The Market Ticker
Commentary on The Capital Markets
2017-10-17 10:42 by Karl Denninger
in Company Specific , 198 references
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You have to love the insanity that's being touted all over the street this morning.

Here's the bottom line folks: Netflix is not "buying" content, they're (for the most part) leasing it at ever-increasing cost.  That cost in terms of negative cash flow is rising rapidly as they acquire customers.

This is a ponzi scheme that is "hidden" by GAAP abuse; in other words, they can report "earnings" under GAAP that do not reflect the fact that on a cash flow basis they're bleeding from the ass.

If you buy plant with said money like this then you have a permanent (ex depreciation) asset.  But Netflix isn't doing that, and further, once someone has watched a given show they've watched it, which means that said customer probably won't pay to see it again.

That is for the current customer base the "value" of the content produced that they've already been exposed to is very close to zero.  Said content is only valuable to new customers who haven't yet seen it.  As new content is produced it has value to a customer once.

Here's the problem: The amount of money they're spending to develop and license this content is accelerating rapidly, and the negative cash flow is also accelerating rapidly.  They are doing this because for existing customers they have to or there's nothing "new" for said customer to watch.  Yet they don't have an asset in most cases, they leased said content instead of developing and owning it themselves.

There is a point at which this goes severely negative on the firm but they'll never get there; it's like going into a black hole.  You never actually get to the singularity before you die; you're ripped into sub-atomic particles first.  Likewise the street will eventually realize that this is an exponential cost curve with a linear, and terminal point on customer acquisition and eyeball time.  That is, you can only watch Netflix so many hours in a day and there are only so many humans, so if you produce more than those hours of watchable shows some is wasted on said customer because he can't watch it.  That content doesn't result in a ratable amount of revenue; it's "contribution" to revenue is zero for that particular customer.

Today Netflix is circling the black hole at an ever-increasing velocity and decreasing distance and their "performance" (speed around the black hole) is causing people to say "wow, these guys are great."  Just like you though they won't hit said singularity.  Either they'll get ripped to atoms first or the street will call bull**** on their business model and when that happens the company will detonate in a day as it will be locked out of the financing market for its ever-more-voracious appetite for fuel in its cash bonfire and collapse.

I find the stock price of this "company" tremendously amusing; like so many companies in the "social" and "media" space today they are serial abusers of the exponential function which they know cannot continue indefinitely.

This model was tried in the 1990s, and it blew up in spectacular fashion in 2000.  The reason Hastings and the rest of these clowns are running that same scam today is that nobody went to jail for doing it in the 1990s.

It will blow up again, just as in 2000, because it mathematically must.

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2017-10-17 07:00 by Karl Denninger
in Environment , 174 references
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Then start turning your attention to these nationsnone of which are in the developed Western World, or STFU.

See, the problem with all the crazies on the environment is that the real problem is hard.  It's hard because you can't have China and other nations making all the **** you want to consume (like your iPhoneys) while at the same time trashing the environment and have soaring stock prices.

I talked about this at some length in Leverage; my answer is wage and environmental parity tariffs.

Of course nobody likes that idea, because then they can't******you, and they can't******the planet either.

So instead we have this, and it's your fault if you're a so-called 'environmentalist.'

All of you are going to burn in Hell, and that's if you don't burn here first.

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2017-10-16 10:04 by Karl Denninger
in Technology , 680 references
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This wasn't what I wanted to wake up to this morning:

The security protocol used to protect the vast majority of wifi connections has been broken, potentially exposing wireless internet traffic to malicious eavesdroppers and attacks, according to the researcher who discovered the weakness.

This one is very bad folks; I've read the paper and related CVEs.

The attack results from a problem in how keys are negotiated between a WiFi router and client.  It's supposed to be impossible (with a proper key negotiation) to force a "favored" key or re-use of a temporal key.  This is enforced by using what is called a nonce; a sequence of random numbers that are used just once ("Number ONCE").

Unfortunately the standard itself left open a way to force the "other end" to reuse a nonce.  This is very bad because you can use this sort of attack to trick the other end into installing a session key you know; such as "all zeros."  Once you've done that you can of course decrypt anything the victim sends because you have the key, and once broken you also have access to all future key renegotiations as long as you remain "in-range".

Encryption relies on not just one but two things being unknown, especially during key negotiation: The key and the content.  If someone can force the key (including the nonce) to be reused with known content then you're in big trouble.

Note that contrary to popular belief the "key" you put into a router is not the actual encryption key.  The password is a "seed" which is used to negotiate a key; the actual negotiated key changes from time to time.

The flaw itself is not hard to patch but there's a severe problem with this particular issue because an utterly huge number of devices use "allegedly-secure" WiFi and many of them don't ever get updated.  In addition you don't need physical access to attack a device using this, of course -- you need merely to be within WiFi range of it.

Consider this: Virtually every cellphone out there has WiFi in it and many are orphaned by their manufacturers, receiving no future updates at all.  These devices, along with nearly all "consumer" WiFi access points in homes and small businesses will never be fixed.

The impact of this flaw means that the majority of consumer cellphones now in-service will never receive a patch for this and will remain vulnerable until they are discarded by their owners, and in addition the majority of consumer and small-business WiFi access points will never be patched and will remain vulnerable for years if not a decade or longer.

As things stand right now commercial WiFi networks in places such as bars, restaurants and other retail environments are extraordinarily vulnerable as these tend to rely on embedded software, some of which will probably not be patched and most of these networks carry sensitive customer data including credit card swipe data.  PCI requires encrypted storage and transmission but if the encryption is in fact worthless then the integrity of these networks are in big trouble.  The recent proliferation of "at table" tablets for bill paying and similar is going to make this much worse than it would otherwise be. 

Our failure as a nation to force chip cards across-the-board, unlike virtually every other country (chip cards have a one-time negotiated key used for transactions and thus "capturing" them is of little value) is likely going to result in severe exposures across the retail landscape for the next several years.

Yeah.

This one is "that good."

Oh by the way, when the WPA2 "standard" was being debated and discussed may we examine who was in the room? I have to wonder why this wasn't caught a long time ago, given that WPA2-AES/TKIP/etc has been around now for a hell of a long time.  When something this nasty is found you have to wonder if the process was corrupted either negligently or on purpose.

Note that the US media has thus far ignored this story; I saw it in The Guardian.

Gee, I wonder why.......

Update: THIS APPARENTLY WORKS against machine-certificate networks as well -- that is, enterprise WPA2.  This is extremely un-good as that means devices in places like hospitals and other large enterprise systems are vulnerable.

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2017-10-15 19:17 by Karl Denninger
in Editorial , 217 references
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Just three days folks.....

Get ready to rumble!

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2017-10-15 07:00 by Karl Denninger
in Environment , 282 references
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..... the Anartictic sea ice was disappearing....

All but two Adelie penguin chicks have starved to death in their east Antarctic colony, in a breeding season described as "catastrophic" by experts.

It was caused by unusually high amounts of ice late in the season, meaning adults had to travel further for food.

Uh....... how does Al Gore say "oops"?

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