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THE TECHNOLOGY MONTHLY BOSTON|NEW YORK|PARIS

Volume 2, Number 2 www.research2zero.com


March 30, 2007

In this issue:
Simon’s Law (Moore’s Law for Energy)
Old names in new clothes: AT&T and 3COM
The Web 20 status and a check on other Web 2.0 adoption metrics
Random bits

Simon’s Law outcome this time will be any different than it has been
during the last few thousand years.
Today there may be more value in viewing energy as
a technology rather than a natural resource industry. We will spare our readers a pile of statistics on infla-
There is a strong theory, proven by historical events, tion and energy prices, but two things should be noted.
that energy (and other raw materials) decline inexorably The first is that the U.S. Department of Energy statistics
in cost over time. Despite our intuition, natural re- on global supply and demand show that oil is a very
sources (energy included) are not in any way finite or orderly market; supply equals demand with very little
scarce. Our notions about declining supply and scarcity difference year after year. The second is that the recent
are deeply rooted in our individual experience of increase in crude prices reflects more of a reversion to
shrinking production from an oil well and sparser lodes the mean from very low prices a few years ago. In 2003
of ore from existing mines. However these individual crude was selling about the same price it did in 1983
notions are the opposite or our collective experience ($26/bbl) despite the fact that inflation figures would
throughout history. The implications are not only lower allow crude to trade at more than double that figure and
energy costs going forward, but also great advances in still be well within the envelope of a long-term decline in
innovative solutions and new technology. real energy prices. After four years of major increases
(+22%, +41%, +19% and +25%) the 2006 average
Julian Simon, noted professor at Maryland Univer- price of $58/bbl is still not abnormal. However we
sity and senior fellow at the Cato Institute, spent sev- can’t resist pointing out that since 1949 we have never
eral decades researching and documenting these find- had four straight years of double-digit price increases,
ings, which include the impacts of human population and past declines warrant preparation for $30/bbl prices
growth on raw materials cost, pollution and bio- in the next few years.
diversity. His work, while controversial, has never been
Today we can already see the forces that Simon out-
disproved. Despite the truth these theories do not
lines beginning to drive the changes that will lead to a
garner as much attention from analysts, economists and
larger, more efficient energy industry. First and foremost
investors as near-term price fluctuations and old-
is the huge wave of financial and intellectual effort now
fashioned notions that black pools of oil left by the
mobilizing into energy. Of course traditional energy
dinosaurs will run out and leave us with secular in-
companies themselves are stepping up their investments
creases in energy costs.
in exploration and production. Increases in extraction
rates are coming from the application of newer 3D im-
These ideas strike people as objectionable or unsat-
aging techniques, steam injection, smarter drills, better
isfactory because we don’t want to be complacent
pipes and a myriad of other tricks that are worth the
about our planet. Particularly in areas that inspire emo-
effort at current oil prices.
tions like global warming and shrinking bio-diversity,
people wrongly take these theories to mean that we Venture capital investments into innovations around
should do nothing and the problems will simply go energy more than doubled in 2006 to $1.8B invested in
away. Simon’s Law says quite the opposite and ac- 183 companies. The increase was even greater in the
knowledges the collective power of society to focus on alternative energy sub-segment, which jumped 272% to
and solve problems by applying its best efforts to what $727M in 39 companies. It’s easy to foresee another big
is most important. There’s no reason to believe the increase in 2007 based on current levels of activity and
enthusiasm for the sector. Thankfully for venture capi- There is also an attenuation of demand that comes
talists the virtuous cycle has just received a major boost from a huge number of small improvements from use of
from the $2B acquisition of Horizon Wind Energy by a LED and fluorescent illumination to replace incandes-
Portuguese utility company. Large companies such as cent lighting, more energy efficient vehicles and hybrids,
GE, ADM, the automobile manufacturers and the greater use of geothermal to cut heating and cooling
semiconductor material and equipment providers are costs and so forth.
also shifting more of their spending on alternative en-
ergy sources. Having been convinced that the future opportunities
in energy innovation are here to stay and that they have
The ultimate success of new innovation in energy everything to do with technology and investments we
depends on the development of a large and viable mar- hereby plant our flag in the space. As we did with the
ketplace. Public attitudes and the political environment software space, we will be introducing a “Power 20”
for creating incentives and subsidies for new forms of group of companies that best represent the investment
energy supply and conservation has probably never vehicles for this space. The Power 20 will include sector
been better. This is necessary now because if one and company reports, beginning with solar energy where
simply runs the numbers on making use of solar panels we have already done a considerable amount of work.
on a residential property they don’t suggest a very at- We’ll then likely move on to advanced materials and
tractive return. Tom Evslin at Fractals of Change has energy-related technologies. We’re excited about adding
done a complete analysis for his own situation taking this space.
account of installation costs as well as the ability to take
advantage of higher time-of-day rates which gives solar ÇÇÇ
an edge over wind. After all is said and done, the cur- Old name in new clothes No. 1: AT&T
rent ROI appears to be about 2% in his circumstances.
Of course over time we can expect the initial invest- The launch of the Apple iPhone precipitated an ava-
ment per watt of solar faceplate to decline. lanche of commentary, almost all glowing but for the
fact that Apple had chosen Cingular as an exclusive
More help is on the way from none other than our service provider partner. We were thinking along the
favorite financial innovators, the investment banks. In same lines at the time. But then a little voice started
particular, Goldman Sachs has created a structure reminding us that maybe we can make more money by
whereby a large commercial customer can switch to thinking the other way.
solar without having to make any capital investment or
worry about ongoing system maintenance (handled by a Visualizing a revitalized AT&T piqued our interest.
third party). Commercial customers do have to sign a At the time, AT&T was trading at less than 5x operating
long-term supply agreement but at rates already lower cash flow. Although we are not expert investors in
than what they are paying now. Structures like this are communication service providers, in the past buying
so attractive that they can drive the commercial indus- similar companies at such a multiple (like Telecom Italia
try forward into solar with some force. back in the ’90s) has paid off well. Since then T has
done well and was the top performer in the Dow for
Local providers are starting to figure out that they Q1. Developing fundamentals hint that there may be a
can build franchises around this business in the resi- larger story here.
dential sector. There are already emerging providers,
such as Ready Solar, springing up that provide a simple First of all, the iPhone may indeed be a catalyst for
kit that can be easily installed by general contractors. AT&T in terms of visibility and investor sentiment. It’s
Some utilities may enter this market as well as they becoming clear that the pull of having the coveted
have done in the past with energy efficient appliances. iPhone is more powerful than the objections to AT&T
Small financial services companies are creating a pack- as a service provider. While the business may not move
age that includes analysis and financing for homeown- the needle in terms of the overall revenue, it should be a
ers that takes into account the numerous incentives and strong win for AT&T in terms of acquiring new cus-
tax breaks available in many states along with low-cost tomers.
home equity financing. (What a great way to create
jobs for all the unemployed sub-prime mortgage What about the rest of AT&T? In combination with
agents!) BellSouth and Cingular it’s over a $100B business that
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will need way more than the iPhone to drive it. AT&T an opening for 3Com in this market it may come from
has been doing pretty badly the last couple of years open source. Early in 2007, 3Com made it clear it was
making for easier comparisons and perceived im- not allergic to open source and would offer an opposing
provements. At least a few things have been going right approach from the (understandably) single-vendor solu-
for AT&T, including their IPTV offering, which is tions the large companies are pushing. Could 3Com end
accelerating rapidly after a false start in 2006. The en- up somehow riding the Asterisk wave? For those who
terprise sector is at least healthy enough for it to exe- don’t know, Asterisk is a very impressive open source IP
cute an orderly consolidation plan. Lastly the company PBX software solution that has been doing very well
has plenty of opportunity to improve cash flow and over the years, but no major vendor has embraced it yet.
dividends as efficiencies are driven by the combined There is some evidence that 3Com is at least actively
organization. When one imagines the cost structures of considering this.
AT&T/SBC/Cingular it conjures up pictures of some
low-hanging fruit ripe for the picking. 3Com has completed some restructuring and pur-
chased 100% of its joint venture with Huawei Tech-
In short, we see the company improving operational nologies for $882M. There is little question that the
results across the bulk of its businesses and growing the success of the company will hinge on how well the
desirable segments of wireless, broadband and data newly owned unit does in meeting targets and adding to
much faster than the rest of the company. As a major the impression that 3Com is able to deliver strong re-
Dow component AT&T won’t wildly outperform the sults. 3Com also has a rapidly growing security fran-
market, but at these levels it still looks too cheap on chise (TippingPoint), which it acquired. While only 10%
both an absolute and relative basis. Compared to GE, of revenues today, it adds to the appeal of the story and
Cisco and Verizon the shares should be 20% higher, will grow in materiality from here. The momentum
and if the stock gets afforded a better multiple (say a appears to be strong enough to carry through over the
15x PE on 2008), the shares could certainly trade in the medium-term.
$45-47 range.
Even though analysts are bearish (19 out of 23 have
ÇÇÇ neutral or negative ratings as of March 30, 2007, accord-
Old name in new clothes No. 2: 3Com ing to Jaywalk), they are forecasting sustained profitabil-
ity from here and revenues of $1.2B for this year. A
The 3Com stock chart has been almost a flat line new CEO, Edgar Masri, who is a technologist with a
since the end of 2001 when it changed hands for financial background, is driving the company. On the
$6/share. There was a brief rally in 2003 that brought surface this would at least suggest a levelheaded decision
the stock to $8.50, only to be followed by three years of making capability and management style.
dreary decline to an embarrassing $4/share — obvi-
ously left for dead, clearly off the radar. If 3Com can put a few decent quarters together the
stock could begin to discount an improved outlook,
Our first positive hint about 3Com came during a which would translate to 2x EV/R and a stock price of
client move into state-of-the-space around MIT. We about $5.70. 3Com may not be a phoenix rising from
were briefed on how the phone system worked and the ashes like Akamai, but it could be story similar to a
were all duly impressed. Afterwards I was surprised to Sun Microsystems, which has climbed over many
discover that the system wasn’t from Cisco or Asterisk doubters to reach $6/share from $4.
but 3Com. At the time (which was two months ago) I ÇÇÇ
chalked it up to a bad decision from the distant past.
But still, a mental note was made.

More evidence of a sustainable business for 3Com


in the SMB market around converged networking and
VoIP came from a partnership solution with IBM. It’s
no game changer, but it’s another validation point.
Without it, it would be hard to consider 3Com in the
land of giants such as Cisco, Avaya, Siemens and
Nortel all vying for a piece of the VoIP pie. If there is
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Web 20 Update and Other Barometers business adoption is aiding continued growth in the
U.S. market.
Finally! Our first Web 20 stock is getting acquired.
Cisco is absorbing WebEx in a move likely to set
Cisco ever more directly in competition with Micro-
soft. Just prior to the Cisco move, Microsoft moved
closer into Cisco territory with the acquisition of
Tellme. We will have to find a good replacement for
WebEx in our Web 20 before August.

For the month the group held up well without


much aggregate change in valuation.

Figure 2 – Concurrent Skype Usage

The odd bump in the peak usage for February from


9 p.m. to 3 a.m. reflects that with Skype you don’t need
money to send love on Valentine’s Day.

Figure 1 – Web 20 TTM Performance

Our Web 20 Widget for Google has been a suc-


cess, and in response to client requests we will be re-
leasing a new version this month with the ability to
customize the widget to compare the Web 20 stock
index with other stocks. We will send an email out
with the new link in the next few weeks.

Skype
Figure 3 – Peak Skype Usage

Following our overview last month showing


Skype’s strong adoption trends we probed a little Two new features were introduced with the latest
deeper into the data to try to discern some usage product release on March 7 that aim to facilitate the
trends within this growth. sharing of information between Skype customers:
SkypeFind and Skype Prime (still in beta). Skype has
received some criticism due to its lack of an actionable
By examining the average concurrent users by time monetization plan. However, as the profit margins ap-
of day (all times are EST) in the chart in Figure 2, we proach zero on even the most efficiently developed
can roughly determine that growth has been particu- VoIP infrastructures (attributed to downward pressure
larly concentrated and continues to accelerate during on prices due to increased competition), only those
the business hours of the Americas and the early eve- providers that can sell value added services to their in-
ning hours in western Europe. Daily concurrent peaks stall base stand a chance of subsidizing their operations,
consistently occur from 9 a.m. to 3 p.m. EST. To- let alone becoming a profit center. Skype is positioning
gether these trends reaffirm last month’s report that itself for exactly that eventuality.

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SkypeFind is Skype’s wiki-style entry into the res- Given the lack, as of yet, of an official “directory”
taurant/product/business review market. This busi- of services, expect to see service offerings listed on
ness has historically been hard to break into, and even eBay’s auction site, adding another cost to the equation:
those who have found their way in have had difficulty
in generating significant revenue. Skype will be facing eBay fees = ($12.00 * 0.0525 ) + $0.60 = $0.93
similar obstacles here.
Therefore, the total revenue that the service pro-
Much more interestingly, and worthy of a deeper vider would see per five minute call would be approxi-
look, is the addition of Skype Prime, the greatly antici- mately $6.82. Assuming that a provider can make 10
pated service that enables Skype users to connect with such calls per hour, the provider would effectively get
one another and exchange paid services. This could be paid approximately $68.20/hour. There are many pro-
particularly interesting to contractors and freelancers fessionals that would gladly hawk their services at that
and may eventually bring about the realization of the rate. Of course, the end-user demand must exist as well.
eBay “triple-play” combining eBay, Skype and PayPal. In order to place a Skype Prime call, users must have
sufficient Skype Credit, requiring many users to up-
A potentially deal-breaking question is whether grade to premium accounts.
the two major ancillary eBay properties, PayPal and
Skype, can be securely coupled together. In fact, the The service is in its infancy, and we expect that
linking of a PayPal account to a user’s Skype account there will certainly be some tweaking during the beta
may well be the best possible solution to the identity period to make the service more attractive to both the
issues that have been plaguing Skype. The strong secu- service providers and consumers.
rity associated with PayPal’s “confirmed” status con-
ferred upon its users could be transferred to the Skype Job Listings
user once that user has associated the two accounts
together in a one-to-one fashion similarly to when Total job listings increased 5% from February 1
eBay acquired PayPal and integrated it into its auction through March 31 based on the aggregated data sup-
platform. plied by Simply Hired. Our time series is expanding
and should provide an increasing array of insights in
While strictly forbidden in the terms of service, coming months, but a few things jumped out of the
there is the distinct possibility that Skype Prime could numbers this month:
simply act as a safe harbor for adult entertainment. If
Skype communications are secure and encrypted, as 1. AJAX is clearly catching on in a major way
they claim to be, who would know if illegitimate busi- with a 40% increase to 7,923 job postings.
nesses began operating under false pretense? 2. Solaris seems to still be losing share
(+1.2%) vs. Linux (+16.1%), Windows
So, what legitimate professional would be inter- (+13.8%) and Mac (+33.8%).
ested in this service? Taking a look at the terms of ser- 3. Other technologies with meaningful num-
vice helps us determine the potential revenue streams bers showing the best growth are Ruby,
and associated expenses with the Skype Prime service. Vista, MySQL, Google and Virtualization.
As it stands now, service charges are either billed by 4. BEA growth was a little less than we would
the minute or as a one-time fee and are limited to have expected at +4.4% to 5,339 listings.
$0.50-2.50 (€0.40-2.00)/minute and $0.50-12.00
(€0.40-10.00)/call. Skype takes a (perhaps unreason- It’s sobering to reflect on the sheer dominance of
able) 30% cut of the final payment amount. Microsoft in the market with 351,836 listings (vs.
91,905 for Oracle and 52,471 for IBM.)
Assuming the maximum allowed charge (a call
length of approximately five minutes) is reached (in Second Life
USD):
Linden Labs’ Second Life (SL), the increasingly
Gross Revenue = $12.00 * .7 = $8.40 popular Massive Multiplayer Online Role-Playing Game
Less: (MMORPG), has drawn its share of criticism as well as
PayPal Fees = ($12.00 * 0.029) + $0.30 = $0.65 praise as businesses rush to evaluate the economic vi-

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ability of the virtual world and determine what, if any, OpenID has been anointed as the open identity so-
action should be taken to bolster their online presence lution of choice but still has a road to travel before it
in this much-hyped new marketplace. can reach the ease of use required for the mainstream.

A number of issues have arisen that bring into There’s a new kid on the Web server block. Net-
question both the scalability and the stability of the craft confirms that lighttpd, which is open source, has
economy and underlying technology platform. Many, burst on the scene at some leading Web site. It is de-
such as Clay Shirky, believe that the numbers released signed for new style interactions like AJAX, and while it
by Second Life are grossly inflated and simply too has a long way to go to measure up to Apache or Mi-
good to be true. Others believe that Linden sits atop crosoft, it will soon pass Sun.
the newest evolution of the Ponzi scheme. Linden
controls LindeX, the virtual currency exchange and, at Agassi leaving SAP is bad enough to sell the stock.
times, buys and sells Linden Dollars (L$) to help stabi-
lize the exchange rate relative to the USD. Compared Salesforce.com (CRM) is being extra aggressive right
to other MMORPG economies, the L$ has remained now, making it tougher for new competition. Pricing
surprisingly stable hovering between L$250-300 per $1 of $9 per user per month is being advertised through
USD. April 30.

The normalized population of Second Life is esti- Integrated 3D could be a key feature of Leopard
mated at just under 2M “residents.” The figure given and another positive software thrust from Apple to be
by Linden, which claims a population of more than 4.8 pushed across iPod and iPhone devices as well.
million, is grossly overstated due to users having mul-
tiple identities or signing up and having never actually We have friends who actually tried the tablet PC
signed on. Peak concurrent users hit an all-time high form factor one last time. They just don’t seem to solve
of 33,000 in mid-February, up from 5,000 at the end any user issues. Nobody wants them.
of 2005. Linden expects peak concurrency to reach
150,000 by year end, an annual growth rate of over Words to filter out of your incoming email subject
350% for CY2007. Using the industry average of 30 lines (other than approved senders) include today, don’t
days since last activity to determine returning users, miss, congratulations, complimentary, ETF, tip, and
churn rate as of March 21, 2007, was about 77%, top.
meaning that only about 23% of users will return
within 30 days of signing up. EBay growing in power but still has lots of signifi-
cant fraud problems. Contributes to the view that do-
Second Life is controversial but still worth watch- ing business there is risky.
ing in our view, so our coverage of its metrics will be
expanded. Advertising on some leading sites such as
Forbes.com, ZDNet, eWeek and many others is getting
ÇÇÇ out of hand. Full screen flash advertisements and ani-
Random bits mated annoyances are getting bad enough to possibly
render them less than useless.
Our most savvy investment clients have always said
that what they really want is more of the material we We’re going to see traditional media figure out how
see and think about before it turns into anything that to start leveraging new sources such as blogs through
looks like a research report. We do use our blog for editorial controls and traffic.
that, but still, many prefer the printed word over RSS.
The number of ETFs has passed the ridiculous
So for the month this is a partial list of the stage and is now worth excluding from all incoming
thoughts we had, trends we watched and things we communication. (The new trend = managed accounts!)
noted, loosely grouped by subject area.

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Nomura published a credible survey in February
showing increased domestic sentiment vis-à-vis the
Japanese equity market.

Technology companies in Israel still don’t get


much respect from institutional investors. Will they
ever? Will LSE or AIM-listed technology stocks fare
better?

THE TECHNOLOGY MONTHLY

Kris Tuttle, Editor


Pete Bishop, Analyst
Charlotte Borde, Copy Editor

The Technology Monthly is published by


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Coming in future issues…

April: Gödel would be short


May: Enterprise IT Update
June: Future in Review Report

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