The Market Ticker
Commentary on The Capital Markets- Category [Technology]
2017-02-16 05:00 by Karl Denninger
in Technology , 331 references
[Comments enabled]  

There is a common - and wrong - premise that "first mover" is an advantage.

Of course it is at the outset.

But it only continues to be if you continue to be the first mover -- that is, you always have "the outset."

As soon as anything you do becomes a commodity then "first mover" = first loser.

The reason is simple: You are the first one to buy the hardware and service necessary to do X and you get stuck with it on a depreciation schedule where the new entrants a year or two -- or five -- later get to buy the next few generations down the road which are more-efficient and far cheaper.

Thus on your "COGS" line -- cost of goods (services) sold -- you get murdered.

Witness Verizon.  Verizon was first mover to deploy LTE.  Unfortunately that means they got stuck with a bunch of older LTE gear that could not cleanly integrate with newer advanced services and was more expensive than the next versions that followed.

Verizon had a major market advantage -- for a while -- as a result.  AT&T went second trying to catch them.  T-Mobile came along after the first-generation gear was obsolete, put in second and third generation gear and is now murdering them with a lower cost structure and thus the ability to offer lower prices.

Who's winning?  T-Mobile.

That's not because Legere is a genius.  He's a brazen *******.  But by not being first he got the cost advantage as the market moved toward a commodity offering and now he's tattooing Verizon and, to a lesser extent, AT&T.

Sure, Verizon has coverage in more places than T-Mobile but that advantage is dwindling fast. They're now getting close to AT&T's coverage, and more-importantly in most cases they're both faster and cheaper.

A couple of years ago T-Mobile's coverage was vastly inferior and they had a lot of EDGE or even GPRS service -- woefully slow.  Now most of their network is LTE capable and it typically outperforms -- frequently by 2x and sometimes by 10x -- the speed of either AT&T or Verizon.

How can they do that and offer "unlimited" service for $70/month when nobody else can and does?

Simple: They weren't first and aren't stuck with depreciation on older-generation gear.

Now here's Amazon's problem: Their AWS service is largely comprised of older, "first mover" equipment.

Yes, they are deploying newer.  But that older stuff will be on their balance sheet and in their data centers for years under IRS depreciation schedules and they have to recover the cost of it.  The newer entrants do not have to do this since they were not first.  They installed hardware that is faster, costs less and consumes far less power (which you pay for twice in a data center -- first for the power, then again to remove the heat via your A/C bill.)

Don't underestimate the power and efficiency issue.  It's very, very real, as is the cost issue. A number of years ago a previous-generation Xeon processor in the primary server here cost many hundreds of dollars each -- just for the chip.  Now?  I can get pulls of a chip a generation further down that is both faster and has the built-in AES instruction set for $15.  Yes, I did, of course - around two years ago.

Today I could buy a replacement system board for a few hundred dollars that would consume less than half the power of the one that's in the case now and is much faster!  But that new board needs new RAM, which makes the cost even higher.

And this is where the problem lies for the existing installed base: It's prohibitively expensive to toss all that older stuff in the trash -- it still works and the capital cost of tossing and replacing it is large.  While MACRS rules have helped (reducing what was a 7 year depreciation schedule to 5) five years is a damned eternity in the computer world and the power and performance structure of newer units is likely to leave you disadvantaged to the tune of 400% by the time five years runs!

In point of fact I had quite a go-around with the accountants in the time of MCSNet that for a lot of gear that we owned we should be able to basically expense it since it had a useful operational lifetime that typically failed to span even two tax years. They told me I'd go to jail attempting that with the IRS......

This means that AWS has a natural disadvantage in cost structure that they cannot evade.  Witness places like Digital Ocean that offers virtual servers for $5/month.  Yes, really.  My secondary DNS has been over there for more than a year.  The storage is all SSD.  The prices are, well, insanely cheap.  Instances are easily spun up and torn down and can be as standard as you'd like.

Why is that service there instead of on AWS?  Because I couldn't approach Digital Ocean's pricing on AWS.

Folks, this isn't magic, and Bezos isn't immune to it.  Neither is Microsoft or IBM.  It's fact and it's a huge problem with any service that gets turned into a commodity.

Does it make any sense for firms that are "riding the cloud wave" to be getting the sort of valuations they are under this fact?  Hell no.  That reality inexorably turns into margin compression and when it does the alleged "value" in these offerings that the market is "pricing in" turn into a big pile of flaming dog****.

Don't be there when it happens.

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2016-10-31 06:00 by Karl Denninger
in Technology , 293 references
 

Give me a break.

A task force of more than 30 major technology and communication companies said they have made progress but have not found a solution to eliminate "robocalls" or automated, prerecorded phone calls, but a top U.S. regulator urged faster action.

Throw some people in prison and you'll get their attention.  Yes, right here in the US, and yes, I'm talking about carrier executives.  Why?  We'll get to that:

Wheeler wrote major companies in July urging them to take new action to block robocalls, saying it was the top source of consumer complaints at the FCC. Scam artists often times based abroad try to appear to call from a bank or a government phone to trick consumers into disclosing confidential financial or account information.

How do they "appear" to call from a bank or government phone when they're not in the United States?

Ah, now see, there's the fraud and the US carriers are complicit in it.

Along with a call setup request (from one carrier to another) comes some information, which includes the "originating" number.  The carriers do exactly nothing to validate that for other than 800 (free to calling party) numbers.

But they could very trivially prevent, for example, foreign calls from appearing with US numbers.

How?  Refuse to route a call that comes from the UK unless the "originating" number is in the correct format including the country code prefixfor example.

That would stop instantly any of these calls that are originating outside of the United States.

As for those within the United States the FCC has jurisdiction, and can require that one of two things be the case:

1. The "originating" number be the actual originating number.  This will be the appropriate setting for all individual lines; simply do not allow an overridden number from a consumer account -- period.

2. For those that are overridden require, under penalty of law, that the party overriding accept both civil and criminal legal responsibility for the authenticity of their override under existing criminal fraud statutes.

There are very good reasons to allow such an override on outbound calls.  For example, at MCSNet we had outbound trunks that were all "rolled up" into high-capacity circuits (at the time DS1s); each of those trunks had a "real" phone number, but it was unpublished.  We then had DID mapping for certain people who needed "private lines" and in addition we had our "main" number (312) - 803-MCS1 that would ring into the PBX on the next available trunk in the group.  If you dialed out from our PBX those trunks (set up for bidirectional signalling) were configured to show 312-803-MCS1 as the "originating" number even though technically it was not.  That's fine, because we owned the originating number, it was "real", and it really was our number.

It would not be difficult at all to require that all such entities that purchase service from a telco provider in the United States and wish to provide "originating number" overrides do so under a contractual requirement, carrying criminal criminal penalties for lying, that any such number they put through be truthful and belong to the actual originating party of the call.

If you were to do this and at the same time hold carriers criminally responsible for accepting "foreign" calls that have originating numbers that violate the country code format of the originating nation, a software check they could easily implement, this problem would disappear instantly.

Of course there are "telco providers" (such as the SIP folks) that would scream about such a requirement -- but let's face reality here.  Enabling fraud as a business model makes you an accessory before the fact and recognizing that along with appropriate criminal sanction would go a long way to draining this swamp -- quickly and permanently.

Instead we "accept" a bunch of handwaving nonsense that comes from the FCC and various telcos.

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