3D Chips

June 29, 2009 — Steve Waite

We have noted previously on this blog that technology is migrating away from 2D toward 3D, and that migration is gathering pace in the marketplace today.  One of the interesting things we are seeing today is a transition away from 2D semiconductors and microprocessors to 3D. What’s the big deal, you might ask? Well, as Bernard Meyerson, IBM’s chief technical officer (CTO) observes, 3D technology offers a pathway to far more powerful computer chip technology that will continue to propel Moore’s Law forward. That is good news, indeed.

Meyerson notes that 3D stacking will allow chips to be fabricated with any number of transistors stacked on top of each other. Two chips can be stacked to double the number of transistors in the footprint of one. This process, says Meyerson, follows Moore’s Law just fine.

IBM is already implementing 3D technology in telecommunication integrated circuits (IC). The company’s fab Burlington, VT, is currently stacking chips and interconnecting them. In the near future, says Meyerson, it will be possible for IBM and others to make 3D microprocessors.

3D chipIBM already has the capability to manufacture 3D microprocessors, and the company is currently making the transition to 3D. Meyerson notes that this transition will take several years to complete. He points out that multicore chips hit the market in 2001, but it wasn’t until about 2005 that most manufacturers were shipping multicore product. Meyerson believes it will probably take three or four years for 3D microprocessors to take off as well.

The first step, he says, will probably be multichip processors, stacked together with memory chips. He points out that today about half of the dissipation in microprocessors comes from communication with external memory chips. If these chips are stacked together in 3D, communication energy cost could drop to a tenth. That is a considerable improvement over conventional 2D microprocessor technology.

Meyerson notes that 3D isn’t the right choice for all computer chip technology. It works best in situations where there is a single microprocessor with multiple memory chips on top. The technology isn’t very useful, he says, when several power-hungry microprocessors are stacked together. The chip in the middle is not able to radiate enough heat.

The investment implications of the migration to 3D technology are profound, but are far too numerous to go into on a blog post. Kris and I have many ideas on this topic. We will be publishing formal reports in the future and discussing them with clients.

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Managing for Value, Not Price

June 22, 2009 — Steve Waite

“Managers create shareholder value when they invest to maximize the present value of long-term free cash flows.”

That’s a quote from a recent report titled, “In Defense of Shareholder Value, from our good friend, Michael Mauboussin, Chief Investment Strategist, Legg Mason Capital Management.  Michael’s report is a breath of fresh air. It attempts to set the record straight on what shareholder value really means. The concept of Shareholder Value, as he notes in his report, is not well understood by CEOs in America and around the world. Many senior managers seem to have little clue what it means to manage for shareholder value.

Many CEOs appear to think that the theory of shareholder value is about maximizing a company’s stock price. Companies that manage for shareholder value, the conventional wisdom goes, do whatever it takes to engineer a lofty market share price, including delivering the highest possible earnings per share. That, says Michael, is a profound misunderstanding of what creating shareholder value is all about.  Indeed!

Mauboussin notes that managers create shareholder value for their companies when they invest to maximize the present value of long-term free cash flows. Investments include capital spending, research and development, mergers and acquisitions (M&A), and share repurchases. These investments also include managing human capital, the task of putting the right people in the right jobs.

Michael points out that shareholder value also considers cash flows for the lifeblood of business, not reported earnings.  The objective is to build the long-term value of the business, and in the process of doing this, the stock price will eventually follow. As Michael observes, executives adhering to shareholder value principles manager for value, not price.

Manage for value, not price.  That’s exactly right.  Oh, how much more productive Wall Street and the business world would be if executives stopped playing the silly quarterly earnings game, and instead focus on long term shareholder value creation as defined above.  Warren Buffett and his disciples don’t give a hoot about reported quarterly earnings.  Neither should you.

Michael spends a good deal of time in his report discussing what shareholder value is not about. I encourage you to read “In Defense of Shareholder Value.” I think you will find it illuminating.

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A Regulatory Road to Nowhere

June 18, 2009 — Steve Waite

“Attention all planets of the Solar Federation. Attention all planets of the Solar Federation. We have assumed control. We have assumed control. We have assumed control.” – Rush 2112

So we have a proposal from President Obama for more financial regulation. Surprise, surprise!  According to the President, his new plan will accomplish the following:

  • Require that all financial firms that pose a significant risk to the financial system at large are subjected to strong consolidated supervision and regulation
  • Increase market discipline and transparency to make our markets strong enough to withstand system-wide stress and the potential failure of one or more large financial institutions
  • Rebuild trust in our markets by creating the Consumer Financial Protection Agency to focus exclusively on protecting consumers in credit, savings, and payment markets
  • Provide the government with the tools needed to manage financial crises so it is not forced to choose between bailouts and financial collapse
  • Raise international regulatory standards and improve international coordination

I confidently predict that Obama’s financial reform plan, like its predecessors, will only lead to more financial crises in the future.  Wall Street will figure out ways to evade the onerous regulations, as it always does.  Wall Street collectively is far smarter than any politician or bureacrat.

It would be oh so nice to see some fresh thinking from politicians on financial reform, as I noted in a previous blog post earlier this week. More regulation like Obama’s proposal is a road to nowhere.  We’ve seen this movie before and we should all know by now how it ends.

plus ca change, plus c’est la meme chose…

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Getting It Right

June 15, 2009 — Steve Waite

“There cannot be debate, after seven crises in 20 years that we do not have a [financial] system that is functioning effectively.”  - Lawrence H. Summers

I believe Mr. Summers is correct. However, I can’t help noting that over the past two decades, we’ve had more government intervention in financial markets than at any point in the history of the modern financial world.  I’m not saying that government regulation cannot be effective in financial markets. What I am saying is that there is something very wrong with the regulations governments have put in place over the past 20 years.  The cure, it appears, has been worse than the disease.

It is imperative that government regulators take a close look at how damaging their regulations have been over the past 20 years, and start asking hard questions about the true nature of complex financial systems. Financial markets are, by their very nature, complex systems.  In my view, very few governments, if any, possess the knowledge necessary today to understand the complexity inherent in the modern financial world.  Modern portfolio theory is flawed. It doesn’t explain what we see in the real financial world. Policies based on modern portfolio theory are bound to be misguided, and even dangerous, as we have seen in recent years.

We are in the dark age in terms of finance. There can be no debate about it. Our financial theories fail to explain what we see daily on our computer screens and in our financial statements. I believe our financial theories need to be built from the ground up based on complex systems analysis. A proper understanding of complex financial systems will go a long way toward helping policymakers craft value-added regulations that can facilitate a financial system that functions effectively.

PostScript:

For an overview of complexity, I suggest reading M. Mitchell Waldrop’s excellent book,  “Complexity: The Emerging Science at the Edge of Order and Chaos.”

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Recovery Ahead

June 10, 2009 — Steve Waite

I did a blog post back in mid-April on what I thought was one of the most bullish things I’ve seen in a while: namely, the change in mark-to-market accounting (see: Back to the Financial Future).  Since that change, we’ve seen a dramatic increase in the ability of the banking system to raise capital. It’s not surprising to me to see enterprise valuations rising in this environment. Our friends at GaveKal Research put together a nice exhibit that shows selected deals in the financial sector during the month of May.

CapRaise

As they say, a picture is worth a thousand words.

Recapitalizing the banks will go a long way to ending the recession and promoting an economic recovery.  From the looks of the Richmond Fed Manufacturing index (see graph below), an economic recovery is indeed underway in the United States.

RichFed

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Real VR Going Mainstream

June 8, 2009 — Steve Waite

“Flash forward to the present, and we are suddenly on the cusp of a game-changing event; one that I believe kicks the door open for 3D and VR apps to become mainstream. I am talking about the release of iPhone OS version 3.0.”

That’s a quote from Mark Sigal taken from a recently published O’Reilly Radar.  Mark is singing one of our favorite songs: Real VR going mainstream in the marketplace. He notes that the next version of the iPhone OS (and the underlying SDK) will allow third-party hardware accessory makers to build external hardware accessory offerings that take advantage of the software, service and hardware capabilities of the iPhone and iPod touch platforms.

Specifically, Mark points out that Apple is opening up the 30-pin connector at the base of the iPhone and iPod touch such that hardware accessory makers can create a software layer that is optimized to take advantage of the capabilities of the hardware in a way that cobbles together with and extends the capabilities of the iPhone Platform. Mark also notes that Bluetooth-accessible hardware accessories can also take advantage of these new capabilities.

What this means, says Sigal, is a rebirth of hardware-based innovation, a segment that Apple has historically played a leading role in fostering, first with postscript-based printing, then with Appletalk networking (which pre-dates Ethernet) and now with Mobile Broadband Computing.

Look at it this way, he says: Very soon, hardware accessory makers will be able to leverage the same tools and marketplace functions that have resulted in more than 35K applications being built and more than 1 billion apps downloaded, all the while tapping into a 37 million device global footprint.

What’s that worth? Consider this: The iPod accessory business itself is already a $2B market, and there has really been no such thing as “software value-add” to the hardware accessory itself. With iPhone 3.0, this changes. That’s a big deal.

I suspect analysts will be re-examining their financial models for Apple and their partners (particularly Nvidia) in the near future as the reality of what the company is doing in the Real VR space begins to sink in.

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Penske Gets It

June 8, 2009 — Kris Tuttle

Finally!  It took a 72 year old to see the future but Roger Penske has the right vision with the purchase of Saturn from the dying GM.

The US domestic auto industry has been “broken” for decades so the current “crisis” has been approaching for what seems like forever. We wrote them off twenty years ago when it came to light that their overhead costs per vehicle were equal to the total production costs for some Asian makers.  There are not too many ways to describe that situation other than “game over” in the flat world.

The auto retailing concept has been similarly broken in that a dealer had to choose a single make to offer.  (Some enterprising dealers would get multiple nameplates to create “superstores” but even these were limited to a handful of brands.)  And each dealer had to sell the whole line of vehicles from that single manufacturer.  What a stupid system that has been.  It forced consumers to go from dealer to dealer and eliminated the chance that any dealer could be objective.

Imagine being able to go into a dealership that was focused on what the consumer wanted?  They would offer a broad range of cars and trucks (small, sporty, family, SUV, truck) and types of power systems (gas, hybrid, electric) in different value ranges (economy, utility, sport, luxury.)  Because a dealer has to able to provide long-term service it’s not likely they would want offer 50 totally unique lines but it certainly would be practical to have several and also be able to customize them to meet market needs.

These ideas and a few more are evident in Penske’s move.  He won’t be making his own cars but he will be doing everything else.  While starting with GM Saturn the dealerships will also offer cars made for them by Renault, Samsung Motors and others.  Saturn dealers can become much more attractive for consumers when their reputation for service and support can be applied to a more interesting array of vehicles that share common features like fuel-efficiency and good design.

This is a big bite for Penske and is said to double the size of his $11.65B auto retailing empire so it may not all be as easy to implement as it appears on paper. There are still many unsettled issues like dealer and manufacturing economics that may take a year or two to sort out.  If they can get it done and stay true to the vision of creating a new, radically different kind of car company, the creative part of the destruction of the “Big 3″ can finally begin!

Who knows? In five years American cars might again be sought after by the world.  Is it possible?

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Going Virtual

June 1, 2009 — Steve Waite

Last week, I ventured into Second Life and sat in on a Metanomics community forum.  The forum was titled: Do Virtual Worlds Provide Measurable Value? Insight for Enterprise with Dr. Mitzi Montoya. The issues discussed by Dr. Montoya, a business professor at North Carolina State University, included:  Can we measure the effectiveness of virtual worlds for business? How do we know whether virtual meetings are better than a teleconference, a live meeting, or a Web cast? How do you put a number on how a virtual world ‘feels’ as a business tool?

Much of what Dr. Montoya said resonated with the work Kris and I are doing in the Real VR space.  Real VR will have a powerful positive effect on collaboration and productivity in the enterprise. While it is still early days, there is already evidence to suggest a positive ROI on investments in Real VR.

The Metanomics forum included a guest presentation by Erica Driver, co-founder of ThinkBalm. Erica recently published a study titled, “Immersive Internet Business Value Study, Q2 2009.” Her report is one of the better studies we’ve seen in the Real VR space. The study is based on a series of interviews and in-depth discussions with various users of Real VR in the enterprise. The study was sponsored by some of the leading companies in the space, including Lindin Lab, Qwaq, Forterra Systems, Inc, and ProtonMedia.

Erica’s study shows that we have moved out of the seedling stage with respect to Real VR and are now in the early adopter phase of growth.  Erica notes that we are approaching “the chasm” – the part of the growth curve where companies have to deal with many important issues related to working with the new Real VR applications, such as inadequate end user hardware, corporate security concerns, raising awareness, and providing training. Erica notes that despite the challenges ahead, significant opportunity exists to extract business value from Real VR (or what she calls the “Immersive Internet”). Kris and I agree wholeheartedly with that assessment.

One interesting tidbit I got from the Metanomics forum last week was several people commented that Second Life was not very user friendly. I have found that to be the case in my experience with the software. Ease of use and widespread adoption of a technology go hand in hand.

The knee of the Real VR growth curve – the really explosive part of growth – is on deck.  Kris and I are scouting out some investments in the space and putting together an investable model portfolio for our clients at Research 2.0. We believe thar’s gold in them thar hills.

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Time to throw it away?

May 20, 2009 — Kris Tuttle

Back in November of 1998 the cover of the NY Times magazine had this quote modeled on the US Declaration of Independence:

"We, the relatively unbothered and well off, hold these truths to be self-evident: That Big Government, Big Deficits and Big Tobacco are bad, but that big bathrooms and 4-by-4’s are not; that American overseas involvement should be restricted to trade agreements, mutual funds and the visiting of certain beachfront resorts; that markets can take care of themselves as long as they take care of us; that an individual’s sex life is nobody’s business, though highly entertaining; and that the only rights that really matter are those which indulge the Self."

Now I’m not in the habit of saving such things (haven’t even received a newspaper in years) but this struck me so much I felt I had to put it aside. Why?  For one thing it rang mighty true at the time.  We were in the early stages of the technology stock market bubble and everyone we knew seemed to be busy building McMansions with two kitchens, media rooms, cigar rooms and wine cellars.   But at the same time there was something viscerally not right with this picture. 

While enjoyable all the consumption was a pretty empty activity.  In fact in retrospect the whole thing looks pretty loathsome.  More on point is the fact that America is *not* about that.  There is after all an actual Declaration of Independence that reads a lot different.  Reading books about US History and even reflecting on the lives and values of our grandparents made it pretty clear that this felt more like a mistaken identity.

So I kept this thing because it seemed like an incomplete loop that had to be closed at some point.  Now it feels like we are in the early stages of closing it.  There’s still a big overhang of too-big homes and too many possessions.  We continue to find stories of unsold inventory and people trading down heavily in the job market. The NYT recently told the story of the Peacocks who tried to sell their mansion and extra home at auction.  With $8M invested, a $3.2M mortgage and about $175K in annual upkeep costs they were unhappy to see the bidding grind to a halt at $5.5M which they decided not to accept.  [My prediction is that they will end up taking less than $5.5M after it all sinks in and the expenses drive them back to the market.]

This fits into an investment context because it underscores the vulnerability of companies and investment returns that rely on high prices or increases in price.  (Comments by the Adobe CEO that they will grow from increased prices scares us since their software already often costs more than the computer to run it on!)

Structurally what our partners call "platform companies" are where we want to be.  Those that can benefit from scale and also ride the lower cost curves from technology innovation and global sourcing.  Companies like Apple and Google come to mind here. 

Additionally there will be durable opportunities to invest in products that appeal to more noble emotions like efficiency and conservation of resources.  This calls to mind many areas within the so-called "green" investment category and cleaner technology.  Although a drop in oil prices has softened demand and the business case for alternative energy sources and technology we don’t think that’s the end.  The wheels are in motion and they are partially fueled by we hope are durable, powerful motivations that go beyond self indulgence and showing off. 

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3D Goes Mobile

May 20, 2009 — Steve Waite

The folks at RealD recently released a new 3D technology to the marketplace called RealD LP™ (Linear Polarizing Z Screen). The new 3D technology brings the power of 3D to smaller screens. As the company noted in a press release:

“The world’s first mobile, single-projector, passive 3D solution, the RealD LP brings the vibrancy of high-quality 3D to smaller venues such as conference rooms, R&D centers, museum exhibits, mobile education centers, virtual rides and other entertainment attractions. Designed to be set up for individual 3D presentations in minutes, or permanently mounted for long term use, the RealD LP allows the flexibility of switching between 2D and 3D on the fly while alleviating maintenance and other issues of dual-projector 3D systems.”

RealD president Joshua Greer noted that the RealD LP brings new possibilities to using the power of 3D in presentations, product development and virtual attractions. Viewers wear comfortable, affordable and reusable RealD eyewear custom built for the LP.

RealD_LP_Projector_400The technology works with 3D-enabled projectors and is suitable for screens up to 17 feet wide, the such as NEC NC800, Christie Mirage HD, and Lightspeed Design HD DepthQ, along with a silver screen from Harkness, MDI or Stewart.

RealD’s product looks pretty cool from what I can tell. One of the downsides of the product is that users have to wear glasses. I suspect that feature will be a turn off to some folks.  There was no pricing information mentioned on the website. Those interested in the product are encouraged to contact the company directly.

It will be interesting to see if RealD LP gets traction in the marketplace in the months ahead. If anybody out there has used the product and has an objective opinion, feel free to post a comment. We’d love to hear from you.

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