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By Rick Sutcliffe
The Spy observes with each passing month that business and the economy seem driven, not by stereotypical hard-nosed logic surrounding bottom line considerations, but by inertia, emotion, and untrammeled greed.
This applies to individual enterprises, industry sectors, and whole economies, and is reflected in actual success, stock and bond evaluations, and exchange rates (proxy instruments along with bonds for the equity of nations). Indeed, in the current environment, rhetoric around social agendas or even the general good, sound increasingly hollow, regardless of whether such originates from corporate, union, or political sources (all parties). Pride, self-interest, and a general lack of concern for others have become the hallmarks of our age. So, pardon the Spy if the shoe seems to fit, has cynicism.
Inertia is a good old physics concept that measures the reluctance for change in momentum. The sedentary remains so, the moving keeps going with the same velocity. In the technology industry, inertia is reflected in acceptance of the familiar and/or laziness, but is essentially determined by installed base (small or large scale). It takes time and effort to learn a new system, whether that system is high tech or low.
The bigger the existing capital commitment to the old machinery/code/techniques, the more likely it is to remain around long after much better is available. It's not that, say, a new software package is necessarily freer of bugs than the old, but that workers know all the workarounds to avoid the old bugs, and have to learn new ways to avoid new pitfalls before becoming routinely productive again.
Intellectually, they know that new computer-controlled combination lathe, printing press, welder, wire stripper, washer-dryer, baggage handler, and coffeemaker is better than the old discrete components, but hey, they still work reasonably well even if programmed in COBOL, and the cost of change in capital, installation, and training is high, so why bother?
Likewise the general marketplace. People get used to buying certain products, and when that's what they see others using, they're likely to be new/repeat customers. Success breeds success, as Apple shows quarter by quarter. But the other side of the coin is true as well. Downward momentum is difficult or impossible to stop, which is why the Spy put a deathwatch on RIM over a year ago and now sees an end similar to that of Palm approaching.
Inertia is why the Spy's fourth law is worded: "Marketshare lags mindshare by two to five years." That lag time has a tendency to be smaller in the high tech arena where the word gets around quickly and people make many small decisions, greater in housing, automotive, and large appliances, where successive purchase decisions are well-spaced. Apple has upward momentum and is still cashing in on unrealized mindshare, and RIM, which has lost that same mindshare, is past the tipping point into the pit, and on an increasingly steep downslope. Nokia may follow, despite Microsoft involvement.
Had automotive marketshare not had a large lag time behind lost mindshare, the North American auto industry would be long gone to the foreign companies who out-innovated them for years. Today, the appliance market is being taken over the same way. Can the domestic manufacturers adapt and survive? Maybe. What of domestic computer manufacturing? What manufacturing, you ask.
Inertia is the reason Europe cannot solve its fiscal problems any time soon. Too many people and too many institutions in the affected countries have had a free ride for far too long to change their minds just because the world in which they thought they were living has proven a fantasy. The fundamental choice the Europeans have is between a sovereign bailout of far larger proportions than anything yet contemplated, or letting the bankrupt countries go their own way and stiffing the creditors with the bulk of the default. Either path will result in a far weaker Europe than today, though the Spy doubts either China or North America will be as much affected as some fear, for those economies appear to be moving in the opposite direction.
More to the point of this column, inertia is one of the major reasons businesses still use Windows instead of switching to the Mac, even though the latter is demonstrably superior and can run all their old software if so needed. But the momentum shifted some time ago, and MacOS is on the increase in relative terms. As long as inertia also retains the Microsoft decision makers in their present roles, Apple need not worry about Redmond coming up with sufficient new ideas to stop the tide from washing them away. Learn a lesson from Palm and RIM. It can happen.
Emotion rather than logic tends to be the driver that can either confirms or changes momentum. One could point to a kind of indolent inertia that, perhaps vacuously could be termed emotional. After Apple and others created the market for small computers, business went with the PC not because it was better, but because of a lazy emotional attachment to IBM as epitomizing what they were used to. Today, decision makers are finding that attachment shaken loose by the younger generation -- children and newer employees -- whose overwhelming loyalties are to Apple's mobile products, and so are eager to use their desk and lap products for work. One emotional tide sweeps away the evidence of the last, so to speak.
This is no knock on Apple's products, just an observation that Apple has done a better job of designing and selling its vision for "cool" than any other technology company, and in the rather levelled information age, whatever emotes "cool" wins -- until the day of a "cooler" dawns. There is no "coolest".
It is important to realize, however, that emotions tend to be overdone--thus one might expect increasing faddishness, and wilder swings in corporate fortunes than in the past. Technical analysis of the stock market takes this into consideration by positing that most stocks will rebound by certain average percentages after getting into either a technical "overbought" or "oversold" state, based on its recent history. This is partly why large price jumps caused by emotional reactions to the day's news tend to correct from their first overreaction, producing a damped sinusoidal oscillation that settles back after a few days to fit the long term trend line.
On this basis, one might have predicted a correction in Apple's stock, today observe that it seems to have become oversold, and recommend a buy. Indeed, on the whole, technical analysis does seem to work much of the time, but it is important to note that it does not take into account fundamental changes that drive a company's intrinsic or imputed value up or down. Again Apple is a good example, for its spectacular earnings increases do gradually drive prices up. Lacking some fundamental change in mindshare loyalties or Asian market penetration trends, Apple still has the potential to grow to several times its current size, and the price-earnings ratio of its shares does not currently reflect this.
Why is the price down from its high? Probably a combination of forced selling for tax purposes, the "go away from the markets in the spring" syndrome, and a perception caused by publicity around reduced store download figures that Apple's mobile fortunes may have peaked. The first two factors are chimeras, and will go away. The latter is merely novelty wearing off for existing users.
The Spy, for instance, rarely downloads new apps to his iPod touch. Inertia has him well satisfied with what he has and how he works. If he changes apps, it's usually because the developer of the old one made enough changes to force him to consider alternatives, since he is being made to change anyway. See—upset the inertia and the result can swing either way.
To be succinct, inertia guarantees that computerizing an existing efficient workflow will improve efficiency, but technologizing a poor one will make it worse, faster. That's why one designs systems first, prototypes next, and implements in systems last. Computing science ain't just rocket science. It's more and better—when done right.
Now consider Facebook, whose stock has taken a pounding in the few days following the ill-fated IPO. Driven apparently by the greed of both the owners and the underwriters, this was the most emotionally hyped IPO in years. It flopped. Why? Because the price target was set too high, and because there were doubts about the soundness of the business model. In the end, there weren't as many suckers as some thought.
Facebook is a business success for having created a fairly ubiquitous, seemingly cool fad. Yet many advertisers are discovering it is an ineffective vehicle for getting out their message, and without them all the users in the world won't make money for the company concept. Moreover, the initial owners and underwriters will only profit on the shares they are now stuck with when they sell, and then sell more for the tax hit. But that will drive the price down now that demand is shown to be illusary.
After all, if Apple were valued at a comparable price/earnings ratio to that demanded in the Facebook IPO, it would be trading some seven times higher than it is. Unless Facebook can come up with some big-time good news drivers in a hurry, we should expect its stock to decline to half for less the IPO price. Greed detected has its own price.
Highly leveraged greed caused the American banking crisis that started the last recession, and is at the heart of recent losses in the same industry. It also caused other historical bubbles, and will trigger more. Between bubbles, people tend to forget two things: first, that leverage works even more efficiently to dissolve riches during downward momentum than it does to inflate them on the upside, and second, that there is an element of gambling in the stock market, and a speculator/investor only wins big if many others lose small.
Since the system itself takes a substantial cut (the house percentage) to operate the market, losses over the long run are only offset by gains if overall prices inflate sufficiently to pay for everything. This does happen for several years at a time on occasion (Bull market) but the reverse is also true (Bear market). Both kinds of market are driven in part by real economic considerations, but mostly by emotional reactions to the daily news. Right now, markets are being driven by emotional considerations around risk avoidance, with the fear of worse to come, not the relative soundness of the underlying economy, and certainly not by the size of the American debt load. The actuality of, say, a Greek default/bankruptcy will probably not be as bad as the uncertainty leading up to it..
Yet another consideration is that like their counterparts in government who manage much of our money, the people who work in the financial industry tend to spend good times' profits immediately on acquisitions and high risk projects, their dividends on toys and high living, and thus have little or nothing to cover losses in the inevitable bad times. Since such behaviour is encouraged by a lack of government regulation on capital reserves and by untrammelled risk-taking behaviour, it doesn’t take much adversity to result in catastrophe.
That's when governments have to decide whether to let the investors take the hit, or to spread the pain to all taxpayers by engineering a bailout. Since the high flyers are the very cronies who finance both sides of election campaigns, they do not find the decision as hard as it should be.
Let us not forget that individual greed drives much of the corporate agenda--and no, the Spy is not referring solely to company officers and/or those who believe the sole purpose of business is to maximize shareholder value. Rather, whether high or low tech, companies sell exclusively to those who want to buy--hoi polloi. And in case you've forgotten our high school Latin, that's us, folks, the great unwashed, the target of market manipulators and advertisers who desire to turn our indifference to their products into wants. Change the focus of our greed and you make sales. Disguise this all they/we want as "need"; it makes no difference to the reality.
And, perhaps all this explains why Apple is at least thought of as different (to twist one of its slogans). Instead of greed, people perceive a corporate mission to be "insanely great", to make better products in part for the joy of doing it. They perceive innovation instead of inertia. They see a "cool" with some substance beyond greed and power. Thus we forgive the behemoth Apple has become, its insane profits, and most of its misteaks, and we open our wallets/purses again and again. For the moment, Apple has inertia, emotion, and our greed on its side, and doesn't even have to act greedy itself.
From any material point of view, this seems to be the place to be. But of those who still live by "he who dies with the most toys wins," I must also ask, "Wins exactly what?"
After all, if whether our net worth is a few cents or a few tens of billions, we never really "cash in our chips". Someone else claims them for a subsequent time, along with all our used toys. But meanwhile, is it too much to ask that the default social drivers be tempered not merely with the kind of productive change Apple and its ilk provide, but with both logic and compassion? If nothing else, some at least of this generation could thereby leave a better and longer-lasting legacy.
--The Northern Spy
Opinions expressed here are entirely the author's own, and no endorsement is implied by any community or organization to which he may be attached. Rick Sutcliffe, (a.k.a. The Northern Spy) is professor and chair of Computing Science and Mathematics at Canada's Trinity Western University. He has been involved as a member or consultant with the boards of several organizations, including in the corporate sector, and participated in industry standards at the national and international level. He is a long time technology author and has written two textbooks and six novels, one named best ePublished SF novel for 2003. His columns have appeared in numerous magazines and newspapers (paper and online), and he's a regular speaker at churches, schools, academic meetings, and conferences. He and his wife Joyce have lived in the Aldergrove/Bradner area of BC since 1972.
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