Divergence Continues in Euro-Zone

From today's Spiegel,

"According to a report released on Wednesday by Eurostat, the European Union's statistical office, unemployment in the 17-nation common-currency area stood at 11.6 percent in September, the highest it has ever been.The numbers represent an up-tick against the 11.5 percent rate reported for August. In total, Eurostat estimates that 18.49 million people were out of work in the euro zone, up 146,000 over August. The rate indicates a significant rise against the euro-zone unemployment rate in September 2011, which was 10.3 percent.
The trend toward spiking unemployment rates was particularly strong in those countries suffering the most under the ongoing euro-zone debt crisis. Between September 2011 and the same month a year later, the unemployment rate in Spain rose from 22.4 percent to 25.8 percent and in Portugal from 13.1 to 15.7 percent. In Greece, unemployment rose from 17.8 to 25.1 percent from July 2011 to July 2012, the last figures available for the country.
With the euro-zone economy likely headed for a year of negative growth this year -- the ECB is forecasting a 0.4 percent contraction -- it seems unlikely that employment in the 17-country currency zone will improve any time soon"

Despite decades of a reasonably successful customs union and a less than stellar currency union, the perpetual struggle for EU hegemony between France and Europe continues to this day.   Italy's international leadership credentials have never kept pace with the nominal size of its economy.  The structure of the EU and the euro have created a further divide, called the "core" and the "periphery."

The whole notion of an EU consensus is a fantasy for academics and bureaucrats in Brussels.  Britain's electing not to be part of the common currency was, frankly, supposed to backfire on them as they stayed out of an economic powerhouse, a United States of Europe.  In a sense, Britain's assessment of the future was correct. However, it really detracts from the potential of an efficient EU to have Britain on the sidelines.

For the elected governments of the periphery nations, especially Spain, Portugal, Greece and Ireland, the only real attraction of the EU at this point is ready credit on subsidized terms with no budget control from Brussels.  That program isn't available.  Their view of a European consensus will have nothing to do with those of France and Germany.  They can't take much more pain without tearing their social compacts.

It seems, superficially, that Schäuble and Merkel are suddenly on the same page, nominally ruling out a "Grexit" and granting powers over national budgeting to Brussels. This is cynical posturing for the press and markets.  The closer such a system came to being implemented, with the specific rules for elections and voting visible, the more viscerally unacceptable this system would be to politicians and voters.  

Where will the funding for a Keynesian stimulus come from in the wake of a zero growth 2012, and prospects for a similar path in 2013?  Multilateral EU facilities are tapped out, or soon will be as they get overtaken by events. 

A German sovereign investment fund, which we've written about before, could only be an improvement over the current impasse.  It would be within national control and directed towards investments that created efficiency and return, hopefully with the cooperation of EU partners.  It isn't a solution to the EU malaise by itself, but it could be a step forward. 

The Euro Is Going Nowhere Fast

Greek President Antonis Samaras has ironically become a salesman for austerity, since he wants to avoid his coalition partners starting to chip away at individual provisions of the austerity and reform packages, limiting access to cash.  Reform of labor market practices, which is fundamental for improving Greek productivity and competitiveness, has already been vetoed by  coalition partners New Democracy and  Pasok.

The original goal for Greece to achieve a primary budget surplus (excluding interest payments on debt) equal to 4.5% of GDP by 2014 was, and is, absolutely ludicrous and unattainable.  The current backup plan is to give Greece another two years to achieve the target, but Spiegel estimates that this will require an additional €20 billion financing over the two year extension.  

The fundamental reason is the ongoing shrinking of the Greek economy.  Austerity and the global slowdown have caused the Greek economy to shrink by 20 percent over the past five years. This is why the world has witnessed genuine anger and anguish in the streets, as opposed to the usual gentrified student and government worker protests.  

According to Taggespiegel, lack of progress towards the budget surplus can't be blamed on "...any lack of austerity by the Government in Athens."  They point out nine months to-date in 2012, Greek government expenditures have been €2 billion less than required by the austerity budget. The problem has been the collapse of tax revenues, driven primarily by the contraction of output and income, as well as by capital flight and a collapse in tax collections.  The "Lagarde list" of wealthy Greeks with Swiss bank accounts is a national scandal, but nothing can be done about it.  Those who can fly have done so.  

It's hard to see a scenario continuing where the Greek government keeps wearing sackcloth and ashes, begging for more relief.  They can never achieve the 4.5% GDP target even in 2016.  What is the point of this two year long multinational charade? 

IMF Chief Economist Olivier Blanchard, whose organization has never met a consensus forecast it didn't like, now has a dire outlook on the Bernanke rescue.  To paraphrase what he says, we're in for a lost decade before recovery. 

Can Google Fix The Wireless Industry?

The U.S. wireless industry, often held up as a paragon of innovation, is morphing into just another classic American duopoly in which customers endure all kinds of psychic and economic abuse with gusto, in pursuit of the next great smartphone.

Remember the concept of "consumer sovereignty?"  Competition is everywhere, and atomistic firms get price signals from markets in which consumers vote with their dollars, driving innovation and product development.  Not any more.

When I was an equity analyst, my firms signed a corporate agreement where we could buy the earliest brick-like ATT cell phones, which could stand on their base and which had a long, rubberized antenna.  Eventually, I got to experience a Blackberry, again through a corporate relationship, and the "always on" capability together with my own obsessive-compulsive behavior led me to withdrawal and to Robert Frost's poetic junction.

I am not, by any means, a technology Luddite.  However, I want to exert my sovereignty and own a non-smartphone, simply to make calls and to send texts.  It has always worked for me, and the siren song of the smartphone does not call out to me.  After owning Nokia phones for a while, I have owned two very fine Samsung phones, including my current model.

It works like a charm, and its menus are simple and intuitive.  It also has a lot of very nice features which the carriers are having them remove from the newer phones.  For example, I can block crank or robocallers by using a very simple option in a menu.  I couldn't find a similar feature on any phones for my daughter when she was looking for a T-Mobile upgrade.  When I showed the feature to the salesman, he seemed astounded.  Now, my daughter could get the same functionality if we could pay a monthly fee of $2.95, and the calls would be blocked through the T-Mobile network only.  

For those of you crying out "EBay," please don't.  I have had my fill of dealing with folks who have all the stars in the world for recommendations, but who are not directly accessible when they fail to perform on a deal.  EBay takes no responsibility either.  I'd like to simply buy the unlocked phone of my choice, from a wide palette, through my retailer of choice.  If I have to deal with a return, I want to know who I'm dealing with.  This isn't possible in our brave new world.  

T-Mobile basically forces upgrades or unlocked phone purchases to be smartphones.  However, smartphones on their network must have a minimal data plan.  I don't want any data plan, and since I am the ultimate minimally resource-intensive customer paying gold-plated freight, I should be able to have my choice.  I can't.  I've been with all the carriers, with the exception of Sprint, and they're all equally lousy.  

Now, I read about Google's Nexus 4, which seems to be an unlocked phone with lots of nice features that seems to operate on GSM networks like that of T-Mobile, but without a data plan.  That sounds like it could be an interesting choice. I think the phone is too expensive for what I want, but it's still cheaper and potentially better than the overpriced phones T-Mobile offers.  

Google's model, according to Jeff Jarvis, is both open and partnering and disruptive.  He talks about Google taking aim at the cable companies.  Bravo!  A friend in the IT business told me that Google has a broadband experiment in Kansas City where they are offering customers the fastest broadband and online storage for a fraction of what the cable companies charge.  Go for it, Larry and Sergey!  

I do have concerns about what Google is doing: I am not an acolyte. However, if their targets involve monopolists and anti-competitive neanderthals like the wireless companies, then hopefully consumers may regain their sovereignty against the odds. 

Surface RT: Good News and Bad News

Following a recent post, Microsoft's launch of the Surface RT broke with the company's history in one, fundamental way.  Walter Mossberg, the widely reach technology guru at the Wall Street Journal, wrote,

"This isn't a cheap iPad knockoff. It's a unique tablet, made of a type of magnesium with a feeling of quality and care. The Surface starts at the same $499 base price as the large iPad, albeit with 32 gigabytes of storage, twice Apple's entry offering."

These are all home runs for the consumer impression. Mossberg's comment is consistent with some of ours about the engineering and design work that went into the product.  Note too, that because it is not a me-too knockoff the iPad, the question of price, which was the siren song of Wall Street analysts like Shaw Wu, doesn't appear.  This was the only way to go, as we said.

David Pogue, tech columnist for the New York Times echoes these thoughts,

"Now, for the very first tablet it has ever manufactured (in fact, its very first computer), Microsoft could have just made another iPad ripoff. But it aimed much higher. It wanted to build a tablet that’s just as good at creating work as it is at organizing it.
On the hardware front, Microsoft has succeeded brilliantly. Read the specs and try not to drool on your keyboard"

Where the folks at Redmond appear to have fallen down is on the software side!  The version of Windows 8  for the Surface, which is called RT, seems to be have some initial bugs and limitations.  The screen, which we talked about, is described as "sharp and vivid" by Mossberg, but inferior to the fourth generation of Apple's retina display.  If it's sharp and vivid and made for working, as opposed to running slide shows, which is what most of my friends use their iPad for, then I don't think this is a big deal.

The camera photo quality, and the battery life issues need to be fixed.

Here's a memo I would put out to the team if I were Steve Ballmer:

You've had a good launch, not a great one.  Make sure we stay in touch with everyone who has bought a Surface---use blogs, set up a special communications tool, but do not, under any circumstances, let our customers stew and get frustrated.  Put engineers on 800 numbers to answer questions.If you've better ideas to increase our customer intimacy, let me know. If we need to change what we do here, go ahead and change it. 

Let our customers tell us what the fixes should be. Mossberg and Pogue are great for initial validation, but we need to make sure that nobody feels bad about their decision to commit their dollars to our product.  We are going to make them feel good, no matter what it takes.  That will be the best testament to your hard work in bringing this product to market.  Thanks for bringing a unique tablet to market on time. Bill, the board, and I are right behind you.   

I hope they go forward from here, because there are definitely things that need fixing, but no show stoppers.

Google Blows a Quarter: No Worries

I'm in the process of reading "What Would Google Do?" by Ben Jarvis.  I'm very skeptical of books that are written by acolytes or high priests of corporate worship, which is what this book's title suggests. This book does flirt with idolatry at points.  However, it is a very interesting and provocative book, ostensibly about Google but it is also about first principles of business models in the digital age.   

Google's share price was buffeted last week by  mistakes of carelessness and inattention by a vendor--someone pressing "Send" when they weren't authorized to do so and without reading what they were sending---and by disappointment in 3Q 2012 financial results.  The basic comment was that Google's take from a mobile ad was lower than that from a desktop ad because of lower rates; the stock swooned.  It was probably talked down so that buyers could find a better entry point.

From what I've read about Google, including from Jarvis' book, I would guess that none of Google's founders or senior executives would be the least bit concerned by Wall Street's quarterly hand wringing.

In fact, here is an excerpt from the recent Wall Street Journal online edition,

 "About half of all U.S. mobile ad spending goes toward search ads, more than the roughly 47% of total digital spending in Web search, according to eMarketer Inc. And Google takes a 95% share of mobile-search revenue in the U.S., estimates eMarketer."

Google CEO Larry Page said that at this point last year Google generated about $2.5 billion from mobile advertising, apps and content.  This year, they are on pace to generate more than $8 billion in revenue from these channels!  "I am not worried about this at all in terms of our business at all," he said.  That's the kind of confidence I like to see. 

By contrast, Facebook and Zynga have either been late to the mobile advertising party or slow to generate revenue growth.  So, even among its New Digital Age peers, Google is clearly at the head of the table.  

In traditional newspaper or media businesses, with considerable overhead and inefficiencies, a corporate strategy would have been to dip the toe into the water of mobile advertising, including "setting" rates at some desired, higher level.  Instead, Google's approach is to watch customers and partners create a mobile advertising platform on top of their search platform without any attempt to control or set the architecture or rates.  

Instead, Google focused on grabbing a 95% market share of a market which analysts say is only going to grow as corporate marketers themselves get more comfortable with this new advertising medium and move dollars there.  

Google, among other things, is all about speed and aggression.  One of their senior execs wrote another one of their principles, "Done is better than perfect."  Aggression, especially towards any of their competitors, used to be a chromosome in the Microsoft DNA.  Microsoft certainly didn't worry about Windows releases being perfect: they went the other way and released really awful bloated, bug-infested software.  Let's see how things go in the upcoming Windows 8 release and the uptake in Surface RT. It should be a new day for them.

I need to have a Google expert explain something to me.  Their practice of releasing all kinds of versions of Android OS on mobile phones: Ice Cream Cone, Cookie Monster....and not allowing users to easily update to the latest and best version: what is that all about?  This makes no sense at all: it borders on Microsoft arrogance, unless there's a nefarious upside I am missing.   

Meanwhile, according to CS analyst Stephen Ju, GOOG is selling at 11 times P/E-ex cash, which doesn't seem expensive on any absolute basis.  He rates the shares Outperform. (I don't own any shares). 

The Inevitable Franco-German Discord

Here we are in the fourth quarter 2012, and the Wall Street Journal is writing about growing Franco-German discord after yet another European summit.  Going back to mid-2011, we wrote,

"Turning to the ECB, it has relatively few options that will provide meaningful support to a dismal outlook in Europe. The Wall Street Journal naively suggests that the Germans, French and stronger European countries will withdraw from the European currency union and create their own "strong euro."


This is extremely unrealistic and would not solve the fundamental problem of economic imbalances within the European Union. Germany is really in the driver's seat, but it too will be reluctant to detonate the charge that destroys the empire of the Brussels bureaucrats, of which many senior ones are French. A slow, economically inefficient unwinding is probably what's in store."

Looking at the original photo ops with former French President Sarkozy and Chancellor Merkel, it was evident to us from the start that the fundamental interests of France and Germany could never align.  Now, with a new French President with his own limitations and political agenda, the situation is worse than before.  At least former President Sarkozy and Chancellor Merkel had a cordial relationship; President Hollande, despite his having been trained at the Ėcole nationale d'administration, seems determined to establish a prickly relationship with Chancellor Merkel. 

President Hollande's attempt to be a broker between Germany and the European periphery is a recognition that the French hand is weak.  It is yet another path to painting German Chancellor Merkel as the reason for rioting in the streets in Greece and Spain.  This subterfuge won't work, because as we said in 2011, Germany is ultimately in the driver's seat.

Nicolas Veron of the Bruegel think tank agrees with us, as the Journal quotes him as saying, "Germany is pivotal in Europe, France is not." 

The edge has been taken off the crisis because the ECB has chloroformed the markets with it promises of a "bazooka" of liquidity.  The markets will eventually awaken again.

Microsoft Surface Tablet: Take an Aspirin or Not?

Someone sent me a link to a presentation by Microsoft engineers, showing off the research and design work that went into the new Surface RT.  I was very impressed by, among others, an engineer who walked through what went into designing the display, both technically (screen aspect ratio, lighting and ppm) and from the point of view of user demographics.  Another engineer talked about her work designing the keyboard, based on her research of how users input data and their digital dexterity.

Articles in the press have talked about the pressure Microsoft is putting on its component manufacturers to meet the $499 introductory model price point.  Grousing has been constant about the continuing need for Microsoft to receive a fee for the installation of Office and the OS on the Surface.  All true, but probably not  critical issues.

Finally, Wall Street tech industry analysts like Shaw Wu of Sterne Agee feel that Microsoft has blown the pricing of the Surface, which may be undercut by the upcoming introduction of an "iPad Mini" and the lower end products of Amazon and Google.  The Apple blogosphere seems to dismiss Surface on its price positioning.

I think that Microsoft had no choice but to position the product price where they did. It's perfectly rational.  Racing to the bottom by competing with Amazon or Google Nexus would be to completely deny the value-added of Microsoft's technical research and engineering.  Once a price point is set, it is extremely difficult to then turn around and raise prices.  It's always easier to come down, either through discounting or combining with other offers.

A medical device company where I was the CFO faced a similar quandary.  Our engineering and technical literature droned on endlessly about the high tech engineering and design that went into our product's profile, deliverability, and performance. Specs and data were everywhere.  The spending to support the research and development weighed on the income statement.  However, when it came time to set a price, we always kept the price flat with the earlier generation product.

When I asked our marketing people "What gives?" the answer was "The customer just won't accept a price increase."  My message to them was "Either we believe what we're saying about we've put into the product and the value, or we should stop talking about it.  If we believe it, then the customer has to pay for that innovation, so we can stay in business.  It's a sales and marketing task to convince the customer about our value proposition."  Bottom line is that we raised prices on the improved product, gained the industry leading share and profits at the expense of the low end and continued to make incremental innovations.  The low end  was left to feed on scraps.

Innovation in computing products has a tremendous advantage compared to medical devices in that component pricing is always under pressure due to the commodity nature of the parts. Manufacturing is also relatively simple component assembly.  Those processor, drive, screen, and flash memory makers have to figure out a business model that works for them.  Microsoft isn't alone in putting pressure on them.  Look at what Apple does at FoxConn.

Microsoft appears to have engineered a credible, innovative, feature-laden tablet at an appropriate price point. A reasonable customer objection is "Microsoft is an unproven and unreliable vendor of consumer products.  Look at Zune. If  I am taking a risk, why should I pay an Apple price?" Answer that question for them, but not by taking an arbitrary, low end price.

The question now becomes, can they act like a consumer products company and tell their story to the customer?  Mistakes will be made. What Microsoft has to do is to fix everything right away for every customer, whatever the cost   This is a critical launch, and success won't be determined early.  Failure is not an option.

The cost of making every buyer happy is a better investment that buying back shares.  That cost is just another form of advertising and brand rehabilitation.  The lessons of Amazon's early days, and the lessons of Lands' End in its heyday were: take care of customer problems right away; give them a good, friendly experience; make them feel good about Microsoft and their decision to buy the product, and you've got a customer for life.

Apple are masters at this, especially through their stores.  Let's see if Microsoft has prepared for this battle.