NFC, the iPhone, and iWatch’s killer feature

It would appear near field communications (NFC) are coming to the iPhone. NFC has been around for a while in other devices but has never really taken off in the mainstream. But now that it might be included in the most popular smartphone, we might ask how does NFC work and what does it do?

Techradar: What is NFC and why is it in your phone?

At its core, all NFC is doing is identifying us, and our bank account, to a computer. The technology is simple. It’s a short-range, low power wireless link evolved from radio-frequency identification (RFID) tech that can transfer small amounts of data between two devices held a few centimeters from each other.

The main reason NFC gets included in phones is to replace your wallet and its various cards. Instead of pulling out a credit card or store member card, you pull out your phone. NFC has never been something that interests me for two main reasons. I quit carrying a Costanza Wallet a long time ago. My current wallet is closer to a large money clip than a traditional wallet. So, being able to pay from my phone will not help me there.

I also do not see any difference between quickly pulling a credit card out of my pocket versus pulling my phone out of my pocket to pay at check out time. Sometimes it is easier to pull out my wallet than it is to pull out my phone. How much of a difference does it really make to wave a phone within centimeters of the register versus just swiping the card?

This is where the iWatch becomes very interesting. Check out what John Gruber had to say.

Daring Fireball: Paczkowksi: ‘Apple Plans to Announce Wearable in September

Follow-up joke: It would be cool, and would make a lot of sense, if the new wearable thing had the same magic payment apparatus.

If this is true then it changes my view a little bit. A watch is always out on your wrist; this location can actually improve the payment experience. You can expect whatever system Apple employs to be compatible with new chip and PIN credit card systems which obviates the need to sign.

There are a few implementation problems that I am interested to see addressed before I could switch all of my payments over to my phone. These include:

  • Paying at restaurants – how long will it be until restaurants have machines that can come to your table? You certainly aren’t going to let the server take your phone to some remote place in the restaurant to process a payment.
  • Paying with different cards – I view my financial setup as being pretty simple; I carry just three cards (one credit card and two debit cards). What is the mechanism behind paying with these different cards using my phone? Will the NFC payment system be tied to the credit card on my iTunes account? This does not sound like a good solution because I do not want to always pay with that card. If the iPhone will let you store multiple forms of payment then how will you choose between them? This type of complexity, unless it can be handled intuitively and quickly, will prevent people from using this payment method.
  • Paying for things online – this might seem out of place when writing about a payment method that lets you wave your phone, but I think this is important to consider. I occasionally buy things from online retailers that do not have my card information, so I have to enter it. This is no big deal when I can just pull out my card. I realize Safari already has a way to auto-complete credit card information. Does the new system operate separately from the current Safari system? This would be unfortunate. Anytime your credit card information changed you would have just one more place to remember to update. Apple would be wise to unify their payment systems so you are using just one account for in person purchases or online purchases.

  • No matter how they have done it, September 9th is going to be a fun day.

    Josh Shaw of USC out with two ankle sprains after heroic act

    ESPN Los Angeles: Josh Shaw: ‘Would do it again’

    Just hours after being voted a team captain on Saturday, Shaw was attending a family function when he saw his 7-year-old nephew, who does not know how to swim, struggling in a nearby pool. Instinctively, Shaw jumped from a second-floor balcony onto concrete below and crawled into the pool where he was able to help his nephew to safety, according to a release from the school.

    UPDATE: ESPN Los Angeles: USC’s Josh Shaw admits to lying

    USC senior cornerback Josh Shaw has admitted to lying about how he suffered his ankle injuries last weekend and has been suspended indefinitely, the school said in a statement Wednesday.

    And what about financial analysts?

    Recently a former IDC researcher made headlines for revealing “how the sausage gets made.” This particular revelation comes in response to a recent inaccurate report by the IDC and Gartner that said Mac sales were falling when Apple’s official numbers actually had Mac sales increasing by double digits.

    Fortune: PC sales estimates: How the sausage gets made

    So, the mantra became, preserve the growth rates; to hell with the actual numbers. Even the growth rates are fiction.

    I am picking on the most controversial statement first. It would appear that the numbers have absolutely no credibility at all. The numbers are just some made up malarky. This statement has caused people to go into a mild uproar and raises a two questions:

    1. What systematic biases do analysts have?
    2. Can we learn anything useful from analysts?


    Psychological research has shown that fields that have arbitrary or delayed performance feedback are more likely to exhibit overconfidence bias. Those most affected are clinical psychologists, doctors and nurses, engineers, entrepreneurs, lawyers, and investment bankers.1 Financial analysts, like investment bankers, are charged with evaluating companies or industries and making predictions about those companies or industries. Contributing to analysts’ overconfidence is the fact that predicting the future is hard.2 Past predictions are frequently not checked to see if they actually came to pass. Predictions that end up being incorrect are easily attributable to unknown forces. It is tempting for an analyst to think, “my predictions were not wrong because I made an error. My predictions were wrong because unknowable forces acted on my prediction.” This type of thought process can absolve (at least in their mind) the analyst of any blame.

    Analysts are consistently overoptimistic about the market and firm prospects. To put this in perspective, by mid-2000 buy recommendations were approximately 75 percent of all recommendations whereas sell recommendations were just 2 percent of all recommendations.3 Most academics, and I would imagine most practitioners, do not care about the level of the rating, focusing instead on changes in rating. Analyst overoptimism seems to be included in market expectations as stock downgrades accompany the largest market movements.

    Analysts are also shown to be prone to a well known psychological bias know as the representativeness heuristic. The representativeness heuristic leads people to make decisions based on stereotypes or applying a small subset of data to the broader whole. Analysts treat stocks that are perceived as growth stocks the same. They likewise would continue to treat a winning stock as a winner even after evidence suggests the situation has changed. Attempts to address these biases through regulation has only has limited impact.4

    Something Useful

    So can we gain anything useful from these analysts? The short answer is yes but it comes with a caveat. I alluded to it above; you have to know how to put their buy/sell recommendations, earnings forecasts, products sales forecasts, and any other forecast in context. Understand what the limitations that analysts have. For example, Regulation Fair Disclosure, which went into effect in 2000, prevents analysts from being fed information from company insiders. Consider this point in context of the numbers the IDC publishes. IDC cannot legally get information directly from publicly traded companies about their sales numbers. How does IDC, or any other similar firm, draw their conclusions?5

    In most quarters, the team starts with OEM guidance and, depending on the country, does some by-country cross-checking. However, for the US team, we just did some systematic adjustments to the vendor guidance and called it a day. For example, we knew that lots of Macs were transshipped from Miami to Latin America. So, we took some percentage of Macs (Apple, of course, never helped; in fact, even objected, saying it wasn’t so) and reallocated them from the US to a smattering of Latin countries, effectively modeling the market but with no low-level data.

    This process should not surprise anyone. They can’t get information directly from firms, so they use a convoluted process to guess. An alternative strategy would be to send someone to sit in a store an count sales. But that has been scorned too. So even though “in the end, the process was political” it didn’t mean that there weren’t parts of the numbers people could trust.

    I used to tell customers which parts of the data they could trust, essentially the major vendors by form factor and region. The rest was garbage.

    The industry itself was aware of these issues, but agreed to maintain the fiction because it was convenient. Most vendors kept their own numbers, but referred to IDC for public purposes.

    How does this IDC analyst’s experience mesh with what we have shown in broad based studies?

    First of all let’s compare analyst performance against company managers. This is really the reason any analysts exist. They exist to tell us something beyond the calculating disclosures of a firm. Putting analysts against managers sets up a clear asymmetric information problem. Managers/insiders should know the most about the firm and its prospects. Analysts are at an informational disadvantage when compared to managers.

    Research has shown that analyst forecasts are more accurate than manager forecasts when macroeconomic factors move with the fortunes of the firm. Managers are more accurate when a firm is experiencing “unusual” circumstances or situations that make the management’s internal knowledge of the operations of the firm more important. Overall, analysts are more accurate than managers about 50% of the time. So, perhaps analysts are not at an informational disadvantage relative to managers. They obviously have different information sets, but both appear to be useful in forecasting the firm’s prospects.6

    We can cross check these academic results against what the researcher revealed above. The researcher essentially was claiming that IDC uses broad economic conditions to adjust their numbers. This is exactly the type of process that leads analysts to the get numbers right. This is the lens through which we should view analyst forecasts.

    Analyst recommendations also are particularly informative when they are against the common trend. Analysts tend to herd in their recommendations.7 Breaking from the crowd to issue a contrary recommendation carries with it a lot of reputational or career risk for the analyst involved. This is why all star analysts are more likely to be contrarian than other analysts. And, yes, analysts get rated by their peers and classified as all stars.8

    I am not defending IDC or any other group of analysts or forecasters. They paint themselves into corners with marketing materials and other statements that claim their numbers are more accurate than they really are. When analysts are inaccurate they should own it.

    The point of this post is to suggest that analysts are not being paid to do nothing or simply make up numbers. Sure you can have instances, maybe I should say many instances, where analysts (expand that list to say researchers, managers, journalists, etc) have a hypothesis beforehand and set out to find facts in support of that hypothesis.

    Analysts can add value. You just have to know what kind of filters you have to use on any information they generate.

    NOTE: Stay tuned for Part II where I discuss financial analysts and why they don’t seem to understand Apple.

    1. Barber, B. M., & Odean, T. (2001). Boys will be Boys: Gender, Overconfidence, and Common Stock Investment. Journal of Banking and Finance, 116(1), 261–292. doi:10.1162/003355301556400

    2. Understatement of the year?

    3. Barbera, B. M., Lehavyb, R., McNicholsc, M., & Trueman, B. (2006). Buys, holds, and sells: The distribution of investment banks“ stock ratings and the implications for the profitability of analysts” recommendations. Journal of Accounting and Economics, 41(1-2), 87–117. doi:10.1016/j.jacceco.2005.10.001

    4. Mokoteli, T. M., & Taffler, R. J. (2009). Behavioural bias and conflicts of interest in analyst stock recommendations. Journal of Business Finance and Accounting, 36(3), 384–418. doi:10.1111/j.1468-5957.2009.02125.x

    5. If a company did directly disclose their sales figures to IDC they would have to simultaneously release those numbers to the public. That doesn’t sound like a great way to maintain any kind of competitive advantage.

    6. Hutton, A. P., Lee, L. F., & Shu, S. Z. (2012). Do Managers Always Know Better? The Relative Accuracy of Management and Analyst Forecasts. Journal of Accounting Research, 50(5), 1217–1244. doi:10.1111/j.1475-679X.2012.00461.x

    7. Herding is a particularly bad problem in a field like finance where everything is compared against some, possibly arbitrary, benchmark. In many areas of finance absolute performance does not matter; only relative performance matters. This, of course, is a topic for another post.

    8. Bradley, D., Liu, X., & Pantzalis, C. (2014). Bucking the Trend: The Informativeness of Analyst Contrarian Recommendations. Financial Management, 43(2), 391–414. doi:10.1111/fima.12037

    Nvidia, 64-bit ARM, and Apple

    Appleinsider: One year after Apple’s A7, Nvidia announces first 64-bit ARM CPU for Android

    Nvidia says each Denver core is capable of processing up to seven operations per clock cycle, compared with a reported six instructions per clock for the A7 and just three per clock for the 32-bit (Nvidia) Tegra K1.

    I think the key here is right in the article’s title: one year after Apple. Nvidia’s new 64-bit system on a chip is impressive and it theoretically will outperform Apple’s offering. But, the problem for Nvidia is that they are completing against a chip that is nearly a year old already. By the time the first generation 64-bit Nvidia chip and 64-bit Android are ready to ship Apple will already be on its second generation implementation of 64-bit in the mobile space.1

    There is no word on which device will be the first to ship with Denver, though Nvidia does promise full pin compatibility with 32-bit Tegra K1 variants for easier integration. The first 64-bit version of Android is currently in testing and is slated for release this fall.

    I guess I will bang the fragmentation drum; every flagship device that Apple ships has 64-bit chips and software. Soon, every device that Apple ships will have 64-bit chips and software. How long will it take for every Android manufacturer to get to that point? How long will it take Android developers to fully optimize their apps for a 64-bit environment?

    I realize there are counter-arguments to the need for 64-bit on mobile devices. But just remember what chipmakers were saying last year:

    The chip’s surprise introduction was said to have left industry insiders “slack-jawed, and stunned, and unprepared.” (…) “Apple kicked everybody in the balls with this,” a Qualcomm employee said at the time. “It’s being downplayed, but it set off panic in the industry.”

    1. I do offer the caveat that raw hardware specs by themselves are not an indication of performance or user experience.

    Amazon might want to reconsider

    New York Times: Dispute Between Amazon and Hachette Takes an Orwellian Turn

    Late Friday, Amazon unveiled Readers United, and encouraged e-book buyers to email the chief executive of Hachette, whose address was helpfully provided.

    In introducing the group, Amazon made the same arguments it has been making in the last few weeks: e-books need to be cheaper and Hachette is robbing readers by preventing this from happening. It also provided a list of recommended journalism on the topic — a very selective list.

    Amazon should be careful waging a public relations war against publishers and writers. A Goliath never will get any sympathy when he fights a David.

    For readers who are not quite sure exactly what to write to Hachette, Amazon included a list of talking points. The first one is, “We have noted your illegal collusion,” always an ice-breaker in these sorts of chats.

    Amazon, you have (or have had) near monopoly power in the eBooks market. Perhaps the publishers felt the need to collude to counter the unrivaled power of a monopolist?

    The retailer argues that people against e-books are against the future, and talks about how the book industry hated cheap paperbacks when they were introduced in the 1930s, and said they would ruin the business when they really rejuvenated it.

    I find a major flaw in Amazon’s argument; somehow I doubt that paperbacks were originally sold below their cost as Amazon is currently doing with eBooks.

    1Password sale

    AgileBits: Heads up: Your best defense against the Russian hacker data breach is still strong, unique passwords [Update: And a sale!]

    The bad news: Russian hackers claim to have gotten their hands on a sizeable collection of login credentials and emails.

    The semi-good news: the story might not add up. According to The Verge, most, if not all, the credentials may simply have been collected from previous breaches we already knew about, including Adobe, LinkedIn, and others.

    The good news: strong, unique passwords for all your sites are still your best defense. If shady individuals nab one or even more of your accounts, 1Password’s unique passwords prevent them from using that information to break into all your accounts.

    EVEN MORE good news: To help everyone get more secure online with strong, unique passwords for all their accounts, we’re putting 1Password for iOS on sale for just $9.99! For how long? We’re not sure yet, so act fast and spread the word. Bonus points: our upcoming update for iOS 8 will be free to existing owners!

    I’ve been using 1Password for quite sometime. I bought it during a sale like this one. It’s been a great purchase. I highly recommend it to everyone. 1Password works on Mac, Windows, iPhone, iPad, and Android.

    iTunes Link: 1Password for iOS

    Reviewing my Big Jambox

    About 18 months ago I purchased a Big Jambox. The Big Jambox is a bluetooth speaker with an integrated battery. It is larger than pocketable speakers and gives a much better sound. Now that I have spent a considerable amount of time with it I can highly recommend it to anyone.1

    Battery Life – The battery life for this speaker is amazing. Officially it is rated for 15 hours of playback. But, I regularly get more than 17 hours on one charge even when playing the speaker at high volumes.

    Design – The Big Jambox is beautifully designed. Mine has the Graphite Hex design. You can also get it in red, white platinum, and white.

    Sound Quality – The sound quality of the Big Jambox is superb. It easily sounds as good as any offering by Bose. I have used the Big Jambox in rooms as large as 25′ by 75′ with more than 25 people and it could have handled an even larger space.

    Versatile – The speaker has may be paired with any bluetooth device or use a 3.5mm stereo cable, so you can use the speak with just about any device. Being battery powered and bluetooth enabled means you can put the speaker just about anywhere. I frequently bring it with me, whether I am in the house, backyard, or garage. This versatility plus its high sound quality means the speaker can replace much more expensive multi-room speaker setups like Sonos.

    Large – It is a little large. And, at 2.71 pounds, it is a little heavy too. What this means is that you really have to make a conscience decision to bring it with you if you go out.

    Mesh Grill – The exterior of the speaker is entirely made of a mesh grill, so you will have to be careful to prevent dust and other particles (just hunk about a sandy day at the beach) from getting inside the speaker.

    I would highly recommend this speaker to anyone for around the house or portable music playing. At the time of this writing, you can find it at Amazon starting at $190.

    1. The Wirecutter also recommended this speaker as best in its class.

    What we wanted Aereo to be

    ArsTechnica: Supreme Court puts Aereo out of business1

    Aereo, a TV-over-the-Internet startup whose legal battles have been closely watched, has been ruled illegal by the Supreme Court today.

    I was disappointed by this ruling. Not so much because I have a legal opinion about the merits of the case, but because I am interested in seeing technological advances that help consumers survive.

    For most people we just want an easy way to legally watch our favorite movies and tv shows. The answer seems obvious. Let us watch it online; let us select à la carte the channels we watch. I think we wanted Aereo to be the company that finally beat the the cable/satllite companies and the movie/tv studios, the company that liberated the way we watch our shows. But in the end Aereo couldn’t do it either.2

    I suspect that the current regime of cable/satellite operators and the movie/tv studios will never fully adjust to the new model of how we want to watch our shows. They will never relinquish the grasp they have on their content libraries.

    The only way our desires to view content in new ways will be satisfied is by firms that produce shows with the expressed purpose of making it available through new platforms.

    I’m looking at you Netflix.

    1. I’m a little late writing my thoughts up on this. This story is from 25 June 2014.

    2. It also seemed ridiculous that the success of their business model was predicated on the need to buy a tiny little antenna for each of their customers. This is an example of laws not keeping pace with technology.

    Amazon’s Valuation Problem

    People always ask, “when will Amazon make a profit?”

    Bloomberg: Bezos Alarms Amazon Investors With Spending Pace as Loss Widens
    (via Daring Fireball)

    Jeff Bezos is testing the patience of investors after Inc. missed analysts’ estimates for a second straight quarter, sending the shares tumbling 11 percent.

    The world’s largest online retailer yesterday reported a second-quarter loss of $126 million, more than double what was predicted, even as sales climbed 23 percent to $19.3 billion. Expenses jumped 24 percent to $19.4 billion. […]

    The loss in the latest period was the biggest since the third quarter of 2012, when Amazon posted a $274 million loss. Looking ahead, Amazon projected sales of $19.7 billion to $21.5 billion for the current quarter. Operating losses are projected to be $810 million to $410 million, Amazon said.

    Amazon gets treated by investors like a brand new start up. A common thought has been that Amazon is a company that is just waiting to flip the switch and can at anytime start to make as much profit as they want. The thought follows that the only reason Amazon is not making a profit now is because they aggressively pour so much money back into the company for new/existing projects.1

    As of today Amazon closed at $324.01, down 9.65% today on the bad news listed above. What might justify Amazon’s stock price given the lack of profits?2 Let’s use a simple model to understand what the market is thinking.

    The Model
    Price = NI / (r -g)

    Price = the stock price per share today
    NI = the firm’s net income per share one year from now
    r = the discount rate
    g = the growth rate

    Many of you will recognize this as a modified version of the dividend discount model. Instead of dividends I will be using the net income amount. 3 Now all we need to do is estimate the inputs to our model, the net income, discount rate, and growth rate. Stock price is positively related to changes in net income and the growth rate but negatively related to the discount rate. The higher you think the firm’s cash flows or growth rate will be, the more you are willing to pay for it today. If you think the firm will be riskier, as captured by the discount rate, then the price you would be willing to pay decreases.

    Scenario #1
    Assuming Amazon could achieve Walmart’s profit margin, Amazon would earn just $5.63 per share, their discount rate would be 12%, and the growth rate would be 3%. Using these values Amazon’s stock price should be just $62.56.

    Scenario #2
    Assuming Amazon could achieve Lululemon’s profit margin, Amazon would earn $26.27 per share, their discount rate would be 12%, and the growth rate would be 3%. Using these values Amazon’s stock price should be just $291.89.

    Scenario #3
    Assuming Amazon could achieve Apple’s profit margin, Amazon would earn $36.52 per share, their discount rate would be 12%, and the growth rate would be 3%. Using these values Amazon’s stock price should be just $405.78.

    Scenario #4
    Assuming Amazon’s actual outcome represents some weighted average of the prior scenarios, Amazon would earn between $17.05 and $20.46 per share, their discount rate would be 12%, and the growth rate would be 3%. Using these values Amazon’s stock price should be between $189.44 and $227.33.

    Three of the four outcomes indicate that Amazon is overpriced and in most cases by quite a large margin. Delaying the first year of profits only exacerbates the problem. Suppose the best case, scenario #3, is the true outcome, but instead of happening this year we delay it by just one more year; the current price of Amazon’s stock would fall from $405.78 to $362.12. 4

    The market is right to be nervous about when/if the profit machine switch can be flipped at Amazon.

    How did I arrive at these scenarios?

    Estimating Net Income5
    Amazon has historically made very little net income. Let’s assume Amazon can flip the switch from no profits to some amount of profits. I have three comparable companies off which to generate Amazon’s hypothetical post switch flip net income. These three com parables will establish upper and lower bounds on Amazon’s potential profitability.

    Walmart – Amazon is a large retailer selling many low margin products that compete with Walmart. Amazon is on the record as saying they would like to be the largest retailer in the world. If they could take that crown, isn’t it reasonable to expect their margins to be similar to the current largest retailer? Walmart has $146.74 of revenue per share with earnings per share of just $4.84. Walmart’s profit margin is just 3.3%. If Amazon had a profit margin of 3.3% their net income would have been $5.63 per share.

    Lululemon – Perhaps using Walmart is not appropriate since Amazon does sell a larger variety of high priced items than Walmart ever will. Perhaps using a high margin retail like Lululemon is more appropriate. Lululemon’s profit margin is much higher at 15.41%. If Amazon had a profit margin this high their net income would have been $26.27 per share.

    Apple – Amazon is following Apple’s lead in many respects. Amazon has steadily increased the amount of virtual goods they sell. They have an ebook store, music downloads, video streaming among other services. Amazon develops their own flavor of Android and now sells a phone and a tablet device. This certainly starts to feel a little more like Apple.6 Apple, who is the poster child for high margins and solid profits has a profit margin of 21.42%. Given this high profit margin, Amazon’s net income per share would have been $36.52.

    I personally tend to think that Amazon’s profit margin, should the flip the switch would be closer to 10%-12%. This opinion is based on the average profit margin that I think would be generated by Amazon’s different units. This would put their net income between $17.05 and $20.46 per share.

    Estimating the discount rate
    The discount rate is the rate that converts future cash flows to present cash flows. The rate is a function of the real rate of return, an inflation premium, and a risk premium. We can estimate Amazon’s discount rate using a naive approach, setting the rate at or near the historical market discount rate of 12%. Using the Capital Asset Pricing Model (CAPM) to derive the discount rate. The with Amazon’s beta of 0.77, the CAPM indicates their discount rate is about 10%.

    Estimating the growth rate
    This growth rate represents the long run growth rate of the company’s earnings. The historical growth rate of the overall economy is approximately 3%; this makes for a very reasonable assumption as it is unlikely that a firm can forever grow faster than the economy as a whole.

    1. Occasionally in casual conversations I ask people how old they think Amazon is… it’s ok if you don’t know. Amazon was founded in 1994 and became a public company in 1997. We are talking about a 20 year old firm here that has yet to make any significant profit.

    2. Remember that the price alone of a stock means nothing. Share price must be given context. This is why price to earnings ratios are so frequently cited. They give context to an otherwise abstract number.

    3. I choose net income because not all firms pay dividends and, with a couple of assumptions, paying out dividends is irrelevant to the value of a firm. Some might argue that I should use free cash flow; given the simplicity of the model the choice between net income and free cash flow is not highly impactful.

    4. This calculation is performed by discounting the price by one year which is done by dividing the price by 1 plus the discount rate.

    5. Revenue, earnings, and profit margin amounts in this section represent totals from the trailing twelve months. Earnings are diluted earnings per share.

    6. although Amazon sell these devices and offers some of these services as a way to entice users to spend more on products through; Amazon’s devices are sold at near to break-even prices counting on this fact