Twitter’s Prospects

October 26, 2009 — Steve Waite

Long-time tech observer Steven Levy has an interesting article on Twitter in the current issue of WIRED.  Twitter strikes us a poster child of network dynamics, social networks, and the evolution of technology.  The company was started as a side project in March 2006. It took an unexpected development – a plane crash in the Hudson River in mid-January 2009, something that would have never been written into a business plan – to take the company into the mainstream. Twitter was the first source for pictures of the Hudson River plane crash.

HudsonPlaneCrash

The idea behind Twitter is simple. As Levy notes, Twitter does little more than circulate bursts of text limited to 140 characters to a list of people who have chosen to receive them. It’s essentially a network-based version of SMS. This simple idea has turned in to a social network phenomenon.  The company expects to have over 25 million active users by the end of this year and 100 million by the end of 2010. In 2013, it hopes to become the first Internet service to sign up 1 billion users. Zero to 1 billion users in 7 years.  That wouldn’t be too shabby.

Given the massive number of potential future users, Twitter has the potential to become a blockbuster IPO, but the key question is: How will the company generate revenue? The company’s revenues, reports Levy, will be a modest $4 million or so this year.  In September, Twitter closed a $100 million round of funding that brought in new investors such as Insight Venture Partners and T. Rowe Price, as well as Morgan Stanley. The round included existing investors Institutional Venture Partners, Spark Capital and Benchmark Capital.  No details on valuation were reported, but it is believed to be somewhere in the vicinity of $1 billion.

Traditional value investors might scoff at Twitter’s current sky-high Market Value-to-Revenue ratio. This is understandable.  However, as we know, the market is a discounting mechanism and valuation is driven primarily by future revenues, operating profits and free cash flow.  What can one billion potential users generate in future revenues, operating profits and free cash flow? That is the question Twitter’s executives and investors are asking themselves. The company believes it can generate at least a dollar per user in the future, which doesn’t seem unrealistic to us.

The basic issue facing Twitter right now is identifying what business it is in. Google coupled search with advertising to great effect. Could this be the path for Twitter?  The company’s executives speak of the potential of data mining services and creating other informational services that foster tighter linkages with customers. Despite not having resolved this key question, Twitter’s CEO Evan Williams seems upbeat.  In five years, he believes Twitter will be an independent, profitable business with thousands of employees.

In assessing the prospects of Twitter, we are reminded of Nobel-Prize winning economist Daniel Kahneman’s formula for success in the 21st century:

Success = Some talent + luck

Great success = Some talent + a lot of luck

Twitter seems to have been lucky so far. We confidently predict great success if that luck continues.

(Thanks to our friend Michael Mauboussin for providing Daniel Kahenman’s formula, which he discussed in his recently published book, Think Twice.)

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Comcast’s Delusion

October 22, 2009 — Steve Waite

I came across some comments recently made by Comcast CEO, Brian Roberts, that struck me as delusional and worthy of a short blog post.  Mr. Roberts was invited to kick off the Web 2.0 Summit this week in Silicon Valley. Conference organizer John Battelle got things rolling by noting that Comcast was a “dead duck,” to which Roberts responded “We are not a dead duck.” Nothing like starting the summit off with a bang!

After reviewing Comcast’s history and discussing some upcoming product launches (eg., new features for the company’s video hub “Fancast”), Mr. Roberts noted that the company’s investments in broadband technology are helping to fuel the explosion in web innovation in the U.S.  Battelle obviously wasn’t having any of this discussion. It was then that he asked Mr. Roberts point blank why America is lagging behind the rest of the world in broadband technology advancements.  It was Robert’s reply that baffled me. He said: “I think that that’s just not true.”

Say what? Are you kidding us? How a CEO of a U.S. broadband technology provider could utter such a reply in front of a learned audience in Silicon Valley is just baffling.  Anybody that has done the research can tell you that the U.S. is currently far behind in broadband technology.  The folks at Speedtest.net have data freely available on their website.  Speedtest conducts twenty million tests every month and provides download and upload speeds by country.

Speedtest’s data shows that the U.S. currently ranks 28th among all countries in download speeds and 31st in upload speeds. Yes, that’s correct – 28th and 31st in the world.  The download speed in the U.S. is current 6.96 Mb/s and the upload speed is 1.57 Mb/s.  The fastest download speed is 21.84 Mb/s and the Republic of Korea claims top position in that slot. The fastest upload speed is found in Lithuania coming in at 8.97 Mp/s. Japan ranks 2nd in both categories with a download speed of 16.08Mb/s and upload speed of 7.20Mb/s.

PDHeadInSand

We’re not sure where Mr. Roberts is coming from. It’s very clear from all the data we have seen, including Speedtest’s, that the U.S. is lagging far behind in broadband technology. To say that it does not is false.

If Comcast stays on its present course, clinging to outmoded technology and data that is false, we have no doubt that it will indeed become a dead duck, as Mr. Battelle says.  As economic history shows, the creative destruction process has a way of weeding out those technology executives who bury their heads in the sand.

Oh, and one more note to Mr. Roberts while we are on the subject of Comcast. Your company’s customer service, like your cable network, is in dire need of a serious upgrade.  We suggest spending time with Marc Benioff at Saleforce.com to learn how to do customer service the right way.  And please don’t tell us Comcast ranks high in customer service. We’ve experienced your customer service first hand. It’s far from good and not even close to being great.

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The Future in 3D

October 9, 2009 — Steve Waite

Kris and I published a couple of reports this week with GigaOM. The first report is a 16- page survey of virtual worlds applications for enterprise, and the second is a 72-page report on 3D computing technology.  The latter covers a broad range of technologies including display, computing, and software.  It also delves into end-markets like cinema, home entertainment, medial, education and the military. For those interested in these reports, you can check them out here:

http://pro.gigaom.com/2009/10/report-virtual-worlds-for-the-enterprise-market/

http://pro.gigaom.com/2009/10/report-3-d-computing-from-digital-cinema-to-gpus/?utm_source=gigaom_pro_headlines_block

Kris and I also wrote a blog post for the GigaOM website today, and it is reprinted below. Bon appetit!

Is Augmented Reality Just the Beginning of the 3-D Revolution?

Augmented reality — a group of technologies that marry the virtual with the real world — has been around for decades, but in the past it required the use of expensive and specialized equipment. What’s different today is the proliferation of smartphones that have cameras, displays, and even GPS and other sensors on them. That’s enabled a whole host of new mobile applications — Soundwalk, Wikitude and Layar, for example — that provide examples of how online digital information and offline physical worlds could be combined. With such tools, the real and the virtual worlds have moved one step closer.

But we are set to move much further. Augmented reality will rapidly move into “mixed reality” and enable immersive applications and shared experiences that will change how computers are positioned in our lives. The latest GigaOM Pro report, “3-D Computing: From Digital Cinema to GPUs,” (subscription required) outlines some of the coming changes in:

  • Display Technologies. From movie theaters and home monitors to computer displays and even mobile Internet devices, the ability to see and experience content in real 3-D — with and without glasses— will become a common feature. We predict that more than 1 million 3-D digital signs (try not to think of Minority Report) will ship by 2014.
  • Interfaces. Keyboards and mice will no longer be primary modes of input. Instead, cameras will go beyond simple image or video capture and become a virtual eye, through which gestures and other physical information will be transmitted. Combined with voice understanding and scanners, acquisition and navigation in real 3-D space will become easy.
  • Computing Technology. New computing demands will be placed on our systems that call for a greater emphasis in visual computing, high-speed networks and software. IBM, Apple, Google and even Microsoft are beginning to embed the frameworks required to enable real 3-D computing interfaces and applications on their platforms.
  • Business Process. Online collaboration is moving from web conferencing to video and there are many successful pilots underway with enterprise virtual worlds. Vertical industries like the military, education and even health care are poised to take advantage of these technology advances to use virtual 3-D worlds to bridge time and space obstacles in their operations.

In sum, the evolution of augmented reality, and 3-D technology in general, is fostering a convergence of the real and virtual worlds unlike anything we have seen in history. We believe this convergence represents the opportunity of a lifetime for those who embrace it and find ways to harness its power and bring new, innovative products and services to the marketplace.

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The Nature of Technology

September 29, 2009 — Steve Waite

I finished reading W. Brian Arthur’s new book, “The Nature of Technology” and wanted to share a few observations he makes in his book. For those who aren’t familiar with Arthur, he is a first-rate economist and one of the pioneers of complexity theory. I met Brian in the early 1990s in Silicon Valley and then followed him to the Santa Fe Institute (SFI).  He is currently visiting professor at SFI and a visiting researcher at PARC (Palo Alto Research Center). Brian’s work is a breath of fresh air. He is an intelligent voice in economics, particularly with respect to understanding the role of technology in the complex system we know as “the economy.”

Brian’s book is rather technical, and I would not recommend it to the general public. That said, I believe the book is an important contribution to the subject of technology and it should be seriously studied by those interested in technology and its evolution. Rather than write a review of the entire book, I wanted to focus on a few observations he makes that have relevance to today’s investing landscape.

Arthur observes that the representative technology today is no longer a machine with fixed architecture carrying out a fixed function. It is, rather, a system, a network of functionalities – a metabolism of things-executing-things-that can sense its environment and reconfigure its actions to execute appropriately. We are moving toward “smart” systems. He states that the arrival of genomics and nanotechnology will enhance this. In fact, he notes, not only will these systems in the future be self-configuring, self-optimizing, and cognitive, they will be self-assembling, self-healing, and self-protecting.

Brian points out words such as self-configuring, self-healing, and cognitive are not ones we would have associated with technology in the past. They are biological words. And they are telling us that as technology become more sophisticated, it is becoming more biological. Technology, he notes, has long shifted away from the Victorian era’s dominance of bulk material processing, and now it is shifting again: from single-purpose fixed processes or machines into raw functionalities that can be programmed to different purposes in different combinations.

Reflecting this, the economy – the high-tech part of it, at least – is more about the putting together of things than about the refining of fixed operations.  The economy, in a word, is becoming generative, says Arthur. Its focus is shifting from optimizing fixed operations into creating new combinations, new configurable offerings. Entrepreneurship in advanced technology is not merely a matter of decision making. It is a matter of imposing a cognitive order on situations that are repeatedly ill-defined. As John Seely Brown says, “management has shifted from making product to making sense.”

In the generative economy, management derives its competitive advantage not from its stock of resources and its ability to transform these into finished goods, but from its ability to translate its stock of deep expertise into ever new strategic combinations. Reflecting this, national wealth derives not so much from the ownership of resources as from the ownership of specialized scientific and technical expertise. Companies, too, draw their competitive advantage from their ownership of technical expertise.

And so, says Arthur, the nature of modern technology is bringing a new set of shifts: In the management of business, from optimizing production processes to creating new combinations – new products, new functionalities. From rationality to sense-making; from commodity-based companies to skill-based companies; from the purchase of components to the formation of alliances; from steady-state operations to constant adaptation.

In sum, we are shifting from the machine-like economy of the 20th century with its factory nodes and input-output linkages to an organic, interrelated economy of the 21st century. Where the old economy was a machine, the new one is a chemistry, always creating itself in new combinations, always discovering, always in process, says Arthur.

After finishing Brian’s book, I thought to myself: “Hmmm… sounds like a recipe for a lot more creative destruction in the future.”

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A123 Comes to Market

September 24, 2009 — Steve Waite

A123 has successfully completed their IPO, and we congratulate the management team and their bankers for what appears to be a job well done.

We first met A123 back in late 2005 over on the MIT campus and included them in our MIT 2005 Corporate R&D Conference Summary.  In 2007, we invited CEO David Vieau to participate in our nanotech/cleantech panel at a large technology conference in San Diego. Since then the end markets for advanced battery technology have become much more interesting thanks to the advent of the electric car.  The fortunes of A123 are tied to that space, for better or worse.

Since the refiling of the IPO we’ve spent some time looking into the company in more detail, especially looking at the technology, patent situation and ultimately a more grounded model of the markets and what the company will be worth.

The accelerated timing and strong demand cut short some of our research efforts which means we will have to follow up with some more detail.  But for now this overview we published yesterday goes through “The Good, the Bad and the Ugly” of the company (click on link to see our free report – registration required).

We see the stock as more of a deep out-of-the-money call option at this point, and it will make valuation an ongoing challenge until we get more clarity on the end-markets.

The stock (NASDAQ: AONE) will begin trading today after being priced well above expectations just a month ago.  In the weeks ahead, we will complete our work on IP, competition, intrinsic value and publish a regular alternative energy/clean tech ecosystem.

We advise investors in AONE to keep their seat belts securely fastened. For those looking at the stock we have this advice:  Caveat emptor. A123 has the potential to become one of the stars in the nanotech/cleantech space, but investors will have to stay focused well beyond the quarter. The company has a challenging and long road ahead. We wish Dave Vieau and his team all the best.

Postscript:

New oil discoveries have totaled about 10 billion barrels in the first half of the year, on a pace to reach the highest level since 2000. Conventional, fossil fuel-based energy technologies are likely to be around for a while, but they aren’t the future.

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Pursuing Opportunities

September 21, 2009 — Steve Waite

The great economist and management guru, Peter Drucker, was fond of urging entrepreneurs not to solve problems but rather pursue opportunities. It is in this spirit that I wanted to highlight some particularly large opportunities associated with technology. The opportunities mentioned below are discussed in George Gilder’s new book, “The Israel Test.” If you are an entrepreneur or investor looking to pursue opportunities that would appear to have sizable upside in the years ahead, here are four to consider from Gilder’s book and two more that are near and dear to my heart:

Opportunity 1:

Insufficient bandwidth is the plague of networks. The promise of a global network seamlessly providing near-infinite bandwidth indifferent to application is the promise, like almost every major economic advance for the past 200 years, to render geography relatively trivial.

Pursue technologies and companies that the supply increasing bandwidth to the marketplace

(Note: We have been engaged in this opportunity for over a decade).

Opportunity 2:

The next major challenge in home electronics is “the mat” – that is, the tangle of connections behind the TV and workstation and the high-definition home theater and the set-top box and the network node and the game player and the residential gateway and the cell phone and the video teleconferencing center and the teleputer and the DVD machine and the intercom and the digital camera and the audio player and the fire and burglar alarms and the camcorder and the speakers and the microphones. This is, as Gilder says, “an incredible morass.”

Pursue technologies and companies that can eliminate the mat.

(Note: We are analyzing this space as there are many companies currently pursuing this opportunity).

Opportunity 3:

Use advances in molecular biology to generate new, powerful biopharmaceuticals to spec on computers rather than discover them empirically.

Pursue technologies and companies that are harnessing advances in molecular biology and computing to generate innovative drugs.

(Note: We launched a biotech mutual fund in the late 1990s that invested in companies pursuing this opportunity).

Opportunity 4:

Develop nano-computers that can flow through the bloodstream, calculate imbalances in the body, and emit the appropriate medicines.

Pursue technologies and companies that are using nanotechnology to create powerful new drugs.

Not mentioned in Gilder’s book, but something I’ve been thinking about for a long time, is this opportunity:

Significantly reduce or eliminate the waiting time associated with phone and cable repair.

This is big hassle. According to a new survey conducted by Harris Interactive, almost half  (49%) of American consumers waited for a cable technician or some other service professional in their homes in the first half of 2009 — and 32% took a vacation day or sick day to do so.  The hassle seems unnecessary in a world teeming with GPS navigation, wireless communications, and mobile computing. Does anybody in phone and cable land care about their customers and the use of their time? I often wonder.

Obviously, there are many more opportunities associated with advanced technology than those mentioned in this blog post. Kris and I believe that the convergence of the real world and virtual worlds – what we dub, “Real VR” – is a tremendous opportunity in the marketplace today. Hundreds of billions of dollars of new wealth will be created as Real VR gathers momentum in the global economy. Cloud computing represents another large opportunity, as does clean energy technology.

And while there are dozens of sizable opportunities associated with technology in the market currently, we believe it is critical for investors to reorient their focus from monthly and/or quarterly returns and begin to think beyond the quarter.  The increasingly narrow time horizon of an ever-larger share of investors over the past decade has created a major inefficiency in financial markets. It is one we intend to exploit in a big way in the future.

A note to our blog readers: If you have identified some major investing opportunities associated with technology, feel free to post a comment on this blog. We would love to hear them!

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AONE

September 14, 2009 — Steve Waite

Just a quick post to say that Kris and I, along with are our good friend Keith Blakely,  are in the process of writing up a research note on A123Systems that will be published by Research2.0 next month.

A couple of years ago, I hosted a panel at a prominent technology conference on the west coast that included David Vieau, CEO of A123Systems (A123, for short) and Keith (who was, at the time, CEO of NanoDynamics).  The purpose of the panel was to explore the use of nanotechnology in designing and producing innovative batteries and energy storage system solutions.  I was intrigued with A123’s technology and business strategy.

A123Logo

The company designs, develops, manufactures and sells advanced, rechargeable lithium-ion batteries and battery systems.  Its proprietary technology includes nanoscale materials initially developed at and exclusively licensed from the Massachusetts Institute of Technology. It owns or exclusively license 46 issued patents and more than 200 pending patents in the United States and internationally.

Earlier this year, A123 announced its intention to do an initial public offering (IPO) on the NASDAQ (ticker, AONE). The deal is being led by Goldman Sachs and Morgan Stanley. There is a strong desire by the company and its lead bankers to complete the transaction, markets willing, during the current quarter.

We plan on following A123 closely in the quarters ahead. Here’s to a nanotech-enabled clean energy future.

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Your Health or Your Car?

September 4, 2009 — Kris Tuttle

We’ve tried to steer clear of the healthcare debate but personally and professionally the trends in healthcare have to be watched. (In fact I made my first investment in the Research 2.0 “proving ground fund” in the Cancer area this year.)

Why are we so angry about healthcare costs?  The part that has to do with inefficiency and waste is understandable.  We want to take every opportunity to stamp that out and make the system work better.  Obviously there has to be a mechanism to make that work that is absent from the system at this point in the United States.

But the part about having to pay for it (possibly a considerable amount) seems to strike most people as unacceptable.  Quality healthcare will always cost quite a bit of money, even if it’s efficient.  Of course if we get everyone to pay into the system (including the healthy ones) then the costs should be manageable.

It’s hard not to wonder what percentage of those unfortunate “uninsured” in America have simply chosen other things to spend their money on.  That people should be spending more on housing makes sense.  But what about education?  How about cars and family vacations?

When it comes to education we often think of the costs as an investment in contrast to healthcare which seems to feel like an expense.  We know that our cars and family vacations are expenses too.  But we “need” these things and pay for them in a more free-spirited way.  It’s not hard to imagine an uninsured American, especially one without a family, shelling out car loan payments, going on vacations and attending night school while “not being able to afford” the few hundred dollars a month for top quality health insurance. It’s a choice, not a problem.  (We know that there are still millions who really can’t afford it so save your stones and arrows.)

At the same time we regularly counsel our close friends and family that “if you’ve got your health, you’ve got everything” and that other concerns about money, job and bad luck are small in comparison.   It seems unavoidable that people will have to start thinking very differently about health and healthcare costs if they are ever going to love the system, whichever one they are in.

The fact is that your health and healthcare is an investment.  The return is the quality and length of your life.  Few investments seem as worthwhile as that.  Because these costs have largely been hidden from view by employer and government support they have mushroomed and the last decade has seen a steady shift of the burden to the individual, we now have outrage and calls for reform.  This is the typical reaction when we find out that we are actually responsible for our own life.   Once upon a time people thought the government would take care of their retirement.  Only a few decades ago people thought that corporations like IBM and GE would provide “lifetime employment” with full benefits and pensions to boot.

This is a profound and hence disruptive shift in how people should be thinking.  Maybe instead of staring a college fund for each of our kids we should start a healthcare fund for them.  Maybe the insurance industry should focus more on a “lifetime healthcare policy” that can be purchased and the insured has certain obligations for checkups and additional costs to be paid if they take up smoking and so on.

The current efforts to reform the American healthcare system claim are probably only scratching the surface of how we will need to change our thinking to take responsibility for  living a longer, and more healthy life.  It’s not going to be cheap but the returns cannot be beaten.

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Three Cheers for Complexity

September 2, 2009 — Steve Waite

Our good friend, Michael Mauboussin of Legg Mason Capital Management, sent us a link recently to a wonderful talk by Michael Crichton on the science of complexity.  Here’s the link to the speech if you would like to hear it (highly recommended!):

http://www.crichton-official.com/video-speeches-smithsonian.html

Crichton’s talk was inspiration for a chapter in Mauboussin’s new book, “Think Twice,” which is due to be published in early October. I will be posting a review of Michael’s new book on this blog after it is published. In the meantime, enjoy Crichton’s talk. It’s a gem.

Post script: Just a quick note to say that Kris and I are in the final stages of finishing our 60-page report on 3D Technology (which I affectionately call, “The Beast.”) Researching and writing the report consumed the whole summer.  It was a lot of work, but also very enjoyable. I think readers will find it interesting and hopefully insightful. The report is due to be published by our friends at GigaOM later this month. We should be back blogging more frequently soon. Hope you had a great summer!  :)

Posted in Complex systems. Tags: . 1 Comment »

Quick Update

July 20, 2009 — Steve Waite

Just a quick update to readers. As you may have noticed, blogging has been light in recent weeks.  Kris and I have been commissioned by a professional research organization on the west coast to write a big report on 3D Technology. The report is scheduled to be published in September.  We have been spending all of our time researching and writing – not to mention trying to enjoy a few sunny, summer days with the kids and family :) .

We’ll have lots more to say about the future of 3D Technology and Real VR in the months ahead on this blog, not to mention more observations on creative destruction in the global economy.

We hope you are enjoying the summer.

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