Andy Kessler

Forbes.com - Google's Offensive Strategy

Back in 1983 on the hit TV show The A-Team, George Peppard's Hannibal said to Mr. T's Bad Attitude Baracus, "There's an old saying: 'The best defense is a good offense.'"

Mr. T replied,"You got that wrong, man. A good offense is the best defense."

Then they wrestled pythons or something.

On Tuesday, Google  let word slip--while showing off a comic book, of all things--about its new browser technology, code-named Chrome.

Was it offense against Microsoft's  Internet Explorer? Defense against Apple's  iPhone browser, Safari? A fight for the great network operating system in the sky? All of the above?

In our increasingly interconnected broadband world, there are two main elements that matter: the edge and the cloud. The devices on the edge--your desktop computer, laptop and cellphone--request search results or do credit card transactions on cheap servers in the cloud. So far, Google, through search-engine dominance, owns the cloud. Microsoft, via computers, browsers and about a third of the cellphone market, owns the edge.

But as early innovators Netscape and America Online can attest, things move fast in tech land. You snooze, you lose. It's speed poker rather than a series of slow chess moves. Microsoft tried to buy into the cloud--and Google's control--but it was rebuffed by Yahoo! . And now, on the surface at least, Google is trying to eat into Microsoft's control of the edge using its own browser.

Make no mistake: This is not about browsers. That was the last war, and we have too many already. Microsoft's Internet Explorer has a 70% market share, Mozilla's Firefox has around 20% and small Norwegian browser Opera has an even smaller sliver. Then there's Apple's Safari, which does well on Macs, and--wait a second--has a 100% market share on iPhones. A classic lock-in. Maybe that's a clue into what Google is doing.

The original Netscape and Internet Explorer browsers were buckets. A server would fill up the bucket, and therefore your screen, with text, links, banner ads and pictures. When combined, these things displayed a Web page. That was Web 1.0, a digital catalog.

The next generation of browsers we now use can actually run programs from languages like Java, PHP, Perl, Python and Ruby. Web pages aren't just drawn anymore. They are alive, constantly connected to cloud servers to update information, maps, inventory data and more. This development enabled the so-called Web 2.0 and spawned new services like Facebook and MySpace, which tightly link the edge and the cloud. The same goes for pages like Google Maps, which have the ability to mash up and display geodata.

Chrome seems to do all these things. No real surprises--its first cut merely matches what everyone else already does.

But even this technology is getting old. No snoozing, remember? There are two new explosive markets. One, the mobile Web, is overanalyzed. Google is spending big bucks trying to outdo Apple's iPhone with their Android mobile technology. Google figured it might as well build in its own browser and take 100% of that market. It turns out Chrome is built on the same base technology as Safari. So why not?

But the real excitement may come from an adaptive Web. Using the zillions of searches we all type every day, Google should have an edge when it comes to figuring out what we are looking for. Google can base that knowledge on what we are currently working on, or where we--and our cellphones--are currently located.

To do this means choreographing a delicate dance between the edge and the cloud. And implementing this, or any other new whiz-bang technology, exclusively is what will get millions to download and lock-in to a Google browser. Advertising dollars will follow naturally. If it's truly useful, we would all switch in a heartbeat.

Mr. T was right. There's no need for defense; it's all offense. Of course, it'll take more than a comic book--or even Mr. T--for Google to pull this off.

Tech Ticker: Is It Safe?

ABX Indicator

Click on ABX-HE-AAA 06-2 for the chart.

WSJ: The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

Mr. Kessler, a former hedge fund manager, is the author of "How We Got Here" (Collins, 2005).

Tech Ticker: The Woz

Part 1 - Get Ready for the Woz!

Part 2 - Creating the Computer of My Dreams

Part 3 - Today's Young Innovators

Part 4 - Favorite Gadgets (yes, he packs a laser)

Part 5 - Stock jock/news junkie

Part 6 - Segway Jousting

NYT: QOTD

Huh?

Tech Ticker: Working Hard and Playing Hard

Carbon Fiber Lifestyle...

NYT: Tough Times for Buyout Lords

I don't normally post these, but I couldn't resist.

http://www.nytimes.com/2008/03/08/business/08mogul.html

Tight Credit, Tough Times for Buyout Lords

By LANDON THOMAS Jr.

Published: March 8, 2008


...
“The crowds are smaller at cocktail parties, the aura is stained, but there still is the letter B, as in billionaire, next to their name,” said Andy Kessler, a former hedge fund executive who has written books about Wall Street. “They may still have halls named after them at universities, but the idea that these guys are the kings of investing, that time has passed.”

UPDATE March 10: A $100 million Donation to the N.Y. Public Library. That was fast. "Stephen A. Schwarzman Building ...the name to be etched on the building." Schwarzman wants his legacy etched in stone and protected by lions.

Tech Ticker: Why Everyone Works So Hard in Silicon Valley

WSJ: Internet Wrecking Ball

Imagine a town that has all sorts of gasoline pipelines running by it but only one gas pump. Rationing is inevitable. So are price controls.

Everyone gets equal amounts, except of course first responders like police and ambulances, which should get all the gas they want. And, well, so should the mayor. And if you can make a good business case that you work 60 miles away, you can file paperwork and perhaps pull some strings for more gas. How about those kids hot-rodding around town who can't drive 55? They get last dibs, and maybe we can sneak in some gas thinner to slow down their engines and not waste gas.

You can do all that and constantly update the gas neutrality rules -- or you can just open another gas station across the street. Or one on each corner.

The trick to an open and innovative Internet is not sneaky technical fixes nor more rules and regulations and bureaucracies to enforce them. The Internet will only expand based on competitive principles, not socialist diktat.

This is the essence of the Ed Markey's (D., Mass.) Orwellian-named Internet Freedom Preservation Act of 2008, which would foist network neutrality on the wild and woolly Internet. The Federal Communications Commission is holding a public hearing today at Harvard Law School in Cambridge, Mass., to build the case for the ill-conceived idea of preventing, as Mr. Markey's bill would, network operators from using technologies that may favor one application over another.

It's a bad idea because the only thing Mr. Markey's bill will preserve is mediocrity via the lack of competition, and full employment for regulators micromanaging a business whose very innovation comes from the lack of rules. With net neutrality, there will be no new competition and no incentives for build outs. Bandwidth speeds will stagnate, and new services will wither from bandwidth starvation.

The idea of network neutrality is that all of our Internet packets are equal, and that the spirit of the Internet and its ability to create wonderful new applications like Google, MySpace and Facebook is predicated on open (albeit limited) access for all. Yet, despite an overabundance of bandwidth pulsing throughout the U.S., we are still stuck with rationing to our homes. Haven't we learned that advancing technology is never served by arbitrary rules to divvy up scarce resources? Look at the dearth of good cell phone applications. Rules make incumbents lazy.

This is all in response to Comcast trying to kill off pirates. Arrgghh. After denying it, Comcast was caught "traffic shaping," sending TCP Reset packets to stop P2P BitTorrent downloads.

In plain English: Comcast is this country's second largest Internet provider and has been plagued by mostly illegal copyrighted video file sharing that is chewing up half or more of its precious bandwidth. More of that than you'd think consists of "Family Guy" episodes. Comcast, whose growth is slowing and whose stock is down 30%, is acting scared of the day when video is delivered one episode at a time instead of via Basic Cable, threatening its bread and butter.

So Comcast took matters into its own hands and applied a sneaky technical fix, a fake message that severely slowed these peer-to-peer video downloads. By the way, this same technique is used by the so-called Great Firewall of China to censor search requests like "Falun" or "Tiananmen." Nice company.

So that's it, isn't it? Comcast's franchise is threatened so it got out the bag of dirty tricks. Google, who you would think has a huge incentive to kill the video star, supports net neutrality. Google has become an incumbent, protecting its no-longer-modern textual ads.

But new layers of regulation just mean long gas lines/slow bandwidth. We have faux competition, cable monopolies versus phone monopolies. Cable modems work by taking away a TV channel or two and using them for data, at $59 per month for 4.5 megabits per second and $69 for 8 meg (while 100 meg in Japan is $30/month).

I have no problem with Comcast cutting back BitTorrent or anything else, as long as I know about it and I have a choice to go elsewhere with my business. But I don't. I might like Comcast service without BitTorrent because my Web pages will come up faster. Others won't. But there is no elsewhere. Antiquated franchise rules mean there's only one cable provider in most towns, and AT&T's DSL service over creaky phone lines is way too slow.

We need policy to help cut a path for more competition, rather than protecting incumbents -- a Bandwidth Competition Act of 2008, not bogus net neutrality. All takers should be allowed access to poles or underground conduits. This is where neutrality should be enforced, instead of being a choke point.

Municipal or privately run wireless data services using Wi-Fi or WiMax should be sprouting like weeds. But they aren't being built because of lack of access to street lights, of all things, to set up access points. Verizon is busy rolling out a fiber optic service, FIOS, that will provide much higher speeds and real competition to Comcast. But it is slow going, as state by state video franchise rules still favor cable over any newcomers.

A stroke of a pen can cure these ills, incumbents be damned. They will adjust. I personally would climb telephone poles on my street to run fiber if I could get 100 megabit Internet service. Any takers? Talk about an economic stimulus; this is the type of infrastructure we need. The stock market will fund it all as well as resolve overbuild problems.

Don't think of Internet access as a static business -- someone put in phone lines 50 years ago or cable lines 20 years ago, and we are stuck with their limitations. Technology changes the game every few years. Even fiber lines put in today will be obsolete within 10 years and need upgrading. Same for wireless systems.

The trick to an open and innovative Internet is not sneaky technical fixes nor more rules and regulations and bureaucracies to enforce them. The Internet will only expand based on competitive principles, not socialist diktat. The more we can do to clear a path, the greater our national wealth will be. Comcast did us a favor by bringing this net neutrality debate out in the open. I hope the FCC doesn't fall for this lousy idea.

Mr. Kessler, a former hedge fund manager, is the author of "How We Got Here" (Collins, 2005).

Tech Ticker: The Game Changer

Tech Ticker: Soap Opera

Tech Ticker on Yahoo Finance launched today. Enjoy.

WSJ: What's Next for the Banks

If you want to know what's going to happen to the big banks and investment banks, you've got to go back to early 2003, when the seeds of destruction were planted.

It had been a year or so since a couple of trillion dollars of investor wealth had been wiped out. The Dow was 8000 and dropping, and the stocks of big institutions from Citi to Merrill Lynch to Morgan Stanley were at multiyear lows. Bank lending was down, but no one was really worried. The old "borrow short, lend long and pocket the difference" game had been around for millennia, and banks had weathered worse than this mild economic slowdown.

What was not at all clear was how investment banks were going to make money going forward. Wall Street had piles of capital and no place to go. Stock trading and large parts of bond trading had gone electronic. Decimalization of the stock market wiped out markups. IPOs were down, mergers were down and, gasp, bonuses were way down.

Stocks were out and investors wanted yield -- safe, predictable returns -- but there wasn't much profit in that. Some, especially hedge funds and international investors, insisted on even higher yields than plain old government bonds.

So Wall Street, as it always does, gave investors what they wanted -- excess yield in the form of derivatives, asset-backed, mortgage-backed, collateralized debt obligations (CDOs), basically funky amalgamations of lots of other pieces of paper. Done right, no one but you knew how to value these exotic instruments, so you could mark them up way more than a penny and generate huge fees, profits and bonuses. Win-win.

Low interest rates from the Federal Reserve and a rising housing market meant the subprime flavors of these CDOs took off like wildfire. Merrill Lynch and Bear Stearns and everyone else raced to package up these CDOs with pretty bows and sell them off as high rated goodness to those hungry for yield.

Banks loved it because they could sell off loans, generate fees and go make some more. It wasn't enough. Billion-dollar hedge funds popped up overnight to buy these things, with leverage on leverage to generate even higher returns. Savings & Loan banks were long gone, so by 2006, armies of mortgage brokers, many just online, answered the call to feed the beast with loans.

Until it went on for too long. By 2006, it was a one-way trade. Banks, especially Citigroup and State Street, couldn't resist the sweet siren's call, especially with "borrow short, lend long" in their DNA. Off balance sheet, they set up conduits, so-called SIVs, to use leverage and buy up lots of these subprime CDOs -- $100 billion worth for Citi -- breaking Wall Street's unwritten "sausage" rule that you sell this stuff to clients, but never own it yourself.

Wall Street's unwritten "sausage" rule is that you sell this stuff to clients, but never own it yourself.

SIVs were mostly invisible yet huge money makers, which makes me question how much money the plain old bank was making. Not much, it turns out. And in the end, neither did these SIVs. Others like Merrill Lynch and UBS got caught with inventory of these CDOs, having packaged them but not able to sell them off fast enough. Goldman Sachs smelled spoiled meat and shorted enough of the market to minimize the hit to their capital structure.

When the inevitable blowup came, most holding the toxic sausage required new capital from a government bailout to survive. No not from the Fed, but from the governments of China, Singapore, Abu Dhabi, Kuwait and New Jersey. Without their cash, Citi and Merrill stocks would halve again.

But that's old news. What about going forward? First, no one, and I mean no one, is going to buy a package of loans without knowing what each and every one of them is, what the risk of default is, etc. Rating agencies can no longer be trusted. The good news is that the same computer technology used to create CDOs can easily be extended to offer this needed transparency, loan by loan. But the bad news for investment banks: The packaging game just won't be as profitable.

So who has the strong hand? As always, it's a capital game, whoever accumulates the most will be best positioned for what's next.

Banks? Sure, they're slow and steady, but lending is dull, not that profitable, as we have seen, so growth is limited. While Citigroup fiddles, JP Morgan is the model, as one of the few big banks to not load up on CDOs to enhance earnings. Instead, it has been quietly accumulating billions in hedge fund assets.

Investment banks? Balance sheets are now mostly cleaned up, but outside of Goldman Sachs, management teams are under scrutiny to see who can come up with the right business model away from CDOs. It won't be until that model becomes clear that their stocks can go up enough to raise serious capital to compete. Not all will.

How about hedge funds or private equity? Lots of money will be made buying distressed debt at the bottom of this cycle, but most of it by firms that are small partnerships on a relative basis, and I don't see them gearing up huge sales forces to become big players. But that can be fixed.

My view is that firms that successfully combine banking and investment banking will walk away with the prize, by being able to offer a full range of services to clients -- short-term loans against assets or receivables as well as bonds and equity for long-term projects, the kind of underwriting and trading that requires large amounts of capital. The inevitable consolidation that should have occurred after Glass-Steagall (the 1933 law that separated banks and investment banks) was repealed in 1999 had been on hold while everyone chased easy profits. But now the shakeout is here.

Goldman Sachs will own a bank, maybe even Citigroup (Goldman's $85 billion market capitalization might be able to swallow Citi's $125 billion value) and strip it down to what it needs. JP Morgan should reunite the House of Morgan by merging with Morgan Stanley, and become a full-service powerhouse. But JP Morgan could buy Merrill or Lehman or Bear Stearns instead. Bank of America will merge with who's left. But don't count out others who have done well with capital. Fortress Investment Group, despite a rocky IPO a year ago, has a powerful real estate arm that could own loan origination and servicing and enough assets to buy its way into the banking or investment banking business. Same for the Blackstone Group.

Capital flows a lot more fluidly around the globe these days. Expect consolidation to start now. The real winners on Wall Street will be the ones with huge stockpiles of capital who listen to the market, and who are fleet of foot enough to smell out and deploy their capital creating instruments that global growth companies need, rather than false profits from eating their own sausage.

The Big Five?: Goldman CitiSachs, House of Morgan, Bear of America, Fortress Lehman Lynch and Blackstone Suisse.

I Still Hate Dividends, Professor Siegel

Wharton Professor Jeremy Siegel is much revered. His students sing his praise, his books are best sellers, the press adores him. I’ve heard him speak and he is very engaging, even convincing. He is also totally wrong. About dividends. About ETFs based on dividends. Enough to lose you money.

A few years back I wrote an op-ed for the Wall Street Journal Op-Ed page about dividends. Specifically, that I hate dividends. You can read it here. Stocks trade on their prospects for earnings. Dividends are just a bribe to get you interested in slow growing companies who can’t be bothered to reinvest their earnings in something useful. In the past, when companies paid out 100% of their earnings to shareholders, well then dividends mattered. Today, no one pays 100%, so dividends have limited say in the value of a company. In fact, they sucker you in with attractive “yields” right before they consider cutting the dividend. Citigroup anyone?

as persuasive as arguments may sound, the hard evidence proves otherwise.

Sadly, to academics such as Professor Siegel, this is heresy. He was nice enough to write a letter to the editor about my piece saying that I was completely wrong. He is entitled to his opinion, of course, as I am entitled to hold a grudge. He even took a swipe at me in his March 2005 book, The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, (although he called me Arthur Kessler, nice fact checking, Professor Seagull). And I quote,

“As persuasive as Kessler’s arguments may sound, the hard evidence proves otherwise…Average returns on older firms surpassed the returns on the newer firms…Technology stocks, which pay the lowest dividends have scarcely been market beaters.”

Like, say, Apple. Don’t bother with the book, it is backwards looking twaddle.

TCS: Cali Cupcake Cops

I tried. I really tried. But it took all of a few days with the kids back in school before I ran into the new "policy" that finally pushed me over the edge.

Look, school is hard, starting with no buses. Yeah sure, a good cardio workout in the morning for my massively helmeted and biking boys is just the ticket to put on an attentive face as the day and their teachers drone on. Never mind that their backpacks are heavier than our troops' patrolling the Sunni Triangle. Biking builds character. Or so I've been told. I'm OK with that.

Gosh, I hope that mother with the pig-tails and hairy legs uses hot water.

And I've caved on the whole paper plate and plastic cup thing. Classes are now stocked with real plates and cups (donated, of course) and us eco-squirrels take turns bringing home the dirty dishes, washing them and returning them to the class. Gosh, I hope that mother with the pig-tails and hairy legs uses hot water. Don't you dare try to load the plates in supermarket bags, paper or plastic, for your awkward bike ride home. No, no, no. Go online and find the same unbleached burlap sack I found and you'll get the clucks of approval you are after. Yeah sure, second graders make a real mess and the dishes smell worse than a chemistry experiment gone wrong, but I'm OK with that.

Weekly Standard: YouTube U.

http://www.weeklystandard.com/Content/Public/Articles/000/000/014/250klogu.asp

Without much fanfare, college lectures are being put online, for free. MIT lectures can be downloaded from iTunes University, and you can watch Cal professors pontificate on your computer via YouTube. Is this some new trend? Do colleges feel threatened by Wikipedia? Something funny is going on. No one gives anything away for free without some ulterior motive.

Now you can sleep through lectures in the comfort of your own home

I mean, don't they know college is big business? Right now, 17 million students are involved in higher education, some higher than others. As a business, college is growing faster than sales of multicolored Crocs. Since 1980, the population of students under 25 has grown 40 percent--and for those over 25, it's up even more at 52 percent. Is this what your neighbors are doing during the day? Could be. Even better (for colleges, anyway), since 2002 tuition has jumped 35 percent in real terms (that's adjusted for inflation, for you French-lit majors). And while financial aid is available, there is some $85 billion in student loans outstanding. Who is going to break the news to these kids that they could have bought a Mustang and watched that physics class for free on their laptop between shifts at Dunkin Donuts (which isn't even spelt right)?

Wallstrip Interview

WSJ: Blackstone's World of Cash

Will the private equity party -- this week's Blackstone IPO is icing on the cake -- end with a bang or a whimper? Let's recall that on Friday, Oct. 13, 1989, the almost $7 billion employee-led buyout of United Airlines fell through, a bookend on a wild 1980s of junk bond-led takeovers. The Dow dropped 190 points that day, almost 7%. That's 1000 points today. Ouch. Could it happen again?

Sure. The money involved here ain't small potatoes. Private equity funds raised $221 billion last year, up from $33 billion 10 years ago. There are now over 170 private equity funds with more than $1 billion in assets. The value of deals done last year was $475 billion, up from $37 billion five years ago. Most of it was taking public companies private -- Equity Office, HCA, Harrah's Clear Channel and on and on.

What's fueling the boom? With the Dow over 13,000, it's not like there's lots of cheap companies just begging to be bought and turned around. Rather, the world has been awash in cash. The money supply has been growing like a weed at the same time that the federal deficit is shrinking -- $148.5 billion through the first eight months of budget year, down 34% from last year. As our trade deficit with China grows, they keep buying our long-term bonds. Add to that the Japanese carry trade (borrow in Japan at negligible interest rates and invest elsewhere), and you get distortions -- especially from fixed income investors such as banks, insurance companies, pension funds and hedge funds, all chasing higher yields.

WSJ: A Future For Newspapers

New technology is mucking up the media, and newspapers seem to be taking the brunt of it. Craigslist and eBay took away classified ad sales, direct advertisers are allocating budgets to search engines and circulation is receding faster than Bruce Willis's hairline. Investors seem to prefer the safety of television broadcasters and cable companies, with their nice, government-mandated franchises and pipes that reach directly into homes.

Media, after all, is about owning a pipe -- some conduit between the creation of news or entertainment and the eyeballs that consume it. Media companies sell the owners of those eyeballs lots of things we weren't even sure we needed. The higher the ad rates, the better the business. The pipe reaches the consumer directly, keeping competition at bay. The tighter the pipe, the less the competition.

For broadcasters, the pipe is spectrum given or bought from the Federal Communications Commission under the guise that spectrum is scarce. For cable operators, it is often the sole cable franchise in a town. For phone companies, it's those regulated copper wires, some of which are so old they have Alexander Graham Bell's teeth marks in the insulation.

And newspapers? Where's the pipe? What conduit to readers do they control? Well, there is the guy that drives up and somehow misses your driveway every morning. Or the sidewalk newspaper dispenser where the homeless man buys one copy and steals the rest so he can peddle them on street corners. So unless you are the only paper in town (ask Warren Buffett how much he makes on monopoly papers like the Buffalo News), there is not much of a pipe to control. Instead, reputation, quality news gathering, trust and credibility maintain the franchise, something The Wall Street Journal and the New York Times enjoy on a national level and the Washington Post and others have locally.

NYT: Trust Me

Is there trust anymore? We are caught between Obi-Wan Kenobi saying, “Let go, Luke. Luke, trust me,” and Eric “Otter” Stratton in Animal House declaring, “You [Delta House language] up. You trusted us!” Heck, the civilized world still shakes hands to show we aren’t packing daggers. In business, “trust me” often turned out to be the two most dangerous words in America.

Joe Nacchio is the latest trust-destroying manager, convicted on 19 counts of insider trading and dumping Qwest stock while smiling to shareholders. Names like Ebbers, Kozlowski, Skilling, and Martha are now synonymous with fraud, scandal and even in polite conversations are likened to the thin film that covers standing ponds. (I did meet Martha once, and she gave me a recipe for flourless waffles, so let’s give her a pass, shall we?)

Wall Street research was long ago disgraced, but add to that mutual fund late trading, options backdating, onerous interest ratings and insurance premium overinflating, and what you have is a lot of folks whose reputations have been shredded into scraps finer than Arthur Andersen documents. And the government? Given all the lying in D.C. on both sides of the aisle, you would think Scooter Libby’s defense would have been selective enforcement.

So here I am at my Carrie Bradshaw moment: Will we ever trust anyone again?

NYT: Blank Slate Hedgies

As heard on TV one morning while shaving:

Morning Show Talking Head: So tell us what drives hedge fund managers?
Hedge Fund Dude: It’s just never ending. Thinking about what is going to work next. I have a friend who is worth $150 million who is working some new ideas for a fund.
Talking Head: If I had $150 million, the last thing I would do is start a hedge fund.
Hedge Fund Dude: That’s why you don’t have $150 million.

What exactly is a hedge fund? It’s nothing more than an investment vehicle that can buy and sell almost anything. Unlike mutual funds that just charge 1 to 2 percent of assets as a fee no matter how they do, hedge funds get to keep 20 percent (and often more) of their investment gains. It’s an incentive for their managers to lead bizarre lives and suffer from mental anguish. You think they should go crazy for free?

According to Hedge Fund Research, $1.568 trillion dollars is now managed by hedge funds. This isn’t small potatoes. Who are these masked men and women? And how is it they make so much money, some of them hundreds of millions of dollars a year, for themselves?

While capital sloshes around the globe seeking its highest returns, most money is slow, almost sedentary, kind of meandering around like a humpback whale looking for easy pickings. Hedge funds, on the other hand, are playing a game of Whac-a-Mole. Whenever anything with a potential return pops up its head, young cobras staring at multicolored screens blast the mole into submission, quickly buying underpriced shares or dumping overpriced ones. How do they know what is over- or underpriced? That’s their dirty little secret. There is no one answer.

NYT: A Colossus Mistake

In H Block at Bletchley Park, the historic code-breaking facility 50 miles from London, visitors can view a rebuilt working model of a Colossus, one of the first electronic digital computers, built during World War II to decrypt Nazi codes. If only they hadn’t waited 60 years to put it back together — there might still be a British Empire. And Silicon Valley might be in some bog outside of Bletchley Park.

During World War II, there were two major Allied efforts — one British and one American — to build electronic computers. The United States needed artillery-firing tables for their big-gun battleships. Until then, the word “computers” referred to people, mostly young women, who slowly fed error-filled information into number crunching machines. One such operation, at the Aberdeen Proving Ground in Maryland, was used to solve differential equations involving speed, wind, distance, etc., to improve accuracy. Over at the University of Pennsylvania, John Mauchly and J. Presper Eckert, with help from the U.S. Army, were working on the design of the ENIAC, an electronic and programmable computer, to help automate and speed that task, and fire those human computers. The contract to build it was signed in 1943, but it was still being developed as the war dragged on. In the meantime, most artillery shells fired during the war simply missed.

The British had more pressing needs. They knew the Nazis were sending messages to troops and to U-boat submarines in code, using a code generating machine called Enigma. The Enigma had actually been used by Germany and other European countries since the 1920s. The Poles developed a model that successfully cracked the Enigma code in 1932. But by 1939, the Nazi’s had learned to change the critical key every day instead of every month. As Poland fell, the Poles smuggled their model, known as the Bomba, to the British, who set up a top-secret effort, ULTRA, at Hut 8 in Bletchley Park to decrypt the Enigma messages. Even with the help of the Polish Bomba it would take several days by hand to determine each day’s key.

Alan Turing, who conceptualized programmable computers at Princeton, was brought to Bletchley Park to design a machine called the Bombe out of electromechanical relays to automate this decryption task. Bombe was delivered in March of 1940 and by December of 1944, there were 192 Bombe machines, more calculator than computer, decrypting code. The Germans, by the way, also had a computer effort, led by Konrad Zuse, which was eventually destroyed by Allied bombing.

Hitler and his high command then developed a tougher code to communicate, named Lorenz (the Brits called it Tunny). An extra letter in its key made it much tougher to crack — it could take weeks to decipher the key instead of a day. In March of 1943, the brains at Hut 8 developed a programmable machine out of vacuum tubes to speed up breaking the Lorenz code. It was named Heath Robinson, after the British Rube Goldberg, as it was more of a contraption than a computer and didn’t help much.

Tommy Flowers and later Alan Coombs of, get this, the British Post Office, improved on the Robinson and by December of 1943, their aptly named room-sized Colossus computer was breaking the Lorenz code (or other codes as it was reprogrammable) in hours instead of weeks. The Colossus was the first real programmable computer; with 1500 vacuum tubes, it could read messages at 5000 characters per second and do 100 calculations at a time, all searching for patterns.

The Colossus played a crucial role in D-Day. By understanding where the Germans had the bulk of their troops, the Allies could decide which beaches to storm and what misinformation to spread to keep the landings a surprise.

The ENIAC, on the other hand, was no help in the shelling of German positions on D-Day. How do I know this? It wasn’t done yet. It wouldn’t be operational until February of 1946, fully two years after the British Colossus, and well after the war was over.

So why, one has to ask, is the computer industry so uniquely American? Why is the U.S. a superpower and the British lapdogs instead of bulldogs? At least in part, blame the Russians. Or British paranoia.

After VE day, the Cold War started immediately. The British were scared to death of Russian spies stealing the plans for the Colossus, of which 10 had been built. So they got rid of them. Yup, destroyed them — took an axe to the machines and lit a match to the plans. All the Bombes were destroyed, too. Can you believe it? Apparently, British Intelligence kept two Colossus machines for their own use (training Secret Agents 001 through 006, perhaps?). But these final two were destroyed the 1960s. It didn’t matter. Secrecy or paranoia, the general public didn’t learn about the Colossus machines until the 1970s. Now you know why there is no Sir Bill Gatesford, Duke of Bits.

Meanwhile, back in the U.S., the ENIAC was finally done and the War Department didn’t burn it. Instead, on February 16, 1946, it put out a press release and then held the first computer conference to explain how the ENIAC worked. Talk about open source! Every major corporation and university sent representatives, each of whom came back home and declared, “I gotta build me one of them things!”

And there you have it. The computer was born at Bletchley Park but the computer industry was born in the good old U.S. of A. Innovation ran rampant. In rapidly changing businesses, secrecy is not always the best policy. Silicon Valley popped up to supply cheap transistors for this uniquely domestic industry. Software grew. Today, companies make billions doing the same searches the Colossus “search engine” pioneered. The military even got their payback, eventually computer-guiding bombs via global positioning satellite coordinates instead of artillery firing tables. A trillion dollar press release!

Poor England. Technology today is a multi-trillion business dominated by American companies, thanks to simple British paranoia. Their century-long lead as an industrial power evaporated with nothing to replace it. A truly Colossus mistake! Let’s hope paranoia is not constraining the United States in the next wave of technology or potential wealth creation: offshoring, F.D.A. approvals, nuclear energy, stem cell research, bandwidth auctions, Area 51?

http://kessler.blogs.nytimes.com/2007/04/19/a-colossus-mistake/

NYT: Share the Air - A Capital Idea

Our friends at the Prague Stock Exchange would agree that common ownership of property has been proven to limit innovation. So should our airwaves be publicly owned or privately controlled? Bet I surprise you with my view!

In less than two years, on February 17, 2009, that 27-inch Sony Trinitron with the rabbit ears antenna on top that your parents bought you for graduation will go dark. Well, sort of. That’s when a government mandated transition to digital television signals will be complete. That old analog broadcast signal blasting from the top of the Empire State Building and elsewhere is going the way of the typewriter. Sure, grandma is going to have to pony up for cable or a special digital adapter to watch “Fear Factor,” but wow, progress from a government bureaucracy —these are heady times.

Considered “beachfront property,” a twisted metaphor if there ever was one, some of the airwaves in the 700 MHz band used by UHF channels that once blasted “Gumby” reruns 24-7 are being given to public safety organizations and first responders. The rest are to be auctioned off by Uncle Sam for billions of dollars to existing or wannabe monopolists, including Reed Hundt, a former head of the Federal Communications Commission. Too bad. Electromagnetic spectrum coupled with innovative technology is one of the few examples where public use vs. private ownership has already been proven out. It should be made open to everyone.

NYT: Hot Stocks and Vice Precedence

Should you care if the companies you invest in have a dark side, if they make money in ways that might end conversations at cocktail parties or operate in the same slop bucket as the seamy underworld you’d rather not have your name associated with?

Back 10 years ago in my hedge fund days, one of our greatest investments was this tiny little tech company that made laser diode drivers. The stock was $3 a share and no one cared about it – heck, I had to look up what a laser diode driver even was. These little devices could turn read-only DVD drives into ones that could also record. Pretty cool. We figured that someday, VCRs would be obsolete. We were way too early on that, but sometimes, you just have to be in the right neighborhood. These $2 lasers also enabled the CD drive on your computer to record onto read/write CDs. But big deal. No one cared — until Napster came along and everyone and their uncle began illegally downloading music and buying CD-RW drives so they could burn discs for their car or portable CD players.

At the time, maybe 1 percent of PCs shipped with these read/write drives, but a few years later, 95 percent of PCs had them. Sales boomed, profits went through the roof and we sold the stock between $150 and $200 (makes up for all the $3 stocks that went to $1), all because law-abiding citizens like me (and admit it, you) didn’t feel all that bad ripping off music companies – maybe because we figured they have been ripping us off for years.

NYT: In Medicine, It's Man vs. Machine

Last week, a new study showed that radiologists don’t need no stinking machines. Radiologists read mammograms, at $120 a pop, to look for breast cancer. One out of every 200 films shows a suspicious pattern the radiologist recognizes from years of experience. It’s tedious work in a dark room with a magnifying glass. And mammograms are often read twice — another $120. A new system called computer-aided detection, or CAD, can identify the same patterns a doctor can, by referring to a database of known cancer films. And now a third of all second mammogram readings are done by CAD, for $20 each. But the study from the University of California, Davis, showed that a radiologist with CAD was statistically no better than a radiologist alone in finding cancer. Round 1: Doctors.

Yet what’s amazing about this is not that the dog can’t speak English so well, but that the dog can speak at all. A machine can read mammograms! The value of CAD is not in assisting radiologists but in getting rid of them. A better study would use the CAD system to read all mammograms and, in the few cases with suspicious patterns, call in the radiologist for a second read. But what radiologist is going to volunteer for that study?

Ever cheaper technology is making its way into medicine in fits and starts. In the many industries it’s transformed, technology works by getting rid of the people in its way — operators, tellers, travel agents, librarians, stock traders and on and on.

NYT: A Fork in the Road for Google

Whenever companies sue each other, my ears perk up. Not that I really care who wins, but lawsuits often showcase hidden vulnerabilities. Inevitably, as the fight plays out, the market thinks a lot differently about the long-term prospects of both parties, and money often sloshes away to play elsewhere.

The Internet has been all cute and cuddly throughout its childhood, given a pass for youthful indiscretions like stealing music and video clips. That just ended with Viacom’s copyright infringement suit against Google. By the time this lawsuit and others are finished, Google may have to change its way of doing business. That would be a shock.

Viacom, which owns cable channels like MTV and Comedy Central, recently charged Google with blatant copyright infringement for hosting 160,000 clips of Viacom shows and then having the audacity to allow bored workers and kids at home to view them 1.5 billion times. Viacom had to sue to protect itself because, well, beneath the surface, Viacom and Google are both in the same business, selling ads. For all Google’s claims to be a technology company, 99 percent of its business is ads — for essentials like megapixel cameras, poker sites and ambulance-chasing asbestos lawyers.

NYT: Sloshing

Left to their own devices, and couches, humans instinctively resist change. Kings and C.E.O.s like it at the top. Workers don’t volunteer to give up their jobs in the name of progress. Profits and productivity may create wealth, but how it gets into the right hands is another matter. Money doesn’t flow — that sounds so planned. It sloshes. There’s a difference. As scary as it sounds, it’s the chaos of markets that keeps us well fed and out of trouble.

You work, you get money. Congratulations. After covering bare essentials like food, shelter and a high-definition plasma TV, you save the rest. You can shove it in your mattress, but central bankers like our Federal Reserve, who haven’t the foggiest clue how much money is needed to run our economy, print more money every year. They target 2 percent inflation, which is another way of saying that they overprint dollars by 2 percent, diluting your worth. How rude. A 2-percent haircut by your very own government. Annoying, but it’s been going on forever. The Roman Emperors debased their coins from 4.5 grams of pure silver to less than a 10th of a gram over a few centuries. Deal with it. Stored wealth is an oxymoron - Weimar, Germany and Argentina are more modern diluting disasters. Don’t get mad, get even.

Liza Minelli insisted that money makes the world go around (along with that whole “life is a cabaret” nonsense), but it’s really the opposite: money goes around the world looking for profits — peeking in skyscrapers, factories, alleys, even gutters. Money sloshes around the globe seeking its highest returns, on a risk adjusted basis.

NYT: It's a Profit Deal

Needing relief from medieval churches and cutesy cafes on a trip to Prague a few years back (O.K., and a tax break), I paid a call on the Prague Stock Exchange, tucked in a blocky, Soviet-style building off the main drag. I climbed a few flights of poorly lit stairs and entered a dour, dusty-musty office. I didn’t expect John Thain clapping with happy C.E.O.s at the opening bell, but heck, this place might as well have been a D.M.V. I started pining for stained-glass windows again. Nonetheless, I learned more in the next 20 minutes about how the world works than I had in the last 20 years sweating on Wall Street as an analyst and running a hedge fund.

Back home, everything on Wall Street is beyond complex: Men in funny sports coats grunting and littering the floor of the New York Stock Exchange. Dow Jones industrial averages rising and falling in seeming random correlations to sunspots or something. Million-dollar bonuses to traders younger than that Rolling Stones T-shirt in the back of your closet. Derivatives. Rate hikes. Credit swaps. Sub-prime loans. Discounted free cash flow. Man, this stuff is harder than Chinese arithmetic. I craved for a simple explanation on what it all meant. It was right in front of me.

There in the Prague office I spoke with a nice chain-smoking gentleman in an ill-fitting suit who was no doubt a district member of the Party a decade earlier. I quickly learned that, duh, there is no Prague Stock Exchange, not physically anyway. It’s just a bunch of computer servers sitting in a backroom that match trades all day. O.K., I get that. But how is it that the Czech Republic has stocks to trade in the first place? One day the government owns every business, bloated with beer-breath bureaucrats, and bleeding money if they ever bothered to check. And then one day, boom, the Berlin Wall falls, Prague is wrapped in Velvet, and the next, you have capitalism? Tricky transition.

WSJ: Weekend Interview with Facebook's Mark Zuckerberg

Where are you from? “Dobbs Ferry.” What’s your major? “Mostly computer science but also psychology.” Where did you live? “Kirkland House at Harvard.”

I’m meeting with Mark Zuckerberg, founder and CEO of Facebook, and have already run through the extent of my social networking skills from college. If that didn’t start a conversation, I usually headed back to the bar. Fortunately, Mr. Zuckerberg is not only a programmer, but a talker as well.

On the third floor of your average downtown Palo Alto building, I meet Mr. Zuckerberg after walking through a large room filled with tables and lots of large screen monitors manned by mostly young men wearing the only thing that distinguished this workplace from a hedge fund—T-shirts.

Mr. Zuckerberg’s creation, an Internet service that allows students to post personal information and photos, is nothing short of a twister sweeping college campuses, keeping millions up to date on their friends’ lives and dating status. There was a reputed $1 billion plus offer from Yahoo!, turned down, natch.

Even more remarkable is that Mr. Zuckerberg is all of 22 years old. What is it that made Facebook become so valuable in less than three years? And will 22-year-olds with 200 employees come up with all the good ideas from now on?

Wired: Make Backdating a Thing of the Past

How the tax man can help get us out of this options mess.

http://www.wired.com/wired/archive/15.03/start.html

As you read this, hundreds of Silicon Valley CEOs are under their desks in full duck-and-cover mode, fearing that the Department of Justice or a shareholder mob might pounce at any time to cart them off for "backdating" or "spring-loading" stock options. The paranoia has gotten so bad that corporate lawyers from San Francisco to San Jose are charging $600 an hour to scour records, all in an effort to clear companies’ reputations before they get besmirched. And it's a good thing — the "everyone was doing it, even Teflon Steve Jobs" defense doesn’t appear to be working.

Whose fault is this? Greedy CEOs? Ambitious human resource pros? The Securities and Exchange Commission? The Financial Accounting Standards Board? Congress? The Immigration and Naturali­zation Service? In some respects, all of them, but the root cause may be the Internal Revenue Service. And that agency holds the key to avoiding the problem in the future.

WSJ: Circular Hedge Fund

I’m thinking of starting a hedge fund that only invests in the stocks of other hedge funds. Who’s in?

Most people think of hedge funds as secretive pools run by a bunch of cowboy traders shooting for the moon. Think again. Fortress Investment Group, a hedge fund managing $26 billion, is about to go public and raise over $600 million. This ain’t Pets.com. Hedge funds are money machines, keeping 20% or more of investment profits: Fortress made $240 million last year. So why go public? Perhaps to distribute earnings as tax-advantaged dividends, or maybe, like the rest of Wall Street, there’s nothing like stock options to attract talent. Most likely, they want to get a lot bigger fast.

WSJ: Beijing Duck

Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other polished cabinetry are visiting China later this week. They'll see fields of skyscrapers, traffic jams of new cars and designer couture replacing the old Maoist uniform with five buttons and too-long sleeves. In other words, we've got the Chinese right where we want 'em.

Sure, the China Miracle is impressive -- double-digit economic growth, exports up 30%, a $150-billion trade surplus and a trillion dollars of foreign currency in their treasury as reserves. The prevailing opinion is that at any moment, China can stop funding U.S. budget deficits by not buying our bonds -- so Messrs. Paulson and Bernanke should come hat in hand and beg for indulgence. Don't believe it.

Email exchange with Milton Friedman

My friend Peter Robinson at the Hoover Institute at Stanford was kind enough to pass along a copy of my book The End of Medicine to his colleague, Nobel Laureate and father of free market thinking, Milton Friedman, who sadly passed away yesterday at the age of 94.

 

 

From: "Peter Robinson" To: "Andy Kessler" Subject: A great man wants your home address.... Date: Mon, 17 Jul 2006

 

Could you remind me of your mailing address?  See below.  Best, Peter

----- Original Message -----

From: Milton Friedman
To: Peter Robinson
Sent: Monday, July 17, 2006 10:59 AM

 

Dear Peter:

I am delighted to have Andy Kessler's The End of Medicine. I appreciate his suggesting that you send me a copy. But one good turn deserves another. If you will let Gloria know the mailing address for Andy Kessler, she will send him a reprint of my venture into the medical field published in The Public Interest about two years ago.

It goes in a very different direction but it is entirely complementary to Kessler's idea.

Cordially,

Milton

A few days later, I received a Xerox copy in the mail of a piece by Milton Friedman titled “How to cure health care”. It is a terrific piece, found here and some of it discusses Gammon’s Law, best summarized by this:

He observed that in "a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted production.’"

Trying to have good manners, I fired off a quick thank you note:

 

Media 2.Uh-Oh in a single file

 

Here is the entire Media 2.Uh-Oh series in a single file.

Media 2.Uh-Oh Part 4: Go Wide

Here is Part 4, the final piece in the series, the others are here:
Intro
Part 1: Pipe
Part 2: Layer Cake
Part 3: Virtual Pipes

So what is a Media Mogul to do? They control pipes in a world of zero margin costs. It costs virtually zero to sell one more digital song, or run one more digital ad or post one more digital classified. As chips and bandwidth get cheap, digital distribution crumbles the quaint old days.

Media 2.Uh-Oh Part 3: Virtual Pipes

Intro
Part 1: Pipe
Part 2: Layer Cake

Yup, Media is about controlling pipes and Technology is (now) about horizontal layers, and on the Web, with all those packets whizzing around like bumper cars, there are no natural end to end pipes to be found. So, can you construct a virtual pipe and actually create a media company on the Internet?

Media 2.Uh-Oh Part 2: Layer Cake

Intro
Part 1: Pipe

I had a college roommate, Franz, who after taking business classes would come back to our house, pound a few beers, proclaim, “Dude, when in doubt, get horizontal” ­and then proceed to pass out in front of the TV. (I still can't believe Forbes let me write this back in 1998!)

The point I was making is that both the computer and communications businesses have transformed over the last 20 years from a vertically integrated business to a horizontal layer cake. 

This may provide a clue as to what will happen with the (mostly) vertically integrated media mess.

Media 2.Uh-Oh Part 1: Pipe

With all this talk of new media, web media, Google as a media company (read the intro to this series) - it's time to go back to basics. According to answers.com, media is defined as:

me·di·a - Channels of communication that serve many diverse functions, such as offering a variety of entertainment with either mass or specialized appeal, communicating news and information, or displaying advertising messages.

That's pretty lame. Even Katie Couric is confused. Like the elephant and the seven blind guys, some think of media as content, others as distribution, aggregating viewers attention, user generated content, ad sales, keepers of our culture, public trust and on and on. How can you lump TV, radio, movies, newspapers, music, cellphones, cable, satellite into one phrase?

My definition is quite simple: Media is about control of a pipe.

Media 2.Uh-Oh: Intro

There is always hidden meaning to deals - the Google-YouTube deal is no exception. Why YouTube sold is pretty easy - $1.65 billion ain't bad for 20 months work and it would have taken at least $50-100 million from Sequoia Capital, their venture backers, to build the infrastructure and salesforce to build a real company. That's real money.

But what about Google? Why do it?

Barron's, Business Week and Across the Board

Here are a few more reviews of The End of Medicine

“Entertaining. A smart-aleck tour of academic labs where Kessler says the future is being invented. Think Bill & Ted’s Excellent Adventure meets The New England Journal of Medicine.” Read the review here.
"a strong case for a digital revolution in medicine's approach to diagnostics" BusinessWeek.com

“A captivating, eminently readable narrative built around his personal quest to determine if anything makes sense in the $1.8 trillion system. Kessler packages all of this in addictively short, thriller-like chapters woven with a breezy, nouveau-gonzo style.” Read the review here (subscription required).

Kessler is great company throughout his briskly paced quest. True, there's too much dialogue here and everyone he meets is a bit too quotable and colorful; in fact, the whole enterprise is pretty casual for someone trying to solve the nation's biggest crisis. But Kessler offers a genuinely fresh take as well as a glimpse of where we're headed, makeing for a valuable contribution.

And finally a quote from Ian Morisson, healthcare author, consulatant and speaker:
"Provocative, profound and profane, exactly what I look for in a book.  Andy Kessler brings a fresh new perspective to the quest for faster, better, cheaper healthcare.  This is a must read for anyone who wants an inside look at the emerging future of medicine."

Dealbreaker Interview and Excerpt: Healthcare Hedgies

Dealbreaker has an interview and an excerpt from The End of Medicine.
Ex-hedge fund guy Andy Kessler, recently took time to talk to DealBreaker's Carolyn Okomo about his new book, The End of Medicine, a witty, engaging examination of the heathcare industry in the not-too-distant future.

DealBreaker: Finance and technology has sort of always been your thing. In The End of Medicine, you utilize your expertise to analyze the healthcare industry. Was this an easy transition to make?
Andy Kessler: I spent 20 years looking for ever cheaper silicon that could change industries. Over the last few years, I’ve gotten bored. Wi-Fi and Wikis are cool, but a little dull. So I started looking for something else besides computing and telecom and music and stock trading and banking that technology would surround, squeeze, suffocate old business models and reshape in its image. In the meantime, a friend was diagnosed with cancer, only because he banged his head on a mogul skiing and an X-Ray showed a tumor on his neck. And a brother-in-law had a heart attack in the middle of the night. I wondered if there was some technology that could find this stuff early, before it was life threatening. Us baby boomers (I’m a late boomer at 47) are entering that fragile age. So I started following doctors around, cardiologists, radiologists, researchers at cancer centers and universities, looking for silicon.

Read the rest of the interview here.

Excerpt: Healthcare Hedgies

I was eavesdropping on two guys I recognized from the past. One guy used to run some tech money, I think I remember him getting blown out in 2000 for being long and wrong. But he’s obviously still in the business. I strained to read his name tag, without luck. The other guy was a classic popcorn hedgie. Always showing up where the action in, figuring out some angle and trading rapid fire looking for returns.

“For me, it’s just one thing.”

“Market size?”

“Nope, these are all billion dollar markets.”

“Management?”

“Nope, they’re all trying to hit fish with a baseball bat.”

“True. So what is it? Balance sheet? Partners? Their logo?”

“You just play the trials. I don’t give a shit what drug it is, it almost always works the same way.”

“Get out of here.”

“No, check it out. Preclinical is bullshit, you could get gum off the sidewalk to reduce tumor size in rats. So what? Even Phase 1 is a load. They are mostly bent around to get decent enough results so you can get to Phase 2. I’ve tried to time Phase 1 announcements, but no dice. You always wait until you are about a third of the way into Phase 2, then you buy the shit out the stock."

Read the entire excerpt here.

End of Medicine Excerpt: Breakfast at Bucks

This excerpt of The End of Medicine originally ran on GigaOm.

I never turn down a chance for breakfast at Bucks in Woodside. Any place with a motto of ‘Flapjacks and Tomfoolery’ gets my devotion. It’s a daily ritual for venture capitalists - the khaki patrol is out early, snagging the tables and booths with the best views of the room so they can spy who is talking to whom and have something to talk about with their venture partners over lunch.

I come here every so often, but it seems that the same folks – hey, there’s Steve Jurvetson doing another nanotech deal – are here every time I come, almost no exceptions. Over the years, I’ve gotten to know Jamis, the owner, proprietor, and self described Pancake Guy, and he made sure I had a table with a view of the viewers.

“Hey, sorry to be late. Don Listwin,” he said as we shook hands and he slipped into the booth. I could almost hear the gears sputtering and subtle whispers, ‘Hmm, hedge fund guy and networking exec - avert gaze - wireless, maybe, how ‘90’s, nothing of note here. Better to check out that other table with blog index guy and venture stud dripping yolk on each other.’

USA Today Review of The End of Medicine

Medicine + tech = great investment (someday)
By Kerry Hannon, Special for USA TODAY

It's hard to know what to make of Andy Kessler's latest book, The End of Medicine.

The former research analyst and investment banker spent 20 years on Wall Street analyzing and investing in the latest and greatest technology. He ran a successful tech hedge fund from 1996 to 2001 with Fred Kittler.

In his last outing, Running Money, he served up investment advice, but not here. Instead, he paints a futuristic Silicon-Valley-meets-medical-technology scenario that he's convinced will open fabulous investment opportunities — someday.

Kessler is witty and sarcastic in the kind of way that makes you want to sit down for a pitcher of beer with him to shoot the breeze

Kessler has observed medicine and technology for a long time. "Working on Wall Street, I'd listened to plenty of pitches for the latest miracle drug or medical device. But every time I looked at health care, costs were going up, not down."

Wall Street Journal Review of The End of Medicine

BOOKSHELF
The Art of Navigating Arteries
Andy Kessler wonders why medicine can't be more like computers.

BY WILLIAM TUCKER
Tuesday, July 18, 2006

Health care has always been the White Whale to Silicon Valley entrepreneurs. Recall "The New, New Thing" (1999), in which Michael Lewis chronicled venture capitalist Jim Clark's efforts to upend the status quo with Healtheon (now part of WebMD). Mr. Clark hoped that his new company would smooth down the rough inefficiencies in health care by digitizing medical records and joining doctors, patients and payers in a streamlined--and online--system. The verdict is still out; the results, so far, have been modest.

Mr. Kessler sets out on an odyssey...he gets it all down with Jack Kerouac-like authenticity

Andy Kessler has similarly grand ambitions, although without the venture-capital part. "Why," he asks, "can't medicine scale the way computers do?" In information technology everything can be reduced to chips, which keep getting smaller and cheaper, making costs go down. In medicine, everything works in the opposite way. Costs keep going up. Why?

Excerpt: CT Anxiety

Originally posted on Slashdot
The same technology and silicon and 3D algorithms we play around with every day are about to invade medicine. The following is an excerpt from Andy Kessler's new book, The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor.

CT Anxiety

I always feel a certain anxiety when I walk into the Hyatt Regency at the bottom of California Avenue in San Francisco. The cutsie Trolley car outside, the Embarcadero tile pattern on the sidewalk — they are all part of the package. But as I've done every time I've been there, I head straight into the lobby, tilt my head back and scan the Escher-like floors, starting at the top and then down and outwards to the bottom until I start feeling dizzy. I thank Mel Brooks for this.

This guy was zooming through someone's brain like it was a Sunday drive. More like a Sunday afternoon video game.

With my head spinning from this "High Anxiety" flashback, I stroll into the conference, half expecting to be given a barium enema by a cross between Nurse Diesel from Mel Brooks' flick and Nurse Ratched from One Flew Over The Cuckoo's Nest. I really gotta switch to decaf on days like this.

The 7^th International Multi-Detector Row Computed Tomography Symposium sounded innocuous enough. I assumed it would be a bunch of technical papers on the future of scanning, where I would read the paper in the darkened hall until lunchtime and then head off for some hot Hunan and home.

Instead, the place was like a carnival for cardiologists.

Excerpt: CAVE

An excerpt from my book The End of Medicine: CAVE

I was still chuckling when I stepped off the elevator on the sixth floor of Rhodes Hall. I followed signs for the CAVE - Computer Assisted Virtual Environment. The demo sounded good in the activities description, but it was past three and my interest was fading. I was due to meet friends at Ruloffs for bloodies. The door was closed, and as I opened it slightly, the room was mostly dark and thirty or so people were sitting around wearing funny looking oversized glasses. I spied an empty seat in the front row, tripped over a couple from the Class of '55 and sat down, almost crushing a pair of those glasses.

"You want to wear those. You won't get the 3D effect from that end." The voice came from a guy with a bizarre looking headset and a short Harry Potter like wand attached to a cord. He was standing on a 10 foot by 10 foot floor, and in front of two more 10 foot by 10 foot walls - three faces of a cube.

I'll remind you, these glasses are liquid crystal shutters, synched up to the display. We calculate and display images for your left eye and block out your right, and then every 60^th of a second flip over, display images for your right eye and block out the left. No more of the red and green glasses from the '50's."

The couple next to me nodded to each other and I thought I heard him whisper, "like at the drive-in, darling."

Townhall Podcast and TCS Daily Review

Podcast with Nick Schulz at Townhall Radio/TCS Daily

TCS Daily presents What's The Big Idea? Andy Kessler, author of "The End of Medicine," suggests that an effective use of technology could drastically reduce health care costs. Listen to podcast.

Glenn Reynolds review at TCS Daily

Andy Kessler has worked in Silicon Valley for a long time. He's seen the way that improving technology can lower costs and increase capabilities in all sorts of areas, and now he says that it's time for silicon to do for medicine what it's done for so many other fields.

That's the topic of his new book, The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your Doctor. And he thinks there's plenty of room for improvement. I agree...It's certainly the case that we're a lot more likely to see that sort of thing if health care consumers demand it. Which I guess is a reason to hope that his book sells well, particularly among policymakers and healthcare consumers. Perhaps you should send a copy to your Senator.

Read the whole thing.

Podcast with John Furrier of Podtech

A podcast on The End of Medicine with Podtech.net's John Furrier (available via iTunes as well):

Analyst, Investor and Silicon Valley Guru, Andy Kessler on the “End of Medicine". Andy Kessler, the guy behind the books Wall Street Meat and Running Money, just published a new book End of Medicine. Andy, who has been a wildly successful analyst and investor can smell the trends and in his new book. He declares the next major bubble and innovation boom from Moore’s Law - Medicine.    PodTech’s John Furrier sat down with Andy at his Silicon Valley home to talk candidly about his book and his views on the “end of medicine”. Andy delares in this podcast: “What technology did for businesses will happen in Medicine”….”where the ATM machine replaced the bank teller… the same will happen to the medicine industry…very soom (if not already) a computer will replace your doctor.”  In terms of “innovation in medicine”, Silicon Valley is leading the way and with that some big wealth creation opportunities.  Andy’s right-on and has some great stories from his travels in researching the End of Medicine.

Listen at podtech or download here.

Excerpt from The End of Medicine: RAD or CAD

Excerpt originally posted at AlwaysOn

OK, nothing in that one, let’s keep going.” Dr. Solon Finkelstein was cranking through these at a pretty good clip. About a minute each.

The light box seemed like something out of the 1970’s. Films were clipped in two rows to some white flexible plastic. Dr. Finkelstein would hit a button and a motor would whir and the films would move to the left, wound onto some spool buried in the machine and a new set of films would roll into view.

“I’ve been doing these since 1967, you know. Not much has changed. Oh, the film is better, but the rest of this…” he waved his hands in front of the contraption.

To his right were color-coded files, the same ones I remember seeing in my pediatrician’s office in, well, 1967. Dr. Finkelstein wore a head mounted magnifier, one that you might see a jeweler wear. He would occasionally lean forward to look closely at the films.

“Some like to hold up a magnifying glass  but I like to keep my hands free for the papers and the dictation machine,” he  said.

After peering at the films, Dr. Finkelstein would push a button and a view of the films would come up on two small monitors that seemed to be gerry-rigged to the light box. He would then read a barcode on the patient’s records - how ‘80’s - and push a button on a phone and talk into a microphone “Patient Smith, negative, 12 month review, Solon Finkelstein.” Two marks with a pen on a sheet of paper and then “OK, let’s go onto the next one.”

I stifled a yawn. I had somehow neglected to tell my wife I was going to be checking out women’s breasts all morning. I think she’d understand. Staring at mammograms with a 70 year old radiologist is probably not considered, er, titillating.

“OK, here’s  something.” I shot up in my seat. Finally, some  action.

“Looks like some calcification there, no problem.” Oh. “But what’s this?” He took out a red grease pen and circled what he was looking at.

“Granular tissue, perhaps?” I was glad he was thinking out loud so I could understand what was going on, but I remembered that most doctors tend to think and talk simultaneously. It can be unnerving.

“Let’s see what R2 thinks.” He pushed a button those two tiny monitors lit up. They had the same identical views as the films we were looking at, except there were a few black triangles and asterisks on them as well.

“Uh huh, R2 sees it too. These triangles are just calcifications, but that asterisk means it might be a mass. Yup, we agree. Usually do. It might be a mass, let’s check last years film. Might be something. No, this is probably no problem. See, it’s the same size, it hasn’t grown. No problem. Good.”

Reviews and Excerpts for The End of Medicine

John Mauldin's Investor Insight Thoughts from the Frontline: The End of Medicine

a very well-written story in Andy's sarcastic, witty, and easy-to-read style, but the message is also one of how fast the world of medicine is going to change in the next ten years

The Gilder Technology Report
Book of the Month: The End of Medicine - Andy Kessler

Excerpt at www.dailywealth.com

“Great, this should take about 3 minutes. Put your hands over your head.” I watched a few lasers light up my torso. He must be aligning the thing.

“OK, take a deep breath and hold it,” garb-man said. I held my breath and could feel my heart beating. And then a strange sensation. After each heart beat, the opening of the machine would move back slightly. Beat, move. Beat, move. Beat, move. I got a little spooked when it stopped moving, until I realized that we were done.

“OK, you can collect your things and wait out in the lobby.” I picked my phone and pen and noticed about a dozen ants scattered along the counter. Either the staff all met for donuts that morning or had their own poker party in the scanning room over the weekend. Not a great sign.

The procedure took all of three minutes but I sat in the lobby for another 30 waiting for Dr. Zander, rocking out to Barry Manilow on Mix 106 and then the damn butterflies started flapping again.

Something must be wrong. The S55 was gone. I think I’m the  only one here. They must be phoning an ambulance and the EMS team.

I picked up another magazine and flipped through it looking for anything to take my mind off the pounding in my chest, most certainly caused by ever shrinking arteries. I found an article about a convicted killer, always a good diversion. On July 3, 1981, a petty crook Joseph Paul Jernigan was in the middle of stealing a microwave oven from the home of 75-year-old night watchman, Edward Hale. As Jernigan was sneaking out, Hale surprised him and Jernigan quickly stabbed Hale and then blasted him three times with a shotgun. I love these kinds of stories and quickly forgot about my potentially sclerotic ticker.

Read the entire excerpt here.

On Disruption Interview

I did Q&A with Michael Urlocker on his website, On Disruption, about The End of Medicine.

"It has Kessler's trademark bawdy stories and acid observations, but it is an outsider's examination and diagnosis of an industry that looks poised for change. We traded emails with Andy to learn a bit more.

Q: Andy, what got you interested in looking at the medical business and what got you to thinking that it is ripe for disruption?

I've spent over 20 years tracking the technology business for Wall Street, as an analyst and then as an investor.

The only thing I really learned was to find the silicon.