Apple: ‘From a tech titan into a dinosaur’ — but not for a year

By  October 29, 2012: 11:51 AM ET

An analyst predicts the company’s demise, yet still rates it a “buy”

FORTUNE — Here’s a quote for Daring Fireball‘s claim chowder:

“As we have stated before on many occasions, Apple’s time to turn from a tech titan into a dinosaur will come, but we still think that we are at least a year away…” — Berenberg Bank’s Adnaan Ahmad

I suppose working for a company that’s been in the private banking business since 1590 gives one a certain historical perspective, but it’s hard to believe — not matter what he wrote on Friday — that Mr. Ahmad really thinks that Apple (AAPL) will face extinction in fiscal 2014.

The occasion for his note — issued the day after Apple’s Q4 2012 report — was the company’s gross margin guidance for Q1 2013: A surprisingly low 36%. Like most analysts, Ahmad is pretty sure that number will trend up over the next 12 months as the company’s production “learning curve” improves.

A bigger issue, he writes, are the margins on the iPad mini, which Apple has priced lower than it might otherwise if it weren’t trying to squeeze competitors like Amazon (AMZN) and Google (GOOG) who can’t seem to sell their 7-inch tablets for less than $199 without losing money on each sale.

But he believes the biggest worry for Apple — and the one that led to that remark about dinosaurs — is that day in the future when the company’s iPhone business begins to slow down:

“The concern is obviously that with a high teens market share in the smartphone space, its share gains (like this quarter) will tap out given the high price points. This quarter, for example, ASPs were $636, which compares to $55 ASPs at Nokia, $150 ASPs at Samsung and $200-250 ASPs at HTC and RIMM. So for Apple to gain wider share of the smartphone market, it will need to offer ‘customised’ products at lower price points (i.e. pre-paid iPhone), rather than continue with its current strategy of dropping price on a one- or two-year old product. This will have similar margin ramifications to those that the mini has had on the iPad segment, and if Apple decides not to have customised lower-end iPhones, then growth will well and truly tap out once the China Mobile deal is signed (likely in H213). Outside of Samsung playing a price war game against Apple, this slower growth trajectory of the iPhone business is Apple’s single biggest concern in our view.”

Despite his concerns, when it comes to making investment advice, Ahmad seems to want it both ways.

“The most-asked question we face,” he writes, “is which suppliers of Apple to own – our usual response is none! Look at it this way: if an 800lb gorilla is having some margin issues, how is its supply base going to fare?…

“Hence our negative bias to Qualcomm, Imagination, Hon Hai, Catcher, TPK, Foxconn Technology and Dialog. If you want to play the volume theme, you would play Apple, Samsung and ARM, all of which we rate as Buys.”

Go figure.

Home prices rise for fifth month in a row

NEW YORK (CNNMoney) — The housing market picked up more momentum in August, as the average home price for 20 major cities jumped 0.9%, according to the S&P/Case-Shiller home price index

The increase marked the fifth consecutive month of gains for the index with all but one city, Seattle, recording month-over-month price increases.

“The sustained good news in home prices over the past five months makes us optimistic for continued recovery in the housing market,” said David Blitzer, spokesman for S&P.

The Case-Shiller report is one of many gauges of housing market health that has turned upbeat in recent months. New and existing home sales have been stronger, inventory of homes for sale has fallen and developers have stepped up building activity.

Slow improvement in the national economy has also boosted the housing market, as have record low mortgage rates. The rates for a 30-year loan have stayed below 3.7% since May. Combined with home prices that are still about a third less than they were when they hit their peak, these record-low rates have made homebuying very affordable.

Of the cities S&P’s index covers, Phoenix has roared back the fastest, with a whopping 18.8% year-over-year gain in August. That marks the fourth month in a row of double-digit price hikes. Detroit prices rose 7.6% over the past 12 months and Miami’s grew 6.7%.

Mike Larson, a financial analyst with Weiss Research, remains cautious about the outsized gains in Phoenix and some Florida markets. Much of the return represents “a resurgence in investor demand,” he said. Investors now represent about 27% of the home purchases in the market, according to data from the National Association of Realtors.

Most of these buyers are looking to take advantage of beaten down prices so they can rent out the properties at a healthy profit, he said.

“The fly in the ointment is that these buyers lack emotional attachment,” said Larson. So unlike regular homeowners, they will likely not stick with the homes should the market head South again.

Among the three cities to have year-over-year losses, Atlanta recorded the biggest decrease in home values, with prices down 6.1%. New York was down 2.3% and Chicago fell 1.6%.

Rising prices are expected to continue, leading some economists to predict the housing market has finally turned a corner.

“Looking forward, price increases will continue,” said Jed Kolko, chief economist for Trulia. His company has more recent data, for September and October, that shows asking prices on homes have risen.

“Prices on Election Day will be almost the same as when Obama took office, probably just 1.7% below where they were in January 2009,” he said.

Microsoft Seeks an Edge in Analyzing Big Data

Published: October 29, 2012

SEATTLE — Eric Horvitz joined Microsoft Research 20 years ago with a medical degree, a Ph.D. in computer science and no plans to stay. “I thought I’d be here six months,” he said.

He remained at M.S.R., as Microsoft’s advanced research arm is known, for the fast computers and the chance to work with a growing team of big brains interested in cutting-edge research. His goal was to build predictive software that could get continually smarter.

In a few months, Mr. Horvitz, 54, may get his long-awaited payoff: the advanced computing technologies he has spent decades working on are being incorporated into numerous Microsoft products.

Next year’s version of the Excel spreadsheet program, part of the Office suite of software, will be able to comb very large amounts of data. For example, it could scan 12 million Twitter posts and create charts to show which Oscar nominee was getting the most buzz.

A new version of Outlook, the e-mail program, is being tested that employs Mr. Horvitz’s machine-learning specialty to review users’ e-mail habits. It could be able to suggest whether a user wants to read each message that comes in.

Elsewhere, Microsoft’s machine-learning software will crawl internal corporate computer systems much the way the company’s Bing search engine crawls the Internet looking for Web sites and the links among them. The idea is to predict which software applications are most likely to fail when seemingly unrelated programs are tweaked.

If its new products work as advertised, Microsoft will find itself in a position it has not occupied for the last few years: relevant to where technology is going.

While researchers at M.S.R. helped develop Bing to compete with Google, the unit was widely viewed as a pretty playground where Bill Gates had indulged his flights of fancy. Now, it is beginning to put Microsoft close to the center of a number of new businesses, like algorithm stores and speech recognition services. “We have more data in many ways than Google,” said Qi Lu, who oversees search, online advertising and the MSN portal at Microsoft.

M.S.R. owes its increased prominence as much to the transformation of the computing industry as to its own hard work. The explosion of data from sensors, connected devices and powerful cloud computing centers has created the Big Data industry. Computers are needed to find patterns in the mountains of data produced each day.

“Everything in the world is generating data,” said David Smith, a senior analyst with Gartner, a technology research firm. “Microsoft has so many points of presence, with Windows, Internet Explorer, Skype, Bing and other things, that they could do a lot. Analyzing vast amounts of data could be a big business for them.”

Microsoft is hardly alone among old-line tech companies in injecting Big Data into its products. Later this year, Hewlett-Packard will showcase printers that connect to the Internet and store documents, which can later be searched for new information. I.B.M. has hired more than 400 mathematicians and statisticians to augment its software and consulting. Oracle and SAP, two of the largest suppliers of software to businesses, have their own machine-learning efforts.

In the long term, Microsoft hopes to combine even more machine learning with its cloud computing system, called Azure, to rent out data sets and algorithms so businesses can build their own prediction engines. The hope is that Microsoft may eventually sell services created by software, in addition to the software itself.

“Azure is a real threat to Amazon Web Services, Google and other cloud companies because of its installed base,” said Anthony Goldbloom, the founder of Kaggle, a predictive analytics company. “They have data from places like Bing and Xbox, and in Excel they have the world’s most widely used analysis software.”

Like other giants, Microsoft also has something that start-ups like Kaggle do not: immense amounts of money — $67 billion in cash and short-term investments at the end of the last quarter — and the ability to work for 10 years, or even 20, on a big project.

It has been a long trip for Microsoft researchers. M.S.R. employs 850 Ph.D.’s in 13 labs around the world. They work in more than 55 areas of computing, including algorithm theory, cryptography and computational biology.

Machine learning involves computers deriving meaning and making predictions from things like language, intentions and behavior. When search engines like Google or Bing offer “did you mean?” alternatives to a misspelled query, they are employing machine learning. Mr. Horvitz, now a distinguished scientist at M.S.R., uses machine learning to analyze 25,000 variables and predict hospital patients’ readmission risk. He has also used it to deduce the likelihood of traffic jams on a holiday when rain is expected.

Mr. Horvitz started making prototypes of the Outlook assistant about 15 years ago. He keeps digital records of every e-mail, appointment and phone call so the software can learn when his meetings might run long, or which message he should answer first.

“Major shifts depend on incremental changes,” he said.

At a retreat in March, 100 top Microsoft executives were told to think of new ways that machine learning could be used in their businesses.

“It’s exciting when the sales and marketing divisions start pulling harder than we can deliver,” Mr. Horvitz said. “Magic in the first go-round becomes expectation in the next.”

Global shares see modest rise as U.S. storm impact assessed

By Richard Hubbard

LONDON | Tue Oct 30, 2012 11:02am EDT

(Reuters) – World shares rose modestly in subdued trading on Tuesday as investors waited to see the full impact of a massive storm that wrought destruction across the eastern United States.

The monster storm, code-named Sandy, was responsible for at least 15 deaths, left millions without power, and has closed much of New York’s financial district.

Wall Street shut for a second day, and bond trading was also halted as the focus switched to whether markets would be able to resume activity on the final day of the month on Wednesday, which is key to pricing investment portfolios.

The FTSEurofirst 300 index of top European shares .FTEU3 was up 0.75 percent at 1,101.75 points and, after gains earlier in Asia, the MSCI world equity index .MIWD00000PUS had risen 0.3 percent to 328.86 points.

U.S. stock index futures, which kept trading in Europe, edged lower, but volumes were very light. .N

“We’re a bit lost without Wall Street, frankly,” said Alexandre Tixier, technical analyst at TradingSat, in Paris.

Across European stock markets, attention was on corporate earnings, with results from well known names like Germany’s Deutsche Bank (DBKGn.DE), Swiss banking giant UBS (UBSN.VX) and oil major BP (BP.L) lifting prices. UBS shares leapt over four percent as it confirmed a plan to cut 10,000 jobs.

Britain’s FTSE 100 index .FTSE was up 0.75 percent, Germany’s DAX index .GDAXI up 0.9 percent and Switzerland’s SMI index .SSMI up 0.5 percent.


In the currency markets, which remained open, the dollar lost ground against a resurgent yen after the Bank of Japan eased policy less aggressively than had been hoped for at its regular policy setting meeting.

The BOJ increased its monetary stimulus for a second month running, this time by 11 trillion yen ($138.5 billion), disappointing many who had positioned for a more aggressive increase.

“It was a very skeptical response to the BOJ policy meeting, made worse by the fact they have revised lower the growth and inflation outlook,” said Jane Foley, senior currency strategist at Rabobank. “That has seen the yen unwind a lot of the softer tone we saw going into this meeting.”

The dollar hit a one-week low of 79.25 yen and was down 0.3 percent against a basket of majorcurrencies at 79.67 points .DXY.

The weaker dollar helped the European common currency climb 0.4 percent to $1.2958, while news the Spanish economy had shrunk slightly less than expected in the third quarter and Italy’s borrowing costs had fallen also supported the euro.

But gains for the single currency are expected to be limited by continuing questions over whetherGreece can agree a deal with its creditors, and when Spain might request financial aid.

Spain’s economy contracted for a fifth straight quarter between July and September, and prices rose, according to new data, keeping pressure on the government to take some action as the prospect of further civil unrest grows.

“Spain’s economy is suffering terribly, which will continue to hit government revenues, and a modest decline in bond yields will not solve the problem,” said Kit Juckes, strategist at Societe Generale.

Prime Minister Mariano Rajoy has maintained an ambivalent stance towards applying for a politically embarrassing rescue that would kickstart an ECB bond-buying programme and ease financing costs.

Investors, too, seem willing to wait; 10-year Spanish bond yields were little changed at 5.67 percent.

German government bonds, the benchmark of European fixed-income markets, were also mostly flat.

Italy was even able to sell 7 billion euros of new five- and 10-year government bonds at its lowest cost since May 2011.

Italian 10-year yields dipped 1 basis point lower on the day to 5 percent, having risen about 25 basis points in the last two weeks.


In oil markets, prices were edging higher as traders awaited news of the damage inflicted by Sandy on refineries and pipelines on the U.S. east coast, though weaker demand from the storm-hit region capped gains.

Brent crude for December rose 8 cents to $109.36 a barrel, recovering from a fall to $108.75 earlier, while U.S. crude for December was up 60 cents at $86.14.

U.S. gasoline futures were little changed at $2.7530 a gallon, after climbing more than 5 cents on Monday on expectations of tighter supply.

“People are just holding back a little bit to see if there’s any real damage and impact, and at the moment it’s too hard to see,” said Bjarne Schieldrop, an analyst at SEB in Oslo.

(Additional reporting by Nia Williams, Blaise Robinson and Alice Baghdjian; Editing by Will Waterman)

Consumers drive growth as businesses hold back

By Lucia Mutikani

WASHINGTON | Fri Oct 26, 2012 9:20pm EDT

(Reuters) – Economic growth accelerated in the third quarter as a last minute spurt in consumer spending and a surprise turnaround in government outlays offset the first cutback in business investment in more than a year.

Even so, the stronger pace of expansion fell short of what is needed to make much of a dent in unemployment, and it offered little cheer for the White House ahead of the closely contested November 6 presidential election.

Gross domestic product grew at a 2 percent annual rate, the Commerce Department said on Friday in its first estimate of the third quarter, a pick-up from the second quarter’s 1.3 percent pace. But to make substantial headway cutting the jobless rate, the economy needs to grow by more than a 2.5 percent pace over several quarters.

The growth was a bit better than economists had expected, in part because of a surge in government defense spending, which was not expected to last. Defense spending rose at its fastest pace in three years, and combined with the rise in household consumption and a jump in home building to strengthen domestic demand.

“The economy still has only weak forward momentum,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington Massachusetts. “Some underlying fundamentals are improving, but uncertainty at home and abroad is holding back the business sector.”

U.S. stocks ended the day little changed, with corporate earnings holding greater sway over market sentiment, while Treasury debt prices rose. The dollar was flat against a basket ofcurrencies.

Since climbing out of recession, the U.S. economy has faced a series of headwinds ranging from high gasoline prices to the debt turmoil in Europe and, lately, fears of U.S. government austerity. The economy has struggled to exceed a 2 percent growth pace and remains about 4.5 million jobs short of where it stood when the downturn started.

White House adviser Alan Krueger said the GDP report underscored the need to extend tax cuts for the middle class and small businesses, as President Barack Obama has proposed. Obama’s Republican challenger, Mitt Romney, described it as evidence of the president’s failed policies.

In the third quarter, consumers shrugged off the impending sharp cuts in government spending and higher taxes that are due early next year and went on a bit of a shopping spree, buying automobiles and snapping up Apple Inc’s iPhone 5.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, grew at a 2 percent rate after increasing 1.5 percent in the second quarter.

A separate private-sector report showed consumer sentiment rose this month to its highest point in five years, another sign households are little worried by the looming fiscal cliff at year end that will raise income taxes and is estimated to drain about $600 billion from the economy next year unless Congress acts.


High stock prices and firming home values have made households a bit more willing to take on new debt, supporting consumer spending even in the face of higher gasoline prices.

An inflation gauge in the government’s GDP report rose at a 1.8 percent rate, up from the second quarter’s 0.7 percent pace. But a core measure that strips out food and energy costs slowed to a 1.3 percent rate, suggesting the rise in overall inflation will be temporary.

Even so, with about 23 million Americans either out of work or underemployed, consumers might have to cut back, especially if they get slapped with a higher tax bill in 2013.

Incomes were squeezed in the third quarter — rising just 0.8 percent after accounting for inflation and taxes — and households slowed their saving to ramp up their spending.

Government spending, which snapped eight straight quarters of declines, accounted for 0.7 percentage point of GDP growth. Defense outlays jumped at a 13 percent annual rate, the most since the second quarter of 2009, after dropping for three consecutive quarters. The surge was mainly in defense services — installation, and support for both weapons and personnel.

Fears of the fiscal cliff hammered business spending, which dropped at a 1.3 percent pace, the first decrease since the first quarter of 2011.

“We are being really cautious about (the) kinds of investments we make and the kinds of risks we are taking in this environment,” the chief executive of consumer products maker Newell Rubbermaid Inc, Mike Polk, told Reuters on Friday.

Worries over slower global growth have weighed on the corporate sector, which has issued a series of disappointing third-quarter earnings reports. According to Thomson Reuters data, 63 percent of companies have posted revenues below analysts’ expectations; several have also announced job cuts.

Slowing global demand, particularly weakness in Europe and China, caused U.S. exports to contract for the first time since the first quarter of 2009. Exports declined by 1.6 percent, outstripping a 0.2 percent decline in imports, marking the first drop in imports for three years.

Another spot of weakness in the GDP report were inventories, which were squeezed by a drought in the U.S. Midwest. Farm inventories cut 0.42 percentage point from GDP growth and could remain a drag in the fourth quarter.

Home building, which has been a weak spot in the economic recovery, surged at a 14.4 percent rate, thanks in large part to the Federal Reserve’s ultra-accommodative monetary policy stance, which has driven mortgage rates to record lows.

Economists say housing – the epicenter of the last recession – will contribute to growth this year for the first time since 2005.

(Additional reporting by Caroline Valetkevitch in New York; Editing by Neil Stempleman, Tim Ahmann and Leslie Adler)

U.S. economic growth gauge edges up last week: ECRI

NEW YORK | Fri Oct 26, 2012 10:30am EDT

(Reuters) – A measure of future U.S. economic expansion edged up last week, though the annualized growth rate declined for the first time since June, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index gained slightly to 126.8 in the week ended October 19 from 126.6 the previous week.

The prior week’s number was originally reported as 126.7.

The index’s annualized growth rate slipped to 6.0 percent from 6.1 percent.

(Reporting by Leah Schnurr; Editing by Dale Hudson)

Euro falls vs dollar, yen on euro zone uncertainty

NEW YORK | Mon Oct 29, 2012 12:05pm EDT

(Reuters) – The euro fell against the dollar and yen on Monday, hurt by uncertainty over whetherGreece can agree to a deal on austerity and with no sign of when Spain might request aid.

The single currency was expected to stay subdued against the dollar and the yen, with investors preferring safe-haven currencies also on renewed worries about weak earnings from top companies in the region.

Near-bankrupt Greece needs a comprehensive deal on an austerity package to unlock its next tranche of aid before it runs out of cash in mid-November. International lenders have refused to make more concessions on changes to labor laws contested by a junior partner in the ruling coalition, prolonging the impasse on a reforms package and weighing on the euro.

A Spanish bailout would enable the European Central Bank to buy the country’s bonds. Unless Spain formally seeks a rescue, sentiment toward the euro is unlikely to turn positive, traders said.

A meeting between Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy on Monday had little impact on trading.

“There’s no quick fix for Europe’s problems and even though this week’s European bond auctions and Spanish bond redemption may pass smoothly, the stability will be a mere illusion,” said Kathy Lien, managing director at BK Asset Management in New York. “Spain is in a state of denial about its problems and while current borrowing costs are more manageable, they need to drop below 5 percent to remove the need for a bailout.”

The single currency was down 0.2 percent at $1.2915, not far from a two-week low of $1.2881, with bids from sovereign investors cited at $1.2850. Technical analysts saw support at its 200-day moving average.

The euro bought 102.95 yen, down 0.1 percent and well off a six-month peak touched on October 23.

Traders expect activity will be thin as Hurricane Sandy is expected to slam into the U.S. East Coast later on Monday. U.S. stock and options markets will be closed on Monday, and possibly Tuesday, as regulators, exchanges and brokers worry about the integrity of markets and the safety of employees.

“The market is likely to remain quiet today as many are more focused on personal safety and the safety of their family and property,” said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut. “I would expect we remain in a sluggish risk tone, meaning U.S. dollar bid and emerging market soft through the remainder of today as there isn’t much to shift the grumpy mood of the market today.”


The dollar rose 0.1 percent to 79.73 yen, just off the session high of 79.75 yen but below Friday’s four-month high of 80.36 yen.

The BOJ is expected to further ease monetary policy and might make a stronger commitment to keep pumping in cash until its 1 percent annual inflation target is achieved, sources have said.

“BOJ easing expectations were a big factor for markets last week, but are not having much impact this week, with the likely outcome already factored in,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

However, some said the yen could weaken further no matter what the BOJ outcome. Should the central bank refrain from easing as strongly as the market expects, futures and options market data suggests the yen’s underlying soft trend will remain intact.

(Reporting by Nick Olivari, editing by G Crosse)

In San Francisco, tech investor leads a political makeover

By Gerry Shih

SAN FRANCISCO | Mon Oct 29, 2012 5:23am EDT

(Reuters) – One morning in April, Ron Conway, the billionaire technology investor, sat in a conference room on the second floor of San Francisco’s City Hall with about 50 representatives from the city’s business community.

On the agenda was a sweeping proposal by Mayor Ed Lee to reform the city’s payroll tax, a plan that would favor companies with many employees but little revenue — tech start-ups, namely — while shifting the burden to the real estate and financial industries.

The head of the San Francisco Chamber of Commerce was arguing against the proposal when Conway abruptly cut him off.

“The tech industry is producing all the jobs in this city,” Conway snapped, according to four people present, his voice rising as he insisted that old-line businesses “need to get on board.”

In the end, they did get on board — and San Francisco voters on November 6 will decide whether to approve the change in the tax code.

Conway’s success with the tax initiative demonstrates the profound transformation playing out in San Francisco’s business corridors and its halls of power. As start-ups blossom, attracting a wave of entrepreneurs and investment dollars, the tech industry is wielding newfound clout in local politics — largely thanks to Conway, its brash, silver-haired champion.

The shift, local political experts say, harks back to the turn of the last century, when financial institutions like the Bank of Italy — forebear to present-day Bank of America — gradually eroded the railroad barons’ grip over California politics.

Now the tech industry, led by Conway, is beginning to overshadow long-dominant local business lobbies, said Chris Lehane, a political consultant and former adviser in the Clinton White House.

“When you have a new business entity that really hasn’t existed in the past and becomes a real player in local politics, that changes the balance a bit,” said Lehane, who is based in San Francisco. “People like Ron Conway, he’s an angel investor in companies but also an angel supporter of politicians he cares about.”

Not everyone in this famously liberal city is enthused about the new tech boom, which is driving up rents and threatening to price out all but the wealthy.

“As someone who lived through the tech boom in the ’90s and watched countless friends and community members get pushed out of their homes, only for the bubble to disintegrate, this is painful to watch,” said Gabriel Haaland, political director for the SEIU Local 1021, the largest union in the city. “Those times are here again.”

Last month, when San Francisco Magazine published an article bemoaning tech-driven gentrification, traffic on the magazine’s website broke all records.

“It touched on an issue that people have been thinking about for a while,” said Jon Steinberg, the magazine’s editor.

Conway and Lee make no apologies.

“Tech added 13,000 out of the 25,000 new jobs we created the last couple years, which helped us bring the unemployment rate to the third-lowest in the state,” Lee, a Democrat, said in an interview. “We have to work with the new jobs creators, and that’s what I believe the public wants me to do.”

Conway, who made his name in the 1990s by betting on small, early-stage companies and scoring a huge win with Google, says a key goal of a new civic organization he has started, San Francisco Citizens Initiative for Technology & Innovation, is to provide service jobs in tech for long-term residents and the unemployed.

“It would be great if we could create a few hundred jobs in the $50,000 to $80,000 income bracket,” said Conway. “We’re here to improve the living conditions for all of San Francisco. That’s the responsibility tech wants to take.”


Conway and Lee have an exceptionally close relationship, one that has captivated the city’s political set even while attracting accusations of favoritism from the mayor’s rivals.

The two make an odd couple. Lee was a publicity-shy city bureaucrat and civil rights lawyer for decades before being named caretaker mayor of this Democratic bastion in 2011 after his predecessor was elected lieutenant governor. Conway, until recently a registered Republican, counts Tiger Woods and Henry Kissinger among his investors and considers a start-up tour with Ashton Kutcher in tow just another day’s work.

In a city that faces chronic budget deficits even as it enjoys a comparatively strong economy, the relationship is symbiotic. Conway taps his access to Lee to promote his companies, from Twitter to Zynga to Airbnb; Lee persuades Conway to rally tech leaders to help fund the police, the schools, the parks.

Their alliance began only last year. As interim mayor, Lee impressed Conway when he pushed through a tax exemption for Twitter, which had considered moving out of the city to avoid the tax bill that would have resulted from an initial public offering. San Francisco imposes a 1.5 percent payroll tax on local companies, a levy that applies to any gains in an IPO.

When Lee ran for a full four-year term several months later, Conway formed an independent political action committee on his behalf. He rustled up almost $700,000 from the likes of entrepreneur Sean Parker; Zynga CEO Mark Pincus; Salesforce CEO Marc Benioff; venture capitalists John Doerr and Tom Byers; and Credit Suisse banker Bill Brady.

He also enlisted Portal A, a video production outfit consisting of three twentysomething hitmakers, to create a YouTube video that featured rapper MC Hammer, Yahoo CEO Marissa Mayer and San Francisco Giants pitcher Brian Wilson dancing on Conway’s rooftop. The clip went viral and effectively drowned out ads from Lee’s rivals.

A year later, Conway rated the mayor’s performance a “9.5 out of 10.”

“I have a tremendous respect for Mayor Lee,” he said. “He listens to people. He builds consensus, and that’s an improvement from the past.”

Conway said he and Lee are “too busy with our day jobs” to socialize frequently. Neither likes to publicly discuss their relationship. But when the mayor turned 60 in May, Lee and his family sat down for a three-hour private dinner with Conway and his wife, Gayle, at an Italian restaurant in North Beach, according to the San Francisco Chronicle’s gossip columnists.

For Conway — whose calls to the mayor’s office are considered the highest priority, City Hall insiders say — no issue facing his portfolio companies is too insignificant for him to get involved. In one instance this year, after social media company Pinterest moved to San Francisco, Conway pressed officials to repaint curbs to allow employee parking near the start-up’s offices, according to two people with knowledge of the matter. The city refused; Conway denied that the incident occurred.

While some cities have cracked down on services like Airbnb, which lets residents rent out spare bedrooms and can run afoul of local lodging ordinances, Lee has taken the opposite tack. This year he formed a policy-making group to consider how to regulate and foster such companies, which are part of what’s known in Silicon Valley as the “sharing economy.”

The mayor has also urged Conway to help city initiatives. Conway recently contributed $100,000 toward a campaign to approve bonds to restore the city’s parks, and gave $25,000 to a charity founded by Lee that funds impoverished public schools. When a group of software developers tried recently to create an app that would improve public bus performance but lacked funds for a pilot program, SF Citi stepped in and cut a check.

Lee said he hoped Conway would fill a void left by recently deceased philanthropists such as Gap Inc founder Don Fisher, real estate mogul Walter Shorenstein and private equity investor Warren Hellman.

“The tech guys like Conway usually want to meet presidents and such. You never see them play so deep in local government,” said one Democratic fundraiser. “It’s unusual.”

But the tech world says the headlong plunge into local politics is classic Conway.

“When Ron is passionate about an issue or a company or a person, it’s never a secret,” said Twitter CEO Dick Costolo. “He’s passionate about San Francisco right now, and it’s exhibiting itself in the way he helps companies in the city, the way he helps the city. It’s fantastic to see.”


Conway says his top priority is passage of the payroll tax reform initiative on November 6.

The measure would tax local businesses based on their gross receipts instead of the size of their payroll, which benefits low-revenue, high-headcount companies like startups. Financial, insurance and real estate companies would see their local taxes rise by 30 percent, while taxes will remain flat for most scientific and technical companies.

Crucially, the measure would also mean that proceeds from an IPO would not be subject to taxes.

Landlords, and to a lesser extent financial services companies, conceded that they had lost their first political fight with the tech industry, but took the long view.

“We knew we were going to be socked in a big way, and we worked early and long and hard with the city for a rate that was fair,” said Ken Cleaveland of the Building Owners and Managers Association. “In the end it wasn’t in our best interest to fight our tenants.”

(Reporting by Gerry Shih; Editing by Jonathan Weber, Douglas Royalty and Dale Hudson)

British engineers create petrol from air and water

By Alice Baghdjian

LONDON | Fri Oct 19, 2012 11:21am EDT

(Reuters) – A small British company has developed a way to create petrol from air and water, technology it hopes may one day contribute to large-scale production of green fuels.

Engineers at Air Fuel Synthesis (AFS) in Teeside, northern England, say they have produced 5 liters of synthetic petrol over a period of three months.

The technique involves extracting carbon dioxide from air and hydrogen from water, and combining them in a reactor with a catalyst to make methanol. The methanol is then converted into petrol.

By using renewable energy to power the process, it is possible to create carbon-neutral fuel that can be used in an identical way to standard petrol, scientists behind the technology say.

“It’s actually cleaner because it’s synthetic,” Peter Harrison, chief executive officer of AFS, said in an interview.

“You just make what you need to make in terms of the contents of it, so it doesn’t contain what might be seen as pollutants, like sulphur,” he said.

The work is part of a two-year project that has so far cost around 1 million pounds ($1.6 million).

The green petrol will not appear on forecourts any time soon, though.

“We can’t make (the petrol) at pump prices, but we will do eventually,” Harrison said. “All we need is renewable energy to make it, and so when oil becomes a problem we will be able to make a contribution to keep cars moving or to keep aeroplanes moving.”

AFS said it was confident the technology could be scaled up to refinery size in the future. Each of the processes that go into making the fuel already take place separately on an industrial scale.

For now, however, AFS plans to build a commercial plant in the next two years that will produce around 1,200 liters a day of specialist fuels for the motorsports sector, Harrison said.

(Reporting by Alice Baghdjian; Editing by Chris Wickham and Jane Baird)

The CIA and Jeff Bezos Bet on Quantum Computing


Thursday, October 4, 2012

Inside a blocky building in a Vancouver suburb, across the street from a dowdy McDonald’s, is a place chilled colder than anywhere in the known universe. Inside that is a computer processor that Amazon founder Jeff Bezos and the CIA’s investment arm, In-Q-Tel, believe can tap the quirks of quantum mechanics to unleash more computing power than any conventional computer chip. Bezos and In-Q-Tel are in a group of investors who are betting $30 million on this prospect.

If the bet works out, some of the world’s thorniest computing problems, such as the hunt for new drugs or efforts to build artificial intelligence, would become dramatically less challenging. This development would also clear the tainted reputation of D-Wave Systems, the startup whose eight-year-long effort to create a quantum computer has earned little more than skepticism bordering on ridicule from prominent physicists.

D-Wave’s supercooled processor is designed to handle what software engineers call “optimization” problems, the core of conundrums such as figuring out the most efficient delivery route, or how the atoms in a protein will move around when it meets a drug compound. “Virtually everything has to do with optimization, and it’s the bedrock of machine learning, which underlies virtually all the wealth creation on the Internet,” says Geordie Rose, D-Wave’s founder and chief technology officer. In machine learning, a branch of artificial intelligence, software examines information about the world and formulates an appropriate way to act in the future. It underpins technologies such as speech recognition and product recommendations and is a priority for research by companies, such as Google and Amazon, that rely on big data.

“Our intelligence community customers have many complex problems that tax classical computing architecture,” Robert Ames, vice president for information and communication technologies at In-Q-Tel, said in a statement released today. In-Q-Tel’s primary “customer” is the CIA, and the National Security Agency is another. Both are known to be investing heavily in automated intelligence gathering and analysis.

Rose, a confident Canadian with a guitar and samurai sword propped in the corner of his windowless office, has been making grand claims to journalists since 2007, when he unveiled D-Wave’s first proof-of-concept processor at a high-profile event at the Computer History Museum in Mountain View, California. Attendees saw a D-Wave processor (apparently) solve sudoku puzzles and find a close match to a particular drug molecule in a collection of other compounds. But in the weeks, months, and years that followed, skepticism and accusations of fraud rained down on the company from academic experts on quantum computing. Rose’s initial predictions about how quickly the company would increase the size and capabilities of its chips fell by the wayside, and the company, although still well-funded, was publicly quiet.

Signing up Bezos and In-Q-Tel—the company’s most prominent backers yet—is the latest in a series of events that suggest D-Wave thinks it is ready to finally answer its critics. In May 2011, the company published a paper in the prestigious journal Nature that critical academics said was the first to prove D-Wave’s chips have some of the quantum properties needed to back up Rose’s claims. Artificial intelligence researchers at Google regularly log into a D-Wave computer over the Internet to try it out, and 2011 also saw the company sign its first customer. Defense contractor Lockheed Martin paid $10 million for a computer for research into automatically detecting software bugs in complex projects such as the delayed F-35 fighter (see “Tapping Quantum Effects for Software that Learns“). Questions remain about just how its technology works, but D-Wave says more evidence is forthcoming. It is readying an improved processor that Rose calls the company’s first true product rather than a piece of research equipment. D-Wave is expected to announce other major customers in coming months.

Cold Spot

Step inside D-Wave’s ground-floor office suite and you’re greeted by bland meeting rooms, offices, and cubicles. But open the correct door off the main corridor and you emerge into a bright white lab space dominated by four black monoliths—D-Wave’s computers. Roughly cube-shaped, and around 10 feet tall, they emit a rhythmic, high-pitched sound as supercooled gases circulate inside. Each of the machines has a door on the side and is mostly empty, with what looks like a ray gun descending from the ceiling, a widely spaced stack of five metal discs of decreasing size held together with cables, struts, and pipes plated with gold and copper. It is actually a cold gun: the structure is a chilly -452 °F (4 °Kelvin) at the wide end and a few thousandths of a degree above absolute zero at its tip, where D-Wave’s inch-square chip can be found. Not even the deepest reaches of space are this cold, or so shielded from magnetic fields as this chip, which is etched at a plant in Silicon Valley from a niobium alloy that becomes superconducting at ultralow temperatures.

The processor in every computer you’ve used is made from silicon and patterned with transistors that create logic gates—switches that are either on (represented by a 1 in the computer’s programming) or off (a 0).  D-Wave’s processors are also made up of elements that switch between 1 and 0, but they are loops of niobium alloy—there are 512 of them in the newest processor. These loops are known as qubits and can trap electrical current, which circles inside the loops either clockwise (signified by a 0) or counterclockwise (1). Smaller superconducting loops called couplers link the qubits so they can interact and even influence one another to flip between 1 and 0.

This delicate setup is designed so that the layout of qubits conforms to an algorithm that solves a particular kind of optimization problem at the core of many tasks difficult to solve on a conventional processor. It’s like a specialized machine in a factory able to do one thing really well, on a particular kind of raw material. Performing a calculation on D-Wave’s chip requires providing that raw material, in the form of the numbers to be fed into its hard-coded algorithm. It’s done by setting the qubits into a pattern of 1s and 0s, and fine-tuning how the couplers allow the qubits to interact. After a wait of less than a second, the qubits settle into new values that represent a lower state of energy for the processor, and reveal a potential solution to the original problem.

What happens during that crucial wait is a kind of quantum mechanical argument. The qubits enter a strange quantum state where they are simultaneously both 1 and 0, like Schrodinger’s cat being both dead and alive, and lock into a strange synchronicity known as entanglement, a phenomenon once described by Einstein as “spooky.” That allows the system of qubits to explore every possible final configuration in an instant, before settling into on the one that is simplest or very close to it.

At least, that’s what D-Wave’s scientists say. Many questions remain about what actually happens inside the company’s chips, not least in the heads of the company’s own physicists, engineers, and computer scientists. “We’re building this system empirically, not just following the theory,” says Jeremy Hilton, the D-Wave vice president who leads its processor development. He and the company’s other engineers don’t know for sure what’s happening in the chip, but as long as each design generates answers to the problems posed, the finer details of the quantum physics taking place inside can wait for retrospective validation.

It’s an attitude that seems to have played well with investors, but it still rankles academics. “At an engineering level they’ve put together a setup that’s impressive in various ways,” says Scott Aaronson, an MIT professor who studies the limits of quantum computation. “But in terms of the evidence that they’re solving problems using quantum mechanics faster than you could classically, I don’t think it’s there yet.” A fierce critic of D-Wave in the years following its 2007 demo, Aaronson softened his stance last year after the company’s Nature paper showing quantum effects. “In the past there was an enormous gap between the marketing claims and where the science was and that’s come down, but there’s still a gap,” says Aaronson, who visited the company’s labs in February. “The burden of proof is on them and they haven’t met the burden yet.”

Aaronson’s biggest gripe is that the design of D-Wave’s system could plausibly solve problems without quantum effects, in which case it would simply be a very weird conventional computer. He and other critics say the company must still prove two things: that its qubits really can enter superpositions and become entangled, and that the chip delivers a significant “quantum speed-up” compared to a classical computer working on the same problem. So far the company has presented proof of neither in a peer-reviewed forum.

Rose says that D-Wave is working on proving evidence of entanglement, and that recent head-to-head tests against classical computers showed it pulling ahead on the kind of computing problem that it is designed to solve.

Aaronson also says the way D-Wave’s processor is hard-coded for one particular type of problem will inhibit the range of problems it might solve. In addition, the relatively small number of qubits on the processor today means it can handle only tiny strings of data. Using mathematical tricks to translate a problem into the right form to deal with those limitations, and reversing the process once D-Wave’s chip has given its answer, could cause significant slowdowns, says Aaronson. Rose counters that a quantum processor will be fast enough to overcome any such penalties, and he says he has engineers working on ways to automatically translate normal programming code into what a D-Wave chip needs.

Whether or not D-Wave can satisfy Aaronson and other skeptics doesn’t necessarily matter to investors and technology companies. That’s because in so many areas of business, computing power is crucial to maintaining a competitive advantage, says Steve Jurvetson, a partner at venture capital firm Draper Fisher Jurvetson, who has invested in D-Wave twice and calls it “the most singular swing-for-the-fences technology” he ever funded. “The application space for this,” he says, “is anywhere we’ve had to fall back on an heuristic—a rule of thumb—to solve a problem: day traders, molecular modeling, anyone in e-commerce and the Googles and Microsofts of the world.” Companies such as Lockheed, Amazon, and big pharma companies are most familiar with the limits of conventional computers and will be first in line, says Jurvetson, but designing a new car or a new online store could also benefit.

Companies and government agencies have another, perhaps more urgent motivation to take a chance on a startup that has a beguiling idea but a few troubling loose ends. There is good reason to believe that the exponential growth in computing power seen over the last few decades is ending, says Bob Lucas, who directs research on supercomputing and quantum computing at the University of Southern California, where Lockheed’s D-Wave computer is installed. Many of the regular advances in computing power have come from connections on chips shrinking year after year, but with leading chip maker Intel currently working on making them just 14 nanometers across, there’s not much smaller things can get. “We’re living in the last 10 years of exponential growth of [classical] computing power, and alternatives to that will become more of interest,” Lucas says. He adds that through his experiments on Lockheed’s D-Wave system he has been converted from “highly skeptical to cautiously optimistic” about the technology.