Wednesday, February 29, 2012

Google's Move Into Home Entertainment

Another front has been opened in the ongoing war between two tech giants, Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL). That front is consumers' homes as last month Google started a six-month test of a device that would hook into a home WiFi network in addition to linking to other devices in the home through Bluetooth connections.

The new device was first hinted at in December when the company filed an application with the Federal Communications Commission for permission to test a prototype outside of laboratory conditions. It is believed the device is a key cog in Google's goal to establish a home entertainment hub with the capability of streaming content between various devices and with Google at the center of it all.

The development of this device is just the latest evidence of the company's push into hardware. It made a bold move into hardware with its proposed purchase of Motorola Mobility Holdings (NYSE: MMI). The pending deal will not only give Google access to Motorola's portfolio of patents but also put the company into the mobile phone and TV set-top box manufacturing businesses.

Another signal that Google is serious about hardware is the recent hiring of Simon Prakash away from Apple where he was senior director of product integrity, Apple's best quality product engineer. Mr. Prakash is a leading expert in high-volume manufacturing of consumer devices like mobile phones. It is assumed he will be deeply involved in the manufacturing process for this new home entertainment hub device as well as Motorola phones.

After all, what better way to fight Apple's reinvention of mobile computing through its iPhone and iPad devices than with one of its own senior executives.

The pending move into hardware is a real shift in strategy for Google. Previously, the company had always worked closely with hardware producers like phone makers to advance products such as its Android operating system. Another example which comes to mind was the introduction last year of its Google TV service software to bring its services to televisions where it worked closely with television manufacturers.

The question for Google investors is whether this shift in strategy makes sense.

It may not. It already has one of the most profitable business models in existence. Its 65% gross margin, thanks to its search advertising business, ranks it up with Microsoft (Nasdaq: MSFT) and its Windows business with its 73% gross margin.

Look too at the recent hardware successes that Microsoft and Amazon (Nasdaq: AMZN) had. At Microsoft, the Xbox game console became the top seller in the U.S. with revenues for it almost matching the revenues from Windows. Yet since it's a low-margin business, it pushed Microsoft's gross margin to its lowest level in several years. And everyone knows that Amazon's very popular, low-margin Kindle ereaders have been one of the key factors weighing down Amazon's profitability with gross margin of only 20%.

But Google has to do something as Apple is setting the rules for the future of technology right now. Google has to somehow gain closer control over the integration of hardware, software and services rather than letting Apple set the agenda. Apple is so very successful at doing that too. In the last quarter, its operating profit expanded by 8 percent to nearly 38%, within a percentage point of both Google and Microsoft.

Google has to hope its hardware, when it hits the market, will help it regain some ground previously lost to Apple. It really has no choice but to move into hardware or cede the consumer technology battlefield to Apple.

This article was originally written for the Motley Fool Blog Network. Please make sure to read all of my articles daily at the Motley Fool,

Tuesday, February 21, 2012

The Healthy Food Trend

U.S. food and food retailing companies are rolling out aggressive healthy food initiatives to generate positive PR and to stay one step ahead of government regulations.

The world's largest retailer Walmart (NYSE: WMT) is the latest company to jump on board the healthy food bandwagon. Beginning in April, it will use “Great for You” labels on its own brands to highlight food products they deem to be healthy for consumers and meet criteria on protein, fiber, fat, sugar and sodium. The company specifically said the initiative would give mothers a simple and reliable way of identifying good food to feed to their children.

Walmart is using its own internal labeling system to highlight fruit, vegetables, whole grains, lean meats,yogurt, snack bars and frozen foods that have low levels of fat, sugar and sodium. This is an important milestone for the industry as a whole since Walmart is often considered to be the industry standard setter.

But Walmart is far from the first company to come out with healthy food campaigns and labeling systems. Other food retailers have already gone down that path. The NuVal labeling system scores food for nutrition on a 1 to 100 scale and was launched in 2009. It is currently being tested by Kroger (NYSE: KR), the biggest U.S. supermarket company as measured by sales.

There are many other such examples of companies emphasizing healthy foods in the industry. Perhaps best known is the healthy foods retailer Whole Foods (Nasdaq: WFM) which has a “Health Starts Here” line of food products that contain no processed food, no added oils or sugars, and have a high vegetable and fruit content.

It's not just food retailers who are emphasizing healthy foods, but food companies themselves.

General Mills (NYSE: GIS) last year said its organic food business was now a “growth engine” for the company and that the success there would transform its entire product line. Its emphasis on health can also be seen in its latest ads for children's cereals which talk about how the cereals are loaded with more healthy whole grains than ever before.

Then there is PepsiCo (NYSE: PEP) which, led by its CEO Indra Nooyi, has gone on a major health food push. Its goal is to double the revenues it receives from nutritious products by the end of the decade. Pepsi though is also turning into a case study of how not to jump into the long-term healthier food trend.

While making its push into healthier foods, Pepsi has been criticized by many as forgetting about its core business – selling carbonated beverages around the world. As its latest earnings report shows, sales of its core Pepsi brand remain flat at best globally as it continues to lose ground to rivals.

Pepsi's example highlights the possible danger lurking for investors looking to get in on the growing trend toward healthy food. The risk is that companies may overreact and place too much of an emphasis on it as Pepsi management has done. This emphasis on health is confusing many times for food companies (and their research labs) which for decades have emphasized taste above all else.

Yes, there is a definite growing appetite for healthier foods among Americans. But companies should be careful about moving too far from what made them successful for so long, like Pepsi.

So for investors looking to invest in this trend, the safer bet may be to go with the food retailers rather than the food companies themselves. And preferably one that is already identified with healthy foods such as Whole Foods.

This article was originally written for the Motley Fool Blog Network. Please check out my daily articles for the Motley Fool at

Wednesday, February 15, 2012

Welcome to the CyberWar Front

The way wars are fought is changing rapidly.

From conflicts using hardware – planes, ships, tanks, guns and troops – wars in the future are more likely to be fought using computers and malicious software. In other words, cyber warfare.

Companies involved in the defense business like Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT) and others are steadily shifting their business to fighting such a war. The move has been accelerated in the light of a number of high-profile attacks such as the Stuxnet attack in 2010 on Iran's nuclear program.

There is a virtual feeding frenzy among these companies and specialist national security firms like Mantech International (Nasdaq: MANT) and CACI International (NYSE: CACI) right now to provide the U.S. government the means to protect against a cyber attack or even to launch one of its own on enemies.

Many of the bigger companies like Boeing are expanding in this area largely through the acquisition of small companies that specialize in cyber warfare with more than a dozen acquisitions occurring in 2011.

All of the companies in this sector are hoping to get a piece of the expanding U.S. budget for cyberarms. American defense, intelligence and homeland security agencies currently spend about $10 billion annually on cybersecurity according to software firm Deltek.

That is a very small portion of the Pentagon's $600 billion annual budget. But what should grab investors' attention is the fact that the $10 billion figure is expected to climb by at least 9% a year for the foreseeable future, even as the rest of the Pentagon budget is facing cuts.

Add to the Pentagon's cyber budget what private companies are spending on cyberarms and fighting against cyber criminals, and the cyberwar market is more like a $100 billion market in the United States alone, says Northrup Grumman (NYSE: NOC) executive Kent Schneider. By the way, cyberarms already accounts for over $1 billion of the company's $27 billion in annual revenue.

Outside the United States, spending on cyber warfare has also picked up. Since the Pentagon's Cyber Command (with 10,000 people when fully staffed) became operational in 2010, more than a dozen countries, including the U.K. and France, have moved to setting up a similar operation.

Unfortunately, even with the military preparedness for cyber warfare, the U.S. is still very vulnerable to cyber attacks.

The fact is that about 85% of the internet is under control of private companies which aren't spending much on protecting their piece of cyberspace. This is particularly troublesome when it comes to vital infrastructure.

Experts in cybersecurity believe that the companies which control the U.S. electric grid, transportation and telecommunications networks need to invest into safer infrastructure.

An attack on any key part of the country's infrastructure could cripple the U.S. economy. It is estimated that damage from a single wave of cyberattacks on critical infrastructure could exceed $700 billion.

Some industries are taking the threat seriously. Utilities, for example, are working on measures to defend against cyberattacks. Deployment of cybersecure systems is expected to take place by 2020.

But there is a lot of work to be done by both private companies and the government when it comes to cyber defense, creating vast opportunities for companies involved in this sector.

Investors should expect an acceleration of the demand for cybersecurity in the years ahead from both the government and private enterprise. This can only benefit companies in the sector.

This article originally appeared on the Motley Fool Blog Network. Please check my daily articles for the Motley Fool at

Monday, February 13, 2012

DNA Sequencing Companies in Spotlight

The recent $5.7 billion hostile takeover bid by Swiss pharmaceutical giant Roche ADR (OTC: RHHBY) for U.S. based Illumina (Nasdaq: ILMN) has certainly shined the spotlight on the business of DNA sequencing. Illumina has sought to fend off Roche through the use of a 'poison pill' defense.

The takeover is just another indication of the drug company's desire to develop treatments in combination with accompanying diagnostics. This will better insure that its drugs are given to patients that will benefit the most from the drug in the proper dosage.

Roche already has vast experience with gene-targeted therapies. For example, it sells the breast cancer drug Herceptin which is aimed solely at breast cancer patients who happen to have a particular genetic mutation. It also has won approval for a melanoma drug, Zelboraf, that works on patients whose tumors have a specific gene mutation.

The company's diagnostics business has centered around DNA technology since 1991 when it bought the worldwide rights to polymerase chain reaction, the primary technology for manipulating genetic material.

Since then it has developed or acquired tests for detecting and decoding DNA, including the whole human genome (3 billion biochemical letters). The first human genome was decoded in 2003.

Roche's COO Daniel O'Day called the market for machines that map DNA as “fast-growing” over the last five years.

So it came as no surprise that the company targeted one of the leaders in large-scale DNA sequencing – Illumina. Other leading companies in the industry include Life Technologies (Nasdaq: LIFE) and Affymetrix (Nasdaq: AFFX).

The devices made by these companies search through DNA coding that contains the instructions for making all human cells. This helps scientists understand how mutations found by these machines contribute to disease. This is especially true with cancer, where mutations can contribute to uncontrolled cell growth. The goal for doctors is to someday use genetic data to help stop the growth of cancer cells.

Illumina is definitely the leader in this field but Life Technologies is running hard to catch up. Earlier in January, it announced a new sequencer that can read a whole human genome in less than a day for only $1,000.00. Illumina is expected to have similar machine sometime in the second half of 2012.

The key takeaway about this industry today for investors is that it is moving out of the laboratory and into the mainstream of medicine, clinical practice.

The stocks of these DNA sequencing companies have plummeted over the past year – Illumina was down 58% - because their target customers were mainly scientists dependent on grants in a tough economy. But as evidenced by Life Technologies' announcement, that is changing.

Thankfully so as currently it is only an $1 market. But now opportunities should expand rapidly – it is expected to be a $2 billion market by 2015. As Life Technologies CEO Greg Lucier stated, “This is going to be an enormous opportunity, and now you see it unfolding.”

Roche's bid for Illumina in effect confirms what Mr. Lucier said and that DNA mapping will be the key to the future of diagnostics.

Even though Illumina is the best in the sector, the bid should ignite interest in the other firms in the sector from companies which, like Roche, already have an interest in DNA technology. These may include the likes of Abbott Laboratories (NYSE: ABT).

If Illumina fights off the hostile takeover, Roche may buy one of these other companies in the space instead. Either way, with its expertise in diagnostic tests Roche is a perfect for these firms as it can get them in the door in the routine clinical medicine world with relative ease.

Roche will not stop until it has Illumina or another DNA sequencing firm in its grasp.

This article for originally written for the Motley Fool Blog Network. Check out my daily articles for Motley Fool at

Thursday, February 9, 2012

The Leaders in Smart Grid Technology

The debate which electric transmission technology to use – either AC (alternating current) or DC (direct current) – goes back to the time of Thomas Edison, a proponent of DC.

AC seemed to have won the debate since it is the method that is widely used to bring power into our homes and businesses. But surprisingly, the debate is not settled. In a smart grid world, DC is making a comeback.

The latest DC technology, HVDC, has been called the backbone of plans for smart grids or supergrids.

Two European companies are leading the charge in HVDC – high voltage direct current – technology. These companies are Germany's Siemens ADR (NYSE: SI) and Switzerland's ABB ADR (NYSE: ABB), which control about 80% of the market.

This technology allows the transmitting of electricity at higher voltages and over longer distances with minimal power loss when compared to current transmission technology.

Transmission losses and other inefficiencies due to the use of AC power is of some consequence in the developed world since semiconductors need DC power. Just think about all the electronics and appliances in homes that have semiconductors in them. These devices have to convert AC power into DC power, generating heat and wasting energy.

In the emerging world, it is of even greater importance. Rapid economic growth has given rise to surging demand for electricity. However, many end users are far away from the actual power sources making power losses incurred over transmission lines a vital issue.

Therefore, HVDC has become a growth industry. Both Siemens and ABB estimates that HVDC will be a $10 billion business in the next five years.

The companies forecast installation of new HVDC transmission lines by 2020 with a total capacity of 250 gigawatts. This is a dramatic increase since in the last 40 years there has been just 100 gigawatts worth of HVDC transmission lines installed.

One factor holding back this technology to date is the fact that such systems have lacked flexibility, allowing only one power source and end user. The users of such systems, electric utilities, would like to make multiple connections to these power lines allowing them to switch on or off individual sections of the line. This a must for power grids in the developed countries.

But there is a problem. Companies like ABB and Siemens have yet to develop effective circuit breakers to handle the DC voltages involved. The difficulty is that the technology involves more than simply breaking a physical connection between two pieces of metal, as with AC switch technology.

Instead, researchers at the companies are trying to adapt the advanced semiconductors used by both firms in the 'converter stations' of their HVDC lines, where AC and DC power are converted back and forth. At the moment, no breakthrough seems imminent, but is inevitable.

In the years ahead, as energy research firm Pike Research said, “the role of DC will increase, and AC will decrease”.

This makes sense if only from the standpoint that power generated from renewable sources such as wind and solar produce DC power. And DC power transmission lines to get this power to end users is certain to increase.

HVDC and the companies leading way in this technology will definitely be worth watching for those investors interested in the smart grid technology space.

This article was originally writtern for the Motley Fool Blog Network. Check out my daily articles for the Fool at

Monday, February 6, 2012

Apple Takes Lead in Digital Learning and Online Education

School-age children are quickly moving away from the traditional ways of learning, involving the use of paper, pencil and printed textbooks.....

The age of digital learning is upon us.

At the forefront of this new era is a company known to every investor – Apple (Nasdaq: AAPL).

The company recently announced its long-anticipated entry into the digital textbook market. It did so by unveiling a new “bookstore” for its iPad tablet, a new application for sharing university courses, online classes and a free publishing tool to help authors create interactive courses.

This is the company's first launch of a new product line since the death of Steve Jobs and therefore quite important.

The potential to improve students' results is significant. After all, children today have grown up with technology all around them all their lives.

The CEO of Discovery Education, a subsidiary of Discovery Communications (Nasdaq: DISCA), had some valuable insight on this subject. He said, “When they [students] go to schools and are asked to 'power down' and put technology away, you're not engaging them and you're going to lose them.”

Apple has wisely joined with partners in the educational publishing field to help sell their product. Some of the partners include well known names such as McGraw-Hill (NYSE: MHP) and Pearson ADR (NYSE: PSO).

These publishers and others unveiled a limited number of digital textbooks that are priced at $14.99 or less. Apple will take a 30% cut of the sales from these textbooks sold over its new iBooks 2 app.

This is a steep cut for Apple but its partners believe Apple can give the industry, with 1.4 billion students enrolled worldwide, just the rocket boost it needs.

Sales in the global textbook market are expected to reach $19.4 billion by 2013. The share of that market taken by digital textbooks is forecast to jump from just 3.4% in 2010 to 18.3% next year, especially if iBooks is a success.

Publishers are hoping iBooks succeed because they will also benefit from the switch to digital textbooks since they would no longer be burdened by the costs of printing and distribution of a traditional textbook.

Of course, it will not be entirely smooth sailing for Apple in this market.

Holding it back will be the price of its iPad - $499. Many schools simply cannot afford to buy iPads for use by their students and Apple made no mention in its presentation of offering schools a discount on its iPads. Currently, there are 1.5 million iPads being used by schools for educational purposes.

This may open the door to this market for lower-cost rivals such as the Kindle Fire from (Nasdaq: AMZN) which sells for only $199. The same publishers who are working with Apple have stated they are also involved in projects with Amazon and other tablet makers.

The educational market is relatively small for Apple, but its rapid growth offers Apple a wonderful opportunity to continue growing the company after the death of Steve Jobs.

But it is unlikely that iBooks will dominate the market as Apple does with music. The real winners here in the long term will be the publishers like Pearson, McGraw Hill and others.

Thursday, February 2, 2012

Smartphone Usage Expands in Emerging Markets

There is a trend in the technology and telecommunications spaces that has gone almost completely unnoticed by U.S. investors. That trend is the rapid expansion of entry-level smartphone usage in emerging markets.

Low-cost semiconductor technology has pushed down the price of a basic smartphone to below $100 in emerging markets over the past year.

In emerging markets such as India, high prices have been the main reason there has not been widespread use of smartphones. High prices have slowed the adoption of smartphones such as Apple's (Nasdaq: AAPL) iPhone and phones using Google's (Nasdaq: GOOG) Android operating system in these markets.

The new microchip design changing the smartphone market in developing countries was developed by the British company, ARM Holdings ADR (Nasdaq: ARMH).

The company has another microchip, the Cortex A7 processor, in the works by 2013 that will further advance the use of low-cost smartphones. It will be one-fifth the size of those used in other smartphones and five times more efficient. Arm says it will enable entry level smartphones below $100 which will be equivalent to a high-end $500 smartphone in 2010.

This is an important breakthrough. The CEO of Arm, Warren East, said “The sub-$100 price point is when we can start to talk about connecting the next billion people to internet content and services over mobile devices.”

The base of smartphones costing less than $100 is already estimated to be about 200 million, with the majority of those phones have been bought in the past year.

Now research from the consulting firm Deloitte says adoption of these cheap smartphones is expected to be even more rapid. Deloitte forecasts take-up of these low-cost smartphones to more than double in 2012 to above 500 million!

This development will help Arm Holdings to maintain its dominance in the mobile phone and tablet market. Chips, using its designs, are already in on the most popular products like Apple's iPhone and iPad devices.

Needless to say, it will also raise demand for connected devices, applications and the spectrum needed to carry vast amounts of data in the emerging world.

Deloitte predicts, for instance, the number of applications available on smartphones to double in 2012 to more than 2 million as a result of the popularity of $100 smartphones in emerging nations.

It will also obviously help the manufacturers of these low-cost smartphones such as Nokia ADR (NYSE: NOK), which remains a leader in mobile phone sales in emerging markets. Nokia was expected to have sold over 400 million phones in 2011, of which more than 300 million were sold in emerging markets.

The worry here for Nokia and others is whether players like Korea's Samsung and Apple will come out with low-cost versions of their successful smartphones. These two companies have surpassed Nokia as the biggest global manufacturers of smartphones last year.

No doubt Apple and Samsung will do so – Samsung is already pushing $200 versions of its Galaxy smartphone in emerging markets.

So the window for Nokia to regain its dominant position in emerging markets may be a narrow one.

This artciel was originally written for the Motley Fool Blog Network. To read all of my daily article for the Motley Fool, please go