Data centers – Part 4 – The future of infrastructure?

I think that proprietary ecosystems like Amazon Web Services will continue to grow.  These ecosystems will be popular with small software developers because it saves a lot of time.  Larger developers will see less benefit from proprietary software because their problems tend to be more specialized and difficult.

The main benefit of pooled infrastructure for larger developers is higher server utilization.  Many of their workloads see fluctuating demand depending on the time of day, depending on the season, or depending on one-time events (e.g. ticketing companies will see a heavy server load when tickets for their most popular events first become available).  They should see their costs drop by taking advantage of the elasticity made possible by pooled infrastructure.

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Data Centers – Part 3 – Pooled Infrastructure

One of the hot new growth areas in data centers is what I call “pooled infrastructure”.  The data center is a pool of interchangeable servers that can be rented out on a moment’s notice.  For example, a customer can rent out 30 servers during peak usage and 10 servers during off-peak usage.  Allowing customers to share a pool of servers greatly increases hardware utilization.

Along with the push towards renting out server capacity, the infrastructure providers are bundling value-added software with their infrastructure to save time administering and setting up the infrastructure.

Data centers – Part 2 – Centralized management

With traditional colocation, a data center will rent out space to many different customers.  Each customer brings in their own server hardware.  One of the trends among data centers is to have the data center purchase and manage all of the hardware.  This creates various economies of scale and benefits such as:

1. Standardization of hardware within a data center allows for elasticity and rapid provisioning of a server.  This opens up a new market for customers who want to rent servers.  Customers can have an operating serving within minutes or hours rather than weeks.
2. Software can automate the process of setting up servers.
3. Centralizing the purchasing and management of hardware reduces the inventory of spare parts that must be kept on site.  It also allows for repairs to have a much faster turnaround time because clients do not need to physically go to the data center to repair their servers.  These are very minor efficiencies.
4. If clients do not need to actually visit their servers, certain efficiencies are possible.  Vertical integration between data center design and server design allows for various capex and opex savings from power efficiency and cheaper servers.
5. Some infrastructure providers offer managed IT services.  They help customers to secure their servers, to maintain the server’s software, etc. etc.

A quick comment about Chinese frauds and leaving racism at the door

The rampant fraud among Chinese reverse mergers and Chinese stocks listed on foreign exchanges has very little to do with ethnicity.  If you are a student of the game, you can figure out the ethnicities and nationalities of the people involved.  For example, many of the accomplices are American stock promoters with American citizenship.  There are also Canadians involved with the American-listed (and Canadian-listed) scams.  It’s silly to discriminate based on race or nationality.  What you really want to do is:

1. Discriminate based on integrity and track records.  People who have committed fraud in the past will likely commit fraud in the future.
2. Look at areas that would be magnets for fraud.  Legally, there is no extradition treaty between China and the US/Canada.  This means that Chinese citizens can commit egregious frauds in American stock markets with virtually no consequences.  The reverse is also true.  A quick Google search for “EB-5 scam” will reveal various ways in which Americans scam Chinese nationals through the Immigrant Investor Program.

Notes on cable – Part 6 – Piracy

Piracy is going to get a lot better in the future.

1. Internet speeds will get faster due to Moore’s Law.
2. Open source software will get better as contributors keep adding code.

My belief is that many of the dynamics that played out for the music industry will play out for piracy.  Piracy itself is a form of competition.  Content companies will be forced to compete with their own content.  The companies that will fare best against piracy are the ones who can put together an offering that is more compelling than piracy (e.g. Netflix).

In the long run, I think that most of the industry will be dominated by a small handful of Internet TV services with big content libraries and excellent software.  Content companies will increasingly need to become good at software.  Usually software markets are dominated by a small handful of companies.  If that’s the case for Internet TV, then many of the traditional players will be losers.

OCN, ASPS, NSM, and inflated fees

I made a mistake.  I did not figure out the game that Ocwen and Altisource are playing.  Ocwen seems to receive fees from Altisource that could be (mis)construed as kickbacks under its “Data Access and Services Agreement”.  These fees could be seen as a quid pro quo (“you scratch my back I’ll scratch yours”) for the big profits that Altisource formerly earned for lender placed insurance “brokerage”.

Companies with verbal agreements

The CalgaryLawyers.ca website states one reason why verbal agreements are a bad idea:

The biggest problem with verbal agreements (also know as oral agreements) is proving them. If one person says that an oral agreement was reached and the other party denies the agreement, it may be difficult to enforce the agreement.

From an auditor’s perspective, verbal agreements may be problematic because they do not generate a paper trail.  I do not see problems with verbal agreements if they are later followed up by written agreements.

When I analyze a stock, oral agreements are a minor red flag.  It may be a sign of sloppy work or stupidity.  It could be more.  One way to identify potential shorts is to look for these agreements (e.g. by using Edgar’s full text search).  However, that is not how I find shorts.

Here are some publicly-traded companies with oral/verbal agreements/arrangements.