Author: Mathew Ingram

Amid the bad news about writedowns and so on in Research In Motion’s second-quarter report, the handheld device maker’s revenue gains stood out as a bright spot — sales climbed by 88 per cent from the same quarter the previous year. Unfortunately, there are just a couple of caveats: One is that the stock market has been pricing in revenue gains of far more than that, and the other is that RIM is now expecting its sales will fall slightly in the third quarter and show little or no growth in the fourth. That’s not the kind of thing investors in a stock selling for 70 times earnings want to hear.

One of the reasons why RIM’s revenues won’t be growing at the speed they were expected to previously is that some of the company’s partners are in serious financial difficulty, including would-be wireless data provider Motient Corp. The U.S. company, which had a deal to offer RIM’s BlackBerry handhelds, said recently that it would not be making a major interest payment on some of its debt and that it is cutting jobs and will have to restructure its finances. Last year, RIM said that it expected to add 50,000 BlackBerry subscribers as a result of an expanded agreement with Motient.

RIM has now taken a $23-million writedown on inventory and receivables as a result of Motient’s “weakened financial condition.” And that is only the latest black spot on RIM’s planned rollout in the United States. Only two months ago, both Motient and Aether Systems — another startup wireless provider — as well as telecom partner Cingular Wireless (a venture of BellSouth and SBC Communications) said they were not adding subscribers as quickly as expected. Cingular added 60-per-cent fewer subscribers than analysts had expected, raising obvious concerns about future sales. Aether has also cut over 40 per cent of its staff and lost $103-million in the most recent quarter.

Research In Motion chairman and co-chief executive officer Jim Balsillie said on Wednesday the company isn’t that concerned about problems with some of its U.S. partners because “we believe that the migration to next-generation networks will limit our exposure to their difficulties.” But the rollout of those next-generation networks — such as the GPRS (global packet radio system) services some North American and European carriers are starting to offer — is not coming as quickly as expected.

That leaves the company in a bind: Its sales of the older-style BlackBerry pagers and handhelds are slowing and profit margins are tightening, but the new markets it needs in order to keep growing have yet to fully develop. RIM said that it has shipped 20,000 of its new handhelds to BT Cellnet,a unit of BT PLC, as part of a deal for 175,000 of the devices — but there was little detail about future shipments. The rollout of GPRS networks by BT and others has been held up by technical and financial hurdles.

Company watchers have been hoping for news of other launches similar to BT’s, since this is where the company expects much of its growth will come from, but so far there has been little. VoiceStream (a unit of Deutsche Telekom) has said that it plans to start offering BlackBerrys in “early 2002,” but apart from that all RIM has are “memorandums of understanding” with Internet and telecom providers in France, Italy and the Netherlands. Many are waiting until they see whether next-generation services will sell, or whether consumers are willing to pay enough for them.

In its release, RIM said sales for the second quarter were $80-million (far below many estimates), sales for the third quarter will be as low as $70-million to $75-million, and the fourth quarter will be about the same — meaning sales for the year could be 15 to 20 per cent below estimates. The company said it would have an operating loss of 6 to 9 cents for the third quarter and a loss of 8 to 12 cents for the fourth — which would mean a loss for the year of anywhere from 4 to 11 cents. That compares with earlier profit estimates for the year of 22 to 34 cents a share.

And RIM is still far from bargain priced. Even before the company revised its earnings expectations, the stock was trading for almost 70 times this year’s average earnings estimates and 30 times next year’s earnings projections. The company is now saying that its earnings for next year may be between zero and 10 cents a share — compared with earlier estimates of between 48 and 76 cents. That means despite its recent fall, and the fact that it is now trading close to its 52-week low of $13.70, the stock is still trading at more than 150 times next year’s estimated earnings. That may have looked reasonable a couple of years ago, but not any more. Mathew Ingram writes analysis and commentary for globeandmail.com

Major North American stock markets are still shaky after the attacks on New York and Washington, the Dow Jones industrial average and the Nasdaq market index are near their lows and investors seem generally tense and nervous. On top of all that, the technology sector is firmly in the grips of a bear market. Sounds like the perfect time to launch an IPO, doesn’t it? That appears to be exactly what the folks at PayPal, the on-line payment service, were thinking: They filed a prospectus for an initial public offering on Friday.

To say the least, this seems like a bizarre – if not doomed – choice of timing. Apart from the malaise infecting technology stocks, the IPO market is virtually dead. It was on life support even before the terrorist attacks in the United States, and the events of Sept. 11 more or less pulled the plug completely: September was the first month since 1975 that saw no U.S. IPOs launched at all. Not just a few – none.

Not only that, there’s a recent cautionary example of just how wrong such an IPO can go: A network services company called Loudcloud – backed by former Netscape founder Marc Andreessen, among others – went public in March, just as the Nasdaq cratered. It raised $150-million (U.S.) but is still struggling, burning through $35-million per quarter, and the company recently laid off an undisclosed number of staff. From $7 after the issue, the stock is at $1.20, having lost over 82 per cent of its value.

But that hasn’t stopped PayPal from going ahead with its issue – which raises the question: Why the hell not? Why would any company decide to wade into the public markets now? The most likely answer is that it can’t afford to wait. Like many startups, PayPal has financed itself over the past two years with funding from venture capital groups, including Sequoia Capital, Clearstone Partners and Nokia Ventures, an arm of the Finnish cell-phone giant. But even venture capitalists have gotten stingy.

Its IPO filing shows that PayPal burned through about $30-million in the most recent quarter – although the company claims that its burn rate is decreasing. Rather than having any equity, it currently has a shareholders’ deficit of more than $164-million, as a result of losing over $230-million since its inception two and a half years ago. After the issue, which is expected to raise about $80-million, the company says it will have shareholders’ equity of $114-million and cash or cash equivalents of $123-million.

And what about the company’s business? PayPal is an on-line payments company, handling e-commerce transactions between individuals or companies. In many ways, it acts as a kind of virtual Western Union, allowing buyers and sellers on eBay or Yahoo’s auction Web site to exchange funds by cheque or credit card. It also functions as a bank, in the sense that users can withdraw funds from their PayPal accounts, are paid interest on any balance they have, and can access their account from automated teller machines.

One of the problems with that model, obviously, is that by functioning as a near-bank, PayPal is vulnerable to competition from actual banks – including Citigroup in particular, which runs an on-line payment service called c2it that has co-marketing arrangements with AOL Time Warner and Microsoft. Not surprisingly, Western Union also has its own services called BidPay (for auctions) and MoneyZap. But the real issue for PayPal is that eBay has its own on-line payment service known as BillPoint.

This is a serious problem because the majority of PayPal’s business comes from auctions – 70 per cent or so in the most recent quarter – and much of that comes from eBay (Yahoo, which also runs an auction site, has its own payment service called PayDirect). EBay promotes its own service prominently on all auction sites as the preferred method of payment. In fact, PayPal recently sent a letter to eBay users telling them the auction site was changing their payment preferences to BillPoint (also called eBay Online Payments) without their knowledge, a charge that eBay has denied.

On the plus side, the company says it has 10 million registered users, and handles an average of 165,000 transactions a day worth about $8-million, for a total of $747-million worth of transactions in the second quarter. But there’s no question the company faces a stiff headwind, particularly in the current economic environment – and the fact that it is going ahead with an IPO anyway has to be seen as a sign of desperation.

After virtually any disaster, natural or man-made, there must be rebuilding, and the attacks on New York and Washington are no exception. That’s not to say the World Trade Center has to be rebuilt, but the brokerage firms and banks and insurance companies that inhabited it have to somehow get back to work. In addition to the horrific human loss that has been suffered, those businesses have to replace the nuts and bolts of their operations, and that means buying everything from computers to phone networks.

According to Tower Group, a New York-based consulting firm that specializes in studying technology in the financial services industry, at least $3.2-billion (U.S.) will have to be spent by securities firms alone to replace the systems they lost when the World Trade Center towers collapsed. The firm expects $1.7-billion to be spent on hardware (including trading stations, sales stations, workstations, PCs, servers, printers, storage devices, cabling, hubs, routers and switches) and another $1.5-billion on consulting services and software to install and connect all the new hardware.

According to the New York Times, one securities firm ordered 200 PCs from Dell Computer within hours of the planes hitting the World Trade Center – and that was just the first in a rush of replacement orders. Dell said it had to step up production at its plant in Austin, Texas and has been more or less operating its plants at peak capacity around the clock. The company said it had sold more than 24,000 servers, laptops and desktop computers as of Monday and had turned three 18-wheelers into mobile support facilities. One law firm sent its own truck to Austin to pick up 400 computers.

Tower Group said in its report that it believes 30,000 securities positions (including trading, sales, research and operations) were destroyed in the two World Trade Center towers – and that as many as 15,000 to 20,000 positions will need to be replaced in nearby buildings, including the World Financial Center and Bankers Trust buildings. That includes 16,000 trading desks (including multiple workstations with multiple flat-screen displays) worth $52,000 each, 34,000 PC workstations at $5,000, about 8,000 Intel servers and 5,000 UNIX servers at a cost of about $370-million.

And those figures are just for the securities industry. Similar numbers will likely apply to the law firms, insurance companies and others that were located in the towers, although they most likely would not have five flat-screen computer displays on every desk the way a securities dealer would. And that’s just the computer equipment that has to be replaced – then there are the phone and data networks that have been destroyed or seriously damaged, not to mention the impact on the commercial real estate market in New York as a result of the collapse of the two immense office towers.

By some estimates, as much as 15 million square feet of office space has been either obliterated or damaged – equal to about 15 Empire State buildings, or all the office space in downtown Atlanta or Miami – in addition to more than 75,000 phone lines and over 20,000 miles of telephone and data cables. According to one report, tens of millions of dollars in phone switches are buried, and steel girders severely damaged one of the switching facilities for Verizon’s network. “We have a giant job cutting out the pieces that don’t work and reattaching the parts that do,” Hugh O’Kane, CEO of telecom consulting firm Levent Management, told Fortune magazine.

Obviously, some of the firms who have lost entire networks – both phone and data – will take the opportunity to upgrade to faster or more secure (or redundant) systems, rather than just duplicating what they had before. And that might mean a considerable amount of unexpected business for companies such as Cisco Systems, Nortel Networks and other networking equipment makers. Focusing on the sales of office equipment after such a terrible event no doubt seems cruel and insensitive, but eventually the world must return to normalcy, and helping companies recover is part of that.

There’s no question that the spending on computers and networking gear will provide tens of billions of dollars that those industries were not expecting to get. But will it be just a short-term blip? Perhaps. On the other hand, it might help PC makers such as Dell and networking equipment companies such as Cisco get through the next couple of quarters, until those industries and the economy itself begin to return to something approaching normal behaviour (assuming that ever happens, of course).

On the front cover of The Hitch Hiker’s Guide to the Galaxy, the traveller’s manual in Douglas Adams’ popular novel of the same name, was a simple piece of advice: “Don’t Panic.” This also happens to be good advice if you are an investor – and not just now, in the aftermath of the attacks on the United States, but at almost any time. In fact, many investors should probably have heeded that advice in 1999, when the market was deep in the throes of a buying panic. And it is just as timely now, when the impulse may be to sell just about everything you own and head for the hills.

If you were to sell everything, you would certainly have plenty of company: Despite all the talk about investors holding fast – or even buying stocks – to show their resolve in the face of terrorism and so on, the Dow Jones industrial average and the Nasdaq stock index both went into free-fall when trading opened on Monday, with the Dow dropping by almost 600 points or more than 6 per cent, and the Nasdaq off by about 6 per cent as well, or over 100 points. After an attempt at a rebound of sorts both indexes started to head south again, hitting lows not seen since the latter part of 1998. Tuesday brought a brief respite, but then the selling intensified again on Wednesday.

So should you join the stampede? Not unless you enjoy throwing good money after bad. The fact is that rash decisions are rarely wise decisions – unless you want to rely on the chance that you might accidentally make the right choice, which probably isn’t the kind of attitude you want to take when dealing with your portfolio. If that is the approach you want to take, then you might as well head down to Las Vegas and put some money on your favourite number, or throw a handful of darts at the stock pages. Throwing all your stocks out the window because of an all-consuming fear of a global meltdown sparked by last week’s events falls into the same category.

Not panicking also covers some of the behaviour that investors might feel compelled to take, apart from selling everything – such as the desire to buy stocks indiscriminately, as a gesture of patriotism or solidarity with the United States, as some financial advisors and columnists were recommending late last week. That may seem like a nice gesture to make, but it isn’t likely to help you or even the economy as a whole.

Holding tight to every stock you own is also not the wisest course, since there are stocks in certain sectors that arguably should be sold – shares in some airlines, for example, whose financial future might be in doubt as a result of a sharp drop in international and business traffic; or shares in certain large insurance companies who might find themselves on the hook for tens of billions of dollars in claims; or some hospitality stocks, on the assumption that travel might suffer.

Conversely, of course, the contrary impulse – to buy some of everything, since this must be an enormous buying opportunity if you were at all bullish before the attacks occurred – would also likely be an over-reaction. As difficult as it may be, investors should do what they (at least theoretically) attempt to do at other times, when there are no disasters and war is not looming large on the horizon, and that is to take a little time and think about what is happening and what it might mean for their portfolio, before coming to any conclusions about which stocks to buy or which to sell.

Warren Buffett, the legendary value investor known as the Sage of Omaha, told the TV show 60 Minutes on the weekend that he wasn’t planning to sell anything, and that depending on how much certain sectors fell on Monday, he might start looking at buying a few stocks. That may be boring and uninspiring, unlike the call to “Buy a stock for America!” that some market watchers have been promoting, but boring is how Mr. Buffett came to be worth $30-billion(U.S.) or so. It doesn’t make for great headlines, of course, but it helps to avoid a lot of the ups and downs of the day-trading crowd.

A survey of past catastrophic events and their effect on the stock market proves the point even better: According to data crunchers such as the folks at Markethistory.com, in virtually every case going back to the turn of the century, a disaster or war event of some kind has caused benchmarks such as the Dow and the S&P 500 index to slide by anywhere from 5 to 12 per cent – but in six months to a year, those indexes were higher than they had been, having made up all the ground they lost and then some. That goes for the bombing of the World Trade Center in 1993, the invasion of Kuwait in 1990, Pearl Harbor and the sinking of the Lusitania in 1915.

In other words, there are plenty of reasons for buying and selling stocks in the wake of the attacks in the United States – but some of them, however well-meaning they might be, are unsound.

Although the pieces of the puzzle haven’t all been put together yet, the early signs are that those responsible for the attacks in the U.S. are associated with militant Islamic leader Osama bin Laden. And what could possibly have sparked those horrific attacks? As with so many other aspects of U.S. foreign policy, much of the hatred that emanates from militant Islamic terrorist groups such as Mr. bin Laden’s can be traced back to a single thing: Oil – and more specifically, the U.S. government’s desire to maintain control over the vast quantities that exist in the Middle East.

Mr. bin Laden, a Saudi-born businessman who left the construction business to become a financier of international Islamic terrorism, is only the latest in a series of Middle Eastern figures who have become public enemy number one as a result of U.S. oil policy. Until Mr. bin Laden came along, for example, the most hated man in the Middle East was Saddam Hussein, the leader of Iraq – who some military intelligence observers feel may be involved in assisting Mr. bin Laden with the war of terrorism against the U.S. Many political analysts believe that the war against Iraq was fought largely to ensure that the oil would continue to flow from Saudi Arabia.

During the Gulf War, the U.S. stationed troops in Saudi Arabia at the request of the Saudi royal family – a move that Mr. bin Laden and other Islamic groups have said was an affront to Muslims, and one which many security experts warned against at the time, arguing that it would increase tension in the Middle East. “A lot of people advised [President George W.]Bush’s father not to put U.S. troops in Saudi Arabia – to put them ‘over the horizon’ rather than in the heartland of Islam,” said U.S. policy expert John Sigler, a professor of political science at Carleton University.

While the State Department argued that the troops should be located in some other area, Prof. Sigler said, the Pentagon decided that they needed to be on the ground in Saudi Arabia for reasons of “military efficiency.” Even after the Iraqi threat had eased, U.S. soldiers remained in what Mr. bin Laden’s group refers to as “the land of the two holy places” (Mecca and Medina). American officials said the troops needed to remain because they would protect the Saudi Arabian government of King Fahd from Iraqi attack – but Prof. Sigler said this was largely a fiction, presumably designed to justify keeping troops to protect Saudi oilfields.

Not only does the presence of non-Muslim soldiers inflame the religious passions of fundamentalist Islamic groups such as Mr. bin Laden’s, but their existence is also a regular reminder that the U.S. is primarily interested in the Middle East because of its oil supplies. Much of Mr. bin Laden’s anti-U.S. rhetoric – expressed in several rare interviews with Western reporters over the past few years – concerns the alleged “rape” and “plundering” of the Middle East by the United States, aimed at controlling the area’s oil for the benefit of the U.S. and other Western nations.

This idea is intricately intertwined with America’s policy on Israel. Some Muslim groups believe that the U.S. is in league with Israel to take control of the Middle East – driven, they argue, by Israel’s desire to crush all Islamic nations, combined with the American desire to control the source of the vast majority of the world’s oil. Within Saudi Arabia, meanwhile, many critics of the monarchy see the U.S. as supporting a “puppet” government for its own purposes, in the same way it did in Iran.

The problem for the U.S. is that anything it does to try and influence the flow or supply of oil involves a large part of the Middle East, and impacts on nations that have an abiding hatred for the U.S. – including Iraq, Iran and Libya. And despite sources of oil such as Alberta’s tar sands, some forecasters expect the U.S. and the rest of the Western world are going to need even more supply from the Middle East in the future: A study by the Center for Strategic and International Studies said the world will become increasingly dependent on the Middle East over the next 20 years.

The study said that oil-rich Persian Gulf nations will have to expand their oil production by almost 80 per cent over the next 20 years in order to keep up with demand, particularly demand from China and India. The potential for terrorism, supply interruptions and outright war will remain high, the study says – adding that getting more oil from Iraq will be “crucial” to meeting the world’s demands, since Iraq contains 11 per cent of the world’s oil reserves, second only to Saudi Arabia’s 25 per cent.

As long as the U.S. continues its growing demand for oil, in other words, it will be forced to deal with the troubled politics of the Middle East in one way or another, whether it wants to or not.

At first glance, everything looked peachy keen in Research In Motion’s quarterly results, released late on Thursday. The handheld device maker came in right on estimates with a 5-cent-per-share profit and revenue more than doubled over the same quarter last year. What could possibly be wrong with that?

Well, for starters, the profit wasn’t really a profit on the BlackBerry pagers that everyone is so in love with — and there are some other warning signals lurking around the edges of RIM’s results. It’s possible that investors don’t care whether RIM made any money selling its two-way pagers and a hybrid pager and Palm-style handheld in one.

Those who pushed the company’s stock price up by more than 7 per cent after the results came out didn’t seem to mind that the firm actually rang up an operating loss of more than $3-million and only made it into the black with the help of more than $9-million worth of gains on RIM’s investments.

Investors’ complacency aside, however, it’s important to note that RIM’s core business is still a money-loser — in fact, operating losses were up more than 40 per cent. Although the company’s revenue rose, expenses also increased at a pretty rapid clip: While sales were substantially higher than the same quarter last year, the company’s cost of sales more than tripled, with research and development expenses tripling and marketing and administration expenses doubling.

Gross profit margins fell to 38 per cent from 44 per cent and the company shipped about 25 per cent fewer units than it did in the previous quarter.

There are larger issues for RIM, however. For example, now that everyone is familiar with its “killer app” — always-on e-mail service — because of the publicity about all the high-tech CEOs who use a BlackBerry, what does RIM do for an encore? And how does it do so without eating into the business model that has convinced investors to pay almost 100 times forecasted earnings for the stock?

Those kinds of multiples are as rare as hen’s teeth nowadays, and it’s not clear what RIM has that justifies such a premium. Palm used to command that kind of multiple, too, back in the old days, but the handheld device maker is only valued at 1.5 times revenues now (it has no earnings), while RIM is still trading at more than eight times its revenue.

And in a jab at the Canadian company’s perceived dominance of the wireless e-mail-access game, a Palm executive said this week that Palm’s wireless Palm VII — which can access the Internet using a number of different networks — has more users than RIM does.

Users agree that RIM is far more elegant and efficient an e-mail solution, but for how much longer?

Wireless access is the Holy Grail for handhelds, and both Palm and the various PDAs that use Microsoft’s Pocket PC software (such as Compaq’s iPaq) are rolling out wireless e-mail and Internet access plug-ins or software that will make them far more competitive with RIM.

Rogers AT&T Wireless and Microcell’s Fido are both introducing next-generation GPRS (global packet radio system) high-speed digital networks, which will allow handhelds or telephones to access e-mail and the Internet at faster speeds.

RIM is working on a GPRS model, too, but it will be entering a fairly crowded field.

RIM executives have said they are working with Compaq and others to develop BlackBerry-style “solutions” that could be used to provide the same kind of always-on e-mail for the iPaq or other Pocket PC handhelds, and RIM also has a prototype of a BlackBerry-type unit that runs on Java software — the idea being that it could partner with some of the cellphone handset makers on a combined BlackBerry phone running Java.

The problem with these options, however, is that making a two-way pager that plugs into an iPaq or helping to make a BlackBerry Java phone would eat away at what RIM is: a proprietary handheld device maker with a unique e-mail solution.

In a nutshell, the problem is this: When always-on e-mail was unique to RIM, it stood out as a result — but when other players with more to offer and deeper pockets also have that capability, what will RIM have left that makes it worth the kind of premium it’s getting now?

As with so many other dreams that seemed attainable a year ago, like the idea that a company could make money by giving away Internet access or selling groceries on-line, the idea that Napster and Mp3.com could revolutionize the music business has also collided with reality. After being bludgeoned by lawsuits, the two digital music companies have fallen into the clutches of the big record labels, with Vivendi agreeing on Saturday to buy Mp3.com – a company it was recently suing – for $372-million.

That means the on-line music game is now controlled by two superpowers: Duet and MusicNet. Mp3.com becomes part of Duet, which is made up of Vivendi’s Universal and Sony Music (Vivendi also bought Emusic.com a month ago), with Yahoo as a delivery partner. MusicNet consists of AOL Time Warner, EMI Group and Bertelsmann’s BMG Music – with Napster as a partner, since BMG owns a stake in the company, and also RealNetworks, which has agreed to provide the software required to use the MusicNet service.

In less than a year, the on-line music industry (if something so new can be called an industry) has gone from being a free-for-all of startups and questionable legality to being a subset of the global record business. Is that going to make things better or worse for music fans? At least in the short term, it’s likely to make things a whole lot worse, and not just for the lawless hordes who got used to downloading with impunity from Napster. In fact, if history is any guide, the record labels could wind up killing the goose before it lays any golden eggs.

One of the ways it could die – or at least become seriously ill – is through sheer boredom. Put it this way: If companies like AOL Time Warner and Universal Music were in charge of the Internet, we would still be typing arcane Unix-style commands and surfing the Web on 9600-baud modems. Despite the fact that the Mp3 format (which made downloading music feasible) has been around for more than four years, the major labels still had to buy Emusic and Napster and Mp3.com just to get in the game.

Why is that? Because rather than seeing downloadable music as an opportunity, the record companies still appear to be motivated primarily by fear: Fear that they will somehow lose control of “their” music, and the massive profits that it generates (for them that is, not the artist – unless the artist happens to be Madonna or Metallica). Fear helped fuel the multimillion-dollar lawsuits against Napster and Mp3.com, lawsuits that softened up the digital music crowd and made them easier to purchase.

And fear is what will probably make the Duet and MusicNet services – whenever they actually arrive – a monumental pain for users. At least there will only be two outlets, which is an improvement on the way things were shaping up, with every record company offering its own competing service. But you will have to pay a monthly fee, and you won’t be able to make a copy of anything (unless you pay a fee, and then only one copy).

You’ll probably get a lower-quality file for the entry-level fee, or it will only be a “streaming” file, and therefore not downloadable. You might be restricted to a certain number of songs downloaded in a certain period, or you might only be able to play them a certain number of times before they “expire” and you have to pay another fee. Not only will the Wild West of Napster be gone, but so will a legal and easy-to-use service such as Emusic, where you could pay $1 and download a song.

Ironically, one of the big roadblocks the record labels are running into involves accusations that they are doing the exact same thing they sued Napster and Mp3.com for: distributing music they don’t own. Music publishers say both MusicNet and Duet are planning to let consumers download songs even though they haven’t paid for the right to do that (the record companies say downloading and/or streaming should be covered under existing deals, but some publishers argue they deserve a separate fee).

In response, both the record companies and some digital music players such as Mp3.com have been proposing – in hearings being held by a U.S. government subcommittee looking at the issue of digital music – that copyright legislation should be changed so that Internet distribution of music can function the same way that radio broadcasting does, with a blanket license that gets paid out to artists and their representatives.

Even if that happens (which isn’t likely), the two superpowers will still control access to something like 90 per cent of the recorded music available for download. If you like the kind of service that comes from a market where two global conglomerates control the supply, then you’re going to love the Internet music business.

Research in Motion’s handheld two-way pager, the BlackBerry, has developed such a passionate following in some parts of the U.S. that one water-cooler humorist dubbed it the “CrackBerry.” Devotees can be seen obsessively checking their e-mail and tapping away on its tiny keyboard with their thumbs during meetings, in restaurants, in buses or taxicabs, or any time they are sitting down.

The rise of the Waterloo, Ont.-based company’s stock since 1999 produced a core of devotees who believed that RIM, as it’s known in financial and stock circles, was destined for once-in-a-lifetime mass-market success. But RIM’s stock plunged in early 2000 as the air escaped from the dot-com bubble. Despite the dose of reality that hit the rest of the market, RIM’s share price then climbed again. That share price still seems to assume that RIM will fulfill the wildest dreams of its supporters, and then some.

Is that possible? Anything is possible, of course. Is it likely? There are some fairly compelling reasons to believe that it’s not. That’s not to say Research in Motion isn’t a good company, or that the original BlackBerry and its newer cousin, the 957, which looks a bit like a Palm handheld, aren’t useful products. But it’s often said that investors shouldn’t confuse a good company with a good stock, and RIM is a good example.

At RIM’s peak price of $260 on the Toronto Stock Exchange in March, 2000, its market capitalization was $18.6 billion, more than the Canadian Imperial Bank of Commerce or Canadian Pacific, and twice as much as Petro-Canada or Canadian National Railways. That couldn’t last. RIM sank to $35 last May, which reduced the company’s market value to $2.5 billion. But the stock turned upward as RIM signed various distribution deals, including one with America Online, even though those deals had no immediate impact on the bottom line.

After climbing into October, RIM’s share price sagged into the new year. In January, it was near $90. At that level, RIM was trading for 1,125 times its earnings per share for the previous 12 months, and 26 times its sales per share for the same period. By comparison, the much larger handheld- maker Palm, Inc., based in California, was selling for 230 times its trailing earnings and 10 times its sales.

In other words, investors seemed to feel that RIM was somewhere between 2.5 and 5 times more valuable than Palm, the company that virtually invented the handheld device market in 1996 with its PalmPilot. Palm still has a worldwide market share of over 80%, and had revenues of $1.55 billion (U.S.) for calendar 2000. RIM’s revenues during the same period were roughly $157 million, and it was expected to make about 54 cents a share in the 12 months ended February, 2002, meaning this February the stock was trading at 170 times forecast earnings.

One reason RIM’s fans believe the company is worth more than its competitors is the unique nature of the BlackBerry, which can be summed up in three words: instant e-mail access. Like the pager that inspired it, the BlackBerry is always connected to a wireless network, meaning e-mail can be sent and received instantly at all times. Other devices require users to connect to a phone line and dial their provider, or connect to a web site, or call a special phone number.

But that instant access may not be worth as much as RIM fans think it is. Nor is the BlackBerry all that unique. Motorola also has a line of two-way pagers that can retrieve e-mail, and they come in a range of cool colours. Plus, they’re popular with the Los Angeles sports and entertainment crowd. Basketball star Shaquille O’Neal uses one, and rapper Jay-Z wrote a song in which he used the popular phrase “two-way page me.”

Defenders point out that the RIM product has more features than Motorola’s, and that it is designed to integrate with a company’s internal e-mail system, whether that is Microsoft’s Exchange network or IBM’s Lotus Notes/Domino system. That’s one of the main reasons why the BlackBerry is so popular with brokers, traders and sales representatives of any kind. RIM’s strategy is to derive much of its revenue from its proprietary server software and other elements of its system, as opposed to sales of the BlackBerry device itself.

Palm, meanwhile, is focused more on consumers, potentially a far larger market. Palm users can access any e-mail account, not just corporate e-mail. The company also permits designers to create add-on software for its devices. So does a Palm-like competitor called Handspring, formed by the three original developers of the Palm after they left its parent, 3Com Corp. Handspring went public last year, and it markets the Visor, which some industry watchers see as a cheaper and more flexible version of the Palm. Using various plug-in modules, the Visor can become everything from an MP3 player to a GPS receiver to a cellular telephone.

Then there’s Microsoft. As part of its ongoing attempt to diversify away from the slow-growing PC industry, Microsoft has developed a version of its Windows operating system for handheld devices that competes with Palm’s. As well, Compaq Computer Corp. has introduced a handheld Palm-style device called the iPAQ. It doesn’t do instant e-mail–at least not yet. But not everyone wants instant access to their e-mail in the same way stockbrokers and day traders (or basketball stars and rap artists) do. Even if they do, iPAQ, Palm or Visor users can add that capability fairly easily using a snap-on modem to access a digital cellular or data network.

In late January, most analysts still rated RIM a “strong buy.” But when it comes to the consumer market, the BlackBerry faces some stiff competition. Unfortunately for RIM fans who are also shareholders, the stock price seems to assume that the company will not only succeed, but will virtually take control of the entire sector. And that isn’t going to happen.

To paraphrase John Goodman’s character from The Big Lewbowski, Nortel investors have just entered a world of pain. Their beloved company – the pillar of everything technological in Canada, the superstar of the networking equipment sector, the big fish of the Toronto Stock Exchange – has just fallen from its pedestal. Anyone who bought shares a month ago has lost 35 per cent of their investment, and those who got in last September have seen more than 75 per cent of their stake obliterated.

More important than just the stock-market losses, however ($260-billion and counting), is the loss of faith in Nortel’s ability to continue its remarkable growth – not to mention the loss of faith in the company’s ability to forecast. As everyone knows, stock prices rise and fall based not on current performance but on future potential, and investors aren’t likely to trust Nortel’s crystal ball gazing as much as they did a week or so ago. How long will it take for that trust to return? Good question.

Just three weeks ago, Nortel reassured the market that its business still looked strong – despite all the warnings from telecom equipment companies such as Lucent Technologies and even Cisco Systems. The company made a point of saying it still expected to increase its revenues and earnings by 30 per cent this year, projecting a profit of 16 cents a share in the first quarter and revenues of $8.3-billion. Now it says its revenues will be $6.3-billion or so, and it will lose 4 cents a share for the first quarter – and growth for 2001 will be more like 10 to 15 per cent.

The difference between those two forecasts is a massive, head-rattling change for a business the size of Nortel to undergo in just three weeks – the kind that should give a chief financial officer or a CEO whiplash. It’s certainly the kind of change that would make the most trusting investor wonder what the hell is going on over at Nortel HQ.

How could the business have gone sour so quickly, for the company to lose almost $2-billion in sales and 20 cents a share profit in three weeks? Either the company doesn’t know what is really going on in its industry – which is hard to imagine, given the obvious warning signs over the past months – or Nortel suffers from a massive case of hubris, believing it could somehow win while everyone else was losing. In the West, this is known as “drinking your own bathwater,” and it is bad news.

If you’re a retail investor who has a few bones to pick with John Roth about his ability to manage his business, you’d better get in line. The phones at Nortel probably started lighting up within moments of the announcement about slower growth, and the list of aggrieved investors and others is likely to be long. Up near the top would be JDS Uniphase, which just a week ago took $2-billion in Nortel stock in return for a plant in Zurich, Switzerland – those shares are now worth 35 per cent less.

Nortel’s bombshell announcement about slower growth has also torpedoed the share price of many other members of the telecom equipment sector, stocks that just finished getting a boost from a bullish report by optical equipment maker Ciena on Thursday. JDS Uniphase tanked by more than 20 per cent on Friday, as did fibre-optic maker Corning, which said its growth would be hurt by lower sales to a certain customer – a customer analysts said was likely to be Nortel itself. Even Ciena was down 8 per cent.

If you’re wondering who comes out of all this looking pretty good, look no farther than Sanford Bernstein analyst Paul Sagawa, the guy who was jumped on by many of his fellow Nortel-watchers when he came out with a negative report on the company and the entire sector in September, when Nortel was at $66 (U.S.). He looked smart when Nortel underperformed expectations in October, at which point the stock lost 25 per cent (and pushed the TSE down by over 800 points) and he looks even smarter now.

The financial wizards at BCE Inc. also look pretty good, seeing as how they locked in their profits on their remaining stake in Nortel when they spun the company off as a separate entity a year ago. They “hedged” the Nortel stake by striking a deal with a consortium of banks to guarantee BCE $90 a share on Nortel, regardless of what happened to the stock after the spinoff. In effect, the company has $2.8-billion more now than it would have if it had not hedged that Nortel stake. Let’s hope the banks sold those shares short at some point, or they are now stuck holding the bag.

As for the retail investors who believed Mr. Roth’s repeated reassurances that all was well at Nortel, they are now holding the bag as well, and they aren’t likely to cut the CEO much slack for the foreseeable future. Does Nortel still have good prospects? Yes – it’s still a leader in the optical equipment game, and it will continue to grow (although at a much slower rate). But investors are going to feel burned, and rightly so – and they will be twice as reluctant to believe any future rosy forecasts.

The major music labels may be crowing about their legal victory against Napster earlier this week, but there are those who believe that the record industry would have far more to gain from working with the “peer-to-peer” file sharing service than by trying to crush it in the courts. For one thing the disk drives of more than 50 million Napster users are a huge storehouse of information – information that could be used by smart companies as an unparalleled marketing database.

For example: Over the past month or so, thousands of Napster users who have songs by the independent artist Aimee Mann on their computer have had messages pop up that appear to be from another user, messages that mention a new song by the artist that is available on her Web site. These messages actually came from an Internet-based marketing firm called BigChampagne, which chose Napster as a novel way of promoting Ms. Mann’s new single, Ghost World.

In a recent interview with Inside.com about the campaign, BigChampagne co-founder Eric Garland said that by trying to put Napster out of business, record companies were ignoring the potential gold mine that users of the service represent. Music publishers “have just been given the greatest marketing tool they have ever had,” he said, but most of the major record labels are still determined to put the company out of business, rather than trying to find a way of working with the technology instead.

Customer surveys and marketing research are a huge part of other retail sales-oriented businesses, Mr. Garland points out. Packaged-goods companies pay millions of dollars to do research on shopping behaviour as it relates to the colours and shapes of their products, where they are placed in a store, and so on. They “can model whether the shading on a package will gain them an extra 10th of a per cent of market share,” BigChampagne partner and market research expert Tom Allison told Inside.com.

In fact, some consumer goods companies such as Procter & Gamble, Mr. Garland said, “used to pay housewives 10 bucks to look in their fridges” so they could try and get some insight into buying patterns and consumer behaviour. The ability to look at which songs Napster users have chosen to download would give record labels a similar insight, allowing them to see patterns – do most users with the latest Jennifer Lopez single also have Puff Daddy or Eminem? – and also make various promotional offers.

BigChampagne isn’t the only firm to come up with the idea: When the rock band Metallica sued Napster, it got a British firm called NetPD to collect the names of users who had the band’s music as evidence of copyright infringement. But NetPD now reportedly also does peer-to-peer marketing using such lists, and has even done some research for the same record labels that are busy suing Napster. According to a recent story at Salon.com, smaller firms such as A.D.D. Marketing are also conducting Napster campaigns, as are independent music labels such as Moonshine.com.

Many Napster users might not like the idea of letting some marketing firm snoop into their hard drive, but that ability is built right into the structure of the file-sharing service: You show what you have to share, and others show what they have. The fact that this could be used for marketing purposes is just a byproduct of the original intent of the software – and marketing messages such as those from BigChampagne are a nuisance Napster users might be willing to put up with if it kept the service free, or reduced the price that a user would have to pay for access.

Napster is working with Bertelsmann AG – owner of the major record label BMG Music – to try and create a subscription service, in which users would pay a monthly fee for access to Bertelsmann music. But what about music from other record labels? So far, none of the other major music distributors have said they are interested in such a service – at least, not one they don’t control – which means users would be restricted to downloading songs that happen to be produced by BMG artists.

That kind of market fragmentation, with 5 or 6 or 10 different services to sign up for, doesn’t seem like a good way to get music into the hands of music lovers. Napster already makes it quick and easy – why not find a way of working with it instead of trying to kill it?

The U.S. music industry is already boasting about how the Napster ruling on Monday is a major victory – how the U.S. appeals court upheld an injunction against the file-swapping service (pending certain modifications) and ordered it to stop letting its users trade copyrighted material. But the industry is wrong, as it has been all along: The music business has been the big loser in the Napster case, and will continue to be the big loser regardless of how the whole affair finally ends – if it ever does.

While the 9th U.S. Circuit Court of Appeals decision didn’t pull the plug on Napster right away, it appears to have set a chain of events in motion that will lead to the demise of the popular digital music-sharing service, or could at least force it to remake itself dramatically. It said that a lower-court injunction against Napster would be upheld, provided the court alters the ban to make it less “broad,” and agreed with the lower court’s finding that Napster could be liable for copyright infringement.

Whether Napster is or isn’t guilty of what the court calls “vicarious infringement” of copyright has yet to be proven in a trial. The appeals court ruling is a response to an earlier decision by District Court judge Marilyn Patel in July: After the record industry argued that Napster’s service was causing it undue harm, Judge Patel handed down an injunction against Napster until the case could proceed to trial.

Like the rest of the music industry’s continuing war against on-line music sharing, however, the case against Napster is a classic case of missing the point, and that’s why the music business is still the big loser. In many ways, Napster is a footnote to the real story, which is how record companies and music publishers have missed the boat when it comes to taking advantage of the potential for digital delivery of music.

So far, the big five record companies who control the Recording Industry Association of America – Sony, Universal, BMG, Time Warner and EMI – have shown that they are a lot better at filing lawsuits and deploying battalions of high-priced law firms than they are at serving the needs of their customers. The time that the big music distributors have devoted to filing briefs might have been better spent coming up with compelling ways of convincing music lovers – which is what Napster users are – to buy their products.

At the moment, if you want a copy of that song that you heard on the radio but feel that using Napster is morally wrong, your only choice is to buy the entire CD for about $20, or to get one of your friends to make you a copy of the song from their CD (which is also technically illegal). For the past two years or more, the record companies have been saying that they plan to make downloading music from their artist catalogue as easy as Napster is – and yet music fans continue to wait, as one clunky and expensive subscription site after another tries and fails to get up and running.

Why haven’t the music companies gotten their act together sooner? Partly because they’re afraid of what might happen if they let “their” music to be distributed on the lawless Internet. In some cases, record companies have prevented artists they represent – such as Tom Petty – from releasing even one song from their CD on the Internet, because of concerns about copying. Music companies are also afraid of eating into their existing revenue stream, and it’s easy to see why: a U.S. trade ruling last year found that CD buyers have been overcharged by billions of dollars.

The Napster ruling is a footnote for other reasons as well, one of which is the fact that there are plenty of other ways of downloading digital music files that are far harder to police than Napster. Some, such as Emusic and Mp3.com, have signed deals with music labels that allow users to download some songs for free and others for a small fee. Others such as Gnutella and Hotline simply provide software that lets users connect to each other (in contrast to Napster, which uses its own servers).

It’s true that the music industry can pursue cases against these other services, as they did against Scour.net – which filed for bankruptcy protection last year as a result – but that too will miss the point. Not only will it be a lot harder to stamp out services that are based on true peer-to-peer networks, but putting out dozens of little fires will continue to divert the industry’s attention from what it should be focusing on: how to convince an entire generation not to desert the traditional music business, which has so far done everything it can to push them away.

In a cruelly ironic twist, the same high-tech industry growth that has fueled the expanding California economy also appears to be partly to blame for the state’s power crisis. Why? Because technology companies – and in fact any company that is a big user of computers – are a major drain on the electrical power grid. Although the exact size of that drain is up for debate, it’s not likely to do anything but grow, as technology becomes a part of virtually every sector of the North American economy.

California’s energy crisis, which has brought the state to the brink of rotating blackouts and driven gigantic power producer Southern California Edison to default on billions of dollars in financial commitments, obviously has a number of causes. Among them are the mishandling of power industry deregulation, which created a critical shortfall in generating capacity, and the effect of sky-high natural gas prices.

But the central problem has been too much demand for power, and the technology industry is a key part of that problem. As one consultant puts it: “A lump of coal is burned every time a book is ordered on-line.” That may not be literally true, but the computers and other devices associated with the tech industry all draw electrical power, some of them quite a lot. The “server farms” and “telco hotels” that many companies use – warehouses filled with Web-hosting computers and switches – are the biggest culprits.

According to a power analyst with the local public utility in San Francisco, a 100,000-square-foot server warehouse would draw enough power to heat 100,000 homes, largely because such farms require sophisticated cooling and ventilation systems. The type of chip-fabrication facility – or “fab” – that has sprung up all over Silicon Valley is an even bigger power hog: some estimates are that even a small facility, of which there are more than 300 in California alone, sucks as much power as a small steel mill.

In the U.S. midwest, server farms are being built that require 250 watts per square foot of power, or about 25 times the demand from a regular office building. One Toronto technology company, renovating an older office building to serve as its headquarters, told the property manager that it would need 600 amps worth of power for the floor holding the servers that would run its data and phone network. The company said there was less than 600 amps worth of service for the entire 10-storey structure.

Technology consultant Mark Mills, who with partner Peter Huber publishes a newsletter about the digital power business that is affiliated with technology guru George Gilder, has been warning for some time that the computer industry is pushing up demand for power. “It takes electrons to move bits,” the two wrote in a recent commentary. The Silicon Valley “campuses” of tech leaders Oracle and Sun Microsystems – which has six sub-campuses – each consume as much power as a small steel mill, they say.

Mr. Mills and Mr. Huber have come under fire for some of their assumptions. They have said that power consumption from technology such as computers, scanners, printers and so on accounts for as much as 13 per cent of the entire demand for power in the United States. After that statistic that was used by the George W. Bush campaign, however, the U.S. Department of Energy’s Lawrence Berkeley National Laboratory said that according to its research the real figure is actually closer to 1 per cent.

Whatever the exact number is, the demand for power is only likely to increase, industry watchers say. According to the California-based Electric Power Research Institute, demand for electricity in Silicon Valley rose by more than 12 per cent in the 12 months ended in August of last year – or four times the rate of growth for the country as a whole.

On top of the actual demand itself is the fact that tech companies, particularly those with “mission-critical” uses such as microchip fabrication or Web hosting want uninterruptible power. Power companies have gotten used to supplying power to traditional manufacturers, who can stop or idle their plants if the power is not available, and so rely on “interruptible service” contracts as a way of balancing the rising demand.

“The current electrical system was not ever designed for the Internet economy,” Karl Stahlkopf, a vice president at the Electric Power Research Institute, told the New York Times. “Anything chip related is a tremendous Achilles’ heel.” Is it any surprise that one of the companies Bill Gates has invested in – Capstone Turbine – makes micro-turbines for on-site power generation? Silicon Valley companies could become big customers if California’s current electricity problems continue.

For Apple Computer Inc. CEO Steve Jobs–not to mention plenty of the pioneering personal computer maker’s long-suffering fans–Sept. 29 must have seemed like déjà vu all over again. Apple’s stock plunged to $25 (all currency in U.S. dollars) from $53 the day before, chopping $10 billion off the company’s market value. The Cupertino, Ca.-based company’s hip marketing campaigns and ultracool products weren’t enough to keep Apple from getting tarred and feathered by investors and analysts for failing to execute its business plan properly–just as it was in 1997 and several times in the early 1990s.

But the skeptics who rushed to dump their Apple stock should remember one thing: The September carnage seemed like déjà vu because the company has been down there before. Stumbling is a part of Apple’s culture–in fact, it seems to be hard-wired into Apple’s DNA. Getting back up again–not to mention breaking into an all-out sprint–also seems to come fairly easily, particularly to CEO Steve Jobs, who is now a legendary (or notorious) figure in Silicon Valley.

If anyone can bring Apple back from the brink, his supporters say, Steve Jobs can. It’s almost old hat for him. To take just one example, when Jobs took over from former CEO Gil Amelio in 1997, Apple was almost a complete write-off. It had dozens of product lines, some old and some new, and none of them were doing particularly well–especially the ill-fated Newton hand-held device. Apple was up to its eyeballs in debt, and regularly missed its revenue and profit targets, if it managed to make a profit at all.

Less than two years later, the company was back near the top of its game. Jobs cut down the number of product lines, and in 1998 and 1999 he introduced some of the coolest computers since the original Macintosh: the candy-coloured iMacs and iBooks. Like the updated Volkswagen Beetle, the iMacs instantly became part of popular culture, and analysts fell over themselves to praise Jobs. Apple’s stock climbed. As recently as January, 2000, an analyst at Morgan Stanley Dean Witter put a “buy” recommendation on Apple’s shares with a target price of $60 (adjusted for a 2-for-1 split in June, 2000).

So what happened? The iMacs got a little long in the tooth, for one thing. So, earlier this year Jobs introduced one of the first new Apple products in a year: the Power Mac G4 Cube, a funky-looking machine aimed at power users. After raving about the G4 for months, however, company watchers noticed that not that many people were buying them. Why? They were expensive–$1,800 for a 450-megahertz version without a monitor. The computer also seemed underpowered compared with PCs powered by 500 MHz Intel chips. Apple adherents protested that the G4 was faster than the Intel-powered machines, and they appeared to be right–but it didn’t help.

At the same time, there was increasing fallout from an operational change that Apple later admitted was handled badly: The company stopped contracting out its educational sales–a traditionally strong market–to third-party contractors, and switched to using its internal sales staff. Even critical analysts agree that this was the right thing to do–too much profit was flowing to the contractors. Unfortunately, Apple made the change in the summer, when most schools are making their big buying decisions for the coming year.

Apple’s sales started to soften, so the computer maker warned analysts on Sept. 29 it would likely miss analysts’ sales and profit forecasts for the fourth quarter ended Sept. 30. The stock fell as low as $25, giving Apple a market value of less than $10 billion, down from $25 billion in the spring. But the bloodbath wasn’t over yet: When the company reported its results on Oct. 19, it didn’t even hit the reduced targets, and the stock sank even lower.

By then, many firms had already cut their ratings on Apple to “hold” or “neutral,” and several said the news raised questions about the company’s business model. “We do not see this as a one-quarter phenomenon for Apple, but rather as the beginning of many tough quarters ahead,” said Steve Fortuna of Merrill Lynch & Co. Apple had always had a big chunk of the school market, giving it an edge when schools wanted to upgrade. Apple’s market share in the consumer, education and artistic markets climbed to 6% in 1999 from just 3.8% in 1997. If this category had peaked, some analysts wondered what was left? Apple had never had much of a presence in the corporate world, except for company graphics departments.

In the end, however, none of the problems Apple faces now are company-killers. The move to using an internal sales force was handled badly, but it can be overcome. Similarly, boosting the power of the Power Mac G4 Cube and cutting the price should win some more market share. Other companies have overcome far worse mistakes: Dell Computer Corp., for example, had serious problems with its notebooks in the early 1990s, and not only recovered, but went on to dominate the market. Compaq Computer Corp. also had numerous problems in the mid-1990s, and yet it became the No. 1 PC seller.

Apple is nowhere near as badly off as it was in 1997, when there were rumours it might file for bankruptcy protection after recording a $1-billion loss, and its revenues had fallen to less than $7.1 billion from about $11 billion in 1995. For the fiscal year ended Sept. 30, 2000, the company turned a $786-million profit on revenues of just under $8 billion, meaning that at $20 in October, the stock was trading for less than one times sales.

Apple has consistently demonstrated that there is a strong desire within a significant proportion of the market for an alternative to the traditional grey PC. Going from a 6% share in its core U.S. markets now to 10% over the next few years wouldn’t be that much of a leap, but it would push Apple’s revenues well past $10 billion. Even if its profit-making ability has been reduced, it should still be able to produce a healthy stream of earnings from that.

As Apple devotee Steven Kowaski, a former contributor to the defunct magazine MacWeek, put it in a comment to Wired News: “The gods must love Apple. Either that, or Steve [Jobs]is sacrificing goats to a dark being. This company has had more near-death experiences than a bimbo in a cheesy horror flick. But unlike the bimbo, Apple manages to survive. Every damn time the company gets kicked to the curb, they reinvent themselves and return stronger than before.”