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Cloud Computing Archives | Page 2 of 22 | Psychotherapy For Your Online Servers

How to Keep Your Business Self-Sustaining After That Initial Success

In this age of constant market evolution and new technology, there is no such thing as a static business that is self-sustaining. The traditional approach of implementing stable and repeatable processes, so that your business can run itself, no longer works.

Just ask former big brand companies, like Blockbuster, Kodak, Lehman Brothers, and Sears, what happened to them.

As a small business advisor, I always recommend that being “self-sustaining” requires taking frequent and aggressive measures to step out ahead of the pack, including yourself, before you start feeling the pain of change and new competitors around you.

Specific measures that go beyond the traditional linear thinking include the following:

1. Develop new products for your existing segment.

Rather than enhancing the offering you have, develop and offer new products that capitalize on the customers that you already know well.

Competitors tend to focus on price and other variations to existing offerings. Too many businesses only think of new products when in crisis mode.

For example, Facebook added WhatsApp as a cross-platform messaging and Voice over IP (VoIP) service to enhance the self-sustaining growth their social media platform before any downturn. WhatsApp alone now has a user base of over one and a half billion users.

2. Introduce disruptive technologies to this domain.

Rather than rely only on linear thinking, the best entrepreneurs are always looking to offer in parallel a more dramatic new alternative.

Since these usually require a large investment, and more time, including customer education, they need to be started while your current business is still healthy.

Apple did this with the introduction of the smartphone, which altered the value chain for computers, video, and software, which were already staples that they knew well. Richard Branson is doing it with Virgin Galactic space rides, without impacting his Virgin Airlines.

3. Populating new domains to sustain your market.

If your product is already unique, then new domains would include adding online to enhance store fronts, and alternatives for business to complement consumer offerings.

These allow you to get new growth without fighting existing competitors. Defining new domains is even more powerful.

Elon Musk is doing both of these, first by expanding his Tesla electric vehicle initiatives beyond cars, into self-driving taxis and trucks, and secondly by entering new domains of transportation with SpaceX and Hyperloop. He entertains no sense of a static business.

4. Redefine your product to reach a new category.

This strategy, often called breakaway positioning, has the intent of expanding your product opportunity into a previously unreachable category.

It also has the advantage over competitors of retaining existing customers, while at the same time attracting new customers from another category.

For example, Swatch was able through marketing to define their watches as fashion accessories, as well as timepieces, greatly expanding their segment. Uber added UberLUX, with stylish high-end cars, to declare access to the limousine category.

5. Implement a plan of regular strategic acquisitions.

Unlike a total reliance on internal innovation and organic growth, growth through acquisition or merger is generally faster and can be self-sustaining as a process. Further, acquisition offers other advantages such as easier financing, instant economies of scale, and new market penetration.

For example, even the giant Amazon acquired Whole Foods as a growth entryway into the competitive grocery and food industry. Apple acquired Shazam to quickly boost Apple Music by letting users identify songs, movies, and commercials from short audio clips.

The reality is that you can never stop changing your business, and still be self-sustaining. The strategies outlined here may seem intuitively obvious, but they require real effort and discipline to implement, perhaps why so few companies consistently outperform the market.

Change is the only constant in business, so now is the time for making your plan for regular change a priority.

The Best Sales App I've Seen in 15 Years and OMG It's Free

What makes a sales app great? Three things: 1) it helps you sell, 2) it’s easy to use, and 3) it costs nothing or next-to-nothing. Using that criteria, it’s obvious why CRM isn’t a great sales tool because while 1) it (arguably) helps you sell, it’s also 2) difficult to use, and 3) can cost you big time in lost opportunity cost, even if you’re using freeware.

Because of that, for the past 15 years, the most valuable sales tool has been LinkedIn. Sales is all about building relationships and that’s impossible without knowing who works inside a company and the role they play in the decision-making. Thus while LinkedIn was designed originally for recruiters, it’s been a total godsend for Sales and Marketing.

However, while LinkedIn has been the king of sales tools since it was launched in 2003, its own email system (InMail) has never caught on as an alternative to regular email. As one of my clients put it a couple of days ago: “I just don’t get many responses when I use it.” And that’s too bad because InMail is theoretically much better than regular email.

Email has become increasing important to sales and marketing because now that most people (especially decision-makers) no longer answer their phones making cold calling obsolete. Today, the only effective form of outbound sales is email marketing which everyone is doing (but most aren’t doing it very well.)

The big challenge with email marketing, however, has always been getting the decision-makers’ email addresses. While you can buy email lists on the open market, the data is often inaccurate or out-of-date. Also, email lists encourage one-to-many email marketing (aka SPAM), which isn’t all that effective.

What IS effective with email marketing is a well-researched personalized email that doesn’t attempt to sell but instead just makes contact and opens up a conversation. I’ve written extensively on how to execute this strategy and helped dozens of companies develop the technique. BTW, if you want to fix your cold emails so that you get geometrically more responses, I’m still available for an hour each week… at least for now.

Once you’ve identified a decision-maker on LinkedIn, the difficult part has always been getting that decision-maker’s real email address (business or, better yet, personal). In the past this involved a online research, guesswork, and even calling the reception desk and asking. None of these approaches were ideal and all consumed a fair amount of time.

Well, no longer, because there are now some very easy-to-use tools that troll through big data on the web and give you the email addresses and even the telephone numbers of the profiles that interest you. I’ve tested several of these tools and have concluded the best is Contact Out, which runs as a Chrome Extension.

Contact Out took me 5 seconds to install and 5 seconds to learn to use (it’s a one-click drop down). To test it, I looked up some of my former editors. Not only did I get their current work emails, I also got personal emails for most of them, and even work telephone numbers. If I’d tried this by hand, it would have taken hours of tedious effort.

Contact Out lets you harvest 50 profiles a day for free, but that’s far more than any salesperson needs if they’re doing personalized emails which, again, is the only form of email marketing that actually works.

I also tried two other Chrome Extensions, Lusha and Hunter, but they didn’t seem to harvest as much data. Hunter was interesting, though, because it got me email addresses associated with a specific website, even if the people in question didn’t have LinkedIn profiles. Since neither tool is expensive, you might want to add them to your tool box, too. 

Oracle sees strong third quarter on cloud strength, share rise

(Reuters) – Oracle Corp on Monday forecast current-quarter profit above estimates after growth in its cloud services and license support unit helped the business software maker surpass Wall Street expectations for the second quarter.

FILE PHOTO: People gather prior to the start of a keynote speech at the All Things Oracle OpenWorld Summit in San Francisco, California September 24, 2013. REUTERS/Jana Asenbrennerova/File Photo

Shares rose 5 percent, with the company saying that excluding fluctuations in exchange rates, it expected third-quarter adjusted profit to be between 86 cents and 88 cents per share.

Analysts on average were expecting 84 cents, according to IBES data from Refinitiv.

Revenue at its cloud services and license support unit, its biggest, rose 2.7 percent to $6.64 billion and beat analysts’ estimate, as more companies shifted to cloud computing from the traditional on-premise database model to cut costs.

Oracle’s in June created a new revenue reporting structure that merged its cloud and software license businesses, which analysts have said gives little insight into the standalone performance of its cloud unit.

Oracle is a late entrant to the rapidly growing cloud-based software business, but has aggressively stepped up its efforts to catch up with rivals such as Workday Inc, Microsoft Corp and Salesforce.com Inc.

“Oracle’s growth in cloud services and license support of just 3 percent appears to be contradicting the strength in the overall cloud market,” said Daniel Morgan, senior portfolio manager of Synovus Trust Co, which hold 152,500 shares in the company.

Last month, Workday reported a 35 percent jump in cloud subscription revenue, while Salesforce’s flagship product Sales Cloud grew 11 percent.

“Oracle is still dragging behind other old line enterprise software players like Microsoft in its transition to becoming a top cloud company,” said Morgan, whose firm also hold shares in Salesforce and Microsoft Corp.

The company’s net income rose to $2.33 billion, or 61 cents per share, in the second quarter ended Nov. 30. Excluding items, the company earned 80 cents per share, beating the average analyst estimate of 78 cents.

Total revenue fell marginally to $9.56 billion, but brushed past analyst expectation of $9.52 billion.

Shares of the company were up at $48 in after-market trading.

Reporting by Vibhuti Sharma in Bengaluru; Editing by Arun Koyyur

So Long, Step Count: My Brief and Sad Smartwatch Hiatus

The rash started out as a small cluster of bumps, angry little irritants arriving out of nowhere. Was it poison oak? Hadn’t I touched some gnarly stuff during a recent hike? It never spread beyond my wrist, and over time, the itchy patch went away. Then I put a smartwatch back on my wrist, and the rash reared its red, scaly head again.

Thus began my smartwatch hiatus, after years of wearing some type of Bluetooth-connected thing on my left wrist. I still don’t know what caused the inflammation, and it would be irresponsible to guess. At the time, I had been alternating between a Garmin watch, an Apple Watch, and some bracelets.

I’ve been somewhat addicted to tracking my activity, information that’s interesting to absolutely nobody except me. Entire events—runs, hikes, swims, attempts to surf, walks downtown—don’t feel as valid if they aren’t recorded on my wrist. Or, as my colleague Adrienne So once said, “If a tree falls without a pedometer, did it really happen?”

At the same time, the value of an activity tracker isn’t always proportionate to the burden of one. They all have these damn proprietary chargers, and you have to charge them all the time, and for what? So they can count steps? The more I thought about it, the more I needed a break from wearing a wrist Tamagotchi. Be gone, smartwatch, I thought.

Then I started to really miss it.

My relationship with wearables started in 2011. Back then, the Fitbit Ultra and Jawbone Up were all the rage, pedometers for the modern age thanks to the availability of motion-tracking sensors and Bluetooth chips. An editor assigned me a story about Jawbone, and I became obsessed with this new class of products.

Could these elastomer wrist dongles eventually do more than track steps and offer shoddy estimations of your sleep? Would people be compelled to wear them for longer than a few months before ditching them? Were these wearables even telling us the truth? (For a brief period in 2013, I made a spreadsheet to compare step counts from four different activity trackers, suspecting they all would spit out different numbers during the same one-mile walk. They did.)

When Apple’s long-rumored smartwatch launched in 2015, I flew to New York to retrieve a review unit, then immediately flew back to San Francisco with the not-yet-released product. During the flight I felt like the future was pulsing on my wrist. Sure, the watch hadn’t fit under the barcode scanner at the airport, even though it was supposed to now serve as my boarding pass. And maybe that future flashing on my wrist was just the same green cluster of optical sensors that were in other wrist wearables. But the Apple Watch felt different. It was validation from the world’s most valuable company that wearable technology was a thing.

At first, the Apple Watch didn’t do much to move the needle technologically. It was slow, its battery barely lasted longer than a day, and faltered as a platform for third-party apps. Other smartwatches had (and still have) their own drawbacks. Samsung’s watches run on limited Tizen software. LG’s Watch Sport was comically ill-fitting on my wrist when I tried it. And plenty of smartwatches have found their place firmly in the world of licensed fashion brands: Did you know you could buy a Android Wear-based, Michael Kors-branded rose gold smartwatch named “Bradshaw”? (I couldn’t help but wonder: Was the watch named after the TV character who couldn’t help but wonder?)

But then smartwatches got better. When Apple waterproofed the Apple Watch, it didn’t just seal up ports to keep the water out; it came up with a solution that involves a tiny vibrating component ejecting water from the smartwatch’s speaker. This still blows my mind, not only because I was able to wear my smartwatch in the pool but because it was so delightfully over-engineered. Samsung introduced smartwatches with rotating bezels, so you can either twist the edge of the watch to navigate it, or tap the touchscreen. Rotating bezels aren’t just satisfying to use; they’re a bridge between the old watch world, in which we twist and turn and crank things, and the new watch world, where we so effortlessly swipe.

Crucially, the software improved, too. Apple Watches invite you to “close the rings,” one of the most clever and addictive forms of personal gamification I’ve seen on a wearable. The newest Apple Watch has an ECG app now. Garmin’s smartwatch maps are so advanced that you can access topographic maps on your wrist. You can even stream music from a smartwatch these days. In a few years, smartwatches have gone from dorky wrist computers with middling features to actually useful devices.

It’s been a week and a half since I stopped wearing any kind of smartwatch on my wrist. This marks the first time in years I’ve packed a travel bag without a proprietary smartwatch charger in it, or walked and run and cycled without tracking my activity. I don’t know what my resting heart rate is right now. I’m telling myself this is OK.

Last week, a group of people asked why I like wearing a smartwatch. I started to say that it was for three reasons: fitness tracking, text message notifications, and… what was the third? I forgot the third reason, and I don’t think there is one.

Maybe I really don’t need a smartwatch. Neither do you. Some people might say they need their phones, and that’s understandable. But a smartwatch—even one that purports to give you unique insights into the inner workings of your heart? Not so much.

Still, I want mine back. Sometimes our relationships with our things don’t always make sense. We like some things because even if they require more care and attention than they ever return, you once received that important text message on your wrist at a moment when you really couldn’t look at your phone. We like them because sometime companies over-engineer a feature on a product, and you at least respect the effort. We like them because they’re attached to us, and as a result, we become attached to them.

Is it bizarre that a friend of mine used to adjust the time zone on his Apple Watch so he could gain three more hours in the day and “close the rings” at night? Maybe, but a Facebook addiction would likely make him feel much worse about himself than taking 80 more steps. Is it egocentric that I enjoy looking back at the Garmin maps of places I’ve been and hiked and ran, or that I want to see if my resting heart rate is lower than it was the day before? Sure, but maybe it’s better to creep on your own private info than it is to complete an activity just so you can share it on social.

My rash is almost gone, and I’ve already decided I’m going back to wearing a smartwatch. Maybe in the new year. Maybe my Garmin watch, since its battery lasts so long. Maybe I’ll swap in a different band, just in case.



More Great WIRED Stories

Confirmed! Those LIGO Gravitational Wave Signals Were Real

After the historic announcement in February 2016 hailing the discovery of gravitational waves, it didn’t take long for skeptics to emerge.

The detection of these feeble undulations in the fabric of space and time by the Laser Interferometer Gravitational-Wave Observatory (LIGO) was said to have opened a new ear on the cosmos. But the following year, a group of physicists at the Niels Bohr Institute in Copenhagen published a paper casting doubt on LIGO’s analysis. They focused their criticism on the experiment’s famous first signal, a squiggly line—representing the collision of giant black holes more than a billion light-years away—that was printed in newspapers worldwide and tattooed on bodies.

Quanta Magazine


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Original story reprinted with permission from Quanta Magazine, an editorially independent publication of the Simons Foundation whose mission is to enhance public understanding of science by covering research developments and trends in mathematics and the physical and life sciences.

Even as LIGO sensed more gravitational-wave signals and its founders received Nobel Prizes, the Copenhagen researchers, led by professor emeritus Andrew Jackson, claimed to have found unexplained correlations in the “noise” picked up by LIGO’s twin detectors. The detectors — L-shaped instruments whose arms alternately stretch and squeeze when a gravitational wave passes — are located far apart in Livingston, Louisiana, and Hanford, Washington, to ensure that only gravitational ripples from space could wiggle both instruments in just the right way to produce the telltale signal. But according to Jackson and his team, the correlations in the noise data suggested that LIGO might have detected not gravitational waves but some terrestrial disturbance, perhaps an earthquake. They claimed that, at the very least, something was not right with the instruments or with the LIGO scientists’ analysis.

The findings were worrisome. LIGO scientists checked their work again, and a party of experts visited the Niels Bohr Institute last year to dig into the details of Jackson and colleagues’ algorithms. Two groups of researchers set out to independently analyze LIGO’s data and the Copenhagen group’s code.

Now both groups have completed their studies. The new papers explain different aspects of the problem that led Jackson and his coauthors to make their claim. Both analyses definitively conclude that the claim is wrong: There are no unexplained correlations in LIGO’s noise.

“We see no justification for lingering doubts about the discovery of gravitational waves,” the authors of one of the papers, the physicists Martin Green and John Moffat of the Perimeter Institute for Theoretical Physics, said in an email.

The pair has no direct ties to LIGO. “It’s important for science for people to do analysis of data and results independently of the group,” Moffat said, “especially for such a historic event in the history of physics.”

The LIGO gravitational-wave detectors in Hanford, Washington (here), and Livingston, Louisiana.

LIGO Lab/Caltech/MIT

LIGO Lab/Caltech/MIT

Frans Pretorius, a gravitational-wave expert at Princeton University who was not involved in any of the recent studies, said that for more than a year, he and most of the physics community have been satisfied that LIGO’s analysis, and its discovery, are sound. Nevertheless, he said, “it’s important that finally there is a thorough analysis in the form of a paper,” rather than “media back and forth.”

The spokesperson of the 1,200-person LIGO Scientific Collaboration, David Shoemaker of the Massachusetts Institute of Technology, said by email that the new findings corroborate internal discussions among the team. “Seeing those two non-Collaboration re-analyses does reaffirm my certainty that the detections [of gravitational waves] are genuine,” Shoemaker said, “and also is a reinforcement of our earlier perception of where the Jackson et al. paper has problems.”

In an email, Jackson called Green and Moffat’s paper, which was published in Physics Letters B in September, “absolute rubbish.” When asked to elaborate, he appeared to wrongly characterize their argument and didn’t address the most important issues they raised about his team’s work. Jackson also dismissed the second set of findings by Alex Nielsen of the Max Planck Institute for Gravitational Physics in Hannover, Germany, and three coauthors, whose paper appeared on the physics preprint site arxiv.org in November and is under review by the Journal of Cosmology and Astroparticle Physics. “We are in the process of writing a response to this latest paper,” Jackson wrote, so “I will not explain where they (once again) made their mistakes.”

“The Copenhagen group refuse to accept that they may be wrong,” Moffat said. “In fact, they are wrong.”

Experts say the problem came down to a combination of blunders: several by the Copenhagen physicists, and one by LIGO.

To help tease out the puny wiggle of a passing gravitational wave from a noisy background, LIGO’s algorithms constantly compare the lengths of the twin detectors’ arms, which oscillate when agitated by a passing gravitational wave or background noise, to “template waveforms” — possible gravitational-wave signals calculated from Einstein’s general theory of relativity. When there’s a close match between a signal detected in Hanford and one sensed shortly before or after in Livingston that also fits a template waveform, email alerts fly around the world.

The scientists then carefully determine the “best-fit” gravitational waveform that most closely matches the signal in the two detectors. When this waveform is subtracted from each of the signals, this leaves behind “noise residuals” — the remaining little wiggles in the detectors that should be uncorrelated, since the instruments are about 2,000 miles apart.

In their 2017 paper, the Copenhagen group claimed to have discovered that the noise in Livingston matched the noise in Hanford seven milliseconds later, just as the putative gravitational-wave signal arrived at both detectors. They interpreted this to mean that LIGO either hadn’t cleanly separated their signal from the noise, or correlations in the noise at exactly the right moment were responsible for the entire signal.

However, Green and Moffat identified a series of errors in the Copenhagen team’s data-handling that they say conspired to create a correlation that wasn’t really there.

To look for correlations in the residuals, Jackson and his colleagues picked a 20-millisecond segment of Livingston data and slid 20-millisecond segments of Hanford data across it, registering correlations whenever peaks overlapped with peaks and troughs with troughs. They found that strong correlations happened when the data was offset by seven milliseconds. But Green and Moffat noticed that when they took Jackson and colleagues’ code and reversed the procedure, fixing the Hanford noise data and sliding Livingston data segments across it, the correlation at seven-milliseconds offset went away. “This was a big red flag because it says, OK, you don’t have a calculational method that’s robust,” said Green, an expert in digital signal processing. Rather, the lengths of the data segments and their asymmetric treatment were “tuned to obtain a correlation signal at just about any desired time offset,” he said.

In a separate calculation, Jackson and his team seemed to find non-random, correlated patterns of peaks and troughs throughout the noise records in the two detectors. But Green and Moffat inferred that the Copenhagen physicists had not “windowed” the two sets of noise data. Windowing is a standard technique of smoothly dialing a signal to zero at the beginning and end of a segment of data before doing a mathematical operation called a “Fourier transform” that facilitates comparisons to other data. The Fourier transform treats a data segment as if it is cyclical, looping together the beginning and end. If the segment isn’t windowed, abrupt changes at the endpoints called “border distortions” can wind up looking like correlations when the data is compared with a second data set.

When Green and Moffat windowed the two sets of noise data, the claimed correlations went away. “Our concern is that the calculation that was done by the Copenhagen group was contrived to get the result they wanted to get,” Green said.

Nielsen and his coauthors — Alexander Nitz, Collin Capano and Duncan Brown — also concluded that the claimed correlation in the noise isn’t real, but they say the error can be attributed at least in part to LIGO’s mistake in providing the wrong data in the first figure of their 2016 discovery paper in Physical Review Letters.

Figure 1 is “the thing people have tattooed on their arms,” said Brown, a gravitational-wave astronomer at Syracuse University and a former LIGO member, who left the collaboration this year to pursue independent analyses of the data.

The figure’s top panel shows side-by-side squiggly lines representing the gravitational-wave signal detected in Livingston and Hanford. Below that are template waveforms closely matching the signals and, in the bottom panel, jagged lines representing the “noise residuals” in the two detectors, after the template waveform has been subtracted from each data set.

Brown explained that Jackson’s code, which he examined in detail during a visit to Copenhagen last year, detects an overlap in the residuals at seven milliseconds offset for a mundane reason: The template waveform shown in Figure 1 is not the “best-fit” waveform that LIGO actually used in its rigorous analysis. The figure was created for illustrative purposes, Brown and others explained. The figure-maker had matched a template waveform to the twin signals by eye, rather than using the best-fit signal as determined by careful calculations. Small imperfections in the subtracted waveform meant that there was some gravitational-wave signal left in both data sets that didn’t get subtracted off, and which ended up mixed in with the noise shown at the bottom of Figure 1—producing correlations that could be teased out by Jackson and colleagues’ algorithms. “What they discovered was an imperfect subtraction” of the signal waveform, Brown said. “When we subtract a better waveform than the one used in the PRL paper, we find no statistically significant residuals.”

“If LIGO did anything wrong,” he added, “it was not making it crystal-clear that pieces of that figure were illustrative and the detection claim is not based on that plot.” Jackson, however, accused LIGO scientists in an email of “misconduct” and making “the conscious decision not to inform the reader that they were violating one of the central canons of good scientific practice.”

Which is to blame, LIGO’s sloppy figure or the Copenhagen group’s faulty calculations? “In reality, I think it’s both,” Brown said. If Jackson and his colleagues were able to tune their parameters to create correlations at seven milliseconds offset, as Green and Moffat’s findings suggest, this would have essentially biased their calculations. Then, at the same offset, their biased algorithm picked out the imperfectly subtracted bits of signal in the noise, reinforcing the false impression.

Jackson, however, maintains that the unexplained correlations are present and says he and his colleagues are preparing a rebuttal to the recent work. He still thinks LIGO’s first, most powerful gravitational-wave signal (and all others by extension) might have been something else altogether — perhaps, he said, “a lightning strike in Burkina Faso, seismic, or even one of the mysterious ‘glitches’ that LIGO detectors see about once an hour.”

But both new papers reviewed and reanalyzed LIGO’s raw data and rediscovered the gravitational-wave signals within it, using different algorithms than LIGO’s. Other researchers have done the same.

“I think the pursuit of independent analyses of gravitational-wave data is a very important and valuable thing to do, and we are delighted that more people are getting involved,” said Shoemaker, LIGO’s spokesperson. “That the Jackson et al. work has stimulated some additional independent investigations can be seen as a positive outcome, but I personally think it comes with a fully unnecessary cost of ‘drama.’”

Visualizations of the 10 black hole collisions detected by LIGO so far, along with the gravitational-wave signals they produced.

Meanwhile, LIGO’s twin detectors, along with a third instrument in Europe called Virgo that switched on in 2017, have recorded 10 black hole collisions to date and one space-time wiggle from colliding neutron stars. Scientists announced the four latest black hole detections this month and released dazzling graphics showing the universe’s growing population of these mysterious, invisible, super-dense spheres. When the neutron-star collision was detected last year, 70 telescopes swiveled toward the fireworks; their observations indicated the cosmic origin of gold, the expansion rate of the universe and more.

Brown said it isn’t surprising that LIGO’s revolutionary discovery invited skepticism. A powerful event was detected “basically the day we turned it on,” he said, and the rate of black hole collisions in the cosmos has turned out to be at the high end of expectations.

“The universe loves gravitational-wave astronomers,” he said.

Original story reprinted with permission from Quanta Magazine, an editorially independent publication of the Simons Foundation whose mission is to enhance public understanding of science by covering research developments and trends in mathematics and the physical and life sciences.


More Great WIRED Stories

YouTube Posted a Video on the Official YouTube Channel. It Quickly Became the Most-Hated YouTube Video of All Time

This is a story about the most-hated YouTube video anybody ever posted to YouTube. In fact, it might just be the most-hated video anybody ever posted anywhere.

Even more embarrassing: it’s a video that YouTube itself posted to the official YouTube Spotlight channel. And people really don’t like it. (It’s embedded below.)

The irony is, this was was supposed to be a big, easy win for YouTube. It’s the YouTube Rewind 2018 video, which is intended to be a feel-good, end-of-year, wrap-up video about YouTube moments and personalities. YouTube has posted a version every year since 2010. It’s usually a fan favorite.

Only, not this year. This year, they blew it big time.

11 million dislikes and counting

After just over a week, the official YouTube Rewind 2018 video now has more “down votes” or “dislikes” than any other video in YouTube history. As of this writing, nearly 130 million people have watched it, and 11 million gave it a thumb’s down.

Compare that to just 2.2 million who clicked that they liked it.

We’ll get into why the video bombed so badly, along with a lesson or two for anyone trying to cultivate an audience. But first, let’s put those numbers in context.

Because until this week, the most-hated video of all time was the video for Justin Bieber’s “Baby,” which has 9.9 million dislikes.

It took eight long years for that many people to vote down “Baby,” and meanwhile the Bieber video also has 10 million likes, so it’s slightly net positive.

YouTube could only dream of hitting those kinds of numbers. 

It’s so bad! (How bad is it?)

Again, the video is below, so you can judge for yourself. I recommend you watch it in Chrome with video speed controller enabled and tuned to 180 percent or so. That’s what I did.

It was still interminable, although I admit I’m not exactly the demo they’re looking for. Anyway, it starts with Will Smith (fair enough), saying that for the 2018 video, he’d like to see lots of Fortnite and YouTube personality Marques Brownlee.

He gets his wish as it cuts to a Fortnite Battle Bus full of YouTubers–including Brownlee.

And from then it goes through a frantic, massive series of jump cuts and quick edits, moving from one YouTuber and scene to another, with almost no context or way to follow what’s going on.

Worse in the minds of many viewers, is that the video ignores many popular YouTube stars in favor of people who aren’t even really YouTubers–like Stephen Colbert, John Oliver and Trevor Noah, for example. And that really created some controversy.

‘A a chaotic barrage of clips’

Don’t just take my word for it, or the thousands of YouTube users who left negative comments, or the millions who down-voted it. Instead, for a fantastic explanation, I’d go to Brownlee, the YouTube personality whom Will Smith wanted to see.

Sure enough, he created a response video (despite the fact that he briefly stars in the original), where he explains the production process and agrees with millions of other people that, yes, it’s pretty horrible.

The problem, he thinks, is that the millions of YouTuber viewers who watched it were expecting what YouTube used to give them in its year-end Rewind videos: a collection of top moments starring the most popular creators.

But YouTube wants something different, as Brownlee puts it: a safe sizzle reel that it can demo for advertisers. So it can’t feature creators like say, PewDiePie, who has the most-subscribed channel on YouTube and sort of represents the site’s original organic creators–but who has also been tied to white supremacists

The result, as Brownlee puts it, is “a chaotic barrage of clips that’s just really hard to watch,” since YouTube wants to give the appearance of including tons and tons of video personalities–without including the ones like PewDiePie that will turn off big advertisers. But that only makes more obvious the omission of some big YouTube stars that YouTube isn’t particularily happy to have.

If YouTube wants to fix the video for next year, Brownlee suggests: “You’ve got to leave some stuff out. You can leave me out. I don’t mind.”

Here’s the infamous YouTube Rewind video–followed by Brownlee’s response. Let me know what you think in the comments.

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California is Considering Taxing Texts. Here's the 1 Insane Detail Hardly Anyone Has Noticed

Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek. 

It sounded bad. 

So bad, in fact, that it was just the sort of thing you’d expect from California.

My home state has a certain reputation —  especially among those who don’t live there — for taxing its inhabitants,

This week, there came news of a potential new tax, one that sounded so Californian as to border on parody.

And a million accusing Eastern fingers pointed toward the west and its serial predilection for socialized nonsense. (I’m not sure how many of those fingers came from East Coasters, how many from Russians and how many from Russians who had emigrated to the East Coast.)

The essence of the tax lies in the fact that people have stopped talking on the phone so much. 

Yes, California currently taxes phone calls. It dedicates the revenue raised to providing the least fortunate with some sort of telecommunications service.

It does the same with other utilities, too.

The phone call revenue has, naturally, fallen as telephonic talking has fallen, so the state proposes taxing texts. Doing this, says California’s Public Utilities Commission, could raise $44.5 million.

Which leaves one small, painful detail: Not many people send text messages.

You might think you do, because texting has become a generic term for constantly saying things in writing to people via your phone — only to occasionally be misunderstood.

Yet the majority of people use iMessage, WhatsApp or even Facebook Messages. These are sent over the internet. 

And, if California suddenly decided it now wants to include these over-the-web services in its tax proposals, does that mean it can start taxing every email? 

Now there’s a delicious revenue-generating idea that could instantly finance so many Californian projects and deter people from sending those dreary reply-all emails that plague business life. 

Naturally, phone industry lobbyists are drinking — I mean, working — late into the night to prevent California’s proposal from being instituted in a vote on January 10.

Should it pass, there might be enormous confusion, with users assuming that all their phone messaging is being taxed? 

What if they stopped texting altogether? 

That simply wouldn’t be the modern world anymore.

Self-Driving Cars? Don't Hold Your Breath

Yeah, yeah, I know. Self-driving cars are just around the corner. Any day now. They’re being tested everywhere. They’re going to revolutionize transportation. Put thousands of Uber drivers and teamsters out of work. Don’t hold your breath.

Despite conventional wisdom, AI programmers haven’t been able to solve basic problems, like identifying pedestrians, or differentiating between dogs and children. AI programmers have totally failed to implement programs that exhibit anything resembling common sense, which is exactly what’s needed to drive in a world full of humans.

According to a recent article on NPR, in California (the only state that requires the reporting of automobile deaths from autonomous vehicles) there have been three deaths in about 10 and 15 million miles of autonomous driving, That compares VERY unfavorably to conventional driving, where it would typically take 260 million miles to result in three deaths.

According to the Guardian, a whistleblower at Uber recently revealed that Uber’s self-driving program results in an accident every 15,000 miles. By comparison, the average human gets in 3 to 4 accidents over 65 years while driving an average of 13,474 miles a year, for roughly one accident every 250,000 miles. That’s a pretty big delta for a technology that’s supposedly right around the corner:

Self-driving cars are particularly hazardous to pedestrians, according to NPR, because their ability to recognize pedestrians somewhat more than 90 percent of the time. Humans, by contrast, are incredibly good at spotting other humans, with a success rate probably around 99.99 percent. Even AI proponents at Carnegie Mellon admit that a five year old child can out perform AI when it comes to common sense decisions. As NPR explains:

“[autonomous vehicles] can’t figure out what a pedestrian is or [what] a pedestrian is going to do. They can’t separate a child from a dog. Sometimes a tree branch overhanging the road will be taken as something in the way.”

Such limitations have huge consequences, as when an autonomous vehicle killed a pedestrian because it couldn’t perceive that she was walking a bicycle. Similarly, simply slapping some stickers on a stop sign–an action that wouldn’t fool a toddler–can confuse a self-driving car.

And that’s far, far beyond the capability of any AI program, because it literally requires human intelligence.

Thus, according to the Guardian, so-called “self-driving” cars will always need a human being present to “take the wheel” when the AI program fails. It should seem obvious, though, that any automobile that requires a human “minder” isn’t really self-driving; it’s just doing cruise control on steroids.

So, while cars will be able to parallel park on their own, and function reasonably well in environments, like freeways, where human behavior is well-delineated, it seems highly unlikely, despite all the rosy hype, that fully autonomous cars are in our near future. Barring the emergence of the “singularity” (which seems unlikely), self-driving cars will remain an oxymoron.

But, but… what about all the breakthroughs we’ve been seeing in AI?

Not ready for prime time, I’m afraid. While AI programmers have successfully improved their programs’ ability to play games with bounded, well defined rules, they’ve been stumped when comes to operating inside environments (like businesses) where the rules are flexible and unbounded.

This is not to say that AI–as currently implemented–can’t be useful. Facial recognition, for example, is good enough to be useful to law enforcement. AI programs can play games (which have bounded rules) much better than humans. AI is excellent at looking for patterns in huge data sets. But none of those functions require common sense, which is required for a fully autonomous vehicle.

I fully expect to get plenty of pushback on this column because I’ve been making similar observations about AI literally for decades and I always get exact same pushback. Every freakin’ time. I’ve come to the conclusion that arguing with AI true believers is like arguing with fundamentalists about the end of the world which )like the long-awaited “singularity”) never seems to actually arrive. 

Apple to push software update in China as Qualcomm case threatens sales ban

SHANGHAI/SAN FRANCISCO (Reuters) – Apple Inc, facing a court ban in China on some of its iPhone models over alleged infringement of Qualcomm Inc patents, said on Friday it will push software updates to users in a bid to resolve potential issues.

FILE PHOTO : An attendee uses a new iPhone X during a presentation for the media in Beijing, China October 31, 2017. REUTERS/Thomas Peter

Apple will carry out the software updates at the start of next week “to address any possible concern about our compliance with the order”, the firm said in a statement sent to Reuters.

Earlier this week, Qualcomm said a Chinese court had ordered a ban on sales of some older iPhone models for violating two of its patents, though intellectual property lawyers said the ban would likely take time to enforce.

“Based on the iPhone models we offer today in China, we believe we are in compliance,” Apple said.

“Early next week we will deliver a software update for iPhone users in China addressing the minor functionality of the two patents at issue in the case.”

The case, brought by Qualcomm, is part of a global patent dispute between the two U.S. companies that includes dozens of lawsuits. It creates uncertainty over Apple’s business in one of its biggest markets at a time when concerns over waning demand for new iPhones are battering its shares.

Qualcomm has said the Fuzhou Intermediate People’s Court in China found Apple infringed two patents held by the chipmaker and ordered an immediate ban on sales of older iPhone models, from the 6S through the X.

Apple has filed a request for reconsideration with the court, a copy of which Qualcomm shared with Reuters.

WHERE’S THE HARM?

Qualcomm and Apple disagree about whether the court order means iPhone sales must be halted.

The court’s preliminary injunction, which the chipmaker also shared with Reuters, orders an immediate block, though lawyers say Apple could take steps to stall the process.

All iPhone models were available for purchase on Apple’s China website on Friday.

Qualcomm, the biggest supplier of chips for mobile phones, filed its case against Apple in China in late 2017, saying the iPhone maker infringed patents on features related to resizing photographs and managing apps on a touch screen.

Apple argues the injunction should be lifted as continuing to sell iPhones does not constitute “irreparable harm” to Qualcomm, a key consideration for a preliminary injunction, the copy of its reconsideration request dated Dec. 10 shows.

“That’s one of the reasons why in a very complicated patent litigation case the judge would be reluctant to grant a preliminary injunction,” said Yiqiang Li, a patent lawyer at Faegre Baker Daniels.

HIT LOCAL SUPPLIERS

Apple’s reconsideration request also says any ban on iPhone sales would impact its Chinese suppliers and consumers as well as the tax revenue it pays to authorities.

The request adds the injunction could force Apple to settle with Qualcomm. But it was not clear whether this referred to the latest case or their broader legal dispute.

Qualcomm has paid a 300 million yuan ($43.54 million) bond to cover potential damages to Apple from a sales ban and Apple is willing to pay a “counter security” of double that to get the ban lifted, the copy of the reconsideration request shows.

Slideshow (4 Images)

Apple did not immediately respond to questions about the reconsideration request and Reuters was not independently able to confirm its authenticity.

Lawyer Li said the case would undoubtedly ramp up pressure on Apple, especially if a ban was enforced.

“I think that Qualcomm and Apple, they always have those IP litigations to try to force the other side to make concessions. They try to get their inch somewhere. That’s always the game.”

Reporting by Adam Jourdan in Shanghai and Stephen Nellis in San Francisco; Editing by Himani Sarkar

Tesla To 90,000: Delivery Forecasts For The Fourth Quarter

Tesla is on track to deliver more than 61,000 Model 3s in the fourth quarter.

Summary

Much is written about Tesla (TSLA) and Elon Musk on this platform and elsewhere. The circus that surrounds Tesla is well-known and heavily-covered on this platform – so I won’t write about any of that here.

Instead, this is simply an attempt to forecast Q4/18 vehicle deliveries based on the best available data. Overall, I estimate that Tesla will deliver ~91,085 vehicles – up 9% from last quarter, including over 61,000 Model 3s. This estimate implies that Tesla will meet their 2018 target for 100,000 Model S and X delivered with a bit of breathing room to spare.

Given analyst revenue estimates of ~3.5% sequential growth, Tesla will need to keep ASPs from slipping more than 4.5% to meet those top-line targets, assuming my estimates are close and assuming the Tesla’s non-automobile units are flat sequentially. Tesla has raised prices several times over the last few months, which should help prevent too much price erosion on their vehicles, although this will be offset by the introduction of the $46,000 Model 3 MR.

In my view, Tesla has a good chance of beating its Model S/X delivery target and a reasonable chance of beating analysts’ top-line estimates. I will continue to hold my Tesla shares.

Model S Delivery Estimate: 14,907 Vehicles

Each of the estimates herein is based primarily on three pieces of data.

Each estimate is based on Tesla’s actual delivery information from past quarters. This data is available in Tesla’s quarterly update letters delivered on earnings day. Tesla also provides estimates of this data in an 8-K filing within a day or two of the end of a quarter. This data provides Tesla’s actual deliveries but is only available quarterly – unlike many manufacturers which provide similar data every month.

This data provides Tesla

(Inside EVs Monthly Plug-in EV Sales Scorecard)

Estimates are also based on monthly estimates for Tesla’s American sales from Inside EVs Monthly Plug-in EV Sales Scorecard. Inside EVs only includes sales in the United States but is updated each month, usually within a few days of the end of the month.

This data is a bit incomplete for the most recent month, as shown above: Spanish Model S registration results are not yet available.

(Tesla Motors Club)

Estimates are further based on European vehicle registration date from Tesla Motors Club. A post on TMC’s forum contains European sales data from each European country, with data updated as it becomes available. This data is a bit incomplete for the most recent month, as shown above: Spanish Model S registration results are not yet available.

Compiling these three data sources into one for the Model S, and combining the data into quarters rather than months, I arrive at the following table:

Compiling these three data sources into one for the Model S, and combining the data into quarters rather than months, I arrive at the following table

(Author based on data from Inside EVs and Tesla Motors Club)

Here, the “Model S Registrations, Europe” is data from Tesla Motors Club, by quarter. “Model S Sales, United States” is data from Inside EVs, also organized by quarter. Total Model S Sales is simply the addition of those two lines and Tesla Deliveries refers to Tesla’s published total Model S deliveries in a given quarter. Most of this data comes from 8-Ks, as Tesla doesn’t usually break down S vs. X deliveries in its quarterly update letters.

As shown, over the past year, sales in Europe and the United States have made up ~85% of sales of Model S vehicles over the past year, with the remainder of sales primarily occurring in APAC and Canada.

We could simply multiply sales by ~1.5x to move from the two-month Q4/18 sales to three-month sales, but history tells us this would be very inaccurate. Why? Because Tesla tends to sell the fewest vehicles in the first month of each quarter and more vehicles in the last month of each quarter:

Tesla Monthly Sales for the Model S and X show monthly seasonality

(Author based on data from Inside EVs and Tesla Motors Club)

As shown, Tesla has had six months where they sold more than 10,000 Model S and X vehicles combined: 9/16, 12/16, 3/17, 9/17, 12/17, 3/18, and 9/18. All of those months are the third month of a fiscal quarter. Indeed, since the start of 2015, Tesla has always delivered the most vehicles in the third month of the quarter.

Thus, simply multiplying the first two-month results by 1.5x will yield inaccurate delivery estimates: Those estimates would have been too low in each of the past 15 quarters.

Tesla will sell nearly 15,000 Model S vehicles in Q418

(Author based on data from Inside EVs and Tesla Motors Club)

To remedy this problem, the above chart includes only the first two months of European registrations and Inside EVs sales estimates from every quarter. For example, last quarter, Insides EVs showed Tesla having Model S sales of 1,200 in July, 2,625 in August, and 3,750 in September. Thus, the above chart shows 3,825 (1,200 + 2,625) Model S vehicles sold in the United States in Q3/18 – excluding the 3,750 reported September sales.

The Tesla deliveries above are actual deliveries for the quarter, and the percentage of sales is sales in the first two months divided by total sales. As shown, last quarter, U.S. and European sales in the first two months of the quarter accounted for 37% of total Model S deliveries in Q3/18.

For Q4/18, I estimate that Tesla will deliver ~14,907 Model S vehicles. This is based on assuming that reported deliveries in the first two months will be 39% of total quarterly deliveries – the average percentage of the last two quarters. Averaging the last two quarters here is conservative compared to using the 37% metric from Q3/18, which would yield an estimate closer to 16,000 Model S deliveries.

Model X Delivery Estimate: 14,923 Vehicles

Tesla Model X is the best-selling SUV EV.

(Author based on data from Inside EVs and Tesla Motors Club)

Last quarter, Tesla delivered 13,190 Model X vehicles. Thus far in Q4/18, Tesla has delivered 5,683 vehicles, although data from Tesla Motors Club is again missing Spain for November. That is a very minor exclusion though, given that Spain is averaging 15.9 Model X registrations/month. Given the level of error inherent in these estimates, the absence of this data is trivial.

We will again take the first two months’ data rather than full-quarter sales data to form estimates: Sales of the Model X show a lot of seasonal variability as in the chart above.

Tesla could deliver nearly 15,000 Model X vehicles in the next quarter.

(Author based on data from Inside EVs and Tesla Motors Club)

Last quarter, first two-month sales in the United States and Europe represented 38% of total Model X deliveries. If we estimate that the same percentage of Model X deliveries occurred in those regions in those months, this suggests that Tesla may deliver ~14,923 Model X vehicles in the fourth quarter.

Notably, while Tesla did not provide a Q4/18 forecast for Model 3 deliveries (or production), Tesla did forecast deliveries for the Model S and X (combined):

In each of the last four quarters, Tesla has suggested that Model S and X deliveries should total 100,000 or more. If Tesla meets my estimates, they would beat this target with a little bit of breathing room to spare:

Tesla Deliveries Q4/17 Q1/18 Q2/18 Q3/18 Q4/18E
Model S/X Deliveries 28,425 21,815 22,319 27,710 29,830?
Cumulative, 2018 21,815 44,134 71,844 101,674?

That said, the margin of error on this estimate is quite high. Notably, this estimate excludes China, which may have seen sales fall off in the fourth quarter. Tesla has denied reports that sales in China fell 70% in October:

“‘While we do not disclose regional or monthly sales numbers, these figures are off by a significant margin,’ a Tesla spokesperson told MarketWatch in emailed comments.”

MarketWatch, Nov 27, 2018

However, even with less dramatic declines than 70% it is possible – perhaps even probable – that these estimates will be too high as Tesla’s U.S. and European sales may make up a higher proportion of total sales given tariffs in China. We’ll find out in January.

Model 3 Delivery Estimate: 61,255 Vehicles

According to Autoweek, the Tesla Model 3 will roll out in Europe in February 2019

(Author based on data from Inside EVs)

The Tesla Model 3 is not available in Europe. According to Autoweek, the Tesla Model 3 will roll out in Europe in February 2019 – well after the end of Q4/18. Because of that, Model 3 deliveries are based solely on data from Inside EVs.

Aside from the United States, the Tesla Model 3 is only available in Canada – it is also not yet available in APAC. Thus, American sales represent the vast majority of Tesla Model 3 deliveries. Last quarter, for example, Inside EVs reported Model 3 sales equal to 97% of total Model 3 deliveries.

in Q2/18, Model 3 sales were higher in the second month of the quarter (May 2018) than in the final month of the quarter (June 2018).

(Author based on data from Inside EVs)

Sales of the Model 3 have not been going on long enough to draw as strong of conclusions as for the Model S and X. Sales appear to show some monthly seasonality: Last-month-of-quarter sales were the highest in four of the five quarters that the Model 3 has been offered. However, in Q2/18, Model 3 sales were higher in the second month of the quarter (May 2018) than in the final month of the quarter (June 2018).

Overall, the trend here is that last-month-sales are becoming decreasingly over-sized for the Model 3. This is based up by first two-month data:

I estimate that Tesla will deliver ~61,255 Model 3 vehicles in the fourth quarter of 2018

(Author based on data from Inside EVs)

As shown, over the past four quarters, first two-month sales have made up an increasing proportion of total sales – from 31% in Q4/17 up to 57% in Q3/18. As the quarters pass, Tesla’s monthly Model 3 sales are becoming flatter and flatter, with respect to in-quarter seasonality.

Because of flattening monthly variations, I will estimate the first two-month sales make up 59% of total Model 3 sales – continuing the 53%, 55%, 57% trend of increase by 2 pp each quarter. Thus, I estimate that Tesla will deliver ~61,255 Model 3 vehicles in the fourth quarter of 2018.

Tesla to 90,000: Total Deliveries Estimate is ~91,085

Tesla will deliver an amazing 91,000 electric vehicles next quarter: More than every before

Tesla will deliver nearly a quarter-million electric vehicles in 2018 - more than twice as many as last year.

(Author based on Tesla filings and own estimates)

In total, my estimates would result in 91,085 Tesla deliveries in Q4/18. This would be a record for the company. This estimate implies ~9% sequential growth in automobile deliveries.

Given 9% sequential growth in deliveries, Tesla should break their own record for the most automotive revenue in a quarter, set last quarter at $6.1 billion. Given the relatively small size of Tesla’s other segments, Tesla would also be very likely to beat their Q3/18 revenue as well.

Last quarter, Tesla earned $6.82 billion in revenue. Analysts at Yahoo Finance expect Tesla to generate $7.06 billion in revenue next quarter, up 3.5% from Q3/18. If automobile sales rise 9% in Q4/18, that may be an achievable target: Tesla would need to prevent automobile ASP from falling more than ~4.5% to beat this revenue target, assuming they ship 91,085 automobiles and assuming that non-automotive segment revenue is flat from Q4/18.

The primary driver for falling ASPs in Q4/18 will be the introduction of the less-costly Model 3 mid-range. Depending on product mix, this $46,000 vehicle could reduce average sales prices substantially, although that decline may be offset by waves of price increases on Tesla vehicles, beginning in the middle of last quarter. Given those price increases, Tesla may have a good shot at beating top-line revenue estimates. We will find out in ~early February.

Happy investing!

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Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Amazon’s Holiday Toy Catalog Is Advertising Parents Actually Want

Never underestimate the market-moving potential of a nagging child. “Mom, Dad, I want THIS for Christmas!” is a phrase that each year leads to billions of dollars of toy sales. And it’s a phrase parents can appreciate, because knowing what your kid actually wants to find under the tree helps minimize Christmas morning tears. Toy manufacturers and retailers spend millions of dollars each year to make sure their products are the ones on everyone’s wishlist, with TV and online ads, special retail displays, and old-fashioned toy catalogs.

The stakes are particularly high this holiday season, since one-time retail juggernaut Toys R Us closed all its US locations earlier this year. Even while its sales were declining, Toys R Us still accounted for around 12 percent of the estimated $27 billion total toy sales in 2017, according to Juli Lennett of NPD Group, the leading toy industry analysts in the US.

With Toys R Us gone, those sales are up for grabs, and Amazon wants them. The digital-first company was already beating Toys R Us in market share. And while it alone was not responsible for the demise of Toys R Us—poor business decisions and its sizable debt were also to blame—Amazon did put intense pressure on the toy store chain with extremely low prices, especially during the past few holidays seasons, using its familiar tactic of sacrificing profit for market share. Toys R Us couldn’t compete. Now Amazon hopes to feed from the carcass.

And so the ecommerce giant went retro this holiday season, mailing out its first-ever print toy catalog, like the one Toys R Us used to be known for. The “Holiday of Play” lookbook from Amazon is 68 pages long and features toys like the über-popular LOL! Surprise dolls, LEGO’s Star Wars Solo, and the Osmos Genius Kit for iPad. An Amazon representative told WIRED the catalog was sent it to millions of customers in November, but wouldn’t give exact numbers. It’s also available at Whole Foods and some physical Amazon store locations, or online in PDF and Kindle form.

The catalog may be made of paper, but it’s designed as a gateway to a digital transaction. What it lacks in pricing information it makes up in QR codes and stickers that kids can use to make note of presents they want their parents to buy. It also works with the Amazon app: Take a photo of the catalog item you (or your kids) want, and the app will pull up the listing and let you buy it from your phone.

“The great thing about a catalog is that it sits on the coffee table, where kids can find it,” says Steve Pasierb, CEO of The Toy Association, a trade group representing American toy manufacturers. “The catalog is a market share play. Amazon has a huge chance to win a lot of those holiday sales.”

Amazon’s top competitors for Toys R Us’ sales are Target and Walmart, according to experts—traditional retailers that have mailed out holiday catalogs for years. And in the wake of Toys R Us closing, both companies decided to devote more shelf space in their retail locations to toys, says Pasierb. With only a handful of physical stores in a few major cities, Amazon’s toy push comes in the form of a dedicated landing page for kids on its website, and its catalog.

“They’re emulating a proven method of doing business, which is the catalog, but using their muscle to engage at a particular time when there are just fewer retailers now that sell toys,” says Richard Gottlieb, CEO of research firm Global Toy Experts. Gottlieb was impressed with Amazon’s catalog, though he far preferred eBay’s catalog, full of weird and wild and expensive one-of-a-kind toys, which launched this season as well.

Amazon and eBay are joining the many other ecommerce companies still finding that print catalogs have value in the digital era. Catalogs are harder to ignore than the clutter of online ads, one footwear startup founder told Digiday earlier this year, explaining that his company gets a slightly higher return on direct mail versus digital-only marketing. Companies can also use data to target catalogs to customers they know are likely to spend more money. And they are a traditional way for families to compile gift wishlists.

“I’m old enough to remember the Sears catalog,” says Gottlieb. “I remember laying on the floor just going through it. I didn’t get much anything out of it. But you know, marking things, studying it in detail. It was wonderful and a wonderful way to communicate with your parents what you want.”

People really want and love catalogs. Take a glance at the reviews for the Kindle version on Amazon’s website. Plenty of customers posted bad reviews, not because they didn’t like the catalog but because they were annoyed that they didn’t get one.

“Why can’t we get a book and why didn’t we get one? We have been prime members for years, have 4 kids, buy lots of toys, and no book. And we can’t order one,” reads the top-rated review right now. “Would love to have the toy catalog delivered through the mail. The children love looking at it and circling what they like. I dont use Kindle. I’ve been a prime member for many years and did not get one,” reads another. A review from November 15 is even more direct: “Disappointed that I didn’t and can not now get a hard copy in the mail even though I have two small children and spend a ton on toys through Amazon Prime. I AM YOUR TARGET MARKET. Speaking of Target – I’ll be doing my toy shopping there because I am THAT petty.”

The disappointment those Amazon reviewers felt speaks to the reason catalogs have worked so well. They’re convenient, above all. Enjoyable, even. And this time of year, when millions of Americans are going to buy toys, it’s easier for children to thumb through a physical catalog that feels like a big book of wonders than a notoriously hard-to-navigate website.

Kids, especially, don’t have a great way to discover toys on the actual Amazon website. Even its dedicated toy section divided by age group is confusing to navigate. And while the site does have a wishlist feature, parents might not trust their kid to trawl through Amazon’s website on their account, since they could accidentally push one button and buy something. A print catalog is a way for Amazon to directly get its offering in front of children, while also giving parents a little bit more control over the process.

The toy catalog is a familiar marketing throwback in an otherwise rapidly evolving industry. Pasierb notes that with the growth in streaming entertainment for kids, the kinds of ads children see have changed. “Unboxing videos, the online kind of stuff is for a lot of our toy companies as important or now more important than traditional television advertising. A lot of our companies that no longer do traditional TV advertising do almost all exclusively digital,” says Pasierb. The highest-paid YouTube celebrity this year, according to Forbes, was a 7-year-old boy making unboxing videos of toys, earning an estimated $22 million in 12 months.

“[These kinds of ads] are entertainment in their own right,” says Lennett. “A lot of these kids, I don’t think they know the difference between watching a show—a real show—versus watching another kid playing with a toy on YouTube.”

“In my household, the word ‘TV’ is gone. Now it’s just ‘shows.’ Children have already fully internalized the idea of on demand, and that disrupts the ad model completely,” says David Carroll, professor of media design at the New School.

But Carroll doesn’t let his two kids watch YouTube, where they might see those ads. I don’t let my three-year-old son watch it, either. We are the exception; a recent Pew survey found that 81 percent of parents do allow their young kids to watch YouTube. Our reasons are less to do with fear of seeing ads than fear that we can’t control the algorithm and our children might get exposed to inappropriate, creepy, or ideological videos. Instead, our kids mostly watch on-demand shows on Amazon Prime, Netflix, iTunes, or Google Play—and those are largely free of ads.

“The only way [Amazon’s toy offerings] are getting in front of my children is through a catalog,” says Carroll. Only Carroll never got an Amazon catalog, despite his prolific Prime usage. Neither did I. Neither did Lennett, who says, “I’m mad I didn’t get one.” Though her kids are teenagers, she buys lots of stuff on Amazon and thought they’d receive one in the mail, as some of her friends did. An Amazon representative declined to comment on how the company decided who to send the catalog to, though the person offered to send me one. (I declined.)

For Amazon, a catalog also fits well with its bigger push into the physical world, with everything from actual store locations to Dash buttons you physically push to order goods. “[Amazon owner Jeff] Bezos has total world domination as the goal. So from that perspective it makes sense that they would not take a digital-only approach. They would take a whatever works approach,” says Carroll.

For world domination, Amazon has to be everything. And everywhere. Even in the living room, where your kid can find it and come up to you whining, “Mom! I want this!” That is, if Amazon sent you one.


More Great WIRED Stories

Kubernetes etcd data project joins CNCF

techrepublic

Kubernetes: The smart person's guide

Kubernetes: The smart person’s guide

Kubernetes is a series of open source projects for automating the deployment, scaling, and management of containerized applications. Find out why the ecosystem matters, how to use it, and more.

Read More

How do you store data across a Kubernetes container cluster? With etcd. This essential part of Kubernetes has been managed by CoreOS/Red Hat. No longer. Now, the open-source etcd project has been moved from Red Hat to the Cloud Native Computing Foundation (CNCF).

What is etcd? No, it’s not what happens when a cat tries to type a three-letter acronyms. Etcd (pronounced et-see-dee) was created by the CoreOS team in 2013. It’s an open-source, distributed, consistent key-value database for shared configuration, service discovery, and scheduler coordination. It’s built on the Raft consensus algorithm for replicated logs.

Also: Kubernetes’ first major security hole discovered

Etcd’s job is to safely store critical data for distributed systems. It’s best known as Kubernetes’ primary datastore, but it can be used for other projects. For example, “Alibaba uses etcd for several critical infrastructure systems, given its superior capabilities in providing high availability and data reliability,” said Xiang Li, an Alibaba senior staff engineer.

When applications use etcd they have more consistent uptime. Even when individual servers fail, etcd ensures that services keep working. This doesn’t just protect against what would otherwise prove show-stopping failures, it also makes it possible to automatic update systems without downtime. You can also use it to coordinate work between servers and set up container overlay networking.

In his KubeCon keynote, Brandon Philips, CoreOS CTO, said: “Today we’re excited to transfer stewardship of etcd to the same body that cares for the growth and maintenance of Kubernetes. Given that etcd powers every Kubernetes cluster, this move brings etcd to the community that relies on it most at the CNCF.”


Must read


That doesn’t mean Red Hat is walking away from etcd. Far from it. Red Hat will continue to help develop etcd. After all, etcd is is an essential part of Red Hat’s enterprise Kubernetes product, Red Hat OpenShift.

Moving forward, etcd will only grow stronger. It being used by more and more companies, as Kubernetes is adopted by almost every cloud container company. In particular, Phillips said, he expects far more work to be done on etcd security.

Related stories:

Marriott Says It Will Pay for Replacement Passports After Data Breach. Here’s Why That’s Likely Baloney.

As you have no doubt heard by now, Marriott disclosed a massive data breach that exposed up to 500 million customer records. Hackers accessed information in the company’s Starwood reservation system, which affected brands such as W Hotels, St. Regis, Sheraton Hotels & Resorts, Westin Hotels & Resorts, and other properties in the Starwood portfolio, the company said. The intrusion apparently began in 2014, two years before Marriott acquired Starwood. This oversight in the M&A process calls to mind another recent, post-acquisition hacker-surprise: Yahoo, whose two mega-breaches remained undetected when the company sold to Verizon last year. Coincidentally, Marriott’s hack is the biggest suffered by a corporation, second only to those at Yahoo.

After news of the Marriott breach came out, Sen. Charles E. Schumer (D-N.Y.) called on the hotel chain to foot the bill and replace people’s passports which were potentially compromised as part of the breach. Marriott quickly promised to cover the cost for as many as 327 million people whose passport numbers may have been exposed. At a fee of $110 per passport, that would put Marriott on the hook to pay up to $36 billion—a price tag equivalent to the value of the entire company, per its market capitalization. A devastating payout.

Here’s the thing though: While seemingly noble, Marriott’s promise is a bunch of baloney. The company said it will follow through on reimbursement only in instances where it “determine[s] that fraud has taken place.” What this caveat conveniently excludes is that Marriott’s hack likely had little to do with fraud and everything to do with espionage. In other words, if you’re a victim, don’t expect remuneration.

As Reuters reported, investigators believe the perpetrators of this attack were Chinese spies. The breach used tools, tactics, and procedures that matched Beijing’s style. The intrusion is said to have begun shortly after a breach of the government’s Office of Personnel Management, which government officials have attributed to China. The Starwood database represents a massive trove of potential intelligence: information on who is staying where, when—a bonanza for building up profiles of targets and tracking people of interest.

Geng Shuang, China’s Ministry of Foreign Affairs spokesperson, issued a statement saying the country “opposes all forms of cyber attack,” per Reuters. He said the country would investigate the claims, if offered evidence. Meanwhile, Connie Kim, a Marriott spokesperson, said “we’ve got nothing to share” about the Chinese attribution claim.

The Marriott breach—which took place quietly over years, as spies prefer—does not appear to have been a cybercriminal score. That’s why the passport payment pledge is probably bunk; nevertheless, if you think you might have been affected, it won’t hurt to follow these steps to refresh your cybersecurity hygiene and better protect yourself.

A version of this article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter Data Sheet. Sign up here.

U.S. accuses Huawei CFO of Iran sanctions cover-up

VANCOUVER/LONDON (Reuters) – Huawei Technologies Co Ltd’s chief financial officer faces U.S. accusations that she covered up her company’s links to a firm that tried to sell equipment to Iran despite sanctions, a Canadian prosecutor said on Friday, arguing against giving her bail while she awaits extradition.

The case against Meng Wanzhou, who is also the daughter of the founder of Huawei, stems from a 2013 Reuters report here about the company’s close ties to Hong Kong-based Skycom Tech Co Ltd, which attempted to sell U.S. equipment to Iran despite U.S. and European Union bans, the prosecutor told a Vancouver court.

U.S. prosecutors argue that Meng was not truthful to banks who asked her about links between the two firms, the court heard on Friday. If extradited to the United States, Meng would face charges of conspiracy to defraud multiple financial institutions, the court heard, with a maximum sentence of 30 years for each charge.

Meng, 46, was arrested in Canada on Dec. 1 at the request of the United States. The arrest was on the same day that U.S. President Donald Trump met in Argentina with China’s Xi Jinping to look for ways to resolve an escalating trade war between the world’s two largest economies.

The news of her arrest has roiled stock markets and drawn condemnation from Chinese authorities, although Trump and his top economic advisers have downplayed its importance to trade talks after the two leaders agreed to a truce.

A spokesman for Huawei had no immediate comment on the case against Meng on Friday. The company has said it complies with all applicable export control and sanctions laws and other regulations.

Friday’s court hearing is intended to decide on whether Meng can post bail or if she is a flight risk and should be kept in detention.

The prosecutor opposed bail, arguing that Meng was a high flight risk with few ties to Vancouver and that her family’s wealth would mean than even a multi-million-dollar surety would not weigh heavily should she breach conditions.

Meng’s lawyer, David Martin, said her prominence made it unlikely she would breach any court orders.

“You can trust her,” he said. Fleeing “would humiliate and embarrass her father, whom she loves,” he argued.

Huawei CFO Meng Wanzhou, who was arrested on an extradition warrant, appears at her B.C. Supreme Court bail hearing in a drawing in Vancouver, British Columbia, Canada December 7, 2018. REUTERS/Jane Wolsak

The United States has 60 days to make a formal extradition request, which a Canadian judge will weigh to determine whether the case against Meng is strong enough. Then it is up to Canada’s justice minister to decide whether to extradite her.

Chinese Foreign ministry spokesman Geng Shuang said on Friday that neither Canada nor the United States had provided China any evidence that Meng had broken any law in those two countries, and reiterated Beijing’s demand that she be released.

Chinese state media accused the United States of trying to “stifle” Huawei and curb its global expansion.

IRAN BUSINESS

The U.S. case against Meng involves Skycom, which had an office in Tehran and which Huawei has described as one of its “major local partners” in Iran.

In January 2013, Reuters reported that Skycom, which tried to sell embargoed Hewlett-Packard computer equipment to Iran’s largest mobile-phone operator, had much closer ties to Huawei and Meng than previously known.

Slideshow (9 Images)

In 2007, a management company controlled by Huawei’s parent company held all of Skycom’s shares. At the time, Meng served as the management firm’s company secretary. Meng also served on Skycom’s board between February 2008 and April 2009, according to Skycom records filed with Hong Kong’s Companies Registry.

Huawei used Skycom’s Tehran office to provide mobile network equipment to several major telecommunications companies in Iran, people familiar with the company’s operations have said. Two of the sources said that technically Skycom was controlled by Iranians to comply with local law but that it effectively was run by Huawei.

Huawei and Skycom were “the same,” a former Huawei employee who worked in Iran said on Friday.

A Huawei spokesman told Reuters in 2013: “Huawei has established a trade compliance system which is in line with industry best practices and our business in Iran is in full compliance with all applicable laws and regulations including those of the U.N. We also require our partners, such as Skycom, to make the same commitments.”

U.S. CASE

The United States has been looking since at least 2016 into whether Huawei violated U.S. sanctions against Iran, Reuters reported in April.

The case against Meng revolves around her response to banks, who asked her about Huawei’s links to Skycom in the wake of the 2013 Reuters report. U.S. prosecutors argue that Meng fraudulently said there was no link, the court heard on Friday.

U.S. investigators believe the misrepresentations induced the banks to provide services to Huawei despite the fact they were operating in sanctioned countries, Canadian court documents released on Friday showed.

The hearing did not name any banks, but sources told Reuters this week that the probe centered on whether Huawei had used HSBC Holdings (HSBA.L) to conduct illegal transactions. HSBC is not under investigation.

U.S. intelligence agencies have also alleged that Huawei is linked to China’s government and its equipment could contain “backdoors” for use by government spies. No evidence has been produced publicly and the firm has repeatedly denied the claims.

The probe of Huawei is similar to one that threatened the survival of China’s ZTE Corp (0763.HK) (000063.SZ), which pleaded guilty in 2017 to violating U.S. laws that restrict the sale of American-made technology to Iran. ZTE paid a $892 million penalty.

Reporting by Julie Gordon in Vancouver and Steve Stecklow in London; Additional reporting by Anna Mehler Paperny in Toronto, David Ljunggren in Ottawa, Karen Freifeld in New York, Ben Blanchard and Yilei Sun in Beijing, and Sijia Jiang in Hong Kong; Writing by Denny Thomas and Rosalba O’Brien; Editing by Muralikumar Anantharaman, Susan Thomas and Sonya Hepinstall

Qualcomm unveils new chip to power 5G smartphones

Visitors are seen by a booth of Qualcomm Inc at the China International Big Data Industry Expo in Guiyang, Guizhou province, China May 27, 2018. Picture taken May 27, 2018.  REUTERS/Stringer

SAN FRANCISCO (Reuters) – Chip supplier Qualcomm Inc (QCOM.O) on Tuesday unveiled a new generation of mobile phone processor chips that will power 5G smartphones in the United States as soon as next year.

The key feature of the Snapdragon 855 chip, launched at an event in Hawaii, is a so-called modem for phones to connect to 5G wireless data networks with mobile data speeds of up to 50 or 100 times faster than current 4G networks.

Mobile carriers are investing in 5G networks and are eager to sell 5G phones and data plans to recoup investment costs.

Qualcomm, the largest supplier of mobile phone chips, said Snapdragon 855 would power Samsung 5G smartphones that Verizon Communications Inc (VZ.N) and Samsung Electronics Co Ltd (005930.KS) said on Monday would be released in the United States in the first half of 2019.

The modem would also enable “computer vision” to help phones recognize objects and faces, and support a new Qualcomm fingerprint sensor that can read a user’s fingerprint through the glass screen of a smartphone.

The Samsung phone would be a major challenge for Apple Inc (AAPL.O), its biggest rival in the premium handset market in the United States as the iPhone maker is locked in a legal battle with Qualcomm. Citing sources familiar with the matter, Bloomberg reported on Monday that Apple would wait until at least 2020 to release its first 5G iPhones.

Reporting by Stephen Nellis; Editing by Richard Chang

Trump panel wants to give USPS right to hike prices for Amazon, others

WASHINGTON (Reuters) – The United States Postal Service should have more flexibility to raise rates for packages, according to recommendations from a task force set up by President Donald Trump, a move that could hurt profits of Amazon.com Inc (AMZN.O) and other large online retailers. The task force was announced in April to find ways to stem financial losses by the service, an independent agency within the federal government. Its creation followed criticism by Trump that the Postal Office provided too much service to Amazon for too little money.

FILE PHOTO – A view shows U.S. postal service mail boxes at a post office in Encinitas, California in this February 6, 2013, file photo. REUTERS/Mike Blake/Files

The Postal Service lost almost $4 billion in fiscal 2018, which ended on Sept. 30, even as package deliveries rose.

It has been losing money for more than a decade, the task force said, partially because the loss of revenue from letters, bills and other ordinary mail in an increasingly digital economy have not been offset by increased revenue from an explosion in deliveries from online shopping.

The president has repeatedly attacked Amazon for treating the Postal Service as its “delivery boy” by paying less than it should for deliveries and contributing to the service’s $65 billion loss since the global financial crisis of 2007 to 2009, without presenting evidence.

Amazon’s founder Jeff Bezos also owns the Washington Post, a newspaper whose critical coverage of the president has repeatedly drawn Trump’s ire.

The rates the Postal Service charges Amazon and other bulk customers are not made public.

“None of our findings or recommendations relate to any one company,” a senior administration official said on Tuesday.

Amazon shares closed down 5.8 percent at $1,669.94, while eBay (EBAY.O) fell 3.1 percent to $29.26, amid a broad stock market selloff on Tuesday.

The Package Coalition, which includes Amazon and other online and catalog shippers, warned against any move to raise prices to deliver their packages.

“The Package Coalition is concerned that, by raising prices and depriving Americans of affordable delivery services, the Postal Task Force’s package delivery recommendations would harm consumers, large and small businesses, and especially rural communities,” the group said in an emailed statement.

A mailbox for United States Postal Service (USPS) and other mail is seen outside a home in Malibu, California, December 10, 2014. REUTERS/Lucy Nicholson

Most of the recommendations made by the task force, including possible price hikes, can be implemented by the agency. Changes, such as to frequency of mail delivery, would require legislation.

The task force recommended that the Postal Service have the authority to charge market-based rates for anything that is not deemed an essential service, like delivery of prescription drugs.

BAD NEWS FOR AMAZON

“Although the USPS does have pricing flexibility within its package delivery segment, packages have not been priced with profitability in mind. The USPS should have the authority to charge market-based prices for both mail and package items that are not deemed ‘essential services,’” the task force said in its summary.

That would be bad news for Amazon and other online sellers that ship billions of packages a year to customers.

“If they go to market pricing, there will definitely be a negative impact on Amazon’s business,” said Marc Wulfraat, president of logistics consultancy MWPVL International Inc.

If prices jumped 10 percent, that would increase annual costs for Amazon by at least $1 billion, he said.

The task force also recommended that the Postal Service address rising labor costs.

The Postal Service should also restructure $43 billion in pre-funding payments that it owes the Postal Service Retiree Health Benefits Fund, the task force said.

Cowen & Co, in a May report, said the Postal Service and Amazon were “co-dependent,” but that Amazon went elsewhere for most packages that needed to arrive quickly.

Cowen estimated that the Postal Service delivered about 59 percent of Amazon’s U.S. packages in 2017, and package delivery could account for 50 percent of postal service revenue by 2023.

The American Postal Workers Union warned against any effort to cut services. “Recommendations would slow down service, reduce delivery days and privatize large portions of the public Postal Service. Most of the report’s recommendations, if implemented, would hurt business and individuals alike,” the union said in a statement. 

Amazon, FedEx Corp (FDX.N) and United Parcel Service Inc (UPS.N) did not return requests for comment.

Reporting by Diane Bartz and Jeffrey Dastin; editing by Bill Berkrot

Google workers demand end to censored Chinese search project

SAN FRANCISCO (Reuters) – More than 200 engineers, designers and managers at Alphabet Inc’s Google demanded in an open letter on Tuesday that the company end development of a censored search engine for Chinese users, escalating earlier protests against the secretive project.

FILE PHOTO: Google’s booth is pictured at the Global Mobile Internet Conference (GMIC) 2017 in Beijing, China April 28, 2017. REUTERS/Jason Lee/File Photo

Google has described the search app, known as Project Dragonfly, as an experiment not close to launching. But as details of it have leaked since August, current and former employees, human rights activists and U.S. lawmakers have criticized Google for not taking a harder line against the Chinese government’s policy that politically sensitive results be blocked.

Human rights group Amnesty International also launched a public petition on Tuesday calling on Google to cancel Dragonfly. The organization said it would encourage Google workers to sign the petition by targeting them on LinkedIn and protesting outside Google offices.

Google declined to comment on the employees’ letter on Tuesday as Alphabet shares fell 0.35 percent to $1,052.28.

Google has long sought to have a bigger presence in China, the world’s largest internet market. It needs government approval to compete with the country’s dominant homegrown internet services.

An official at China’s Ministry of Industry and Information Technology, who was unauthorized to speak publicly, told Reuters on Tuesday there was “no indication” from Google that it had adjusted earlier plans to eventually launch the search app. However, the official described a 2019 release as “unrealistic” without elaborating.

About 1,400 of Google’s tens of thousands of workers urged the company in August to improve oversight of ethically questionable ventures, including Dragonfly.

The nine employees who first signed their names on Tuesday’s letter said they had seen little progress.

The letter expresses concern about the Chinese government tracking dissidents through search data and suppressing truth through content restrictions.

“We object to technologies that aid the powerful in oppressing the vulnerable, wherever they may be,” the employees said in the letter published on the blogging service Medium.

The employees said they no longer believed Google was “a company willing to place its values over profits,” and cited a string of “disappointments” this year, including acknowledgement of a big payout to an executive who had been accused of sexual harassment.

That incident sparked global protests at Google, which like other big technology companies has seen an uptick in employee activism during the last two years as their services become an integral part of civic infrastructure.

Reporting by Paresh Dave in San Francisco; Additional reporting by Cate Cadell in Beijing; Editing by Jonathan Oatis and Tom Brown

How Galia Lahav's CEO Got His Fairy Tale Ending

How did an e-commerce entrepreneur who came late to the social media revolution become an internationally celebrated innovator and build one of the world’s top luxury bridal brands? For Idan Lahav, CEO of Galia Lahav House of Couture, it took both serendipity and a social-centric strategy.

Galia Lahav’s story reads like both an entrepreneur’s field guide for the digital age and an old-fashioned fairy tale. When I recently sat down to talk with Idan, I found him to be a walking case study of a brand leader whose success has been driven by a deep understanding of the connected consumer.

A new vision.

Galia Lahav is a luxury bridal and evening wear brand with a network of 70 stores across 40 countries that for almost a decade has achieved 40 percent year-over-year growth. Though Galia Lahav was founded in 1984 in Tel Aviv, it was only about ten years ago that the current chapter in its story began.  

At that time, Idan was helping his mom with some Galia Lahav tech issues. As he went through the company’s email, he was shocked to discover something that would forever alter the course of the business. Eighty percent of consumer inquiries were coming from locations outside of Israel where the brand didn’t do business (namely, from the U.S. and Europe). It was then Idan realized that Galia Lahav was destined to be a global brand.  

Making up for lost time.

As a self-proclaimed data geek, Idan immediately set about determining what was driving the international traffic since the brand wasn’t investing in ads or PR. As Idan dug deeper, he quickly came to three realizations. First, that the traffic was being sourced through social media. Second, that he was late to the e-commerce revolution. Last, that he had to act now.

Though Idan had virtually no experience with ecommerce or social media, he immediately began to actively feed the social media platforms that were driving traffic to the Galia Lahav site and sold his first couture wedding gown that very day.

As I learned more of the story behind Galia Lahav’s brand ascendency, I heard Idan speak to three key themes for succeeding in the digital age:

Find and focus on your niche.

“A new business that wants to build a brand has to start within a niche or a well-defined product and be very precise with the message it’s sending out,” says Idan. Galia Lahav found and focused on this niche by being among the first brands to understand that today’s brides wanted more curve-accentuating silhouettes and updated designs than those traditionally available on the market.

But in the early days of the brand’s current incarnation, almost no stores would carry its designs, believing them to be too “sexy” or “fashion forward.” After nearly a year of failed tradeshows on multiple continents, funds were nearly depleted and the brand was in danger of folding. But then serendipity struck. At Galia Lahav’s final trade show in New York, three buyers fell in love with the collection. From there, it wasn’t long before the brand’s designs were available in Bergdorf Goodman, Browns, Takami group and other luxury retailers.

Leverage a clear, consistent, agile social strategy.

Idan realized that social media was the brand’s primary link to global clients, and moved quickly to assemble a multi-disciplinary team to develop a clearly defined campaign that was highly consistent across channels.

“The world is flooded with content, so in order to succeed you have to invest in a strong social media team —  a team of experienced trendsetters and active social users, who specializes in creative, conceptualization and content,” says  Idan. “There is also the image specifications for each channel. Everything is constantly changing so you have to adapt quickly and correctly in each platform as well.”

Listen to and learn from connected consumers.

“It would be shameful to receive free feedback and not take it into account when creating new designs,” Idan told me. In creating its collections, Galia Lahav relies heavily on social media for direct feedback.

It’s this commitment to listening to and learning from connected consumers that keeps the brand constantly evolving.  

Idan also spoke to the crucial role of influencers. “Our biggest and most effective source of exposure is through the presence of digital influencers on social media. Real brides and other customers who share their own imagery and experience online are priceless and give the brand another layer.”  

The meteoric rise of Galia Lahav is a testament to what’s possible for brands who are driven by an understanding of the connected consumer and the rules of engagement for the digital age. Though serendipity opened a new chapter for the brand, it was Idan’s social-centric strategy that saw its story through to a fairy tale ending.  

Risk Off Intensifies: As These Attractive Opportunities Fall, The Flight To Omega Healthcare Grows

This week’s Blue Harbinger Weekly digs into specific investment ideas following the powerful market-wide “flight to quality” since October, including a detailed review and trading idea for big-dividend (7.3% yield) REIT Omega Healthcare Investors (OHI), which is now up 44% year-to-date while the S&P 500 is essentially flat (do you think Omega is Overbought?).

We also review the names on our Income Equity watchlist, as well as the results of an attractive Growth Equity stock screen. We provide an update on our market-wide health monitor, and we conclude with some ideas about how you might want to position your investment portfolio going forward.

When Will The “Flight To Quality” End?

As we can see in the above chart, the markets have been selling off since October, and there has been a subsequent “flight to quality” as low-beta high-income sectors (such as REITs) have performed better than high-beta, high-growth sectors such as tech stocks. And as Dr. Brett Steenbarger asks and answers in his recent excellent blog post Oversold In An Oversold Market:

The assumption seems to be that because we’ve seen weakness in stocks, oil, high yield bonds, etc., we are in danger of an outright bear market.

According to his data, the answer to that notion is:

Maybe.

However, look at to REIT expert, Brad Thomas: Realty Income Is A Flight-To-Quality Trade. Specifically, Brad explains:

Mr. Market sees some clouds forming on the horizon and that’s what’s driving the flight-to-quality trade.

Realty Income’s (O) recent strong performance is certainly consistent with the current “risk off” environment, and that’s exactly why many people own high-quality REITs in the first place.

But is the flight to quality trade overdone? Is it time to move some of your chips around? We absolutely advocate sticking to your personal long-term investment strategy, but that doesn’t mean you can’t be opportunistic on the margin.

According to Ariel Santos-Alborna, The Great Rotation (from Growth To Value And Risk-Off) may be underway. Ariel provides lot of good data to support his thesis, and it’s something we keep on our radar for risk management purposes.

And depending on your individual situation, we’ve highlighted some attractive stock-specific opportunities, and dramatic recent stock price moves, in the next section, for you to consider.

Stocks For You To Consider:

1. Watchlist: High-Income Equities…

The following table includes a list of high income securities that we follow (many of which we have written about, in great detail, in the past). These securities generally offer large dividend yields, and many of them have sold off over the last month as the market has sold off (although they haven’t sold-off nearly as much as the names on our Growth Equity list, which we will share later).

One of the first thing to note about this list is the large dividend yields. For example, we’ve had success owning 12% dividend yield New Residential (NRZ), which has recently pulled back in price. We’ve written about NRZ previously here, and encourage investors to consider the big risks before investing. We also currently own Omega Healthcare (a top performer in the table), which we cover in detail later in this report.

2. Watchlist: Contrarian Growth Ideas…

Also worth considering, we ran the following list of more growth-oriented stocks that had been performing so well this year, that they’re still up sharply year-to-date, even after selling off dramatically in recent months as part of the market-wide flight to quality.

The list includes big movers in the technology, consumer cyclicals, and information services sectors (because they tend to contain many of the higher beta growth stocks), but we’ve also been sure to include the FANGs. It’s still hard for us to believe names like Netflix (NFLX) won’t continue to grow rapidly and experience some powerful price reversion back much higher in the future (Netflix is still up 36.6% year-to-date, even after selling-off 22.5% over the last three months. For perspective, the S&P 500 is at the bottom of the table, and shows just how much more volatile the other stocks have been relative to the overall market.

Also, if you’re wondering, the “Money Flow Index” in the table is a technical measure of price and volume, or money flow over the past 14 trading days with a range from 0 to 100. A MFI value of 80 is generally considered overbought, or a value of 20 oversold.

Omega Healthcare Investors:

3. Stock of the Week: Is Big-Dividend REIT Omega Healthcare Overbought?

Big dividend yield (7.3%) REIT Omega Healthcare Investors has been on fire this year, gaining over 44% year-to-date. Granted, the shares have been rising from a low base (related to distress among many of its large operators). However, the company’s recent upbeat earnings announcement, combined with the market-wide “flight to quality,” has benefited the shares significantly. And by many measures, the shares are now approaching “overbought” levels in the short term, irregardless of your views of the stock over the long term (for the record, we like Omega as a long-term income-investment, and we continue to own the shares).

As long-term investors, and before we get into the details of our recent short-term income-boosting Omega options trade (spoiler alert: we sold very attractive covered calls), it’s worth reviewing the current fundamentals behind Omega’s business.

Omega Overview and Recent Challenges:

Omega is a healthcare REIT focused on skilled nursing facilities (“SNF”), and despite favorable long-term demographics, many of its SNF operators have been struggling financially, to put it mildly. As a result, Omega has temporarily halted dividend increases, and has been focused on disposing of certain properties to generate near-term cash flow instead of focusing on long-term growth. As a result, many of Omega’s critical financial health metrics have reached precarious levels as shown in the following table.

And as a result of the precariously high dividend payout ratios and negative Funds From Operationsgrowth (see above table), the shares had understandably sold off dramatically (before the recent sharp rebound).

Specifically, many Omega analysts and pundits were expecting the worst, however Omega remained positive and upbeat in its last two quarterly earnings announcements, and the shares have rebounded dramatically. For example, here’s a very encouraging statement from Omega’s CEO during its most recent quarterly earnings call.

With the bulk of our asset sales and repositioning behind us, we expect that in 2019 acquisitions will meaningfully outpace dispositions, as we return to our historical growth model.

However, in perhaps a new chapter to the recent Omega drama, the shares are becoming dramatically overbought by many technical measures. For example, the 200-day moving average and two-week Money Flow Index show Omega’s overbought levels are increasing sharply while much of the rest of the market (e.g. the S&P 500 (SPY) and Nasdaq (QQQ)) is moving in the other direction and becoming oversold.

Our Omega Trade:

Because we remain bullish on Omega’s long-term prospects (we own shares), but recognize the potential short-term headwinds, we have elected to sell income-generating call options on our existing Omega position. This generates attractive income for us now, and if the shares continue to rise significantly (before our options contract expires on January 18, 2019), they’ll get called away from us (our strike price is $38) at an even larger profit than we already have in the position.

And if they don’t get called away from us before the options contract expires, then we’re happy to keep holding the shares for the long -term, plus we get to keep the attractive premium income we just generated for selling the calls, no matter what.

And worth mentioning, the premium income currently available is higher than usual because market volatility and fear also is higher than usual, as evidenced by the heightened VIX (more on the VIX, and overall market health, later). For perspective, if the shares get called away from us within the next two months (when the contract expires) that’s an extra 35% income for us on an annualized basis (((($38+ $0.40) / 36.28) -1) x (2/12 months) = 35%).

We believe Omega remains an attractive long-term investment despite the climbing near-term technical levels. And as a long-term investor, we view now as an attractive opportunity to boost near-term income with covered calls. Further, if you enjoy the idea of boosting your income with covered calls, Dr. Jeff Miller has been running an outstanding series on boosting your income with calls, and his latest is available here: Boost Your JM Smuckers Dividend Yield.

Overall Market Health:

We view long-term market conditions to be healthy and constructive, whereas near-term conditions warrant caution. Here’s a look at some of the data that goes into our assessment:

Despite the recent spike in volatility and fear (as measured by the market “fear index,” the VIX, aka CBO Volatility Index), and despite the recent market-wide sell off (which has been more pronounced for technology, growth and momentum stocks versus “fight to quality” stocks – such as REITs), long-term market conditions remain healthy. However, in the short term, volatility is persistent, and risk is elevated.

Remember, the risk versus reward trade-off is one of the most basic tenets of investing. Specifically, if you take more volatility risk – you should be compensated, over time, with higher returns. Therefore being a contrarian and “buying low” after/during a sell-off is often a better opportunity if you are a long-term investor. However, there’s certainly no guarantee that the market won’t go much lower in the short- and mid-term. And if you cannot handle the shorter-term volatility (or if you are in a comfortable financial position where you don’t need to take on the volatility risk), then there’s really no need to take on that risk with your investments.

Worth noting, from a short-term standpoint, negative indicators include an elevated Volatility Index (VIX), and an uptick in credit-spreads (which are still low by historical standards), which are both indicators of near-term risk as volatility is persistent. Also interesting to consider, @AlphaGenCapital reminds us that there have never been so many investment grade bonds approaching junk status.

From a long-term standpoint, positive market health indicators include an increasingly attractive S&P 500 forward P/E ratio, low unemployment, low interest rates (even though they are rising), and continuing GPD growth.

Overall, despite elevated near-term risks, the market remains relatively healthy and attractive from a long-term investment standpoint.

Conclusion:

The risk-off flight to quality in recent weeks has been quite pronounced as fearful investors ditch volatile high-growth stocks in favor of lower-risk, lower-beta securities including REITs such as Omega Healthcare. Not only has the market’s preference for REITs helped Omega’s share price, but so too have the company’s last two earnings announcements which were both very positive, especially relative to the dire operator challenges the company has faced (and been working through) over the last year. We like Omega over the long term, and we continue to own the shares. However, we recognize the increasingly overbought technical indicators for Omega in the short term, and we’ve elected to sell income-generating call options against our shares for the reasons described in this article.

More broadly speaking, near-term market volatility has created some attractive investment opportunities across the market, such as those described in this article. It makes sense for investors to be opportunistic around the margin (i.e. pick up a few attractive shares at discounted prices if it’s consistent with your investment time horizon and goals), but don’t ever do anything crazy like ditching your long-term plan out of fear or greed. Be smart. Stick to you plan.

Disclosure: I am/we are long OHI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Insiders Just Bought A 15% Yield At Below Book Value: USA Compression Partners LP

Looking for a dependable high-yield vehicle? The management at USA Compression Partners LP (USAC) have maintained the company’s $.52 quarterly through previous boom and bust cycles:

(Source: USAC site)

If you’ve ever researched how natural gas gets pulled out of the ground, you’ve already discovered that compression is an increasingly important part of the operation. Compression also is a vital element in shale fracking production, which requires more compression than traditional techniques.

Although you wouldn’t know it from its current low price, which is near its 52-week low, USAC is in a good place now – demand for its large horsepower units is robust, and the major acquisition it made of the assets of CDM in early 2018 put it into a dominant position in its industry.

Management referenced this on the recent Q3 ’18 earnings call:

“The overall market for compression services remains very strong, driven by solid natural gas fundamentals and the continually midstream infrastructure buildup, which does not just combine to one region, but rather it’s taking place across the country in areas which we operate. We continue to take advantage of the strong market to push through rate increases while prudently investing capital in the business. Our utilization metrics demonstrate the current strength of the market and we expect continued strength throughout 2019, based on the current visibility for compression services demand.”

Natural gas has multiple drivers – increasing utilization as a replacement for coal at power plants, LNG exports, exports to Mexico, and demand as a feedstock for petrochemical companies, which continue to ramp up their presence in the US, in order to take advantage of larger natural gas supplies:

(Source: USAC site)

Many have posed the age-old question, “Does size matter?” with advocates on both sides of the argument.

However, when it comes to the scintillating world of compression, size does matter, and here’s where USAC has a distinct advantage over its competitors. The trend is toward outsourcing, particularly for large equipment, which tends to be “sticky” – it’s expensive for a customer to demobilize this type of equipment, ($60K – $200K plus), which promotes longer contracts and increasing prices for USAC.

“The market for large horsepower equipment has remained very tight as we’ve experienced throughout the entire year. Demand continues to be especially strong for the very largest horsepower categories in which USA Compression specializes.”

“Compression – the way forward continuing to outsource actually is trending to accelerate. So, I think you’re actually in a very unique time right now that you’ve got limitations on access to capital, you’ve got limitations on access to people and you have limitations on access to new equipment. So, all of those three things together can provide for a perfect storm which we think plays well to our strength of large horsepower infrastructure equipment and will allow us to re-price our book upward over time.”

“We’re in the equivalent of a seller’s market right now where there is a lot of demand and not a lot of supply.” (Source: Q3 call)

(Source: USAC site)

Looking forward, USAC should be able to capitalize on a better pricing environment: “When we look at the spot pricing on the new units we’re deploying, 120,000 some odd horsepower for next year, these are extremely attractive new unit economics, effectively five-year or less cash on cash type of payouts, low 20s, IRR on an levered type of basis.” (Source: Q3 ’18 call)

Distributions:

USAC’s next distribution should have an ex-dividend date sometime in early February. It pays in the usual Feb/May/Aug/Nov LP cycle for LPs, and issues a K-1 at tax time. At a $13.50 price/unit, USAC yields 15.56%, with trailing coverage of 1.02X.

DCF coverage was just 1.01X in Q3 ’18. However, moving forward, management sees additional cost savings synergies from the CDM deal kicking in for 2019, as it finalizes the transition. The entire 900 employees of the company are now using the same customer, contract and asset data systems. This should improve coverage going forward, in addition to forward price increases.

No More IDR’s:

USAC closed on the CDM deal on 4/2/18. CDM was the compression services arm of Energy Transfer Partners LP, and Energy Transfer Equities, which merged into Energy Transfer LP (ET). CMD was valued at ~ $1.8B.

This deal included the following:1. The contribution of ETP’s subsidiaries, CDM Resource Management LLC and CDM Environmental & Technical Services LLC, to USAC.2. The cancellation of the incentive distribution rights in USAC.3. The conversion of the general partner interest in USAC into a non-economic general partner interest. As part of the transaction, ETE acquired the ownership interests in the general partner of USAC, and approximately 12.5 million USAC common units from USA Compression Holdings.

(Source: USAC site)

Earnings:

This table illustrates the impact that the CDM deal has had on USAC’s operations. It was transformative, ramping up revenue and EBITDA by well over 100% and DCF by over 54% in Q3 ’18, while Q2 ’18 saw even larger increases.

USAC had a larger than normal number of legacy CDM field technicians after the CDM deal closed, and also used outside parties to perform routine maintenance on some compression units, which was much more expensive than using internal personnel. It took a while to find the right caliber of technicians, due to a strong marketplace environment, but they’ve fixed the situation, and upgraded their staff talent level.

USAC’s coverage has improved dramatically over the past four quarters, rising from a sub-par .87x (when the GP was relinquishing IDR rights to support the payouts, up to 1.09X in Q2 ’18, and averaging 1.02x over the past four quarters).

Looking forward to 2019, if we use an average of the post-CDM deal Q2 and Q3 2018 DCF figures of $47.5M and $51.4M, respectively, that gives us an average DCF of ~$49.45M/quarter.

We compared and extrapolated that $49.45M DCF average to the Q3 ’18 total cash distributions of $47.02M, which were higher than the Q2 ’18 total of $43.5M.

If USAC’s DCF and total distributions stay flat, we should see 1.05X coverage in 2019. This is without the benefit any cost savings, or additional revenues from price hikes.

Fleet Utilization:

Fleet horsepower was over 3.6M, as of 9/30/18, an increase of more than 53,000 horsepower vs. Q2 ’18. Active horsepower increased 61,000 to over 3.2M, up ~2% over Q2 2018.

Another positive is that management has been able to redeploy ~353,000 horsepower of idle horsepower from the combined fleets at nominal additional capex costs. (CDM’s fleet had a lower utilization rate.) Most of its idle equipment is in the small horsepower category – long before the CDM deal, management had been shifting USAC’s emphasis toward large horsepower equipment.

USAC has had a very stable fleet utilization rate of ~93% for more than a decade:

(Source: USAC site)

Guidance vs. Performance:

Management narrowed its full-year 2018 adjusted EBITDA guidance range to $310 – $320M, and its 2018 DCF guidance range to $170m – $180M.

We pro-rated this 2018 guidance to three quarters to get an idea of USAC’s actual Q1 ‘3 ’18 results compare to the guidance. So far, EBITDA looks roughly in line with the low end of 2018 guidance, while DCF is ~4% above it.

Risks:

Natural Gas downturn – If there’s another protracted downturn in the energy patch, this could lead to a cutback in rigs, and potential demand for compression services, even the large units, which are in tight demand now.

Unlike crude oil, which has had a rough go of it in 2018, natural gas futures are up 34% over the past month, and 46% year to date in 2018. However, producers need compression to get their product out of the ground, which gives USAC a cushion in energy cycles, as its fleet utilization has had a strong, long term record of 93% utilization.

IRA Holders – Holding an LP in an IRA may result in tax complications for IRA holders due to UBTI. You’ll also get more tax deferral advantages from investing in USAC in a taxable account. You should consult your accountant about these aspects of investing in LPs.

Valuations:

At $13.50, USAC is less than 5% above its 52-week lows – its price hasn’t been this low since April 2016. It’s also selling at .85x of book value, and its price/DCF is one of the lower valuations we’ve seen recently.

Analyst’s Price Targets:

That $13.50 price puts it nearly 26% below analysts’ lowest price target of $17.00, almost 44% below the $19.43 average price target.

Insiders Are Buying:

Management just upped its skin in the game last week – they bought 45,000 units at a price range of $13.40 to $13.90.

(Source: finviz)

Financials:

Due to negative net income, which includes heavy non-cash depreciation and amortization charges, USAC has negative ROA and ROE valuations.

The interest coverage factor of just .69X looks poor, when compared to the 1.45X average, but, again that includes a great deal of non-cash depreciation and amortization charges.

USAC’s EBITDA/Interest coverage factor for Q1-3 ’18 was 4.49X.

Debt and Liquidity:

“As of September 30, 2018, the Partnership had outstanding borrowings under the revolving credit facility of $1 billion, $578.2 million of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $309.7 million. As of September 30, 2018, the outstanding aggregate principal amount of the Partnership’s 6.875% senior notes was $725 million.”

(Source: USAC site)

USAC’s Credit Agreement has an aggregate commitment of $1.6B, with a further potential increase of $400M, and has a maturity date of April 2, 2023.

Its 6.875% senior notes Senior Notes mature on April 1, 2026.

Options:

We have options picks for USAC in our Double Dividend Stocks service, which we can’t divulge here, but you can see trade details for over 25 other option-selling trades in our Covered Calls Table and Cash Secured Puts Table.

Summary:

We rate USAC a long-term buy. Demand for its natural gas compression services isn’t going away any time soon, just the opposite. USAC has a strong position in its niche industry, and is well-positioned to benefit from increasing demand for large-scale horsepower compression.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

CLARIFICATION: We have two investing services. Our legacy service, DoubleDividendStocks.com, has focused on selling options on dividend stocks since 2009.

Disclosure: I am/we are long USAC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Gadget Lab Podcast: Pinterest CEO Ben Silbermann on Visual Search

Holidays are supposed to be about presence, not presents, right? It’s about spending time with family and friends and re-prioritizing…right? (Right?) That’s certainly true, but it’s also that time when there’s a tremendous amount of pressure on people to buy gifts for their loved ones, which can be stressful. Fortunately, the Gadget Lab team has some fail-proof gift ideas, and they’re more than happy to share on this week’s podcast.

Later on in the show, Lauren sits down with Pinterest CEO Ben Silbermann for a conversation about the future of visual search, as well as Pinterest’s financial future. Spoiler alert: The company plans to IPO, Silbermann says.

Show notes: If you’re looking for more gift recommendations for the holiday season, check out our annual Wish List; as well as our buying guides for laptops, Android phones, travel-friendly items, and STEM toys. There are also some great deals to be found here.

Send the Gadget Lab hosts feedback on their personal Twitter feeds. Arielle Pardes can be found at @pardesoteric. Lauren Goode is @laurengoode. Michael Calore can be found at @snackfight. Bling the main hotline at @GadgetLab. Our theme song is by Solar Keys.

How to Listen

You can always listen to this week’s podcast through the audio player on this page, but if you want to subscribe for free to get every episode, here’s how:

If you’re on an iPhone or iPad, open the app called Podcasts, or just tap this link. You can also download an app like Overcast or Pocket Casts, and search for Gadget Lab. And in case you really need it, here’s the RSS feed.

If you use Android, you can find us in the Google Play Music app just by tapping here. You can also download an app like Pocket Casts or Radio Public, and search for Gadget Lab. And in case you really need it, here’s the RSS feed.

We’re also on Soundcloud, and every episode gets posted to wired.com as soon as it’s released. If you still can’t figure it out, or there’s another platform you use that we’re not on, let us know.

Chinese online shopping sites ditch Dolce & Gabbana in ad backlash

BEIJING (Reuters) – Chinese e-commerce sites have removed Dolce & Gabbana products amid a spiralling backlash against an advertising campaign that was decried as racist by celebrities and on social media.

The ads – released earlier this week to drum up interest in a Shanghai fashion show the Italian brand later canceled – featured a Chinese woman struggling to eat spaghetti and pizza with chopsticks, sparking criticism from consumers.

The blunder was compounded when screenshots were circulated online of a private Instagram conversation, in which the brand’s designer Stefano Gabbana makes a reference to “China Ignorant Dirty Smelling Mafia” and uses the smiling poo emoji to describe the country. The brand said Gabbana’s account had been hacked.

Amid calls for a boycott, the furore threatened to grow into a big setback for one of Italy’s best-known fashion brands in a crucial market, where rivals from Louis Vuitton of LVMH to Kering’s Gucci are vying to expand.

Chinese customers account for more than a third of spending on luxury products worldwide, and are increasingly shopping for these in their home market rather than on overseas trips.

China’s Kaola, an e-commerce platform belonging to China’s NetEase Inc confirmed it had removed Dolce & Gabbana products while luxury goods retailer Secoo said it removed the brand’s listings on Wednesday evening.

On Yoox Net-A-Porter – owned by Cartier parent Richemont and a leading online high-end retailer – the label’s wares were no longer available on its platforms within China. The company declined to comment.

Checks done by Reuters on Thursday morning also showed pages that previously linked to Dolce & Gabbana items on the e-commerce sites hosted by Alibaba Group Holding Ltd and JD.com Inc were no longer available and searches for the brand returned no products.

Alibaba and JD.com did not respond to requests for comment, and Dolce & Gabbana did not comment on the retailers’ moves.

RESPECT

After its China missteps quickly went viral on China’s Twitter-like Weibo platform, it apologised in a statement on the site.

Celebrities including “Memoirs of a Geisha” movie star Zhang Ziyi criticized the brand, while singer Wang Junkai said he had terminated an agreement to be the brand’s ambassador.

An airport duty fee shop in the southern Chinese city of Haikou said on Weibo it had removed all Dolce & Gabbana products from its shelves.

The Communist Party Youth League, the youth wing of the ruling Chinese Communist Party, said on Weibo “we welcome foreign companies to invest and develop in China … companies working in the country should respect China and Chinese people”.

The gaffe is not the first by Dolce & Gabbana in China, even as it pushes to increase its appeal there. It came under fire on social media last year for another series of ads showing the grungy side of Chinese life.

The unlisted firm does not publish earnings or disclose how much revenue it derives from China.

Other uproars have come and gone in China without appearing to cause lasting damage, including at brands like Kering’s Balenciaga, which apologised in April amid a backlash over how some Chinese customers had been treated in Paris.

But there was an increased chance such controversies could affect sales as buyers became more discerning about brands, some analysts said.

FILE PHOTO: People walk past a Dolce & Gabbana store at a shopping complex in Shanghai, China November 22, 2018. REUTERS/Aly Song/File Photo

“It’s a different market now – Chinese customers are more savvy, and there’s so much more choice,” said Sindy Liu, a London-based luxury marketing consultant.

“A lot of western brands don’t really understand China that well when it comes to cultural sensitivities. But most brands are quite careful, they don’t do things that are humorous.”

Controversial comments by designers can be devastating for luxury brands. In one of the worst fallouts from in the fashion world, Christian Dior, now fully part of LVMH, fired designer John Galliano in 2011 after a video of him surfaced hurling anti-Semitic abuse at people in a bar in Paris.

Reporting by Pei Li and Cate Cadell in Beijing; Additional reporting by Sarah White in Paris and Claudia Cristoferi in Milan, Editing by Himani Sarkar

Sticking to Your Morals Benefits Your Company, Study Says (But There's a Catch)

That little twinge of temptation to cheat. Fudge. Lie. Play favorites. Maybe you’ve felt it. And as hundreds of headlines show us, companies veer off of the rules all the time. But according to research, if you want your business at the top, the one thing you shouldn’t skimp on is your ethics.

Better ethics from leaders, better performance

In a study published in Academy of Management Annals, researchers reviewed more than 300 books, studies and other texts on moral leadership published between 1970 and 2018. They found that the organizations with the highest performance had leaders who prioritized morality. Those companies had employees were more satisfied, engaged, creative and proactive.

But why does sticking to a moral path get this result?

Coauthor Jim Lemoine, assistant professor of organization and human resources at the University of Buffalo, says that the employees tended to see ethical leaders not only as more effective, but also as more trusted. When workers know you stand for something, that you’ll do what you think is right, they feel protected and stable. This subsequently frees them to focus on their jobs better, be more creative and interact with others in a relaxed way.

The big catch: Who decides what’s moral?

As Lemoine points out, what’s “right” can be subjective. As an example, consider the decision to open a new coal plant. One leader might say this is ethical because it provides jobs and relies on a natural resource. Another leader might say it’s not ethical because of the harm to the environment or because there are more cost-effective forms of energy now available.

What’s more, the research study asserts, different approaches to ethics can get different outcomes. For instance, leaders who focus on norms and standards can excel at keeping companies out of hot water legally or politically. But they might twist the rules to their own benefit.

At the end of the day, Lemoine says, there’s no best moral philosophy. Just make sure you have a philosophy you live by. Even as you abide by a particular approach, you should recognize that others might have a way of looking at a situation or the world that’s different than you. This doesn’t make them right or wrong, but it does require that you communicate as openly as possible to avoid conflicts and work better together.

An Obscure Concealed Carry Group Spent Millions on Facebook Political Ads

Among the biggest spenders on Facebook political ads during the midterms are some names you’d probably expect. There’s Beto O’Rourke, who lost to Ted Cruz in Texas’s recent Senate race. There’s President Trump—both his campaign and his Super PAC. There are billionaires like JB Pritzker, incoming governor of Illinois, and Tom Steyer, the environmentalist leading the campaign to impeach Trump. And of course, there’s a multi-billion dollar oil giant, ExxonMobil. But tucked into that list, rounding out the top ten, is one name few have heard of: Concealed Online, a for-profit company that offers an online course and sells online certifications for concealed carry permits in Virginia.

Since May, it’s shelled out more than $2 million on Facebook ads—just slightly less than ExxonMobil, and far more than well-known groups like Planned Parenthood. Its ads warn about the “blue wave.” “MOB RULE IS COMING!” read one series of ads before the midterms. And after: “IT’S ALMOST OVER! The Gun Control Dems are IN.” The ads are laced with heated political rhetoric, but they don’t advocate for political action. Instead, they seem squarely designed to make the company money. They urge Facebook users to “certify online for free to carry concealed” through their website. (The certificates cost $65 to download.)

Concealed Online doesn’t share much more information about who’s behind it. The company’s website gives no indication of who the owner is. Its address as of early November was a virtual office in Burbank, California, but after WIRED inquired about it, the company changed the address listed on its site to Walnut, California. There’s no Concealed Online registered with the California Secretary of State, and the company’s website is registered to a business that buys domains on behalf of clients who don’t want their information disclosed. A legal complaint filed in the Northern District of California in February 2017, however, identifies OrionClick LLC as the parent company of Concealed Online.

WIRED reached out to Concealed Online through an email address on the company’s website. After WIRED received a response from Concealed Online’s lawyer, Karl Kronenberger, the company’s owner agreed to an interview if WIRED did not publish his name. The owner says he chooses to keep his identity private in part because he fears attacks by “crazies,” and in part because his personal politics are “the opposite” of the ones reflected in his ads. He insists he’s not a partisan actor, but an internet marketer, capitalizing on political events to make money.

“We’re opportunistic marketers, sure,” he says. “The point of the ad is to effect a purchase, not influence policy.”

Digital political ads exist in a regulatory no-man’s land. Where political advertisers on radio or television must file disclosures with the Federal Election Commission and include disclaimers about who paid for the ad, no such rules exist in the digital space, though some have been proposed. Even on television, for ads that aren’t purchased by candidates or PACs, the FEC only requires disclaimers on so-called “electioneering communications,” which must be publicly distributed shortly before an election and include clear references to a specific candidate. But the digital gap allows anyone, regardless of motive, to run highly targeted, politically divisive ads, with next to no oversight. With its ad archive, Facebook has tried to institute some transparency into the process. But Concealed Online’s multi-million dollar ad campaign raises questions about how transparent that system really is.

Concealed Online launched in 2016, three years after Virginia started allowing people to take online courses to qualify for concealed carry permits. Those permits are recognized in states across the country, and even non-Virginia residents are eligible. The company’s owner saw a business opportunity in that. So he developed an online training course, where people can watch a video on gun safety, take a test, and instantly download a certificate of competency with a handgun for a fee. You can take the test as many times as you need, making it nearly impossible to fail. I passed without watching the training video and with no firearms experience to speak of. I purposely got questions wrong and still passed.

Once you pass the test, you can download a certificate for a fee, which can then be used by Virginia residents and non-residents as part of an application for a concealed carry permit in Virginia, one of the only states that allows online certification. On its website, Concealed Online specifies that the Virginia permit isn’t recognized in all 50 states and notes that it’s the customer’s responsibility to heed the laws where they live. But the ads WIRED saw don’t include those caveats.

Instead, they feature urgent warnings, like, “The election is just DAYS AWAY and Gun Control Lawmakers could do a FULL STOP 🛑 on your 2nd Amendment rights! FAST-TRACK your Concealed Carry Certification ONLINE! It’s FREE, EASY, and STILL LEGAL! IGNORE AT YOUR OWN RISK.” And yet, Concealed Online’s owner rejects the idea that this is in any way a political ad. “It all depends on the intent of the ad. What’s the call to action? 100 percent of the time our call to action is: Click here to buy our product,” he says. “The intention is to cause a sense of urgency to achieve more sales.”

Concealed Online via Facebook

The Better Business Bureau gives Concealed Online an F rating, in part because it has received 25 complaints, primarily from people who paid for the certificate only to find out that Virginia’s permits aren’t recognized in their state. The most recent complaint was filed last month. The Better Business Bureau opened an investigation into Concealed Online’s ads but received no response. The company’s owner says Concealed Online sells certificates to people living in states like California and Colorado, which don’t accept Virginia permits, because they can use them when they travel to states that do.

Kronenberger, Concealed Online’s lawyer, stresses, “My client didn’t do anything wrong. They followed the law.”

Concealed Online is not the only company leveraging the Virginia permit as a business model. Others like National Carry Academy and US Concealed Online have popped up in recent years offering similar online certifications. The Virginia State Police confirmed the state accepts online certifications, but doesn’t endorse any particular program. But Concealed Online appears to be the only one that spent so substantially on ads in Facebook’s political ad archive. From May through November 10, the company ran 12,961 ads at a cost of $2,185,554, according to the archive report.

Concealed Online’s ads are included in Facebook’s political ad archive because they address an issue of national importance, namely, guns. The company’s owner, however, says his ads shouldn’t be listed alongside super PACS and political campaigns in Facebook’s ad archive, because their purpose is purely commercial, not ideological. In fact, he says business was better when it looked like Hillary Clinton was going to win the presidential election, because people were afraid that “everybody’s going to come take their guns.”

That may be, but in Facebook’s eyes, any ad that talks about guns—or immigration or abortion or any number of other political issues—is considered a political ad. There’s a reason for that. During the 2016 election, Russia’s infamous troll farm, the Internet Research Agency, ran ads focused on divisive political issues, like race and immigration, often, without mentioning a candidate at all. One page, called Black Fist, even posed as a commercial venture offering self-defense courses to black Americans.

Such ads wouldn’t trigger an FEC disclaimer, even if they appeared on television. But the backlash against Facebook and other platforms has been so fierce since 2016, that in its efforts to combat future manipulation, Facebook decided to include both candidate and issue-specific ads in its archive, which stores information on the advertisers and the ads themselves. The company requires these advertisers to go through an authorization process, which includes submitting their government-issued ID and a residential mailing address.

Concealed Online’s owner says he had no choice but to register as a political advertiser when Facebook instituted its new policies. Facebook wouldn’t run his ads until he completed an authorization process, which included sending a letter to his home to prove he was a US resident. But he considers Facebook’s new system to be an overreach. “Facebook made the rule. It’s not a law,” he says.

Facebook confirmed that Concealed Online is an authorized political and issue advertiser. A spokesperson for Facebook said the company has looked into Concealed Online’s ads and they don’t violate Facebook’s policies.

Concealed Online via Facebook

In a lot of ways, the ad archive does make political ads on Facebook more transparent. Before it, there was no way to see everything an advertiser was publishing, who they were reaching, or how much they were spending. Without the archive, Concealed Online’s ads would remain, well, concealed, except to those users who saw them in their News Feeds. Concealed Online is far from the only for-profit business swept up in the archive. Both Ben & Jerry’s and Penzeys Spices are also authorized political advertisers on Facebook. But the opacity of Concealed Online’s business also exposes a blind spot for Facebook and for the regulation of digital political ads in general, says Ann Ravel, a UC Berkeley law professor and former FEC commissioner under President Obama.

Despite all of the noise about protecting elections in Washington and Silicon Valley over the last two years, digital political ads remain largely unregulated. “The law doesn’t cover them,” she says. “My opinion is that it should. This is the essence of where campaigning has gone now.”

Ravel says Facebook’s archive is “not sufficient.” As the case of Concealed Online shows, Facebook’s database can tell you what entity placed the ad, but it reveals little about who’s really behind it. That’s an issue that’s hardly specific to Concealed Online. ProPublica recently reported on a dozen ad campaigns that appeared to be backed by oil giants hiding behind Facebook Pages of different names. And reporters have proved how easy it is to deceive Facebook’s authorization system. Vice News recently tried to buy Facebook ads that were marked as “paid for by” 100 different senators. The ads never ran, but Facebook approved the disclaimers.

With millions of ads being placed in any given election cycle, it’s just tougher for tech platforms to vet each advertiser thoroughly. That makes the problem of transparency, which exists offline, too, all the more difficult to address online. Democratic senators Amy Klobuchar and Mark Warner and the late Republican senator John McCain introduced legislation last year that would impose new disclosure standards on digital political ads, including ads related to “a national legislative issue of public importance,” like the ones Concealed Online runs. But that bill, the Honest Ads Act, hasn’t progressed.

“None of this is covered on the internet by any laws or regulations, no one has even attempted to consider the Honest Ads Act, and the FEC has done nothing,” Ravel says. “It’s really a bad portent.”

Instead, Facebook, Google, and Twitter have all devised their own systems of disclosure. But those systems operate differently and include their own, distinct databases, which are still works in progress. They’re no substitute, Ravel says, for unilateral standards on a federal level.

Facebook, for its part, says the fact that people are asking questions about what they find in the archive is a step in the right direction. During a meeting with reporters at Facebook’s New York office late last month, the company’s global politics director Katie Harbath, was asked about ProPublica’s big oil investigation. “Before this they would never have even seen those ads,” Harbath said. But she, too, noted that the issue of transparency in political advertising is a problem Facebook can’t solve alone. “There’s not a legal structure around some of this yet, particularly when it comes to issue ads and what they’re required to disclose,” she said. “We’re going to be limited somewhat in terms of what we, as Facebook, can do.”

Facebook is rolling out changes to reduce the spread of sensationalist content, which has traditionally gotten the most engagement on the platform. Whether that will have any impact on the effectiveness of ads like the ones Concealed Online runs is unclear. For now, Facebook remains a main source of customers for the company. As Kronenberger put it, “They’re using this language because it’s working.”


More Great WIRED Stories

China's Xiaomi swings to net profit in third-quarter on robust sales in India, Europe

HONG KONG (Reuters) – Chinese smartphone maker Xiaomi Inc said on Monday it swung to a net profit in the third quarter, beating analyst estimates, driven by robust sales in India and Europe.

Xiaomi branding is seen at a UK launch event in London, Britain, November 8, 2018. REUTERS/Toby Melville

Profit for the three months through September reached 2.48 billion yuan ($357.23 million), versus an 11 billion yuan loss in the same period a year earlier. That compared with a 1.92 billion yuan average of five analyst estimates compiled by Refinitiv Eikon.

Xiaomi also said operating profit sank 38.4 percent to 3.59 billion yuan in the third quarter. Revenue rose 49.1 percent to 50.85 billion yuan.

The mixed results come amid a slowdown in smartphone purchases both in China, where Xiaomi once was the top-selling handset brand, and overseas.

Nevertheless Xiaomi, along with fellow low-cost handset makers Oppo and Vivo, accounted for around a quarter of the global smartphone market in the first half of 2018, showed data from researcher IDC.

Xiaomi’s fastest-growing markets are India, where it has had success with its budget Redmi phone series, and Europe, where it entered in 2017 with launches in Russia and Spain. Earlier this month it released its flagship Mi 8 Pro device in Britain.

But to weather the global market slowdown, analysts said Xiaomi needs to expand to new markets and also sell more higher-priced devices with wider profit margins.

The firm has been adding new brands to its smartphone portfolio to target niche consumers. Concurrent with today’s earnings, it announced a partnership with Meitu Inc, a maker of a photo app popular with young women, to sell phones under its brand. Earlier this year it launched Black Shark, a phone targeted at gamers, and Poco, a value-for-money device aimed at India.

Mo Jia, who tracks China’s smartphone makers at research firm Canalys, said attempts to sell more expensive devices requires changing its brand perception.

“It’s still very hard for Xiaomi to change its perception of being a low-end device manufacturer as the majority of its smartphone shipments are the Redmi series.”

Xiaomi also aims to transform itself from a smartphone firm into a software company. As the firm prepared for its IPO, founder Lei Jun touted internet services – namely advertisements placed on the firm’s in-house apps – as its future and key differentiator from other handset brands.

In the third quarter, Xiaomi’s smartphone division grew revenue by 36.1 percent while its internet service division grew 85.5 percent. But phones made up 64.6 percent of total sales, while internet services made up 9.3 percent.

The results are the second set released by Xiaomi since the smartphone maker raised $4.72 billion in an initial public offering (IPO) in June, valuing the firm at about $54 billion – around half of some earlier industry estimates of $100 billion.

Its shares have fallen roughly 20 percent since they started trading in July amid a broader Chinese stock market sell-off and concern about a slowdown in China’s tech industry.

Reporting by Josh Horwitz; Editing by Christopher Cushing

With 1 Simple Move, Google Showed Yet Again Why It's Not the Company You Thought It Was

Absurdly Driven looks at the world of business with a skeptical eye and a firmly rooted tongue in cheek. 

They hope, though, that you don’t notice when those promises become, well, a little diluted over time.

It’s the thought that counts, after all.

One thought offered by Google when it committed itself to your health was that Deep Mind, its profound subsidiary that uses AI to help solve health problems, was that its “data will never be connected to Google accounts or services.”

Cut to not very long at all and Deep Mind was last week rolled into, oh, Google.

In an odd coincidence, this move also necessitated that an independent review board, there to check on Deep Mind’s work with healthcare professionals, was disappeared.

This caused those who keep a careful eye on Google — such as NYU research fellow Julia Powles — to gently point out the company’s sleight of mouth.

This is TOTALLY unacceptable. DeepMind repeatedly, unconditionally promised to *never* connect people’s intimate, identifiable health data to Google. Now it’s announced…exactly that. This isn’t transparency, it’s trust demolition. 

This is, though, the problem with tech companies. 

We looked at them as if they were run by wizards doing things we could never understand.

Any time we became even slightly suspicious, the tech companies murmured that we should trust them. Because, well, we really didn’t understand what sort of world they were building.

Now, we’re living in it. A world where everything is tradable and hackable and nothing is sacred.

A world where the most common headlines about the company seem to begin: Google fined..

I asked Google whether it understood the reaction to its latest Oh, you caught us, yes, we’re going to do things differently now move. 

The company referred me to a blog post it wrote explaining its actions.

In it, Google uses phrases like major milestone and words like excited

It also offered me these words from Dr. Dominic King a former UK National Health Service surgeon and researcher who will be leading the Deep Mind Streams team: 

The public is rightly concerned about what happens with patient data. I want to be totally clear. This data is not DeepMind’s or Google’s – it belongs to our partners, whether the NHS or internationally. We process it according to their instructions – nothing more.

King added:

At this stage our contracts have not moved across to Google and will not without our partners’ consent. The same applies to the data that we process under these contracts.

At this stage.

Oh, but you know how creepily the online world works.

You know, for example, that advertising keeps popping up at the strangest times and for the strangest things.

Within minutes, certain apps on my phone were full of ads for Google’s new Pixel 3 phone. Which I could buy most easily, said the ads, at a Verizon store. 

Who would be surprised, then, if personal health data began to be linked with other Google services, such as advertising?

Too many tech companies know only one way to do business — to grow and wrap their tentacles around every last aspect of human life. 

The likes of Google operate on a basis of a FOMO paranoia that even teens and millennials might envy.

They need to know everything about you, in case they miss out on an advertising opportunity.

You are not a number. You are a lot of numbers. 

And your numbers help Google make even bigger numbers.

Will that ever change? Probably not.

Cloud security: The essential checklist

Cloud security is one of those things that everyone knows they need, but few people understand how to deal with. I

The good news is that it’s actually pretty simple, and somewhat similar to security for your enterprise systems. Here’s a checklist of what you may need and how to make these features work.

  1. Directory service. If you use identity and access management, you need a directory to keep the identities. Although Microsoft’s Active Directory works just fine, any LDAP-compliant directory will work. Note that you need to deal with security at the directory level as well, so the directory itself does not become a vulnerability.
  2. Identity and access management. IAM is needed to ensure that you can configure who is who, who is authenticated, and what devices, applications, or data they can access. This gives you complete control over who can do what, and it puts limits on what they can do. These IAM tools are either native to the public cloud platform or come from a third party.
  3. Encryption services. What specific encryption you needwill largely depend on where you are in the world and the types of things you need to encrypt, as well as if you need to encrypt data at rest, in flight, or both. I say “services” (plural) because you’ll likely ise more than one encryption service, including at the file, database, and network levels.
  4. Security ops. Often overlooked, this is the operational aspect of all of security. Security ops, aka secops, includes the ability to proactively monitor the security systems and subsystems to ensure that they are doing their jobs and that the security services are updated with the latest information they need to keep your system safe.
  5. Compliance management. Another often overlooked security feature, this is where you deal with those pesky rules and regulations that affect security. No matter if you need to be GDPR-compliant or HIPAA-compliant, this is where you have a console that alerts you to things that may be out of compliance and lets you take corrective action.

Of course, you may need more security features than these five types, based on who you are, what sector you’re in, and your own enterprise’s security requirements. However, this checklist provides a solid foundation for security success. Chances are that you’re missing one or two of them.

How Did the 'Freedom From Facebook' Campaign Get Its Start?

In July, executives from YouTube, Facebook, and Twitter testified before Congress about their company’s content moderation practices. While Facebook’s head of global policy Monika Bickert spoke, protesters from a group called Freedom From Facebook, seated just behind her, held signs depicting Sheryl Sandberg and Mark Zuckerberg’s heads atop an octopus whose tentacles reached around the planet.

Freedom From Facebook has garnered renewed attention this week, after The New York Times revealed that Facebook employed an opposition firm called Definers to fight the group. Definers reportedly urged journalists to find links between Freedom From Facebook and billionaire philanthropist George Soros, a frequent target of far-right, anti-semitic conspiracy theories. That direct connection didn’t materialize. But where Freedom From Facebook did come from—and how Facebook countered it—does illustrate how seemingly grassroots movements in Washington aren’t always what they first appear.

The point here isn’t to question Freedom From Facebook’s intentions. Their efforts seem to stem from genuine concern over Facebook’s outsized role in the world. But the labyrinthine relationships and shadowy catalysts of the efforts on all sides of that debate show just how little involvement actual Facebook users have in the fight over reining the company in.

Since the 2016 presidential election, Facebook has confronted an onslaught of scandals, many of which drew scrutiny from federal lawmakers. First, Russian propagandists exploited the social network, using duplicitously bought ads to sway US voters. This March, journalists revealed data firm Cambridge Analytica had siphoned off information belonging to tens of millions of users. In the wake of this second controversy, Freedom From Facebook was born.

The initiative wasn’t formed by everyday Facebook users. It’s instead the product of progressive groups with established records of opposing tech companies, whose own relationships illustrate just how tangled these connections can be.

Specifically, Freedom From Facebook is an offshoot of the Open Markets Institute, a think tank that operated under the auspices of the New America Foundation until OMI head Barry Lynn publicly applauded antitrust fines levied against Google in Europe. Google is a major New America donor; Lynn’s entire team studying tech market dominance and monopolies got the ax, and spun out Open Markets as an independent body.

Earlier this year, former hedge fund executive David Magerman approached Lynn’s group with the idea to start to start a campaign in opposition to Facebook. Magerman poured over $400,000 into what became Freedom From Facebook, according to Axios. His involvement wasn’t known until Thursday. The connected between Freedom From Facebook and OMI was also not entirely explicit.

Freedom From Facebook has done more than stage protests on Capitol Hill. During Facebook’s annual shareholder meeting in May, the group chartered an airplane to fly overhead with a banner that read “YOU BROKE DEMOCRACY.” When Sandberg spoke at MIT in June, Freedom From Facebook took out a full-page advertisement in the student newspaper calling for the social network to be broken up. On Thursday, the group filed a complaint with the Federal Trade Commission asking the agency to investigate a Facebook breach disclosed in September that affected 30 million user accounts.

Freedom From Facebook also formed a coalition with a diverse set of progressive organizations, like Jewish Voice For Peace, which promotes peace in Israel and Palestine, and the Communications Workers of America, a labor union that represents media workers. The coalition now comprises 12 groups, who “all organize around this fundamental principle that Facebook is too powerful,” says Sarah Miller, the deputy director of Open Markets Institute. Confusingly, according to Freedom From Facebook’s website, the coalition also includes Citizens Against Monopoly, a nonprofit Miller says was set up by Open Markets itself.

Eddie Vale, a progressive public affairs consultant, also confirmed in an email that Open Markets hired him to work on the Freedom For Facebook Initiative. He led the protest in July featuring the octopus signs.

Definers began lobbying journalists, including those from WIRED, to look into Freedom From Facebook’s financial ties this past summer. The effort was led by Tim Miller, a former spokesperson for Jeb Bush and an independent public affairs consultant, according to The New York Times. “It matters because people should know whether FFF is a grassroots group as they claimed or something being run by professional Facebook critics,” Miller wrote in a blog post published Friday. He added that he believes the push to connect the group to Soros does not amount to anti-semitism, especially if it contains a modicum of truth. Facebook itself asserted much the same in a statement it released Thursday.

The extent of the Soros relationship seems to be that the billionaire philanthropist does provide funding to both Open Markets and some of the progressive groups who constitute the Freedom From Facebook coalition. There’s no indication, though, that he has any direct involvement with the initiative. Open Markets’ Miller says the think tank wasn’t aware Facebook was paying an opposition firm to ask journalists to look into its work. “I just think knowing Facebook as we do, I don’t know that I would say that we were surprised, but I do think the Soros angle was surprising,” she says.

After The Times published its report Wednesday evening, Facebook severed its ties with Definers. “This type of firm might be normal in Washington, but it’s not the sort of thing I want Facebook associated with,” CEO Mark Zuckerberg said on a call with reporters Thursday. Both Sheryl Sandberg and Mark Zuckerberg claim they didn’t know Facebook was working with Definers until the The Times published its story. This is not the first time Facebook has employed an opposition research firm. In 2011, the social network hired a public relations firm to plant unflattering stories about Google’s user privacy practices.

By distancing itself from Definers, Zuckerberg and Sandberg are putting space between themselves and how the sausage gets made in Washington. As they have grown more powerful, tech organizations including Facebook, but also Google, Amazon, and others, have poured millions into lobbying on Capitol Hill. Those efforts include fighting back against well-funded and sometimes secretive campaigns, like Freedom From Facebook. Meanwhile, the social network’s over two billion users mostly sit on the sidelines, watching the high-stakes battle unfold.


More Great WIRED Stories

These 3 High-Yield Blue-Chips Are Retiree Dream Stocks

(Source: imgflip)

All income investors can agree that safe and rising income is a top priority when choosing dividend stocks. That’s especially true for retirees or those near retirement, who are counting on steady passive income to help pay the bills during their golden years.

This is why most conservative high-yield investors generally stick to non-cyclical industries when looking for good investment candidates. However, even cyclical industries such as energy can sometimes offer great high-yield income growth opportunities that shouldn’t necessarily be ignored. In recent weeks, the price of oil has crashed into a bear market, causing several readers to ask me to offer some top picks for taking advantage of the rapid decline in crude.

So, let’s take a look at not just what’s causing oil prices to dive off a cliff, but why Exxon Mobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) (RDS.B) are three of the best high-yield choices for conservative income investors.

Not just have these three oil giants proven they can deliver safe income (and good total returns) for decades in all manner of oil price environments, but there are five reasons I expect them to continue to do so for the foreseeable future. What’s more from current prices, all three are likely to deliver market-beating returns as well, though Exxon Mobil is my top pick among these three blue-chips for new money today.

What’s Causing Oil Prices To Fall

In recent weeks, the global oil standard, Brent, has flirted with bear market territory.

Chart

Brent Crude Oil Spot Price data by YCharts

West Texas Intermediate, the US oil standard, has had it even rougher. On Monday, November 13th its price plunged nearly 8%, the worst single-day decline in over three years. And that previous decline was during the second worst oil crash in over 50 years, in which crude eventually plunged as much as 76%. In fact, WTI has now fallen for 12 consecutive days, which is the longest losing streak ever, or at least since oil futures began trading in 1983. WTI is now at $56, off $20 or 26% from its recent four-year high of $76. That places US oil firmly in a bear market. What’s causing oil prices to tank so hard and fast? Three things mainly.

In the short-term, there are the Iranian sanctions that were supposed to go into effect on November 5th. Previously some analysts had warned that these could take up to 2 million barrels per day or bpd off the global oil market in a matter of weeks. To offset this, Saudi Arabia and Russia agreed to increase daily production by 1 million bpd to stave off a sharp spike in oil prices. However, thanks to President Trump granting six-month oil importation waivers to eight major oil importing countries (ironically enough that includes China), that big supply disruption hasn’t occurred.

Now, Saudi Arabia has said that it will cut production next month by 500,000 bpd to help stabilize crude prices. However, that decline in supply is being offset by continuing strong growth in US shale production, which the EIA just reported hit a record high of 11.6 million bpd. That’s up 2 million bpd in the past year and is putting the US on track to potentially exceed the EIA’s 2019 US year-end production forecast a year early. According to OPEC’s latest forecast, US shale is expected to drive 2.23 million bpd of new supply in 2019.

Finally, you have rising fears of less rapid oil demand growth next year over concerns that the world economy is slowing. For instance, OPEC’s latest 2019 oil demand growth forecast is down 70,0000 bpd to 1.29 million. That might not seem like much but what has the oil market worried is that it’s the fourth straight monthly growth forecast decrease. Back in July, OPEC said it expected 2019 global demand for crude to rise by 1.45 million bpd. That 11% decrease in expected demand growth has the oil futures market concerned since crude is priced at the margin, thus the reason for its extreme volatility.

So, does this current short-term supply glut, which Wall Street fears might become protracted, mean another oil crash in coming?

Why Another Oil Crash Is Unlikely

Most likely not. That’s because there are major differences between today and the events that led to the oil crash of mid-2014 to early 2016. Most notably back then OPEC threw open the taps to try to drown US shale producers in an ocean of cheap crude. That was because at the time US oil & gas companies were spending not just all of their cash flow to ramp up production but also taking on mountains of debt (because of record low interest rates). At the time, OPEC (and most analysts) estimated that break even shale oil production prices were about $80. So, OPEC gambled that it could quickly bankrupt the industry that was blindly hiking production and stealing its market share.

Today, despite continuing to raise production, most oil companies (who have spent the last four years aggressively deleveraging) are committed to funding production growth with operating cash flow and maximizing returns on investment, not growth for its own sake.

(Source: Pioneer Natural Resources investor presentation)

In addition, breakeven prices for US shale have proven to be far lower than earlier forecasts (as low as $27 for some formations). OPEC now realizes it can’t bankrupt the US shale industry, at least not unless it also guts its own finances. That’s why Khalid al-Falih, Saudi Arabia’s oil minister, said on November 13th. that OPEC (and Russia which has effectively joined it via the so-called “Vienna Consensus”) might cut production 1 million bpd. Note that this 1 million bpd cut would be enough to totally offset the supply glut caused by next year’s non-OPEC production increase. This shows that the world’s major oil producers are NOT looking to repeat the oil price war they kicked off in 2014.

But what about soaring US supply? Well while that has indeed been impressive, consider this. According to the International Energy Agency or IEA 52% of the world’s oil supply is currently coming from legacy fields that are, on average, seeing 6% annual decline rates. This means that just to maintain global supply at current levels requires about 3 million bpd of new production to come online each year. And according to some analyst estimates, the total amount of new production set to come online each year from currently announced oil projects between 2019 and 2022 is just 1 million to 1.5 million bpd.

OPEC estimates that, due to pipeline constraints, US total production, driven mostly by shale, will hit 13.4 million bpd in 2023. That amounts to long-term US oil production growth (over six years) of about 1 million bpd. Which means that even US shale, as might as it is, probably won’t be enough to even close the necessary production gap just to keep current global production steady. Factor in continued (though slower) oil demand growth over the coming years and you get a scenario where another oil crash (to $30 or below) is extremely unlikely.

In fact, taking a longer-term view another major oil crash also seems even less likely. That’s because, according to the EIA, 80% of all new production growth through 2040 will merely offset the natural decline rates of legacy oil fields. As a result, Exxon estimates that the oil industry will need to invest $400 billion annually over the next 22 years ($8.8 trillion in total), just to allow supply to match demand. That is far less spending than what’s currently planned meaning that the long-term outlook for oil prices remains higher, not lower.

However, let’s say I and most analysts are wrong. After all, the oil market has been befuddling nearly all attempts to forecast prices for nearly 150 years. Say that we do have another oil crash. Even then, there are numerous reasons that Exxon, Chevron, and Shell are likely to prove great sources of safe and even rising income for retirees.

1. Exxon, Chevron, And Shell Have Great Dividend Track Records

The first thing income investors should look at with any long-term investment is the dividend track record. You at least want to see a company, even an oil major, able to sustain its payout in all economic, industry, and interest rate environments. Better yet, you’d like to see dividends grow every year, which can help you sleep well at night no matter what the stock price or commodity prices are doing.

Shell’s dividend track record is the third best in the industry, with the company maintaining or growing its payout every year since WWII. Note that Shell did pay part of the dividend in stock during the oil crash, but in late 2017 returned to full cash payouts. However, considering that most oil companies were slashing or eliminating their payouts at this time, this is still a very impressive long-term track record. Especially given that a repeat of the last oil crash isn’t likely anytime soon.

Meanwhile, Chevron’s dividend track record is even better, thanks to 32 consecutive years of dividend increases that makes it one of just three oil industry dividend aristocrats. Exxon is also an aristocrat, having raised its dividend every single year since 1983. That 35-year payout growth streak is the second longest in the oil industry (HP has been raising since 1973) and is but one reason that the stock is so trusted by conservative income investors.

Chart

Brent Crude Oil Spot Price data by YCharts

These three companies’ dividend track records are even more impressive when you consider the context in which they were created. Specifically, they have been maintaining, or growing dividends every year even during prolonged periods when oil averaged about $15 (much of the 1990s), interest rates were as high as 12%, and when financial markets almost completely froze up during the Financial Crisis.

This shows that, barring an even worse recession than 2008-2009, none of these companies is likely to cut its payouts or break its dividend growth streaks. That’s due to their industry leading balance sheets, which for oil companies is the most important dividend safety factor.

2. Industry Leading Balance Sheets Are The Key To Riding Out Downturns

Because oil is a depleting asset, even during commodity crashes, when revenue, earnings, and cash flow fall off a cliff, oil companies must continue to invest billions into growth projects. This means that maintaining or growing dividends, plus growth capex, must be largely funded by debt. As a result, the number one thing conservative income investors need to focus on is an oil company’s balance sheet.

Specifically, five key metrics are important to know, which shows how likely it is that an oil company can ride out a protracted industry and or economic downturn. These are the debt/EBITDA (leverage) ratio, the interest coverage ratio (operating cash flow/interest), the debt/capital ratio, the credit rating, and the average interest cost.

Company Debt/EBITDA Interest Coverage Ratio Debt/Capital S&P Credit Rating Average Debt Cost
Exxon Mobil 0.9 62.6 10% AA+ 1.8%
Chevron 1.0 50.3 17% AA- 2.0%
Royal Dutch Shell 1.2 23.0 26% AA- 4.3%
Industry Average 1.8 11.5 24% NA NA

(Sources: Morningstar, Gurufocus, Fast Graphs, CSImarketing)

Royal Dutch Shell has the highest leverage ratio of these three blue-chips, but still far below the industry average. Chevron and Exxon, not surprisingly, maintain the most conservative leverage ratios in the industry.

Shell’s relatively high debt (among these three) is mostly due to the 2015 $70 billion acquisition of BG, which included a lot of debt assumption but also made Shell the world’s largest liquified natural gas or LNG company. Management has stated it’s making paying down its debt a priority and is targeting a long-term debt/capital ratio of 20%. The company has managed to steadily pay down its debt, which it began to do as soon as oil prices started to recover.

(Source: Shell investor presentation)

But even at current levels, Shell’s cash flow is sufficient to cover its interest costs 23 times over, more than double the industry average.

Chevron and Exxon’s interest coverage ratios are sky-high, which is why each enjoys such strong credit ratings. Shell’s rating was just upgraded by S&P to match Chevron’s for the second strongest in the industry. As a result of their strong balance sheets, all three companies can borrow at low interest rates. However, Chevron and Exxon have been the best at minimizing interest costs thanks to taking advantage of foreign bonds because interest rates overseas are still near zero.

Ultimately this means that Chevron, Exxon, and Shell should have no trouble maintaining and growing their dividends, while still investing in future growth. That’s great news because all three companies have solid long-term growth plans that should ensure years, if not decades, of generous, safe, and rising dividends.

3. All Three Companies Have Solid Growth Plans To Deliver Safe And Rising Dividends In The Future

Exxon Mobil has frustrated investors for years, thanks to upstream (oil & gas) production being essentially flat at 4 million bpd over the past 10 years. However, Morningstar analyst Allan Good actually has a very different take on the company.

We continue to rate Exxon as the highest-quality integrated firm, given its ability to capture economic rents along the oil and gas value chain. While its peers operate a similar business model with the same goal, they fail to do so as successfully, as evidenced in the lower margins and returns compared with Exxon.” – Allan Good, Morningstar (emphasis added)

I happen to agree with Mr. Good and consider Exxon my favorite oil major. That’s for several reasons including the strongest balance sheet in the industry, the second best dividend growth track record, and its superior historical returns on capital.

(Source: Exxon Investor Presentation)

Despite what investors might have thought of former Exxon CEO Rex Tillerson (CEO until early 2017), the man did lead Exxon to the best long-term returns on capital of any oil major. And under his watch, despite some botched acquisitions (which all oil companies occasionally make), Exxon reported the smallest impairments (losses on investments) of any of its peers.

But new CEO Darren Woods (a 27-year company veteran) has a very different vision for Exxon. He still plans to focus spending on the highest return projects, but unlike Tillerson, is very much pro production growth. That’s thanks to what management calls the best long-term investment opportunities in 20 years. During the Q2 conference call, Woods told analysts that Exxon was on track for its extremely ambitious growth plans.

Key projects in Guyana, the U.S. Permian Basin, Brazil, Mozambique and Papua New Guinea are positioning us well to meet the objectives we outlined in our long-term earnings growth plans.” – Darren Woods, Exxon CEO

What are those growth plans? Well to take advantage of the industry’s deeply inadequate capex spending, Exxon is being contrarian and plans to jack up its growth spending in a big way.

  • 2016: $19 billion in capex
  • 2017: $23 billion
  • 2018: $24 billion
  • 2019: $28 billion
  • 2020-2025: Average of $30 billion per year

By 2020, Exxon might be spending the most of any of its peers on growth. But in keeping to the company’s historic focus on maximizing returns on capital, it plans to spend those massive amounts wisely. Here are Exxon’s 2025 goals:

  • Increase production 25% from 4 million bpd oil equivalent to 5 million bpd oil equivalent.
  • Increase chemical production by 30% (40% in North America and Asia).
  • Achieve 20%, 20%, and 15% ROIC on production, refining, and chemical, respectively.
  • Double earnings from refining and chemical.
  • Triple earnings from oil & gas production (at $60 oil).

Overall the company thinks it boosts the company’s returns on capital from 7% in 2017 to 15% in 2025. While that’s slightly below its 10-year average, it would still make Exxon the second most profitable oil company (based on this important metric) behind Chevron. More importantly for income investors, it would mean a massive increase in cash flow.

(Source: Exxon Investor Presentation)

Even should oil prices fall to $40 by 2025, Exxon anticipates that its operating cash flow would increase by 50% and thus generate $15 billion in free cash flow. That’s good enough for a 93% dividend payout ratio at the current rate (which was raised 6.5% for 2018). And if oil prices come in at higher levels than Exxon will become a money minting machine:

Oil Price In 2025

Exxon Annual Free Cash Flow

FCF Payout Ratio (Current Dividend)

Annual Retained FCF

$40

$15 billion

93%

$1.1 billion

$60

$31.5 billion

44%

$17.6 billion

$66 (Current Price)

$34.7 billion

39%

$19.4 billion

$73 (Analyst Consensus)

$38.3 billion

36%

$21.9 billion

$80 (My Best Estimate)

$52 billion

27%

$38.0 billion

(Sources: Exxon guidance, Morningstar, GuruFocus)

Retained FCF is free cash flow (what’s left over after running a company and investing in future growth) minus the dividend cost. Even accounting for Exxon’s likely 6% to 7% dividend growth through 2025 ($20 billion annual dividend cost in 2025) the company will still likely have enough to meet its ambitious future spending plans while maintaining a fortress-like balance sheet.

But how exactly does Exxon plan to achieve such impressive and profitable growth? One strategy is to increase production from its US shale acreage.

(Source: Exxon Investor Presentation)

Exxon estimates that it has about 10 billion barrels of reserves locked up in US shale that can generate 10% or better returns even at $35 oil. In fact, thanks to fracking 3.0 technology (which includes AI driven real-time drilling analysis), Exxon thinks it will be able to lower its break-even cost on US shale to just $20 per barrel over the next six years.

A big reason for that is the superior economics of the Permian Basin, where multiple layers of oil-bearing rock are tightly stacked on top of each other. In 2017, Exxon spent $6.6 billion to acquire Bass Energy Holdings, which doubled its Permian reserves to about 6 billion barrels. Since then both further bolt-on acquisitions, as well as organic discoveries, have increased those reserves a further 66%. Exxon expects that by 2025 its Permian production will have increased five-fold, and all while generating exceptional returns on capital (30+%). But the Permian is expected to account for just 60% of Exxon’s 1 million in daily oil production growth. The remaining oil increases are coming from several of its very promising global growth projects.

One of the most exciting is Guyana, the small South American country. Exxon had previously announced eight major oil discoveries off that country’s coast totaling four billion barrels of recoverable oil.

(Source: Exxon Earnings Presentation)

That figure is actually likely to rise since Exxon just announced a 9th major Guyana offshore discovery. Management is so confident that even more oil pockets remain to be discovered that it has deployed a second exploration ship to the country to keep looking for even more offshore deposits.

Now it’s important to note that Guyana is still an early project for Exxon. Production is expected to start in 2020 and hit just 100,000 bpd by the end of that year. But by 2026 (beyond Exxon’s current mega-growth plan) Guyana production is expected to rise 700% to 800,000 bpd. And if the company keeps finding new deposits that figure could ultimately rise to 1 million bpd or more over time. For context remember that Exxon’s entire seven-year growth plan calls for 1 million bpd in extra production meaning that Guyana alone would be enough to get the company the majority of the way there, even account for ongoing natural depletion from existing wells.

The next major growth opportunity is Brazilian offshore.

(Source: Exxon Earnings Presentation)

Since the oil crash, Exxon has managed to lower production costs for offshore drilling that even at $40 oil (40% lower than current price) it expects to be able to generate at least 10% returns on its Brazilian operations.

But as if the Permian, Guyana, and Brazil weren’t enough Exxon is also planning to give Shell a run for its money in terms of trying to become the world’s largest producer of LNG.

(Source: Exxon Earnings Presentation)

Exxon is currently working on two major LNG projects in Papua New Guinea and Mozambique that could potentially boost its 2025 LNG capacity to double that of its nearest rival today.

The bottom line is that Exxon today offers investors a great opportunity to benefit not just from a generous, safe and growing dividend, but also has the long-term vision to deliver some of the industry’s best dividend growth long into the future.

Chevron: Growth With Laser-Like Focus On Maximizing Returns On Capital

Chevron is my second favorite oil major and might one day even top Exxon for my number one pick in the industry. That’s because, like its slightly larger aristocrat cousin, Chevron has a proven shareholder friendly track record of dividend growth, but also excellent long-term capital allocation resulting in great returns on investment.

New CEO Mike Wirth (who took over in 2018 and has been with Chevron for 26 years), has outlined the most conservative capex plans of any of these three companies, just $18 to $20 billion per year through 2020. However, thanks to putting that money to good use (75% of capex will be producing cash flow within two years) in its best growth opportunities in the Permian Basin, Gulf of Mexico, West Africa, and Western Australia, the company expects that to drive industry-leading production growth of 4% to 7% annually.

(Source: Chevron Investor Presentation)

Chevron has been killing it in 2018, thanks to superior execution allowing it to update its 2018 production growth guidance to 7%, the top end of its medium-term plan. And that’s even accounting for continued non-core asset sales. Chevron’s Q3 production soaring 9%, mostly thanks to the company’s booming Permian operations.

(Source: Chevron Annual Report Supplement)

Chevron owns 1.7 million net acres in the Permian, which is the crown jewel of its shale assets. Those assets include an estimated 17.5 billion barrels of recoverable oil equivalent, about 25% of the company’s total reserves. Chevron has been steadily adding to its Permian acreage, including 70,000 acres in 2017 and plans to buy 90,000 more in 2018.

Chevron’s love of the Permian is for the same reason that Exxon is so bullish on the formation. Massive, low-cost reserves that allowed the company’s Permian production to grow by 80% YOY in Q3. In fact, Chevron’s Permian production of 338,000 bpd in the last quarter was over 100,000 bpd more than its previous guidance back in March. The oil industry has high amounts of execution risk (bringing projects in on time and on budget) and so far, the Permian is allowing big oil to not just meet expectations, but exceed them by a country mile. Analysts currently expect Chevron’s Permian assets to be able to more than double in the coming years, to 700,000 bpd.

But Chevron is far from purely focused on US shale oil in the Permian. It also owns 873,000 net acres in the hyper-prolific Marcellus/Utica shale of Pennsylvania, Ohio and West Virginia.

(Source: EQT Midstream Investor Presentation)

Production in both formations is growing like a weed and that’s expected to continue for the foreseeable future. While natural gas is not nearly as profitable as oil, the reason that Chevron still invests heavily in it is that gas has a much longer growth runway than crude.

(Source: US Energy Information Administration)

According to the EIA, US oil production is expected to peak in 2030 and then start declining around 2043. But thanks to strong export demand growth from emerging markets like Mexico (gas), and India and China (LNG), US gas production is expected to keep growing steadily through at least 2050.

But it’s not just US gas that Chevron is planning to grow its production in. Like Exxon and Shell, Chevron is betting big on the future of LNG. After several years of costly delays and cost overruns, the Australian Gorgon and Wheatstone LNG projects are now complete and ramping up quickly. By the end of the year, Chevron expects these two projects to be generating the equivalent of 400,000 barrels of oil. Those projects are price indexed to oil (thus higher margin) and expected to see minimal depletion rates over the next 20 to 25 years.

But production growth for its own sake is worthless to income investors. Cash flow, especially free cash flow, is king. Which brings me to the other major reason I like Chevron so much.

(Source: Chevron Investor Presentation)

Chevron has been among the most aggressive cost-cutters among the oil majors and by 2020 expects to lower its average production cost 50% compared to 2014. Combined with strong medium-term growth in production that equates to very strong growth in operating cash flow, and even better growth in free cash flow.

(Source: Chevron Investor Presentation)

Even assuming just $60 oil by 2020, Chevron estimates that its free cash flow will increase 30% between 2017 and 2020. That’s the biggest FCF increase of any oil major and Chevron is currently beating that impressive guidance by a wide margin. Specifically, higher oil prices have allowed it to generate $14.3 billion in FCF in the past 12 months, compared to just $9.2 billion forecast for the end of 2020. The company’s river of FCF is what allowed it to pay down $2.4 billion in debt in Q3 while also buying back $750 million in stock (part of a $3 billion buyback authorization).

Ok, so maybe Chevron is having a great year, but what about if oil prices crash below $60 and stay there? Well the good news is that, even without asset sales, Chevron’s lean operations can sustain the dividend at $50 oil. That’s a level that the Russia and Saudi Arabia won’t likely allow it to fall below.

(Source: Chevron Investor Presentation)

And since oil is likely to go higher in the coming years, not lower, that bodes well for Chevron returning to its former industry leading dividend growth rate.

(Source: Chevron Investor Presentation)

Beyond 2020, Chevron is going to need to accelerate capex spending, since the strong production growth is mostly being driven by earlier projects and the Permian. But even over the long term, analysts expect Chevron to deliver 4% production growth and industry leading 20% returns on capital (by 2020). If Chevron can indeed pull that off, it will overtake Exxon as the highest-quality oil blue-chip you can own.

Shell: Betting The Future On LNG

Shell is still an oil company and so part of its $25 billion to $30 billion in annual capex spending over the coming years will be focused on increasing oil production by 1 million bpd or 25% above 2017 levels.

(Source: Shell Investor Presentation)

However, while that kind of production growth is impressive enough for an oil major, Shell’s biggest growth efforts are focused on boosting its LNG capacity by 50%. That’s because, while oil demand growth is expected to continue rising for decades, gas demand is expected to rise much faster.

(Source: Shell Investor Presentation)

The reason that Shell is so gungho on LNG specifically is that it’s the most cost-effective way for transporting large amounts of gas around the world (LNG is 1,000 times denser than natural gas in its standard form). Asian gas demand is expected to grow 3% annually through 2035, which is three times the growth rate of energy in general.

(Source: Shell Investor Presentation)

In fact, Shell expects that global LNG demand will be the fastest growing part of the fossil fuel industry, courtesy of Asia’s enormous demand growth, mostly due to emerging markets like China and India.

(Source: Shell Investor Presentation)

Shell’s LNG focused growth strategy began in 2012 when it began construction of the $12 billion Prelude floating gasification ship (Shell owns 68% of the project).

(Source: Shell Investor Presentation)

The Prelude is 1601 feet long, displaces the equivalent of six US supercarriers and is now complete and generating LNG 300 miles off the coast of North Western Australia. Shell expects to keep the ship there for the next 20 to 25 years where it will feed off cheap natural gas and produce 5.25 million tons per annum or MTA of LNG, gas condensates, and liquefied petroleum gas. This will then be shipped to export markets in Asia, mostly via Shell’s own LNG tanker fleet (it owns 20% of the world’s LNG tankers).

Which brings us to the second part of Shell’s LNG pivot. That would be the BG acquisition which made Shell into the world’s largest producer and shipper of LNG. While that deal involved a lot of stock, Shell has said it will buy back $25 billion worth of shares between 2017 and 2020 to neutralize that dilution.

Ultimately, the BG acquisition is likely to prove a big win because it has made Shell the top name in global LNG (for now). The company plans to pad that lead via even bolder investments by recently announcing it will be going forward with LNG Canada. This joint venture is already included in the company’s annual capex budget and expected to generate 14 million MTA of low-cost LNG. That will then be exported to Asia, at about 5% lower overall cost (including shipping) which gives Shell a major competitive advantage over rival LNG shippers operating from America’s Gulf Coast.

(Source: Shell investor presentation)

Shell expects to generate about 13% returns on capital from this project, which is above its 2021 target of 10% return on capital company wide (up from 8% in 2017).

(Source: Shell investor presentation)

As a result of its strategic growth plan, Shell expects to be able to average $25 billion in annual free cash flow between 2019 and 2021 at $60 Brent oil, and $30 billion at $65 crude.

Today, Brent is $66, and most analysts think it’s likely to average around $73 over the next few years. Note that assuming Shell’s forecasts come true its dividend payout ratio will fall to 47% to 56% during the next few years. However, should Brent indeed average $73, then Shell is likely to enjoy even greater FCF, courtesy of its impressive cost discipline (production costs are down 35% since the oil crash and overall capex spending is 40% lower). That potentially greater FCF would then be funneled into larger dividend hikes (though still modest) and more aggressive share buybacks.

Note also that Shell has stated it plans to invest $1 to $2 billion per year into alternative energy, as it starts planning for a post-fossil fuel world. Management expects its “new energies” segment to generate 8% to 12% returns on capital, in line with its overall company profitability.

The bottom line is that all three of these oil blue-chips have ample financial resources to fund aggressive growth in their businesses, all while also delivering generous, safe and rising income over time. That in turns should also allow them to generate marketing-beating total returns.

4. All Three Offer Generous, Safe Income And Good Return Potential

The most important part of any income investment is the dividend profile which consists of three parts: yield, safety, and long-term growth potential. Combined with valuation it’s what tends to drive total returns.

Company Yield TTM FCF Payout Ratio 10 Year Projected dividend growth Projected 10 Year Total Return (From Fair Value) Valuation Adjusted Expected CAGR Return
Exxon Mobil 4.2% 81% 6% to 7% 10.2% to 11.2% 13.3% to 14.3%
Chevron 3.9% 59% 6% to 7% 9.9% to 10.9% 10.4% to 11.4%
Royal Dutch Shell 6.0% 85% 1% to 3% 7% to 9% 7.5% to 9.5%
S&P 500 1.9% 38% 6.4% 8.3% 0% to 5%

(Sources: Morningstar, Simply Safe Dividends, Fast Graphs, BlackRock, Vanguard, Yardeni Research, Multpl.com, Gordon Dividend Growth Model, Dividend Yield Theory)

All three oil giants offer very attractive yields, at least double that of the S&P 500. More importantly, those dividends are low-risk thanks to sustainable FCF payout ratios and fortress like balance sheets.

Over the long term, Exxon and Chevron are likely to continue their historical 6% to 7% dividend growth rates, courtesy of their robust FCF. Shell on the other hand, represents a tradeoff. You get a much higher yield today, but much slower historical long-term dividend growth. Given management’s priorities (deleverage and buybacks first through 2020), I don’t expect Shell to deliver more than about 2% payout growth, essentially offsetting inflation.

Combining yield with long-term dividend growth (Gordon Dividend Growth Model, effective for dividend stocks since 1956), we can estimate what each company’s long-term total returns will likely be from fair value. Exxon and Chevron are pretty evenly matched with Shell bringing up the rear with about 8% return potential. That’s below the S&P 500’s 9.2% historical total return, but likely to beat the market over the next five to 10 years. That’s because Morningstar, BlackRock and Vanguard expect just 0% to 5% CAGR total returns from the market over that time.

However, those expected total returns are from fair value, and when we adjust for valuations we find that, Exxon, among these three blue-chips, becomes the best stock you can buy today.

5. Valuation: All Three Are Buys But Exxon Is The Place For New Money

Chart

XOM Total Return Price data by YCharts

Thanks to the recent plunge in crude prices, all three stocks are underperforming the S&P 500 over the past year. But for value investors such underperformance merely presents better buying opportunities.

There are many ways to value a stock, but for dividend blue-chips, one in particular has proven highly effective since 1966. It’s called dividend yield theory or DYT, and it’s been what asset manager and newsletter publisher Investment Quality Trends has been exclusively using to beat the market for decades (and with 10% lower volatility to boot).

(Source: Investment Quality Trends)

DYT works well for stable dividend stocks whose business models (and growth rates) don’t change much over time. It compares a stock’s yield to its long-term historical norm to determine whether or not a stock is overvalued, undervalued, or fairly priced. That’s because dividend stocks tend to have mean reverting yields that cycles around a relatively fixed point over time. Thus, their historical yields can be thought of as a “fair value yield” at which buying a quality company is a good idea.

Company Yield 5 Year Average Yield 13 Year Median Yield Estimated Fair Value Yield
Exxon 4.2% 3.5% 2.6% 3.1%
Chevron 3.9% 3.9% 3.5% 3.7%
Royal Dutch Shell 6.0% 6.0% 5.4% 5.7%

(Sources: Simply Safe Dividends, Gurufocus)

For my fair value yield, I take the midpoint between a stock’s five year average yield and 13 year-median yield. That gives you a more accurate sense of what the market values each company at across various economic, industry, and interest rate environments.

Today, Chevron’s and Shell’s yields are trading slightly above their fair value yields indicating both are good buys. However, Exxon’s yield is far above its historical yield meaning it’s the most undervalued of the three.

Company Discount To Fair Value Upside To Fair Value 10 Year CAGR Valuation Boost Expected CAGR Total Return
Exxon 26% 35% 3.1% 13.3% to 14.3%
Chevron 5% 5% 0.5% 10.4% to 11.4%
Royal Dutch Shell 5% 5% 0.5% 7.5% to 9.5%

(Sources: Simply Safe Dividends, Gurufocus, Dividend Yield Theory)

At today’s prices, I wouldn’t expect much valuation boost from Shell and Chevron, but Exxon is likely to outpace its cash flow and dividend growth significantly (about 3% CAGR over the next decade). Add in this long-term valuation boost to the current yield and long-term dividend growth rate (valuation adjusted Gordon Dividend Growth Model) and Exxon offers the best total return potential by far. That’s not to say that Chevron and Shell won’t generate decent returns as well, but for new money today I consider Exxon the best option for conservative high-yield investors.

Of course, that’s only if you’re comfortable with the rather complex risk profile that comes with owning any oil stock.

Risks To Consider

While Exxon, Chevron and Shell are the lowest risk dividend blue chips in the industry that doesn’t mean they don’t still have a complex set of risks that investors need to be comfortable with.

The first is, of course, that their sales, earnings, and cash flow are highly dependent on oil & gas prices, which as we’re seeing now is extremely hard to predict.

(Source: ConocoPhillips Investor Presentation)

And given the capital-intensive nature and long lead times for major production growth projects, that can make profitable long-term capital allocation decisions challenging. For example, ConocoPhillips’s (COP) proprietary long-term oil forecast model shows that oil could realistically average anywhere from $40 to $82 per barrel by 2025. The actual price will depend on hundreds of factors including long-term growth rates in the global economy, the rate of alternative energy adoption, and how quickly US shale production ramps up and for how long. And that’s just a few of the things that oil companies must guesstimate when making their long-term investing plans.

Analyst and government agency models are similarly volatile and uncertain. For example, last year, analyst firm McKinsey, in its long-term (through 2050) energy industry report, estimated that peak global oil demand might come as early as 2030. That’s far quicker than most large oil companies (and government agencies) expect (the 2040’s). This year’s updated report now puts that peak oil demand estimate at 2036. While that’s closer to the current industry consensus, the point is that long-term demand forecasts can be nearly as volatile as the short-term price of crude itself.

Now, of course, the good news is that oil giants are not just in the oil business, but the gas business too. And even with the rapid adoption of electric vehicles or EVs, rising demand for baseload electricity from gas-fired power plants is expected to still see natural gas (and LNG) demand increase through at least 2040 and potentially 2050.

(Source: Exxon Mobil investor presentation)

But here too we must remember that these long-term projections are merely current best guesstimates that can change over time. Improved renewable energy (including low-cost storage) technology might end up disrupting natural gas power far quicker than most analysts, government agencies, and oil companies currently expect. For instance, one analyst at Credit Suisse thinks that renewable energy might “effectively be free” by as soon as 2030.

Now I track both the fossil fuel and renewable energy industries closely and while I agree that renewables + storage prices will drop substantially over time, I consider such a forecast to be highly unlikely. But the point is that even if natural gas isn’t made obsolete within the next decade, today’s oil & gas investors are relying on a far longer growth runway that might actually exist.

And of course there are plenty of other risks that oil companies and investors need to contend with including:

  • cost overruns and delays on new projects (between 1993 and 2003 13% of global oil projects ended up 40% over budget)
  • complex regulatory environments all over the world (including in unstable emerging markets)
  • investment losses due to sanctions (such as against Russia)
  • seemingly never-ending lawsuits filed by US cities and states over climate change in an attempt to recreate a tobacco industry-style class action mega-settlement.

With so many risk factors to content with conservative income investors are better off sticking with time-tested blue-chips like Exxon, Chevron and Shell. These companies have not just the enormous financial resources to deal with inevitable setbacks but are also the most likely to be able to eventually transition to a renewable energy-focused future. Or to put another way, while most oil stocks are unlikely to be “buy and hold forever” investments, these three giants are the most likely to be able to eventually pivot and not just survive in the coming decades, but thrive and continue delivering solid income quarter after quarter.

Bottom Line: The Oil Industry Is Volatile But Exxon, Chevron And Shell Are Three High-Yield Stocks You Can Rely On

The oil industry is known for its volatility and complex risk profile. That’s why for conservative income investors it’s generally a good idea to stick to time-tested high-yield blue-chips. Companies like Exxon, Chevron, and Shell have proven over decades that even oil stocks can make great dividend stocks. That’s because all three companies have:

  • industry leading balance sheets that let them maintain dividends and invest in growth even during oil crashes
  • shareholder-friendly corporate cultures dedicated to safe and growing dividends over time
  • good long-term growth plans that should allow all three to deliver strong total returns in the coming years

And thanks to the most recent oil bear market, all three of these high-yield blue-chips are once more trading at attractive valuations that make them good buys today. However, Exxon is by far the most undervalued which makes it my top recommendation for conservative income investors looking for direct exposure to the oil industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Netflix Subscribers Will Pay Less (Or Possibly More) Depending on Where They Live, According to 2 Surprising Reports. Here Are the Details

It’s releasing 700 new shows this year. Think about that. It’s almost two new shows per day, counting new seasons of existing series.

And it turns out many subscribers absolutely love it. In fact, a new study by a Wall Street firm says a majority of U.S. Netflix users would be willing to pay a lot more for the service –40 percent or more than they currently pay.

That has to be tempting to Netlix, which simultaneously has spent $8 billion to produce and license new shows.

And it’s why the same Wall Street firm, Piper Jaffray, is predicting that Netflix will “bump pricing up across many of its markets in 2019,” according to Business Insider, because a “primary determinant in the ability of Netflix to raise price is subscriber perception of content quality.”

Or to put it a bit more plainly: people like it, so they’re willing to pay more, so you can expect Netflix to charge more.

That makes sense. But the news comes in the context of another report–one that says Netflix is actually playing around with an idea to charge less in other parts of the world.

Last week, a Malaysian news site called The Star Online reported that Netflix was trying a somewhat stripped down, mobile device-only subscription plan that goes for 17 Malaysian ringgit a month–which works out to about $4.25 in U.S. currency, and is less than half what a regular Netflix subscription costs in Malaysia.

Netflix confirmed to TechCrunch and USA Today that it’s running these cheaper, mobile-only subscriptions “in a few countries,” but didn’t provide further details. But it’s in keeping with what CEO Reed Hastings told Bloomberg last week, about want to experiment with different pricing strategies around teh world.

Of course, as Netflix users know, the content that you see in one part of the world isn’t always the same as what you’ll see in other parts of the planet. And Netflix has been emphasizing local content recently in Asia, where it faces stiff competition from lower-priced streaming services.

Besides meaning that Netflix, not Apple or Alphabet, keeps the customer data, it also means Netlix doesn’t have to pay a 15 or 30 percent cut to those companies to reach its own subscribers.

That could free up more opportunity to drive prices down in some markets. But not, analysts predict, in the United States and perhaps other wealthier countries. 

It might literally be a first world problem, but if these analysts’ predictions are right, we’ll likely be paying a bit more before long. Either way, you’ll probably keep watching.

By the way, I contacted Netflix via email to ask them for comment on these reported price fluctuations, but I haven’t heard anything back. If they do reply I’ll update this column. 

Amazon picks New York City, Washington D.C. area for new offices

SAN FRANCISCO/WASHINGTON (Reuters) – Amazon.com Inc (AMZN.O) picked America’s financial and political capitals for massive new offices on Tuesday, branching out from its home base in Seattle with plans to create more than 25,000 jobs in both New York City and an area just outside Washington, D.C.

The world’s largest online retailer plans to spend $5 billion on the two new developments in Long Island City and Arlington, Virginia, and expects to get more than $2 billion in tax credits and incentives with plans to apply for more.

The prize, which Amazon called HQ2, attracted hundreds of proposals from across North America in a year-long bidding war that garnered widespread publicity for the company. Amazon ended the frenzy by dividing the spoils between the two most powerful East Coast U.S. cities and offering a consolation prize of a 5,000-person center in Nashville, Tennessee, focused on technology and management for retail operations.

Losers said they learned from the process, while winners said it was costly but worthwhile.

“Either you are creating jobs or you are losing jobs,” New York Governor Andrew Cuomo told a news conference on Tuesday.

With more than 610,000 workers worldwide, Amazon is already one of the biggest employers in the United States and the world’s third-most valuable company, behind Apple Inc (AAPL.O) and Microsoft Corp (MSFT.O).

Still, it faces fierce competition for talent from Alphabet Inc’s (GOOGL.O) Google and other companies working to build new technologies in the cloud. Those rivals routinely offer free food and perks in sunny California, seen by many as a better draw than Amazon’s relative frugality in rain-plagued Seattle. Google also has a growing footprint in New York City.

Already marketing its forthcoming location in the New York City borough of Queens, Amazon talked up Long Island City’s breweries, waterfront parks and easy transit access. Rents there are typically lower than in Midtown Manhattan, which is just across the East River. The former industrial area also has a clock counting down the hours until the end of U.S. President Donald Trump’s first term in office.

The choice of Arlington, Virginia, just across the Potomac River from downtown Washington D.C., could hand Amazon greater political influence in the U.S. capital, where it has one of the largest lobbying shops in town. Locating close to the Pentagon may also help Amazon win a $10 billion cloud-computing contract from the U.S. Department of Defense, said Michael Pachter, an analyst at Wedbush Securities.

Jeff Bezos, Amazon’s chief executive and the world’s richest person, privately owns the Washington Post, which has written critical articles about Trump. In turn, Bezos’s companies have been a frequent target of broadsides from the president. The newspaper maintains full editorial independence from its owner.

Amazon’s choice largely bypassed the middle of the United States, where many cities had hoped for an economic boost and bid for the new jobs. The company already had large corporate workforces in greater Washington and New York.

“My heart is broken today,” Dallas Mayor Mike Rawlings said.

A couple walk past an office building at 1851 S. Bell St. in Crystal City where Amazon may place some of its workforce after announcing its new headquarters would be based in Arlington, Virginia, U.S., November 13, 2018. REUTERS/Kevin Lamarque

TAX BREAKS

At the outset of its search last year, Amazon said it was looking for a business-friendly environment. The company said it will receive performance-based incentives of $1.525 billion from the state of New York, including an average $48,000 for each job it creates.

It can also apply for other tax incentives, such as New York City’s Relocation and Employment Assistance Program that offers tax breaks potentially worth $900 million over 12 years. What benefit the company would actually get was unclear.

In Virginia, Amazon will receive performance-based incentives of $573 million, including an average $22,000 for each job it creates.

These rewards come on top of $1.6 billion in subsidies Amazon has received across the United States since 2000, according to a database from the Washington-based watchdog Good Jobs First.

Amazon says it has invested $160 billion in the country since 2010 and that the new offices will generate more than $14 billion in extra tax revenue for New York, Virginia and Tennessee over the next two decades.

It expects an average wage of more than $150,000 for employees in each new office.

Slideshow (10 Images)

HOUSING CRISIS

Amazon’s emphasis on new, high-paying jobs earned publicity as it faced criticism for low wages in its sprawling warehouses.

The company got $148 million worth of media attention across the English-language press in the two months following the launch of its search last September, according to media measurement and analytics firm mediaQuant Inc.

Amazon received 238 proposals and New York and Virginia beat out 18 other finalists from a January short list, which included Los Angeles and Chicago.

New Jersey made headlines early in the contest by proposing $7 billion in potential credits against state and city taxes if Amazon located in Newark and stuck to hiring commitments.

Others with less money to offer took a more creative approach: the mayor of the Atlanta suburb of Stonecrest, Jason Lary, said he would create a new city from industrial land called Amazon and name Bezos its mayor for life.

In evaluating its options, Amazon looked at the quality of schools, meeting with superintendents to discuss education in science and math. Amazon also wanted helicopter landing pads for the new sites, documents it released on Tuesday show.

The company has already had to navigate community issues at its more than 45,000-person urban campus in Seattle. An affordable housing crisis there prompted the city council to adopt a head tax on businesses in May, which Amazon helped overturn in a subsequent city council vote.

Some critics had pushed for more transparency from cities and states in the bidding process, warning that the benefits of hosting a massive Amazon office may not offset the taxpayer-funded incentives and other costs.

“Our subways are crumbling, our children lack school seats, and too many of our neighbors lack adequate health care,” New York State Senator Michael Gianaris and City Council Member Jimmy Van Bramer said in a joint statement. “It is unfathomable that we would sign a $3 billion check to Amazon in the face of these challenges.”

Amazon shares closed down 0.3 percent at $1631.17, giving the company a market value of almost $800 billion.

Reporting by Jeffrey Dastin in San Francisco and David Shepardson in Washington; Additional reporting by Arjun Panchadar and Supantha Mukherjee in Bengaluru, Angela Moon, Hilary Russ and Laila Kearney in New York, Suzannah Gonzales and Karen Pierog in Chicago; Writing by Nick Zieminski; Editing by Meredith Mazzilli and Bill Rigby


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