The last four weeks have contained much dinner time discussion about my step-son ditching the Xbox 360 (all of six weeks old, which he bought with money that he earned) to buy the new, cool PlayStation3. You may be asking what does this have to do with product design management. Microsoft, Nintendo and Sony are competing over the console space. A game console is a thinly-disguised computer that hooks up to your TV to play games. When I was growing up the console space was brand new and was dominated by Atari. Later generations of game consoles boiled down to a console war between Nintendo and Sega. Sega lost. The latest consoles are the Sony Playstation3 (Sony), Xbox 360 (Microsoft), and the Wii (Nintendo).

The Sony Playstation3 has cutting-edge graphics and physics powered by the IBM cell processor. The XBox 360 is a year old now and doesn’t quite have the graphics horsepower that the Playstation has. However, it does have a very successful on-line component called Xbox Live. The Sony costs from $500-600. The Xbox costs from $400-500. The Wii costs from $200-300 and doesn’t have the graphics (or physics) horsepower of either of its competitors.

The Wii does have a very innovative controller that was designed to make game play easier. Both the Playstation3 and the XBox controllers are button farms. They can be difficult to use. The other Wii advantage is its emphasis on ease-of-play. The system was designed to make game play easy. Making it easier makes it more attractive to a wider audience, and not just hard-core gamers. Nintendo’s plan is to design a better experience for a broader audience.

My step-son (age 16) test played the Wii last night. When he got home, he was raving about how great the Wii was. When I asked how it could be that great he said; “I like the way it played”. This goes back to exactly what Shimon (www.Touch360.com) has been saying about designing for experience: http://www.montie.com/PDMA/2006_sept_event.

The Wii, it doesn’t have the sheer computing power of the PlayStation 3, but it does have a well-designed experience. We, as product designers and managers, should strive for similar forms of design excellence. It isn’t always about additional features and more performance. Elegance can be difficult to achieve, but the result is usually worth the effort especially if you are the end user.

As always, comments and suggestions are welcome.

Montie Roland
President - Montie Design (ww.montie.com)
President - Carolinas PDMA (www.pdma.org/carolinas)

MyOwnFund Daily Commentary
Tuesday, November 21, 2006©
Thomas E. Vass

 

Economic Commentary:
What Is On Top When The Stock Market Goes Down?
Stock market analysts and pundits like to point to the inverted yield curve as the lead indicator of the stock market top because they suspect that the inverted yield curve, in a round-about-way, eventually affects stock prices.
The logic of the inverted yield curve, as a indicator of doom, is that investors like present
incomes better than the prospect of risky future incomes. When short rates are higher than long rates, rational investors would prefer the income bird in the hand, not the risky bird in the future. If that suspicion is borne out in reality, the inverted yield curve perhaps could signal, in an even more round-about-way, a possible economic recession. There is some statistical correlation between the appearance of the inverted yield curve and an economic downturn, which also would affect stock market prices in a negative way.
A Better Indicator of Doom: The M&A Frenzy
The Wall Street Journal today reports on another indicator of stock market decline that is even better than the inverted yield curve in predicting a stock market drop. They do not describe the indicator the same way MOF does, and editiorialize that the M&A frenzy is an economic positive.

MOF is happy to provide the contra-argument to the WSJ.
The WSJ graphic below is great for explaining both how the Merger & Acquisition frenzy is
occurring, and for the future, even describes what industrial sectors are most vulnerable to stock market declines.
http://online.wsj.com/media/info-mergeracq0611.gif

The Dire Economic Implications of the M&A Frenzy on Technological Innovation
All of the sectors mentioned by the WSJ could pass harmlessly into a stock market abyss without causing lasting economic damage to the U. S. economy. Except.
Except that two of the sectors contribute the most to technological innovation in America, and innovation is the last, best economic hope of America.
Telecommunications and information technology are the crown jewels of innovation, and when the smaller U. S. players in these two sectors get merged into the big players, especially the big non-domestic, foreign players, America loses the vital breeding grounds of innovation. The acquisition of Oregon Steel Mills by Russian Steel Maker Evraz fits this bill.
As the WSJ report points out, the process of M&A involves loading the target up with debt. They tend to gloss over the fact that after the merger, the parent company radically cuts essential research and development expenditures in the target in order to squeeze out more current revenue from operations.
As they note, “More than $60 billion in deals were consummated in the past 48 hours of frantic merger and buyout activity…buyout firms searching out prey and raising cash with bonds and loans that are then sold off to investors around the world. Leveraged buyouts account for some 17% of the $3.4 trillion in transactions announced globally so far this year.”
The Link Between The Inverted Yield Curve and the M&A Frenzy
“Investors also have a growing appetite for high-yielding assets, which has them turning to junk bonds and risky loans behind takeover deals. So far this year, junk bonds have returned a robust 10%,” reports the WSJ. And, therein is the link between the inverted yield curve and the M&A frenzy.
The M&A frenzy and the urgency for yield means that irrational behavior for short-term gains will keep short term interest rates higher than long rates, which requires patience and foresight.
Patience and foresight are the lynchpins to making investments in technological innovation, especially in high risk sectors like biotech. If economic conditions change so that the highly leveraged companies do not have sufficient revenues to pay dividends and interest, or short term interest rates creep higher, the bulk of the M&A target companies will default on the junk debt.
Why The WSJ Editorial Comment On M&A Is Wrong
The editors at the WSJ state: “But the very fact that billions of (M&A) dollars are being put on the table in an attempt to shift assets to their highest and best uses is a sign that the animal spirits that give the U.S. economy its dynamism are alive and well. The time to worry about an economy is when no one wants to take such risks.”
Directly contrary to their opinion, the fact is that frenzy of M&A activity is a prime indicator that no one wants to take the risk of making the tough private equity investments in technological innovation, in favor of the easy money to be had on existing technology in the M&A targets.

The M&A activity squanders private equity on a huge and massive scale, and depletes the
potential supply of capital that could be directed to long term, risky investments.
The WSJ states: “But as an economic matter, it is largely irrelevant whether the shares are publicly traded or not.”

We disagree. The public capital markets are inextricably intertwined to the private capital markets, and the private capital markets are not able to do their job for America with the bloated M&A frenzy.

MyOwnFund Daily Commentary
Friday, November 17, 2006©
Thomas E. Vass
Economic Commentary:
Having a Chance Is Not Like Having An Economic Policy

In his Wall Street Journal op-ed piece, Senator-elect Jim Webb begins the task of outlining the Democrat’s new economic policy for America. (American Workers Have a Chance To Be Heard, WSJ, November 15, 2006; Page A18).

Sounding the new Populist trumpet of class division, Webb makes the essential Democratic value point that Republicans argue that these social class divisions are the natural results of a competitive society.

Not so, says Webb. He writes, “A recent survey in the Economist warned that globalization was affecting the U.S. differently than other “First World” nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration.

He concludes that the “true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life.

Fairness Is A Legal Term, Not An Economic Growth Strategy
Ever since John Rawls wrote his famous book Justice as Fairness, the Democrats have had a convenient way to mix up political concepts with economic concepts. To recall, Rawls main notion was the maxi-min principle, which stated that the lower rungs of the social ladder should benefit from economic programs more than the upper class.

Rawls, and now Webb, tend to overlook the essential pre-condition that in order to distribute economic benefits to the poor, there must first be some type of economic growth. Citing an economic report from the journal The Economist, Webb notes that, “unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash” in America that would take us away from what they (the writers at The Economist) view to be the “biggest economic stimulus in world history.”

The Economic Issues As Defined by the Democrats
As seen by Webb the economic problems in America concern income inequality and
unwarranted, unelected corporate political power. “The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth. At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners’ pockets rather than from insurance, and 47 million Americans have no medical insurance at all.”

The Democrat’s Solution Is Less Free Markets
The solution for Webb is more government control over the economy, and in this advice, Webb is joined by Professor Jeffrey Sachs of Columbia University. Sach writes that Nobel Prize-winning economist Friedrich Hayek “was wrong” about free markets and prosperity in his classic, The Road to Serfdom.

Sach states that the ability of free markets to create economic growth without government coercion is a myth. “The evidence is now in,” says Sachs. William Easterly, in his WSJ column, Dismal Science (November 15, 2006; Page A18), says “This sounds like one of those moments in which the zeitgeist of mass confusion about national poverty, world poverty and prosperity comes together in one mad tragicomic brew.”

Part of the Democrat Economic Analysis Is Accurate
What makes the Mad Democratic tragicomic brew even more crazy that part of their analysis is correct. The part about what wealthy folks do with their profits actually has profound economic growth implications for America.

This was the same issue that James Madison and Alex Hamilton confronted when they rewrote the Articles of Confederation. “How do you keep the wealthy folks happy so that they will reinvest their profits in the fledgling American economy?”

In Madison’s and Hamilton’s rendition, they gave the wealthy their own branch of government, and eliminated the common riff-raff from democratic participation in economic matters.

Part of the Democrat Economic Advice For America is Sheer Economic Lunacy
America’s great economic strength in the global economy is individual freedom and legal right to own capital resources. The freedom leads directly to the greatest rates of technological innovation, which leads, in an ineluctable chain of logic, to the fastest rates of income growth.

The end goal of the economic policy is fast income growth, and that depends on high rates of technological innovation, and that depends on high rates of capital investment, primarily by small businesses and individual entrepreneurs.

The Democrats will take the American society and American workers down a steep irrevocable slope if Democrats like Jim Webb fail to put technological innovation at the top of the Democrat economic policy agenda.

Economic Commentary: For November 13, 2006

(see all comments at www.myownfund.com)

http://www.montie.com/upload/3/dailycommentnov132006.pdf