. later this summer.  
  • With a business model driven by a mix of technology and Internet services that compete with Amazon,EBay/PayPalGoogle and others; the IPO will be one of the largest in history.
  • Proceeds from the IPO should help Alibaba expand its global presence.  
  • Risks that investors should consider include: 1) the potential that China’s government could place restrictions on how the firm operates, 2) lack of clarity about who are members of the Alibaba partnership, increasing competitionand 3) will the valuation of the stock be justified.

Sunday, April 27, 2014

As “Capital in the 21st Century” becomes a Number 1 Best Selling Book

  • The book “Capital in the 21st Century” by French economist Thomas Piketty focuses on wealth and income inequality.  It was originally published in August 2013, with its English translation released in March 2014.  Last week, the book became the number 1 best seller on Amazon.  
  • The book suggests that 1) when the investment returns exceed economic growth, wealth becomes increasingly concentrated, 2) wealth concentration did not occur during much of the 20th century because of positive population growth trends and factors associated with the destructive forces of World War I and II3) wealth disparity may exceed levels of the 19th century and 4) political and social upheaval may increase.  Piketty suggests the best solution is a globally coordinated tax on wealth.
  • Piketty’s analysis is heavily data driven and he believes that “too much energy [by economists] has been and still is being wasted on pure theoretical speculation without a clear specification of the economic facts one is trying to explain or the social and political problems one is trying to resolve.  The new methods often lead to a neglect of history and of the fact that historical experience remains our principal source of knowledge."
MY TAKE

Factors driving Piketty’s recent popularity likely include:
  1. broad based concerns about income inequality within many developed regions, 
  2. the level of detail supporting his data driven approach and 
  3. the potential for increased income inequality in the future.  
Other challenges that society must confront include 
  1. the impact that technology can have on the value of human capital and the displacement of workers, 
  2. the impact of globalization which has reallocated capital to developing regions, 
  3. the negative impact of immigration restrictions on population growth in developed regions and 
  4. the diminished role of organized labor.  
While Piketty’s view of the future may be negative, it may also serve as a catalyst for policy makers, business leaders and citizens to consider alternative paths for the future.   

Sunday, April 20, 2014

As Earth Day Approaches - Observations on Climate Change

  • In its most recent report (March 31, 2014), the Intergovernmental Panel on Climate Change stated, “In recent decades, changes in climate have caused impacts on natural and human systems on all continents and across the oceans … Impacts from recent climate-related extremes, such as heat waves, droughts, floods,  cyclones, and wildfires, reveal significant [ecosystem] vulnerability  Climate-related hazards affect poor people’s lives directly through impacts on livelihoods, reductions in crop yields, or destruction of homes and indirectly through, for example, increased food prices and food insecurity.”
  • A March 25, 2014 report by the World Health Organization (WHO), estimates that one out of eight deaths globally result from air pollution exposure.  Dr. Maria Neira, a WHO director said, “The risks from air pollution are now far greater than previously thought or understood, particularly for heart disease and strokes.”  Dr. Flavia Bustreo, a WHO assistant director said, “Cleaning up the air we breathe prevents noncommunicable diseases as well as reduces disease risks among women and vulnerable groups, including children and the elderly … Poor women and children pay a heavy price from indoor air pollution since they spend more time at home breathing in smoke and soot from leaky coal and wood cook stoves.” 
  • Recent reports from China’s Ministry of Environmental Protection note that 1) 20% of the country’s farmland is polluted as a result of various industrial and agricultural activities – the leading pollutants s are cadmium, nickel and arsenic and 2) only three of the 74 cities it monitors met official minimum standards for air quality during 2013.
MY TAKE
  • As Earth day approaches (April 22), debates continue about the validity of various environmental studies.
  • More substantive topics for discussion should focus on the trade-offs between short term economic costs and long term environmental benefits
  • Even skeptics of climate change should concede that providing a cleaner planet to future generations is better than the alternative

Sunday, April 13, 2014

A Heartbleed, Worn Out Windows and the Business of Cybercrime

  • Last week, researchers at Google and Codenomicon (in Finland) identified a security flaw in OpenSSL, a piece of security software used on the Internet. Known as the Heartbleed bug, the flaw may be active in about 17% of web servers, as well as some smartphones and other communication devices. While the flaw may have been in place for about two year, firms such as Google, Facebook, Yahoo and Dropbox said they have addressed the problem; but there are concerns that the National Security Agency (NSA) may have used the flaw in its surveillance efforts. A U.S. government spokesperson said; "NSA was not aware of the recently identified vulnerability in OpenSSL, the so-called Heartbleed vulnerability, until it was made public in a private sector cybersecurity report," 
  • Also, Microsoft terminated free technical support for Windows XP (released 12 years ago), which included security patches. It is estimated that about 25% of personal computers around the world still use this version of the operation system. Notably, as the April 15 deadline for filing taxes in the U.S approaches, it is believed that over 50% of the Internal Revenue Service’s personal computers still use Windows XP. The agency stated, “None of our filing season systems or other major business operating systems for taxpayers use Windows XP”
  • The RAND Corp. report “Markets for Cybercrime Tools and Stolen Data” (March 2014) stated that “The hacker market—once a varied landscape of discrete, ad hoc networks of individuals initially motivated by little more than ego and notoriety—has emerged as a playground of financially driven, highly organized, and sophisticated groups. In certain respects, the black market can be more profitable than the illegal drug trade.” 
 MY TAKE
  • Regarding the Heartbleed bug – it is another example of the Internet’s complexity and privacy issues associated with rapid advances in technology. 
  • Regarding Windows XP – its installed base is a reminder that as technology advances, many “legacy” systems remain vulnerable to cyberattacks. 
  •  Regarding the RAND Corp. – their report highlights that, within the mix of old and new technology, exploiting security flaws is a big and growing business. Bottom line - as Internet technology growth continues, threats to our privacy, data security and personal information will likely increase. These dynamics will result in both negative economic impacts and the creation of new business opportunities.

Sunday, March 30, 2014

As Bitcoin meets the Taxman

  • Last week, the U.S. Internal Revenue Service issued a notice that said, “virtual currency is treated as property” and “under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.”  Senator Tom Carper, chairman of the Senate Homeland Security and Governmental Affairs Committee, said he was "pleased the IRS is taking this important step to provide clarity for taxpayers."
  • Separately, concerns that the People’s Bank of China would further restrict/terminate the use of Bitcoin triggered a 17% negative move in Bitcoin’s price on Thursday.  Earlier in the week, Bobby Lee, CEO of BTC China (the country’s largest digital currency exchange) acknowledged that speculators and short term-traders account for most of the activity on their exchange.   
  • Also, technology investor Marc Andreessen, commented at a conference that “We want a whole sequence of companies: digital title, digital media assets, digital stocks and bonds, digital crowdfunding, digital insurance. If you have online trust…you can reinvent field after field after field.”
MY TAKE
  • Regarding the IRS ruling – while debates may continue about how regulators should treat Bitcoin and other digital currencies, the IRS’ action should be considered good news as it reduces uncertainty in this market.
  • Regarding China – digital currency markets are still at an early stage of development where 1) news and rumors can trigger sharp price moves and 2) less speculation and more on-line commerce activity should reduce price volatility.  
  • Regarding Andreessen’s comments – As advances in big data, mobile, cloud and digital currency technologies are enabling efforts to reshape financial service markets, factors that may slow innovation include: 1) the pace of regulatory reform, 2) concerns about security and 3) the challenge of converting customers from incumbent services.

Sunday, March 23, 2014

Building Trust and the "Post Snowden" Internet

  • On March 14, the U.S. Commerce Department’s National Telecommunications and Information Administration announced plans to give up control of Internet Corporation for Assigned Names and Numbers (ICANN) that manages Internet names and addresses.  Prior to a meeting of ICANN members in Singapore this week, its President and CEO Fadi ChehadĂ© said, “ICANN will lead a transparent dialogue among governments, the private sector, and civil society to determine the transition process and establish a governing body that is globally accountable. This process ensures each of the Internet’s diverse stakeholders has a voice in its governance."
  • On Friday, U.S. President Obama met with Mark Zuckerberg (Facebook)Eric Schmidt (Google)Reed Hastings (Netflix)Drew Houston (Dropbox)Aaron Levie (Box) and Alexander Karp (Palantir) to discuss the U.S. government’s “commitment to taking steps that can give people greater confidence that their rights are being protected while preserving important tools that keep us safe” as well as “the issues of privacy, technology and intelligence."  Commenting on the meeting, Dean Garfield, president of the Information Technology Industry Council said, “In response to the NSA disclosures, there has been an acceleration across the globe of economically harmful policies … [it’s] imperative that Congress and the administration show their leadership by helping to repair trust [in the industry]”. Note: MicrosoftLinkedIn and Yahoo were invited, but unable to attend.  

MY TAKE

  • Regarding ICANN – While the post Snowden era has increased concerns about the U.S. government’s oversight of the Internet, the management transition of ICANN will likely be a slow process.  In the meantime, the organization which operates the “domain name system” with addresses endings  in  .com, .gov.edu and .org  is considering 100 new addresses including .rich.sexy.ninja.pink.email, .buzz and .coffee.  
  • Regarding Obama’s meeting - With most attendees making money from the use of customer data, the discussion likely focused on potential revenue lost rather than increasing privacy.  Bottom line –   “big data” drives significant revenue for many technology hardware, software and services providers, but “trust” remains a critical component for business success.