Posts Tagged ‘lose the game’

Polar Bear & Seal Dilemma in the Apollonius Circle

Abstract

Polar bears pursue seals. But polar bears cannot swim as well as seals. As the ice cap melts, there is less ice caps for the seals to rest. Both have to survive. With melting ice caps, the seal as victim should adapt to the same speed as the pursuer, the polar bear. In the language of differential games equal speed preserves the distance in the Apollonius circle Swimming at equal speed means survival. A valuable lesson – more cooperation, less conflict.

Introduction

One of the classic illustrations in the game theory literature is the Prisoners’ dilemma. Faced with the option of whether to cooperate or compete with a rival depends on what each believes the other is going to do. In the playbook of a rational player competing is a dominant strategy supporting a Nash equilibrium wherein both are worse off in the long term.  Is there an equilibrium we all prefer? In nature, there are many games and different equilibria: the polar bears hunt seals; the seals swim to avoid the bears: https://www.youtube.com/watch?v=B0DCOTaZgtA. This ice game of pursuit results in a Darwinian outcome of survival of the fittest.

Does it have to be so? Can the rules of the game be changed? What if the polar bears and seals signal mutual cooperation in order to survive? They cooperate because their behaviour is directed by the fact that the ice is melting. The amount of ice is no longer infinite. The newly observed patterns of behaviour in nature are too complicated to understand. New insights are being discovered in the BBC’s Planet Earth http://www.bbc.co.uk/programmes/p02544td. So, what if cooperating is a signalling solution to the polar bear and seal dilemma, how can we rationalise this solution from a game theory perspective? And how can we observe a degree of cooperation?

Adaptation

As the ice cap melts, there is less ice caps for the seals to rest. Less resting places makes it harder for the polar bears to capture the seals as they spend more time swimming in the waters. Polar bears cannot swim as well as seals. So, do polar bears spend more time on fewer ice caps waiting for the seals to rest or do they improve their ability to swim longer in pursuit of the bears?

For the seals, knowing that polar bears cannot swim as well and as long as they can, the optimal action is to stay longer in the water. But they risk capture by the polar bear, who, knowing that the seals believe that polar bears cannot swim as well as they, adapts to swim better, pursues the seals until they rest on an ice cap in the belief that there will be no polar bears nearby or the seals believe that the bears cannot swim as well as seals.

 Thief of Nature

In a post-Darwinian world of melting ice caps more seals stay longer in the icy water. If more seals stay longer in the icy water polar bears unable to swim as well as seals, will fall in population as they lose a vital food source. Fewer seals will survive. Fewer seals means fewer polar bears, so as the ice caps continue to melt it appears to be a no-win outcome for both the polar bears and the seals. This ‘thief of nature’ no-win outcome obtains since neither are responsible for the ice cap melting.

So, is there a lesson for the seals and bears faced with the dilemma of survival? There is the Darwinian outcome of survival of the fittest. However, since climate shapes their environment[1]  whomever adapts better to the melting ice caps has a greater probability of surviving. But what if they signalled to each other – the predator bear signalling to the seal?

Avoiding Bad Choices

Fish congregate in the centre of the frozen ice pack where the ice is thinnest. You, the reader and I, as humans, we know that if either of us falls through the frozen lakes of Siberia in temperatures approaching 60 degrees below zero we will die of hypothermia, or if you rescue me, my body will freeze immediately and I will die of shock. Same fate applies to you, I’m afraid. It’s nature’s own Siberian dilemma. We both know that this outcome of very bad choices to be true.

A higher payoff is represented by avoiding thin ice, by avoiding bad choices. The seals probably know by now that both will obtain the higher payoff if the polar bears stop pursuing them. And the polar bears believe that the seals believe this to be true.  Neither benefit from thin ice and both need the ice pans to survive. So, the polar bears unable to swim as well as the seals adapt to new food sources. The bears signal to the seals and both survive by adapting in the game of melting ice caps. A signalling strategy represents a payoff-dominant Nash equilibrium for both. By surviving they could both reach a payoff-dominant Nash equilibrium.

Swim at Equal Speed

In order to understand this signalling strategy we need to transpose the dilemma into a pure search game. A solution is for the seal as victim to adapt to the same speed as the pursuer, the polar bear: equal speeds equals survival in the equation of climate change. Same equal speed minimises capture provided each follow a pure strategy of avoiding thin ice. In the language of differential games equal speed preserves the distance in the Apollonius circle. The animals may rely on chance to choose their paths to survival. Seals can swim; polar bears need to learn to swim as fast as seals. The sole decision rests with the seal, the victim in the search game: how fast should she swim? Not swimming is not an option. Swimming too often or too fast is tiring and with the increase in thin ice, resting ice packs are less promising.

Prognosis

The life history of seals and polar bears is a cumulative process of adaptation of means to survival that change as the ice caps melt. What is possible is whatever isn’t necessarily not the case[2], so possibly, seals and bears swim at equal speed. Logically, that means that there is at least one possible world in which the sentence ‘seals and bears swim at equal speed’ is true. Albeit, since you and I are responsible for the melting ice cap, we too, need to adapt. We need to avoid conflict. There is at least one possible world in which the sentence ‘to avoid conflict’ is true. There may be and it is our 21st century world with finite resources and infinite data.

[1] On polar bears: http://news.nationalgeographic.com/2015/09/150904-polar-bears-dolphins-seals-climate-change/ and on seals http://www.seals-world.com/seals-and-global-warming/

 

[2] Excellent read is Daniel Dennett (2003): Freedom Evolves

Bargaining & Dispute Resolution

Recently, at the Manchester Business School we introduced bargaining as a solutions methodology for use in alternative dispute resolution (ADR). It was the central theme of Day 2 of a three day residential Workshop on the broad theme of ethics and responsibility in business (ERB) http://www.patrickmcnutt.com/news/new-module-ethics-in-business/ a new elective available to all MBAs. The material from Day 2 and the case work reviewed during the Workshop have now being assembled into a Masterclass offering. If you are interested in finding out more about the bargaining process and how it could be adapted for your particular needs then please do contact us on this webpage.

The Conversation

The parties to the dispute need to have ‘a conversation’ so they meet with the arbiter in a neutral location. The approach focuses on an inherent ethic of responsibility as the centre piece of any conversation or dialogue between the conflicting parties. Throughout the conversation the arbiter by observing the parties extracts a latent code of ethics and begins to influence the parties’ belief systems. The approach complements the structural analysis of negotiation recognising the bargaining power of both parties.

Negotiating, however, is a party-specific power-centric approach whereas bargaining is more subtle – it has a power base that rests with the arbiter’s influence over the belief systems’ of the conflicting parties. The premise on which the bargaining approach is built is simple:  that the parties can reach a better outcome – called a bargain – by contracting or bargaining. The methodology is expressed in terms of converging towards a resolution – called a payoff or a bargaining set – in which neither party to the dispute is worse-off.

patrick mcnuttChina2015

Taking Responsibility

The pedagogy is grounded in a Kantian ethic of responsibility – this allows the parties and the arbiter to transform the priorities into a value set of duties so that the dispute can be ascribed by the arbiter to the lack of commitment to one’s duty. Our integrative analysis divides the methodology into ‘off-contract’ or dispute and contract or resolution stages, wherein each stage represents a sub-game. In the off-contract sub-game each party will learn the priorities of the other party and observe a trade-off pattern of conflicting priorities. For example, workers may have a right to a living wage or a minimum wage in many jurisdictions but it is the duty of the employer to pay it. However it is the duty of the employer to pay the wage and by not fulfilling duty, the wage is not paid and an off-contract dispute occurs.

The objective of the conversation is to move the parties to a contract point. Starting from an off-contract point a bargaining set is established which is equivalent to an ADR agreed resolution of a dispute. In theory the set is obtained by moving the parties on to an Edgeworth contract curve. In practice the bargaining process is sequential; it follows a stage-by-stage process moving the parties forward from initial consultation at time period t to final agreement at time period t+1.

Bargaining builds on the conversation. We applied the approach in 2010 to enable senior partners at a leading UK law firm come to an agreement on office relocation and new areas of specialism. Earlier the approach was adopted by the Board of Directors of a payments system company to reach an agreement on allocation of shared capital costs in the roll-out of new payments technology. Like the opening move in chess the off-contract steps follows a sequence:  Step 1: meet with the parties to extract the material facts. Step 2: elicit the duties expected of each party by the other. Step 3: identify the lack of commitment, the off-contract point, around which this dispute occurs. Step 4: assess both the threat values and the opportunity sets available to each party within the contours and parameters of the bargain. Step 5: define the trade-off function in terms of threats v opportunities for each party to the dispute.

The contracting steps have to be choreographed by the arbiter. Central to the bargaining is the payoff-constant trade-off. This is Step 6. It is a critical step. A good example is provided by Caffé Nero’s response to the recent increase in the living wage to £7.20 per hour. They offer to pay the increase but suspend the staff’s entitlement to free lunches http://www.independent.co.uk/news/uk/politics/national-living-wage-caffe-nero-free-lunch-wage-costs-a6975511.html. At Step 6 the payoff-constant Pareto move for each party is assessed. Step 7: introduces the bargaining set in terms of justifying the payoff-constant move from each party. Step 8: initiates the bargaining process by moving the parties towards an agreed contract position, a unique position, so that no-one party is worse-off post-agreement but one party is better off.

Playing Not to Lose                 

This facilitates bargaining as an inclusive process with a positive focus and an emphasis by all parties on playing not to lose. For example, when Kraft HQ in 20105 signalled a decision on factory closures and job losses at the Dublin plant and at their plant in Bourneville, outside Birmingham, the workers responded by improving productivity to ensure the long term viability of the plants. A deal was agreed. The trades union Unite commented it was a good deal for the remaining workers http://www.bbc.com/news/uk-england-birmingham-30815052. Once the parties realise that neither party can do better unilaterally than the arbiter’s bargain they have reached a resolution. The arbiter’s bargain is the best they can do given the reaction of the other party. Quintessentially it is a Nash bargaining outcome obtained by the good offices of an arbiter skilled in the reasoning tools of non-cooperative game theory.

Key Take-Away

Participants are introduced to a range of bargaining tools as a form of reasoning that has its roots in non-cooperative game theory. The tools are an aid to reasoning during the conversation as the conflicting parties move towards a dispute resolution or bargain. Duration is a one day attendance at a residential Masterclass. Participants will be introduced to a set of invaluable tools in finding a resolution to a dispute viz. opportunity costs, value net, bargain, payoff-equivalence, Nash equilibrium, indifference trade-off, belief system and payoff-constant Pareto improvement.

Raw War: Google ∧ Apple = 1

Google and Apple are like chess players in a smart game – their war is raw. They are as thran as a pair of cloth galluses. Both players attack: they have developed a cognitive awareness of each other as competitors and like[1] Radar O’Reilly they always know the rival strategy before the rival does. Players ought to know their weakness in a game[2]. Their weakness, paradoxically, is their rivalry. It is rational now for Apple (White) to defend iOS with selected roll-out of iNext smart pawns supporting iCloud to Apple Pay to e-SIM to iCloud Voicemail to MVNO in 2016 and beyond. But with Google (Black) in attack allowing its King’s Knight (Android) to be positioned across the chess board so as to weaken White’s centre pawns both players could be worse-off. Maybe Pushkin[3] had a point in preferring a bad peace to a good quarrel.

In this essay we try to argue that they should lose the competition and collaborate together in a partnership. Both players would be better off. Their individual success lies in the creative technologies and innovations they have created unilaterally. From the recent iPad Pro launch to Google’s voyage into wireless. Their future success, however, in the evolving complex market of artificial intelligence, cyber-genetics and autonomous devices, is mutually interdependent. Maybe Apple will buy Tesla. Maybe Google will navigate successfully the unchartered technical land of the wireless Sirens. Who cares?

Google throws the gauntlet down at every opportunity but Apple remains secretive, playing a Fabian[4] strategy of delay. Apple products can fail: who remembers Newton, Apple’s personal digital assistant? Or who remembers the Pippin game console system? Or the befuddled roll-out of its mapping service? Or that Apple TV does not support 4K? Or that Apple lags behind in the evolving complex market of artificial intelligence, cyber-genetics and autonomous devices. Covertly, Apple may have the upper-hand. Even if Apple does not have the latest device or innovation once it decides to enter a market, any market, competitors find themselves[5] in Apple’s line of fire. Who cares?

Chess Analogy

Apart from investors, twenty-first century consumers, and businesses, care. As the ipso-centric generation[6], we, as our own[7] ‘photographers, broadcasters, cinematographers, chanteuse, matchmaker and funeral director’ do care because of the impact the new innovations and technologies will have on our daily lives and in the creation of new services.

Integrating the narrative of Fred Vogelstein’s book[8] with chess strategy provides an interesting canvass on which to paint the competitive rivalry between Apple and Google. Guided by the brush strokes of non-cooperative game theory we discuss the strategy choices as moves on a chess board, Apple (White) v Google (Black) with Google (Black) as a player on the counterattack since the launch of the first iPhone in 2007. A game where it will be challenging for Apple (White) to hold on to the centre as Google attacks its Queen (iOS) quickly and swiftly, faster than any counterattack from Apple. In the discussion of a best reply for Apple (White) to counteract any perceived weakness in the game we have argued before[9] that Apple as a player should stop defending its pawn line of iPhone-iPad. The recommendation then for Apple in 2013 was to reshape strategy by playing not to lose rather than playing to win – simply, launch a[10] nano-iPhone for $100-150.

Google (Black) is intent on attacking the pawn line. So, what is Apple’s best reply today? The recommendation for Apple playing not to lose today is to acquire or develop wireless. Google (Black) has already moved into wireless, launching ‘Project Fi’ an alliance with Sprint and T-Mobile. Google’s entry into the mobile virtual network space (MVNO) has changed the game dynamics to the very core of the rivalry, the ecosystem iOS v Android.

Alekhine’s defense

The ecosystem is a zero-sum game. It is a game of attack in the style of Alekhine’s defense where Google (Black) attacks Apple’s broad pawn base with Google (Black) allowing its King’s Knight (Android) to be positioned across the chess board so as to weaken White’s centre pawns as Black continues to play vigorously.  It is a game of uncertain technical standards and software development that facilitates the arrival of spherical competitors[11] from anywhere at any time in the game.

What would a playbook look like as Apple (White) defends pawn line of iPhone-iPad against a Google inspired Android alliance with Black allowing its King’s Knight (Android) to weaken White’s centre pawns.  In the ‘I-think-You-think-I-think’ reasoning of non-cooperative game theory we could translate the Apple (White) v Google (Black) game into a payoff matrix with strategy sets S1, S2, S3 and S4. The Google payoffs (S3, S4) are in italics so best to read Table 1 as if you were an Apple executive with (S1, S2) and Google is your near-rival[12] competitor.

Attack is a Dominant Strategy

In the classic game theory of Prisoners’ dilemma both players prefer the outcome (3, 3). However attack is a dominant strategy and if both players behave rationally they will end up at the equilibrium payoff (2, 2). This is happening now in an action-reaction sequence of product launches and software updates toggling towards a point of balance in the game where both players independently of each other decide whether a new product is too geeky for it to be commoditised for the mass-market.

Payoffs (iOS, Android)

Table 1[13]: Attack Strategy for Apple (White) & Google (Black)

  S3: Defend  Android

 

S4: Attack

Smart-products

S1: Defend iOS

 

3,3 1,4
S2: Attack with Pawns –

iPhone./iPad

iNext?

 

4,1 2,2

 

The players’ secrecy, for example, in artificial intelligence may be hurting its software development. So we have to ask: are the strategies realistic for 2016? Yes. Apple (White) will (and does) continue to move pawns to centre stage, launching new smart products including the recent iPad Pro and Google (Black) will continue to engage with Nexus smartphones, AI, IoT and MVNO as re-shaping strategy set S4,.

Unbeatable Strategies

The technology game is changing. Early denials by Apple in 2010 on MVNO have changed to signals on trial and camouflage[14] allowing for a more realistic and nuanced interpretation of likely future strategies, so we include e-SIM and iCloud Voicemail in Apple’s S1 strategy set in Table 2 and ask: what if Google (Black) is looking at a payoff column in Table 2 with payoffs (2, 4) and (1, 2) with an S4 attack strategy? Why would Google think like this? Firstly, there have been plausible denials and camouflage from Apple. Also the facts speak for themselves: in the commoditised market like smartphones and tablets Apple is unique and a brand leader commanding 28% of industry profits.

Payoffs (iOS, Android)

Table 2[15] Attack Strategy for Google (Black)

  S3: Defend  Android S4:Attack

MVNO

S1:Defend iOS

With e-SIM

iCloud Voicemail

 

 

 

3,3

 

 

2,4

S2: Attack with pawns –

iPhone./iPad

iNext?

 

 

4,1

 

1,2

 

It would be rational for Google to believe that Apple would defend with iPhone-iPad pawns under a sustained attack from Google. Or does Apple have MVNO plans but delayed due to the early innovation cycle of MVNO? Probably – Apple filed patents for MVNO IN 2006.

Fabian Strategy

The Fabian delay in roll-out of MVNO would be equivalent to a Fabian strategy of avoiding a frontal attack with a sequence:

Step 1: observe the future of Sprint under Softbank management[16].

Step 2: orient strategy and then

Step 3: attack with a MVNO product offering.

This is a classic OODA feedback loop[17] in play here by Apple (White). This is a rational ‘hold-back’ play by Apple in an evolving smart innovation technology[18] game where its competitor Google (Black) castles queenside and attacks Apple (White) pawns. If Google believes that Apple believes that Google thinks like this then we recommend for Apple to play minimax[19]  strategy in order to minimise the maximum gain of Google in the zero-sum ecosystem game.

If Apple plays minimax it should continue the pawn attack because Google will play maximin in order to secure a second win[20] by forfeiting larger payoffs of 4 for a 2 in smartphones and smart products. Google will attack with S4, for example, a wireless strategy and (1, 2) is the likely outcome. Knowing this, it is rational for Apple (White) to prefer the payoff (3, 3) in Table 2. Apple (White) should not over-extend. It is rational for Apple (White) then to defend iOS now with selected roll-out from iCloud to Apple Pay to e-SIM to iCloud Voicemail to MVNO in 2016 and beyond.

Lose the Competition

Albeit, both players know that if Google (Black) MVNO strategy fails to take off or if Apple (White) is prepared to sacrifice its Queen with open source iOS the game could careen towards the Nash equilibrium. The war as described so vividly by Vogelstein might just result in significantly higher payoffs in the short term but lower long term benefits. When both Apple (White) and Google (Black) realise that[21] in this war ‘the sweetest wine, it’s a witches’ brew’ they should lose the competition and collaborate together in a partnership.

Apple ∨ Google = 0 → Google ∧ Apple = 1

Regulators will catch up  http://www.patrickmcnutt.com/blog/soft-law-google-the-coffice/ and their ‘soft law’ will not only satisfice the demands of the ipso-centric consumers but it will also facilitate the spherical competitors[22] arriving on the scene with new software developments and greater innovations – new businesses and new challenges.  A 2013 cover page[23] in Bloomberg Business Week, featuring Tim Cook, Jonathan Ive and Craig Ferderighi in a photograph had the tag ‘What, Us Worry?’ Yes, we say. Both players have developed a cognitive awareness of each other as competitors and like Radar O’Reilly they always know the rival strategy before the rival does. Know your weakness in a game. Their weakness, paradoxically, is their rivalry. Ultimately, a bad peace is[24] better than a good quarrel. So lose the competition and collaborate together in a partnership.

[1] Radar O’Reilly in the TV series M*A*S*H who always knew what his colonel wanted before the colonel did.

[2] From McNutt, P (2014): Decoding Strategy

[3] Extracted from Alexander Pushkin’s The Captain’s Daughter translated by Robert & Elizabeth Chandler.

[4] This is named after the Roman General Fabius Maximus who delayed decisions for tactical advantage.

[5] Think Roku and Spotify. Check Chanelle Besette’s article ‘Invaders from Cupertino’ in Fortune December 23 2013 Edition.

[6] Read 2012 Blog http://www.patrickmcnutt.com/blog/game-vision-you-are-your-own-irrepressible-opponent/

[7] Comment from Will Self great article ‘The Book of Jobs’ in Prospect January 2014 pp58-60.

[8] Fred Vogelstein (2013) Dogfight: How Apple and Google Went to War and Started a Revolution

[9] Check Memo to Ms Ahrendts 2013 http://www.patrickmcnutt.com/news/memo-to-ms-ahrendts/

[10] Think of ‘nano’ in the dimensions of the Moto Razr. Processor speed – think of XiaoMi’s phones in 2014 such as Hongmi IS powered by 1.6GHz quad-core Snapdragon 400 as good as and cheaper than the Samsung S3 1.4GHz quad-core Exynos 4412.  Check WIRED Magazine August 2015 article by Andrew Huang. The ‘sweet point’ on price in order to capture the 6.5b people who do not have smartphones is US $100 or less.

[11] Spherical competitors arrive at any time. Ironically, Apple in 2007 with the iPhone was a spherical competitor to both RIM and Nokia. In 2015, Chinese players like Xiaomi, TenCent, Lenovo, Huawei fit the criteria as does Amazon and Google. Check McNutt Decoding Strategy

[12] As defined in Decoding Strategy as that competitor from the sum of competitors whom you believe is more likely to react first to your move in a game. However, this does not imply that Google necessarily identifies Apple as its near-rival.

[13] For both players attack strictly dominates since 4 > 3 and 2 > 1 and 4 > 3 and 2 > 1.

[14] Check out Business Insider August 2015 on a possible Apple MVNO http://uk.businessinsider.com/apple-in-talks-to-launch-an-mvno-in-the-us-and-europe-2015-8.

[15] In Table 2 attack for Google (Black) strictly dominates since 4 > 3 and 2  > 1.

[16] Softbank is a key investor in Sprint and there may be regulatory hurdles in the US http://www.bloomberg.com/news/articles/2015-08-18/softbank-boosts-sprint-stake-again-with-73-million-share-buy.

[17] The OODA loop refers to the military strategy of observe, orient, decide and then act.

[18] SIT games are like games of attrition and fall under combat competition requiring constant defence as in McNutt’s Decoding Strategy

[19] Maximin is more commonly used in non-zero-sum games to describe the strategy which maximises one’s own minimum payoff

[20] The winning move is at the point of second win where the best reply in a zero-sum game to a minimax is the maximin strategy play.

[21] Extracted from the lyrics of Ladybird by Natalie Merchant.

[22] Competitors from anywhere in Decoding Strategy book and also : http://www.patrickmcnutt.com/blog/byte-me-on-my-app-and-the-brontosaurus-paradox/.

[23] Bloomberg Business Week Edition 23-29 September 2013.

[24] Extracted from Alexander Pushkin’s The Captain’s Daughter translated by Robert & Elizabeth Chandler.

Activist shareholders, Tobin’s q = Marris v

Investors generally over-react to good and bad times. Equity values are now increasing at a decreasing rate across the indexes as investors anticipate corporate earnings and begin to read the signals; many investors extrapolate past share price performance, and using an moving average or charting the trends in the share price are de rigueur in the search for a Fibonacci pattern. Management are in a signalling game with shareholders, especially the activist shareholders who are demanding changes in the execution of strategy. From Pepsi to Apple from Hertz to Red Lobster, activist shareholders are trying to break up companies, demanding change from management. In http://www.mheducation.asia/html/9781259071065.html Chapter 4 of Decoding Strategy we define the activist shareholder as Bayesian – seeing what they want to see at a point in time. As Aristotle observed in Rhetoric it ‘is a matter of putting one’s hearers, who are to decide, into the right frame of mind’.  It becomes a constant exchange between activist shareholders and the management team of the targeted company. Most prominent today is Carl Icahn; he sees a pot of cash in Apple and is urging a share buy-back. The Apple C-suite management team are a player in a game of signalling and they should really engage in positive learning transfer [PLT], by signalling to shareholders how they intend to execute strategy, re-assuring them that further innovation will support a continued rise in the Apple share price.

All shareholders prefer high expected returns but they should also be concerned with the impact of signalling on share price performance.  Signals can be observed at any time: check the business feeds from CNN, cnbc or Bloomberg. Apple at US$554 January 24th 2014 9.37 ET is not the call – rather it is Apple at a sustainable US$800 by end of 2014. And that target price depends has a co-variance matrix that depends on (i) the outcome of market share zero-sum game with Samsung; (ii) Apple’s penetration in China with China Mobile and (iii) the launch of a nano-iPhone. The latter has been a theme of this Blog, notably in an open Memo to Ms Ahrendts: http://www.patrickmcnutt.com/news/memo-to-ms-ahrendts/. A nano-iPhone launch would signal innovation – the real challenge, however, is not just in the timing of a launch date but the price point. It should be competitively low priced with a volume throughput encroaching demand from low end smartphones across the world. We should be debating the sweet price for an advanced well specified nano-iPhone not the share price of Apple.

Mant of these issues are accommodated within the Marris methodology; for example, failure to re-invest the cash or any signals of lagged innovation can damage the long term value of the company. Bayesian shareholders are attracted to companies like Apple and Red Lobster’s parent company Darden Restaurants. They are unlikely to praise management. But as shareholders they are frustrated. In game theory language, they believe that management are bounded rational or limited in their decision making. A nano-iPhone signal to the market would be a better play for Apple executives now than a share buy-back. New product launch is a classic PLT signal, re-assuring investors that Apple executives are playing to win the game, not playing to lose. In addition, it could relax the constraint imposed by activist shareholders.

And the Marris v – probably better known as Tobin’s q – is a reliable metric in our game theory tool-kit where rational investors are also concerned with how their share portfolio co-varies with the signals in a signalling game. It is the ratio of market value and book value or the replacement cost of the firms’ assets. Combined with other metrics, the Marris v offers a guide to investors: if v > 1 consider a sell and if v < 1 consider a buy. Who didn’t buy ARM at 95p in early 2009? Taking a moving average of v, defined as v if v > v consider a sell and if v < v consider a buy.

Compare Intel v ARM share prices over the past 5 years. The relative high performance of ARM’s share price from less than £1 in early 2009 to £9.80 at 10.44 GMT January 24 2014 reflects management PLT, their innovation and their attack on Intel’s dominance in the chip market and Intel’s lagged response to getting its chips into smartphones and tablets. Intel management were bounded rational. They tried to acquire ARM but antitrust law prohibited the acquisition. Tobin’s q is interchangeable with Marris v. Both rely on market valuations; the Marris v, however, should be understood in terms of PLT. Management’s type, that is, their ability to define the game dimension and their ability to win the game represent an intangible asset in the Marris v. The Marris v by relying on market valuation avoids many of the descriptors of accounting profits wherein high profits often equate with a monopoly position. But it could also be the case that companies with high market shares earn profits not attributable to concentration in the market – they are more efficient and more innovative than their competitors. Observe the share price and the investment commentary but when v < 1 or v < v step back, read the signals, make a judgement call and consider a buy as a long term investment – do not look back and do not regret the decision once made.

Spin-0 for Apple in a French defence: from iPod to iNext or acquire a telco?

In our previous Blog entries, on the smartphone and tablet market, we referred to the market as a game, G. In G a new phenomenon has occurred, created by a convergence of technology coupled with rational consumers asking: is the iPhone5 = a mini iPad or is the new iPad mini = iPhone6? This line of questioning, we believe, translates the Apple products into a scalar (spin-0) with no strategic direction. A scalar product, if you recall from physics, only needs a numerical value, and is not attached to a direction. Where is Apple going? Earlier this year, IDC Research reported that Apple’s share of the global market for tablets fell sharply in 2012 from 65% to 50%.

Strategists therefore need to ask the entropy question: do gains necessarily accrue to Samsung, Amazon and Asus or are rational consumers simply waiting or delaying buying Apple devices? To find an answer, we posit that Apple products and non-Apple products may share common features and functionalities but they do not overlap, thus creating lines of adjacent vertices in an evolving market share game.  Furthermore, Apple may have the greatest App store in the game but as it continues to rotate through iPod, iPhone and iPad to iNext, spherical  competitors from anywhere at any time to will enter the game and win.  Rational consumers delaying a purchase and the convergence in rival technologies facilitate competition, and by Q4 2011 Google powered devices began to close in on Apple’s dominance. More recently, Microsoft’s Surface, the Google-Samsung Nexus 10 running on the latest Jelly Bean software, the Amazon Kindle Fire HD and the Asus-Google Nexus 7 have emerged as formidable competitors in the game.

What if the XBox music internet service has the potential to impact on iTunes? Investors are not clueless about the technology convergence nor are they aloof to the need for an optimal strategic response from Apple. With a cash balance that is equivalent to a quarter of its CAPM, investors will want more investment. They may ask: why not acquire a telco? The iPhone5 can indeed promise 4G technology, albeit not everyone, who has an iPhone 5, nor anyone anywhere in the world, who is thinking about buying an iPhone 5, will be able to avail of 4G. There is no point really in offering rational consumers a new fountain pen without the ink! As rival competitors continue to enter the game G, the family of competitors grows and new features and functionalities create entropy and adjacent vertices that will limit Apple’s progress unless they join the family.  For example, today in November 2012, Apple is not a key player in social media, digital mobile advertising, OLED Smart-TV, nor is it dominant in cloud computing, NFC and mobile e-wallet payments. They could be in time, many investors hope that they will – sometimes this is not how it works.

Apple can fail: who remembers the Newton in the 1990s? Or the more recent befuddled roll-out its mapping service?  The more we observe G the more convinced we are than it mirrors a game of chess. But is it a game of French defence where it will be challenging for Apple (White) to hold on to the centre as opponent’s attack its Queen (iOS) quickly and swiftly, faster than any counterattack from Apple.  Maybe Apple should stop defending its pawn line of iPod-iPhone-iPad? Acquire a telco. In chess language, Black is out to attack the pawn line. What is Apple’s optimal sequence of moves? Is the ecosystem a sub-game of Alekhine defence by Google (Black) or Android alliance (Black), allowing its King’s Knight (Android) to be positioned across the board so as to weaken White’s centre pawns? We will take up these issues in next Blog entry – our continued recommendation for Apple is to play not to lose rather than play to win.

i-Lag or Byte of the Apple

The smartphone has evolved from new gadget to just another gadget – it has become commoditized.  The Razr i will indeed allow you to switch quickly between the web, play games, send texts and take photos. Will iOS 6 disappoint as consumers realize that it begins to slow down your iPad2 and is backward incompatible with the new generation iPod touch?  A case of i-lag will emerge as random consumers begin to ask: why upgrade to iPhone5? Why queue? Why buy Apple product? The convergence of technology will trump the key players as spherical competitors from anywhere at any time enter the game. Google’s Motorola has now unveiled its first smartphone with Razr i, a social media and mobile advertising market game began without Apple, SmartTV technology resides with LG and Samsung, and the new spherical competitors in smartphones are likely to be the Chinese players, Huawei and ZTE. Forget the device; the game has evolved from a game of competing ecosystems, OS v Android and 4G technologies to one of consumer expectations. Rational consumers have no idea what they want, but whatever it is, they want it now.  So expectations are dangerously high, matching them with low prices may be an optimal response. Judicious pricing policies will facilitate a winning strategy. We have argued before in this Blog for a nano-iPhone – a strategy to compete on price against the impending challenge from Huawei in the US. Launching a nano is a dominant strategy for Apple Inc because its payoff in the smartphone game will be (i) always at least as much as that of iPhone5 [whatever Samsung or Huawei do] and, (ii) at least some of the time actually better in the evolving game of commoditized smartphones.

Refer back to Blog entry: Simon en-cycling to SMIN!

Refer back to early Blog entries: The  Brontosaurus paradox

Simon en-cycling to SMIN!

In less than 10 years the smartphone game has eclipsed its humble beginnings of combining a PDA with a phone. The App-ing Generation T who communicate and share across technologies can have an ice cream sandwich in their operating system or a mountain lion or faster graphics performance with ivy. Poorer consumers across the developing world simply want a phone to curve with messaging and FM radio and a 2 mega pixel camera. But do you remember where you were in 1992 when we witnessed the planting of the seed of the smartphone tree with the inaugural launch of the IBM Simon? Do you care? How many remember the first smartphone, the Ericsson GS88 with the open OS Symbian? That was 1997. By the time it had re-launched in 2000 as R380, the Palm Kyocera 6035 enabled you to phone a friend from your PDA contact list. So cool! How many remember the Palm Kyocera 6035? That was 2001. In 2012 Generation T eagerly await the global launch of Apple iPhone5 and the Samsung Galaxy S3. Analysts are reporting that Apple and Samsung could account for 30% of volume and 52% of sales in the global smartphone game. The game is less about the device or product – it is more about the ecosystem, the operating system in the game of smartphones. We are observing a battle of OS standards through the lens of a convergence in technology that will end the game because time available to the key players, young and old, from Apple to Samsung, from MS to Nokia, from HTC to Sony Ericsson to RIM, to make a decision is diminishing in time itself. In others words the game is en-cycling to an end point as spherical competitors from anywhere at any time are entering the game: the Nokia-MS alliance with Lumia platforms powered by Win8 and supported by Intel and AT&T, MS-Facebook alliance to challenge Google in social media and in search with a new search engine, a possible MS-Nokia-RIM-Dell alliance, emergence of Huawei and ZTE, of China Mobile and Data Wind. Who? The game started with Simon in 1992 and will end with the must-have small and thin, SMIN, the outcome that Generation T, the customer, wants rather than the device that produces it. Think on to 2022 and the Blog reader asks: who was Apple? But who is SMIN? Ref back to early Blog entries: The Brontosaurus paradox

nano iPhone now or lose the game!

It could be time in the smartphone game for a nano iPhone from Apple Inc as spherical competitors, ie from anywhere at anytime enter the game,…with Huawei and Qualcomm new chip spec in low cost low price with multi-functionality and the emergent DataWind in India with the $35 phone and promised $100 tablet……already we see the convergence of technology at Samsung Galaxy with the telephony function in the tablet….whither?….the iPad converges to the iPhone or the iPhone converges to the iPad….the SMIN [introduced in Game Embedded Strategy] is launched like a pheonix rising from the ashes and it may not be with Apple Inc!..game on..so launch the nano iPhione now or risk losing the smartphone market-as-a-game….patrick