Technomediatainment Futures:

Structure, Barriers, Outlooks and Assessments

By Dave Livingston, Managing Principal, Llinlithgow Associates (www.llinlithgow.com )

Dave is a management consultant primarily focused on improving enterprise performance by

coupling strategy with execution thru the design and implementation of workable, integrated
management systems. He blogs on this and related issues in Economics, Markets &
Investments and specific industries and companies at www.llinlithwo.com/bizzx, his
BizzXceleration blog.

This essay collection is a survey of the emerging and evolving Technomediatainment Industry and its
component Industries. The label is an invented one that incorporates Technology, Telecom and Media &
Entertainment. Over the last few years technology evolution has resulted in the convergence of these
industries into one very large virtual industry where characteristics and activities in one define the
environment and outcomes in another. Yet, at the same time, each industry continues to be a powerful
force in its own right and must be understood by itself as well as for the interconnections and impacts on
the others.

Toward that end we build up a suite of tools and conceptual frameworks for each industry and use them
in series of performance evaluations. Simultaneously we look at the economic and market factors, as
well as these internal and technical components, to understand where the industry is at. And to also
understand what the key barriers and opportunities are, how individual companies are performing and
what the likely outlook and outcomes are.

The net result is a set of tools that allow you to analyze the industry per se, its impacts on the business
performance of its customers, the key challenges and barriers facing it and the consequences for
investment, economic & business performance and marketplace implications. What we find over and
over again is that much of the commentary is too centered on the headlines and doesn’t understand, nor
adequately take into account, all of these various factors and how they inter-play.

If you are an employee, customer, investor or market purchaser at all involved in these exciting but risky
industries you’ll find a set of approaches to use in your evaluations, as well as examples for
investigation.

Let’s put that another and blunter way – using these tools can make you money, save you money or
protect your business and career when properly used. We hope we’ve done our part by building a
complete toolkit and showing how to use it. The rest is up to you.

As always with our essays they are largely drawn from an inventory of blog postings built up over three
years. For each essay the URL is listed and each post generally contains a very extensive list of
background reading excerpts. These not only document the issues and companies but provide a library
of resources for you in your own investigations.
 Table of Contents

1. Tech, tech, who's got the tech: Greenberg on Definitions 3

2. Tech Bizz: Times They are Changing 4
3. B2C Wars:Yhoo/MS Merger - Disaster in the Making? 6
4. Tech: Dropping Outlook vs Climbing Competition 7
5. Comments on the Tech Outlook (and Earnings in general) 9
6. Telecom, Media & Entertainment 11
7. Small to Large - IT Industry Structure 12
8. DLS' s, Two Cultures and the Breakdown 14
9. Commoditization, Consolidation, Consequences 15
10. Telecom: More Perfect Storms a' Comin 16
11. Telemedia, Entertonics: Let the Wars Begin 17
12. The Content Who Would Be King 18
13. Tech Industry: Innovators, Survivors & Also-rans 20
14. Tech Industry: APPL vs MSFT vs YHOO Wars 21
15. Technomediatainment (Telecom): RIM, ATT, Sprint, Cable Wars 23
16. Technomediataiment (Content): the Revolution is HERE 24
17. Technomediatainment: Maturities, Barriers and Disruptions 25
18. Technology Industry: HPQ/EDS, PCs and Prospects 27
19. Tech Industry: Playing it Again, Same...oops Sam 30
20. Tech Trends I (Readings): Big Picture to Key Players 30
21. Tech Trends II (Analysis): What' re the Drivers and Outlooks 32
22. Tech Trends III: Dell Earnings to Bandwidth to Content Wars 35
23. Tech Industry Refresh I: Boxes to Software to Phones - OUCH! 38
24. Tech Industry Refresh II: From Downturn to Re-structure to Re-engineer? 40
25. About Llinlithgow Associates 44

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Tech, tech, who's got the tech: Greenberg on Definitions
http://llinlithgow.com/bizzX/2007/10/tech_tech_whos_got_the_tech_gr.html

Earlier this week Herb Greenberg had an interesting Marketwatch colum on just exactly what is a technology
company that's not only worth reading but even more worth thinking about. And then perhaps comparing and
contrasting to Fleck's most recent jeremiad where
he trys to focus on profits, earnings and margins for
real.
Herb borrows and advances the argument that you
need to look at R&D spending and gross margins,
which is useful, but only a start and can be more
than a bit mis-leading. My argument would be that
you need to look at the consequences to that
spending in terms of sustainable income and
continuos innovation. Which is, btw, really hard work
to dig into. But at the end of the day the ability to
invest in R&D, translate that into products and sell
those products for an above-average profit because
you've focused on delivering value is the real set of
things to look at. So as you're looking at the
excerpts and links below check out the
accompanying 3-month chart and ask yourself - is
that NDX runup based on sustainable profitable
products or not ? Or is it just a momentum play ?
To start with Mr. Greenberg here's what he had to say:

Why Google, Apple, Dell, others may not be what they appear. Herd mentality drives me
nuts, especially when it involves "technology stocks" as if one size fits all. It often is a
categorization that is as arbitrary and blurry as the line can be between value and growth
stocks. That is simply the way Wall Street works, especially when any sector comes into
favor, as tech has been in recent months. But that also raises the question: What really is
a tech stock? Broadly defined, high-tech is anything having to do with
telecommunications, semiconductors or personal computers. But that can be misleading,
which is why former hedge-fund manager, tech analyst and all-around out-of-the-box
thinker Andy Kessler likes to take it a step further to say that to be considered bona fide
tech, a company must spend "some exorbitant amount on research and development"
resulting in products that more than pay their own way. The easiest way to figure that out
is to look at gross margins and the amount spent on research and development relative to
sales. On both counts, the higher the better.

Definitely worth reading but there are several major problems with taking it to far.

Having commented on the column let me quote myself:

A useful set of distinctions and metrics that are also worth kicking around - for one thing if the
folks putting money into tech think it's tech then it is; at least from a short- and intermediate-term
market view. On the other end of the spectrum the test being proposed here is that relative
magnitude of R&D investment in overall spending. By that measure the two really dominant
technology industries are Pharma and Aerospace where one should really run two P&Ls. One on
the research side and the other on the operations side, linked by the capital asset acquired by the

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 latter from the former. This is really an important distinction - for example the troubles of the
Pharma industry are really aging, maturity and failures of it's R&D effectiveness and the need for
new approaches. On that path when Boeing or Airbus make a bet on a new plane it's "bet the
company time". The B747 gamble almost destroyed BA while the AB380 may destroy Airbus if
the hidden assumptions about the structure of the travle market don't work out. If you're
wondering what hidden structures those are things an investor should learn.
Back to more traditional companies normally referred to as tech why restrict it to PC's - IBM still
dominates the worldwide server market and wraps a lot of very sophisticated software around it to
sell it and services around both (btw in the name of digging into details while share of revenue is
different share of profit is balanced across the three). Hiding in here are two other distinctions that
are really hard to dig out of the normal financials. One is the role of technology; as pointed out
above Apple as measured appears to be non-tech, or a hybrid, yet technology innovation is the
driving engine of who and what they are. But it's also fair to say that innovation is driven by
design-awareness and value focus on the customer.
A 2nd and related distinction is how effective is the R&D component - that is how much usable
product and process innovation results from that l.t. investment ? IBM spends enormous sums on
R&D which has resulted in great strides in chip technologies and a reputation for innovation yet it
hasn't been able to create any new major sources of revenue or growth in over a decade. As a
real case in point look at the development investments of the car companies who are
extraordinarily large spenders. But what have they to show for it.
So while I applaud the effort and the results I'd also suggest there's a lot more too it. It seems to
me the first test is not necessarily the magnitude of R&D - thought that's a nice starting screen -
but the fundamental question of how R&D fits into the company's overall strategy and structure.
Then one can ask how effective is it in terms of innovation and how effective it is the marketspace
and ultimate on revenue and profits. This means really having to dig into the fundamentals - bear
in mind, using BA as an example again, the roots of the B787 go back 1-2 decades in terms of
design tools, manufacturing processes, materials and so forth.
Unfortunately I don't know any good places to turn to get that kind of information for investors.

Tech Bizz: Times They are Changing

http://llinlithgow.com/bizzX/2008/01/wrfest_20jan08tech_bizz_times.html

Now that our little side detour to look at the emerging bear is "over" - btw just kidding, from the futures today it's
just really beginning - it's time to put up the interesting links and excerpts for the business stories of the week.
There are enough we're going to split them into two. This one will focus on Innovation based industries and the
next on general business issues and more traditional industries. In fact judging from today's open this is pretty
timely :).
A constant theme we've been playing is the need to understand the drivers and characteristics of enterprise
performance, which argument has been mightily reinforced these last few weeks. Not to mention these last few
days. While all this sturm und drang is going on there are some major deep changes happening in the innovation-
based industries. Which notion is itself a major one. Notice we didn't just say technology industries ! Innovation is
something that all firms should be doing, most don't and will become increasingly important as a foundation for
survival. But the innovation-based industries are the ones where product development in fact drives the whole
rest of the firm.

As Josh Limon pointed out the first pill costs $10B while the 2nd costs $1 in the pharmaceutical industry. Similarly
in the aerospace business Boeing and Airbus should really have a split P&L. One for the research, development
and production behind the first new model. The second for the continued manufacturing, sales and support of the
next 1,000. In comparison R&D and innovation do not, as a matter of fact, take up as much of the budget and
aren't as critical to the traditional tech industries. Though it is still critically important. So we've collected readings
on tech, telecomm, pharma, aerospace and alternative energy under this heading.

But let's set the table with - why do you care ? Well if this carnage ends in six months as the standard expectation
has it who'll you pick to get back in with ? If it keeps going same question, different dates ? On the other hand if

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you'd read Truth, Justic and the NDX Way and agreed with the conclusions you might have been out of Tech in
time to save or short and make money. Consider this post a continuing part of our efforts to dive deeper into
business evaluation and rubble sorting (Winners & Loosers: Rubble Sorting). Since we've a little space, and each
link deserves it's own post - if not a series, let's try and expand on the context a bit.

1. Telecomm - on it's 3rd or 4th Perfect Storm. The story below on the iPhone will help explain why the decade+
business model of the big telcos got blown up last year. Another major disruption is the "fat pipe to premise" war
between the telcos and cable companies. The result of which is already upending the media & entertainment
industries more than they've been since they were shaped at the end of the 19th C (hyperbole ?). Part of the next
big storm is the growth of Unified Communications which should be a major innovation for the Telcos but which
they're having trouble grasping. Meanwhile MSFT and IBM are going after it big time. Interesting. And then there's
the GOOG vs YHOO war where the first's model may be aging while the latter let complacency and lack of
innovation and adaptation depreciate its' user base value so severely. And who doesn't seem to be generating
any new breakthru thinking either !

2. Technology - meanwhile IBM reported a 12% jump in EPS but when you look at the detailed investor
presentation that was 24% YoY but 10% was in revenue growth and buybacks, each. But revenue growth would
have been 4% without currancy benefits. And they told me that you buyback shares when they're under-valued
not to catch a falling knife in a down market. Me, I'd rather have that cash as a dividend rather than see it go into
buybacks and be depreciated completely. Similarly ORCL bought BEA (finally) but BEA has almost completely
lost its' clout to IBM in the last few years in the Java arena and ORCL's not done well with its' own middleware
strategies (FUSION). Can't say there are many indicators of organic revenue and profit growth let alone long-term
innovation here.

3. Pharma - it's finally dawning on investors that the R&D model which drives Big Pharma is broke as broke can
be and no substitute is on the horizon for a long....long time. Which is why you hear a lot of analysts beginning to
talk about major downsizings and further consolidations. Drug pipelines are 7-15 years long. Today's problems
were laid down in the late 90s and the stock prices have increasingly reflected that.

4. Aerospace - Boeing's been taking it in the neck recently over continued delays in the B787 Dreamliner
because of supply problems. That's in addition to market pressures of course. Yet the 787 represents major
design and construction innovations that date back almost a decade, based on design innovations in CAD/CAM
that go back to the mid-90s. For this plane they've undertaken a huge new operational innovation by outsourcing
whole assemblies around the world. That's turning out to be a major headache but I'm pretty confident that they'll
solve it. Meanwhile Airbus's big new thing is the A380 which is so big only a few airport can handle it and which is
really only profitable on very long-haul int'l routes. Yet as technology advances it becomes more feasible to start
flying more and more point-to-point city pairs. Which is perfect for the B787. When this is over, like Apple with its'
string of sustained innovation, BA looks like a great investment for the future.

5. Energy - alternative energy is going great guns but the fact of the matter is that it takes 20-30 years to migrate
an energy infrastructure to a new foundation. All this does is nibble around the edges. And that's as long as you
don't make silly mistakes like subsidizing ethanol production from corn thereby driving up food prices, not
producting fuel at any cheaper prices and neglecting your real alternatives over the next several decades of coal
and nuclear. Meanwhile of course these might still be good speculative investments.
All in all there are going to be real winners and loosers in these industries. Sorting them out takes a bit of work but
you'd probably spend that much time reading charts and financials. Why not invest a little in exploring the
structure and fundamentals as well. We'll do our best to help.

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B2C Wars:Yhoo/MS Merger - Disaster in the Making?
http://llinlithgow.com/bizzX/2008/02/b2c_warsyhooms_merger_disaster.html

Among the other big news, and there was sure a lot of it last week, was Fri's announcement of MSFT's semi-
hostile offer for Yahoo. An offer which apparantly is the last item in almost two years of on-going discussions and
failure to reach agreement. In our humble opinions this is a disaster in the making and they only possible
beneficiary is Google. That conclusion is reached by a combination of familiarity with the Industry, with companies
and technologies involved and applying our model of enterprise assessment (Masterclass: Buffett on Investing
and Business Analysis). It's also a lesson in business history among other things. In any case how this plays out
is important for Internet users, for investors and for employees as well as customers and suppliers of the
companies involved. As a start on pulling the pieces together we used our framework to put together a preliminary
analysis skeleton of the merger and wrapped it in a bit of industry analysis as well. Below the line you'll find some
very interesting reading excerpts and linkages as well. In particular we highly recomment following thru the link on
Nicholas Carr's article and using his discussion as a template for understanding what's going on here. To put
another point on it btw - this is an excellent example to illustrate how one might begin to do deeper analysis on
companies. Let's start with the skeleton in the table below:

Basic Internet AOL(~ 1985) MSN (~1995) Yahoo (~1995) Google

(~1998)
Business Online access to Dial-up, created Dial-up to high- Internet directory to Search + Adsense
data & text. Non- content, nonGUI, speed, services portal Portal + = multiple search
Model&
profit (?). [Prodigy, subscription, mono- (mail, messenger), Dedicated content based advertising
Strategy Compuserve, …] services proprietary content (Finance, …). Display
advertising
Mkt/Sales/Srvc Dial-up subscription On-line access for Evolved many Build it and they will Indirect, user-
On-line databases non-computer users properties but late come. Many valuable driven & ad-
• Users too game properties left fallow associated for
• Customers & not marketed. users
Discombobulated Customized and
embeddable for
customers
Operations Services + Proprietary network Entirely MS platform Open-source(?) Open-source+ PC-
proprietary network based server farms
Management ????? Merger was disaster MS platform focus Management ? O.K. but TBD
Disappeared into the - Lack of integration, - Software hacker System ? - Grad skul culture
• Culture phone companies controls (Code Red - Free-wheeling to - Engineers
• - Never linked Longhorn) bureaucracy - Terminal
Leadership distribution & content - Bureaucratic and - Vision-deficient & arrogance
non-adaptive non-responsive

The emphasis here is on preliminary - a considerable amount of additional work would be needed to flesh out the
details, especially at a company level. Nonetheless several key points stand out when one uses the template to
think things thru a bit.

1. First off this is a battle of business models. As you look over the history of the B2C industry notice that it
evolved from dial-up access and text interfaces to proprietary databases to GUIs, dedicated content and more
user-friendly interfaces.Both Yahoo and MSN eventually evolved the portal model while Google came up with an
entirely new approach based on embedding context-driven advertising in ANY on-line source. In a very ecological
fashion one change begat another.

• It'
s particular worth noting that at each stage of this evolution the prior dominant company
locked itself into a culture, business model and operating processes that led it to freeze in place.

2. As MSN and Yahoo evolved the portal model they became, rather than a few key services, attempts at
becoming central locii for ALL possible services, e.g. Finance, Movies, Music, communities, etc. etc. etc. And as a

Page 6 of 44
result became to a large extent hodge-podges of different services with a) no common thread or targeted user-
base and b) saw each community fail to receive the dedicated marketing and sales support it needed to nurture
both the user-base AND the folks paying for the portal thru advertising. The theory of portal-based advertising is
display advertising based on attracting viewership.

3. At the same time both have received numerous complaints from their customer bases about slowness, lack of
response, inattentiveness and over-bureaucratic processes which made them slow, unresponsive and non-
adaptive.

4. If you were to break down both MSN and Yahoo into, what in effect, the myriad seperate businesses
supposedly built on a common platform you'd find that many of these businesses have deep failures and
structural flaws on their individual models, marketing, sales and service capabilities and operational capabilities.
For either to recover a better position each business they choose to keep must be effective - however one
chooses to define that.

5. Operationally each business and general platform is founded on entirely different technical bases that are
mutually incompatible; even contradictory. Merging the two will be a nightmare of monumental proportions.

6. Culturally not only are each non-adaptive and non-innovative but each is also antithetical to the other.

7. Finally each has failed to both maintain, nurture and grow their existing portfolio of businesses but each has
also failed to find a path forward; i.e. they've failed to innovate and become stuck in their own complacencies.
Going back to #1 they let themselves be trapped by their histories. There is early evidence that Google is so
trapped in it's engineer's mindset that the same level of cultural blindness and idiosyncratic arrogance is driving
their decisions. Note for example that the original context-based search continues to be a monumentally
successful business but the vast majority of new business initiatives have failed to yield new successes.

A perfect example of Yahoo's failures of imagination, innovation and execution is implicit in this video interview of
Susan Decker from the Davos conference (if it's still available):

Friends and Enemies:Insight on transforming Yahoo, with Susan Decker, Yahoo! president and
CNBCs Becky QuickYahoos
Any senior officer of a major company should be able, at a moment' s notice, be prepared with the
"elevator speech" outlining the vision, strategy and operational execution plans & capabilities. IMHO
this brief interview proves that such was and is totally lacking at Yahoo. And won' t be provided by a
merger with MSN/MS. In other words a disaster in the making!

Tech: Dropping Outlook vs Climbing Competition

http://llinlithgow.com/bizzX/2008/02/wrfest_25feb08techdropping_out.html

Well spreading the news excerpts does give us some chance to slice and dice 'em. Here we'll focus on the
technology news, some of which we've either already mentioned and/or have been covering for a few weeks now.
Primarily that the various analyst shops (Forrester, Gartner, et.al.) have abruptly lowered their spending outlooks
for '08. Below you'll find the first outlook that anticipates a negative growth rate for Q208. Bear in mind these
surveys are based on bottom-up work talking to IT departments so they reflect reality on the ground but a reality
which tends to lag big picture economic cycles. By combining that with our top down look at macro-trends you get
a bookend perspective - and those trends have been suggesting declining capex outlooks for a while now. So
when John Chambers shows up on CNBC and says things are going well he's talking about the quarter just past
and the sales activity and order stream he can see right then. NOT an outlook - keep that in mind.
The other little thing we thought we'd insert into our discussions is a way to sort and filter the tech news as the
jumble of acronyms floats by. So we're going to introduce you to the infamous "stack" picture of how all the pieces
in the tech industries fit together. Then to show what it's worth talk a little about some industry examples, e.g.

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Oracle's merger spree and then try to apply it to this week's stories. You'll have to judge whether this is useful or
not.

Thinking in "Stacks"

If you'll take a look at the picture on the right we provide

a very simple version of the infamous stack, which you
may have heard folks refer to. The stack is all the things
you need to make a computer (or a phone for that matter
work). Simple but a powerful sorting hat because it'll tell
you who's in what House and how they're linked. The PC
on your desk incorporates the top four layers. Likely an
Intel/AMD processor which then has to have a bunch of
other chips, power supply etc. IBM's announcement
today of a major new mainframe will define the new
large-scale server standard for some time.

To make that PC or server work you need an Operating

System (OS) which on your PC is likely Windows but on
the server is something called MVS, or Multiple Virtual
System. All this hoorah about Google's huge server
farms and virtualization software - well the big guys have
been doing it for three decades and your life depends on
it in the sense that most banks, airlines, etc. are running
on very large servers. But all the OS does is let the
machine talk to itself it's what's called Middleware (MW) that sits between the machine and the applications that
lets interesting things be done.

So when Oracle buys BEA what you're seeing is a further consolidation in the MW space where BEA was the first
provider of a Java application "server", i.e. a software machine commercially even though Java was created by
Sun. Unfortunately BEA wasn't able to match IBM's inventiveness over the last decade and has lost those wars.
In fact if you take IBM's analysts reports apart their growth engine for several years, for profits as well, and
anticipated to be in the future is software. And when they say software they mean middleware. Finally the thing
you talk to is the application - though you can debate for example whether or not a spreadsheet is an application
or middleware in a sense. But when somebody talks about ERP, CRM, Sales Automation, etc. etc. they're talking
about big bundles of code sitting on top of the MW that actually process the data, talk to the user and get things
done.

Using the Stack: a Little History

Just as a little bit of history Oracle got it's start in life as a MW company by introducing the first commercially
viable relational database management system (DBMS) which was invented by IBM but...well you've heard that
story. Now though IBM's DB2 is the dominant player, at least in some circles. As the DBMS market matured
though Oracle moved up the stack to start creating business applications using their database software. An
approach many mimicked or had done first in other forms. But building an application on top of a DBMS is easier,
faster, higher quality and more flexible than building all the functions into the application. So when you heard
about all those ORCL acquisitions in the last several years, e.g. J.D. Edwards that was one big application
company with some o.k. applications buying a smaller one with great apps. Here's the rub though - they're
technically incompatible. What Oracle did was buy marketshare in a maturing (slowing market). And now faces
the problem of either continuing to invest in all those incompatible application portfolios or re-write them to a
common standard. Which'll take billions in either case. And bear in mind they're making most of their money these
days off of maintenance fees instead of selling new apps. SAP on the other hand continues to grow itself
organically with judicious acquisitions to fill in small holes. It's also gotten a major leap ahead of Oracle by building
it's own middleware so that it can re-develop its' ERP suites on a common and sharable platform. Meanwhile
Oracle's me-too project "Fusion" isn't going so well.

Page 8 of 44
We could go with either or both companies or switch to HP, MSFT, Dell, Intc, etc. stories. Or talk about the
Telecom Wars, Verizon, ATT vs each other or the cable guys. The convergence of voice and data that allows the
big Telcos to migrate from their old switched network to the new IP networks but at the same time opens them up
to competition from the cable guys. Or we could compare HPQ vs IBM vs Dell and find out that they play in very
different parts of the stack and in very different markets.
But as you read the stories below you can use the stack to analyze and interpret each one of them. And should
because it fits that little piece into a larger whole.

Interpreting the News

The first except talks about slowing spending which we don't really need to interpret but just for fun we'll call it the
shrinking stack syndrome. Where it's important though is the reactions in the markets where the major players in
the tech stocks are not only getting hit but hit hard because too much hot air got blown into their balloons - as in
this'll never end. But the stack and the size of the market pie change all the time so, for example, the story about
toys which are increasingly using embedded chips to become more interactive and controllable thereby opening
up a whole new set of end-markets for the tech guys as well as finding new avenues for the toy makers who were
running out of one more warm fuzzy (maybe). Since the toys also now connect to computers (what does that say
about culture change) with 2 year olds in front of them...well?

As some of these technologies have changed they've cause other industries to change enormously as well -
Media & Entertainment will never be the same again though it's not clear what it will be. The forms, content,
applications etc. are still in an accelerating rate of flux. A couple of things to remember though...first off this exact
thing happened before. The Media businesses got locked into their old "stacks" and thought they world would
never change. Newspapers were defined as we still know them in the late 19thC - notice that when they first went
online they imitated that layout. The only challenge they faced was the introduction of whole new stacks, radio
and TV, which didn't seem to do too much damage though print journalism shrank considerably as TV caught on.
Now they're all having to move to the same stack and nobody's coping very well.

The ripples from all this show up in the news stories where the Yhoo/MS merger war is really a strategic debate
about what's the best way to turn Internet eyeballs into advertising money. Notice that paying for media access,
where you're paying for the large set of resources that gather, report, write, edit, etc. the content which will NOT
go away, is a model invented by old...old media. So this debate is over whether or not putting ads around content
you want to see (display) or as the result of a search is the best model. Several of the next stories fit right into this
line of inquiry - two on the NYT and whether or not it has a future.

The story on the wireless firms offering flat rates is a big.....big deal, in at least two ways. First off it means that
the "old" fixed line into your home might be going away and secondly that they're anticipating new forms of
competition they're not telling you about from VoIP on wireless data networks which could replace their
proprietary and expensive ones over time. And the other "Pipe War" is the ones between the cable companies
and the phone companies over who gets to control your house because you sure don't need two fat pipes.

Comments on the Tech Outlook (and Earnings in general)

http://llinlithgow.com/bizzX/2008/02/comments_on_the_tech_outlook.html

On the theory that if you're going to take the trouble to analyze somebody's work and comment you might as well
post the work instead of restricting it. Today's WSJ had an interesting "Ahead of the Tape" pointing out that other
than Financials earnings were holding up well. Reasons for which we've discussed extensively before: Grading
the Takehome: Bottoms, Earnings & Outlooks, Review the Bidding, Count the Cards: EPS Growth Rates, Have
You Seen the Elephant ?: More on Earnings. These are btw worth reviewing in their own for some differentiated
perspective on the earnings outlook from what you may be hearing on bubblevision. Now we may be wrong but at
least we've laid out the argument with data and our feeble attempts at logic. Feel free to disagree but given stories
like this you should have an alternative toolkit for compare and contrast.

Page 9 of 44
The parts that caught our eye was the discussion of how well Tech earnings are doing and how poorly their
stocks are in general. Here are some relevant excerpts with our 4-Part assessment of some fundamental
problems after the break.
Earnings Slump Still Confined:Technology earnings have been an important, and potentially
overlooked, bright spot. In the latest earnings season, the technology sector has been the Best in
Show. But tech stocks have been treated more like mutts.Fourth-quarter earnings of technology
companies in the Standard & Poor' s 500-stock index are on track for a 26% increase from the
prior year, according to Thomson. That makes it the best performance of any sector in the index.
Even computer maker Dell, which has struggled to compete with rival Hewlett-Packard, is
expected to report healthy operating earnings growth today, at 36 cents a share, up from 30 cents
a year ago, a 20% gain.There have been some scares, but 76% of tech companies beat analyst
estimates for the fourth quarter, according to Thomson.
Taken together, tech earnings have been 5% higher than expected. Yet the tech-stock-focused
Nasdaq Composite index hasn' t benefited much. Though it has recovered 2.5% from its late-
January low this year, it lags behind the S&P' s 5.4% rebound and the Dow' s 6% comeback. And
the Nasdaq is still down 18% since Oct. 31.Could investors be missing an opportunity?
BtW just by way of compare and contrast consider the following headline from Bloomberg: Dell Profit Misses
Estimates as Retail Expansion Falters; Shares Decline. Not to mention Sprint, et.al. But we'll pick up all that
coverage in the next Readfest.

Sent: Thursday, February 28, 2008 6:45 PM

Subject: Tech Spending Outlook


Guys - decent job of reporting but you might want to take a look at the recent spate of rapid and
significant tech spending outlooks from Forrester, Gartner, ChangeWave, et.al. Several of which were
covered on the Biz Tech blog of the Journal. Not quite sure who you' re talking to but more than a bit of
it is whistling past the graveyard for several reasons. Let me list them in reverse order of scale, scope
and duration.

1) Looking back one could see the economy flattening out last year yet in fact the markets in
general were running over their long-term uptrends, though I' m no technican I can draw some
lines and see a trend channel. That done one can clearly see the tech markets, especially the
NDX bubbling way above as a self-sustaining "we believe our own stories" frenzy built up. Most
of the recent downturn simply took the air out of that bubble without really doing much about the
l.t. trend.

2) Capex in general is a lagging indicator in the basic business cycle. We'

re relatively early days
as yet in that and consumer spending has only recently begun to turn down with the major
drivers, e.g. MEW, that sustained it only now beginning to turn down. Even if your outlook is
benign and sanguine ( a word which used to mean bloody) if you take a gander at the Fed' s
outlook it's pretty bleak to 2010. Not a great encouragement for an uptick in tech spending either.

3) There ARE huge shifts in various industries and sectors but tech has become a mature industry
which will follow more along the business cycle for a long time to come. That said as more
traffic with higher data storage and transmission requirements grows there'll be some demand for
storage, processing power and telecom equipment. And the shift from switched-networks to
VoIP will continue to cause major telecom equipment expenditures. A good example being

Page 10 of 44
 Verizon' s FiOS investments. But it'
ll be nothing like the upticks we say in the late '
90s - instead
it'
s mostly replacement investment and some incremental capacity spending. One of the reasons
for the recent narrow telecom equipment upticks, I think, was that all the huge excess of dark
networks was slowly getting into use plus some of it was dying off anyway.

4) There is a great deal of ill-will and resentment on the part of business buyers that was built up
on the over-hyped and none-delivered experiences of the tech boom. Corporate IT has no respect
left by and large for their vendor community, is increasingly at odds with their own business and
user communities and coming under increased budget pressures. This doesn' t bode well either.

Telecom, Media & Entertainment

http://llinlithgow.com/bizzX/2008/03/wrfest_2mar08technology_teleco.html

There's not necessarily any major new sources of growth in the Telecommunications industry in the sense that
major new capabilities are appearing. At the same time there is a fundamental, tsunamic structural change going
on with changes in the nature of the underlying network. That basic change is the shift of all forms of Telecom
network infrastructure to the new platform, VoIP. Or Voice-over-IP where IP is Internet Protocol. Actually it's much
broader and more complex than that and isn't happening all at once but we tried to capture some of the simple
characteristics in the accompanying chart. Many of the results of which you can see for yourself.

For example with the writer's strike when's

the last time you watched TV? Being a victim
of what Comcast laughingly thinks of as it's
customer service it's been at least two years
for me. But that hasn't caused me to miss any
programs I was particularly interested in.
Many of my favorites happen to be available
on-line for free. And then there's always DVD
rentals. Both of which are being
supplemented and perhaps replaced by
downloadable audio and video files.

Apple is now the largest music retailer in the

country for example thru its' iTunes store.
This is going to go on for a while and not only
continue the changes you see around you but
accelerate them. It'll also change the industry
- actually it'll change several industries from
Telecom & Cable to Telecom equipment to
Semi-conductors to the entire Media &
Entertainment complex. A decent start on
understanding it is to understand the
structural shift.

All the different networks (Voice, Data, TV/Video) grew up with their own separate network infrastructures and
technologies. The old-line phone companies started with PSTN, or Public Switched Telecom Network, which
required physical lines in part and a dedicated point-to-point service capability based on central switches. The
DoD was worried about survivability in event of nuclear war so funded the creation of the Internet which created
TCP/IP which was a data oriented technology. Cisco got it's start as the first of the major, or at least successful,
IP datacomm equipment providers and rode that rocket from the early '90s. It's since undergone many major
evolutionary changes. As the IP networks matured the phone companies started moving traffic onto IP backbones
even when the line into your house was the old stuff. When ATT split and though the new national company

Page 11 of 44
would dominate that was a badly mis-placed guess that VoIP was mature enough that they could give up those
local connections. That was about five+ years to early but now VoIP does very well thank you and Cisco is the
new major player (Avaya having let it get three steps). Meanwhile there grew up the Fat Pipe wars between the
Telecom and cable companies over who'd control the network to the house line. The cable guys started with the
advantage that their pipes were fatter and already carried video but they've been "challenged" by, among other
things, customer service. But more and more endpoint devices are being hooked to this massive new network
which should be good for the Telcom equipment providers and their chip suppliers. Alcatel/Lucent, Nortel,
Siemans and Ericsson ought to be in great shape but aren't. Interesting.

In parallel with this you got things like the AOL/Time-Warner merger on the theory, as well founded as Mike
Armstrong's at ATT, that everything was moving to the Net. Pre-mature again and badly under-executed. But with
iTunes and other things more and more traffic is going that way. One of the real breakthrus btw was Bob Iger's
takeover of the Disney CEO's job because, instead of continuing a rear-guard fight, he jumped on the Internet
bandwagon. Ironically doing for the Disney that Eisner had almost destroyed what Eisner had, in turn, done
twenty years earlier in taking over.

So as you read the stories below bear in mind that we have a)network backbone convergence, b) wireline
displacement to wireless to be followed by IP displacement, c) Fat Pipe Wars with huge investment demands and,
on top of the telecom stack d) the Application/Content wars. Which is why the Media industry is going thru more
changes in the last two years than it has in decades, perhaps since the early 20thC in some ways. And oh yeah,
this also sorta explains why the iPhone was and is so revolutionary. You see the old line phone companies had
kept control of their networks and rationed the services and content. Apple broke that control and opened up the
world. Which makes Google's "Alien" open-source phone platform a serious threat to their control as mobile
service moves to IP networks. Whee. So as you read the stories below keep all this backstory in mind!

Small to Large - IT Industry Structure

http://llinlithgow.com/bizzX/2008/03/wrfest_2mar08technology_tech_t.html

Odd as it might seem we're still, at the end of this week, just catching up with last week's news summaries. Here
we want to focus on the Technology Industry with several interesting stories. In the process of several of these
recent Tech focus summaries we've been wrapping the excepts with some charts that show how the industry is
put together. Earlier we introduced a simple stack picture which showed all the elements from platform to
middleware to application to interface that are necessary for any particular solution to be put in place. Think of
that as the basic characteristics of the industry's ecology. Another dimension that structures an ecology is the
number of large and small players and what niches they go over. Which we try and capture with the
accompanying chart.

Imagine that the stack describes the vertical axis

(you have to picture four segmenting lines
horizontally across the dumbbell please). So
another dimension of the ecology is the size of the
customer from very small to very large. What the
dumbbell tries to capture is how well populated, or
covered or served, are each of the major niches.
So for example IBM and it's strategic
partners/competitors, e.g. SAP, ORCL, et.al., have
their roots in the large end of the scale. And from
platform to application they purport to cover most
of the requirements and sell to most of the
customers. In fact they ARE in fact installed, one
way or another, at most of the customers.

Last time I looked 70% of the world's data

processing was still occurring at the large end and

Page 12 of 44
IBM is very much the dominant player on the platform and middleware layers. In fact it defines the market despite
all the hype you've been reading for 20 years about PC's taking over. When you hear someone talking about
Software as a Service (SaaS), the applications cloud, etc. oddly enough they're returning to the roots of almost
forty years ago with time-sharing!

On the other end is the small user - businesses and consumers alike (they're some caveats here though - Dell for
example really had it's home base selling PC's to sophisticated users in large businesses who understood what
they were getting and could provide their own support). But by and large the small end is well served by the
Wintel guild though not as completely covered as the large end. That's for two really critical reasons. First the
needs of many small businesses and users are served by spreadsheets and other simple application/middleware
software packages, e.g. QuikBooks (as good an accounting and small business package as their is). The
interesting thing is the un-populated middle where mid-sized businesses have needs that are often nearly as
complex for sophisticated applications as large businesses but haven't the resources to afford large installations.

In particular they can't afford the staff or application integration resources required to install, adapt and maintain
these applications, which means they are woefully under-served as measured by the gap between needs and
solutions. In other words there is, and has been for decades, a bigger opportunity to help mid-sized businesses
solve their technology problems than in any other part of the ecology. It's rather like it must have been for the
early settlers first bringing more complex capabilities to North America in the 1600s and 1700s. With many of the
same sort of challenges. And all the vendors know it because they keep going after those markets. The problem
is that the applications are very complex, big, cumbersome and very...very hard to use. NOT until somebody
figures out how to make easy-to-operate business applications that can be sold thru distribution channels will that
change. But there are many huge cultural barriers in the way.

The following story excerpts should be read with this ecology in mind. The first one is about the growing use of
freeware and/or inexpensive solutions, e.g. Wiki technology, to bring some of the level of sophistication for team
collaboration to small and medium businesses to market. Then are two pairs of articles. The first pair contrasts
Dell's continuing struggles to re-invent itself and how Apple can increasingly look to Macs, which are growing
marketshare more rapidly than any other platform, to sustain itself. It turns out that all the iPod/iPhone/retail store
helps with introducing new generations of users to a more friendly, easy-to-use platform, otherwise known as
marketing. Meanwhile Dell's forays into Retail were doomed to fail because it's entire functional capabilities were
built around the assemble-to-order business model which doesn't fit well into Retail channels.

The second pair looks at the bottom slice of the dumbbell and compares & contrasts the demand for data centers.
Everybody thinks of Google as a search, that is software, company. But what makes it work is the acres of data
centers and thousands of PC-class servers tied together in giant spaghetti furball that does all the constant
searching and indexing. This might be one among several Google Achilles heels. It certainly means that they will
be a capital intensive business. The greatly amusing thing for those of us with some experience is that very large
servers (BTW - these are the guys actually running your life whether it's airline reservation systems, you bank or
credit card company, your retailer's store orders of what have you) have been wrestling with these same
scalability and management problems for decades. And very successfully we might add. IBM gets a huge amount
of business from folks who take what're alleged to be a bunch of large SUN Unix servers and consolidating them
to one easier-to-operate large mainframe, or a piece of it. And that's even more true of comparing server farms
with thousands of PCs vs one mainframe. The staffing, power, reliability, etc. etc. are just not in the same class.

So as you evaluate the trends, directions and investment opportunities in these businesses you need to bear in
mind what's really going on. Remember our discussion of Warren Buffett's maxim of "don't invest in anything you
don't understand"? Well it turns out that Warren spent decades of hard...hard work getting smart until he's built up
a huge backlog. But he won't touch technology. As he says they'll still be drinking Coke, chewing gum and eating
candy in 20 years. Guess what - they'll still be processing larger and larger amounts of data in 40. Who the
successful players will be is another question but understanding the ecology will help you figure that out.

Page 13 of 44
DLS's, Two Cultures and the Breakdown
http://llinlithgow.com/bizzX/2008/03/wrfest_16mar08tech_dlss_two_cu.html

DLS stands for "Dirty Little Secret" in case you

didn't know and it refers to those "inside
baseball" hidden characteristics that, once all
the formal stuff is out of the way, actually
determine how something works. The
Technology Industry has two major ones, one of
which we'll focus on. The first is that the cultural
gap between business and technology
continues to be wider than any other
Mars/Venus split you can name. Men
understand Women better than IT gets business
and visa versa. That was sorta o.k. when all the
bottom of the stack was new and obvious needs
exceeded capabilities. Now it's a continuing
disaster. We'll focus on that but just FYI is that
the other DLS is that decisions are made on
technology use by politics, not what best serves
value and service. IT needs adult supervision
but doesn't get it from the business side, which
has abandoned it's responsibilities.

But when that gap is bridged the results can be

truly magic. Unfortunately the small list of
companies that use IT strategically is largely the
same small list it's been for almost 20 years.
Until actively managing the "two-culture" gap becomes standard business practice companies won't use
technology systematically, systemically or correctly. Vendors will keep building the wrong things. And investment
returns will still be commodity-like because the bottom 3/4 of the IT stack are commodities. It's what's hurting Dell
and MSFT for example. On the other hand what Jobs and Apple has done is conceive and execute total
technology solutions that start with customer value, translate it into high-value strategies and execute it
comprehensively in total solutions. IF technology worked as well in general as Quicken did in managing your
home finances a lot of money could be picked off the table. The graphic shows how it should be and isn't. Now
here's an interesting fact - it dates from circa 1991 ! And is based on work, some from IBM's Business Institute
dating back to the late '70s !! BUT when you find a tech company who can bridge that gap you've found a real
winner. Or a company who runs its' own business by using technology truly strategically.

Introduction

The excerpts below start with a front-page WSJ article from last week that discusses these problems - front page !
WSJ ! 20+ years and counting ! SHEESH !! It's followed by a hopeful article on re-thinking the user interface
which will be one of the great themes that play out in the next decade across the board, largely under the
influences of innovators like Apple and others. Much of the rest of the readings aren't so hopeful. For example,
speaking of DLS's it turns out that MSFT's exec knew Vista was a potential disaster but the company chose to go
ahead in spite of that. And speaking of maturity and exhausting a value prop Google is starting to come under the
same questioning scrutiny that MSFT did in the late '90s.

Then there's a bunch of Telecom stories from MOT's continuing struggles to arrest its' decline and get back in the
game at the bottom of the Telecom stack to the CEO of British Telecom talking about value-adding services being
the Next Big Thing. Again in both cases think of the graphic and how what they say they're doing addresses the

Page 14 of 44
gap between business value and technology delivery. Sprint is next up and one has to suspect they're beyond
recovery for a combination of a failure to execute and a failure to deliver value. We end with a set of stories on the
rapidly emerging adoption of new cellphone technologies to business, particularly Apple's recent announcement
on the iPhone. And conclude with a brief introduction to Hulu, the new joint-venture that's bringing old media into
the new media/telecom world. We've tried it and as a solution it's excellent and user-friendly. What it lacks is
depth of content as well as structured organization as that depth grows.

BUT think of this - as we move into a world where any content is deliverable at any time on any device in any
location two things.
1) Those industries are about to undergo radical shifts in structure.
2) The winners will be sorted from the losers by using technology to solve customer problems
and execute well on both the business and technology sides. We strongly suggest you consider
using these tools to sort them :).

Commoditization, Consolidation, Consequences

http://llinlithgow.com/bizzX/2008/04/wrfest_30mar08tech_industry_co.html

In case noone's noticed the Technology Industry as a whole has reached the point where it is mature, which we
define as being able to provide products and solutions who's capabilities exceed customer requirements. If that
sounds a bit like Clayton Christiansen's arguments in the "Innovators Dilemma" it should because it is. In fact
we're on record as arguing that the PC industry reached that point circa '98/'99 when speeds and feeds were
adequate for the software, e.g. Word, who's functionality was well beyond any reasonable cutoff point, say 60/40
and meandering around the 95/5 or worse. Unfortunately costs tend to go up non-linearly as you add bells and
whistles. The chart at right traces out this industry dynamic.

It's kind of simple but hopefully it gets the point

across. We show customer requirements slowly
evolving over time along with two products which
have high demand initially because the gap between
requirements and capabilities is large and negative,
that is customers want more than can be delivered.
New products may have some special capability or
vastly lower cost but not meet current requirements
and have to be introduced in a niche. So does a
company keep investing in old products or gamble
on new and jeapordize the franchise and cash flow ?
You have to apply this thinking to each major
business segment in the stack as well because their
history, status and outlook are all different.

But for the bottom layers of the stack, by and large,

capabilities vastly exceed requirements. The top
layer, applications and business alignment are very
different as the capabilities are vastly exceeded by
requirements, especially in the SMB space. But
NONE of the customers believes the industry can
deliver value-enhancing, businss-driven solutions.
As you go thru each of the readings below you might
keep all this in mind because a lot is explained.

For example Dell is outsourcing much of its' sourcing to China which it wouldn't do if innovation were still the main
driver. Similarly IBM has developed a reputation as the steady-goer but when you look at its' financials and

Page 15 of 44
investor presentations most of the earnings growth comes from buybacks and other financial engineering.
Similarly Oracle's acquisitions sprees are hallmarks of a mature industry.

For a short introduction to how the industry changed and evolved in the ' 90s you can read and download
this short note on industry evolution: Technology Industry Changes and Evolution. BTW just in case
you' re interested in understanding the history of the technology and consumer electronics industries,
who the players were/are, how they did and why and how the ecology of the industry was shaped and
evolved over decades we can' t recommend enough Inventing the Electronic Century: The Epic Story of
the Consumer Electronics and Computer Industries, with a new preface (Harvard Studies in Business
History) by Alfred D., Jr. Chandler. In or humble opinion a great, insightful and well-written book that
any serious student (investor, employment, market player) would benefit from reading. For our prior
posts on the stack, industry evolution, business vs IT alignment, et.al. issues see the industry archive
where we' ve built up quite a "stack" of charts to help you with your analysis ala Buffett'
; that is
understanding as best we can manage how the business works :).

Telecom: More Perfect Storms a'Comin A Little Telecommunications

http://llinlithgow.com/bizzX/2008/04/wrfest_30mar08telecom_more_per. History

html A conversation with C. Michael
Armstrong, CEO and chairman of AT&T,
about the phone industry, his position as an
Almost more than any industry the Telecom Industry has been the outsider infiltrating the company and the
"beneficiary" of a series of perfect storms that have shaken and re- future of communications. (1998)
shaken it from the telecom bubble and bust to the displacement of
wirelines by wireless to the VoIP shift to the fat pipe wars that are going
A rebroadcast of a conversation with
on now. And as the underpinnings of the industry have changed so have
Steve Case, chairman and CEO of America
the players - people still under-estimate for example how revolutionary
Online, the world's largest Internet service
the iPhone is for product development, commercial relationships and
provider, about his company' s pending
industry structure. But the realizations are growing.
acquisition of Time Warner, the world' s
largest entertainment and media company
There was a fair amount of news in the last two weeks which we've
(from May 17, 2000).
gathered up here which reflects a lot of this change as well as how the
individual companies are coping. The first harbinger for example of
A conversation with Michael Armstrong,
weakness in the Tech outlook was Chamber's discussion of earnings
chairman and CEO of AT&T, about his
last Fall which scared everybody. What everybody forgot is that when a
corporation'
s technologies, his association
tech company says everything's all right now they are capital goods and
with IBM and his deal with Comcast Cable.
capex spending lags in downturns. Well that's beginning to be visible.
(2002)
Meanwhile on the coping front a lot of equipment suppliers are still
failing to cope with this brave new world, for example Siemens and
A discussion with Ed Zander, Chairman
Sony/Ericsson.
and CEO of Motorola about the latest in
communications and his company' s
But the unfortunate poster child is Motorola which under pressure from
resurgence driven by cutting edge mobile
Icahn is proposing to go thru yet another breakup. We think this is, at
phone designs. Zander also discusses some
best, only a short-term financial good idea and is a terrible strategic
of Motorola's new products in the Rockr,
choice. MOT's problems haven't been so much strategic focus as a total
which is equipped with iTunes music
lack of execution on a sustainable basis. This'll be the third time in the
software, and the Motorola Q PDA. (2005)
last decade that they've broken off a chunk on the theory that this time
we'll fix it. And each time failed and it failed because they couldn't figure
out how to change the way the company operates. A conversation with the Chairman of the
FCC Michael Powell about his tenure and
the deregulation of media ownership.
But let's put this all in some historical context with the accompanying
(2005)
table which mines various online archives of the Charlie Rose Show for

Page 16 of 44
our Wayback Machine. We start with an early conversation with Mike Armstrong who was a leading contender for
IBM's CEO slot and highly respected. In fact Mike's a perfect before and after case if you compare his
appearance. Then there's a slot with Steve Case where the euphoria still hadn't worn off ( ~ 2000) and another
with Ed Zander at the height of Marketwatch CEO of the Year status. Finally another with Michael Powell, then of
the FCC. The old commonplace about those who don't remember history get to repeat it, and it's a lot worse than
doing H.S. all over believe me. Now this round of execs aren't quite as hubristic and risk-averse as the last round.
For example Verizon's gamble on fibre is a gutsy and forward-looking at it gets. Nonetheless there's another
whole huge surge of changes coming.

Each of these stories deserves it's own separate dissection, rather like what we did with Home Depot a while
back. But let's just set the stage. In his first vid Armstrong is talking about the brave new world though the bust is
beginning. If all the machinery worked just fine - no problem. But in fact he had two or three breakages of
monumental proportions...some of which are still with us. First off to set up ATT as a national carrier with local
service after the breakup he had to have VoIP to bypass the local connectivity. It wasn't mature, he didn't have
the pipes and kaboom. Second, ATT (then and now for current customers) hadn't a clue as to the nature and
value of Customer Service (shall we mention Sprint).

If he was going to migrate to a new service, application and technology infrastructure he had to get the funds by
maintaining the cash flow from the base. Yet customer service was abysmal and got worse. Finally there's the
little matter of execution - when ATT split again ATT Wireles was the largest in the world but to make it work it not
only needed good CS but had to make it's backoffice and execution capabilities adequate - and they spent 3
years screwing up an IT implementation vital to billing and service that should have taken less than one. And
around, and around she goes and where she stops...we all know.

So are we about to go 'round again with some of these folks? It's possible, even likely though the good companies
with good business models & strategies, excellent execution, good management systems and above all
adaptability will be able to take advantage of these storms. I'm thinking particularly of Cisco here. BtW at the
bottom of the readfest we point to two previous posts on Telecom related issues which have some very
interesting links, e.g. Sprint, the future of value-added services, HULU and the Media Industry etc. that wrap more
around these readings as well.

Telemedia, Entertonics: Let the Wars Begin

http://llinlithgow.com/bizzX/2008/04/wrfest_13apr08telemedia_entert.html

As usual there's a lot of tech and related news so we've accumulated and sorted key stories and prior posts that
span the suddenly exploding Yahoo Wars, the search wars, iPhone news and rippled effect changes in the
telecom, media, entertainment and related distribution industries. It's kinda hard to sort it all out and put it into an
organized context but we'll take our best shot. Ram Charan had an interesting article (When -- and How -- to
Reposition Your Business) on one of the most fundamental strategic requirements of business - looking outside
the business and re-thinking it when things change. And they're changing enormously and rapidly across multiple
industries.

Telecommunications is seeing the bandwidth wars between cable and traditional providers with alternatives
coming up fast. New "phonelike" platforms, e.g. the iPhone, are going gangbusters AND forcing major re-thinks of
the traditional business model, at the heart of the Yahoo discussions are two things. First off, and let's not kid
ourselves, was a profound lack of execution on a large and rich portfolio of sub-businesses. And second the
fundamental debate over getting and monetizing eyeballs. Yahoo's model was create attractive content and then
DISPLAY advertising. Google stumbled into the alternative of embedding advertising in search and the brilliant
notion that they could collaborative with any and all content providers.

Meanwhile in the last week old media has finally really, truly been heard form. Not only did the Yahoo/Msft
contretemps boil up and over but all of a sudden the promised disruptions of old media by new took on new life
with Time-Warner's and Fox's entry into the bidding wars. This is a cusp-point SEE change that we've been

Page 17 of 44
waiting for since 1995 and the development and distribution of content will never be the same. Media is beginning
to re-think itself.

And two of the major changes enabling and driving it are the sudden appearance of new platforms that are
alternatives to the ones we're all used to. The iPhone being the preeminent example but the gaming industry,
which combines platforms with content, being another and bigger one. Which is also driving enormous changes in
distribution.

In the entertainment business that means re-thinking and re-structuring the networks. In parallel the other form of
distribution is the retail channel which is experiencing very hard times as the steady stream of profitable new
consumer electronics dries up. So at the end of the day we have five major industries that are going thru huge
disruptions with new value propositions, strategies and business models to be developed and established. And
with a profound dearth of good operating execution on the old models, which contributed to the problems, and no
apparent clues as to what the new operating models should be let alone examples.

These are not criticisms per se, by the way. They're observations reflecting a natural state of affairs that ALWAYS
results when new technologies, products and services emerge. Cast your mind back to when mass-market
newspapers took off in the 1890's - how long did it take Hurst and Pulitzer to develop new models ? How 'bout
when radio emerged in the '30s and the models had to be re-thought ? And again in the '50s in the early days of
TV ? Everybody always started with adapting what they knew to the new formats and capabilities. And then slowly
evolving more effective and efficient approaches.

We're in the first inning of what promises to be a long game. And an early season game in what will be a
long...long season. Now that the bigs have emerged from their cocoons this'll get really interesting.

The Content Who Would Be King

http://llinlithgow.com/bizzX/2008/04/wrfest_telemediatainment_the_c.html

With network convergence, the shift of consumer electronics from analog to digital technology and new tools for
content generation and management we're seeing a major evolutionary event emerge in front of our eyes. And
are participants willy-nilly. But are we knowledgeable ones ? Gaining ground on that is helped a bit by framing the
changes. What we're seeing is the Telecom industry going thru network and service changes, and increased
overlap with Media and Entertainment, shifts in Consumer Electronics and the growing force of things like games
in the later. In my mind that leads to the re-labeling of the new industries as Telemedia and Entertronics. The
individual components will remain by thes new hybrids are also forming. And at the end of the day it'll be all about
the content - who creates it, how it's packaged, who distributes it, over what kind of networks and
where/what/when it's delivered.

In case you haven't noticed in the last 18 months we've seen

ginormous changes in the way content is presented on the
Web. People talked about Web 2.0 which was really just
extensions and developments on the capabilities of the
existing capabilities into social networking, collaboration, etc.
IOHO what we're seeing now is something truly deep - a
fundamental re-think of how content is presented. Which is
accompanied by a change in who the players are. It started
with Iger taking over Disney and striking up a deal with
Apple for content distribution - thereby becoming the first
major media player to seriously embrace the web and begin
the landslide beyond small-scale participants.

The other big change, which we first really noticed about two
years ago, was that content generators were beginning to
really re-think presentation instead of just adapting the formats and thought processes inherited from prior

Page 18 of 44
generations. Now things are much more inter-active, non-linear, multiply connected and wide open. And we're
seeing it just in the last couple of months. The first example was Amazon's re-think, the WSJ has done some
really good stuff over the last year or so but now it's spreading like wildfire. And a great example is Hulu.

All of a sudden a huge wealth of old and new content is readily available on-line in a decent interface with more
coming. Now personally I think some of it needs to be worked on, more is needed and they've already exceeded
the limits of managing the sortation and searching. In other words they need a much better content architecture
and information management capability. But when you look at the quality of the material, as opposed to say one
more YouTube amateur nightmare, content quality matters. And when you've said that you've said it's about the
people, skills, money, networks, resources and management capacities to create, build and distribute content.
This is the REVOLUTION folks. Just in the last month I've
been able to re-discover Dougie Howser, Babylon 5 and
Studio 60 (Fair Disclosure: my TV went away a couple of
years ago and I've been online for things like Rose, etc. for
that long).

Here's one my favorite S60 episodes which proves the point.

Sadly the show went into a nosedive after the creator moved
away from exploring deep and great issues and started
writing to his personal troubles. But while he was on a roll he
was looking at US culture, what it takes to run a creative
business, Corporate America, the wasteland of TV all inter-
woven with personal stories. It could have done for culture
and the corporate world. Sorry about the sidebar. Now wait -
that is the point. It's all about the content !
Now it's going to be about the Value Chain the emerges and
evolves for the Telemediatainment Sector(s).

Consider the picture at right which shows the ecology

of that value chain as it was. To get an idea of how it
will be "simply" add more major "Distributors" to the
framework. We'll take a deeper dive sometime in the
future but the excerpts below should be looked at in
this context. The Telecom industry faces huge
demands for bandwidth and shifts in types of service,
which'll impact the Equipment providers. Major Web
1.0 content providers (Google, Yahoo, Amazon, AOL)
are showing widely varying ranges of adaptability and
innovation to old challenges and new ones. Yahoo in
particular is a sad....sad story because it had the
world's largest portfolio of high-value content which it
let go fallow thru neglect and an inability to sell and
then monetize. Now it's looking for quick fixes but can't
explain any of this (for the record I read the latest major
investor presentation which hints at some interesting
things but is so discombobulated that, as a mirror on
executive thinking, it's scary). You also find stories on
new ways to manage content, alternate distribution experiments, e.g. Blockbuster's bid for CC (!! yikes) and the
problems with providing economic access to bandwidth which could kill the whole thing.

Page 19 of 44
Tech Industry: Innovators, Survivors & Also-rans
http://llinlithgow.com/bizzX/2008/04/wrfest_27apr08tech_ind_innovat.html

Here's an interesting accumulation of Tech-related readings (after the break) that are worthwhile in their own right
but also are perfectly illustrative of many of the themes we've tried to strike here. Both for the Tech Industry itself
and for it's inter-actions with the larger economy. Most of us, myself included, have this wonderful, romantic view
of the Tech Industry as being its' own thing running on an internal dynamic. Unfortunately most of the major
names are now mature companies struggling to find the NBT (next big thing). Worse many of them are
experiencing severe organo-sclerosis in their core disciplines. Tech is not the only industry driven by Innovation
however. In fact it is more central to the Pharmaceutical and Aerospace industries than what we traditionally think
of us tech. And, as I hope we've established, innovation is returning as a fundamental requirement for survival let
alone prosperity. Put all this together and you have two
broad mis-conceptions to adjust:

1. Patterns of Innovation: Once a company or industry

matures it is no longer driven by internal dynamics, e.g.
the famous "S-curve" of fame and fortune. Worse when a
company is used to living on the curve it gets both
complacent and, with growth, harder to manage. Often its'
core disciplines deteriorate as well, so that one ends up
with desperate gamble after desperate gamble to recover
the glory years. There are however key players who have
managed, thru discipline, execution and insight, to find
sources of renewal.

2. Business Cycles: one you're off the curve then you

become just another capital "equipment" supplier (or
consumer supplier for those migrating into the
entertronics industry). Which means normal business
cycle consequences begin to show up. In this downturn,
which we've barely seen the beginnings off, first
consumer demand will slow and turn down, likely
severely. And companies will cut their hiring and capital
expenditure plans. All of which we're beginning to see and
more of which is coming. As IT budgets are constrained what do you think happens to IT spending and tech
industry outlooks? Wouldn't ask the analysts on the Street :)

The trick is to sort out the survivors from the also-rans who are going to struggle. And then sort the survivors into
the so-so's and the real men. As you skim over the readings we think the portents for the future are pretty clear.
Which means in terms of evaluating investment and performance we're back to asking Economy - Industry -
Company questions. You're hopefully looking for the companies with the skill, chutzpah and resources to gain
new high ground. And IOHO those are the folks who've re-made or are re-making themselves. Those will be the
buying opportunities after we get thru this current unpleasantness.

A perfect contrast is AMD vs Intel. The former had a hit but failed to follow-up, sustain it or execute. Instead it
made an acquisition gamble looking for the easy fix. In stark contrast Intel transformed itself by building on it's
base skills in chip design and manufacturing as well as operational excellence and is now extending those
capabilities to whole new markets. (We can't recommend some of the last investor presentations highly enough
btw). MOT is the perfect poster child for what we've called decliners in the charts. IBM on the other hand could
serve as the example, if not exemplar, for the sustainer.

The real interesting contrast is APPL vs MSFT. There are a lot of readings below but consider what we think is
the most fascinating and powerful contrast. At it's heart MSFT is a software company and it's most fundamental

Page 20 of 44
discipline should be product development. Yet it delivers Vista late, emasculated, bloated, missing an ecology and
buggy. What Longhorn was going to be and what Vista became reduces in large part back to Code Red - when
internal development broke down almost completely and they had to do emergency surgery.

In contrast Apple made a decision to create a new, elegant, powerful and portable OS that not only drives Max
OSX but the iPod and iPhone because it's modular, componentized and scalable. (Shades of NEXT and it's
object-oriented OS and application platform). That means that every product Apple makes runs the same
software base and therefore can share applications, within limits of course. So MSFT is wrestling its' own kudzu
and Apple has created a self-sustaining, evolving and growing eco-system. Which holds the most promise for the
future do you think?

Of course there's many a slip 'twixt cup and lip and MSFT is still a huge, tightly run profit machine and Apple will
need to sustain it's innovations with the NBT on top of this wonderful foundation. Which merely makes it easier
and more likely. But it's looking like Apple joins Cisco and Intel in that pantheon of folks who've made the
necessary cultural changes to embed innovation in their DNA. (Sailing Into the Storm: From Execution to
Innovation)

Tech Industry: APPL vs MSFT vs YHOO Wars

http://llinlithgow.com/bizzX/2008/05/tech_industryappl_vs_msft_vs_y.html

Let's take a look at the big tech news from the last week
or so (deferring the HPQ/EDS discussion for now) and
focus on the APPL vs MSFT and MSFT vs YHOO
campaigns. In both of which there was some big news
everybody covered and some that may have passed you
by. In an earlier post/survey (WRFest 27Apr08(Tech
Ind): Innovators, Survivors & Also-rans) we introduced
some ways/weighs of thinking about innovation and
typical patterns. You may want to refer back to that as
here we're going to build some more charts to dig into
some other patterns to set the stage for our discussion.
You might also find reviewing the earlier discussion
(Sailing Into the Storm: From Execution to Innovation) of
innovation a worthwhile review, especially if you buy the
argument that Innovation is not just an issue in the Tech
Industry but is both a general requirement and the
biggest challenge beyond Execution facing all
businesses. And one that most are failing at. We think
the framework for analyzing what works and is required
vs the typical barriers applies to P&G just as much as to
MSFT...a view which, judging from public statements
and observable behaviors, P&G agrees with.

So consider the chart at right which shows how many

companies face the "Renewability Challenge". Chrysler
is almost the perfect poster child, along with MOT, of a
company who lurches from breakthru hit to hit and hopes it survives the downturn. That behavior is apparently
deeply seated in its' culture. What you'd like to do is have good strategy, translate that into excellent and on-going
execution and, on that foundation, build up a repeatable capability for innovation. And better yet embed that
capability into the core of the Company. A path that Lafley at P&G appears to be well along on after close to
seven years of hard and sustained effort.

There are two big questions. First, can you get the Innovation process going on a regular and speedy cycle show
that new products and offerings begin to take off before the old starts into decline. And second, and as or more

Page 21 of 44
important, is the question of what path is the Company on. That is are innovations moving the company forward,
marking time or eroding despite apparent cleverness.

When you think about the Big Three here you reach very different conclusions. Apple appears to have created a
sustainable culture of Innovation with one hit following another. Admittedly largely due to Steve Jobs...yet none of
the major innovations Apple has produced are from a one-man band but represent the efforts of entire teams. And
even more interestingly, in a rather Disney-like fashion, Apple is beginning to see cross-feeds and synergies. The
iPod effort led to the iPhone which was and is a major breakthru in the entire Telecom business model. Both
together are causing a rapid growth in Mac sales. Even more importantly big business is beginning to give serious
consideration to Apple computers. A critical strategic enabler is a brilliant decision on the Operating System which
is modular and scalable. All Apple lacks now is a portfolio of small business applications along with a good
development platform. That would allow them to become a major player in the empty dumbbell space of ill-served
SMBs. (WRFest 2Mar08(Technology): Small to Large - IT Industry Structure)

In contrast MSFT has not only failed in its Yahoo acquisition - which you may recall we thought was a disaster
from the get go.(B2C Wars:Yhoo/MS Merger - Disaster in the Making ?) But it really hasn't had any major successes in
any of its' new endeavors in years. Instead it's milking the cash cows and monopoly positions it enjoys in OS
share and Office Suites. And doesn't appear to have made much, if any, headway in the SMB space. Largely
we're given to understand because of a lack of cultural understanding of the applications development process.
Now apps are different from middleware, culturally as well as technically. Yet at the end of the day MSFT's core
competence MUST be software development. Yet we ended up with a new OS (Vista) that was grossly de-
featured from the original innovations promised in Longhorn, has been rather badly received, even resisted as it
doesn't provide significant advantages over XP and throws open the door to competitors. Particularly in the
business marketspace.

How 'bout that YHOO ? Well after the initial breakout as the most successful portal, with a business built around
display advertising it failed to find a way to grow that business. Terry Semel was brought into to provide a little
adult supervision, which he did and effectively, but his "new media" initiatives, which presumed that increasing the
portal attractiveness and thereby number of eyeballs, both built on the display advertising theme and failed.
Meanwhile of course GOOG's wild, and unexpected, success with search-based advertising blind-sided them
completely. So what does Yahoo do now ? So far it's failed to take its' huge footprint and sustain it, failed in
developing its' own superb search engine (though admittedly with major improvements) and faces an incredibly
daunting uphill battle given Google's share, penetration and street cred. Nor can it tell us what it wants to be when
it grows up.

Looking at the chart and the three different timepaths illustrated we could just about assign names to each path:
Apple, Microsoft and Yahoo. These interesting times are really tough. From a stakeholders perspective you'd
have to argue that Apple has found a sustainable path that appears to make it a great place to work but one that's
more than fully valued in the markets. That MSFT is suffering from Red Queen syndrome with major investment
after investment that have not succeeded in major incremental growth opportunities. Which makes it an
intermediate-term value play and a long-term question mark. For Yahoo the future is now - they appear to be
locked into downward path that may metastasize into a death spiral if they don't pull themselves together, execute
enormously better and deliver value to existing users/customers and find new paths (visions, value props,
strategies, business models) forward. At best this is a "turn-around" opportunity but it'd take time, money, blood
and enormous effort.

Page 22 of 44
Technomediatainment (Telecom): RIM, ATT, Sprint, Cable Wars
http://llinlithgow.com/bizzX/2008/05/tehnomeditainment_telecom_rim.html

Watching the Superbowl this year was an interesting

experience this year for lots of reasons, not least of course
because it was one of the best games I've seen in a
long...long time. But another thing really interested me
because my hosts had just gotten a new HDTV which the
man of the house was eagerly looking forward to.
Unfortunately the sound quality on the HD channel was
terrible with most of the announcer's gabble almost washed
out in noise. Contrawise the picture was very good but
when we switched to the regular channel at his wife's
insistence we of course ended up with a mediocre picture.
The moral of the story - other than who rules the roost -
was despite all the hype and hoopla that the cable
company (Comcast in this case) didn't have the bandwidth
to support even one good HD channel with the most
important sporting event of the year!

Now we've talked for some time about convergence and

competition in the telemediatainment industries but
underlying a lot of our, and many others thinking, was that
the cable companies had an innate advantage because
they already had fat pipes into the premise. What that little
anecdote tells us is that it just ain't so. Worse, as many of the stories below illustrate, our experience was by no
means isolated. We've tried to represent these issues in the Telecom Industry stack chart which shows both the
technology requirements and integrated value proposition that all the underlying service providers are wrestling
with.

We've talked before about the 4As - Anything, Anywhere, Anytime, Any device. If the cable companies are
already struggling with things as they are that means $Bs of new infrastructure investment will be required to
compete with the traditional phone companies and completely disrupts the entire competitive landscape. The
"Bandwidth Wars" are going to take on a whole new character that will determine who wins and looses up and
down the entire stack. This dynamic will also impact the extent of the convergence where XoIP, x being anything
from Voice to Video and so on, becomes the underlying enabling technology. Just as an example that all means
that Seidenberg's strategy to pull fibre for Verizon is looking more and more brilliant, not just gutsy.

After the break you'll find interesting stories about device wars as RIMM struggles to up it's game against Apple's
iPhone where ATT/Apple are cutting prices for more functionality! Whoops indeed. You'll also find an interesting
story about the next wave of competition on the services being offered - which puts tremendous requirements on
multiple layers of the stack but is the value proposition requirement to make all these myriad devices and the new
media offerings viable. Then there’s a potpourri of Sprint the Disaster stories - nothing like combining bad strategy
with worse execution and abysmal customer service to watch your customers leaves in droves. Hmmm...Telecom
and customer service... an oxymoron? Or just morons? And then there's a special section reinforcing our point
about the Cable industry's struggles and attempts to find strategic alternatives. Interesting times indeed!

Page 23 of 44
Technomediataiment (Content): the Revolution is HERE
http://llinlithgow.com/bizzX/2008/05/technomediataiment_content_the.html

The prior post took a look at the multiple wars going on at

the bottom of the Telecom value stack. Now we'd like to
look at the smaller but growing ones at the top. If you will
yesterday's post was on the technology and infrastructure
wars while this one is on the content wars and the
distribution debates. Just to refresh your memory about the
Content & Distribution Wars you might want to look at a
prior discussion (WRFest (Telemediatainment): The Content Who
Would Be King) which offers up some other examples that
play nicely with these. And lays out a "model" of Content
value chain, which we have in mind here.

In the last few weeks there have been some startling new
developments that continue to accelerate the changes in
New Media "cusped" by Iger's coming to terms with Pixar
and the Internet a couple of years ago. Now we're talking
about the top of this stack where the strategic questions
are: 1) who's content will appear on 2) which device and 3)
what kind is it?

TWX and Apple have agreed to have new movies come on

iTunes the same time as the DVD while Viacom (cf. the earlier post) is starting up a new channel aimed at,
among many other things, doing something similar. Since Paramount is captive they might have an easier time of
it even. At the same time Apple is revisiting its' not-too-successful' foray in Apple TV. It may have a long way to
go but they've also got a lot of runway considering everything else that's working well for them. That re-visiting is
synergistic with the iTunability of movies.

Meanwhile Europe is accelerating its' experiments with Mobile TV - think of it as TV on your smart-phone. Back to
the 4A paradigm as well as the bandwidth/infrastructure wars. And ATT is following suite in the US. Whee....Katie
bar the door. A lot of challenges before the cup really gets to the lip but again consider this, really mixing
metaphors, another big canary.
On the other side of the house traditional content generators are still struggling with the problems of migrating to
this brave new world. Unfortunately, aside from online web sites and blogging, old media is still struggling mightily
to re-think itself for this new environment. That is - they still haven't figured out two key things. First - how to
create an interface that takes advantage of the new media instead of just mimicking the old one.

And second - how to make money in either/any case. On the latter I'll bet, at least for now, that they end up back
at the answer of the last 100+ years - advertising. Maybe with a dash of subscription thrown in. On the former
though, as the prior post, discusses at more length, several interesting or key players are beginning to really re-
think what can be done online. This'll be really interesting, eh what !

Page 24 of 44
Technomediatainment: Maturities, Barriers and Disruptions
http://llinlithgow.com/bizzX/2008/06/key_postings_vb_technomediatai.html

Two industries where we've ended up taking particularly deep dives are Technology and what we're calling
Technomediatainment - the emerging composite of Telecom, New Media, Entertainment and Consumer
Electronics. After the break you'll find the usual summary tables with all the previous posts in these areas
separated into those categories.
The two industries are interesting for their own sakes, as exemplars of the approach we take to business analysis
and for the implications and impacts on the broader markets and economy. The first two Tech posts focused on
the market situation and pointed out with slowing Capex spending (thereby linking back to our "understand the
context" theme of coupling to economic analysis) that the unusual performance of the Tech indices was unlikely to
continue. An argument which seemed to first be born out from Oct to Mar and then wrong as the NDX/Nasdaq
bubbled up over the SP500. Notice however that, literally today, the NDX is now moving in concert with or lower
than the S&P. Interesting, eh what ? That question will be settled by whether or not earnings hold up unusually
well - something we don't think will happen as the Economy continues to tip over but which is likely to lag other
indicators.
Exactly how the Tech & Techno enterprises perform will result from the confluence of changes in industry
structure, the emergence of new products, services and solutions and the performance of individual companies.
All of which is discussed in more detail in these prior posts by some of which can be briefly reviewed here.

Technology

1. Industry Structure - Technology per se is

essentially a commodity, at least on the bottom
part of the stack. On the top part, the
applications/content/solutions portion, there's
still lots of room for value creation. The former
assertion leads to the wave of consolidation
we've been seeing among the platform
providers and middleware vendors. The latter
on-going challenge leads to the struggles of the
application vendors as well as the emergence of
SaaS, e.g. Salesforce, to try and fill in that gap.
The biggest untapped opportunity is to provide
reasonably sophisticated business applications
to the grossly under-served mid-market.

Page 25 of 44
2. New Frontiers - the Application Space. The
interesting thing is the continuing challenge on the
part of vendors, customers/users, analysts and
service providers still wrestling with the multi-decade
old "two cultures" problem where Tech guys like
bright shiny things and resent adult supervision.
Contrawise business guys just want it to work but
aren't willing to invest the hard...hard work in
learning enough about Tech - at least in terms of
end-use - to provide the guidance, participation and
supervision required. That btw also means that
those invidual user enterprises who can and do
learn how to manage their Tech investments will
continue to enjoy a sustainable competitive
advantage. Sadly and surprisingly that's the same
list of the "Usual Suspects" it's been for decades,
e.g. Fedex, WMT, et.al.

Technomediatainment

1. Industry Structure - the key factor here is

the rapid convergence of the various networks
to a common infrastructure based on the same
"stack" that underpinings the Internet and
creates the strategic opportunity for XoIP
where IP = Internet Protocol and X = Data,
Voice, Video, etc. etc.

2. The Techno Stack - this shift creates huge opportunities for the
Equipment Sector and the Service Providers (Phone and Cable
companies). It also enables a revolution in the New/Old Media and
Consumer Electronics companies, an exemplar of which is Apple's
successive introduction of the iPod and iPhone. Which are really
digital consumer electronics that are complete end-to-end solutions
that are destroying the underpinnings of the old analog world in
both media and consumer electronics. Whee...we're having fun
now.

Page 26 of 44
Winners and Losers: the Undiscovered
Country

The separation between the winners and the losers

will be between those who establish an on-going,
sustainable and repeatable innovation capability and
those who do not. And we DON'T just mean invent
new crap but also execute on the delivery of those
inventions. The relevant operating distinction
between invention and innovation is whether or not
you deliver it and make money in the process.
Clever is fun but doesn't count. This will get
interesting in all the sectors of these industries but is
particularly fascinating to watch as as the New
Media companies adapt to the "Content Wars". The
series of posts on Innovation walk thru the general
requirements and characteristics involved - here
illustrated by contrasting pathways. So where do
MSFT vs YHOO fall? How 'bout Dell vs HPQ? Or
Nintendo or AAPL?

Anyway...that's certainly not all the accumulated

graphics digging into various aspects of these Industries. And definitely all the discussions, analysis and readings.
If anything strikes your fancy you'll have to follow the pointers below to dig in some more. Bon Appetit' indeed. We
are definitely living in interesting times.

Technology Industry: HPQ/EDS, PCs and Prospects

http://llinlithgow.com/bizzX/2008/06/technology_industry_hpqeds_pcs.html

Now that we've got all this machinery listed, cataloged and presented it might be time to apply a bit of it so that's
what we propose to do with the Tech Industry news from the last few weeks. A lot of that's either gadgets, related
to Telecom or the Yahoo Wars...all of which we'll come to in separate posts. Here we'll focus on a couple of things
in the classic mainstream of the industry - where the primary big news that caught our eye in the last few weeks is
HPQ's acquisition of EDS. Before we comment on that per se this is our time to talk about the industry in general.

When you look at the analysts consensus forecasts for Q4 it's the Tech industry they expect to save the day.
Earlier this year the bottom-up estimates were 20% for Tech and 29% for Telecom. It'll be interesting to see
how/when/where/if these other industries follow the financial guys who've been madly revising downward. There
are two sets of problems you need to think about. First there are some major breakages in the logic regarding
economic fundamentals. Second there are further breakages with regard to the analyst's methodologies.

Page 27 of 44
But let's start with a chart on the NDX
and, pardon the experimentation, it's a
"Point and Figure" chart which may be
as new to you as us but does offer up
some interesting perspectives. A
column of X's indicates a day where the
price rose a pre-set amount and O's the
converse - start a new column when
certain limits are exceeded. The result is
almost a pure price trend chart though
dates are indicated by numeric/letter
entries where 1=Jan...Oct=A and so on.

And this one you really do need to click

thru on. The chart on the left is a daily
chart that runs back ~ Oct peaks while
that on the right is a weekly chart that
runs back to '06. Interestingly the
shorter-term chart didn't quite break the
uptrend this last week - the innate
sentiment in favor of Tech is therefore
intact. Yet on the longer-term chart
there is a significant downtrend and the
software suggests a bearish target of
1760 ! But that's only a 9% drop from
here.

The Fundamental arguments that have floated around are that spending will still occur on Big Tech because it
helps companies save money. Got some bad news for folks - I've made those decisions and sold to those who
day and that is not the way they think. When things tighten up they cut capital budgets and live with what they've
got. So here are the four exposures on fundamentals: 1) a slowing economy which is likely to tip over will lead to
a downturn in capex with the normal lag; i.e. Tech spending will be pressured and the signs are already in the
surveys. 2) For some players the "consumer shift card" has been played, e.g. Apple and iPod/iTunes. Please -
consumer spending is going to be the first and is already headed for the basement. 3) Foreign sales are the next
shibboleth - based on currency conversions and de-coupling. Well as a matter of fact many of the majors have
shifted large chucks of business into the int'l economy - a major structural shift in fact. But it's still not their
dominant businesses and they've enjoyed a revenue runup mostly based on currency effects not jumps in unit
sales. 4) On top of which it turns out that not only is de-coupling mythological but the BRICs et.al. are
experiencing their own unique set of problems in addition to slowing growth; e.g. Europe. C'est la vie for that
arguments set - does the earnings estimate hold up ? Do you think it'll be "just" a 9-10% if it doesn't?

The key to re-thinking earnings is coupling economic fundamentals with company performance analysis - which is
where the analyst community should come in but, with some notable exceptions, generally doesn't. Earlier
(Readings (Earnings): The Real Earnings Realities that Ain't...YET) we'd gone thru a long, careful and documented dissection
of some of the characteristic flaws of analyst work that might be worth reviewing. Aside from the fact they are
often wrong they also tend to lag the realities and all too often their work is biased because it's based on
management prognostications. Which in turn are all too often looking backward to the last quarter instead of the
readily discernible general trends that should govern business outlooks. In other words executives are telling folks
how it is and was - not reading the tea leaves about how the currents are running. Which was, at the end of the
day our whole point with the "Dashboard" series.

Page 28 of 44
Which leads us to this next chart, which is a little more
traditional and uses ETF's as proxies for various Tech
sectors starting with the common index of IXN - Global
Technology stocks which turns out to track the NDX
almost exactly. On the top are IXN, IGV - Software and
IGW-Semiconductors. The bottom is more Telecom
oriented with IGN-Telecom Equipment, WMH-wireless
provides and mfg., FDN - Internet players (GOOD,
Yahoo, et.al.) and TTH - telecom service providers. On
the whole everybody has enjoyed the benefits of the
bear market bounce AND the tech mythologies,
particularly software which'll power thru any possible
downturn of course. This whole discussion reminds us
of nothing so much as the discussions circa '05 about
how the homebuilders were safe this cycle 'cause
they'd been careful to maintain the health of their
balance sheets and not over-invested in land. Think
about the metaphor there for a bit...please!

If our economic outlook has any

validity to it the estimates of
Tech earnings are wildly
overdone due to a lack of
sensible business analysis
coupled with grounded
economic fundamentals.
Potentially an textbook case in
why our mantra makes sense.
Which then leads us to the pick
good companies who'll do well
as survivors in any downturn
and prepare yourself to pick
them up as/when/if we go thru a
significant adjustment. Which in
turn leads to the HPQ/EDS
news. Which was a real puzzler
to a lot. There are two key
questions, perhaps three here.
First can Hurd apply his
strategy-based execution
improvement magic to EDS
which sorely needs it having
kept tripping over it's own feet
for years. Two - out of necessity
EDS targets the big companies
for advanced and complicated
services - is there enough HP
business there to grow a well-
running EDS's revenue ? Or, conversely, can EDS bring in HP behind it on it's client base? HP has a large
enterprise component but that's not been its' primary emphasis so this represents a real strategic addition, if not a
shift.

And, I guess, third, EDS has done very poorly at building an international presence and capability unlike IBM, in
particular, or Accenture. If that can be developed and leveraged there some real potentials. In any case HP is

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both an extremely well-run company which also has a very thoughtful and considered strategy by line of business.
IOHO they go on any value oriented investors shopping list, post downturn of course.

After the break, in addition to some excerpts, you'll find pointers to some recent vidclips on CNBC with some
analysts who actually reinforce much of what we're arguing for here. Worth your time. Bon Appetit'.

Tech Industry: Playing it Again, Same...oops Sam

http://llinlithgow.com/bizzX/2008/07/readfesttech_indstry_playing_i.html

Continuing on the theme of slowing capital spending combined with increased pressure on foreign economies we
turn our attention to the Tech Sector. And with the NDX down 1.4% so far today on the heels of Apple's surprise
this might be even more timely than anticipated - purely accidentally of course. Which nonetheless reinforces the
point that, at the end of the day, the state of the economy and general business matter even for a superb
innovator like Apple. If this keeps up consider this an early fore-shadowing of a future buying opportunity.

Just to put a point on it consider the accompany multi-company chart graphic, which shows pairwise comparisons
of key tech bellweathers. The top contrasts the NDX with CSCO where Chamber's honesty and directness has
led to a more serious decline in Cisco's stock than many techs so far. Meanwhile the new and the old (AAPL,
IBM) show two companies that have held up very well but highlight key concerns with consumer spending
domestically, the likely downturn in capex and the issue of foreign demand. Which leads one to the next pair of
GOOG and MSFT both of which blindsided with lower than expected performance. The final pair is also a new
and old contrast in the software business showing Salesforce.com vs SAP. Both of which holding up well.

Lots and lots of issues hiding there as well that get to the heart of the Tech outlook. Besides the general the key
question there is how will spending on softward hold up as the economic malaise grows and extends worldwide ?
One might suspect future surprises in store - unless of course the thesis that software spending saves money in a
downturn holds it up. Not a thesis btw that's historically well-grounded. Which leads us back to yesterday's
international economic outlook summary (Economy (Int'l): Re-coupling Redux and Deterioration Accelerations).

How all these conflicting forces play out is illustrated after the break with another set of worthwhile readings
excerpts, starting with Cisco but then comparing and contrasting INTC vs AMD. There you get an almost perfect
contrast between innovative strategic transformation PLUS superb execution and scale verses self-inflicted foot-
shooting. But the real poster child for bad execution is Sprint which continues to suffer tremendously from terrible
customer service problems.
The other interesting pair of excerpts is on the transformative nature of Apple's recent iPhone announcements
which change it from a very smart customer gadget to a new computing platform. A fundamental game-changer
that's not being widely recognized as yet but calls for strategic re-positioning on the part of all the players
involved. Jim Jubak is one of the few widely read commentators who gets it and his discussion of GOOG vs NOK
vs AAPL highlights some interesting aspects. And creates a list of future buying candidates that you need to table
for evaluation.

The final excerpt discusses Kleiner's strategic shift to green tech investing and away from its' traditional base -
which could serve as the exemplar for the paradigm shift emerging in the VC community and is worth thinking
about.

Tech Trends I (Readings): Big Picture to Key Players

http://llinlithgow.com/bizzX/2008/08/tech_trends_i_readings_big_pic.html

Oddly enough the logical next step from international economic news is considering how that might impact
business, specifically big technology businesses. The linkages are threefold - a slowing US economy further
slowed by feedback from slowing foreign economies will lead to lower capital spending, which we've talked about.
That's a little in-direct though. There are two direct impacts to consider. First, all the big tech companies have

Page 30 of 44
been claiming that major portions of their growth comes from abroad. That means there's a direct link that will see
foreign sales start to come under pressure in the next periods. Not something that's being factored in by
executives, investors or the markets so far, as best we can judge. Second - all those foreign earnings have
enjoyed huge currency conversion benefits. If foreign earnings went up 13% half of that was currency. Now even
if the dollar just flattens out or drops back to the level it was at the free ride is over. In other words you might be
looking at a 50% drop in foreign earnings, which might be 35-50% of total earnings, for many of the big tech
players. And that's without any real economic impacts.

Well there's something funny beginning to happen

in the Tech Markets that popped up last week and
got reinforced a bit this week. In case you didn't
notice the NDX didn't drop relatively as far as the
SPX, by a longshot, climbed rapidly back and has
been relatively immune to the gyrations of the
more traditional businesses and their stocks. All on
the thesis that earnings would hold up. We think
the market's beginning to notice because there's
several days recently where the tech indices have
in fact gone down while the oldline indices have
not. Most of which you can see on this chart of the
NDX, if you believe it's a decent tech proxy.
Thought notice that the XLK ETF, which mirrored it
for so long is considerably below recently. Telling
us that the big names are holding up while the
industry is starting to hurt, perhaps?

We'd like you to keep that in mind as we swerve to

the other side of the Tech road and talk about the
"inside baseball" issues which impact all of that nasty stuff like how much you actually sell and how much money
you make off it. After the break you'll find two collections of readings. The first on "big picture" industry issues and
the second on news on specific players. The former sets the stage for the latter in many cases once you translate
what you're reading into guidelines for evaluating it. Which, hopefully and perhaps the Industry Dumbbell will help
with.

What it tries to show is how well tech industry

customer's requirements are satisfied where
those requirements are defined by the stack
picture we've put up before that layers them
together. Starting with the box (chips, OS, etc.)
at the bottom, with middleware like databases,
integration and development tools, etc. next,
followed by applications and then the interface
on top. For very small businesses often
something like a spreadsheet, a contact
manager and a word processor plus QuikBooks
solves their entire problem and runs easily on a
bunch of PCs. For very large businesses things
are orders of magnitude more difficult, complex
and expensive. But strangely enough their
needs are satisfied by huge servers, say
mainframes from IBM, ginormous database
programs from Oracle or IBM, huge suites of
ERP and other software and so on. The poor
schmoos in the middle have hard, complex problems but the stuff at either end doesn't scale very well, either up
or down. And none of the attempts to work around those problems have worked out very well. In particular below
you'll find:

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1. The whole Software as a Service, i.e. hosting it on a server ala the old-style time-sharing services, doesn't work
well when you actually try to solve real business problems and get multiple different packages to work together.
Which creates huge barriers for such folks as Salesforce or GOOG's attemps, even when it's liteweight apps. And
also explains why SAP backed off their mySAP efforts years ago.

2. Meanwhile the big software packages turn out not to solve every problem (the gap between what's claimed,
what's delivered and what businesses needs could fill up several textbooks - in fact it does but never mind for
now). And in those niches you're finding a lot of small companies busy trying to make some money. And oddly,
they're using a lot of very good programming talent from India, Russia, Eastern Europe and so on. Hm....

3. Meanwhile the mid-size Tech departments who are the most under-served. Someday somebody will crack that
code and make a lot of money.

4. At the same time when Intel and the rest ran into speed limits on single-core chips they created something with
multiple-cores. Unfortunately they forgot to tell the software people how to write for the new architectures so your
fancy new "Intel Inside" isn't much faster than your old box. Hint, hint. On the other hand the big server guys have
been solving these problems for decades. Gee, what happens if the big-server guys figure out how to scale their
boxes down to go after the medium-sized companies that the PC-farms can't handle very well.

Looks to me as if every layer of the Dumbell is up for grabs over the next few years. Wonder what that does for
earnings ? As you read thru the excerpts we suggest you keep both sets of factors in mind - the external
economic ones and the internal technical ones. Both are telling us that some wild rides may just be getting
started.

Tech Trends II (Analysis): What're the Drivers and Outlooks

http://llinlithgow.com/bizzX/2008/08/tech_trends_ii_analysis_whatre.html

Consider this a direct continuation of the prior post on Technology since there was too much ground to cover in
one post, even one of mine. :). Which also provides a great opportunity to debunk the received wisdom for today -
obviously the markets took off and the only possible explanation was, of course, the surprise jump in durable
goods orders. Let's parse that out a little because it sets the table for so much else that we need to dissect. First
off on the markets - judging from sector ETFs the real news was Finance (XLF +1.9%), Homebuilders (XHB
+3.7% !!) and Energy (XLE, 1.6%). Now if capital spending were the thing that'd be some different sectors. In
reverse order you've got a hurricane - likely temporary, fantasies about a surge in mortgage applications and the
fact that Fannie fired three top execs today. Sometime likely in the middle of the day when the markets surged
"for no observable catalyst" before falling back at the end of the day. And bear in mind Finance is still 21% of the
SPX and Energy about 10%. There you have it folks - unsinn as usual.

So moving away from nonsense what we'd like to do is trace thru the outlook for Technology spending by asking
what's the outlook for capital spending, under which it falls. Bear in mind the prior discussion about the severe
earnings jeopardy we see coming from the disappearance of currency conversions on foreign revenues as well as
falling international demand. And the fact that the markets seem to be getting nervous, i.e. aware of, that little fly
in the ointment. So that boils the question down to what's investment going to look like ? And in parallel how's that
going to impact demand in each of the major Tech sub-industries, in line with our "Dumbbell Ecology" discussion
about who plays at what level of the layers and in which markets (yes, I'm afraid this may mean reviewing the
prior post: Tech Trends I (Readings): Big Picture to Key Players).

Page 32 of 44
Durable Goods and the Tech
Outlook

So what did the DG numbers tell us this

time ? Well take a gander at the
accompanying chart. YoY% changes in
new orders for durables, capital goods ex-
aircraft and industrial production, montly to
Jan04 and quarterly to Jan99. Which
should clearly establish it's a business
cycle related data series, that they three of
them move together with the cycle and,
recently, some interesting things have
happened. IndProd is headed down - so
much for domestic industrial activity and
therefore future domestic cap spending.
Reflected in a flattish Durable orders
curve. Notice that capital goods have
jumped short-term, though not noticeably
in the longer timeframe. Can you spell
exports and oil equipment ? We thought so
and think that pretty well explains things. If you'd like a more detailed breakdown a superb one is on EconomicPic
Data:Durable Goods - July. Well worth your time.

IBM as Earnings Exemplar

After the break we continue this

line of inquiry by diving deeper
into investment in the business
cycle big picture, looking
specifically at Software &
Equipment and then look at stock
price performance for some
bellweather tech companies. But
we want to conclude with a
dissection of IBM's last earning
report just to close the loop on
the currency conversion and
foreign revenue issues. You've
got to give IBM enormous credit
for the clarity and honesty of their
materials - this lays things out so
explicitly we can analyze and
comment on it. And that's not true
in many cases. Since we can, we
did. And take a look at the major
comments. And then think about
the fact that almost every other
Tech company is exposed to the
same pressures and risks. In
other words what we have to say
about IBM applies to everybody else as well !!

Page 33 of 44
Investment and the Business Cycle

The three major components of Investment

in the national accounts are Residential,
Structures and Equipment/Software. The
latter two are business spending and our
primary concern. Typically RI precedes a
downturn while the latter two lag it. Let's
look at how we're doing now. No real big
surprises - RI is in the tank and headed for
worse (still can't believe the
Homebuilders...). Anyway, guess what
Structures aren't doing badly but
Equipment and Software spending has
turned down pretty sharply. In fact it looks
to us as if Eqp/SW (Capex) turned down
almost as sharply Q106 as it did at the
beginning of the Tech Bust.

We might also want to ask so

what? Part of the explanation is
that Structures really got hurt badly
in the last downturn - nobody was
building new plants or
warehouses. And part of the uptick
this time around is that Oil Field
facilities gets rolled up there as
well - e.g. offshore drilling
platforms.

There's another interesting little

factoid one needs to consider -
Structural investment isn't
relatively a big deal. In fact the
whole Tech Bubble was
concentrated in the Eqp/SW
category. For all practical
purposes Structural spending is
nice, it's cute but it's not a swing
factor. Just so you get a sense of perspective remember that terrible market crash - well ask yourself how
significant that little dipsy doodle was in late '01 and thru
'02 in tech spending ?

Equipment/Software Detail

Courtesy of our friends at Northern Trust here's Eqp/SW

spending back to '00 quarterly showing the QtQ% change
at a seasonally adjusted annual rate. Take a real good
look and ask yourself how healthy you think capex is
anyway ? And bear in mind that QtQ data is "jumpy", i.e.
volatile. You need to run an average thru the middle of
those bars. By and large that looks to us as if capex was
pretty poor from Q207 forward and is really beginning to

Page 34 of 44
get worse, fast. In other words domestic demand for Tech Spending is beginning its' own private little downturn
though you may not hear John Chambers tell you that for a couple of quarters. Now would be a good time to start
preparing though.

Stock Performance: Bellweathers

and Sectors

The chart below is a tracking portfolio

of what we think are representative
bellweather stocks in the US
technology industry. It's worthwhile to
look at the key stats and compare the
day's change (from Tu. 8/26) to the
50da moving average differences to
the distance form the one year
High/Low numbers. Notice that some
pretty sound companies are running
above their 50Da averages still, e.g.
HPQ, Dell, and others. Now our
opinion of Dell's turn around is a
matter of record since we devoted an
entire long post to dissecting the
details of that strategy. And judging by
the readership stats many people find
it interesting every day. One
could/should perform a similar analysis
on the others and see what their
invidual cases are. We'll leave you with
one big observation and two
questions. First off notice that only
three companies are slightly below
their one-year highs: ORCL, SAP and
IBM.

The first two because the thesis is that companies will keep spending on application software because it saves
money in a downturn. If you believe that you may have a buying opportunity. If you believe this logic chain you
might have a shorting opportunity.

The other "high-performer" is IBM which is managing the company for EPS numbers. Later we'll get into the
strategic consequences. But with the currency impacts and slowing international revenue growth, well what do
you think? And don't take IBM as an isolated case - take it as representative of just about every company on this
chart. And with all that in mind notice there's another bunch who're down for the year in line with the index (~
15%), including Dell, HPQ, and APPL. Now ask yourself is that likely to remain the same or not?

Tech Trends III: Dell Earnings to Bandwidth to Content Wars

http://llinlithgow.com/bizzX/2008/08/tech_trends_iii_dell_earnings.html

Let's pick up where we left off with dissecting the outlook for Technology, having started with the computer
industry per se, segued into a deep dissection of the environmental pressures and side-tripped into economic
data, it's probably time. We're going to try and weave three major strands together because the reinforce one
another. First, what're the trends in the Telemediatainment Industry, how does Dell's surprising performance
illuminate that and what's the future of content. You might recall our mantra is Economy - Industry - Company. In
other words don't fight the tide because you'll drown. Or put differently Dell's results are more about a growing

Page 35 of 44
worldwide downturn than they are about them. On the other hand once you're caught in a riptide you'd better be a
good swimmer. There are some great wars going on right under our noses that'll create challenges and
opportunities in all these areas.

Telecom Stack and Industry Trends

You might recall this graphic which shows how the

Telemediatainment Industry is structured from the
networks that provide the bandwidth for distribution to the
applications, services and content that create and deliver
value to the end users and their growing myriads of
alternative end-point devices. After the break you'll find
the readings excerpts organized roughly along these
lines. Here are a few observations to go with.

1. Networks - the traditional phone business is dying but

the replacement, wireless, is saturated in this country and
Europe so the "future" likes in finding new
applications/services to drive higher usage. The iPhone
was a revolutionary cusp point trigger and no everybody's
going gang busters after smart mobile devices, from INTC
to MSFT to HPQ to ATT. You name it they're chasing it.
At the same time you still need some sort of pipe into the
home and the fatter the better. The cable guys were
winning 'cause they had lots of spare pipe but it turns out it doesn't scale. Which indicts this whole argument and
makes the operating companies new infrastructure investments brilliant, courageous and risky. Ivan Seidenberg
may be the next hero.

2. Mobility - as the result of all this everybody is going after the next big platform - MID or Mobile Intelligent
Device. This is literally a center piece in the annual strategy presentations of all the companies named. It's also
why Apple's 3G announcement coupled with the open software platform for applications is so game-changing.
Even mighty IBM has announced a major packaged solution to after large-scale mobility opportunities; though in
their case they're bundling stuff they've been building at in services engagements. In any case welcome to the
brave new world.

3. Content Wars - at the end of the day consumers and businesses will judge value not by bright shiny things but
what you've done for them lately. In other words by the entertainment or business value of the applications,
content and information. They theory being that ubiquitous and cheap bandwidth would make any content
deliverable anywhere/anytime/anyhow...the 4A's. Which if true completely turns over the entire business model of
the traditional media. And one which they're struggling to proceed with. And haven't figure out as yet.

Page 36 of 44
Dell's Results and Implications

At the end of the day the relative

performance of any of these players will
depend on developing the right strategy,
the right operating capabilities and
delivering results thru superb execution.
Earlier we took a very deep dive into
Dell and argued that a major re-
engineering was well started there and
the early indicators were promising. We
stand by those conclusions and think, in
fact, that yesterday's earnings results
bear them out in a way. But it also
illustrates the power of the mantra. At
the time we suggested Dell was a target
to keep on the front-burner, not a
purchase, because the economic and
industry situations said otherwise. We
stand by that argument as well and
consider yesterday's results - when you
dig into them - to bear it out. AND, most
importantly, serve as a model for the
kind of investigation that one needs to do into any of these players.

Powerpoints are one thing, delivery is another. When you do dig in you'll find that many of their product, market
and geographic initiatives resulted in outstanding growth, absolutely and relatively. They got hurt on gross
margins and operating margins. The latter especially because they have quite a ways to go in re-factoring their
operations. But they appear to know that and are moving "smartly ahead". Which is not what the press coverage
or analyst comments would have you believe. In effect Dell is investing in market share, this time on a sounder
strategic footing with more aligned products and services, and taking the penalties to buydown future gains. They
call that value-investing don't they ?

Magic Answers and Zuckervision

One executive who admits he doesn't know the answers but is running a tight ship while investing in explorations
of the alternatives if Jeff Zucker of NBCU, which just had a great real-time lab test with the Olympics. As well as
their on-going experiments with HULU in conjunction with FOX. There are two Charlie Rose interviews that we
recommend as the best candid discussions of the issues and challenges facing the industry and what they're
doing about it. These are a bunch of smart guys who have taken the first, in some ways biggest and hardest step.
They've recognized that change is required AND they're doing something about. That includes Zucker, Peter
Cherin at FOX and Bob Iger at Disney - who helped kick start this whole thing with his early commitment to
iTunes for movies. We forget how revolutionary iTunes was for music and how big a leap going from music to
video was and is. But unlike the old-line industries of movies, newspapers & magazines and music these guys are
out there doing all the right things to find out what works, test many alternatives and invest in the experiments.
This is as big a structural change for them as the creation of their media was when it was born. Most of the
traditionalists are loosing or have lost. We think these guys will figure it out but you decide for yourselves.
Jeff Zucker on Charlie Rose
Peter Chernin on Charlie Rose

Page 37 of 44
Tech Industry Refresh I:
Boxes to Software to Phones -
OUCH!
http://llinlithgow.com/bizzX/2009/03/tech_industry_re
fresh_i_news_b.html

Now that we're slowly catching up with the business

news let's shift our attention to a refresh of the Tech
Industry news, which has been unrelievedly bad
these last several months ! NB: this may seem like a
jump-shift from huge scale disruption and company-
scale WMT studies but there is a direct link, even
though we step sideways. At it's core Tech is about
product development, both new and improving
existing. Large-scale and small-scale innovation
should be at the heart of what it does; case in point
being MSFT's failures to create any new major
business lines or products other than bey near brute
force. And not at a profit or positive ROI ! Which is the second link - if product development is a core enterprise
competence, akin to manufacturing for the auto companies or store operations and distribution for retailers, then
all the devilish details we waded thru for WMT apply here as well. For example Sprint's customer service has
been abysmal and customers are leaving in droves. Dell despite noble efforts to re-invent itself first fired a
warning shot when it sacrified it's own service to short-term cost control. Operational execution really matters, it's
where the rubber meets the road, and strategies remain fantasies unless they are coupled to capabilities.
We last visited the Techs in Jul/Aug (Tech Trends II (Analysis): What're the Drivers and Outlooks) and warned
that as the business cycle turned over eventually so would capex; and that would take Tech profits, earnings and
stocks with it. The chart shows the NDX/QQQQs on the left, which is down about -45% almost to the day. Much of
that with the credit crisis implosion but nonetheless.... A couple of friends recently took us to task for not
translating our assessment more strongly into investment recommendations. If you look at the 2X leveraged ETFs
the inverse was up almost 125% from Aug to Nov08. That's opportunity ! But nonetheless indeed...the real
economic pressures didn't hit and really hurt until the end of the year and accelerating into this. In other words our
prescience was luck and our warnings then are just now showing up in the daylight - so be re-warned !!! The
consequences show up in the readings which survey a collection of tech stories running back aways from chips
and boxes to middleware to application software to telecom equipment to telco services. And include Intel,
Lenovo, Dell, HPQ, MSFT, IBM, Sony, Cisco, ALU, NOK, MOT, Nortel, L3, Sprint and ATT. Nobody's not in
serious trouble with storied names cutting costs and laying off thousands and others headed for the big house, BK
that is ! In this post we wanted to rollup, wrapup and explain the news by sorting it into categories. We'll try to
follow this with a complementary post de-constructing
the strategic and structural changes that are taking
place hidden by all this "normal" bad cycle sturm und
drang.

Re-Visiting the Tech Stack

Repeating an earlier graphic on the Tech stack that

explains how chips make boxes, adding operating
systems and middleware makes platforms and adding
applications and interfaces makes solutions. The graphic
also illustrates the evolutionary challenges the industry
continues to face. We won't tell you how old this
particular illustration is but trust us it's got some legs on
it. The problem is that the problems that needed to be
overcome back then are still unsolved today. The

Page 38 of 44
industry does extremely well on it's home turf, where geek talks to geek. That would be the bottom of the stack
(chips, boxes, middleware). On the top of the stack (applications and services) they're still be-deviled by the two-
culture communications gap between users needs and tech delivery. The net results is that those companies on
the bottom may keep adding functionality but they exceed customer's wants and needs. That's a recipe for
becoming a commodity where competition reduces to execution capability. On the top after over-promising and
under-delivering during the '90s and seeing no major new uptake in applications in a decade the "take them to the
cleaners model" for aging application maintenance business model is pretty aged itself.

Telecom Stack Re-view

The next graphic is the "future" of the Telecom industry, the

emerging Technomediatainment mega-industry. The problem
is that the equipment manufacturers and telco service
providers still make their money on the old businesses, for
one thing. For another the new industry has it's own
challenges which we'll go into in another follow-on posting.
But briefly, and this is important, the content everywhere
revolution requires two things. Cheap and infinite bandwidth
combined with applications and content that are truly valued
and valuable. On the first everybody's having troubles and on
the second the first initial hype surge for Web2.0 and social
media appears to be running out of steam. OOPS and
DOUBLE OOPS!

Meanwhile demand for both wirelines and mobile support has

dropped like a rock, even before the downturn got really going. The net result is that equipment providers and
Telco's are taking it in the neck. They desperately need the "New Media" thing to work out and right now are just
struggling to survive. When MOT and Nortel head for bankruptcy and ALU is in the ditch you know things will
never be the same. Even mighty Cisco, the sole remaining stander in the entire industry with the exception of
Huiwei, is hurting big time. You think them declaring war on HPQ, IBM, et.al. is an accident ? It's a symptom of no
place to go on their home turf. And, likely to the worst strategic mistake in their entire history. CSCO's a great
company but hasn't shown any special magic ala Apple these last ten years. What makes them think they can run
IBM's ROLM purchase and ATT (gen -5) in reverse ? Trouble ahead. Like their friends in the traditional Tech
space (think about that as a label for the industry of the future !) these guys are competing in a commodity space
at the bottom of the stack. And are utterly dependent on being save, again a similar situation, by innovation and
value-creation at the top.
As you skim thru these readings we'd ask you to do three things that are critical to evaluating the situation for
each company:

1) Place them in the stack in your mind; that tells you what the external opportunities and pressures are.

2) Understand on that basis how they'll be effected by a sustained and worldwide economic downturn
where capex is likely to keep shrinking for a long time.

3) Ask are they prepared with operational capabilities and core competencies that will enable them to
survive and then positions themselves for the future. HPQ and INTC may be, jury's out on Dell, MSFT has
failed for a decade, none of the telco equipment folks have made any headway for longer except Cisco,
the Telcos themselves are struggling with yet another perfect storm. And so on and so on.

Last Jul/Aug when I shared my appreciation of the situation with all my tech buddies they basically ignored me as
not knowing what I was talking about. Even as late as Nov. a very sr. exec with a major tech analyst firm basically
blew me off. The time to see these things is when there coming not after they're hear. And that is another tsunami
wave building up offshore IOHO !

Page 39 of 44
Tech Industry Refresh II: From Downturn to Re-structure to Re-
engineer?
http://llinlithgow.com/bizzX/2009/04/tech_industry_refresh_from_dow.html

As we work our way thru the business, finance and policy news, and wrap it in our interpretations and frameworks
- hopefully to make more sense of it - two central questions keep taking center stage. First - how are businesses
and their leaders reacting - are they adaptive and resilient or are they standing around flat-footed and shell-
shocked ? So far the answer is more of the latter than the former. Second, how are they positioning themselves
for the future - do they understand that there are multiple firestorms ripping thru the economy, even society, and
their industries and are they prepared and preparing to deal with the consequences? Again the answers we can
see aren't encouraging. While we've been working thru Finance as a whole and sector by sector as the exemplar
of all this they are not an isolated, single case. Every industry faces these changes and pressures. We could, for
example, dive into the next obvious example as GM and Chrysler teeter on the edge of bankruptcy and every
major worldwide player is threatened. But we're going to dive into an investigation of the strategic outlook for the
Tech Industry by asking those two questions of it. The answers are no more pretty than for anyone else.

Tech vs the Downturn

Let's start with this busy little composite chart

which, by presenting multiple data on multiple
timeframes, is meant to tell an integrated
story of where we're at, been and will be in
economic and industry terms. The top shows
the relationship between GDP, Industrial
Production and Capex. IndProd has fallen off
a cliff which tells us that Capex has a long
way to go down. Not surprising given that it's
a leading indicator. The LL corner contains
two charts that break down these indicators
so you can see Capex and it's two
components (Equipment/SW and Commercial
Real Estate - Structures). This downturn is
worse than anything we've seen, not
surprisingly, and much worse than the Tech
Bust with a long way to go judging from these
charts. In the LR corner we take a more granular breakdown and you can see how severe things are. Now
imagine how much worse things are going to get.

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Industry Responses and Pressures

In the prior post on Tech (Tech Industry Refresh I

(News): Boxes to Software to Phones - OUCH !)
we reviewed the current news and status of the
Industry and used our "stack" pictures to help sort
and filter things as well as provide an interpretive
framework. After the section in the readings where
ALL the various analysts groups are finally
catching up with economic realities the next
section presents a cumulative set of readings that
look at various components and how they are
performing and reacting. The graphic is another
(commercial) depiction and expansion of the stack
that shows us how industry solutions build on
network and computing platforms to deliver
business-driven solutions, if they do.

No one buys Technology for the pure fun of it, or at

least they shouldn't. In actual point of fact too many
technologists fall in love with "bright shiny things".
Which is a major part of the continuing gap
between value required and value delivered. The other major part is the lack of business involvement and
responsibility. Tech folk can pretty much build anything you want but to get it, and get it right, you have to invest
the time, effort and energy in deciding on goals & strategies, requirements and working to drive those into the
actual design and construction of solutions. Which isn't, and hasn't been, happening - there are no clean hands
here.

The Continuing Performance Shortfall - the Business/IT Gap Lives

For that gap to be filled and value-created solutions to be created four things have to happen. Clear strategies
have to be developed on the Business and IT sides of the house. And business operating execution and realities
have to be reflected in the detail design and
development of IT products and solutions. Now as it
happens the controversy that erupted a couple of
years ago over whether or not IT was a commodity is
directly related to these problems. The bottom part of
the stack, where the IT community are the business
experts, has become a commodity because the
existing requirements are satisfied and more. The top
1/3 of the stack, where the two communities have to
come together is NOT a commodity. Anything but. As
the example of the list of usual suspects (WMT,
Fedex, Tesco, Zara, et.al.) continue to show us IT
investment driven by a deep understanding of
business requirements offers a sustainable
competitive advantage. Especially if the organization
leans to be continuously innovative. Oddly enough
we first addressed these cultural breakdowns almost
exactly a year ago (WRFest 16Mar08(Tech): DLS's,
Two Cultures and the Breakdown) along with the
associated consequences for commoditization
(WRFest 30Mar08(Tech Industry): Commodization,
Consolidation, Consequences).

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Requirements vs Functionalities: Consequences
of Maturity

In that latter post we introduced a concept that's at the

heart of all this, in the Tech and other industries, as a
matter of fact. That's the question of whether or not a
particular solution meets, is less than or exceeds
customer requirements. Stop for a minute and ask
yourself whether or not you computer and your software
fits into one of those categories. For example we run on
WinXP which is robust and reliable (though we confess
to dearly missing OS2 for it's multi-tasking, industrial
strength robustness and overall reliability. Think of it as
mainframe in a box). And we use Office2K software
because those versions of Word, Excel and Powerpoint
not only do all we need done but exceed our
requirements by about 80%. Our suspicion is that you
are no different. Now think about the implications -
though each tech company and sector would need to be
individually dissected. Consider Oracle for example.
Databases are commodities so competition reduces to a
couple of major players (IBM and ORCL plus some
small-scale open source and MSFT's offerings). On the
other hand they've never managed to create much
breakthru thinking or value on their applications. So
without innovation you end up with effective maturity
because solutions to customers needs aren't
forthcoming. That results in industry consolidation, default maturity and saturation, a lack of new sales and them
"coasting" on their legacy installs and collecting maintenance fees as their key strategy. Yet because new sales
are lagging badly the legacy is eroding and customers are looking for alternatives. We think you can apply these
tools to every company (and have the ambition to do so at some point but....).

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MSFT as Exemplar: the Value-Gap

Not to pick on another favorite whipping child but let's

consider MSFT. Not just because everybody loves to do that
but because they also represent a lot of the problems with
the Industry in general. And just to put a point on it after
years of mega-buck investment in Longhorn we got the
sterilized VISTA OS which represents the removal of about
3/4 of the previously announced new features and was slow,
under-integrated and didn't work on most platforms. So
much so that there was a concerted effort that was partially
successful to retain on-going support for WinXP. Then we
were presented with a set of deceptive marketing programs
and mis-leading public positioning when in fact MSFT
executives knew that Vista was broken. Which is all implicitly
admitted by their announcement of Win7! The graphic is
extracted from their last set of major annual analyst
presentations and is their strategic vision.

The top sub-chart id's the mega-trends that are supposedly

changing the market. While they're all true do any of them
speak to solutions - or just the bottom of the stack ? The
middle chart id's the four major sectors they're choosing to
pursue. Commercial software - where's the beef ? Without
the mad cow infections ? Open source is dismissed with
faint praise of course. Advertising and Commercial
Electronics - these are areas where MS's culture, skill set,
market position, etc. etc. will provide breakthrus in value
delivery ? And are big enough soon enough to move the
earnings dials ? We don't think so. We're looking at a
company trapped into "mining" it's legacy reserves, just like
an oil company over-pumping a declining field.

We don't mean to pick on MSFT in particular, though we certainly savor the opportunity of course, but ask our
standard enterprise questions: what is the "Theory of the Case" ? That is in the immediate future, the short- and
long-terms and structurally for each line of business and product family what are your capabilities, strategic intent
and resources ? Can you make the case for credible value delivery ? That question should be being asked and
analyzed for each company and sector IOHO ! On the whole we're arent' seeing the kind of re-thinking and
renewal from the Technology Sector, the supposed home of innovation and adaptive resilience, that we see from
Mickey D's or WMT etc. Though in fairness IBM appears to have found ways to maintain it's reserves in the
commodity spaces though not finding new ones while Apple is the main counter-argument. (WRFest
27Apr08(Tech Ind): Innovators, Survivors & Also-rans,Tech Industry:APPL vs MSFT vs YHOO Wars ).
In the readings section we end with a pretty complete inventory of prior postings that provide other readings, tools
and frameworks and interpretations that reinforce many of these points. You may want to consult them as
appropriate.

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 About Llinlithgow Associates
Llinlithgow Assoc. is a management
Customer Problem
consultancy focused on evaluating • Value Proposition
businesses to reduce risk, leverage under- • Business Model
developed opportunities in operations and • Strategy
increase overall enterprise performance to
improve investment return.
Management System
Our approach is based on •Budgeting system
Marketing, Sales &
Service
BizzXceleration, a proprietary framework •Management Controls • Customer value focus
•Operating Plans
with 25 years of development, to review •Resource Development
• Process Discipline
• Business-driven
and analyze Business Models and
Strategy, key operating functions and
supporting infrastructure and management
Core Operating
systems. From there we develop Functions
comprehensive, integrated operating plans • Functional Efficiency
• Inter-function
that tie all the components of the business Integration
into a high-performance enterprise. •Value Alignment

Several years ago Michael Lewis published an interesting book on how the Oakland A’s took a
systematic look at how the game really works, and what investments in players, strategies and tactics
were most likely to result in the most wins for the lowest cost. Our approaches are similar in taking a
systematic look at the whole business, each of the major components and the best way to tie everything
together into a high-performance system.

We start by looking at the basic core value proposition and it’s translation into the Business Model and
Strategy. Typically we next examine Marketing and Sales operations, where it is possible to reduce
operating costs by 30%, shorten the sales cycle by 30% and increase the closure rate by 30%. This is
primarily the result of establishing good processes and discipline.

BizzXceleration is comprehensive but integrated across the total reach and range of business activities
and issues. And emphasizes a pragmatic, workable approach that results in a stepwise path to
performance improvement. We believe that our approach mitigates business risks, improves operational
performance and can lay the groundwork for 10-30% EBITDA improvements in post-deal execution.

If you would be interested in further discussions, more detailed descriptions or the review and testing of specific
opportunities we would enjoy hearing from you. We can be reached at contact@llinlithgow.com .

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