Welcome to Ununoctium (Element 118)

Just a quick article that I had to post.

The Seattle Times: Nation & World: Heaviest known element created

Ever since I learned about basic chemistry, I’ve had an unnatural affection for the periodic table. What an amazingly elegant and simple roadmap to understanding the composition of matter.

I’m not sure what we’re learning at this point as we built heavier and heavier elements, but for some reason, I still love the fact that we have scientists pushing forward our understanding of matter in this way.  This one was particularly interesting, because there has always been something special about the noble gases, and this one was the blank spot on that last row.

Let’s hope they give it a better name than Ununoctium

Apple license Mac OS X to Dell?

“Those who cannot remember the past are condemned to repeat it.”
Life of Reason, Reason in Common Sense, Scribner’s, 1905, page 284
George Santayana

“The future success of Apple, Dell and Intel lies with a licensing deal between Steve Jobs’ company and the PC maker according to analyst Gartner,” Andrew Donoghue reports for ZDNet UK.

The ZDNet article is here.  The MacDailyNews coverage is here (the commentary always cracks me up).

I happened to be at Apple Computer in 1996-7, and I remember quite well the launch of Mac OS licensing, and the eventual cancellation by Steve Jobs.

This idea is one that MBAs just love… regardless of the economic reality of the process.

The basic problem with OS licensing for Apple is easy.   Yes, the profit margins are much higher.   But the aggregate margin dollars are much lower.

Example:
Sell 10 copies of Mac OS X to Dell for $50 each.   Even if the margin is 95%, that is a $450 profit.

Sell 10 iMacs for $1000.  A margin of 20% gives you $2000 profit.

End result: Apple would need to expand Mac OS marketshare by 4-5x to make exactly the same profit they do today on the Mac.

It’s not impossible, but the problem is the transition.  What Apple learned during licensing is that when given the option to buy a non-Apple Mac, a lot of existing Mac users took it.

These are Mac users who used to give Apple $200 profit each, and they switched to giving them 1/5 that amount.

That means Apple would have to shrink to a company with less revenue and less profit for several years, in order to hopefully someday capture sufficient marketshare to exclipse their old numbers.  An uncertain bet, given the lockdown that the Windows monopoly has on the desktop.

Unfortunately, I’m not a Gartner subscriber, so I can’t read the original report.  But I feel like I’ve read 100 like it in the past 20 years.

None of them ever explained how Apple would live through the process.   What’s worse, is that Apple actually tried this already.  They gave in to the overwhelming pressure of management consultants everywhere.

Maybe there is an answer now.   Maybe the iPod business gets so large that Apple doesn’t really need the Mac profits anymore.  But I doubt it.

This is a good lesson for all companies that have very profitable businesses that are lower margin.  It’s wonderful to see a promised land with higher margins, but make sure you think through the transition.

In evolutionary biology, they refer to this problem as a “local maximum”.  The problem is that evolution can incrementally push you towards a solution that is better than any other incremental step – but it’s still not the ideal solution overall.

It happens in business as well.

By the way, if you didn’t hear, Apple is delivering numbers that no one would have ever thought possible in 1996.  Q3 earnings here.

Dow 12000? Could have been 22000! Berkshire Hathaway in the Dow Jones Industrial Average.

Big news this week. The Dow has closed over 12,000. Whoopee.
Sometimes, I am amazed at how incredibly stable certain staples of culture can be, even in the face of overwhelming logic & reason.

One example of this is the continued fascination that people have with the Dow Industrials index. This group of 30 stocks has changed over the years, but dates back over 100 years (1896), ever since Dow & the Wall Street Journal attempted to capture a measure of the “Industrial Strength” of the US Economy.

The problem is, the equation they used to calculate it is nonsensical. Literally.

The Dow Jones Industrial Average is a “price-weighted” index. This means that a $1 move in a $25 stock is worth more than a $1 move in a $10 stock.

This, of course, makes absolutely, positively no sense.

Now, a “market-capitalization-weighted” index, like the S&P 500, makes sense. An “even-weighted” index makes sense. Even some of the cool new “fundamental-weighted” indexes, based on figures like the revenues or cash flows of companies makes sense.

But a price weighted index makes no sense. If a stock in the Dow Jones splits 2:1, it’s future impact on the average will be lower than if it never split at all.

This, compounded with the incredible unpredictable and poor timing that the index owners have used to add & remove stocks from the index has led to extremely unpredictable performance.

There is a really great piece in Business Week that illustrates how ridiculous this index is.

As you may have heard, Berkshire Hathaway, Warren Buffet’s company, hit its own milestone lately by trading at $100,000 per share. Yes, that’s right. The reason it is so high is that they have never split their stock, and it has compounded at extremely high rates since the 1960s.

Can you imagine what the Dow would be like if it had included Berkshire Hathaway as one of its stocks (which would be easy to justify)?

The answer is: if they had added it in 2000, the index would now be at 22000!

Buffett’s Baby: Too Big for the Dow

Despite this, every newspaper and television show seems to highlight this milestone for this nonsensical financial metric. And it really does influence investor behavior. I have family members who have told me they are reluctant to buy stocks right now because “the Dow is so high”.

For the 20 or so readers of this blog, hopefully now you know the truth. Spread the word. The DIA is meaningless.