First Mover = First LOSER
The Market Ticker - Commentary on The Capital Markets
2017-02-16 05:00 by Karl Denninger
in Technology , 356 references Ignore this thread
First Mover = First LOSER
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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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Posts: 7702
Incept: 2007-09-10

Scottsdale, AZ
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Really good breakdown on why the leaders in AWS won't be profitable for long. When I saw Verizon go to unlimited data this week, the writing was on the wall. They can't compete anymore and are have become a drowning victim grabbing for the rope. They are weighted down by old technology and huge overhead and it's killing them. The younger people can't afford their pricing structure, so they automatically look elsewhere. I have a Verizon phone because of the mountains that surround me and nothing else seems to work well. My service has been getting worse and worse in the past couple of years and I believe it's because they are cutting back on service and quality to keep the party going. I have talked about the margins getting whacked on just about every retail product out there that has been commoditized and now it's happening in technology. Getting caught with a bunch of out dated inventory is the death call on a business if you don't have the cash flow to keep up. They are buying a dying company in Yahoo and think that they will shore up their sagging other business. I use Yahoo's search engine over Google because it doesn't throw all those paid businesses to the top of the list like Google. I typically get what I am looking for much faster then nothing but Ads and it works better. I am betting that Verizon will destroy that with the Google type search engine taking away the natural search for paid ads. The entire internet is nothing but a garbage dump of the highest paid ads and not relevant information. Everyone is looking for the cheapest price for just about everything. This is killing all businesses because their cost of doing business is rising substantially. We all saw it in Amazons earnings report and if they are sucking air, then just think what the brick and mortar stores are doing.
Everything is a race to the bottom and yet we see the markets rising like there will be no top. Still trying to figure if tax cuts will justify even half this move. We saw retail sales jump and they skewed the numbers with gasoline sales. January was a really bad retail month for everyone I know. It seems like the people running these economic numbers just make them up to appease the markets. When does the truth come out?
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It happens in the trucking industry as well.
Older trucks, 2010-2012 models with the early EGR and DEF injection, 4-5 mpg.
Last night my assigned 2016 model averaged 7.9 over 440 miles.
Some nights I get over 8 mpg and climb Mt Eagle both ways.
The company is rebuilding the pre 2010 diesels that can get 7-8 mpg and installing the drive trains into new chassis.

2010-2014 engines are going down the River.

Recently built my son a new computer based on an off lease HP Z420 workstation with an 8 core E5-2670 and 8 GB ECC DDR3 for $400. Added a 2 TB hybrid and 32 GB RAM and an Nvidia Quadro K2200.
Better than any consumer grade model at Best Buy for less money.
It gives up some frames per second in gaming but he is doing CGI and will start SolidWorks soon I hope.
It rocks Blender3D and Sketch up.
Still have some empty RAM slots and another PCI Express slot.
Tesla card next?
16 core pull?
Can build some nice stuff for students now without going broke.
Another example.
Free CGI software suite.

Some better features than Maya and Autodesk 3d Studio.
Python programming API.
$30k a seat for Maya when optioned up.
Then the yearly subscription.

Bailey already got a job offer just off of his portfolio.
Short term contract work though.
Self taught.

Preparing to go Hunting.
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They are weighted down by old technology and huge overhead and it's killing them.

4 years ago it was a two hour wait in line for service at a Verizon store. Now, not so much. Though they still have the greeters and drag things out to make it look like they're still in demand for time.

I'm about fed up with Verizon honestly. I'm not buying any more CDMA phones.
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This is why I almost never buy Bleeding Edge.

Early bird gets the worm; second mouse gets the cheese.
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Tulsa, OK
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In this link, it seems that Amazon has created a new service (Lightsail) to compete with Linode and Digital Ocean, but they are *still* way behind Linode in many aspects:

I had never heard of LightSail before. I imagine they built it as a "holy crap we're going to die unless we do this" option. And, looking at the plans, it seems that they are competitive at $10/box, but not even remotely competitive after that. At $80/month Lightsail gives you 8 GB RAM, and is *STILL* sitting at 2 CPUs, with an 80GB drive. On Linode, for the same money, you get 12GB of RAM, *6* CPUs, and a 192GB drive, and almost double the network transfer.

EC2 has a wider product selection, but I honestly don't see many people doing these things. It is easier just to run your own open-source versions of this stuff on cheaper computers. We use them for a few things (video recoding), but that is basically as an interim until we get something better together. The S3/CloudFront combination is somewhat compelling, though CloudFront has been kinda slow. We use Highwinds for most of our stuff, and there are a lot of low-budget CDNs around.

They are trying to keep the high-margin stuff running by a plethora of services, but, honestly, I think it is going to just cost them in long-term maintenance costs. Any software you write has to be factored in to the long-term maintenance. Looking at all those services, you just know that there has to be someone whose job it is to maintain that. The more you add, the more maintenance costs there are. And, if Amazon stops one of their services, then they get a black eye from everyone who built their software around them.

Compare that to Linode, which has about 20 screens to their whole interface. That means super-low maintenance costs.

I just don't see a bright future for Amazon down this path.
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Do what is the "point" of MACRS?
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A True American Patriot!
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Wake me up when any other carrier besides VZW has service at my place in the mountains of SW VA. Until then, I'll pay whatever VZW is charging.

"I am free, no matter what rules surround me. If I find them tolerable, I tolerate them; if I find them too obnoxious, I break them. I am free because I know that I alone am morally responsible for everything I do." -- Robert Heinlein
Posts: 8471
Incept: 2007-09-10

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Thanks Karl,

Just went to T-mobile to check out a sim and see how their service runs at my house.

I'm getting ass raped right now by ATT and 2 of my phones have the grandfathered in unlimited data for 25 bucks. That is great accept we have two kids and they run over their data plans all the time.

I hate AT&T and now we are walking, bonus get a 150 bucks for each line a port over, kick ass!

If you want a vision of the future, imagine a boot stamping on a human face - forever.
George Orwell

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Scottsdale, AZ
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Just posted:

T AT&T will launch a new AT&T Unlimited plan available to all postpaid wireless customers starting tomorrow (41.21 +0.09)

The new AT&T Unlimited Plan will include unlimited talk, text and data on 4 lines for $180. Business customers can also take advantage of their additional corporate discount.
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Uwe, only Verizon works where I live as well, and my daughter and I are on Totalwireless with 8gb for $60 and my wife on Straight talk with 10GB for $55. They run on verizon towers, on verizon service.

Posts: 364
Incept: 2012-10-11

Northern VA
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Karl, you have a way with logic and words. Bravo!
I am a total two gens back bleeding edge *****.
and I drive a 98 Honda
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This is why I almost never buy Bleeding Edge.

I am a total two gens back bleeding edge *****.

Sames applies for me with MacBook operating systems. Let the other folks beta test, that way when I finally adopt months (years?) later there will be plenty of workarounds and tutorials for the inevitable bugs and I'll be saved the larger headache.
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