Once they plotted revolutions, now they're typing blogs. Today's cafe society is a weak decaf
By Michael Idov
The coffeehouse may just be mankind's greatest invention. It certainly is the most collective one: In the classic, which is to say Viennese, form, the coffeehouse is perhaps the finest collaboration between Europe, Asia and Africa. It is almost as if every great civilization in the world had taken a brief time-out from trying to kill one another to brainstorm what a perfect public space should look like. The result was equal parts Athenian agora, Saharan oasis and Continental court, with pastries. Modernity in its bloody splendor has tumbled out of the coffeehouse: In January of 1913 alone, as Frederic Morton describes in his Vienna history "Thunder at Twilight," Lenin, Trotsky, Hitler, Freud and Josip Broz Tito were using the same cups at Vienna's Café Central. (Stalin was in town, too, but he was too much of a country bumpkin for espresso.)
And yet it seems that we're losing the coffeehouse—less to the usual suspects like the Internet and Dunkin' Donuts than to our own politeness. We've brought the noise level down to a whisper and are in the process of losing even the whisper: Enter the modern café and the loudest sound you'll hear will be someone typing, in ALL CAPS, an angry blog comment. We've become a nation of coffee sophisticates—to the point where McDonald's feels compelled to roll out some semblance of an espresso program—but we're still rubes when it comes to the real purpose of the place: It's not the coffee. It's what your brain does on it.
It's telling that the people credited with the invention of the coffeehouse tend to be rogues with tangled multinational roots. There's George Franz (or Jerzy Franciszek, or Yuri-Frants—his very name holds at least three passports) Kolschitzky. A kind of Austrian-Polish-Ukrainian-Cossack cross between Paul Revere and Ray Kroc, he is said to have slipped out of the Turk-beseiged Vienna in 1683, disguised in a fez, to call up reinforcements. When invited before the emperor to collect his reward, he asked for the sacks of "camel fodder" left behind by the retreating enemy, and opened Vienna's first café shortly afterward. This whole coffee caper whiffs mightily of folklore—it's even reminiscent of one Arabic fable—and sure enough, no historical record of it exists. Kolschitzky's real-life counterpart, however, is hardly less exotic: an Armenian named Johannes Diodato, who's been given a royal monopoly on coffee for his services as a spy.
It's no wonder, then, that the coffeehouse became a hotbed of a proudly rootless culture. Psychoanalysis and socialism sprang partly from the espresso cup. In 17th-century London, coffeehouses were derided, in a fantastic turn of phrase, as "seminaries of sedition." By the end of that century, they numbered over 2,000. Poet John Dryden held court at Will's; the so-called "Learned Club" gathered at the Grecian, where a sword fight once erupted over the correct pronunciation of a Greek word; and the London Stock Exchange itself began with a newsletter John Castaing distributed in 1698 at Jonathan's. A bit later, Adam Smith, Edward Gibbon, and Samuel Johnson—with Boswell in tow, naturally—enjoyed interdisciplinary shouting matches with actors and painters at the Turk's Head. And then the East India Trading Company buried the kingdom in affordable tea, private clubs closed their doors to the rabble, and the age of the coffeehouse in the British Isles was over.
In the late 19th century, the global nexus of café culture returned to Vienna for arguably the greatest stretch of coffee-fueled creativity known to man. This is when every convention of the modern coffeehouse—the many-antlered coat rack, the marble tabletop, the day's newspaper spread Torah-like on bamboo holders—fell into place, and its role as the intellectual sparring ring was cemented. Turn-of-the-century Vienna gave rise to a generation of close-knit "Jung Wien" writers, including Arthur Schnitzler and Stefan Zweig, most of whom practically lived in cafés. This is not an exaggeration. Peter Altenberg had his mail delivered to Café Central.
The arrangement was hardly idyllic. The Jung Wieners steadily went through a limited pool of girlfriends and came to blows with each other over reviews. Yet out of the friction came the kind of humanist thought that still reverberates throughout literature, design, philosophy, even architecture. And once again, a cosmopolitan, slightly alienated attitude permeated the room: Most of the writers were, after all, Jewish, including Schnitzler.
It was Vienna's postwar generation that grew tired of what they now saw as an irredeemably quaint antebellum lifestyle. In the early 1950s, dozens of famous coffeehouses—some of them centuries in operation—shuttered one by one. The Viennese had a special word for this phenomenon, as the Viennese tend to: kaffeehaussterben, coffeehouse death. Some placed the blame on the more casual "espresso bar," with its new and blasphemous practice of selling coffee to go, but many suspected a deeper malaise. Critic Clive James, in his collection "Cultural Amnesia," logically blames it on the decimation and scattering of the Jewish civil society and the lost art of Jewish conversation. An even likelier culprit, I think, is the Germanic postwar self-loathing jag. "The truth is that I have always hated the Viennese coffeehouse," Austrian novelist Thomas Bernhard wrote in his memoir, "because in them I am always confronted with people like myself, and naturally I do not wish to be everlastingly confronted with people like myself."
Compared to the passions that roiled London and Vienna, the American coffeehouse was always genteel and, dare I say it, elitist; the only surviving art genre our café society has birthed is coffeehouse folk music—sensitive-guy or –gal tunes that fade almost eagerly into the background. Sure, we love the idea of the coffeehouse because it dovetails with our idea of urbanity in general: That's why a coffeehouse is the first harbinger of a gentrifying area, and the last stand of a neighborhood in decline. As with a hospital or a bookstore, we may not even go there but feel better knowing one is near.
We've also used it to balkanize ourselves. The Viennese coffeehouse is a communal exercise in individuality: As an Austrian friend noted recently, his compatriots don't go to cafés to socialize—everyone goes to watch everyone else. This phenomenon doesn't quite work in America because cafés here tend to draw specific crowds: a hipster café, a mom café, a student café. With the exception of the ubiquitous Starbucks, where slumming and aspiration meet, we use our coffeehouses to separate ourselves into tribes.
Don't get me wrong—any coffeehouse is better than none at all, and their second, post-Starbucks, wave of proliferation is a fantastic phenomenon, bringing jobs and the pleasure of good espresso to communities across the country. The only trouble with the new, proudly bean-centric places that keep popping up is that they tend to be austere obsessives. There's barely anything to eat other than a perfunctory pastry, and never, ever any alcohol. You're supposed to contemplate your coffee, top notes to finish, in worshipful silence, a notion as wrongheaded as a caramel frappucchino.
The coffeehouse experience is inextricably linked with newsprint: Coffee and a paper are an even more powerful pair than coffee and a cigarette. Early London coffeehouses used to have "runners"—people who would go from café to café to announce the latest news; there's just something about the intake of data tidbits from many sources that goes well with coffee. Same goes for writing in cafés. Hemingway nails it down within the very first pages of "A Moveable Feast": the author alone with his café au lait, shavings from his pencil curling into the saucer, and, of course, a girl with "hair black as a crow's wing and cut sharply and diagonally across her cheek" at the next table.
Which brings us to the laptop. At any given moment, a typical New York coffeehouse looks like an especially sedate telemarketing center. Recently, there's been a movement afoot to limit the use of laptops. The laptoppers hog the tables, but they do the coffeehouse experience an even deeper disservice. They make it a solitary one, and it's a different kind of solitude from the stance sung by Hemingway. You're not just alone—you're in another universe entirely, inaccessible to anyone not directly behind you.
Perhaps the economic downturn will untie our tongues and restart the conversation. With rents going down, the next Café Abraco or Café Regular may be able to afford a larger space and have some money left for tables and chairs. And the new Lost Generation of creative strivers is already here to fill these chairs. In Los Angeles, friends report, where the lavish business lunch is no longer the industry standard, the café society is in unexpectedly full swing. Somewhere in the caffeinated ether, the ghost of Schnitzler is smiling.
— Latvian-born Michael Idov is a contributing editor at New York Magazine and author of the novel "Ground Up."
12.11.09
World Energy Outlook
It was barely 10 years ago that a well-reasoned cover story in The Economist told us we were “drowning in oil” and that its price could drop by more than half to $5 a barrel. As everybody now knows, prices rose tenfold before peaking last summer. There are just so many moving parts to the energy market that making forecasts is a mug’s game. If exhaustive detail is a measure of credibility, though, few sources equal the International Energy Agency’s World Energy Outlook, published yesterday.
Coinciding with the first time since 1981 that global energy use has declined, 2009’s report is not complacent about future energy supply and environmental challenges. Like many forecasts, though, it makes the mistake of extrapolating recent trends too freely. For example, the IEA expects global oil production to rise from last year’s 85m barrels to 105m by 2030 while acknowledging that about two-thirds of this will come from fields yet to be found or developed. But at what cost?
In just the past decade, exploration spending has nearly tripled in order to maintain a similar rate of supply growth. Leaving aside arguments that the IEA’s forecast skirts the edge of what is geologically feasible, incremental barrels are getting pricier to find and, once out of the ground, are more coveted. The IEA expects real oil prices to hit $87 a barrel by 2015 and $115 by 2030 to make this all possible. What about the possibility that supply will falter and that a far higher clearing price will instead do the trick? Living with $300 crude is no more outlandish than suggesting a decade ago that $80 would be the new normal. The payoff from conserving oil could soon outstrip that of drilling for it.
Just as forecasters failed to appreciate the market’s reaction to low prices a decade ago, they may be underestimating how we will react to increasingly expensive oil tomorrow.
Coinciding with the first time since 1981 that global energy use has declined, 2009’s report is not complacent about future energy supply and environmental challenges. Like many forecasts, though, it makes the mistake of extrapolating recent trends too freely. For example, the IEA expects global oil production to rise from last year’s 85m barrels to 105m by 2030 while acknowledging that about two-thirds of this will come from fields yet to be found or developed. But at what cost?
In just the past decade, exploration spending has nearly tripled in order to maintain a similar rate of supply growth. Leaving aside arguments that the IEA’s forecast skirts the edge of what is geologically feasible, incremental barrels are getting pricier to find and, once out of the ground, are more coveted. The IEA expects real oil prices to hit $87 a barrel by 2015 and $115 by 2030 to make this all possible. What about the possibility that supply will falter and that a far higher clearing price will instead do the trick? Living with $300 crude is no more outlandish than suggesting a decade ago that $80 would be the new normal. The payoff from conserving oil could soon outstrip that of drilling for it.
Just as forecasters failed to appreciate the market’s reaction to low prices a decade ago, they may be underestimating how we will react to increasingly expensive oil tomorrow.
20.10.09
Clash of the clouds
Cloud computing
Clash of the clouds
Oct 15th 2009
The launch of Windows 7 marks the end of an era in computing—and the beginning of an epic battle between Microsoft, Google, Apple and others
DO YOU have plans for next weekend? If not, don’t worry: perhaps a friend will be throwing a party to celebrate the launch of Windows 7, Microsoft’s new operating system, on October 22nd. You’ll get help installing the program and be shown how to use the new features. To maximise the fun, your friend will get tips from the “HostingYourParty” video on YouTube or go to the dedicated website, complete with downloadable party favours and a trivia quiz (sample question: “The Microsoft Pretzel Hunt is an annual pretzel hunt held at the Redmond campus. True or false?”).
This is not satire. It is a toe-curling attempt by Microsoft to create some buzz for its new software. Fortunately for the firm, it will hardly matter, because Microsoft dominates the market for operating systems. After the let-down that was its predecessor, Windows Vista, Windows 7 is certain to be a success. There is plenty of pent-up demand, because Vista’s aged predecessor, XP, is still widely used. Reviews of Windows 7 have been positive, some even glowing, although the software is sometimes hard to install.
Windows 7 is not just a sizeable step for Microsoft. It is also likely to mark the end of one era in information technology and the start of another. Much of computing will no longer be done on personal computers in homes and offices, but in the “cloud”: huge data centres housing vast storage systems and hundreds of thousands of servers, the powerful machines that dish up data over the internet. Web-based e-mail, social networking and online games are all examples of what are increasingly called cloud services, and are accessible through browsers, smart-phones or other “client” devices. Because so many services can be downloaded or are available online, Windows 7 is Microsoft’s first operating system to come with fewer features.
As one window closes…
The launch of Windows 7 coincides with the closing of the book, after more than a decade, on Microsoft’s antitrust woes. The company got into hot water in America and Europe mainly for abusing its dominance of PC operating systems to promote its web browser. On October 7th the European Commission said it had all but reached a settlement with Microsoft. The firm has agreed to give Windows users in Europe a “ballot screen” that allows them to choose a rival browser in place of its own Internet Explorer.
Windows is not going to disappear soon, but cloud computing means it is no longer so important. Other products, some being launched this autumn with less fanfare than Windows 7, represent Microsoft’s future. Last month the company opened two data centres that between them will contain more than half a million servers. This month it released a new version of Windows for smart-phones. And next month it will launch Azure, a platform for developers on which they can write and run cloud services.
The rise of cloud computing is not just shifting Microsoft’s centre of gravity. It is changing the nature of competition within the computer industry. Technological developments have hitherto pushed computing power away from central hubs: first from mainframes to minicomputers, and then to PCs. Now a combination of ever cheaper and more powerful processors, and ever faster and more ubiquitous networks, is pushing power back to the centre in some respects, and even further away in others. The cloud’s data centres are, in effect, outsize public mainframes. At the same time, the PC is being pushed aside by a host of smaller, often wireless devices, such as smart-phones, netbooks (small laptops) and, perhaps soon, tablets (touch-screen computers the size of books).
Although Windows still runs 90% of PCs, the fading importance of the PC means that Microsoft is no longer an all-powerful monopolist. Others are also building big clouds, including Google, a giant of the internet, and Apple, renowned as a maker of hardware, with a market capitalisation that now exceeds those of both Google and IBM, its original arch-rival (see chart above).
Granted, there are hundreds if not thousands of firms offering cloud services—web-based applications living in data centres, such as music sites or social networks. But Microsoft, Google and Apple play in a different league. Each has its own global network of data centres. They intend to offer not just one or two services, but whole suites of them, with services including e-mail, address books, storage, collaboration tools and business applications. They are also vying to dominate the periphery, either by developing software for smart-phones and other small devices or by making such devices themselves.
These three giants (for their vital statistics, see table) are already preparing for battle. In July Google mounted a direct attack on Windows by promising to launch a free PC operating system, Chrome OS. Rumour has it that a basic version may hit the market on the same day as Windows 7, or soon after. Microsoft’s new operating system for smart-phones represents its latest effort to catch up with Apple’s iPhone and Google’s operating system for handsets, called Android. On October 12th Apple and Google severed a tie when Arthur Levinson, a member of both boards, resigned from Google’s. In August Eric Schmidt, Google’s chief executive, had quit Apple’s board because “Google is entering more of Apple’s core businesses,” in the words of Steve Jobs, the gadget-maker’s boss.
A taxonomy of giants
Despite the growing similarities among the three, each is a unique beast, says Michael Cusumano, a professor at Massachusetts Institute of Technology’s Sloan School of Management. They can be classified according to how they approach the cloud, how they make money and how openly they approach the development of intellectual property.
Google, you might say, has been a cloud company since its birth in 1998. It is best known for its search service, but now offers all sorts of other products and services, too. It has built a global network of three dozen data centres with 2m servers, say some estimates. Among other things, it offers a suite of web-based applications, such as word processing and spreadsheets. Lately it has branched out, releasing Android for phones, and its Chrome web-browser and operating system for PCs.
It took Google a while to come up with a way of making money, but it found one in advertising, its main source of revenue. It handles more than 75% of search-related ads in America. Worldwide its share is even higher. Google is also trying to make money from selling services to companies. On October 12th it said that Rentokil Initial, a pest-control-to-parcel-delivery group, would roll out Google’s online applications to its 35,000 employees, making it the biggest company to do so.
Google’s reliance on advertising explains its open approach to intellectual property. Giving Android and Chrome OS away as open-source software not only makes life difficult for rivals’ paid-for products but also increases demand for Google’s services and the reach of its ads. Its openness has limits: Google says little about the architecture of its data centres and search algorithms, because they give the company its competitive edge. The way it organises R&D internally is open and decentralised: self-organising teams come up with ideas for most new services.
If Google was born in the sky, Microsoft started on the ground. Office, its bestselling suite of PC programs, is almost as ubiquitous as Windows. But the company is less a stranger to cloud computing than it may seem. It has built a network of data centres, and is starting to gain traction after losing billions developing online services. Its Xbox games console has powerful online features. Bing, its new search engine, has gained a shade in market share (though it is still miles behind Google). It is even preparing a stripped-down web-based version of Office, and it now offers much of its business software as online services.
However, most of Microsoft’s revenue and all of its profit still come from conventional shrink-wrapped software. But the company cannot leave online advertising to Google, because consumers expect cloud services to be free, financed by ads. Hence Microsoft’s efforts to convince Yahoo!, another online giant, to merge its search and part of its advertising business with Microsoft’s. The deal, sealed in July, means that Microsoft will handle 10% of searches, against Google’s 83%, says Net Applications, a market-research firm.
Given Microsoft’s history, it is hardly surprising that its treatment of intellectual property differs from Google’s. It gives other software firms the technical information they need to write programs that run on, say, Windows. Otherwise, it guards the underlying recipes of its software jealously. That said, the firm now supports many open standards and has even started using bits of open-source software. Internally, its R&D is somewhat more centralised than Google, at least in its online division: teams are bigger, work with more co-ordination and get more guidance from above.
Apple, too, came from outside the cloud. Online services have always been a bit of an afterthought to what the company excels at: pricey but highly innovative bundles of hardware and software, of which the iPhone is only the latest example. Its online offerings—the iTunes store for music and video, the App Store for mobile applications, and MobileMe, a suite of online services—were all originally meant to drive demand for Apple’s hardware, but the firm’s interest in the cloud has grown. It is building a $1 billion data centre, possibly the world’s largest, in North Carolina.
Still, Apple’s financial health thus far has depended mainly on selling hardware. Gadgets generate most of the firm’s revenue and profit. The firm does not reveal its revenue from services separately, but it is not to be sneezed at. Apple accounts for 69% of online music sales in America and 35% of all sales, more than Wal-Mart, reckons NPD Group, a market-research firm. Apple has so far forgone advertising revenue: its services are ad-free, but most of them require payment. Apple’s services are aimed at consumers, not businesses.
Illustration by Ian Whadcock
Apple is also the odd one out when it comes to openness. The word does not appear in its vocabulary. It does not allow any other hardware-maker to build machines using its operating system. It blocks iPhone applications it does not approve of from appearing in the App Store. Apple is also secretive about the way it conducts its internal R&D. Mr Jobs clearly calls most of the shots. But insiders say that there is a system of teams that pitch projects to him.
How will this three-way contest play out? The last similar war was in the 1980s and early 1990s, when Apple, IBM and Microsoft fought for mastery of the PC. After much fire and smoke, Microsoft was victorious. Thanks to what economists call strong network effects, which allow winners to take almost all, Windows relegated its rival operating systems to mere sideshows, securing fat profits for its owner.
Such a lopsided result is unlikely this time. One reason is that the economics of the cloud may be different from those of the PC. Network effects are unlikely to be as strong. Much of the cloud is based on open standards, which should make it easier to switch providers. To underline this point and to counter arguments that it is trying to lock users in, Google has set up the Data Liberation Front, a team of engineers whose job is to devise ways of allowing people to transfer their data.
Unfortunately for Google, it is equally unclear whether the most open player will win, as Microsoft did last time. Many of Google’s new services have failed to take off. Having control over the software on the PC, smart-phones and other client devices, Microsoft can more easily create what it calls “seamless experiences”, for example by keeping a user’s address book and other personal information in step. Consumers may also prefer Apple’s tightly integrated, easy-to-use devices and services, despite the restrictions they impose. Lots of people buy iPods and download music from iTunes even though it is difficult to play the songs on other devices.
Second, all three giants have reliable sources of cash to sustain them. Windows may be under attack, not least because of the boom in cheap netbooks, which has forced Microsoft to reduce prices, says Matt Rosoff of Directions on Microsoft, a newsletter. Even so, the operating system will keep on giving for some time. Microsoft has other strong divisions too, including business and server software. Google may lose some market share in search (and some advertising) to the combination of Bing and Yahoo!, but it is unlikely to be dethroned. Apple is still able to command premium prices, although others make hardware just as slick.
Full war chests
This means that all three will have ample resources to spend in the main areas of the fight: data centres, cloud services and the periphery. In data centres, Google is ahead, but Microsoft is catching up in size and sophistication. Apple has most to learn, but this, too, seems only a question of time and money. Just as much of hardware has become a commodity, knowing how to build huge data centres may not be a big competitive advantage for long. And data centres can get only so big before scale ceases to be an advantage.
In services too, Google is ahead. But in Bing Microsoft may at last have created a worthy rival. The “decision engine”, to use the company’s term, does a good job of helping people choose a new camera or book a holiday. The big question is whether Apple can catch up. Its iTunes and App stores are successes, to be sure, but for now they are highly specialised. Its broader suite of cloud services, MobileMe, is nothing to write home about.
At the cloud’s periphery, however, Apple has a strong position, thanks to the success of the iPhone. More than 30m have been sold so far, 5.2m in the quarter ending in June. Its share of the American market is pushing 14%. The App Store now boasts 85,000 applications and a total of more than 2 billion downloads. But recently Google’s Android has gained momentum. Several handset-makers have released smart-phones based on it, or will do so in the next few months. In early October it received the backing of Verizon, America’s biggest mobile operator. At the end of 2012, predicts Gartner, a market-research firm, Android phones will have a bigger share of the market than iPhones.
Microsoft’s mobile strategy, though, is in disarray. This could prove to be a serious weakness, as people increasingly use mobile devices to reach online services. Plans to build smart-phones of its own seem to be going nowhere. Its music player, Zune, will remain just that, Steve Ballmer, Microsoft’s boss, said recently. Pink, a project to develop phones based on technology from Danger, a start-up acquired by Microsoft in 2008, is said to face death by cancellation—even more likely after Danger lost personal data belonging to tens of thousands of its customers earlier this month. And the latest version of Windows Mobile is no match for the iPhone and Android. Some handset-makers, including Motorola, have ditched the software.
However, as with Bing, Microsoft has only recently been getting serious. It has put Windows Mobile under new management. Another version is expected by the end of 2010. Some analysts fancy Microsoft’s chances. According to iSuppli, a market-research firm, “Reports of Windows Mobile’s death are greatly exaggerated.”
What could disrupt the three-sided struggle? The antitrust authorities, possibly. Now that Microsoft has made peace, the other two are likelier targets. Most observers imagine Google would be first, pointing to the hullabaloo caused by a settlement with book publishers that allows Google to create a vast digital library. But Apple may beat Google to the dock. The firm’s tight control over its technology is no problem in markets where its share is small (in PCs, it is a mere 7.2%). But in mobile applications and digital music distribution Apple is by far the market leader. America’s Federal Communications Commission is looking into its refusal to carry Google Voice, a telephony and messaging application for the iPhone. Its bar on rivals’ devices connecting to iTunes may cause trouble too. Tellingly, Apple recently hired a lawyer with antitrust experience: Bruce Sewell, the former general counsel of Intel, the world’s biggest chipmaker, which the European Commission wants to pay a fine of more than €1 billion ($1.5 billion) for abusing its dominance.
Then there are market forces. One of the three may come up with something “insanely great”, an expression used at Apple in times past to describe the original Macintosh computer. Apple itself may do so with a tablet computer, rumoured to be ready for release as early as January. Others have built such a dream device, but none has yet overcome the problem of input: typing on a screen is difficult and handwriting recognition has never really worked. If Apple has cracked it, it could upend the PC industry, as the iPhone did the handset market. If the tablet is also a good substitute for paper, the publishing and newspaper industries could be in for more upheaval. The blogosphere is abuzz with rumours that Apple is talking to publishers about offering their content on its device.
The final possibility is for another contender to emerge. The obvious candidates are Amazon, the world’s biggest online retailer, and Facebook, the leading social network. Amazon already has a cloud of sorts. It offers cloud computing services to other online firms and has developed the Kindle, an electronic reader, which is due to be available worldwide from October 19th. Facebook runs what is arguably the most successful cloud service, with more than 300m registered users. It provides a platform for people to communicate, share information and collaborate online—all things that businesses want to do, too.
Only one thing seems sure about the future of the digital skies: the company or companies that dominate it will be American. European or Asian firms have yet to make much of an appearance in cloud computing. Nokia, the world’s biggest handset-maker, is trying to form a cloud with its set of online services called Ovi, but its efforts are still in their infancy. Governments outside America may harbour ambitious plans for state-funded clouds. They would do better simply to let their citizens make the most of the competition among the American colossi.
Clash of the clouds
Oct 15th 2009
The launch of Windows 7 marks the end of an era in computing—and the beginning of an epic battle between Microsoft, Google, Apple and others
DO YOU have plans for next weekend? If not, don’t worry: perhaps a friend will be throwing a party to celebrate the launch of Windows 7, Microsoft’s new operating system, on October 22nd. You’ll get help installing the program and be shown how to use the new features. To maximise the fun, your friend will get tips from the “HostingYourParty” video on YouTube or go to the dedicated website, complete with downloadable party favours and a trivia quiz (sample question: “The Microsoft Pretzel Hunt is an annual pretzel hunt held at the Redmond campus. True or false?”).
This is not satire. It is a toe-curling attempt by Microsoft to create some buzz for its new software. Fortunately for the firm, it will hardly matter, because Microsoft dominates the market for operating systems. After the let-down that was its predecessor, Windows Vista, Windows 7 is certain to be a success. There is plenty of pent-up demand, because Vista’s aged predecessor, XP, is still widely used. Reviews of Windows 7 have been positive, some even glowing, although the software is sometimes hard to install.
Windows 7 is not just a sizeable step for Microsoft. It is also likely to mark the end of one era in information technology and the start of another. Much of computing will no longer be done on personal computers in homes and offices, but in the “cloud”: huge data centres housing vast storage systems and hundreds of thousands of servers, the powerful machines that dish up data over the internet. Web-based e-mail, social networking and online games are all examples of what are increasingly called cloud services, and are accessible through browsers, smart-phones or other “client” devices. Because so many services can be downloaded or are available online, Windows 7 is Microsoft’s first operating system to come with fewer features.
As one window closes…
The launch of Windows 7 coincides with the closing of the book, after more than a decade, on Microsoft’s antitrust woes. The company got into hot water in America and Europe mainly for abusing its dominance of PC operating systems to promote its web browser. On October 7th the European Commission said it had all but reached a settlement with Microsoft. The firm has agreed to give Windows users in Europe a “ballot screen” that allows them to choose a rival browser in place of its own Internet Explorer.
Windows is not going to disappear soon, but cloud computing means it is no longer so important. Other products, some being launched this autumn with less fanfare than Windows 7, represent Microsoft’s future. Last month the company opened two data centres that between them will contain more than half a million servers. This month it released a new version of Windows for smart-phones. And next month it will launch Azure, a platform for developers on which they can write and run cloud services.
The rise of cloud computing is not just shifting Microsoft’s centre of gravity. It is changing the nature of competition within the computer industry. Technological developments have hitherto pushed computing power away from central hubs: first from mainframes to minicomputers, and then to PCs. Now a combination of ever cheaper and more powerful processors, and ever faster and more ubiquitous networks, is pushing power back to the centre in some respects, and even further away in others. The cloud’s data centres are, in effect, outsize public mainframes. At the same time, the PC is being pushed aside by a host of smaller, often wireless devices, such as smart-phones, netbooks (small laptops) and, perhaps soon, tablets (touch-screen computers the size of books).
Although Windows still runs 90% of PCs, the fading importance of the PC means that Microsoft is no longer an all-powerful monopolist. Others are also building big clouds, including Google, a giant of the internet, and Apple, renowned as a maker of hardware, with a market capitalisation that now exceeds those of both Google and IBM, its original arch-rival (see chart above).
Granted, there are hundreds if not thousands of firms offering cloud services—web-based applications living in data centres, such as music sites or social networks. But Microsoft, Google and Apple play in a different league. Each has its own global network of data centres. They intend to offer not just one or two services, but whole suites of them, with services including e-mail, address books, storage, collaboration tools and business applications. They are also vying to dominate the periphery, either by developing software for smart-phones and other small devices or by making such devices themselves.
These three giants (for their vital statistics, see table) are already preparing for battle. In July Google mounted a direct attack on Windows by promising to launch a free PC operating system, Chrome OS. Rumour has it that a basic version may hit the market on the same day as Windows 7, or soon after. Microsoft’s new operating system for smart-phones represents its latest effort to catch up with Apple’s iPhone and Google’s operating system for handsets, called Android. On October 12th Apple and Google severed a tie when Arthur Levinson, a member of both boards, resigned from Google’s. In August Eric Schmidt, Google’s chief executive, had quit Apple’s board because “Google is entering more of Apple’s core businesses,” in the words of Steve Jobs, the gadget-maker’s boss.
A taxonomy of giants
Despite the growing similarities among the three, each is a unique beast, says Michael Cusumano, a professor at Massachusetts Institute of Technology’s Sloan School of Management. They can be classified according to how they approach the cloud, how they make money and how openly they approach the development of intellectual property.
Google, you might say, has been a cloud company since its birth in 1998. It is best known for its search service, but now offers all sorts of other products and services, too. It has built a global network of three dozen data centres with 2m servers, say some estimates. Among other things, it offers a suite of web-based applications, such as word processing and spreadsheets. Lately it has branched out, releasing Android for phones, and its Chrome web-browser and operating system for PCs.
It took Google a while to come up with a way of making money, but it found one in advertising, its main source of revenue. It handles more than 75% of search-related ads in America. Worldwide its share is even higher. Google is also trying to make money from selling services to companies. On October 12th it said that Rentokil Initial, a pest-control-to-parcel-delivery group, would roll out Google’s online applications to its 35,000 employees, making it the biggest company to do so.
Google’s reliance on advertising explains its open approach to intellectual property. Giving Android and Chrome OS away as open-source software not only makes life difficult for rivals’ paid-for products but also increases demand for Google’s services and the reach of its ads. Its openness has limits: Google says little about the architecture of its data centres and search algorithms, because they give the company its competitive edge. The way it organises R&D internally is open and decentralised: self-organising teams come up with ideas for most new services.
If Google was born in the sky, Microsoft started on the ground. Office, its bestselling suite of PC programs, is almost as ubiquitous as Windows. But the company is less a stranger to cloud computing than it may seem. It has built a network of data centres, and is starting to gain traction after losing billions developing online services. Its Xbox games console has powerful online features. Bing, its new search engine, has gained a shade in market share (though it is still miles behind Google). It is even preparing a stripped-down web-based version of Office, and it now offers much of its business software as online services.
However, most of Microsoft’s revenue and all of its profit still come from conventional shrink-wrapped software. But the company cannot leave online advertising to Google, because consumers expect cloud services to be free, financed by ads. Hence Microsoft’s efforts to convince Yahoo!, another online giant, to merge its search and part of its advertising business with Microsoft’s. The deal, sealed in July, means that Microsoft will handle 10% of searches, against Google’s 83%, says Net Applications, a market-research firm.
Given Microsoft’s history, it is hardly surprising that its treatment of intellectual property differs from Google’s. It gives other software firms the technical information they need to write programs that run on, say, Windows. Otherwise, it guards the underlying recipes of its software jealously. That said, the firm now supports many open standards and has even started using bits of open-source software. Internally, its R&D is somewhat more centralised than Google, at least in its online division: teams are bigger, work with more co-ordination and get more guidance from above.
Apple, too, came from outside the cloud. Online services have always been a bit of an afterthought to what the company excels at: pricey but highly innovative bundles of hardware and software, of which the iPhone is only the latest example. Its online offerings—the iTunes store for music and video, the App Store for mobile applications, and MobileMe, a suite of online services—were all originally meant to drive demand for Apple’s hardware, but the firm’s interest in the cloud has grown. It is building a $1 billion data centre, possibly the world’s largest, in North Carolina.
Still, Apple’s financial health thus far has depended mainly on selling hardware. Gadgets generate most of the firm’s revenue and profit. The firm does not reveal its revenue from services separately, but it is not to be sneezed at. Apple accounts for 69% of online music sales in America and 35% of all sales, more than Wal-Mart, reckons NPD Group, a market-research firm. Apple has so far forgone advertising revenue: its services are ad-free, but most of them require payment. Apple’s services are aimed at consumers, not businesses.
Illustration by Ian Whadcock
Apple is also the odd one out when it comes to openness. The word does not appear in its vocabulary. It does not allow any other hardware-maker to build machines using its operating system. It blocks iPhone applications it does not approve of from appearing in the App Store. Apple is also secretive about the way it conducts its internal R&D. Mr Jobs clearly calls most of the shots. But insiders say that there is a system of teams that pitch projects to him.
How will this three-way contest play out? The last similar war was in the 1980s and early 1990s, when Apple, IBM and Microsoft fought for mastery of the PC. After much fire and smoke, Microsoft was victorious. Thanks to what economists call strong network effects, which allow winners to take almost all, Windows relegated its rival operating systems to mere sideshows, securing fat profits for its owner.
Such a lopsided result is unlikely this time. One reason is that the economics of the cloud may be different from those of the PC. Network effects are unlikely to be as strong. Much of the cloud is based on open standards, which should make it easier to switch providers. To underline this point and to counter arguments that it is trying to lock users in, Google has set up the Data Liberation Front, a team of engineers whose job is to devise ways of allowing people to transfer their data.
Unfortunately for Google, it is equally unclear whether the most open player will win, as Microsoft did last time. Many of Google’s new services have failed to take off. Having control over the software on the PC, smart-phones and other client devices, Microsoft can more easily create what it calls “seamless experiences”, for example by keeping a user’s address book and other personal information in step. Consumers may also prefer Apple’s tightly integrated, easy-to-use devices and services, despite the restrictions they impose. Lots of people buy iPods and download music from iTunes even though it is difficult to play the songs on other devices.
Second, all three giants have reliable sources of cash to sustain them. Windows may be under attack, not least because of the boom in cheap netbooks, which has forced Microsoft to reduce prices, says Matt Rosoff of Directions on Microsoft, a newsletter. Even so, the operating system will keep on giving for some time. Microsoft has other strong divisions too, including business and server software. Google may lose some market share in search (and some advertising) to the combination of Bing and Yahoo!, but it is unlikely to be dethroned. Apple is still able to command premium prices, although others make hardware just as slick.
Full war chests
This means that all three will have ample resources to spend in the main areas of the fight: data centres, cloud services and the periphery. In data centres, Google is ahead, but Microsoft is catching up in size and sophistication. Apple has most to learn, but this, too, seems only a question of time and money. Just as much of hardware has become a commodity, knowing how to build huge data centres may not be a big competitive advantage for long. And data centres can get only so big before scale ceases to be an advantage.
In services too, Google is ahead. But in Bing Microsoft may at last have created a worthy rival. The “decision engine”, to use the company’s term, does a good job of helping people choose a new camera or book a holiday. The big question is whether Apple can catch up. Its iTunes and App stores are successes, to be sure, but for now they are highly specialised. Its broader suite of cloud services, MobileMe, is nothing to write home about.
At the cloud’s periphery, however, Apple has a strong position, thanks to the success of the iPhone. More than 30m have been sold so far, 5.2m in the quarter ending in June. Its share of the American market is pushing 14%. The App Store now boasts 85,000 applications and a total of more than 2 billion downloads. But recently Google’s Android has gained momentum. Several handset-makers have released smart-phones based on it, or will do so in the next few months. In early October it received the backing of Verizon, America’s biggest mobile operator. At the end of 2012, predicts Gartner, a market-research firm, Android phones will have a bigger share of the market than iPhones.
Microsoft’s mobile strategy, though, is in disarray. This could prove to be a serious weakness, as people increasingly use mobile devices to reach online services. Plans to build smart-phones of its own seem to be going nowhere. Its music player, Zune, will remain just that, Steve Ballmer, Microsoft’s boss, said recently. Pink, a project to develop phones based on technology from Danger, a start-up acquired by Microsoft in 2008, is said to face death by cancellation—even more likely after Danger lost personal data belonging to tens of thousands of its customers earlier this month. And the latest version of Windows Mobile is no match for the iPhone and Android. Some handset-makers, including Motorola, have ditched the software.
However, as with Bing, Microsoft has only recently been getting serious. It has put Windows Mobile under new management. Another version is expected by the end of 2010. Some analysts fancy Microsoft’s chances. According to iSuppli, a market-research firm, “Reports of Windows Mobile’s death are greatly exaggerated.”
What could disrupt the three-sided struggle? The antitrust authorities, possibly. Now that Microsoft has made peace, the other two are likelier targets. Most observers imagine Google would be first, pointing to the hullabaloo caused by a settlement with book publishers that allows Google to create a vast digital library. But Apple may beat Google to the dock. The firm’s tight control over its technology is no problem in markets where its share is small (in PCs, it is a mere 7.2%). But in mobile applications and digital music distribution Apple is by far the market leader. America’s Federal Communications Commission is looking into its refusal to carry Google Voice, a telephony and messaging application for the iPhone. Its bar on rivals’ devices connecting to iTunes may cause trouble too. Tellingly, Apple recently hired a lawyer with antitrust experience: Bruce Sewell, the former general counsel of Intel, the world’s biggest chipmaker, which the European Commission wants to pay a fine of more than €1 billion ($1.5 billion) for abusing its dominance.
Then there are market forces. One of the three may come up with something “insanely great”, an expression used at Apple in times past to describe the original Macintosh computer. Apple itself may do so with a tablet computer, rumoured to be ready for release as early as January. Others have built such a dream device, but none has yet overcome the problem of input: typing on a screen is difficult and handwriting recognition has never really worked. If Apple has cracked it, it could upend the PC industry, as the iPhone did the handset market. If the tablet is also a good substitute for paper, the publishing and newspaper industries could be in for more upheaval. The blogosphere is abuzz with rumours that Apple is talking to publishers about offering their content on its device.
The final possibility is for another contender to emerge. The obvious candidates are Amazon, the world’s biggest online retailer, and Facebook, the leading social network. Amazon already has a cloud of sorts. It offers cloud computing services to other online firms and has developed the Kindle, an electronic reader, which is due to be available worldwide from October 19th. Facebook runs what is arguably the most successful cloud service, with more than 300m registered users. It provides a platform for people to communicate, share information and collaborate online—all things that businesses want to do, too.
Only one thing seems sure about the future of the digital skies: the company or companies that dominate it will be American. European or Asian firms have yet to make much of an appearance in cloud computing. Nokia, the world’s biggest handset-maker, is trying to form a cloud with its set of online services called Ovi, but its efforts are still in their infancy. Governments outside America may harbour ambitious plans for state-funded clouds. They would do better simply to let their citizens make the most of the competition among the American colossi.
20.8.09
$1.8 trillion
A highly influential American has finally hit the panic button about the tremendous mountain of debt the country is piling up.
Last year, Warren Buffett says, we were justified in using any means necessary to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we'll destroy the value of the dollar
and many Americans' life savings.
Some not-so-fun facts from Buffett's editorial today in the New York Times:
* Congress is now spending 185% of what it takes in
* Our deficit is a post WWII record of 13% of GDP
* Our debt is growing by 1% a month
* We are borrowing $1.8 trillion a year
$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we'll still need another $900 billion.
So, where's it going to come from? Most likely the printing press. And, ultimately, Buffett says, that will destroy the value of the dollar.
Last year, Warren Buffett says, we were justified in using any means necessary to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we'll destroy the value of the dollar
and many Americans' life savings.
Some not-so-fun facts from Buffett's editorial today in the New York Times:
* Congress is now spending 185% of what it takes in
* Our deficit is a post WWII record of 13% of GDP
* Our debt is growing by 1% a month
* We are borrowing $1.8 trillion a year
$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year and Americans save a remarkable $500 billion and lend it to the government, we'll still need another $900 billion.
So, where's it going to come from? Most likely the printing press. And, ultimately, Buffett says, that will destroy the value of the dollar.
15.5.09
Don't write off Germany
JUST think. If the German GDP figures had been reported in the American fashion (annualising the quarter-on-quarter change), they would have been announced as a 13.9% decline. Imagine the headlines if America ever delivers that kind of number.
It doesn't seem fair. The virtuous Germans did not enjoy a housing boom. Their public finances are under reasonable control, with a budget deficit forecast at 4.4% of GDP this year. They joined the euro at too high a rate, and then painstakingly made themselves competitive, creating a powerful export machine (their current account is in surplus). And yet their GDP is set to contract this year by far more than the profligate Americans or British.
Exports are, of course, the reason why German GDP has fallen so sharply. Put crudely, the Lehman collapse caused businesses to put their capital expenditure programmes on hold, and that meant cancelling orders for the type of goods Germany produces. Conversely, this means that, if the green shoots (better purchasing managers' surveys, higher commodity prices) continue to flourish, then German activity will rebound.
Indeed, one could make a class for buying German assets whichever way the global economy goes. If it rebounds, then German manufacturers will benefit (admittedly, many of these are not on the listed market). And if we are heading for financial breakdown, then one would much rather own German government bonds than those of America or much of the rest of Europe.
Buttonwood
9.4.09
Rights issues
Published: April 7 2009 15:15 | Last updated: April 7 2009 20:00
The economy is shot, public finances are on the rocks and many banks are state controlled. Yet UK plc is adroitly restructuring itself. Indebted companies have raised about £20bn ($29.5bn) of equity this year. The banks have taken most, with HSBC alone swallowing £12.5bn, but the miners, construction and property companies have hardly held back. What is surprising, though, is how little equity has been raised elsewhere: according to Dealogic, just half the UK amount in Europe and the US each.
National idiosyncrasies may explain some of this apparent sluggishness. German companies have raised almost no equity this year – perhaps believing, as Berlin long did, that the crisis might pass. But US companies have been almost as slow. Another possibility is the process itself. Yet, while the British rights issue system has been streamlined to 16 days, US companies can raise capital in a heartbeat through book-building, and Europe is often not much slower.
Instead, the reason for UK plc’s speed may be its shareholders. European companies are often controlled by families – which may lack the funds for cash calls. US companies can have large retail bases, invested via mutual finds, which face similar constraints. UK institutional investors, by contrast, have played an active role. They have wanted strong balance sheets among the companies they co-own, were prepared to pay for it, and even act as sub-underwriters to help an issue’s success.
Steep discounts have protected sub-underwriters from the risk of large rumps of unplaced shares. Minorities, meanwhile, can avoid dilution by exercising pre-emption rights that allow participation on equal terms. The result is a relatively efficient and equitable process – and, probably, a lower cost of capital.
So hats off, for once, to institutional shareholders, if not to the debt-binged companies they saved. Other companies, in other countries, may regret not moving as fast.
BACKGROUND NEWS
UK companies have raised some $29bn of fresh capital through rights and convertibles issues this year, compared with $14bn in Europe and $16bn in the US. Asia has, meanwhile, raised $24bn, according to Dealogic.
Citigroup estimates that European companies, including those in the UK, will need to raise as much as $400bn of equity in 2009 and 2010
The economy is shot, public finances are on the rocks and many banks are state controlled. Yet UK plc is adroitly restructuring itself. Indebted companies have raised about £20bn ($29.5bn) of equity this year. The banks have taken most, with HSBC alone swallowing £12.5bn, but the miners, construction and property companies have hardly held back. What is surprising, though, is how little equity has been raised elsewhere: according to Dealogic, just half the UK amount in Europe and the US each.
National idiosyncrasies may explain some of this apparent sluggishness. German companies have raised almost no equity this year – perhaps believing, as Berlin long did, that the crisis might pass. But US companies have been almost as slow. Another possibility is the process itself. Yet, while the British rights issue system has been streamlined to 16 days, US companies can raise capital in a heartbeat through book-building, and Europe is often not much slower.
Instead, the reason for UK plc’s speed may be its shareholders. European companies are often controlled by families – which may lack the funds for cash calls. US companies can have large retail bases, invested via mutual finds, which face similar constraints. UK institutional investors, by contrast, have played an active role. They have wanted strong balance sheets among the companies they co-own, were prepared to pay for it, and even act as sub-underwriters to help an issue’s success.
Steep discounts have protected sub-underwriters from the risk of large rumps of unplaced shares. Minorities, meanwhile, can avoid dilution by exercising pre-emption rights that allow participation on equal terms. The result is a relatively efficient and equitable process – and, probably, a lower cost of capital.
So hats off, for once, to institutional shareholders, if not to the debt-binged companies they saved. Other companies, in other countries, may regret not moving as fast.
BACKGROUND NEWS
UK companies have raised some $29bn of fresh capital through rights and convertibles issues this year, compared with $14bn in Europe and $16bn in the US. Asia has, meanwhile, raised $24bn, according to Dealogic.
Citigroup estimates that European companies, including those in the UK, will need to raise as much as $400bn of equity in 2009 and 2010
23.3.09
Agriculture
Green shoots
Mar 19th 2009 | HONG KONG
From The Economist print edition
No matter how bad things get, people still need to eat
At a time when much of the global economy is falling apart and demand both for consumer goods and the firms that make and finance them is collapsing, the notoriously cyclical world of agriculture is holding up remarkably well. Prices for grains and meat are down from the peaks of mid-2008, but are 30-50% above their averages over the past decade. There is reason to believe that this strength is more than just another of the many bubbles that have recently inflated, only to pop.
Higher prices are hardly a universal blessing: they are good for farmers, many of whom are poor, but bad for consumers. Some of the increase can be blamed on the shift of crops from food to fuel, prompted by wildly inefficient subsidies. But high prices are also a sign of progress because their single largest cause is the steady increase in demand from poorer countries, as people there eat more food—especially more protein. More people are better nourished thanks to a bit more grain, a lot more meat, and much more milk.
China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.
And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.
Expanding supply at the same rate will be difficult, because the amount of arable land under cultivation is growing by only a fraction of a percentage point each year. In China and India many of the most fertile areas are the ones being developed for roads and factories. That means existing land is becoming more valuable, and must become more productive.
The consequences stretch from one end of the food chain to the other, as higher food prices prompt a response. BASF, one of the world’s largest producers of agrochemicals, saw 9% growth last year in agricultural sales, including 16% growth in Asia. It expects the industry to grow by 17% this year, which has begun well, the global economic tumult notwithstanding.
Its competitors are also prospering. The share prices of Agrium, CF Industries, Bunge and Syngenta spiked last year along with food prices, then tumbled (along with the shares of nearly every other company), but then stabilised, even as the rest of the stockmarket continued to tank. Monsanto, which a decade ago had been praised and then trashed for selling highly efficient genetically modified seeds, has seen its popularity restored for exactly the same reason. After years of strong growth, and with the prospect of more to come, its shares are valued at 20 times trailing earnings, nearly double the market average.
Interest in the industry is still growing. A conference for fund managers tied to agriculture held annually in Sydney by Austock, an Australian broker, attracted a few dozen contrarian souls three years ago. This year’s event, which began on March 16th, had to be restricted to several hundred ticket-holders, with many others turned away. Deals are also being done. On March 13th Terra Firma, a private-equity firm based in London, announced it would buy 90% of Consolidated Pastoral Company, the vast Australian cattle holdings of the Packer family, which encompass 5m hectares (12m acres) of land.
In February Nufarm, an Australian agrochemical maker, won approval for its acquisition of AH Marks, one of Britain’s oldest chemical companies, which has a valuable portfolio of herbicides. Nufarm itself only barely avoided being acquired in 2007 in a joint bid by an American private-equity firm and a Chinese state-owned company. Shares of Mosaic, a maker of fertiliser, have been swept by one acquisition rumour after another. Last year COFCO, China’s state-controlled food conglomerate, bought 5% of Smithfield, the world’s largest pork producer. Al Qudra, an Abu Dhabi-based investment company, said it had bought big tracts of farmland in Morocco and Algeria, and was closing in on purchases in Pakistan, Syria, Vietnam, Thailand, Sudan and India.
In November China Agri-Industries, a subsidiary of COFCO, established a partnership with Wilmar, the world’s largest trader in palm oil. Landkom, listed on London’s AIM market, and Black Earth Farming, listed in Stockholm, have each made big investments in farming in Ukraine. And reports are circulating in China about local investors buying 50,000 hectares of farmland in Argentina, and considering other investments in Argentina and Brazil.
Even China is finally opening up to private agricultural investment, in part because new laws allow farmers to lease land, thus making possible economies of scale. Asian Bamboo, a company that is listed in Frankfurt, leases 27,000 hectares in Fujian province. It announced profits for 2008 of €21m ($30.4m) on sales of €44m, reflecting how, at least for the moment, agriculture can be an extraordinarily high-margin business.
There are limits to what can be done, however. By far the most ambitious of all the land deals in the past year was Daewoo Logistics’ contract with the government of Madagascar to lease 1.3m hectares, almost half the country’s arable land, to produce corn for Daewoo’s home country, South Korea. But after riots and a coup in Madagascar, the deal is off. These tensions are not unique. In response to local concerns about the loss of critical food supplies, several governments have imposed taxes or other restrictions on exports: on a key ingredient of fertiliser in China, on grain in Argentina, on rice in India. That sort of meddling undermines some investments and businesses. But in a strong market, it makes the businesses that can operate freely all the more lucrative and valuable.
Mar 19th 2009 | HONG KONG
From The Economist print edition
No matter how bad things get, people still need to eat
At a time when much of the global economy is falling apart and demand both for consumer goods and the firms that make and finance them is collapsing, the notoriously cyclical world of agriculture is holding up remarkably well. Prices for grains and meat are down from the peaks of mid-2008, but are 30-50% above their averages over the past decade. There is reason to believe that this strength is more than just another of the many bubbles that have recently inflated, only to pop.
Higher prices are hardly a universal blessing: they are good for farmers, many of whom are poor, but bad for consumers. Some of the increase can be blamed on the shift of crops from food to fuel, prompted by wildly inefficient subsidies. But high prices are also a sign of progress because their single largest cause is the steady increase in demand from poorer countries, as people there eat more food—especially more protein. More people are better nourished thanks to a bit more grain, a lot more meat, and much more milk.
China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.
And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.
Expanding supply at the same rate will be difficult, because the amount of arable land under cultivation is growing by only a fraction of a percentage point each year. In China and India many of the most fertile areas are the ones being developed for roads and factories. That means existing land is becoming more valuable, and must become more productive.
The consequences stretch from one end of the food chain to the other, as higher food prices prompt a response. BASF, one of the world’s largest producers of agrochemicals, saw 9% growth last year in agricultural sales, including 16% growth in Asia. It expects the industry to grow by 17% this year, which has begun well, the global economic tumult notwithstanding.
Its competitors are also prospering. The share prices of Agrium, CF Industries, Bunge and Syngenta spiked last year along with food prices, then tumbled (along with the shares of nearly every other company), but then stabilised, even as the rest of the stockmarket continued to tank. Monsanto, which a decade ago had been praised and then trashed for selling highly efficient genetically modified seeds, has seen its popularity restored for exactly the same reason. After years of strong growth, and with the prospect of more to come, its shares are valued at 20 times trailing earnings, nearly double the market average.
Interest in the industry is still growing. A conference for fund managers tied to agriculture held annually in Sydney by Austock, an Australian broker, attracted a few dozen contrarian souls three years ago. This year’s event, which began on March 16th, had to be restricted to several hundred ticket-holders, with many others turned away. Deals are also being done. On March 13th Terra Firma, a private-equity firm based in London, announced it would buy 90% of Consolidated Pastoral Company, the vast Australian cattle holdings of the Packer family, which encompass 5m hectares (12m acres) of land.
In February Nufarm, an Australian agrochemical maker, won approval for its acquisition of AH Marks, one of Britain’s oldest chemical companies, which has a valuable portfolio of herbicides. Nufarm itself only barely avoided being acquired in 2007 in a joint bid by an American private-equity firm and a Chinese state-owned company. Shares of Mosaic, a maker of fertiliser, have been swept by one acquisition rumour after another. Last year COFCO, China’s state-controlled food conglomerate, bought 5% of Smithfield, the world’s largest pork producer. Al Qudra, an Abu Dhabi-based investment company, said it had bought big tracts of farmland in Morocco and Algeria, and was closing in on purchases in Pakistan, Syria, Vietnam, Thailand, Sudan and India.
In November China Agri-Industries, a subsidiary of COFCO, established a partnership with Wilmar, the world’s largest trader in palm oil. Landkom, listed on London’s AIM market, and Black Earth Farming, listed in Stockholm, have each made big investments in farming in Ukraine. And reports are circulating in China about local investors buying 50,000 hectares of farmland in Argentina, and considering other investments in Argentina and Brazil.
Even China is finally opening up to private agricultural investment, in part because new laws allow farmers to lease land, thus making possible economies of scale. Asian Bamboo, a company that is listed in Frankfurt, leases 27,000 hectares in Fujian province. It announced profits for 2008 of €21m ($30.4m) on sales of €44m, reflecting how, at least for the moment, agriculture can be an extraordinarily high-margin business.
There are limits to what can be done, however. By far the most ambitious of all the land deals in the past year was Daewoo Logistics’ contract with the government of Madagascar to lease 1.3m hectares, almost half the country’s arable land, to produce corn for Daewoo’s home country, South Korea. But after riots and a coup in Madagascar, the deal is off. These tensions are not unique. In response to local concerns about the loss of critical food supplies, several governments have imposed taxes or other restrictions on exports: on a key ingredient of fertiliser in China, on grain in Argentina, on rice in India. That sort of meddling undermines some investments and businesses. But in a strong market, it makes the businesses that can operate freely all the more lucrative and valuable.
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