Friday, September 19, 2014

News Hilites & Commentary, 9/19/14


Every once in a while I like to do a news roundup - mostly to keep myself informed of new developments, but also to double check if my prognostications have any merit or if I've merely been out in the sun too long without a hat. Here's a string of news items I've collected over the summer that I found particularly noteworthy, with added analysis and comments as appropriate. As a conclusion, I wrap up the implications of these news threads to make some further predictions for the future.


Is the Web 2.0 explosion in the bay area about to have a shakeout? This industry expert thinks so:

There is a noteworthy difference between the dotcom bubble of the late 90's and today's internet boom - specifically, the level of talent and fundamental professional competence in the sector is much higher this time around. This distinguishing factor has lent itself to the thoughtful development of a smorgasbord of web-based companies that are much more sophisticated in their business planning, market segmentation and creation of methodologies to define products and services for these markets. To put it more plainly: people like Eric Ries and Brian Balfour simply weren't to be found among the dotcom bubble crowd of the late 1990's. 

Nonetheless, the alarm bells started blaring in my head about two years ago when a wave of internet startups touting ideas such as their "new paradigm in social media" or similar jaunty proclamations began receiving utterly ridiculous levels of funding - yet few had a defined business model for monetizing their "platform." The only qualifications for funding these dreams seemed to be an Ivy League MBA and the founder's ability to produce a seemingly endless stream of prattle filled with Web 2.0 jargon - "Our interactive social targeting & management services platform is architected as a paradigm-breaking technology that enables bringing people together synergistically while harnessing their collective intelligence in a rich user experience and remains in accordance with our 'passion before profit' corporate model" etc, etc...

In hindsight, this should have been predictable. The huge QE infusions forced into the financial system over the past 6-7 years have been looking for a home. Such fiscal stimulus programs are part of the historical record, having been tried before at other times and in other places, but the ultimate effects have remained the same - the stimulus would do nothing to resolve the poisoned debt structures in financial institutions and systems at which they were targeted, but would instead wind up fueling speculative bubbles in real estate, equities, raw materials, bonds and so forth. In the case of the Federal Reserve's modern day QE program, a portion of these liquidity injections have been used by Wall Street to pursue a new round of speculative investments in the internet.

Mainstream media pinheads fueled the flames with reporting that amounted to little more than lightly dressed up advertising. By attaching the labels "Tech" and "Silicon Valley" to the storm of media blather, the genuinely impressive achievements of strong Web 2.0 companies that are busy rewriting the rules for media, advertising, high finance and retail have been overshadowed by a tsunami of hot money from Wall Street directed at a slew of "Dotcom 2.0" chimeras, accompanied by a chorus of circus-like media hype.

As an example of the bubble nature of the Web 2.0 segment today, one need look no farther afield than Twitter. Its services are widely used, yet the company shows no signs of changing its long history of bleeding oceans of red ink - a virtual Charybdis of the modern age. Yet the Wall Street valuation of this firm today tops $30B.

All industry expansions go thru alternating boom and bust phases, each time whittling the field down to the strongest, smartest players. It would surprise me greatly if such an 'extinction event' did not strike the Web 2.0 sector in the next 12-18 months to shake out 60% of the current participants. The truth of the matter is that the industry will benefit immensely from it and will emerge with much greater strength, focus, fiscal sobriety and even new market opportunities.

In the PC market, the gild seems to be decidedly off the lily with notebook sales:

This is a clear warning sign that the small Q2 spurt in the PC market was an aftershock of the Windows XP obsolescence, as so many analysts had suspected. For the medium term, it's likely we'll continue to see deterioration in unit volumes and revenues for the PC market. 

However, Intel appears to be poised to change all of that rather violently. In the wake of Broadwell and Skylake, it seems plain that Intel intends to use 3D-IC packaging to stack DRAM, GPU, CPU and other die into SoC offerings for any conceivable 3C (computing, communications & consumer) application. They may even put ARM CPUs into their 3D-IC products. 

The 3P (price, performance and power) advantages of this approach are enormous and justify pursuit & perfection of this packaging technology, despite the applied R&D costs and expensive changes to manufacturing and testing that it requires. These 3P improvements might even be of such a magnitude as to re-energize the PC market, at least from a volume perspective. What is even more impressive than the 3P benefits of 3D-IC, though, is the consequent effect on the applications space with respect to the CPU market in general. 

The range of software applications such chips could support could prove so attractive to systems houses that Qualcomm would be fatally wounded and other SoC companies such as NVidia, Broadcom, Marvell and Mediatek  would suffer monumental damage. After all, why should a systems house buy and integrate a Qualcomm apps processor into a smartphone or a Broadcom networking SoC into an edge router when a 3D-IC device from Intel can offer much more processing muscle at a much lower system cost and power consumption along with considerably superior performance that at the same time also opens up a huge range of new software applications? Stated differently: unless ARM can suddenly begin to run Windows-based apps at high efficiency or AMD suddenly starts offering competitive Intel-compatible CPUs as die, I wouldn't short Intel stock.

As discussed in earlier posts, China is intent on establishing itself as the pre-eminent global force in microelectronics. In addition to a pledge by Beijing to spend $10B/yr in fostering China's domestic semiconductor industry for the next decade, it seems China is also trying to ramp its presence on the global semiconductor stage non-organically thru acquisitions:

Some leadership news from Japan: NTT has begun testing for 400Gbps Ethernet deployment. Note, however, that the company clearly states the testing does not constitute a commitment to immediate deployment and the firm will await firmer indications from the market before diving in:

This news was a bit surprising: the growth in Cloud-based services seemed to spell healthy revenues in the short and medium term for storage system houses and their memory and logic chip suppliers. However, due to the observable slowdown in mobile computing growth, it appears demand for mass storage is beginning to feel the pinch along with the rest of the market:

This next item is a bit irritating. I covered India's central government plan to heavily subsidize silicon foundries for two industrial consortia in previous blog posts. Yet here is the leader of one consortium pursuing the acquisition of an overseas fab:

One wonders why the Indian government needs to subsidize domestic efforts, since the beneficiaries seem to have investment cash of their own.


This announcement from AT&T deserves some scrutiny:

AT&T cites the IoT - and in particular smart watches - as a spur for their renewed emphasis on infrastructure investment and expansion. Either this is just a convenient way to jump on the IoT hype bandwagon, or the AT&T executive management is so unsophisticated in High Technology that they believe smart watches and individual electrical items in the home will all be linked directly to the internet. If the reason for mentioning the IoT in this release is the latter, this might be a good time to short AT&T stock.

Below are a couple of reactions to the new Apple Watch. Generally speaking, critics admire the skill and thoughtfulness of the design, but nobody seems to be convinced that this is the 'killer app' the industry has been anticipating to replace the saturating mobile computing market. The ChannelEye take on the Apple Watch is particularly trenchant.

For those who are looking for ways to enter the IoT market with their own killer app, some technical details will be particularly thorny - in particular, connectivity at high data rates and/or sharing bandwidth with multiple clients while minimizing power draw. The wireless spectra available will present their own design challenges, obstacles and constraints, and there are companies already undertaking research and even product development to deal with this. Wireless bands are, in fact, an area to watch carefully to understand underlying trends and opportunities in the IoT.

Samsung is demonstrating the kind of adventurism and creativity that one normally expects of Apple, further demonstrating that it may indeed be Samsung that rises to utter dominance in consumer electronics in the 21st century. As noted last week, the smartphone and tablet markets seem to be on a path of convergence towards a Personal Processor that would likely perform as the primary server for the individual consumer in an IoT world. Yet Samsung shows great daring in going in the other direction with this product, which seems inspired by the example of the Dick Tracy watch:

Mobile Computing (Smartphone & Tablet)

Tablet sales may actually decline for the year - a real surprise and a reversal of position with smartphones, where tablets previously seemed on course to continue growing for another 6-12 months after smartphones leveled off:

I had forecasted earlier in the year that 2015 would likely be the swan song for tablets and smartphones, with growth plateauing that year and tablets still having a little bit of life remaining in them. It appears I was overly optimistic and also got it backwards - tablets are peaking before smartphones and it appears 2014 is the last year of growth. In fact, it's beginning to look like unit volume forecasts from many industry pundits of 20% growth for smartphones this year are optimistic. Smartphone chip suppliers and handset manufacturers should consider themselves doing well if they can achieve more than half that growth.

Price wars continue to intensify, both in services and in hardware, with Qualcomm leading the way in chips. An already shaken Mediatek and Marvell unquestionably must be seeing a storm headed their way:

A sure sign that the smartphone market is on the razor's edge of stagnation is not only the chip, handset and service provider pricing wars underway, but the fact that otherwise strong companies are finding the market is no longer fertile ground for new entrants:

One can also see that the final battle for dominance in mobile computing chips will be bloody indeed, as Intel quite publicly draws a bullseye on qualcomm:

Finally, one can see the international implications of mobile computing with these grossly protectionist moves by China against qualcomm:

Clearly China sees the pre-eminent importance of mobile computing in the future of microelectronics and High Technology in general - hence their blatantly protectionist actions against Qualcomm. China is not alone in this, however. 

There is a rising tide of protectionist sentiment in the major 1st world industrial powers and the BRICs, as nations adjust to a wave of instability in major currencies along with trade & financial sector threats from sovereign and private market debt loads. A marked departure from the globalist trend of the last 30 years, this protectionism is likely to get more severe and bitter for the medium term and will also likely see major shifts in economic alliances, as old structures based on western economies give way to much larger new structures whose center of gravity is farther east.



Weep not that the world changes—did it keep
A stable, changeless state, it were cause indeed to weep. - William Cullen Bryant

Arnold J. Toynbee was a historian at the London School of Economics in the first half of the 20th century. He is best known for his epic treatise "A Study of History", a 12 part analysis of the common patterns observed in civilizations and cultures throughout the history of Man. It is a monumental work, written in beautiful prose and demonstrating a keen eye for the discernment of patterns in which all societies seem to move over time. The singular breakthrough of Toynbee's work is his discovery that civilizations do not go thru cycles such as the birth-life-senescence-death cycle eloquently theorized by Ibn Khaldun, nor the Wheel of Fortune motif first described by Herodotus and illustrated in the image above, but instead move thru observable phases of relatively indeterminate duration. These phases are punctuated by severe challenges which the civilization must overcome in order to continue moving forward as an entity thru time. 

If a given civilization or culture successfully meets a challenge but must expend all its energies merely to maintain its position, it will tend to freeze in place. Some illustrative examples include the Tuareg, the Polynesians, the Inuit and the various nomadic tribes of the central Asian steppe. In the case of these cultures, the inordinate difficulties presented by geography, climate and distance were overcome, but the sheer physical effort to conserve their victory over the elements left no time or reserve strength to pursue other goals.

In other instances, a given culture may encounter a challenge which it repeatedly fails to surmount. In such cases, the minority of people who had established themselves as leaders of the culture thru their creativity and excellence in fields important to that society (the Creative Minority) devolve into a tyrannical clique that holds onto power not thru merit but by force and oppression (the Dominant Minority.) This represents an inflection point for the culture wherein it enters a period of stagnation, decline and eventual collapse, to be replaced by a new, more responsive and vibrant civilization that in almost all cases is generated from within the ranks of the oppressed majority.

To illustrate this concept visually, Toynbee evokes the image of two dozen people scaling a cliff face by hand. Some climb a ways and then fall off; others reach a ledge and stop; and still others continue, stall at some point and are replaced en route by some sort of derivative of their original selves.

This leads us to another fundamental maxim put forth by Toynbee - one that concerns itself with how a new civilization will encompass major elements of the previous society within its new form. The old culture does not totally disappear, but in fact donates major elements of itself to serve as a kind of platform for the formation of its successor. This can be seen from numerous historical examples - the foundation of Christianity on the organizational structures of the Romans, the Persian adoption of Medean political forms and customs, the organization of the Ottoman Empire on the Byzantine administrative apparatus and so forth. In this way, the old society does not so much die as become reborn in a more dynamic, adventurous and vigorous form, like a Phoenix rising from its own ashes - a phenomenon Toynbee termed 'palingenesia.'

Economic matters are a somewhat different issue. They do not adhere to the same patterns or rhythms of civilizations, but are a participant in those patterns and one of a culture's constituent elements, often serving as a barometer of the relative health of that culture and providing an indicator of its spirit and panache.

If we look at the High Tech sector in this light, what does it tell us? Well, both China and India have central government efforts underway to bolster their domestic Technology sectors thru $B's in direct subsidies. I've discussed Beijing's endeavors earlier in this article and detailed New Delhi's plans in previous blog posts (see the editorials from August 1st and July 4th.) Both are descendants of truly ancient cultures that are, in my humble view, experiencing a glorious palingenesia and are at the early stages of embarking on a wondrous future - a journey that will still compel their cultures to grapple with significant obstacles that will take much of this century to work thru before India and China fully flower into their new forms. 

But when you look not only at China and India, but the broader industrialized world, including all of Europe, the Far East and the Americas, and focus attention not on what governments are doing, but what their their High Tech sectors are up to, the common behaviors they are broadly manifesting tell a different story. Among these behaviors are:
1. Cash hoarding
2. Mergers and acquisitions
3. Stock buybacks, including the use of heavy leveraging with cheap credit from bank loans sporting artificially suppressed interest rates
4. No budget growth for new hires and precious few plans for expansion of any sort
5. A tremendous growth of interest in 3D-IC, FD-SOI, metallic RAM (in numerous flavors) and the IoT market

A simple interpretation of the above factors - one used by the mainstream media - is that High Tech is experiencing a temporary slowdown and is busy trying to innovate its way out of it to get back on track with steady 3P (price/density/cost, performance and power) improvements to prepare itself for the coming IoT boom that will replace the sputtering smartphone and tablet growth engines. And, since this is indeed the mainstream media interpretation of the current state of affairs, one can safely conclude that it is the wrong one.

All the new work underway in FD-SOI, metallic RAM and 3D-IC (both packaging and monolithic) is a testament to the ingenuity, grit and 'never say die' determination of High Tech engineers worldwide. They have a can-do attitude that is unmatched in any other business sector. High Tech workers collectively, in fact, constitute a Creative Minority that by its unique nature exercises a certain independence from any one culture or society.

Yet the impetus for these expensive technology development efforts and their attendant costly alterations to manufacturing and test capabilities stems from the oft-discussed demise of Moore's Law - now either de-facto or imminent, depending on who you ask. These technology enhancements are intended to wring the last drop of value possible from silicon and provide chip and systems companies with any possible extra advantage they can get in value propositions for their products, no matter how ephemeral and incremental that advantage is likely to be. 

Stated differently - these engineering measures are very different in spirit and intent from the proliferation of new and enhanced products made realizable from the previous steady march of Moore's Law and its attendant 3P gains from every successive process node. Moore's Law allowed companies to go on the offensive. These new technology initiatives, on the other hand, are instead a set of engineering measures intended to protect companies, their products and the pricing they can command in existing markets. They are thus defensive in nature.

When taken together with the various balance sheet protection measures listed above, the picture becomes clear. On a global basis, High Tech is not gearing up for an imminent explosion of fresh growth, but is either subconciously or deliberately shoring up its fortifications in preparation for a long, drawn out siege on pricing and market share.

Since the above mentioned process technology enhancements are inevitably bound to diffuse thru the entire semiconductor sector in relatively short order, the ability of chip companies to design features and benefits into their chip offerings and transfer that value to their systems customers will, within the next few years, be fleeting. New value-adding features will be few and will have a shorter beneficial life span. There will be no way for individual firms to maneuver out of what will become a war of attrition. They will only be able to do whatever is within their power to find the means to endure.

High Tech is, in the end, responding to consequences from the end of productive life in silicon and pressures cascading from the greater economy, where cost has become king, optional purchases with disposable cash for both individuals and enterprises are put off unless there is a dire necessity, and discretionary income has by and large been tapped out.

Even the IoT is unlikely to be the savior of the Technology industry, and the very words and actions of High Tech companies betray their own suspicions. After all, any product that hopes to sell in smartphone or tablet unit volumes in this nascent market will have to generate mass appeal. Thus, in these Lean Times with low or zero growth, declining incomes and a rising cost of living, any killer app is unlikely to command the kind of prices that generate rich profits and fat margins or it risks becoming unaffordable to 80-90% of the potential market. What high tech companies all thru the value chain seem to be hoping for is a growth in volume over which to amortize PPE and unit costs - yet another competitive measure which is, in the end, defensive.

Nonetheless, as stated earlier, the High Tech workforce can legitimately be characterized as a Creative Minority that is, because of its mindset, somewhat independent of a specific culture. Thus, despite the world's substantial macroeconomic problems and their deleterious effect on the financial health of the Technology industry for the medium term, that spirit of innovation, creativity and invention remains. 

The general macroeconomic and fiscal problems faced by the global economy will be dealt with over time - and, considering it will be central banks, governments and TBTF banks who will exercise the greatest influence over the resolution of the problems they themselves created, it's probably a safe assumption that their solutions will both draw out and deepen the pain for everyone. But the important factor to focus on is that these crises will resolve themselves in one way or another. After that, it will be up to someone to pick up the pieces and get economic activity back on track.

Who else is there to lead such a charge except for the Creative Minority of the folks in High Tech? If the many private and government-sponsored technology industry associations across the globe - the SIA, China's Institute of  Computing Technology, ETRI, ITRI, Fraunhofer and so forth - truly understood the people in the industry whom they purport to represent, they would all have a mascot that was a variant on a mythological creature that has analogues in almost every ancient culture of which there is a record - greek, roman, egyptian, slavic, persian, arabic, indian, chinese, korean, japanese and more. 

Source: Wikipedia

Is there any organized activity in human history that has shown the capacity to reinvent itself more than High Tech? I can think of no symbol more perfectly descriptive of the industry and its participants.

For the moment, new technology development can be considered to be entering a dry spell. Silicon is on its last legs - there's no avoiding the truth of it. For the drought in High Tech to be broken, we will require the rains to return in the form of inventions that break the conditions and circumstances governing the present, shattering the old regime to usher in a new time of change, innovation and adventure. 

At the technology level, this means a substitute for silicon, which serves as the base upon which everything else - circuits, systems and software for communications, consumer electronics, high performance computing, mobile systems, ISM, automotive and mil/aero technology - is developed. As many of you know, I have written before about what I believe that next materials technology will be - graphene. At the moment it appears that it has the potential of being a true miracle material, figuratively an alchemist's dream. There must be something to all of the current fanciful speculation on graphene - there are efforts underway in university research facilities, private laboratories and government R&D centers worldwide. I'll be moving on to a deeper analysis of graphene and its derivatives in future VF blog posts.