News came this morning that Google is acquiring Motorola Mobility for a hefty $12.5 billion. Motorola Mobility which focuses its efforts on mobile phones and tablet computers is a spin off from Motorola. Here is the story from Bloomberg:

Google Inc. (GOOG), maker of the Android mobile-phone software, agreed to buy smartphone maker Motorola Mobility Holdings Inc. for $12.5 billion in its biggest deal, gaining mobile patents and expanding in the hardware business.

Motorola shareholders will get $40 a share in cash, the companies said in a statement today. That’s 63 percent more than Motorola Mobility’s closing price on the New York Stock Exchange on Aug. 12. Both boards have approved the takeover.

If this is not about patents(which it most likely is), then it is a completely crazy move on the part of Google. What kind of message does it send to other Android handset makers?

This also shows how well Microsoft has played its hands with their new Windows Phone platform. Analysts and pundits forecasted (and even pressured) a possible Nokia acquisition by Microsoft. Microsoft instead got what it wanted without an outright acquisition of Nokia – an exclusive Windows Phone deal. I have to say that this move by Google has increased the attractiveness of the WP7 platform to handset vendors.

Now, back to the topic of patents – Google’s Android ecosystem was under relentless attack from competitors – not by outsmarting and out-innovating Android, but suing them for patent infringements. Also Android rivals colluded in order to exclude Google and Android from getting their hands on Nortel’s portfolio of patents. Microsoft, arguably, has been making more money from Android than Google itself. Apple was successful in blocking Samsung’s tablet from sold in the European markets. Something is badly broken in the patent system.

These companies are spending money on lawyers and lawsuits instead of spending it on engineers and technology. One has to really question the utility of the patent system itself. All these companies are clearly in violation of each other’s patents, and they use their own patent portfolio as a deterrent(nuclear style) against potential lawsuits. The biggest loser in this system is innovation. Does a new upstart, without the protective shield of a large portfolio of patents, stand a chance against these behemoths? What usually happens is startups are ignored until it achieves a level of success where patent trolling becomes a lucrative strategy.

This blog post from the maverick,Mark Cuban, deserves a more serious consideration. At the very least, I think it is time to rethink the patent system.

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Extracted from a paper I wrote for my MBA macroeconomics class.

Countercyclical fiscal policy to combat economic downturns was unheard of before the Great Depression. Even the very idea of monetary policy was nascent in the United States, with the central bank being only 13 years old at the beginnings of the Great Depression. In the pre-Great-Depression era, governments, generally, followed a policy of letting the downturn run its course. Yet, there had never been a recorded case of prolonged slump in peace time that lasted more than 12 months or at worst 24 months. So, what caused the garden variety recession that started in October of 1929 to turn into a persistent economic malaise? The answer to that question could be in the policies pursued by the administrations of Presidents Herbert Hoover, and Franklin D. Roosevelt.

For instance, during the depression of 1920-21, the Government pursued a policy of cutting spending and running budget surpluses. In 1921, the output collapsed more than it did in the first year of the Great Depression yet it was a short recession that lasted barely more than a year, leading the economy into the roaring 20s.

 

 

Year

Revenues

Outlays

Surplus/Deficit

1920

6,649

6,358

291

1921

5,571

5,062

509

1922

4,026

3,289

736

1923

3,853

3,140

713

(Budget of the United States Government: Historical Tables, 2011) – Table 1

For another example of successful budget cutting in the middle of a depression, one has to go back no further than the infamous panic of 1907. Between 1907 and 1908, the real GDP of the US declined by more than ten percentage, and yet in 1909, the GDP grew by more than 7 percent from the bottom and continued to grow at a fast clip in the following years.

Year

Revenues

Outlays

Surplus/Deficit

1907

666

579

87

1908

602

659

-57

1909

604

694

-89


(Budget of the United States Government: Historical Tables, 2011) – Table 2

Hoover – FDR lite

Policies of the Hoover (later FDR) administration in the midst of a garden variety depression (at least until 1930) were a dramatic departure from the past. Historically successful policies of laissez-faire were discarded for continuous meddling into the economy – weak firms were propped up, fall in wages were fought, prices were propped up in several cases. “The Great Engineer” (Hoover) was a worldly man who travelled and lived in many parts of world and had a temperament and mental makeup radically different from his predecessor. Hoover was a problem “solver” who wanted to jump in and intervene.

Hoover’s unfettered enthusiasm for massive public projects was on full display long before he became The President of the United States. As soon as he got back after World War I, as the Commerce Secretary under President Harding, Hoover proposed “Reconstruction Program” which included among other things increased inheritance taxes, public dams, and significant regulation of stock market to prevent “vicious speculation”. His public dam wishes came closer to reality as he got approval for the dam on the Colorado River in 1924 when he was Commerce Secretary under President Coolidge. Originally named Coolidge Dam, project was popularly known by the name Hoover Dam. FDR administration named it Boulder Dam, before grudgingly reverting back to Hoover Dam.

As the Great Depression was slowly setting in (Table 3 – below), government spending grew and grew fast against collapsing revenues. Contrary what one may presume the first Hoover budget was the fiscal 1930 and the first FDR budget was for the fiscal year 1934.

Officially, the depression ended in March of 1933, the very same month that FDR was inaugurated. It is popular amongst many economists that the course of the remarkable economic slump was reversed by a massive spending program started by Roosevelt called New Deal. There are a couple of problems with this myth. As famous New Dealer Rexford Tugwell later acknowledged, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” (Gibbons, 2008) Furthermore, Table 3 shows that the increase in spending in the fiscal year (Hoover – 1933) that ended a couple of months after the official end of the economic contraction was lower (however mildly) from the previous year.

Year

Revenues

Outlays

Surplus

1929

3,862

3,127

734

1930

4,058

3,320

738

1931

3,116

3,577

-462

1932

1,924

4,659

-2,735

1933

1,997

4,598

-2,602

1934

2,955

6,541

-3,586

1935

3,609

6,412

-2,803

1936

3,923

8,228

-4,304

1937

5,387

7,580

-2,193

1938

6,751

6,840

-89

1939

6,295

9,141

-2,846

1940

6,548

9,468

-2,920

(Budget of the United States Government: Historical Tables, 2011) – Table 3

Hoover – “Do Nothing” Myth

On November 19th 1929, less than a month after Black Tuesday, President Hoover called a meeting of the railroad presidents in the white house. Railroad was a major industry back then, and was a primary mode of transportation of people and goods. He demanded that railroad industry maintain their construction, and one week after that meeting, the railroad business leaders announced one billion dollars in outlay, a third of the federal budget for 1929.

Two days after meeting the railroad presidents, Hoover setup another meeting in the White House, this time with leaders of major industries. People in attendance included Henry Ford, Julius Rosenwald of Sears, Julius Barnes who was chairman of the U.S Chamber of Commerce, Alfred Sloan Jr. of General Motors, Pierre Du Pont and Walter Teagle of Standard Oil. He(Hoover) demanded that industry keep wages up and share the work among the employees. While noting that “liquidations” was allowed in all previous American recessions, “his very instinct” told him that wages ought to be kept high in this recession. Some of the largest manufacturers, later on, advertised their compliance with Hoover’s wage programs. This specific call, arguably, did more damage to the labor market early on in the Great Depression than any other Hoover intervention. Toward the end of 1931, real hourly wages in manufacturing had increased 10 percent due to a deflation and Hoover wage program, hours worked declined by 40 percent, and average work week declined by 20 percent

President Hoover demanded that governors of states keep the spending up whenever possible. He even received a response from then New York governor, Franklin D. Roosevelt that he is doing his bit to maintain “much-needed construction work”. Hoover and his treasury secretary Mellon, after proposing a federal build program of 400 million dollars, on December 3, 1929, established Department of Public Construction. Hoover went on to provide subsidies for shipping industry. Professor JM Clark of Columbia University in the American Economic Review Journal went on to praise Hoover’s policies as “great experiment in constructive industrial statesmanship.” In January of 1932, Hoover established Reconstruction Finance Corporation (RFC) to make finance available to such projects, and to industry, mortgages etc.

Republican Party platform in 1928 claimed that tariff is a fundamental and essential principle of the economic life of this nation.” Congressman Willis Hawley of Oregon and Senator Reed Smoot of Utah passed a legislation that called for one of the steepest tariffs in U.S history. Tariff separated U.S farmers from their much needed customers abroad at the worst time possible. Smoot-Hawley triggered a global trade-war against the U.S. These retaliatory tariffs affected 125 categories of American products. These tariffs also had secondary effect on the international gold standard – denied many nations opportunity to earn gold that they desperately needed to pay for cross border debt obligations. Global trade collapsed under the burden of this trade war – between the years 1929 and 1934 international trade is estimated to have declined by around 66% (Smoot-Hawley Tariff).

By late December 1929, Hoover also started a verbal warfare on “wave of uncontrolled speculation” in the stock market. Short sellers were picked on as targets for prosecutions, ridicule, and shame. Attack on Wall Street and speculators did not help the stock market one bit.

Hoover laid the foundation for many a “New Deal” interventions, especially in the agricultural sector, including subsidies, protective tariffs etc. Hoover continuously intervened in two ways, first by subsidizing the production of many produce – incentivizing farmers to produce more of something that already had an oversupply, then buying many of these produces and stock piling them under agencies he established – like the Grain Stabilization Corporation and Cotton Stabilization Corporation.

Hoover’s tax policies did everything it could provide disincentive to investment and savings. Highest marginal tax rate was raised from 24% to 25% in 1929, and then again from 25% to 63% in 1932.

In 1932, Hoover signed first of two major banking regulatory bill that goes under the name Glass-Steagall Act.

Hoover lost his bid for the second term to his opponent Franklin D. Roosevelt. Between the November 1932 elections and March 4, 1933 inauguration, the country’s banking situation went from worse to a disaster. Uncertainty of interregnum did not help the cause of the markets. Hoover tried to contact the newly elected President FDR several times. He even wrote a personal letter. There was no response. President Hoover met with Rexford Tugwell (part of FDR’s brain trust) where he (Tugwell) informed President Hoover that the new administration had no interest in co-operating.

Nothing throws more light on Hoover’s policies than the campaign speeches of the two presidential candidates in 1932. Hoover himself summarized his policies in the face of a deep depression in the following words:

Two courses were open to us. We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action. (Hoover, Address Accepting the Republican Presidential Nomination, 1932)

A couple of months later into his campaign for reelection, Hoover went on to say the following, that he would have nothing to do with any advice that urged him to let economy take it’s natural course.

In the midst of this hurricane the Republican administration kept a cool head, and it rejected every counsel of weakness and cowardice. Some of the reactionary economists urged that we should allow the liquidation to take its course until it had found its own bottom.

We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction. (Hoover, Address at the Coliseum in Des Moines, Iowa, 1932)

Hoover was not just blowing smoke with him claims. His political opponent and, later, the 30th President of the United States, Franklin D. Roosevelt said the following about Hoover during his campaign and acceptance speeches:

I accuse the present Administration of being the greatest spending Administration in peace times in all our history. It is an Administration that has piled bureau on bureau, commission on commission, and has failed to anticipate the dire needs and the reduced earning power of the people. Bureaus and bureaucrats, commissions and commissioners have been retained at the expense of the taxpayer.

And on my part I ask you very simply to assign to me the task of reducing the annual operating expenses of your national government. (Roosevelt, 1932)

Besides the platform of the Democratic Party running against the incumbent republican President Hoover contained the following statement:

The Democratic Party solemnly promises by appropriate action to put into effect the principles, policies and reforms herein advocated, and to eradicate the policies, methods, and practices herein condemned. We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance, to accomplish a saving of not less than twenty-five per cent in the cost of federal government, and we call upon the Democratic Party in the States to make a zealous effort to achieve a proportionate result.

We favor maintenance of the national credit by a federal budget annually balanced on the basis of accurate executive estimates within revenues, raised by a system of taxation levied on the principle of ability to pay. (Democratic Party Platform 1932, 1932)

As anyone who knows politics and politicians would already know, a political party that has long been out of power would try to differentiate their platform from that of an extremely unpopular incumbent. Implications are clear, far from being a budget cutting liquidationist, as popular myth would have it, Hoover was an interventionist and profligate spender.

FDR and Regime Uncertainty

If Hoover was a profligate spender who took on unprecedented spending programs and interventions, then FDR was Hoover on steroids (Table 3). Coming to power in 1933, FDR quickly forgot his castigation of Hoover administration as “the greatest spending Administration in peace times in all our history”. During his first two presidential terms, Congress enacted under proposals from the administration a plethora of laws severely weakening private property rights. Taking a cue from Roosevelt administration, various state legislatures passed their own “little New Deals”.

The post WWI period also marked severe political disruptions around the world including communist and National Socialist “revolutions” in many parts of the West. “Taken together, the many menacing New Deal measures, especially those from 1935 onward, gave business people and investors good reason to fear that the market economy might not survive anything like its traditional form and that even more drastic developments, perhaps even some kind of collectivist dictatorship could not be ruled out entirely” (Higgs, 2006)

One of the chief ironies of the Roosevelt administration’s policies that “for the most part the New Deal relied on private investment to stimulate recovery yet its rhetoric precluded the private confidence to invest” (Badget, 1989, p. 116)

(Higgs, 2006)

Following are a few selected acts of Congress substantially threatening private property rights.

Year

Legislations

1933

Agricultural Adjustment Act, National Industrial Recovery Act, Emergency Banking Relief Act, Banking Act of 1933, Federal Securities Act, Tennessee Valley Authority Act, Gold Repeal Joint Resolution, Farm Credit Act, Emergency Railroad Transportation Act, Emergency Farm Mortgage Act, Home Owners Loan Corporation Act

1934

Securities Exchange Act, Gold Reserve Act, Communications Act, Railway Labor Act

1935

Bituminous Coal Stabilization Act, Connally (“hot oil”) Act, Revenue Act of 1935, National Labor Relations Act, Social Security Act, Public Utilities Holding Company Act, Banking Act of 1935, Emergency Relief Appropriations Act, Farm Mortgage Moratorium Act

1936

Soil Conservation & Domestic Allotment Act, Federal Anti-Price Discrimination Act, Revenue Ac t of 1936

1937

Bituminous Coal Act, Revenue Act of 1937, National Housing Act, Enabling (Miller-Tydings) Act

1938

Agricultural Adjustment Act, Fair Labor Standard Act, Civil Aeronautics Act, Food, Drug & Cosmetic Act

1939

Administrative Reorganization Act

1940

Investment Company Act, Revenue Act of 1940, Second Revenue Act of 1940.

Table 4 (Higgs, 2006)

This relentless tinkering with the laws, regulations and government policy coupled with political disruptions at home and abroad added to the uncertainty surrounding the investment climate and private property regime. Economist and economic historian Robert Higgs called it “Regime Uncertainty”. As further proof of regime uncertainty and crowding out, we provide the following three charts – Figures 1-1, 1-2 and 1-3 (Higgs, 2006). First, private investment as a share of GDP – did not come anywhere close to full recovery until after WWII when Truman was in Oval Office and government spending collapsed dramatically after WWII. During WWII, “crowding out” was total with government spending replacing private spending/investment. There was no multiplier as the economy functioned essentially under command and control – one that produced a lot of war goods and a few consumer goods. Given the price controls and rationing, CPI and GDP deflators used for this period are questionable at best. The military draft essentially reduced unemployment to zero.

 

 

After his inauguration as President, one of the first few policy moves from President Roosevelt was confiscation of people’s gold – with threat of imprisonment for those who refused to sell their gold to U.S Treasury. He then worked on to remove gold clauses from all sorts of contracts that had been written in to contracts for more than 100 years. It was pitched to the public as a temporary measure, but it remained in place until the breakdown of Brettonwoods in early 1970s.

Ignoring the opposition of the U.S Chamber of Commerce and National Association of Manufacturers, in 1935, Roosevelt administration supported “the Social Security Act, the National Labor Relations Act, the Banking Act, and the Public Utilities Holding Company Act, as well as a host of other laws, including soak-the-rich taxes” (Higgs, 2006)

In 1935, 1936, and 1937, FDR requested legislations intended to punish the wealthy. The administration instituted “Wealth Tax” of 1935 which included a graduated corporate income tax, a tax on corporate dividends, increases of estate and gift taxes, and increase of surtaxes on incomes greater than $50,000 that went all the way up to a top bracket of 79 percent. In 1936, the administration sought to tax retained earnings on top of all other corporate income taxes. The tax act of 1937 closed a variety of “loopholes”. These punishing taxes were levied upon those who made majority of the decisions about private investment. Economic historian Brownlee concluded “the tax reform of 1935-37, more than any other aspect of the New Deal,… stimulated business hostility to Roosevelt…Business opponents of New Deal tax reform charged that Roosevelt’s taxes, particularly the undistributed profits tax, had caused the recession [of 1937-38] by discouraging investment” (Brownlee, 1985)

There were other interventions that stroked the perception that FDR administration was hostile to private property rights. Supreme Court had rightfully struck down many policies of FDR administration as patently unconstitutional. In 1937, the Administration put forth a plan to circumvent the constitutional challenge by packing the Supreme Court. Although he failed to get congressional support, many perceived this move as “a naked bid for dictatorship” (Benjamin Anderson, 1949, 1979 p. 430). This move intimidated justices. They (justices) became weary of public contempt and worried about their constitutional power being stripped away, and they finally capitulated.

The top marginal tax rates were raised further to 94% in multiple increments in 1940, 1942 and 1945. As disastrous as the picture that unemployment statistics paint, it does not come close to describing the real misery that the Great Depression wreaked on the American public. 10 years into the depression, unemployment rate remained stubbornly high at 17.2 percent in 1939. (Margo, Spring 1993).

Folly of spending binges of Hoover and FDR administration was captured in the remarks of FDR’s treasury secretary Henry Morgenthau’s remarks in the House Ways and Means Committee testimony in 1939:

We have tried spending money. We are spending more than we have ever spent before and it does not work.

I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises.

I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot! (Morgenthau, 1939)

The Great Depression: An Avoidable Tragedy

It should be reasonably clear from the events that led to the Great Depression and from the policies that perpetuated and lengthened the tragedy, that a better fiscal policy to pursue would have to been to do what was always done prior to the Great Depression – government staying out of it. Drawing from the excellent work of JR Vernon (1994); Ritschl, Sarferaz and Uebele (2008); and Christina Romer (1986) on GDP and historic business cycles, economists George Selgin, Larry White & William Lastrapes concluded that the length, depth and severity of business cycles in post WWII era got slightly worse than the length, depth and severity of the business cycles between Civil War and WWI. This renders questionable at best the perception that fiscal stimulus could solve economic stagnation.

Bibliography

Democratic Party Platform 1932. (1932, June 27). Retrieved from American Presidency Project: http://www.presidency.ucsb.edu/ws/index.php?pid=29595#axzz1Tj5ZvM3p

Budget of the United States Government: Historical Tables. (2011, July 30). Retrieved from GPO Access: http://www.gpoaccess.gov/usbudget/fy09/hist.html

Brownlee, E. (1985). Taxation. In O. G. Wander, Franklin D. Roosevelt, His Life and Times: An Encyclopedic View (p. 417). Boston: G.K. Hall and Co.

Eichengreen, B. (February 2004). Understanding the Great Depression. Canadian Journal of Economics, vol.37, no. 1, 1-27.

Gibbons, P. R. (2008, November 4). Old myths about the New Deal. Retrieved from NPRI: http://www.npri.org/publications/old-myths-about-the-new-deal

Hayek, F. v. (1974, December 11). The Pretence of Knowledge. Retrieved from Nobel Prize: http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html

Higgs, R. (2006). Regime Uncertainty. In R. Higgs, Depression, War and Cold War: Challenging the Myths of Conflict and Prosperity (p. 13). Oakland: The Independent Institute.

Hoover, H. (1932, August 11). Address Accepting the Republican Presidential Nomination. Retrieved from The American Presidency: http://www.presidency.ucsb.edu/ws/index.php?pid=23198&st=&st1=#axzz1TZPsKZak

Hoover, H. (1932, October 4). Address at the Coliseum in Des Moines, Iowa. Retrieved from The American Presidency: http://www.presidency.ucsb.edu/ws/index.php?pid=23269&st=&st1=#axzz1TZPsKZak

Margo, R. A. (Spring 1993). Employment and Unemployment in the 1930s. Journal of Economic Perspectives, 41-59.

Morgenthau, H. (1939, May 9). Henry Morgenthau Diary. Retrieved from Burton Folsom: Where History, Money and Politics Collide: http://www.burtfolsom.com/wp-content/uploads/2011/Morgenthau.pdf

Roosevelt, F. D. (1932, September 29). Franklin D. Roosevelt Address Sioux City, Iowa. Retrieved from Pepperdine University School of Public Policy: http://publicpolicy.pepperdine.edu/faculty-research/new-deal/roosevelt-speeches/fr092932.htm

Rothbard, M. (2000). Americas Great Depression. In M. Rothbard, Americas Great Depression (p. xiii). Auburn: Ludwig von Mises Institute.

Rothbard, M. (2000). Americas Great Depression. In M. Rothbard, Americas Great Depression (pp. 142-144). Auburn: Ludwig von Mises Institute.

Schwartz, M. F. (1993). A Monetary History of the United States, 1867-1960. Princeton University Press.

Shlaes, A.(2007). The Forgotten Man: A New History of the Great Depression. Harper Collins Publishers.

Smoot-Hawley Tariff. (n.d.). Retrieved from U.S. Department of State: http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html

Summers, L. (2011, July 26). ‘I think Keynes mistitled his book’. Retrieved from Washington Post: http://www.washingtonpost.com/blogs/ezra-klein/post/larry-summers-i-think-keynes-mistitled-his-book/2011/07/11/gIQAzZd4aI_blog.html

White, E. N. (2009, September). Barnard College. Retrieved from Columbia University: http://www.econ.barnard.columbia.edu/~econhist/papers/White%20_1920s_Real_Estate_September_2009.pdf

 

 

On the wee hours of June 21st, I wrote a post about “troubles” that Apple’s management is facing given the staggering amount of cash on it’s balance sheet. I speculated that Apple will have to decide to give out a special dividend, choose to acquire one or more companies or do both. I wrote the following in that post

It could do one of two things or a combination of the two, and, either way, for Apple, it will be a break from its past. So what are these two things? First, Apple could offer a large one time dividend (a la Microsoft in 2003) to shareholders, followed by regular quarterly dividends. Even though Apple is sitting on large piles of cash on its balance sheet, it will be under no pressure, at least not in the immediate future, to do this – for the simple reason that Investors are happy with the returns they are getting, despite Apple’s “inability” to reinvest that money.

That leads us to the second option in front of the mercurial gang from Cupertino. It could make strategic acquisition in the technology space, and there are a lot of attractive players in this space.

Furthermore I argued that Apple’s weakness is in cloud and not in software or hardware. That lead me to the conclusion that Apple would/should acquire an internet company – my picks were Twitter or Yahoo. Then in the comment section, Rajesh R Shenoy reminded me that Steve Jobs and Apple had a history with media and therefore a pure media company could also be a potential candidate. I meant this to mean a company like Netflix. I wrote the following in the comment section of that post:

Your point about media company  is a good one. I thought about Apple as a potential buyer for a company like Hulu. But I don’t think that is the kind of media company that Apple would be interested in. Apple already sells multimedia over iTunes. I am not sure how interested they will be in a low fixed monthly payment model approach taken by the likes of Hulu & Netflix.

I got two things right. First Apple will break tradition and will acquire larger companies. Second, as Apple tries to fill gaps in its portfolio of product offerings through acquisition, it confirmed my conclusion that weakness lies in cloud. How do I know this? Two stories – first about confirming that Apple is considering an acquisition bid for Hulu.

Apple Inc. , with $76.2 billion in cash and securities on its books, is considering making a bid for the Hulu online video service, two people with knowledge of the auction said.

Apple, the world’s second-most-valuable company, is in early talks that may lead to an offer for Hulu, said the people, who weren’t authorized to speak publicly.

Second is more of a confirmation from a third party - an analyst – that cloud is Apple’s weakness. I came across this video at the bottom of the bloomberg story on Apple’s potential hulu bid.

I also was right in considering Hulu as a potential acquisition target for Apple, yet I completely failed to see what Apple saw in Hulu. To be frank, I do not know what Apple sees in Hulu’s business model. Given Apple’s successes in the recent past, they obviously know infinitely more about running a technology company than this mere aficionado of technology.

People invest money in a business in order to take risk and to get a return beyond what they could get by just keeping it under the mattress or even depositing it in a savings account. While it might be important for companies to have large amounts of cash on their balance sheet, it is always kept for strategic investing purposes – like making an acquisition, or investing in new lines of business, major expansions etc. If all that an investor aspires from his investment is to get an interest rate, he/she could invest in a CD.

In the case of Apple, it is sitting on a ginormous stash of cash valued at 75 billion dollars. The “trouble” for Apple is that cash balance, in all likelihood, will spike further in the days, weeks, and quarters to come. For a company growing as fast as Apple, I do not see it investing that money in to organic expansion plans.

Secret to Apple’s success in recent years is its sharp focus on doing only a few things, and doing them extremely well. Apple has proven over the last few years that its new product lines, instead of being radically different from the existing ones, nicely compliment the existing ones. Apple has managed to create a whole array of products and product lines that work well as a complete ecosystem. R&D is not cheap, yet a new product line like the iPad could be created from the ground up with a really tiny fraction of that 75 billion dollars. So what is Apple to do with all that growing stash of cash?

It could do one of two things or a combination of the two, and, either way, for Apple, it will be a break from its past. So what are these two things? First, Apple could offer a large one time dividend (a la Microsoft in 2003) to shareholders, followed by regular quarterly dividends. Even though Apple is sitting on large piles of cash on its balance sheet, it will be under no pressure, at least not in the immediate future, to do this – for the simple reason that Investors are happy with the returns they are getting, despite Apple’s “inability” to reinvest that money.

That leads us to the second option in front of the mercurial gang from Cupertino. It could make strategic acquisition in the technology space, and there are a lot of attractive players in this space. However obvious this option may be to any other company, it is far from obvious for Apple to do such a thing. Apple has achieved all that growth without making any large acquisition, and I believe this has been a key to the success of Apple as a company – going back to my point about products complimenting each other and working well as one single ecosystem. Besides, acquiring and integrating another large organization is a risky, and tedious process. For a company that nurtures a special employee and customer culture, integrating an established alien work culture would be tricky, to say the least.

Let us just speculate for a moment that if Apple, indeed, were to acquire another company, which one should it be?

Before we answer that question, let us break down the Apple ecosystem for a moment –  one could break it down into 3 pieces – Mobile, Desktop, and cloud. In the mobile space they have the iPods, iPhones, iPads & iOS; in the desktop (including laptop), they have the MacOS books and cubes; and in the cloud they have the music, video, books etc. Then, of course, there is the Apple TV, which could, in the future, lead to a successful home entertainment console that, in addition to bringing multimedia into living rooms, could bring a lot of popular gaming. Apple also has its own browser, Safari, across all these platforms. Apple is gaining momentum and market share against competition in most of these product lines. If there is a slight weakness in their armor, it is in the cloud, especially communication, sharing, and social. Ping has not exactly been a rip-roaring success. More over, biggest success stories in the cloud/social space are not exactly cozy with Apple – Google and Facebook with its close ties to Microsoft.

First and most obvious candidate for potential acquisition, I will say, is Twitter. It is very successful, not quite as large as Facebook, and has not aligned itself with any other behemoth in the, increasingly, tripolar technology industry. Apple could easily digest this acquisition. Besides, iOS5 comes with Twitter integrated into the OS. They could easily integrate Twitter into iTunes, to iCloud, and into the Safari browser itself.

A more risky acquisition would be Yahoo.  Yahoo clearly is a company in decline, yet it has a lot of assets in the cloud that could be valuable to a company like Apple which is battling it out with other giants like Microsoft and Google. Yahoo has a few popular internet properties in news, finance, movies, email etc. Yahoo was once involved in a search engine project code named Panama, which they later canned in favor of a partnership with Bing. Apple could even breathe some new life into the search effort with Yahoo. Apple already has Safari browser that could be already collecting a lot of data valuable to search engine technology. Yahoo Search could become the default search across all Apple devices, and Yahoo Maps could become the default Map/Local application across those same devices. The biggest challenge for Apple, if they ever end up acquiring Yahoo, will be integrating a company that is on the fast elevator down on the track to oblivion, a company that lacks excitement, and (from what I have heard from former Yahoos) a company that has a lethargic culture. A lot of heads will need to roll to transform Yahoo culture into a winning culture that is Apple.

The “trouble” for Apple is the cash acquisition costs of these companies are likely to be replenished in the balance sheet in a couple of quarters. At the same time, a bad acquisition could cost the company dearly, not just the investment but the impact that a rotten apple could have on the barrel full of excellent ones.

I have said  many times before that Google is a one dimensional company that makes money from Ads, almost exclusively through their search engine service. Here is a break down of their revenue from ads.

Chief Minister (somewhat similar to a governor of state in the U.S) of my home state of Kerala in India has installed live webcam in his office, viewable to the public 24/7. He is doing it in the name of transparency, but kickbacks, bribes etc happen outside of these offices. Oommen Chandy, from what I can gather, is a decent man for a politician, but corruption is all pervasive in India from the very bottom all the way to the top.

Staying on the topic of transparency of public officials in India, here is another incredible piece of news about the email accounts the officials use for official business – Yahoo Mail, Hotmail, Gmail etc.

Another strike against Keynesianism – this time from near impossibility of executing “the plan”. Here is Larry Summers as quoted by Ezra Klein on his WP blog:

And even if Congress was willing to green-light more money, spending it turned out to be harder than the Keynesians had hoped. “Anybody who is honest and knowledgeable will say it is harder to move money quickly and well in reality than it is in the textbook model. I don’t think the idea that lots more money could have been moved is credible unless there had been a whole set of prior planning,” Summers says.