Friday, May 1, 2015

High Tech "State of the Union", Q1 2015 - Part 2


The future cannot be predicted, but futures can be invented. - Dennis Gabor

As this quarter's "State of the Union" serial update on technology financials continues, we find ourselves this week sailing the High Tech seas in a very different vessel and on an altogether vaster ocean. Specifically, this week's ocean is not one of "how things are now" but "what may be" - the Future. 

Last week, we covered The Big Iron and Wintel, as all of their companies had released Q1 2015 financial results. However, the vagaries of individual company reporting dates being what they are, this week's installment will be able to cover only one group of firms instead of the usual two - the Area 51 companies of Google and Apple. The remaining groups - the Stone Masons (leading SoC firms), the Vanara (programmable logic) and the Carolingians (Europe's leading semiconductor companies) - will complete their reporting the week of May 4.

Area 51
Apple and Google are the sole members of this group (at least for now) because of their evident raison d'etre - to define the future of technology and build a better tomorrow. Yet the technology mix and management style of these firms are starkly different from each other - and so are their financials, as can be seen below:



The importance of Apple's fortunes to High Tech cannot be understated. The Macintosh and its windowed GUI, the iPod, iPhone, iPad - the entire history of the firm is characterized by a succession of digital revolutions. One could reasonably claim that IBM played a great part in shaping society in the 20th century; Apple, on the other hand, is playing an even greater role to date in the 21st. Even the Wall Street hucksters have at least an inkling of Apple's extraordinary value among technology companies - like Atlas, the legendary Titan holding up the roof of the world on his shoulders, Apple alone is propping up the entire NASDAQ:

Apple's performance is also a significant determinant in the health of the semiconductor sector. Along with Samsung, it is a leading consumer of worldwide chip production:

The last two quarters have been monumental for the company. The iPhone 6 was such a definitive move forward towards a combined smartphone/tablet device and, ultimately, a Personal Processor of the future that Apple achieved the marketer's dream of stealing sizable market share from powerful competitors in what is now a relatively mature mobile computing market. The revenue spike of the last two quarters also broke Apple out of a plateau that was forming in the company's revenue trend. 

There are, of course, no guarantees that the revenue spike is an indication that Apple's growth will continue in the same vein. I suspect that the revenue trend will once again revert to the formation of a plateau, albeit at a higher level. After all, Apple's competitors are no slouches and Samsung seems to have at least partially recovered its footing from the iPhone 6 onslaught:

Wall Street carpetbaggers and CNBC & Fox Business talking heads continue to blabber incessantly about the Apple Watch in the hopes that this product line will help drive Apple's long term revenue trend to the right and up for the company in a stereotypical 'hockey stick' pattern. Frankly, I'm skeptical. The fickleness of smart watch consumers and their tendency to drop their wearable gadget into a desk drawer to gather dust after several months use is well documented. Furthermore, the Apple Watch is decidedly not a mass market product. Even the low end model at $349 is a non-trivial expense in the US market, where the median household income for a family of four is roughly $52,000 (this is a fact that Wall Street and Silicon Valley denizens seem to have particular difficulty wrapping their minds around.)

Where men are the most sure and arrogant, they are commonly the most mistaken, and have there given reins to passion, without that proper deliberation and suspense, which can alone secure them from the grossest absurdities. - David Hume

There is also evidence of a sickness within the senior and executive ranks of Apple - the psychological malady of arrogance, borne of unbridled success. Silicon Valley companies that have achieved great prominence have a history of destroying themselves from within as the management chain begins to believe that they are supermen whose wills can be made real by commanding & driving their people without mercy or compromise and who believe that the only remaining path to recognition & advancement within the bureaucracy's ranks is thru destroying each other in an orgy of internal political strife and organizational cannibalism.

This sort of behavior may be a relic of our primal heritage. Chimpanzee tribes in the wild and rat populations observed under experimental conditions, if provided with all the necessary physical comforts in terms of ample food and security from predation, will eventually break into gangs and begin warring with each other over territory, even consuming their fallen foes. One can see this sort of savagery in the following story of a senior ex-Apple employee - a story which is, per my own contacts, not really all that unique in the ranks of the Cupertino company:

Regardless, there must be a few pockets in the Apple corporate hierarchy which are relatively immune to the shenanigans of weak-minded, self-serving and egotistical technocrats. Otherwise, Apple would not be able to develop the incredible products it seems so gifted at creating. Consider Apple's work in AI, for instance, discussed in the March 27th editorial:

It takes a team of free thinkers, unencumbered by bureaucratic idiocies and career-obsessed autocrats, to think in such original terms.

Or perhaps there is a different reason for Apple's incredible success. When Apple demonstrates visionary insights into the future of computing, they lend credence to the story that the company has a core group of scientists who are aliens that disembarked from a flying saucer at Nevada's Area 51 back in the 1970's. In fact, there's more than one thing about Apple that hints at this possibility - after all, the new corporate headquarters still under construction in Cupertino is rather suggestive, isn't it? ;-)


"Ludit in humanis divina potentia rebus,
Et certam præsens vix habet hora fidem."

Heaven makes sport of human affairs, and the present hour gives no sure promise of the next. - Ovid

The status of Google as a legitimate member of the Area 51 group is in jeopardy. Sony, Epson and Toshiba are ahead of Google in the Smart Glass sector, with offerings that are admittedly less ergonomic but which are finding much more traction in medical and industrial applications. Microsoft is outdoing Google in AI and finding success in hardware in contrast to Google's more limited deployments and clear failures. Worst of all, the search engine cash cow is now steadily losing its revenue generating capability to competition from both Microsoft and Yahoo (whose engine is powered by Bing.)

In past "State of the Union" reports, I considered it likely that Google's investors would begin to clamor for concrete returns from the many R&D efforts underway at the company. Clearly that day has come, as Wall Street and stockholders are demanding greater accountability by Google executive management and are plainly not interested in holding onto shares in the 21st century equivalent of Xerox PARC:

A particularly illuminating development is the recent change in Google's executive management:

This, in my view, represents a critical turning point in the history of the company. Ruth Porat is from Morgan Stanley. She is, to put it bluntly, the Big Shark in the water. Hiring her could easily turn out to be a decision Google's founders will deeply regret. In fact, I am happy to go on the record with the prediction that if Google's revenues and R&D ROI don't turn around drastically within the next 18 months, Ruth Porat will be given the reins of the company and Sergey Brin, Eric Schmidt & Larry Page will be put out to pasture.

Next week, we'll look at two more groups of companies. :-)
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