Notebook 02.19.13: Merchant Silicon, Insieme, Controllers, Portfolio and stuff…

Before the week is over, I am going to write a blog post entitled “Imagine that SDN Did Not Exist, What Would Do with All the Free Time?”  That is something I will find the time to crank out either on my current flight to SFO or the return flight.  Until then, here are a few things I have been collecting in my SIWDT Evernote to write about.
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Notebook 01.24.13

On board the train heading out of a cold NYC.  Had a super cool day at the Oktay Technologies SDN conference.  They had an A-list line up of speakers with the CEO of Arista, Martin Casado of Nicira/VMware and others.  I presented yesterday’s blog post in PPT format.  That is enough networking for the day.
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Notebook 12.18.12

The last few months have been a blistering pace at Plexxi and it has impacted my time to write.  Writing is important to me as it is my method of thinking in depth without the interruptions of email, calls, text and tweets.  Outside my window a Biblical rain is falling and I have Zac Brown playing.  As with past notebook entries, here is collection of topics I have been reading and thinking about over the past few weeks.
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New Network Meme

Warning, there is a nothing really new in this post – it is more of a rant by me.  I am not grumpy, just curious as to how all the “Scale-Out, SDN, New Network Era” meme developed.  I just happened to look at the Arista Network’s blog today and saw a posting from Jayshree that agrees with the SDN posting from Nick Lippis.  This triggered a thought on internet memes and what are the sources of thought around the new network meme.  Where is thought leadership coming from and how is it propagated?  This is my attempt to list a few external sources that I think have had an impact on the networking industry thought leadership and then analyze how it has developed on my blog which is a personal reflection.

February 11, 2008: Vyatta and Liquid Computing use the phrase “scale-out networking” in a press release.  From my limited searches, this is the first use of the phrase, but it is used in a bit of a throw away manner.  I would not be surprised to get mail from people saying that they deployed their Hadoop cluster and found 483,011 entries prior to 2.11.08.

September 2, 2009: Amin Vahdat writes a blog post and cites a paper by Nathan Farrington, titled Data Center Switch Architecture in the Age of Merchant Silicon.  Personally I think this is the starting point of a lot of industry thinking around what would become the third wave of networking meme.

October 31, 2010: James Hamilton Networks are in My Way.  A year later, this was one of the big thought catalysts for the SDN movement or at least the catalyst around what should the network do or look like.

I decided to go back and read through a few of my old postings on my blog to see how I was thinking and what was influencing my thought process.

May 11, 2011: End of the Era of Large Scale Venture Capital Backed Innovation post.  A year ago I wrote this post and in the intervening time I seen disagreement and agreement.

July 4, 2011: Moore’s Law Exhaustion post. This was about networking – not silicon.  I still think it is valid unless someone wants to show me a terabit ethernet switch.

July 11, 2011:  The Inventor’s Dilemma post.  When I wrote this post, I had not met anyone from Plexxi (where I work now), but I was definitely thinking we had been building the same network over and over for 20 years and something had to change.  This is the first time I had thought about what Nick Lippis would write about in terms of “network epochs.”

September 16, 2011: When I wrote the Stream of Consciousness on the Data Center and Networking I was back into the world networking reading and talking to a lot of people on a weekly basis.  This was my first attempt at a post about the feeling I was getting talking to people about networking.

October 1, 2011: Scale-Out Networking and Solving Big Problems Matter.  When I wrote this post, it was clear in my mind that networks were going to change.  It was not a hunch; it was not a guess – I knew.

October 10, 2011: Hypothesizing About the Future of Networking post. More of the same.

October 27, 2011: The Network is at Apogee post.  When I wrote this post and called out the Rise of the Stupid Network, a colleague told me I would get hate mail. Surprisingly there was no reaction.

October 16, 2011: What was I thinking in 2005?  I highlight this post because I included a presentation I gave in January 2005.  I was thinking a lot about the Cloud, we were just calling it grid computing in 2005.

Those posts really define my thinking on my way to joining Plexxi.  Since I started working at Plexxi and now spend many hours a day thinking about networking, it has only accelerated my thoughts about how the network will change.  The Plexxi effect has shown up in these posts:

That is the end of my rant.  It turned out to be an abbreviated list of reading that summarizes how I have been thinking about the network, the evolution of the network and the fusing of concepts around building networking products and networking companies.  It is probably pretty boring for most people, but I think there are at least a few people who appreciate the index.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

Notebook 05.12.12: CSCO, INTC, SDN, OpenFlow, Cash

It has been awhile since I thought about CSCO in terms of the equity value.  I read many reports on CSCO post their Thursday earnings call and most reports generally like the long term prospects of the company and think CSCO will do better as the macro economic conditions improve.  Over the past year, I have written a lot about CSCO and it is all in the blog archive.  Here a few thoughts on CSCO post their recent earnings call.

Chart: Below is a 10Y weekly chart of CSCO.  Technical charts do not predict the future, but they do show a sentiment trend from the past and it is possible to map the trend to events.  The three red circles from the center to the lower right represent the price peaks from mid-2007.  They are a series of lower highs.  There is a five year wedge developing and the astute observer will note that this wedge looks to be resolving around the Oct/Nov time frame, which is the end of CSCO’s Q1 FY2013 and early November reporting date.


It should be noted that wedges do not necessarily resolve to the negative.  Below is a 10Y weekly chart of INTC and the breakout of a long downward channel is visible.  I pitched INTC as part of the 1G to 10G server transition to the CEO and tech analyst at Alger in September 2011 when I interviewed for a position with the firm.  I wrote about it here.

End of the Switching EraI am firm believer that we are at the end of the 20 year run of the Switching Era (1992-2012) in networks.  The network is changing and that is going to have an affect on CSCO.  They will buy innovation through Insieme and/or others.  The new networks will start small this year, barely noticeable to CSCO and become visible by mid 2013 and they will have a real affect on CSCO in 2014.  All you need to know is that then entire global base of networks are up for replacement.  CSCO will win their share, but it is possible and probable they will lose share in this cycle.  The last cycle was the evolution of shared LANs to switched LANs driven by GbE and CSCO used M&A and product cycles (Cat 5k/6k) to win the vast amount of market share in that era.  If you want to be long CSCO, forget about macro conditions, telepresence, transformational connected communities, cloud, big data, mobility and all the other crap.  All you need to be comfortable with is the knowledge that CSCO will win and upgrade the core of networks in the next five years.


OpenFlow/SDN: I have written a lot about SDN and OpenFlow and what it all means or might mean or does not mean in the past month.  The real question you have to ask about CSCO is why do they fail at internal innovation?  CSCO confirmed the Insieme investment ($100M with right to buy for $750M) last month.  They have used this proven method in past to great success.  No arguments from me on the validity or success of the strategy.  The question I would ask is why does CSCO have to use this method?  I accept that it works, I accept that it is proven — but AAPL does not use this strategy.   A person who thinks about companies might ask:  why does a company with an annual R&D budget of $5B need to use the spin in strategy?  Is $5B too little to fund innovation with so many legacy product lines to support?  The other odd data point is the Insieme team is building a product for the heart, I repeat the heart of the Cisco franchise.  Switching is not some adjunct part of the company.  Switching is the business in which the company made the very first acquisition.  I know that great innovation has been done by companies taking teams and separating them from the core business such as IBM with the PC.  I get it.

On the other hand if you add up all the venture capital in the next-generation of networking companies in the US it has to be around $200M give or take $50M.  CSCO invested $100M in Insieme, provided space and have a call option on Insieme for $750M.  Was it not possible to do the same internally for $250M over two years, which is 5% of the annual R&D budget?  Did anyone on the BOD even ask the question why the company has to go outside the company to build something innovative for company’s core franchise?  This leads back to the 10Y chart.  If the company has to do something special to accelerate a product solution in the core franchise of their business, two unspoken facts must be true.  (1) There is a bigger threat to their core switching franchise than they are willing to identify and (2) they cannot drive their internal teams in the their core franchise to innovate.

I have read speculation that the whole OpenFlow/SDN movement will die in a few years.  As I posted earlier, changes in how networks will be designed will have little to do with OpenFlow in my view and SDN is just a poor term.  Networks have always been about software.  We have all been through various software debates in networking.  How many people remember APPN versus APPI?  Back in the early 1990s, CSCO was all about APPI when they were going against the monster incumbent IBM who was willing to license APPN for $400k.  Interesting comments from CSCO this past week complaining about Huawei using on site support people to lock out competition.  I felt the same way in the late 1980s and early 1990s, but I used to complain about the teams of IBM employees at every F500 company selling SNA.  Where is IBM today in terms of networking?  Market share can shift from the company with 80% share.  Perhaps more of you remember tag switching and Ipsilon Networks; today we have MPLS.  Side note on IBM.  It may be unnoticed by many people, but IBM acquired a company called BNT in October 2010.  I continue to read speculation that IBM is going to rebuild their networking division.  The same division that CSCO destroyed in 1990s and then purchased in 1999.  More than a decade after IBM exited the networking business, why would IBM want to get back in the networking business?  You can come up with your own answer, but I do not think the answer is: more of the same.

Cash: CSCO has not filed their 10Q for the Q3 FY12 yet, but if we look at the 10Q filed on 2.21.12 CSCO had $41.7B of cash off shore and $5B of cash in the US.  I do support CSCO’s position that US companies domiciled in the US should be offered a cash repatriation holiday perhaps with some sort of on-shore investment requirement.  I would call it bring home cash for US jobs.  How is that a bad?  I think it is terrible that US companies are using off-shore cash for  foreign investments when that cash could be used in the US.

As always this is just a bunch of speculation by me.  I am sure I not in possession of all the relevant facts and it quite likely much of my speculation is incorrect.  For new readers to my blog, Notebook posts are a collection of data points and theses that I am thinking about.  I was inspired to write Notebook posts after reading Alchemy of Finance.


Notebook 03.13.12: Datacenter, Equities and HPC for Wall Street

I have been sans posts for the last week.  I did write a long post on the evolution of datacenter and broader network architecture.  I think it came in around 2.2k works, which is long for a blog.  I shared with a few colleagues and it stirred up some interesting responses and the consensus was to wait and post after integrating reviewer comments.  On a rainy Saturday I thought some bookkeeping was in order:

Tech Field Day Networking Event: I spent part of the past week listening to presentations from a number of companies.  I really did not see anything new, just more of the same.  I hope ONF 2012 is not the same as ONF 2011.  Presenters should be banned if they reuse an old presentation.  Back to TFD, I thought the event was interesting and clearly geared towards a technical audience; I am really disappointed in the vendors – not the TFD team.  Innovation seems dormant and no amount of science projects and Crossing the Chasm buttering will take the place of bold innovation.  I will take another look around on Monday in NYC, but ODM hardware + Openflow does not = innovation.

RIMM: What is there to say that I have not said before?  Prior posts are in the RIMM category.  Missing a product cycle really sucks.  I thought the other day that maybe they should just focus on the keyboard market for smartphones and uses who want to use BBM.  It looks like it will go the way of Palm.

APKT, BRCM and FNSR: I am recently long all three of these stocks.  If there is really an uptick in orders for optical stuff, I think inventories are lean and FNSR should work.  I like the product cycle at BRCM.  APKT is the biggest risk.  If NA CAPEX is better, APKT should work and I think there are a lot of lazy shorts in the stock right now.

Old Trading Instincts: Back and forth with a few buysiders during the past week has led me to trim overall gross exposure to equities.  It feels like correlations are breaking down and after the best Q1 since 1998, I feel better being less exposed to equities because theUS economy in Q1 2012 does not feel like theUS economy in Q1 1998 or even at the end ofClinton’s first term.

I am off tomorrow to NYC for the Flagg 2012 High Performance Computing Linux for Wall Street conference on Monday.  Looking forward to seeing many of you at the show on Monday, I will be in town for drinks Sunday night.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

Notebook 03.06.12: RIMM, Product Cycles and Content

I am off to OFC/NFOEC tomorrow and as Andrew Schmitt of Infonetics tweeted (@aschmitt) earlier, I am looking forward to the “Drink every time someone uses the word “bandwidth” and “explosion” in the same sentence. #OFCNFOEC drinking game.”  This is post is a collection of things I am thinking about, therefore I am writing them down in my notebook to validate or dismiss.

RIMM: With the news last week of more layoffs within the WebOS group at HPQ, it shows the missed opportunity that RIMM had with PALM.  If RIMM had acquired PALM instead of QNX, they would have had a legit, complete OS to put across their devices.  The mobile device market would have four OS contenders – not three.  Unfortunately, HPQ acquired PALM and has pretty much killed WebOS.  I am not saying that acquiring PALM would have saved RIMM, but they would have had a chance.   I have spent a fair amount of time posting about RIMM; I read the other day that RIMM was up that day on take over rumors.  I still wonder why would someone want to own the RIMM business?  Seems crazy to me and as for the new CEO, I agree with him the only way out is hard work and hope they made some correct decisions.

Service Providers: I read an interesting sell side note from Deutsche Bank today in which the analyst (Brian Modoff) wrote that he had spoken to several US carriers who were disappointed in one of their large infrastructure suppliers because this company was not designing products how they wanted the products designed.  Well…that pretty much sums up my post here and here from the last few weeks.  Nothing kills creativity faster in the organization than becoming the outsourced engineering arm of your customer.  I want to solve my customers challenges, I just want to do it on terms that are best for my business – not their business.

Content: I have posted three times on content.  For some reason, I glanced at a TV today in a hotel lobby that was tuned to CNBC.  There was some bizarre conversation about Apple and mobile devices and Dow 13k and it triggered a thought.  One of the trends I have been tracking is what I call DIY content.  That was the point I was making about Verizon not buying NFLX, but hiring the team from NFLX.  My view is that it is increasingly easier for content owners to distribute their content and this will increasingly pressure content distributors and content aggregators.  The middle ground between the consumer and the content creator will NOT be a good place to be unless you can own the distribution ecosystem (i.e. devices) like AAPL.

Off to LA tomorrow for OFC and looking forward to meeting PollyAnna and hearing about the how the internet is about to break under the weight of all those videos.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

Notebook 01.08.12: Cloud Providers, APKT, Macro and Finding Time to Think

Cloud Providers

It was just a month ago that I posted some thoughts on Cloud Providers being the CLECs of the twenty-tens and a few days into the New Year look what happens: a cloud provider M&A deal.  Here is summary of the deal.  I guess the cloud provider consolidation is under way.  It appears that the price per user for an acquisition in the cloud services market is $28k per user as of last week.  I calculated this price using the Internap/Voxel comp, I assumed 1,250 users and assumed they will get the earn out, but I should really take the time to run the Terremark and Savvis deal comps and maybe I will get to that this week.

Acme Packet (APKT)

APKT updated their 2011 guidance this past week to reflect a lower anticipated revenue result.  I have written positively about the company in the past.  Observing APKT over the past year reminded me of lessons I learned about scaling PE-VC companies.  There are real operational barriers when a company approaches and exceeds $75M a quarter.  The barriers to growth that emerge around $75M a quarter and into the next revenue band between $75-299M are quite real and often the business activity level required to execute on a 90 day cycle and transition between revenue bands is really challenging for leadership teams.  There are marked internal differences between a company executing around $75M a quarter and a company executing at $150M a quarter.  As companies organically approach the $75M level it is like a plane climbing to altitude and encountering turbulence.  The company has to fly through it and it is going to be bumpy.  Leadership teams can (1) go it alone, (2) buy something or (3) find some help by combining efforts with a larger company.

Scaling venture backed startups is a topic I wrote about years ago and had given a thought to as part of five PE-VC backed startups in my business career.  Here is an excerpt from a paper I had written in 2006 and updated a few times into 2007:

“When all the numbers were entered into the model, companies were placed into four revenue bands.  These bands were created from my experience on the operating side of the business.  The revenue bands were chosen because within each band, the complexity of the business is different and the scale of a company’s infrastructure changes from band to band.

  • Tier 1 Companies: >$2B Quarters
  • Tier 2 Companies: $300M-$1.99B Quarters
  • Tier 3 Companies: $75-$299M Quarters
  • Tier 4 Companies: <$75M Quarters

I am looking at technology companies in terms of revenues (i.e. market share) because this is how CEOs look at their companies.  EPS and operating margins are important, but leadership teams in technology companies think in terms of top line revenues and market share.  This is in part due to the cycle of creation/destruction within the technology industry, but also because revenue growth means the possibility of an equity event.  There are a few additional reasons why I put companies into revenue tiers.  If you accept the World is Flat hypothesis or some variation of the premise that competing in global markets is important, then it is important to consider that only a few companies can compete in all geographic markets in their target technology verticals.

The chart below [not included in this 2012 blog post] illustrates total revenue (i.e. market share) for each tier on the left axis and number of competitors per tier on the right axis.  This chart shows that 56 competitors are playing for 12.89% of the market and nine competitors control 87.11% of the market. [The 65 companies in the model are networking/comm equipment companies.]

Moving between revenue tiers is very difficult.  It is the movement between these tiers that produces investment value.  To move between tiers requires a (i) technology paradigm shift to be occurring in the broader market or a specific technology sector or the (ii) expansion of the size of an existing market.  An example of a paradigm shift was the adoption of the client/server model and an example of the expansion of an existing market is the Telecom Act of the 1996 and the creation of ~300 CLECs, ~1300 ISPs and ~15 IXCs.

The objective of this paper is to look at the companies in the market and ask: (1) Are any companies moving between tiers, (2) are their any consolidation candidates and (3) are there any macro technology changes that will enable companies to cross tiers?

As a starting point, the following page shows a graph of the total revenues from 1990 through mid 2007.  The broad technology drivers in the market are identified as well as a selection of key events.  The term “turning point” is taken from Carlota Perez’s book and used in her context to describe the behavioral economic aspects of technology adoption.”

By reviewing my prior thinking on the subject of APKT, it makes me think that APKT would be an attractive M&A candidate for a company like CSCO.

Macro Market Thoughts

This past week a few friends and I were discussing the various market outlooks for 2012.  We were having all sorts of debates on risk on and risk off.  Then there was one email from buy side friend that succinctly summarized the back and forth email thread.  Here is the quote “The troubling thing for me is every time the market rallies – prices of commodities (especially oil) go up more than the market, which inflicts pain on the economy.  It is like QE2.  If the market rally means commodity price go up (risk on) – it means economy gets hurt and there is also inflation.  Inflation makes it impossible to launch QE3.  Ergo seems like there is implicit cap on the ability of market to rally because of this Risk On thing and what happens to commodity prices.”

Finding Time to Think

I am making a commitment in 2012 to find time to think about problems and not be distracted by the tyranny of the present.  This means I am not tweeting, I am not on Facebook, but I am reading and taking time to think about problems and plans.  Here is a link to an interesting post on creativity and problem solving.  If you are going to watch the video and just want to view the thinking portion then start at the 19 min mark.  I fully admit that I use the computer as a tool.  I write and analyze data sets on my computers and I use programs to organize data sets, create communications and interact, but I try to guard against time spent doing unimportant and non-urgent tasks.  Ideally what I want to be working on and thinking about should be important, but not urgent subject matter.  That is one of the reasons I like to write and my writing manifests into books, blog posts and if you ask the people I work with occasional long emails.  For me, writing is a method to framing my thoughts and my computer is a tool for this process that I must guard against becoming a distraction and creative inhibitor.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **


Notebook 12.19.11: NFLX, Mobile Devices and SP CAPEX

In the world of virtualization, we are somewhere between exiting the first stage and seeing how the second stage develops and ultimately it will all depend on how the third stage develops to see if the virtualization wave translates into a big driver of the cloud.  Here are the three stages of the virtualization:

Stage 1 Server Virtualization: Server virtualization made life a lot easier for sys admins.  This was the primary driver for the first wave.  It is still on going, but we are in the sunset for this stage as we are seeing the emergence of the second stage.

Stage 2 Software Stage: This is the stage that we are currently in and we will see if the business proofs created in this stage become sustainable, long term businesses.  In the second stage of virtualization, software engineers begin to write software differently.  Software is architected for the virtualized environment.  This is about open APIs and a cultural shift in software coding behavior.  If want to dig into the details of what I am referring to I suggest you review this 269 slide presentation here.  I inserted an interesting slide from the presentation to the left.

Stage 3 Real Businesses Emerge: This is the next foreseeable stage of virtualization and developments in stage 2 are trying to test or prove their efforts in stage 3. The real businesses that emerge in the open API / virtualized infrastructure of the cloud will be called proofs.  I am not certain if we have many proofs yet, but we are trying.  I do not see a stage 4, but that does not mean a series of additional stages will not appear – they are just presently not visible.


This brings us to NFLX which has certainly been the subject of a lot of drama this year and I too have written about NFLX here, which I point out specifically for the commerce reference of Braudel which I think is important to keep in mind when evaluating content businesses.  Last week NFLX stock was rallying on take out rumors by VZ.  A buy side PM friend emailed me “You see desperate NFLX longs put out rumor today VZ was interested acquiring them. Totally stupid and you would think they could make something better up. Closed down 3.”  I tend to agree with the comment for two reasons.

(1) The first is that NFLX has a content acquisition problem for which they need to raise capital.  That is clearly a problem that VZ would solve, but what would VZ gain?  The NFLX service is an open API hosted on the AWS infrastructure, i.e. stage 2 of virtualization.  The question is how sustainable is the business and will it become a proof in stage 3?  Here is an excellent overview of the NFLX open API.  Back to the VZ acquisition rumors and for all I know VZ could be buying NFLX at this very second, but I would suppose the real value of NFLX to VZ is the engineering team that built out the open API platform in a year.  There is value in the subscriber base, but clearly this has been greatly diminished.  Therefore, I think the real value is the 300 engineers and 700 employees that built the product offering.  If that is true, that brings us to the second point (2) as I think VZ could hire that team for a lot less than paying for the whole company.

Mobile Device Market

Gigaom had two visually interesting posts recently on the mobile device market here and here.  If you look at the first post it shows a visual history of the mobile device market including the $1,000 StarTac in 1996 and $500 Blackberry’s in 2001.  My conclusion in the wake of RIMM’s earnings last week and this visual reminder of phones I owned over the years is that the mobile device market still sucks.

Service Provider CAPEX

Hard for me to understand why analysts are writing about CAPEX uncertainty for 2012 when there were warning signs six months ago.  Links to some of reports this morning are here and here.  Now that it is getting fully priced in I think it is time to start thinking about initiating new longs in the space over the next few weeks.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. ** 

Notebook 11.27.11: AKAM, Datcenter Jobs and Bitcoin

AKAM: Is rumored to be buying Contendo.  Check mark on the thesis that AKAM would be a buyer not a seller and if they are buyer of a site acceleration service, that makes more sense as site acceleration is a high margin business.

Datacenters: Again we are reminded that operators of warehouse scale data centers would really prefer to run them lights out with minimal staff.

Bitcoin: Really interesting article here on Bitcoin if you want to take the time to read it.  It reminds me of something I wrote in late 2006 and updated in January 2007 about Second Life on my old blog.  Here is the section with the January updates marked:

(1) Web 2.0 (Broadband) Is Affecting Culture and it is not only

Avatar web sites are changing cultural elements.  People can create characters and exist in a world doing things they are unwilling or unable to do in their real life. Koreais the broadband capital of the world.  The government funded the basic wiring of the country, which was not overly difficult considering it is a peninsula, mountains in the middle and most people live on the edges of the horseshoe and it is geographically small compared to the US, China and Russia.  Web 2.0 is in full bloom inKoreaand the ability to have cheap and readily available broadband connections has affected how people use the internet.  Avatar websites are hugely popular inKorea.  Video gamers have become as famous as musicians, movie stars and sports heroes.  Avatar web sites inKoreaproduce revenue in the hundreds of thousands per day.  Avatar obsessed people commit hundreds and thousands of dollars to their online avatar(s).

<01.29.07 Update>: I was able to TiVo a showing of The Discovery Channel’s program on gaming called the Gamer Generation (on HD Theater).  I was absolutely amazed at the segment that showed the popularity of Starcraft inKorea, corporate sponsors, live TV matches and groupies.  This is coming to you neighborhood faster then you think.

(2) Avatar Sites Are Becoming New Market Constructs

Forget about ad revenues from search.  The Google business model is doomed.  I am only interested in the future.  The future is Web 3.0.  It is a dream evolution for venture capitalists.  I envision a world of thousands if not millions of artificial worlds in which we can all have avatars that exist and transit from artificial world to artificial world.  If I was a VC, I would be out funding Web 3.0 companies.  What is a Web 3.0 company you ask?  A Web 3.0 company is a company that creates either artificial worlds (i.e. Markets) like Second Life or they create businesses inside artificial worlds.  This is an incredible thought because we just added a new dimension to the global economy.  We can have businesses that exist inside artificial worlds.  The more artificial worlds that exist, the more businesses we can create.  Forget about, who cares about the model and who needs a just in time supply chain like Dell when you can have a world that is completely artificial.  No more worries about DSOs, inventory turns or same store sales.

<01.29.07 Update>: Recent reports show that this is not only going to happen, but companies and web commerce companies are all trying to determine the path to success.  Here is a link to Sam Palmisano’s use of his Avatar in Second Life to provide a customer briefing (additional links here and here).  If the name is not familiar to you, Sam is the CEO of IBM.  Just when you

If I was a Madison Avenue marketing agency that realized over the past few months that Google is eating their lunch and dinner, I would plan to skate where the money will be.  Google is old world Web 2.0.  The future money is Web 3.0: advertising and economic transactions for content in artificial worlds.

<01.29.07 Update>: Here are two links to a blog discussion on Second Life and a rumor that Google would build a competitive world to Second Life based on Google Earth.  I would think that companies with large server farms that build content delivery or transaction systems over the web are clearly looking for strategies to monetize virtual worlds.  This means that companies like eBay, Akamai, Amazon, Yahoo and Google are going to find increasing competitive overlap in the area of the monetization of artificial assets.

(3) Doomsday Evolution Thoughts

Admittedly, I do not believe all that I am writing, but if we extrapolate the evolution of the avatar evolution to the extreme, imagine what the headlines of tomorrow will be.  If the world of Second Life grows to a 100 million residents (55 times today’s size) and daily currency exchanges grow to $35.7M per day or ~$13B a year, is this business, an industry, a market or an economy?  Understand the broad scope at what we are hypothesizing in this scenario.  This is a venture capitalist dream.  Social networking in an artificial world in which global currencies are exchanged for artificial currencies in which the corporation that owns the artificial world sets the monetary policies!

Linden Labs controls the world of Second Life and they take in global currencies in exchange for Linden Dollars.  The site runs a currency exchange with historical transaction rates.  If you are currency trader think about what I just wrote.

<01.29.07 Update>: Here is a link about in game trading of virtual assets.  I think this is interesting when you frame it with this article on eBay removing virtual items from its auction site.  I wonder if any finds this hypocritical.  The eBay business model is to provide a virtual market for the exchange of goods.  How can they claim that the exchange of virtual assets in a virtual world is ethically questionable?  I know the real issue is tracking the exchange of assets, but it does appear hypocritical and I think deep down eBay is concerned that virtual worlds that are becoming economic constructs for the exchange of goods and services is really a competitive business model.  My prediction, eBay will reverse their policy and open a virtual asset class exchange site.  Long term doomsday prediction, eBay will shrink into background or they will have to add an avatar based component to the eBay experience or link store fronts to sites like Second Life.

Second Life is an artificial world in which the company takes in global currencies in exchange for its own private currency for use in their artificial world.  Did I mention it is an artificial world in which real companies are purchasing property to promote and sell their products?  HelloMadison Ave!  Can you read what I just wrote or are you getting a busy signal on the modem?

What I like the most about artificial worlds is that the companies that own the avatar worlds (i.e. markets) set the exchange rates.  What would happen one day if Linden Labs decided to devalue the Linden Dollar?  Will there be an outcry?  Will Congress hold hearings?  Will a Federal Reserve Chairman of the future ask that Linden Dollars be pegged to the dollar or the RMB or the Euro?   Will Ronald McKinnon write a companion to his book entitled Exchange Rates in the Artificial World?  Cleary there is no comparison between Linden Dollars and global currency exchanges, but the hypothesis is interesting and profound to think about when you consider that avatar sites are in their infancy.

<01.29.07 Update>: It was bound to happen.  Here is a link to some text on the taxation of gaming assets.  I can see it now.  You are going to have to file a 1099-Articfical World Asset Declaration for the IRS every year.  Which artificial world site will be the first to automatically email a 1099 statement at the end of each calendar year with quarterly statements for those players with artificial wealth exceeding a certain threshold?


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. ** 

Notebook 11.23.11: HPQ, RIMM, Comm Equipment, NFLX, Talking Books, Ken Langone and Egypt

I started my notebook post two weeks ago here.  This is my notebook heading into the Thanksgiving break.

– Meg Whitman, CEO of HPQ on CNBC: I think companies should give Y/Y guidance only and report a monthly set of numbers, which would be a subset of financials and unaudited.  I think this would take a lot of emotion out of quarterly results as well as channel check drama.  With that said when companies stop giving guidance or provide less transparency, I do not see how this is helpful and I sell or short the stock until I can trust the management team.  I listened to Meg Whitman’s comments on CNBC yesterday.  She said there was a lot of complexity and cost in HPQ and she wants to strip it away and simplify the company (my take away from her talking points).  Leo was there 9 months, so did all this cost and complexity come from him or did Hurd oversee it?  I viewed Hurd was a cost cutter and when he was ousted the management team at HPQ was quick to tell investors that Hurd and stripped the company down to the bare bones and there was no investment in innovation and growth.  Apparently I am confused.

– RIMM: This market is very difficult to invest and I think the people who promote the notion that it is cheap and people should buy stocks or if Europe was just fixed it would all be good are nuts.  I picked RIMM off the bottom a week ago as written here.  I was smart enough to put a stop limit in at $18.50.  It triggered on the scary market day.  The lesson with this market is you can trade some stuff, but it is impossible to be invested.  All shorts and longs require stop limits.

– Telecom Equipment Markets: I sent the four charts below to a friend the other day.  Both of us had careers in networking in the 1990s.  He came back at me with following argument:  “Carrier traffic growth is 40-60% annually, carrier CAPEX growth is ~3% annually and carrier revenue growth is <10% annually.”  The only way to reconcile that construct is to drop the cost per bit.  Who will bear the burden of that cost reduction?  I think the most likely candidate is the equipment providers.  I have been Verizon FiOS customer since July 2006.  In 64 months my service cost has never changed – yet they have increased my bandwidth twice.  That is deflation.  I have covered all this before in various posts here (optical upgrade cycle), here (exaflood), here (Moore’s law) and here (data center).  My thinking here is that the people who tell you to buy stocks based on mobile traffic growth, or YT hits or software defined networking, blah, blah are lazy in their thesis construction.  Just because there are lot of mobile devices and tablets andChina andIndia require billions of handsets is not a sufficient argument.  I would submit that the real investment thesis is to ride that wave of jubilation and sell the hype-cycle before it collapses.

– NFLX and Buybacks: I have always felt that buybacks are stupid use of cash by management teams.  Buybacks are put in place to offset option dilution, help achieve EPS and keep the stock propped up so insiders can sell.  The SEC should regulate or ban buybacks.  The latest example is NFLX, who raised $400M ($200M stock and $200M zero coupon convert) the other day, but spent $200M buying back stock in 2011.  Here is a good overview.  My question would be if the company is so desperate to raise cash, why was it spending cash buying back its stock?  Who on the BOD, Audit Committee or management team takes the fall for this?

– Talking Books: In the wake of Focus Media, NFLX and countless others, I still think it does not serve the interest of active money managers to talk their books on CNBC, Bloomberg and emails.  I think if you are active fund manager, silence and discretion is best.  IMO, if you talking stocks to the world, it should be because you have stepped away from daily investment management.

– Ken Langone on CNBC: Spot on.  I have no idea who I will vote for in 2012, but our politicians lack fundamentals of leadership and the whole political process of red versus blue is terrible.

– Egypt: If you read my 17k word missive on revolutions that I posted in October, the events in Egypt should be no surprise.  It looks like they are entering the Accession of the Extremists stage.

Happy Thanksgiving to all.


* It is all about the network stupid, because it is all about compute. *


** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. ** 

Notebook 11.02.11: Datacenter Switching, Packet Switching, Market

A few weeks ago I wrote a post in which I referred to keeping a notebook and how George Soros’s book the Alchemy of Finance reminded me of the value of keeping a notebook and that my blog is really a distillation of my notebook accessible by all.  Today I am creating a new category and entry format that I will use on occasion.  The notebook format will be for days when I want to cover multiple subjects without focusing on a specific topic in detail.

Datacenter Switches and Mobile Devices: I was sitting through a presentation from a merchant silicon team last week.  They were going over their designs in detail as well as roadmaps and application examples.  They put up a slide matching chips to switch reference designs.  A customer could choose chip A and build 48x10G switch or chip B with 48x10G and 4x40G design, etc.  I was looking at the slide and thinking where have I seen this before and then it occurred to me: the mobile device market.  One of the reasons I have been negative on the mobile device market is it really down to four operating systems: IOS, Android, Windows and RIMM.  Apple is a fully integrated (vertical) and closed system.  That is the most valuable franchise in mobile devices.  RIMM has the oldest OS that was designed to solve problems from ten years ago.  If you want to design a smartphone today, the process is to pick an OS: Android or Windows.  Then you get a reference design from QCOM or Mediatek, etc.  The real value is in the user interface (UI).  I know marketing, manufacturing, distribution all matter too, but the mobile device market is bifurcated into Apple (the closed OS with ASICs) versus the Windows or Android OS phones with developer built UIs and merchant silicon (reference design) mobile device companies.  I am crossing analogies to explore a thought path.

Will the switching market go the way of the mobile device market?  Will CSCO someday have to make a choice like Nokia or will they go the way of RIMM?  Will a new company or legacy company quickly rise to take share because they built a vertically integrated switching solution like the iPhone?  Will the rise of merchant silicon and reference designs create a vast market of white boxes driving down price points in which the differentiation and value is in the software, i.e. the customer UI?  Just a thought path I am exploring.

Packet Switching and the Network: I found this article on Blackberry’s SWAT team interesting.  Here we go again with the network being the problem and not the solution.  Perhaps we all need to review Paul Baran’s paper on distributed networks from 1962.

Market Thoughts: The market is basically un-investible.  You can pick individual stocks here and there, but Europe is a mess and not getting better.  There was a long stretch of peace in Europe from the close of the German wars of unification in 1871 to 1914; forty-three years of economic expansion and living standards improvement.  Europe is completing a 60-65 year cycle and countries are thinking more about dissolution than union.  It will be interesting to watch how European politics play out over the next year to see if any old stresses emerge from their slumber.  I am not sure which way the FOMC plays QE III, it seems the market wants it, which must mean the economy is bad and therein lays the problem.  The market is not a self sustaining entity – it is propped up by artificial entities thus making it un-investible.  The governments and central banks should have let a lot of institutions that were over stretched go down, but rather they transferred their liabilities to the public side and we are still living with the cancer.  Just look at GM.  I think I am one of the few people to think of the Corzine MF Global irony this week.  Corzine was head of Goldman-Sachs when LTCM went down forced by bond spreads that went against the firm driven by the Russian default of 1998.  The book to read is When Genius Failed.  Lowenstein infers in the book that Corzine always wanted Meriwether as a partner.  Thirteen years later they can share stories of failure caused by a global sovereign credit crisis.


* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **