There’s been discussion about consumers spending less this winter shopping season, and how the credit crisis is the culprit. I would like to introduce a thought here, and one that extends a little further down the rabbit hole. Consider for a moment that demand destruction has in fact occurred. Consumers are scared and are holding back purchases - everyone understands that concept. However, the new construct I would like to introduce is the notion that demand destruction will not exceed supply destruction.
What did that mean exactly? Most retailers, specifically consumer focused retailers, tend to turn profitable around Thanksgiving. That’s one of the reasons why the day after Thanksgiving is called Black Friday. This is directly tied to demand coming in the front door (actual or virtual) of the business. It’s possible that the exogeneous factor of the credit crisis may delay Black Friday, and in fact keep the year in the red. However, if one also considers the reduced ability to borrow, things get even more challenging for the retailers to turn profitable.
Retailers need to stock up inventory ahead of their selling season. Inventory is taken on credit terms. Whether it’s a “net X day” payable, with the ability to return the goods if unsold, or borrowing against the value of the inventory is irrelevant. Someone, somewhere, needs to borrow funds to make the stuff. If the ability to borrow is impacted, whether by higher interest rates (pushing down margins and borrowing power), or borrowing is negated all together, the retailer themselves will be harmed because they will have reduced inventories to sell. With reduced inventories, retailers will be challenged to hit their “black” date.
This puzzle becomes ever more challenging when you consider psychological factors on pricing. To wit, if retailers fear reduced demand, they may start jumping the gun and offering sales, at reduced prices (and thus reduced margins), to spur demand. This will have the perverse effect of pushing out even furhter the date at which they would turn black. An even bleaker picture could envision inventories running out, and credit not being there to keep up with even a reduced demand, at reduced margins.
I can say this - I would not want to be long any retailers for the next two quarters.
Treasury’s initial plan was about three pages long. The House version, which failed, stretched to 110. The Senate substitute now runs over 450 pages.
I will, for the most part, stay away from political issues on this blog. No need to incesnse half my audience, one way or the other. That said, I find this demonstration of our government at work too difficult to let go.
That’s my emphasis above. Somehow the bill managed to go from a pamphlet to a novel. Never mind the fact that the cost of this thing has swelled over 20% from the original ask. If you have an opinion one way or the other on this thing, I suggest you let your congress person and/or senator know what you think. You don’t get to complain if you don’t vote, whether by way of your actual vote in November, or your proverbial vote with a phone call to your representatives.
It has been pointed out to me by a commenter and some emails that perhaps the thesis of both Stallman and Ellison is correct, and should not have any hate flakes rained upon them, such as I did with this post. With that in mind, allow me to suggest some other things that could be confused with cloud computing, per Stallman and Ellison:
Daycare services - you send your kids off somewhere where they are processed, and returned to you in a different state
Delivered Pizza - you enter your state as “hungry,” make a request on the network, and food is returned in a box object, with a state of “closed” and “hot.”
US Postal Service - put your message in the queue, for delivery to a remote end point, with zero guarantee of quality of service
Goodyear Blimp - a message is transmitted to many synch points via broadcast mechanism, and based on the message content, message consumers take certain actions
Yes, I am joking, but I’m just trying to underscore the notion that given a broad enough definition, you can lump anything into it.
Stanley Schuster, famous horse breeder and seller c. 1910 - “These stupid cars are just a fad. They aren’t going to love you like a horse.”
Robert Valchek, Polish military tactician c. 1936 - “I’m not sure about this whole tank thing. It’s stupid really. What soldier wants to sit inside of tin can, separated from his enemy? I just don’t see how those things make any kind of an impact.”
James Vanderslotten, home radio salesman c. 1945 - “Moving plays in your living room? What a waste of time. Customers want the intimacy of performances acted for them in the comfort of their home, not nitwits on a impersonal screen talking about house cleaners.”
Howard Hallet, big band conductor c. 1962 - “This rock and roll nonsense is nothing but noise.”
Bill Gates, Microsoft CEO c.1981 - “640k is all the memory your computer will ever need.”
Donald McAvoy, Encyclopedia Brittanica salesman c. 1995 - “Disk based encyclopedias? Who wants that? People buy encyclopedias because they want to have the books…to turn the pages.”
Joe Stinson, owner Corner Video Rentals c. 2004 - “Mail delivery of DVDs? Seriously? What a joke. How do you browse through titles? What about the last minute pickup? What a brain dead idea.”
There you have it…plenty of curmudgeons who have staked their claim on history with some pretty prescient pronouncements.
Suspend your imagination for a moment and imagine that Treasure Secretary Paulson is a one time successful entrepreneur who is coming to a VC looking to raise money for his next venture. Perhaps that conversation would go something like this:
Paulson: So, I’m here to raise $700 billion dollars for my new venture. I see a unique opportunity in the marketplace of which I want to take advantage. I have built out the business plan, and am here to raise some money.
VC: OK. So what’s the idea?
Paulson: I want to invest in some mortgages.
VC: Interesting. And how do you plan to make money?
Paulson: Didn’t I cover this already? I have a business plan.
It should go without saying that the current financial crisis is going to loom large over the business plans of young and new software companies. In fact, there is an article out that suggests that the removal of Lehman and Merrill from the buyer pool has reduced the IT budget of the financial services sector by 6%. Let’s let that marinate for a moment.
It’s one thing to have a cyclical contraction in spending. It’s another thing entirely to compound that problem with demand destruction. Worse still, the demand destruction is not due to a symptomatic pricing issue, but rather the abject removal of key buyers from the market.
Even more complicating is the difficulties in financing businesses operations. I’m not talking about raising venture money, but good old commercial credit. Many companies use debt for expansion, and many times that expansion includes computer systems. Companies are now having their hands forced to not just pay lip service to lowering their CapEx associated with IT, and moving it to OpEx. They have no CapEx dollars left. They need (must) find a way to fund software and services. Enter SaaS business models, and the Cloud more broadly. I would expect a knee jerk and rapid migration of buyers in the market to seek out SaaS solutions for line of business applications, and a reduction in spending on CapEx associated with IT.
Here’s the sad irony of the current financial debacle. IT is what got us here. IT has been wielded as an offensive asset for many of these firms. The calculations required to price and model out many of the derivative products they were buying in insane. I almost took a job at Merrill working on their Fixed Income Derivatives desk back in 1995. Scary. Here’s what’s more scary: my Fixed Income homework from my FNC235 class (*there’s a nod to all Wharton peeps who ever had Prof. Basak) is what got me the job. The MD actually said “hire this guy. I can’t make heads or tails of his homework and he got them all right.”
People worry about Google being the current incarnation of Skynet, but I would look more to the systems which have been handed the ability to make trades for humans based on human created models which very few people understand, much less can maintain in such manner as to adapt to what are being called 10 sigma events.
I was in NYC when 9/11 happened. I remember a quote that still hangs with me: that we suffered a failure of imagination in our ability to stop the terrorist attacks. There’s a similar sentiment to be had here. The failure of imagination in the building of these models has led to many models essentially acting (reacting?) the same way, causing herd like behavior in a flight to or from assets. The combination of programmed trading, naked shorts and no uptick rule has led to some serious unintended consequences.
I don’t understand this one. The good people at Kellog’s seem to doing the ham handed offer for the young ones. Due to the pressure resulting from coverage of youth and obesity, some of the formulations have changed. Even the packaging has changed. There are 12 grams of sugar in every serving of Fruit Loops. Good times for the rambunctious child, and the parents who mind them.
I always loved digging around in the cereal box to get the toy that came with it. Most times they were interesting enough to dig, and sometimes they sucked. However, putting a step counter in a box of sugar laden cereal, sponsored by Adidas no less, is sort of confusing. I get it…I understand they are trying to say that they take children’s health seriously, but this just seems a little odd to me. Maybe I’m just getting old.
Irvine, California — August 15, 2008 — Blizzard Entertainment, Inc. today announced, in Beijing, that American swimmer Michael Phelps was served notice that he was in clear violation of the terms of use of it’s award winning massively multi-player online role playing game, World of Warcraft. The violation, according to the company, is that Mr. Phelps’s actions at the 2008 Summer Olympics show strong indication of gold farming activity originating from within Chinese borders.
“Gold farming is one of those things about which we are very vigilant,” said Mike Morhaime, CEO and cofounder of Blizzard Entertainment. “Long known to be an issue with some of our international players, gold farming detracts from the overall experience of the game for all of the players in the World of Warcraft universe. We take it very seriously.”
As defined by the uber-authoritative source Wikipedia, “Gold farming is a general term for an MMORPG activity in which a player attempts to acquire (”farm”) items of value within a game, usually by exploiting repetitive elements of the game’s mechanics. This is usually accomplished by carrying out in-game actions (such as killing an important creature) repeatedly to maximize gains, sometimes by using a program such as a bot or automatic clicker. More broadly, the term could refer to a player of any type of game who repeats mundane actions over and over in order to collect in-game items. An organization which organizes farmers is known as a sweatshop.”
As anyone who has even a modicum of swimming knowledge is aware, following the black line on the bottom of the pool for hours and hours on end is easily one of the most mundane and repetitive tasks known to man. While Blizzard has taken steps to reduce instances of gold farming, they were incapable of slowing down the unprecedented, and some say unstoppable, force known in game as “Baltimore Bullet.” By some accounts, Mr. Phelps has been said to be swimming for upwards of 8 hours at a time. Initial research into the activity led some at Blizzard to think that a bot was being employed.
Mr. Phelps was last seen exiting a raid, pulling another gold medal, and adding to his already astounding total of 12. Mr. Phelps was unavailable for comment.
In a related story, the US Olympic team was also served notice for organizing an entire team of gold farmers, and thus being labeled as a sweatshop guild.
*** this is a total joke, but I thought it would be funny to write.
