Hal O'Brien

"At Apple, we reward excellence -- as long as you're excellently white, and excellently one of the guys."


More at my journal. But let's just say this has been a longstanding problem at Apple.

Thought provoking piece from Reuters' John Kemp. He's taking dead-eye aim at gold bugs, peak oilers, and others convinced of doomsday scenarios.

A report to the trustees, staff and advisers of the California State Teachers Retirement System (CalSTRS) confirmed: “Investors should view commodity performance as analogous to insurance. Commodity investments may not always produce high returns and may impose some form of opportunity costs similar to an insurance premium. During unexpected investment-related events, such as high inflation, commodities are expected to outperform”.

A similar case is being made for why investors should include 100-year bonds, gold, commodity futures and a host of other insurance-like contracts in their portfolio to protect against a range of investment risks — from inflation and deflation to flash crashes, a global energy crisis or bad harvests.

OVER-PAYING FOR INSURANCE
The comparison with insurance should give investors pause. The only people who make money from insurance are generally the sellers. For buyers, they amount to a cost — and sometimes not very good value. Some companies such as BP and some other oil majors decide it is cheaper to self-insure against at least some risks.

Insurers make money because the amount collected in premiums and earned by reinvesting them exceeds the amount paid out in the event of insurable events. Providing insurance is profitable because (a) insurable events are not common; (b) insurers have reserves to absorb periodic large losses; and (c) insurers pool risks across uncorrelated markets.

The key is that buyers of insurance generally pay more up front in premiums (ex ante) than they ever claim in payouts (ex post). Precisely the same thing is happening in many of these newly popular markets for tail risks. Investors will pay far more for the exposure to tail risks than they will ever get back if and when those risks eventually occur.

"Investors brace for dramatic accounting change. That sounds like a fantasy headline from one of the great geeky professions, but it's almost true."

That was the lead on the Lex column in the FT on Tuesday the 17th, when I started my new job. (We found a way to get a year's subscription to both the FT and the Economist using airline miles, so I'm reading them again.)

It's a fairly big deal. As Lex goes on:

"New rules announced yesterday on lease accounting will increase the average company's debt load by 58 per cent, according to PwC, the professional services firm, and Erasmus University.

The issue: with the right kind of lease contract, companies currently keep assets off the balance sheet that are both durable and vital to operations - for example airlines' aircraft and retailers' stores. But accountants are on the way to banning these operating leases. Almost all leases will see their assets and corresponding discounted present value of future payments put on the balance sheet. The result: the average retailer can expect a three-fold increase in debt levels. For Tesco, an extra £15bn of lease liabilities will be included into a pool barely £200m deep.

The results of the new rule, a joint project of the International Accounting Standards Board and the US's Financial Accounting Standards Board, may surprise many investors. But not lenders and credit rating agencies, which already make similar calculations. They will have to decide whether the new measure of the value of leases is better than their existing rule of thumb, multiplying rental expense by seven. PwC believes the official measure of the liability will be lower in more than nine out of 10 cases.

Uniform lease accounting will make balance sheet comparisons more accurate, but there is a wrinkle. The prevailing interest rate on which each lease's value is based will be set on the day the contract is signed. An unusually low discount rate translates into an unrealistically high liability for the duration of the lease, sometimes 25 years. In big portfolios, the distortions may cancel out. But investors reading financial statements still cannot afford to rest in lease."

There have been few "matchers" out there in the world. That is, few outlets have been picking up the story. One of them was Reuters, with this piece, estimating global impact at "$1.2 trillion in leased assets."

Another was this breathless piece at the Economist, describing the proposed changes as "shocking" in the headline. However they did make the timetable more clear: "(The changes are) up for public comment until December, but could be enacted as soon as June next year."

Why am I telling you all this?

Well, mostly because I can see political implications afoot. Mainly I see the possibility, if these changes take effect, that as corporate debt is then stated on balance sheets to skyrocket, we'll hear the refrain from the Republicans leading into 2012, "Of course Obama's bad for the economy! Look at how corporate debt has soared because of his policies!"

I want to plant my flag here and now, and tell you when you hear that, someone is either lying or misinformed. These changes are being driven wholly by the private sector, and reflect the market giving furtive borrowers their due.

Odds are I'm not exaggerating where I say this: You read it here first.

First, let's check in with Joel Spolsky from 10 years ago:

"Speaking of Verizon (formed by the merger of BellAtlantic and GTE): whenever a company changes its name, the only thing that it logically means is that they concluded that their old brand name was a liability, not an asset. BellAtlantic and GTE have spent so long pissing off so many people with such bad customer service that their names had negative brand equity." {emphasis in original}

For those who don't know, BP insists they're just "BP" these days, and not "British Petroleum," because they went through renaming the company after a merger with Amoco in the late 1990s. First it was "BP Amoco," and then it was solely "BP." So what does BP stand for, if it doesn't mean "British Petroleum"? Nothing. Or, one can think of it like a Sesame Street sketch: "This company is brought to you by the letter B and the letter P."

As Mr. Spolsky points out, this is probably because someone sold management on the idea that all three of the constituent names -- "British," "Petroleum," and "Amoco" -- had negative brand equity.

The other self-referential-to-the-point-of-autism rebranding that took place at a similar time was BAE Systems. BAe once stood for "British Aerospace." Now, the all-caps BAE stands for, you guessed it, the letter B, the letter A, and the letter E. (And I forget who wrote about that clusterfuck fannishly, but I remember reading about it at the time in some fanzine from the UK written by an employee.)

My point, though, is that these are among the most incompetent rebrandings of all time. Because letters are not names. Letters, when used in a proper noun, represent something. And it's not like this doesn't have a known solution -- as Exxon, Verizon, Altria, and many others demonstrate.

So, Dear BP: Too damned bad. It's British Petroleum until you can be bothered to get the job done, and actually come up with something else.

When it has something to do with Apple.

The New York Times has a blog piece on the iPad's arrival in Japan, and the stir it's allegedly causing. They use this as a peg for a larger analysis about the Japanese feeling like they've lost their competitive edge, not only to Apple, but to South Korea's Samsung, Taiwan's Acer, etc.

Along the way, they drop an eyebrow raising stat:

"Shipments of the iPhone more than doubled, to 1.69 million units, in the year ended in March, giving Apple a 72 percent share of the country’s smartphone market, according to the MM Research Institute."

Eyebrow raising enough that I went looking at it. There are a few problems.

The most obvious: Note the 72% figure is of "smartphone" sales. The thing is, smartphones don't sell well in Japan (or anywhere else). The iPhone's actual market share in Japan among all cell phones is 4.9%, according to the very same report from MM Research Institute Ltd. quoted for the 72% figure.

Now, mind you, that is slightly better than the iPhone's global market share among cell phones -- which is 3 percent in Q1 2010. (Smartphones sold 54.7 mil units; they're 18.8% of global sales; that yields global sales among total devices of 290.96 mil units; of which Apple sold 8.8 mil.)

Around the world, 97% of the market looks at the iPhone -- and buys something else. In Japan, "only" 95% of all customers buy something else, but it still ain't great.

The iPhone has a smaller market share than Linux. And Steve Jobs has yet to trade in his "reality distortion field" for a "reality clarification field."

Executive summary: If American business is so smart, why is Dilbert so popular?

There's a well-known phenomenon in politics: People dislike Congress as an institution, but generally like their local Congresscritter. (I suspect this also happened to the LibDems' detriment in the recent UK elections: Parliament are bastards, but "my" MP is all right, Jack.) I suspect this is an example of experience vs theory. Congress is abstract and distant, and won't complain back. Local guys (of either gender) may well be known to you, and it's much tougher to dislike them without a concrete reason.

So, here's the curious thing: The like/dislike relationship completely reverses (in general) when it comes to business, or laissez-faire, or entrepreneurship, or whatever you choose to call it. That is, many people grouse about the stupidity of middle-management (and higher) at the companies they work for, but small-l libertarians still praise The Genius of the Market. I suspect this is an example of experience vs theory as well. Sure, the local guys (of either gender) may be total incompetents, but the story of the possibility of success due to hard work and merit (let alone the Lottery of Luck aspect) is so appealing it trumps people's experience with the real thing.

Thus the realists in the office put Dilbert in their cubicles and watch The Office at home, even as middle management is enraptured by tomes of survivorship bias like Good to Great, The Millionaire Next Door, etc.

If health care reform is so bad for the insurance business, why does an index for health insurers keep rising the closer we get? (Look at 1-yr, esp.) Yet again, some Republicans are all in favor of markets, as long as the market agrees with them.

Or, to put it another way -- health insurance stocks are up 90% over the past year. Clearly the market hates the idea of health care reform. {cough}

This here Macintosh runs an operating system officially known as Mac OS X Snow Leopard.

Here's my question: When you read that line, did you pronounce it to yourself as "O-S-X" (that is, each letter individually), or "O-S-Ten"?

Turns out this is much like "sci-fi" vs "SF." Hoi polloi pronounce it "O-S-X"; cognoscenti, "O-S-Ten."

My point? Well, just like the company that sells software they claim can accurately predict trends -- like, whether one is a terrorist -- but still isn't able to manage to accurately predict how many will park at their building every day... Well, how much does it say about one's ability to make interfaces that are "intuitive" when one has to constantly correct the pronunciation the unfamiliar public intuitively applies to your product? You can't get something as simple as text on a page right, but you believe you get something as complex as computer screens right?

Why is it the retailers like Amazon and B&N coming out with Kindles and Nooks? Why isn't it the publishers?

As I understand it, the standard splits in publishing for the longest time have been 50% for the retailer, 40% for the publisher, 10% for the writer (of which 10% goes to their agent, so really 9% for the writer, 1% for the agent).

If you're a retailer who brings out an e-reader, that means you still have to deal with publishers, so the percentages shouldn't really change -- even if Amazon then charges only USD$9.99 for a "hardback" that's $24.99 in a cloth edition.

But if you're a publisher who brings out an e-reader, with a Kindle/iTunes-like "store" of your titles, that means you can cut the retailer out entirely. 90% of $9.99 turns out to still be less than 40% of $24.99 -- but not by much, it gives you lock-in over time, and it beats 40% of $9.99 all hollow.

Or, the nuclear option in the other direction: What if Amazon and B&N are thinking about becoming publishers themselves (and not just of public domain works a la Dover the way B&N has done for a while now)?

It seems to me one level of this ecosystem is about to become superfluous. Who? Am I missing something?

Edited to add: Urban myths don't constitute an explanation. Bertelsmann's sales alone annualize out at just shy of $21 billion, larger than either Amazon or B&N. Book sales have been holding steady since 2007 according not only to Bertelsmann's, Amazon's, and B&N's annual reports (and inside sources in publishing), but according to the US Census Bureau, who show only a 1.5% drop 2007-01 through 2009-10, annualized out. The broader economy has been having trouble during that time, as you may have heard. Here's Amazon's 2008 annual report; here's Barnes & Noble's. Unsurprisingly, the majority of their revenue does come from book sales.

Have some used book stores closed over that time? Yes. Have a great many dealers, including new ones, gone to ABEBooks, Alibris, etc. over the same time? Yes, again. While bricks and mortar stores may have decreased in number, I would be completely unsurprised if the total number of book dealers has increased. (If reputable numbers can be found, I'd welcome them.)

Good: A large, faceless, bureaucratic institution that has no competition called an "insurance company."

Bad: A large, faceless, bureaucratic institution that has no competition called a "government."

Good: Paying an annual sum of $6,000 a year per person in a transfer called an "insurance premium."

Bad: Paying an annual sum of $6,000 a year per person (or, whisper it softly, less) in a transfer called a "tax."

Good: Aggregating the total cost to the nation and employers if paid in "taxes."

Bad: Aggregating the total cost to the nation and employers if paid as "insurance premiums."

Good: Rationing health care using dollars.

Bad: Rationing health care using medical advice.

Good: Not being able to "choose your own doctor" through price constraints and insurance company policies.

Bad: Not being able to "choose your own doctor" through resource constraints and government policies.

*^*^*

Good: Having a substantial percentage of the population uninsured.

Bad: Having the overwhelming majority of the population insured.

Good: Having high absenteeism and lost productivity due to poor employee health.

Bad: Having low absenteeism and optimal productivity due to good employee health.

Good: Having only private companies who have themselves grown to be large, faceless, bureaucratic institutions that have no competition be able to afford insurance premiums for their employees.

Bad: Having private companies who have themselves grown to be large, faceless, bureaucratic institutions receive competition from smaller, more nimble, more agile companies who are now able to afford health care for their employees.

Good: Having US employers at a competitive disadvantage to employers in countries that insure their citizens.

Bad: Giving US employers a level playing field in the global marketplace.

Good: Having citizens, employees, and small business owners who are lucky enough to be covered in the first place, live in constant fear of losing that coverage, either for themselves or their employees.

Bad: Having citizens, employees, and small business owners covered, and unafraid of losing that coverage, either for themselves or their employees.

Good: Having retirees fear losing their health care if their former employer goes bankrupt in a way that reneges on their fiduciary commitments.

Bad: Having retirees assured they'll never lose their health care.

*^*^*

Or, in sum:

Good: Fear.

Bad: Confidence.