Over the last few days a debate has flared up over the GPL (the GNU General Public License). Specifically, the debate relates to the refusal of DIYThemes to release its WordPress Thesis theme under the GPL.

The details of the debate encapsulate a major nerdfest, with legal and technical nerds crawling out of their boxes and greeting the world. But beyond this, the debate has much wider implications.

In fact, at Vox Sapiens we wonder whether this debate will be seen as the tipping point that identifies the crest of the Open Source wave. We think that, maybe, the strength of the Open Source movement will wane from this moment because of the fear and confusion that is being created.

The heart of the current debate itself centers upon what constitutes a derivative work, because the GPL license mandates that any derivative work of a GPL-licensed product must inherit the GPL license. The representatives from the WordPress developers claim that themes written for WordPress are derivative works – and therefore must be distributed under the terms of the GPL. This means that customers who pay for a premium theme are then able to give away copies of this theme (recipients of these copies would not be entitled to support from the theme developers).

Many premium theme developers have been persuaded to adopt the GPL, but DIYThemes refuses to do so and the representatives of the WordPress developers are being urged to take legal action.

The case of DIYThemes is, legally, a bit of a red herring because a former employee has admitted that lines of original WordPress code have been copied and pasted into the Thesis theme. So it is pretty clear that DIYThemes would lose a copyright case on this point. But many commentators are blurring the issue by not differentiating between the “copypasta” and the definition of a derivative work.

To make matters worse, many commentators are also suggesting that customers of DIYThemes are also legally liable for using the Thesis theme, even though the GPL applies to distribution and not users.

The Vox Sapiens opinion is that the debate has escalated into one with only one possible outcome – and that is lose-lose. Furthermore, we see this war as different to previous technical or legal disagreements in the Open Source arena, and we predict the slow decline of Open Source as a result.

JC Flowers, the Private Equity house based in New York, has agreed to pay GBP50m for a 49% stake in a Joint Venture with Kent Reliance Building Society (KRBS).

Does JC Flowers see KRBS as a major business opportunity? Hardly, because KRBS has only one branch and 45 employees. So it is definitely not in the multi-billion dollar league in which JC Flowers normally plays.

No, JC Flowers has done this deal for one reason only – to get cheap, fast access to a banking license. Whilst the “Grumpy Old Men” (Peston’s name for the group of banking industry veterans who have clubbed together to form a company to buy bank branches which the big4 are being forced to sell) are applying for a license from scratch (although with special dispensation from the UK Financial Services Authority which allows the group to bid for banking assets at the same time – so the outcome of the license application is pretty clear), JC Flowers has bypassed this.

A UK banking license is a valuable commodity. Under EU legislation, banks are now able to “passport” the licenses throughout the EU, obviating the need to apply for a license in each member state. So the moment the JC Flowers / KRBS deal is closed, JC Flowers is able to use this vehicle to provide banking services throughout the EU.

Should banking licenses be available in this manner? Or should there be a requirement that any significant change in shareholders or executive officers triggers a review of the license, and possibly a requirement to repeat (a subset of) the application process, forcing would-be bidders to think very carefully?

For sure the banking regulator can revoke a license, but this is a very serious and very public course of action, and exposes the regulator to unwanted public scrutiny of its approach. Refusing to grant a license initially, or postponing this until further requirements are fulfilled, is much easier.

Here at Vox Sapiens, we have concerns that there is a route to bypass the hoops that must be jumped through to obtain a banking license, thereby increasing the risk of problems in the banking industry. And we know what havoc these can cause.

The European Union parliament will vote next week on new legislation to curb bankers’ bonuses. The rules on bonuses are included within a larger proposal on capital requirements. According to the Financial Times, ‘lawmakers and EU officials welcomed the agreement and said it should help to reduce the “bonus culture” in the banking sector.’

Well here at Vox Sapiens, at risk of repeating ourselves (see Bankers’ bonuses – wrong target) we think the bonus culture should be increased, not reduced. This is because a properly designed bonus structure should align a banking employee’s goals with those of the employer. The problem is not one of a bonus culture, it is one of misalignment.

First, let’s consider where we find the most extreme bonus cultures. Is it in banking? Absolutely not. Instead, take a look at the “little man in the street” (or “little woman” – for reasons of brevity I will use only the masculine henceforth, but references to males should be read as equally applicable to females) that the authorities believe they are protecting by reducing his liability to bail out banks. Let us assume that this “little man” is self employed. So this “little man” generates business, performs some services, and receives payment. The business therefore generates a profit. How much of this profit is attributable to the “little man”? Well clearly, in the case of a sole trader, 100%. And for the vast majority of small limited liability businesses, also 100%.

Now let’s think about bankers. Typically around 50% of a bank’s profits are paid out to employees.

So where is the bonus culture strongest? Actually in the hundreds of thousands of “little men.”

So all this hot air about the banking bonus culture is completely wrong.

What is wrong, is the misalignment – paying bonuses from non-existent profits (not possible in the “little man” scenario), and/or developing bonus calculation mechanisms that reward employees for taking risks where the employee’s downside does not balance his upside (possible to a degree for the “little man” although the typical downside might be bankruptcy, which is far worse than being fired).

There will continue to be a clash while politicians and mandarins continue to pander to barely-informed populist agendas and rail against the bonus culture per se, rather than work on a serious framework to induce alignment between risk-based performance and reward.

So it looks like SAP is going to buy Sybase, database vendor. But SAP is paying a lot of money for the company placed fourth in its main market. The price per share, at USD65 and a 44% premium to the pre-announcement price, hearkens back to the mid-1990’s when Sybase was still considered a serious competitor to Oracle, IBM, Ingres (another decliner), and Microsoft was not taken seriously as an enterprise computing vendor.

Here at Vox Sapiens we are not sure this is the right move for SAP. Firstly, Sybase is probably a poor choice at virtually any price. But there is plenty of commentary available on this elsewhere on the web.

So instead, here at Vox Sapiens we will discuss the company that SAP should have bought. And that company is Software AG (or “SAG”).

SAG is the second largest German software vendor, after SAP. The SAG headquarters are in Darmstadt, just south of Frankfurt and only 70km (45 miles) north of Walldorf, the home of SAP. There would be huge cost synergies achievable in a very short timescale. In fact, on cost synergies alone SAP has a huge advantage over any other potential acquirer of SAG. Furthermore, the market capitalization of SAG is approximately half that of Sybase pre-announcement, making it easier to swallow.

But more importantly, SAG is probably a much better fit strategically.

Sybase brings two things to the table: a database and mobile computing capability. What can SAP do with these?

Well the mobile capability is interesting, and fits with SAP’s strategy of moving access onto mobile platforms. But there are plenty of small companies with this capability that SAP could snap up at a fraction of the price of Sybase.

And the database is really no big deal at all. SAP has alliances with the three bigger database vendors, alliances that allow the SAP application(s) to work on these databases. And existing customers are highly unlikely to be persuaded to switch databases just because SAP owns Sybase. The cost of switching will be very high, and it is 99.99% certain that the former database couldn’t be eliminated entirely from the enterprise because other applications would be using it.

Furthermore, selling the SAP application to existing Sybase-only customers is unlikely to be significantly affected by the acquisition. The Sybase database sale is a very technical one, the key customer contacts are the CTO and the database specialists. Contact with these people will not give SAP the links to the senior executives to whom SAP would try to sell the application.

And SAP already has a database for customers that don’t have or want one from the leading three vendors – it is called MaxDB and is based on technology developed by … Software AG. MaxDB is actually a modified version of SAG’s ADABAS D database, licensed by SAP. So there are big opportunities here for cost synergies and for modifiying MaxDB even more to meet SAP’s requirements. ADABAS D should not be confused with ADABAS, another SAG database, and another leading technology that is closely linked to SAG’s Natural programming language.

An issue with the SAP application that many customers raise is the difficulty to integrate it with other applications. Many customers have to buy middleware, business process management (“BPM”) and other similar technologies to facilitate this integration. SAG bought webMethods in 2007, a company that produces middleware of the same name. SAG has also recently bought IDS Scheer (which created the ARIS enterprise modeling approach) giving it even more presence in the BPM market, and also a presence in SAP consulting. With webMethods and IDS Scheer, SAG presents a bundle of technology that SAP needs and can’t find in plenty of other companies as is the case with Sybase’s mobile technology.

So yes, at Vox Sapiens we believe that SAP has missed a trick. It should have bought Software AG.

The latest European passenger vehicle emissions standard (“Euro5″) was introduced in September 2009. Since that date, in Europe it has been illegal to sell new vehicles that do not meet this standard. Older models that only met the Euro4 standard can only be exported outside Europe to markets with more lenient standards. Within Europe the cars have little value – they can only be disassembled in order to reuse the components – and this value is therefore below cost.

This situation alone raises the possibility that dominant carmakers in the other markets will already be very suspicious of Euro4-compliant automakers. But it can get worse, much worse. Imagine that the government in another market introduced emissions standards that the locally dominant carmakers were not meeting, but with which the Euro4 vehicles were compliant. Imagine that, to compound that, the local market had only recently introduced a new emissions standard so many vehicles were in the early phases of their marketing cycles and the automaker had not had much time to prepare for the new emissions standard.

So the consequence is that the locally dominant carmakers find that (part of) their range is no longer legally saleable before they have achieved payback, plus they do not have new compliant models waiting for release to fill the gaps. And so the Euro4 compliant automakers find a hungry market for their formerly almost-worthless cars.

Well from July 2010, China will require compliance with Chinese5 emissions standards. And guess what? Chinese5 is basically the same as Euro4. So vehicles that become unsaleable in Europe last year remain compliant in China whilst some competing models in that market will be withdrawn from sale. And guess what else? Chinese3 emissions standards were only introduced in July 2008. So some of the vehicles to be withdrawn may have only been available for two years.

So perhaps there will be an opportunity for China to complain about dumping?

The US Senate has started to debate the Financial Reform bill. This bill proposes the most sweeping changes to US (and, therefore, global) financial markets regulatory practices since the Great Depression of the 1930s.

So one might think this an extremely important bill, right? So all the Senators have read it? Dream on!

The bill presented to the Senate is 1,300 pages long. How many people will read all of it? And even those few souls who do manage to read all the way through, will they really digest it, thoroughly, all of it? Of course they won’t.

So here we have what is possibly the most important piece of legislation relating to financial services for decades, and nobody fully understands it. Isn’t that frightening?

Perhaps in clauses hundreds of pages apart there are disparities that will keep lawyers employed for years.

In addition to its length, another problem is the breadth of the subject matter. Whilst all of the bill relates to financial markets in the broadest sense of the word, there are sections that are barely related to each other. A key risk here is that concessions and watering-down will be agreed in one section in order to gain support for a completely unrelated section. So, for example, the agreement to the derivatives section might affect regulation of deposits, or comments on naked insurance might impact international wire safeguards. These are just possible examples, the Vox Sapiens team hasn’t read the bill.

The US has an opportunity to show real leadership to the world here. It should cut the bill up into smaller sections that allow proper understanding of the consequences of each clause.

As Tolstoy said: “There is no greatness where there is not simplicity.” Is there greatness in this bill?

Let us hope that debating this bill doesn’t encourage many Senators to snore so that others can fleece us.

At Vox Sapiens we are disappointed by a recent FT article which appears to show sloppy research. We have long admired the quality of the research and analysis in the FT compared to many other newspapers. However, today’s article appears to have taken an idea from an old article and repeated it almost verbatim, thereby misleading the reader. We are using this as an example of how it is important to be careful when using the Internet for research.

The article in question relates to Toyota – When sorry is the hardest word. In the article the author states:

A related weakness, says Hisao Inoue, author of Toyota Shock, a book on Toyota’s recent problems, is that Toyota’s relentless growth has amplified its conservative culture, by favouring bureaucratic conformity and discouraging the sort of negative views that are vital to anticipating disaster. “People with contrary opinions used to be respected, but today’s managers have succeeded by getting along,” he explains.

So as readers we probably assume that the recent problems referred to in that quote are the recalls that started earlier this year? Well, unfortunately these problems are not the subject of Inoue’s book. Consider the following from June 2009:

Hisao Inoue, author of “Toyota Shock,” a book that chronicles the automaker’s recent troubles, said Toyota sorely needs what he called “a philosophy” or “a spirituality” that a founding family member like Akio Toyoda might offer.

Source: Japan Times, Toyota counting on family ties

So Inoue’s book was published before June 26 last year. But Toyota’s recall-related problems began to become a public problem when?

Well here at Vox Sapiens we actually discussed this matter in a previous post. The post Toy-woe-ta – Looks like a business school case study in the making was published in January this year. In the post, we don’t name the exact date when the issue regarding floor mats preventing accelerator pedal release became big news. But a quick search shows that this was September last year – three months after the Japan Times article. (See, for example, Toyota/Lexus Consumer Safety Advisory: Potential Floor Mat Interference with Accelerator Pedal.)

So Inoue cannot be referring to the floor mat recall nor subsequent problems.

Sorry FT, but this just isn’t good enough.

We would have made these comments on the FT.com website against the article in question, but unfortunately this article appeared not to have comments enabled.

The Consumer Watchdog April 21 asked the US Department of Justice (DOJ) to launch an antitrust action against Google. In its request it suggested that Google might be broken up.

While there is the potential for Google to develop into something that needs to be broken up, right now there is a candidate that is way higher in priority. And that is Paypal.

In a previous post I pointed out that the attacks on bankers’ bonuses missed the point (see Bankers’ bonuses – wrong target). The Consumer Watchdog has performed a similar trick here.

So why should Paypal be at the front of the queue?

1. It has become a monopoly – it demonstrates Metcalfe’s Law beautifully – and, if the allegations repeated below are true, is now abusing its status. Without Paypal you are unable to send money to or receive money from a very large proportion of Internet users. For sure there are competitors such as Google Checkout and 2CO. But if you can use only these, whilst most people are using Paypal, you are extremely restricted in your ability to engage in web-based financial transactions.
2. Paypal provides a service for which there is no viable alternative. You can’t realistically barter online, you need to use some form of electronic payment system.
3. Alledgedly Paypal has repeatedly misunderstood how dangerous false positives are to a person’s financial position. The web is full of stories of people who claim that Paypal has frozen their account without warning, usually on the basis of “suspicious transactions,” only to discover that the transactions are valid. Now this also happens a lot offline – personally I find my erratic credit card usage results in a new card approximately once every three months. But I can own 2 or 3 credit cards, and if one is cancelled I can use another. It is not so easy to have multiple Paypal accounts, and even if you do have more than one account, switching is not as easy as taking a different credit card out of your pocket. You need to modify your email address associations, so that Paypal transactions linked to the email address associated with the frozen account do not fail. If you are using Paypal buttons to sell, you need to recreate buttons to associate to your new account and update your website. For some people who make their living selling online, a frozen Paypal account can put them out of business in days – and for those working as sole traders or with personal guarantees to a separate incorporated business, the result can be much worse when supplier contracts cannot be immediately termninated.
4. Alledgedly Paypal is also reticient to reinstate accounts, potentially leaving people permanently excluded from the growing online economy.
5. Your online Paypal activities can impact your offline financial status too. Many people almost see Paypal as “play money” – especially if they are sending friends, say, 99 cents. What they don’t realise is that Paypal is linked into many of the credit reference agencies, and your offline creditworthiness can be decreased by your online activities. So your application for a mortgage might get refused, or the interest rate increase by a couple percentage points, because Paypal has reported “suspicious transactions.” For sure this is not all Paypal’s fault, but Paypal could do a better job of teaching people that they need to be as responsible with their Paypal account as they do with their bank account.

So what should be done about the situation?

1. Fungibility is required between Paypal and other online payment providers. I can setup an automated payment from a bank account in one country to deliver funds into a bank accounts in another country (with a few exceptions) – I am not restricted to depositing into accounts in foreign branches of my own bank. I should be able to send money between online payment providers.
2. Paypal needs better regulatory oversight. In particular, the issue of alleged indiscriminate account freezing must be investigated and addressed. This will require international coordination between regulators.

And if Paypal does not agree?

It should be split into three or four separate companies, each with the same international coverage as Paypal provides now, thereby giving consumers a choice of online payments provider. And by starting from a common position, IT system interconnectivity will be simple, and therefore fungibility can be built in from the beginning.

A condition of the licence to trade should be that fungibility should be maintained, even in the event that one of the baby-Paypals is bought by, for example, a commercial bank.

My personal expectation is that, under this scenario, one of the first buyers would be Google, which would merge the baby-Paypal with Google Checkout to take advantage of the fungibility with the other baby-Paypals – this might then provide grounds to investigate Google if it were to use the inaccessiblity of Google Checkout-only functionality in an anti-competitive manner.

Powertrain 2020! The EV vision! The lust for lithium! The fuss about fuel cells! The automotive industry is alive with a debate over the replacement of the gasoline powertrain.

This is an extremely important debate, and will have major impacts on the strategic positioning of the OEMs. For example, what would happen if the future is rechargeble batteries and in the future the electricity supply companies give away vehicles in exchange for exclusive recharging contracts? Don’t believe it could happen? Look at the mobile phone handset industry.

But creeping up quietly is another technological shift that could have even more impact

Telematics is likely to completely change the way consumers choose, use and maintain cars.

Telematics will feed frequent, perhaps daily, maintenance data feeds to the dealer network where analysis will determine service needs in a far more precise manner than the current mileage-based approach. The data will also be used to predict imminent component malfunctions.

Telematics will support the driver with applications that are orders of magnitude more advanced than the existing satellite navigation systems. Want to take a break? Well just lock into an automated convoy.

Telematics will bring to automotive accident investigations what the “black box” has brought to aircraft accident investigations.

Telematics will enable usage-based insurance – and not just “how many miles?,” “where?” and “when?” but also speeds, severity of breaking, amount of skidding, etc. – indicators of driving style that might be indicators of propensity to be involved in an accident (let’s wait for the cries of “unfair” regarding whether or not these indicators really are predictive).

And where in the list of “telematics will” did I mention gasoline or internal combustion engines? I didn’t. The vast majority of the telematics enhancements are powertrain-agnostic and will be incorporated into future vehicles irrespective of their means of propulsion.

Add to this the fact that the vast majority of car drivers really don’t understand the technical details of their vehicles – they assess them on cost, looks, ride quality and user interface. Telematics could be the determining factor for the final element in the list of criteria.

If I wanted to predict the winners to dominate the next generation of vehicles, I would be seriously examining the telematics suppliers.

The Icelandic Special Investigation Committee (SIC) yesterday (April 12th, 2010) delivered its report on the collapse of the three main banks in Iceland. It makes shocking reading.

It can be downloaded here.

At Vox Sapiens, our initial vision was of a couple Escher’s masterpieces.

“Ascending and Descending” depicts a monastery where half the monks are forever walking upstairs and half are forever walking downstairs.

“Waterfall” depicts a perpetual motion machine in which water runs forever downhill.

The business empires of the owners of the three large Icelandic banks – Landsbanki, Glitnir and Kaupthing – allegedly demonstrate similar features.

The banks’ owners are alleged to have borrowed money from their own banks, and to have used some of this money to buy shares in the banks, resulting in an increase in the share price. The SIC refers to this as “weak equity” and it grew to represent more than 25% of the banks’ capital base.

These shares were also used as collateral against loans, further leveraging the banks’ positions.

And the growth of the banks was out of all proportion when compared to the Icelandic economy and the ability of its officers to supervise the banks.

In seven years the banks grew to twenty times their size until their debt issuance exceeded the GDP of Iceland and grossly distorted the requirement for foreign currency reserves. The writedown in the value of the banks’ loans in 2008 was the equivalent of five years GDP.

At the same time, a country of only 320 000 people was not able to provide a sufficiently large and experienced banking oversight regime to handle three large banks.

Finally, there appears to have been insufficiently long arms when lending contracts were established. Not only were loans provided to the banks’ owners, but also to the owners’ other businesses. These other businesses also pledged icelandic shares when borrowing from foreign banks. As the icelandic share prices fell, the icelandic businesses had to repay the foreign banks, and the icelandic banks stepped in to replace this debt, further leveraging the icelandic economy. The SIC summary presentation at the press conference states that “these investment companies had an abnormally easy access to loans in the banks in the capacity of their ownership and influence within them.”

A sorry state indeed.

Note: These images are available for commercial reuse.
Ascending and Descending search
Waterfall search

They can be obtained from:
Waterfall: http://picasaweb.google.com/lh/photo/36X8UHueP5H6pycVt_JBEA and
Ascending and Descending: http://picasaweb.google.com/lh/photo/gwkazaD_DWA9EyY3W0LyfA

The recent financial crisis was exacerbated by several failures, one of which was poor risk management by banks. Previous attempts to coerce management into being more responsible have failed. How about this approach?

In principle, fining companies for risk management failures is not very effective. A fine is a one-off that can be explained as such and the magnitude is of minor importance because financial accounts can be presented excluding the effects of the fine.

However, an alternative approach would be that the capital adequecy requirements of companies are affected by the results of risk management failures. The Basel requirements calculation could be modified to include factors to compensate for poor risk management (evidenced either through the identification of weaknesses during an audit or through the manifestation of a failure).

By forcing banks with poor risk management to hold more capital, this introduces a market adjustment and puts such banks at a competitive disadvantage, thereby encouraging better risk management.

Furthermore, this approach would embody the “prevention is better than cure” principle by improving risk management before banks got into serious difficulties rather than adopting some of the ring-fencing techniques (such as the currently fashionable contingent capital approaches) to prevent contagion and systemic failures.

There would be some pre-requisites for this approach, including:

• improvements in regulatory competence – the failure of the regulators being another reason for the magnitude of the financial crisis
• clear guidelines for assessing the severity of risks to make sure that the capital surcharge penalty was appropriate for the crime
• detailed modelling to ensure that banks cannot game the rules and continue to allow weaknesses because fixing them costs more than the cost of holding the additional capital

So how does this proposal differ from (UK Financial Services Authority Chairman) Lord Turner’s capital surcharge for risky banks proposal?

Well firstly, I should say that the approaches can work together. In fact, they should work together.

The emphasis of the UK regulator’s proposal is a bank’s strategy – additional capital is required in order to engage in risky activities. What Lord Turner’s approach does not cover is banks’ capabilities to manage the risks in these activities. In effect it assumes that all banks are equally competent at risk management.

However, this is clearly not the case.

So the Vox Sapiens proposal suggests that risk management competence is also measured and used to compute an appropriate capital requirement.

So Renault-Nissan and Daimler have agreed a cross-shareholding and cooperation on future technology. Here at Vox Sapiens we are not optimistic about this alliance.

Firstly, this seems very one-sided. New emissions standards is forcing Daimler to develop its small-car models (smart, A-class, B-class). So far it has made a right pig’s ear of anything below its C-class range, and is desparate for a partner that can help it. So this deal, if successful, helps to dig Daimler out of a big hole.

But Renault-Nissan have no similar burning platform. Both businesses will need to continue to cut costs to remain competitive, and one route is co-development of technology and even shared production. This agreement supports this option, particularly through Daimler’s engine technology contribution. But Renault-Nissan already has a lot of the necessary expertise in-house. Daimler’s engineers will add value, but not to the extent that Renault-Nissan adds value for Daimler in the small-car areas.

Second, the management’s comments don’t sound too confident about making the alliance work.

“The main difference is … that with Chrysler, we agreed on a merger but had no ideas about areas of collaboration, … This is just the opposite of what we did with Chrysler and I am very optimistic that the outcome will be the opposite as well,” Dieter Zetsche, Daimler’s chief executive, said.

OK, so this time Daimler is out of first grade. But second graders are not that mature. Will a 3.1% equity stake really be enough to influence Renault or Nissan as a shareholder? Probably not. And does a change in the value of a 3.1% shareholding in Renault and Nissan have a major financial impact on Daimler? Once markets recover, probably not. So getting value out of this deal is all about being able to influence the technical guys to work together. Daimler couldn’t do this when it owned all of Chrysler. What has happened in the intervening period to show that it can do it now, especially when it doesn’t have the management control to force cooperation?

And thirdly, and this concerns us greatly as another unknown for Daimler, the French government is able to control this agreement. Just this week, Christian Estrosi, the industry minister said: “It is a very strong undertaking of the French president that from now on the state will take part … in the industrial strategy of Renault.”

Wow ! Not much requirement to read between the lines there.

Although a senior government official tried to assuage concerns by saying “We will have our say about Renault, but not about Daimler,” we don’t see how having a say about Renault’s participation in this agreement can not impact Daimler.

Earlier this year the French government appeared to alter Renault’s manufacturing strategy by blocking the transfer of Clio production from France to Turkey. What happens if the Daimler-Renault-Nissan alliance plans to produce a co-developed engine outside France during the next economic downturn?

And the French state will buy 0.55% of Renault as this agreement dilutes its stake and it drops below the 15% required to meddle to the degree that it wishes.

We will sit, watch and wait for the tears.

So Microsoft (presumably on the advice of lawyers) used the DCMA (Digital Millennium Copyright Act) to force Cryptome.org’s hosting provider, Network Solutions, to close down the website and keep a lock on the domain name to prevent the site being relocated. Then a day later the complaint was rescinded, allowing the site to be restored.

This was a bad thing to do? Why?

OK, where should I start?

Well firstly, it brought huge publicity to the situation, and the number of people aware of it is now many orders of magnitude greater than it would have been. Cryptome.org’s typical readership is a combination of technogeeks, political activists and privacy specialists. Most would have a good idea where to find a document that other parties might wish to keep out of cyberspace. So even if Microsoft had been successful in forcing the removal of the document from the Cryptome.org site, it would have appeared somewhere else, and the people really interested in it would still be able to get to see it.

Secondly, Microsoft has egg on its face. Such a sharp reversal of policy in 24 hours hints at a lack of crisis management expertise in Redmond. Theoretically this could impact the share price, particularly because Microsoft is not a stranger to legal battles, albeit ones that focus on monopolies rather than copyright.

Thirdly, it is another thing to think about when registering a domain name, and could impact the US-located domain registrars’ businesses. If Cryptome.org had been registered with a foreign domain registrar, it would have been out of the reach of the DCMA. I assume this is one reason behind the choice of registrar for Wikileaks. Even if you are a non-US business using a non-US server your site can still be brought down, permanantly, if the domain name is registered through a US registrar.

And fourthly, and most importantly, this will really scare a huge number of Microsoft customers and potential customers. By bringing this action, Microsoft has made the general public aware that it is keeping track of what they are doing, and archiving the information that it knows. Long term, this could be very costly indeed.

This is just the latest in a string of similar foolhardy activities. Why did people not learn from Bridgeport Hospital, from Julius Baer, from Royal Dutch Shell, and from many other large organisations?

When will lawyers learn that just become something is “the law” and their client is “in the right” there might be very good practical and strategic reasons to avoid attempting to enforce it. And when will the large organisations learn to manage their lawyers instead of being managed by them?

Greece uses the same currency as Germany. But Greek government bonds yield almost four per cent more than German government bonds, an all time record for the eurozone.

This is telling us something; really telling us something. The bond market is pricing in a high possibility of default by the Greek state.

Until recently, the market perceived barely any difference in credit risk between different European Union countries. The yields on bonds were pretty similar between countries – so low that some commentators suggested the differences should be greater. But the perceived wisdom was that the risk of default by an alleged profligate state (predominantly those with a mediterranean coastline) was very low, and that even if a default was imminent the other austere and prudent states would step in to help their prodigal sibling.

But Herr Brüderle, the German Economics Minister, put an end to those thoughts. First acknowledging, in a speech to German Members of Parliament (more similar to Representatives than to Senators), that “some euro states are showing dangerous weakness. This may have fatal effects on all states in the eurozone,” he then went on to add that “there should not be a collective bailout for lopsided developments at national level.”

There is likely to be plenty of coverage of the “will they, won’t they” predictions over the next few days. But say they won’t, and Greece defaults. What are the implications? Vox Sapiens will be following this closely and answering the question.

As a footnote, it is likely that the Ouzu crisis will appear as just a small ripple compared to the Shochu crisis. But that’s another post.

Toyota seems to have spent the last few weeks giving PR people a good example of how not to handle a negative story.

Firstly, there were the stories of floor mats preventing the release of the accelerator pedals and the potential for accidents.

Then, two days ago (on January 26, 2010), there is the halt to production in North America and the recall of another couple million vehicles.

But, worst of all, many consumers do not know that the latter recall is a separate problem because Toyota never managed to clearly articulate the fact. So many consumers do not appreciate that the reason for the second recall is nowhere near as dangerous as the first.

Let’s look at the state of the Toyota website on January 28, 2010.

http://pressroom.toyota.com/pr/tms/news.aspx is the main webpage (live).

Or click on the thumbnail to see a partial screenshot taken on January 28, 2010.

Shameful. Utterly shameful. Here at Vox Sapiens we have major concerns here that Toyota does not know the scale of its PR shortcomings and that there are big troubles ahead.

Vox Sapiens will be watching this closely and there may be more blog posts about Toyota.

During the last few days many of the large Investment Banks have announced staff bonuses. And in many cases these have been at, or near, record levels. This has led to public outcrys.

As a response, some governments have announced special taxes on these bonuses. And the triumverate of governments, central banks, and financial services industry regulators have all railed against the bonuses.

But why are the bonuses so high? Who should be the real target of the outrage?

Well unless you are a shareholder in one of these Investment Banks, it should not be the bankers. Bankers’ bonuses are just a transfer of wealth from Investment Bank owners (shareholders) to employees (bankers). Other than a miniscule drip-down effect introduced by higher earnings and dividends, there is no impact on the economy. And like all employees, all that the bankers are doing is getting as much out of their employers as they can do. This behaviour affects the average man in the street far more when sports stars do it (leading to higher and higher prices for admission tickets and replica kits) than when bankers do it.

But what allows bankers to demand such hefty bonuses? Extraordinarily high bank profits.

Just a year after virtual doomsday, and a blood-splattered Wall Street, Investment Banks are making hefty profits again. Why?

Because making profits in the last few months has been easier than taking candy from a baby.

Firstly, interest rates have been kept exceptionally low – near-zero in many developed economies. As a result, banks have been able to borrow costless money. And have banks suffered the same credit squeeze as other business? Not the big ones, not on your life. They have had money thrown at them in order to prime the pumps of the world’s economies (a task in which they failed, but that’s the subject of another post).

And secondly, banks have been handed “get out of jail free” cards on their bets that went wrong. Banks have been able to sell their toxic assets at prices higher than they could get in the market (i.e. more than they are worth, the difference in price being risk-free profit).

And who have been responsible for creating these über-benign conditions? Our good friends the governments, central banks and regulators.

No wonder they are so keen to keep the attention on the bankers’ bonuses – it deflects attention from the banking profits that they have helped create – the real transfer of wealth from the average Joe to the large Investment Bank. Joe Taxpayer forks out to support the banking system, and in return finds the recovering banking system taking more money. Do you think Joe Taxpayer might get a wee bit angry if he realized? So better that he didn’t, eh?

Just a bloglet today – a more substantial post will be arriving soon.

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I subscribe to Get Abstract (registration required) which provides 5-page abstracts of business books, allowing me to keep up with trends without spending my entire life reading books. Usually I find it very useful. But today I received an abstract that included the most banal statement ever.

I received the abstract of “Inside the Mind of the Shopper: The Science of Retailing” by Herb Sorensen. Here is a quote:

Studies of shoppers’ behavior show … “Trips always start at the entrance and end at the checkout [or] exit.”

Well DUH !!!

As somebody who has spent a large proportion of his career as a management consultant, I am often accused of selling snake oil or taking a client’s watch in order to tell him/her the time. But never have I been accused of stating the obvious in this way.

Renault has announced that it will produce a cheaper vehicle than the Tata Nano, which is currently the world’s cheapest car.

This story from Autonews (registration required) reports that the CEO of Renault and Nissan, Carlos Ghosn, states that an agreement has been signed with Bajaj Auto whereby

• an ultra-low-cost car would be produced at a lower cost than the Tata Nano
• Bajaj would undertake design, manufacturing and sourcing
• Renault and Nissan would handle marketing (including in the Indian market) and provide technical support
• no changes were indicated to a previously signed ULC cooperation agreement whereby Bajaj would own 50% of the project, Renault and Nissan would each own 25%

Apparently Ghosn indicated that there would be a difference between price and cost, suggesting perhaps that the ULC would sell at the same price as the Nano, thereby giving Renault, Bajaj and Nissan a better margin than Tata’s. “I can tell you the cost of this car would be lower than any car today made in India,” said Ghosn.

Here at Vox Sapiens, we have already written about the Nano, and how it might change the auto market in our Here comes the Nano tax article.

Additionally, General Motors plans to launch a small car for India next year, and Toyota plans one the year after.

These ULC initiatives only confirm our view that ultra-low-cost vehicles are going to cause a dislocation in the automotive industry.

Ghosn only confirmed that the ULC will definitely be sold in India, although he did state that exports will be a possibility. We don’t understand the reluctance of OEMs to consider the developed world market for these vehicles, especially in the near future where such ULC offerings may be the only affordable options for many families.

So McClatchy Newspapers has discovered that in late 2007 some analysts at Moody’s Investors Service were “downsized” for expressing concerns about the accuracy of the ratings being applied to some of the CDOs (collateralised debt obligations), especially those comprising MBSes (mortgage backed securities).

The news group alleges that Moody’s shuffled its internal employees, sidelining and/or firing those that were raising red flags and replacing them by structured finance specialists, in order to continue to provide the high ratings needed by the Investment Banks that were assembling the CDOs (see this story). The allegations are supported by quotes attributable to several former employees.

If true, the allegations reveal a deep weakness in the debt valuation process.

The story ends with the comment:

The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.

Experts such as Columbia University’s [finance expert, John] Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they’ll remain “just one more conflicted gatekeeper,” and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained,” Coffee said.

As somebody involved in the equity valuation process, I find this absence of responsibility quite shocking.

In the equity valuation process, an analogous process to debt ratings would be VDD, or vendor due diligence. VDDs are employed to reduce disruption to a Seller’s business. For example, if a Parent company wishes to sell one of its business units (the “Target”), then every potential Buyer would wish to dispatch its own team of analysts to perform (buy-side) due diligence on the Target’s finances, including interviewing management representatives from the Parent and Target.

The VDD approach means that only one team of due diligence analysts is encamped at the Target, preparing a due diligence report. The Parent company contracts the due diligence provider, and pays for the work, and often attempts to suppress any negative commentary about Target business. However, when the transaction is completed, the vendor due diligence report is assigned to the successful Buyer, and the due diligence service provider assumes a duty of care to the Buyer.

This approach focuses the due diligence service provider’s mind on preparing an objective and factual report when confronted by the Parent company management’s intimidation.

This is very different to the “under no legal obligation since technically their job is only to give an opinion” scenario in which the debt rating agencies work.

Isn’t it time that the users of debt ratings demanded that the ratings agencies become more accountable for their “opinions?”

Dr Dieter Zetsche, CEO of Daimler AG (that produces Mercedes-Benz and Smart) is reported in Automotive News to have said of electric cars being on the immediate horizon that “we are at that tipping point now.”

Really? I disagree for several reasons. …

Insufficient range

How far can an electric vehicle travel between charges? About 80 km (50 miles)? That’s less than an hour on the open road, and a bit more in slower-moving urban areas. For many people that is not enough for the daily round-trip commute to work. So if you want a quick journey to visit the relatives who live just 170 km (105 miles) away (less than two hours down the freeway/motorway/autobahn), that means two charges on the journey there and two on the way back. Is that practical. A resounding NO.

No charging infrastructure

So we need to stop on the freeway every 80 km (50 miles).

Existing gas/petrol/filling stations are not equipped with charging mechanisms. How long will it take to roll out a complete infrastructure upgrade? A partial upgrade is no use – what do I do if I need to charge my vehicle every 80 km and the upgraded charging stations are located 100 km apart?

And I’m not sure that every freeway has filling stations every 80 km. So new buildings are also required, or signposted diversions into local charging stations are needed. How long will it take to build these new stations? And how economic will the business model become after the new stations cannibalize the non-fuel sales from the existing stations?

An alternative charging/refuelling process is required

How long does it take to refill a vehicle with gas/petrol/diesel? A couple of minutes?

How long does it take to recharge an electric vehicles’s battery pack? Much more than two minutes. Hours. Although I have heard that technology is advancing and super-fast charging techniques are being honed. Thankfully the existing filling stations tend to be hooked into the high-power grids that can deliver, say, 100 amps at 440 volts. But this sort of high-speed charging will never be possible for home-based use.

An alternative approach would be removable battery packs. You pull up at a charging station, underneath a hoist, and your existing battery pack is lifted out and a new pack is lowered in.

There are health and safety issues here to be overcome – but if we can allow people to squirt highly flammable liquids out of nozzles on pressurised hoses, then I doubt we will be stumped by an acceptable approach to lifting battery packs.

And another issue is to ensure that new packs are not removed and replaced by old ones, leaving the system overly expensive whilst the people responsible find themselves with high quality and readily saleable goods to quietly slip over the border into a different country.

Recently I was re-reading Theodore Levitt’s epochal Marketing Myopia and considering the basic premise that companies are not defining their markets correctly (by being product-orientated or service-oriented rather than customer-oriented) and therefore not following the market as it migrates to an alternative product or service to fulfil the same underlying desire.

Then it struck me that maybe there is an exception for which a replacement has not been produced, and maybe cannot be produced …

What about tobacco?

I have been unable to think of an alternative product or service that a tobacco or tobacco product (cigarettes, cigars, mainly) company can produce.

If this were possible, don’t you think that either an existing tobacco company would have staked its claim on this new market or that a new competitor would have muscled in?

Don’t you think that the reason that people find it so difficult to give up smoking is precisely because there is no viable alternative? That the so-called alternatives have been unable to fulfil the same need that a puff of a cigarette meets so effectively?

And if this is the case, what are the implications?

Well apart from legislating smokers into secluded “baccy dens” there seems to be little to reduce the size of the existing market. And 30 years of anti-smoking advertisements have not been exceptionally successful in deterring new adopters. So maybe tobacco companies are the ultimate survivors? Maybe the safest place for a stock investor?

I’m happy to be proven wrong. If there is an alternative to tobacco, please tell me.

An annuity is a contract between you and an insurance company whereby the insurance company will pay you a certain amount of money, on a periodic basis, for a specified period. For example, you might pay an insurance company ten thousand dollars and in return you will receive 100 dollars a month for 10 years.

Typically an annuity will be the basis for a pension, but this need not be the case. And some annuities are structured to provide tax benefits, this being the case especially for pension annuities.

Annuities, at a high level, can be divided into two categories: immediate annuities and deferred annuities.

An immediate annuity almost always involves a lump sum payment and the “distribution phase” begins as soon as you have made this payment.

A deferred annuity almost always involves an “accumulation phase” where you make periodic payments to create a capital sum which is later used to provide the payments to you during the distribution phase.

The distribution phase might be a fixed term or it might be until the end of your life (or, in the case of a joint annuity, until the later of the end of your life or the end of your spouse’s life).

The payouts during the distribution phase are a combination of a return of the capital that was used to establish the annuity plus additional money earned by investing the capital sum. For distribution phases that run until the end of your life, the payout amount also depends upon your life expectancy. The inclusion of the return of the initial capital is what makes the returns appear particularly high – especially for lower life expectancies.

The investment component of the payout can be either fixed or variable. Fixed returns are either guaranteed by the annuity provider or a result of investing in products with fixed returns, such as bonds. Variable returns are typical achived by investing in stocks.

Every report on the state of mergers and acquisitions points out that a proportion of mergers fail to deliver the intended benefits. Similarly, reports on the success of projects convey a similar message – some projects fail. Mergers are amongst the largest and most complex projects that companies must implement, and are not ‘run of the mill’ for most companies, so shouldn’t we expect mergers to fail – at least until we can implement projects successfully?

Disclaimer – I am a management consultant and spend a large proportion of my time advising clients on the strategic and operational aspects of mergers and carve-outs. I have written this post without intending to sell my capability and/or services (I haven’t disclosed the name of my employer, for a start) but readers might want to bear in mind my position.

So companies are not very successful at implementing projects. Over the years the reported success rate has improved, but the proportion of failures is still shameful.

What is a merger if it is not a project?

Mergers are just projects with tighter than average timescales, more politically-charged than average environments, broader than average scopes, more than average interdependencies, less well-defined than average requirements, and higher than average public scrutiny. In other words, they are more complex than average projects.

So we should expect mergers to fail at least as frequently as the overall rate for projects, and probably at a greater rate due to the high complexity. Although the share of executive attention means that maybe there is more ground-level motivation to make the merger a success that may work against this.

OK, so maybe we should expect some mergers to fail. So what? The point of this blog post is what exactly?

Well the simpler reason is just to point out that preventing the failure of mergers will not be a simple task – without solving the problem of why projects fail.

But the main (and hopefully more perspicacious) reason is to prompt the consideration of project failure in more detail within the context of mergers. Presumably if we know why projects fail, we should be able to introduce measures to avoid the failure. And we should be able to apply the same approach to that subset of projects called mergers, assuming the measures applied are applicable to all projects. I will return to this idea, and discuss possible responses, in subequent posts.

And carve-outs? Well they are probably even more difficult because the deadlines are legally driven.

The media report that General Motors was loathe to sell (a full or partial stake in) its European Opel operations to the Magna consortium because it is concerned that this will provide a conduit via which GM’s intellectual property (“IP”) might end up in the hands of GAZ, a competitor to the Chevrolet brand in Russia. Today the media report that GM has agreed to sell to the Magna-led consortium, but that there are conditions attached to the sale. I find this approach somewhat strange, and wonder whether it is a smokescreen.

We also read media reports that Ford is concerned about the possibility that a Chinese company (Geely being the most commonly quoted) might buy (a stake in) Volvo Cars as a mechanism by which to acquire automotive IP. Furthermore, Ford is reported to have concerns about Magna, which is one of Ford’s major suppliers too, owning a rival to Ford’s European operations (although Reuters reports that Magna co-CEO Donald Walker recognizes the need for “a clear barrier between the parts and car companies”).

For many years, the greater portion of automotive IP has not been developed and owned by the OEMs. Most IP sits in the supply chain. The OEMs work with the suppliers to define requirements for new parts, and the suppliers develop the IP as part of their work in producing these new parts (in fact, the failure to take advantage of this situation is one key reason behind the weakness of many suppliers, but that’s a story for another blog post).

The skills and knowledge in the OEMs revolve around:

1. Supply chain management – managing a cascaded supply chain of hundreds of suppliers providing tens of thousands of components is an enormous challenge. There might be some program management IP here, but very little automotive product IP.
2. Sales and marketing – the OEMs have done a great job of keeping their suppliers’ brands out of the general public’s awareness. Whereas, for example, Dell and HP have been unable to resist the “Intel Inside” initiaitive, the OEMs do not have to contend with “Denso Inside” or “American Axle Inside” or “Bosch Inside” slogans. As a result, only the automotive afficionados are interested in the source of components when buying a car.
3. Channel logistics – predicting demand, having the right models, with the right attributes (engine size, color, extras, etc.), in the right place at the right time. The performance of the Detroit 3 in this respect might also be the subject of another blog post.

So why do I think this is a smokescreen?

1. It is very difficult to protect product IP – your competitor only needs to purchase your product and dismantle it to discover 99% of the product IP that is embedded in it. Process IP is another matter, of course, but …
2. Russian tax laws make it advantageous for OEMs to supply CKD/SKD kits that are reassembled in Russia (whether this is the approach taken for Chevrolet and/or Opel vehicles, I don’t know), making it easier to determine the later-stage process IP. Furthermore, more assembly process IP can easily be obtained by luring away two or three key personnel.
3. Opel is the technology source for GM’s small car platform, which possibly represents GM’s future growth strategy. Does GM want to risk this strategy by releasing ownership of the technology to another industrial player?
4. Without Opel, GM ceases to be a global company. In particular, Russia is a market with a huge potential. And if GM loses control of Opel, what prevents the new owner targetting Russia and seriously affecting Chevrolet? At present, GM has the opportunity to ensure that Opel and Chevrolet present complementary product ranges in the Russian market; a new owner for Opel is likely to ensure the establishment of competitive product ranges.
5. By selling to a financial buyer, GM has the opportunity to buy back into Opel at a later stage when its finances are in better shape. Would an industrial owner be prepared to sell (at a realistic price)?
6. Magna, as the owner of Opel, will obviously become the preferred supplier to Opel. With Opel and the remainder of GM sharing many components (especially for the new small car platform), this gives Magna immense additional leverage over the remainder of GM.

Why might GM have a point?

In the interests of balance, here are some reasons why GM and Ford might be right to be concerned.

1. Shanghai Automotive Industry Corp (SAIC) bought the rights to the 25 and 75 models when MG Rover Group collapsed (it bid for the entire group but lost out to Nanjing Automobile). SAIC then transferred the assembly from UK to China where the same cars are assembled at a lower cost (see this Reuters blog). GM and SAIC have a joint venture, so maybe GM has seen at first hand some of the tricks used to transfer IP.
2. A Magna-owned Opel may be less concerned about IP for Opel components being utilized for parts destined for other OEMs, because the benefit still accrues to Magna

The Tata Nano is likely to change the lives of an immense number of families in the developing world, with the possibility that the Indian car market will increase by 65%, according to Standard and Poor’s Indian arm, CRISIL (source India Times). And much has been written about Ratan Tata’s dream of migrating Indian families from two wheels to four.

But how about the developed world? I believe that it will be disruptive here too – by fundamentally altering the tax applied to private vehicles.

Car ownership patterns

The Tata Nano promises to bring a fundamental change to car ownership in the developing world. It is cheap enough to appeal to a new group of car owners for whom no other car is affordable. However, I believe that the Nano is also cheap enough to be affordable as a second, or third, or even fourth car, for developed world families. And it comes with the benefits of new car warranties, rather than the potential cost of breakdowns that accompany used cars that can be found at the same price.

The basic model, the Nano BSII, sells in Delhi, India for about 115,000 Rupees (about 2,400 US dollars), and for between 5% and 10% more in most other Indian cities (source Tatamotors.com). Expectations are that the “Nano Europa” prices in the developed world (meaning mainly Europe, rather than North America) will be a little more than double this – so a westerner will be able to buy one for about 6,000 US dollars (about 4,500 Euros). And the Nano is very economical to run, with the extremely good fuel economy that one might expect from a car that only weighs the same as a Formula One Grand Prix car (including driver).

How many developed world households will replace public transport usage by an additional car at this price? How many parents will be able to provide their eighteen-year-old child (17 in UK, Ireland, Poland) with a Nano so that the child no longer needs to ride the bus to school/college/university, or catch a lift with the parent?

A surge in vehicle ownership

And what will be the effect of all of these additional cars?

Well there have been several comments on the web about the potential gridlock that the anticipated traffic volume surge will create. And also many comments about the environmental effect of the additional exhaust gases, for example:

• The New Scientist Environment Blog
• The Independent (a UK newspaper)

But there has been previous little commentary on how governments will react, particularly regarding fiscal matters.

Welcome the “Nano Tax”

I believe that the time is ripe for an “additional car tax” or “Nano Tax” as it could be called. I think that governments might seize the opportunity to portray green credentials and formulate a new approach to vehicle taxation. And the additional income will be most welcome as a contribution towards paying down the public debt mountains that the recession has given western economies.

For governments this is almost a “must win, can’t lose” story:

• too many additional cars on the road, outpacing road building programmes, will lead to congestion for everybody – so people will support measures that reduce the number of “other drivers”
• governments need to meet the requirements of the Kyoto Protocol – and the notable absentees from the list of signatories, USA and Australia, are not the most attractive markets for Nanos and other ultra-cheap but very small cars, due to their low population densities and requirements to travel long distances
• a tax on additional vehicles does not penalise the poorer families that can only afford one car – in fact left-wing governments could portray this as a redistributive tax if the tax for the primary car was reduced

Forms that the Nano Tax may take

A substantial amount of mathematical modelling would be required to predict the impact of the Nano and how vehicle tax changes might alter the impact. Would a 30% increase in tax be required to avoid a 10% increase in the number of vehicles on the average European highway? I don’t know. My gut tells me that Europe’s citizens will be quite inelastic to changes in the tax charge when offered such a radical reduction in the cost of vehicle ownership. Thus I expect that a major increase in vehicle tax will be required to halt the increase in vehicle ownership, and that governments will need to reduce the tax on the primary vehicle in order that the overall vehicle tax revenue doesn’t increase so much that the governments are accused of profiteering.

And so where will the increase in tax fall hardest? The upper working class and the lower middle class. These groups, already comprising a large number of two-car families, and dependent upon two cars, will not have the disposable income to handle a radical change in second-car tax policy. The lower working class will probably benefit, if the tax on the first car is reduced, due to the low rate of second vehicle ownership. And the upper middle class and upper class have enough disposable income to absorb the additional tax.

So if you are in these social classes, enjoy your second car while you can. In 2011 or 2012 you might find it becoming a luxury that you have to live without.