Friday, August 24, 2007

Marvell's Huge Research and Development Budget

Marvell (MRVL) reported fiscal Q2 2008 earnings yesterday (August 23, 2007) with a GAAP loss of X or x per share. The stock lost 10% of its value in trading today. I believe some traders were hoping for a short-term pop because of rumors that a hedge fund had taken a position and that Marvell produced one part for Apple's iPhone cell phone. They overlooked the elephant in the room: Marvell's R&D (research and development) spending for the quarter. In fact the short-term sell-side analysts probably see the R&D budget as a negative. Here I'll focus on the future and the R&D expenses. For more on the past, see my notes on the Marvell analyst conference.

Marvell spent an astonishing $236 million on R&D in the quarter. Its revenues for the quarter were $657 million. So R&D was 36% of its budget. Compare that with, say Intel, which spent 30% of its revenues on R&D last quarter; or a more direct competitor, Linear Technology, which spent $47 million on R&D, or 17.5% of revenue.

It looks to me like Marvell is girding for war. They are not going to try to become the world's sole supplier of semiconductor chips, but they are going after a lot of cutting-edge, high volume, high margin business.

Some results are already rolling in. In May management guided Q2 revenues to $645 million; instead they came in at $657. Part of the differential probably came from chips that went in iPhones, but you have to remember that Marvell is already a big company. In fact it has pretty well made its intention clear: it is going after the 3G high-end phone market, not just Apple's tiny fraction of it. Last year it bought Intel's communication processor business (which this year is resulting in $36 million per quarter non-cash write offs of amortization costs, which really skews GAAP EPS downward). It was already developing its own communications processors. It also has some of the best analog radio technology in the industry. What it is doing is combining all of these functions - digital signal processing, general digital processing, and cell radio signal transmission with Wi-Fi and bluetooth. That is a killer combo. It does not mean there is no competition, or that any cell phone maker is required to adopt it. But those who do not may find themselves, in a year or two, at a severe competitive disadvantage.

Most companies that have done so well in making chips for hard-drive storage would see taking on the entire cell phone semiconductor industry as challenge enough. But not Marvell. It is also going after some other big hunks of business.

One is video processors for large screen TVs. Again, Marvell came to this game late. Again, the already have a foot in the door with some advanced silicon that makes for better pictures. Again, they are planning to solve a bunch of unsolved problems and deliver a solution that will be irresistible to the TV makers.

In parallel with that they are working on the DVD/ HD-DVD end of things as well.

Oh, and not satisfied with mere dominance in the hard drive industry, they have sunk a bunch of effort into R&D to make even better drive chips; they are confident they can gain revenues in this area.

Then there are their advance in LAN technology. And power management. And printer technology. I'm probably missing something, but that seems to cover the basics.

After a year in which Marvell and many other semiconductor makers got hit by inventory adjustments, slowed demand growth, and pricing pressure, Marvell's intense pursuit of new markets may be bearing fruit. Management believes Q3 revenues may come in around $710 million, up $53 million sequentially from Q2. I'll be very impressed if that happens.

More important, if they are right about design wins they are getting this year leading to significant new revenues in calendar 2008, I can't wait to see what Marvell looks like a year from now.

As to pricing the stock, you'll just have to choose your theory. I don't believe in buying stocks with high PE ratios, and right now if you use the GAAP numbers the PE ratio of Marvell is infinite. If you use non-GAAP numbers, it is pretty high. On the other hand I understand the value of R&D. Another company, trying to please short term investors, could have simply cut back its R&D budget in Q2 and shown some very impressive results. But as a long-term investor I'd rather have the company with the bad short term results, especially when its R&D arm has a record of paying off, as Marvell's has.

Right now I already own as much Marvell stock as my portfolio model allows, so I won't be buying more anytime soon. Even holding it at this level involves risk: just because Marvell is spending money on R&D does not mean it can sell any resulting technology. But that is a risk I can live with.

Sunday, August 19, 2007

Analysis of Dendreon Breast Cancer Results

Interpreting cancer therapy study results is as much of an art as a science. Add to it trying to put some sort of financial spin on the results, and things get pretty arcane.

Dendreon announced results from a Phase I study of one of its immunotherapies on breast cancer on Friday, August 17, 2007 (See press release). A full report of the study is in the Journal of Clinical Oncology dated August 20 (See abstract). The question Dendreon investors (and potential investors) will be asking is this: will further study just burn cash, or are we headed towards a therapy that can be marketed profitably if it is ever approved by the FDA.

My first reading of the press release put me in a cynical state. 18 patients received the therapy. Of those only 4 showed any benefit. No need to pull out my statistics text: that is 22.2% who benefited, 77.8% who did not. So this does not look like a cure for cancer. In fact 3 of the responsive patients only showed "stable disease." That means the cancer did not progress, but it did not shrink either. Only one patient achieved a "partial response," meaning the cancer decreased in size. So you have to ask yourself, is that even statistically significant? Could any group of 18 people with breast cancer have one partial response or a couple of "stables" over a similar period of time without undergoing any therapy at all?

But I know that Dendreon has a similar therapy for certain prostate cancers (Provenge) that has received an "approvable letter" from the FDA. A Phase III study is being conducted with the FDA promising approval if certain endpoints are met. Provenge is exciting because there is no good treatment for the serious prostate cancer type it is likely to be approved for. While Provenge does not work for all patients, and only extends life on the average for a few months, it is safe and patients like it since it does not have the terrible side effects of chemotherapy.

This immunotherapy model will have great advantages when it works. Patients are not very inconvenienced, as the therapy requires only a blood draw, the processing of the blood, and then the re-infusion of the blood back to the patient. When it does work, by stimulating the immune system, it appears to work over a long period of time. Since it has little in the way of side effects, if could be used in combination with almost any other cancer treatment.

Some types of breast cancer respond well to available therapies, but others don't. One type that does not respond well is called HER-2, which is tied to the overactivity of the HER-2 gene. Dendreon's new treatment, Lapuleucel-T, brand name Neuvenge, specifically targets cells having overexpressed HER-2 genes. Why do some patients respond and not others? Probably because there are many complexities to HER-2 breast cancer; there are a variety of other genes that are over or under-expressed in any given case.

Depending on which sources you read, HER-2 cancers account for about 1/4 to 1/3 of malignant breast cancers. So there are a lot of patients. HER-2 breast cancer tends to be more aggressive than non-HER-2 cancer. A metastatic HER-2 cancer is a frightening thing.

There are drugs for HER-2 breast cancer already, notably Herceptin, a "blockbuster" drug from Genentech that had sales of $329 million last quarter. Herceptin is a monoclonal antibody that targets cells expressing the HER-2 gene. Although it provides benefits, according to Wikipedia "70% of patients do not respond to treatment. In fact resistance is developed rapidly by treatment, in virtually all patients." It also has potentially serious side effects.

So in fact there is room for a HER-2 breast cancer therapy, even if it is not a cure-all, if it is safe, shows some effect, and could be combined with other therapies.

As I always point out, Phase I studies provide little to go on. They should have almost no impact on the valuation of a company. Dendreon's value is in the fair possibility that it will have Provenge approved for market in 2008, combined with its general immunotherapy technology that could work on other types of cancers.

Dendreon's management will have to decide whether to proceed to Phase II studies of Neuvenge. The Phase I results were encouraging. But that has to be weighed against other possible therapeutic targets that may provide a better response to immunotherapy and be a better use of company funds.

Dendreon stock is risky (because it has no FDA-approved therapy yet, and no revenues), but the potential rewards for investors are high. In any clinical trial, no matter how encouraging prior trials may have been, there is substantial risk that efficacy numbers may decrease or previously unseen adverse reactions will appear.

I own Dendreon stock. Do visit my Dendreon page for more analysis of the value of the company.

Friday, August 17, 2007

Anesiva Zingo Approved by FDA

Today Anesiva announced that the FDA approved its Zingo (TM) product, which painlessly injects a tiny amount of analgesic into the skin. Within two to three minutes a needle puncture can be made without the patient feeling pain (or feeling noticeably less pain). Anesiva specifically sought and got approval for using this on children. Health guidelines now say that children should be given pain relief before needle insertions, but that seldom happens because existing therapies take 20 to 30 minutes to act.

In addition the company, in an analyst conference this morning, said that it is near completion of enrollment in its study of Zingo for adults. This trial could be concluded soon (in industry terms; it is not like a cancer trial where you may have to wait a couple of years to get meaningful results). If the results are positive, as I expect they should be, Anesiva can file a supplementary application which, if approved, will give the FDA's blessing to using Zingo for adults.

This is going to be a big market. I know I don't like pain when a blood sample is drawn; I want my Zingo. Anesiva estimates the price (I'm assuming this is their selling price, not the price your hospital will charge you) will be between $12 and $16. Multiple that by the number of needle sticks for drug injections and blood draws and etc., subtract out the number of masochists and manly men who will insist on feeling the pain, and you get a number. A pretty darned big number.

Of course it will take a while to get to that big number. Sales of Zingo are likely to start in 2008.

Anesiva has run through a lot of money developing Zingo and its other drug candidate, Adlea (TM), for surgical and other internal pain. However, it still had $62.8 million in cash at the end of Q2. It has already spent a fair amount to get ready to manufacture and sell Zingo in the hopes it would be approved. While it is possible that it might have to go out for more cash before Zingo revenues flow in, Anesiva is likely to be able to do that without diluting the stock.

Partnership agreements are being discussed. Anesiva is seeking a partnership in the U.S. to cover health care providers that would not be efficient to approach with its own organization. It is also seeking a partnership in Europe. That is contingent on approval by European authorities. The current thinking of management is that they will wait until the get the adult study done before applying in Europe, rather than doing it in two stages as they have done in the U.S. It is very possible one or the other of these partnership agreements could include some cash up front for this potentially lucrative franchise.

For those who have not been following the company, let us just note (without hubris) that a number of biotechnology analysts believed that Anesiva would not get approval for Zingo. I am not against critical analysts; more often the problem with analysts, especially sell-side Wall Street analysts, is that they are not critical enough. Their argument was not without reason: they believe pain drugs are not easily approved by the FDA. They neglected two more important facts: Zingo is not an opioid of addictive in any way, and the data from the studies was really solid. There was no clear basis for failing to approve Zingo.

One other potential source of revenue mentioned by management is the application system itself. Now that the device, as well as the drug, has been approved, the device could be used to deliver other drugs, and the FDA would probably feel very comfortable with that. Anesiva hopes other companies will license this drug delivery device. I don't know that I would put numbers on that scenario; if it happens, I would treat any revenue as a pleasant upside surprise.

More data:

My Anesiva page (with links to analyst conference summaries)
Anesiva investor relations page
Anesiva home page
My Biotechnology Research Help page

Thursday, August 16, 2007

AMD and Notebook Computer Bottlenecks

I see no reason to doubt that there are now shortages of certain components that are making it impossible for electronics manufacturers, in particular notebook computer makers, to meet demand expectations as we go into the holiday sales season. NVIDIA (NVDA), the graphics chip maker, reported last week (See my NVIDIA Analyst Conference Summary) that their inventories were low and their production capacity was maxed out. Taiwan's Digitimes reported that talks with Acer and other manufacturers were facing shortages of display panels, graphics chips from NVIDIA and AMD, analog chips, batteries, optical drives and even motherboards and some types of capacitors.

Last year AMD acquired ATI, the only credible rival of NVIDIA. AMD has lost bales of money writing off ATI acquisition costs, and ATI was having trouble keeping up with NVIDIA long before it was bought. In the long run AMD believes integrating graphics processing and general purpose processing on a single chip will give in a competitive edge over rival Intel, but even if that is true, it is years away from fruition. Meanwhile AMD/ATI lost market share to Nvidia.

If shortages of other notebook components don't impact the notebook market substantially, this short term situation is to AMD's advantage, as it can probably sell all the graphics chips it can make in Q3 and at good prices. Of course if notebook demand is left unfullfilled AMD leaves not only the graphics chip potential revenues on the table, but its some of its Turion processor revenues as well. It also, through its acquisition of ATI, makes chip sets (the "glue" that interconnects processors with memory and other components). Again, if it can sell all it can make, that is great, but if not enough notebooks can be made, it loses out.

So probably AMDs Q3 will be an improvement over Q2, even above the normal seasonality of the computer market, but it depends on exactly what the component shortages are, and to what extent.

As I speculated this spring, undo caution with inventories at electonronics makers is now causing an upturn in demand for chips and other components that will be difficult to meet. That is good for chip makers, but it may drive up some costs for computer and device makers and it means another round of capital investment for those who have been running too lean. If we are truly entering a video era, as Cisco believes, then there is going to be a big boom in demand for every kind of semiconductor chip that provides the processing power or bandwidth needed for this new paradigm. That includes CPUs, graphics processors, and analog chips.

I own AMD and Marvell (MRVL) stock (an analog chip maker), but not Intel or Nvidia stock. You can access my summaries of analyst conferences for these and other technology stocks at

Wednesday, August 15, 2007

Applied Materials and Technology Business Insights

Applied Materials (AMAT) reported its results for the quarter ending July 29, 2007 (their 3rd quarter fiscal 2007) yesterday. With revenues essentially flat both sequentially and year-over-year, this is not a company that investors are likely to get excited about at the moment.

Yet if you are investing in technology stocks Applied Materials is an important company to watch for insights into technology and its economics. Applied Materials is one of a small group of companies that makes a broad range of equipment for manufacturing semiconductor circuits. In the July quarter revenues were $2.56 billion. KLA Tencor (KLAC) is a competitor with $736 million in revenues last quarter; companies like Samsung and IBM make semiconductor equipment, but that is a relatively small part of their overall business; and there are a variety of smaller specialty competitors. It is reasonable to look at Applied Materials as a single-company proxy for the industry.

With Cisco reporting strong growth in the router and switch market I have to wonder if the slump we have seen this last year in revenues at semiconductor chip companies is hiding a trend towards stronger long-term growth. Cisco believes the transition to Internet telephony and video-over Internet are propelling its growth. Internet trunk line capacity was overbuilt in the late 1990's, but now we are seeing fiber optic cable being run all the way into people's homes. Certainly the bandwidth requirements of video are far higher than those of text and picture Web pages.

You might think that Applied Materials would be seeing demand for new semiconductor manufacturing equipment leading demand for chips, but that is not the case so far. Chip makers, including the increasingly important companies that run fabs for fabless and fab-light chip companies, are buying as slowly as possible. The only area where demand was characterized by Applied Materials as good was RAM or memory production. The increased use of memory in cell phones and other devices is a clear trend people are willing to bet on; no one wants to risk losing a supply contract with a cell-phone maker because they did not buy enough equipment six months ago to get it up and running and ready for next-month's demand.

But in non-memory silicon their has been caution. Demand hit 95% of capacity in 2006, then slumped, and is not back up to 95% quite yet. Discussions with customers indicate that, whereas a few years ago hitting 85% of capacity was a signal to start expanding plant, today manufacturers are delaying their costs by waiting until the 95% mark is reached.

In flat-panel display manufacturing Applied Materials management believes they are in the bottom of a short-term cycle that should end soon. In contrast to chip manufacturers, display manufacturers bought a lot of equipment in 2005-2006 and still have reasonable capacity. However, consumer demand for flat panels is exploding as prices fall, so soon more manufacturing capacity will be needed.

Applied Materials is also into creating the equipment to make both traditional solar cells and the new thin film cells; revenues in the area are growing and should be a larger percentage of revenues in 2008.

Another trend to not is the shift from 200 mm silicon wafers to 300 mm. Much is still done with 200 mm wafers, but Applied Materials believes the cost advantages of 300 mm are such that in the 2008 - 2009 time frame 200 mm wafers will no longer be cost-competitive, so those who have delayed shifting will have to buy 300 mm equipment.

You can tweek your models however you like, but no one is sure when video demand is going to help anyone much besides Cisco. Older personal computers don't do a good job with video; there are always people who (wisely) change computers only when they get a major performance benefit out of doing so. High-end cell phones are becoming more popular, driving demand for low-energy, high-capacity digital and analog chips. Increases in overall demand will show up eventually in semiconductor equipment maker revenues. Macroeconomics aside, I expect demand to be healthy as display screen sizes, memory requirments, and processing capacity for video all continue to attract end consumers (including businesses who want to save money by using telepresence technology).

More Data:

My summary of the Applied Materials analyst conference (August 14, 2007)
Applied Materials home page
KLA-Tencor home page

Wednesday, August 8, 2007

As Cisco Goes ...

We had quite a stock market rally today, especially in the technology stocks. Some people who had gone short on worries about credit tightening had to cover their bets, judging from the upward spike.

The rally is being widely attributed to the Federal Reserve statement issued yesterday and Cisco's (CSCO) report on its Q2 results. I listened to the Cisco Q2 analyst conference (See my summary) and got an idea of why Wall Street would read so much into a report that only saw the company beat sell-side analyst average expectations by one penny.

Cisco's revenues are booming. Cisco is probably the most important provider of hardware to operate the Internet. Its main products are routers and switches. It is a global business and has huge market share. With no disrespect meant for the engineers at Extreme Networks, Jupiter, Sycamore Systems, or any of its competitors, it is difficult to beat Cisco when it comes to technological innovation and breadth of products available to solve the problems that confront telecommunications companies, Internet-based businesses, and global enterprises and consumers.

So aside from growing its own revenues 18% in one year, what about Cisco's report would spark a technology stock rally? Other bellwethers have been mixed, with Motorola struggling and many chip makers below or barely above last-years revenue numbers.

Cisco reported that global sales were strong and broad (by product type). Businesses are spending money when they think it can save them money or improve efficiency. There were some notable exceptions, but they were drowned out by the all-around strength of the global economy.

One exception was Japan. In line with what other companies are saying, decisions about technology equipment buying have been in delay mode in Japan for about a year now, particularly when it comes to the big telecommunications companies.

In the United States there were three vertical markets that were weak. One was financial services; no surprise there. Another was automotive; again no surprise. Retail sales was also below expectations. Without a doubt big retailer are cautiously hoping that the housing bust won't hurt retail spending too much.

What is driving the need for more Internet equipment? Against a background of the continued shift to Internet, including using it for phone service, is an explosion of demand for video over Internet. Video requires huge numbers of bytes of information transmitted rapidly in order to work. All the text web pages at, say Google, pale in comparison to the amount of bandwidth it takes to move a few video pages across the Internet.

Cisco is meeting that demand. But many other companies, not just router and switch makers are benefiting as well. Video requires servers and storage. Processor makers like AMD, Intel, Sun and IBM; server systems makers like Dell, HP, and Rackable; and the various semiconductor manufacturers that make chips that glue all this together are all going to see larger that previously expected demand. Fabs that take these companies outsourcing, optical component makers, and the people who make the machines that make the semiconductors like Applied Materials should all benefit.

So what we may be talking about here is sector rotation. The technology sector has been neglected by many investors since the year 2000 meltdown. Prices are not at all frothy. If Cisco is right about future demand, and if that demand goes out more broadly

Then again, nothing is certain in the world of stock speculation. Maybe Cisco is the exception to the rule; maybe demand in narrow and temporary, rather than broad based and about to roar in like a tsunami.

Video. Telepresence. Think about it. A billion people broadcasting and receiving video around the world, all the time. The Bandwidth. The Bandwidth.

More data:

Cisco Investor Relations page

I do not own Cisco stock, but I wish I did.

Monday, August 6, 2007

Microchip, Housing, and Semiconductor Demand

Microchip (MCHP) reported Q2 revenues last Tuesday that were down from April guidance but slightly better than they had warned about in June. Revenues were $264.1 million, up 2.3% sequentially from $258.2 million and up 0.6% from $262.6 million year-earlier. That is not exactly high-growth but it is better than many semiconductor companies reported, notably Motorola (MOT).

The slump in the semiconductor chip industry, which appeared to have have hit bottom for most companies in Q1, was mainly caused by inventory restructuring at end customers and distributors. Given that, while unit shipments increased in many cases, pricing was weak and the result were drops in revenues. Of course the semiconductor industry is complex. Many companies reported weak demand for telecommunication infrastructure chips as a result of industry consolidation. Motorola also lost market share in the low-end of the cell phone market to Nokia.

Microchip had predicted a 5% sequential rise in revenues. At their analyst conference (See my summary) they accounted for their 2.7% miss of that prediction partly because of the housing industry slump. You might think that houses don't have microcontrollers and other semiconductor chips in them, but you would be wrong. Microchip supplies parts that go into five things that can go into new home construction: garage door openers, security systems, thermostats, irrigation equipment, and airconditioning. Yet despite the rather broad slump in the housing market, this did not cause Microchip revenues to fall; instead they failed to grow as quickly as expected by about 1%. It's stock price has held up well because it pays a hefty dividend and has good profit margins even in weak periods.

Slow housing construction hits specific industries like lumber and concrete pretty hard, but many economic sectors are only affected by a drop in housing construction if that is accompanied by lower consumer demand. In addition, most U.S. semiconductor companies do more than half their sales outside the U.S.

Microchip's management, humbled by missing guidance, now only expects revenues to be flat to up 2% in Q3. Usually demand in Europe is slow in Q3 because the whole subcontinent goes on those nice vacations only the elite are allowed in the U.S. But Q3 is when Asian manufacturers have to gear up for Q4 sales in the U.S., and while demand in India & China is not quite as seasonal, it is growing rapidly.

While not wanting to minimize the pain of individuals who took out adjustable rate mortgages, or became the ultimate owners of those mortgages, after the Federal Reserve had (belatedly) started raising interest rates, I don't think that particular situation says much about the economy at present. Housing demand always returns when prices get low enough to entice cautious people back into buying. Some paper profits will dissappear, but very little actual money will be lost on net by anyone.

It is just one more reminder that if you can, buy at the bottom of the cycle when others are panicking. Don't be the greater fool. Refrain from buying when prices lose touch with reality.

Note: I own Microchip stock

More data: Microchip investor relations page

Thursday, August 2, 2007

Napster Versus Apple?

Can Napster take on Apple in the digital music market? You have to be kidding, right? Apple has a market capitalization of $117 billion. It dominates the MP3 player market with its iPod. It dominates music downloads with its iTunes service. It recently introduced the iPhone to enormous amounts of free publicity. In contrast Napster just reported $32 million in revenues for the June quarter and has operated for years without a profit, burning through much of its once substantial cash reserves. When people want to pay for music downloads, they use Apple; when they don't want to pay, they don't subscribe for $15 a month for Napster's (or Yahoo's, or RealNetwork's) music library of 4 million tunes, they just get it for free (or steal it, according to the music industry). Napster had just 770,000 paid subscribers world-wide at last count.

But wait, maybe you should look at the Napster story. After all way back in 2002 Apple was a loser company with a stock worth well less than a tenth of what it is today. Its Mac line was languishing, its Newton PDA had been a failure; go back to 1998 and people were practically giving away Apple stock.

So what is the Napster story? Napster management understood that they were being shut out of most of the music download market partly because of the dominance of Apple's proprietary iPods, which will not allow music subscription services to run. They also understood that people, especially young people, will pay for music only to the extent it is a hassle to get it for free. So while they did fight for share in the MP3 player space, they concentrated on the future, which they saw as music-enabled cell phones. For those of you who have not been paying attention, these phones have been around for a couple of year's now with almost no media attention prior to the iPhone launch.

Napster has built its own infrastructure capable of allowing telecoms to enable music subscriptions, ring tone downloads, and yes even single-tune sales to download to cell phones over the wireless networks. Right now you can buy cell phones from AT&T and other carriers that have the option of subscribing to Napster. Major cell-phone manufacturers are building the capability of using Napster into at least some of their cell phone lines. Nine, yes 9, carriers around the world are working with Napster to compete with Apple iTunes.

So when it comes to music, it is not clear who is David and who is Goliath. You might consider Goliath to be the telecoms, with Napster as one weapon they hope to use to defend themselves against Apple.

This is unlikely to be a linear process. Remember that Apple did not invent the portable music player. It made a deal with the music industry to sell songs, then did great job integrating hardware and software. Apple fans spread the word about iPod / iTunes much more successfully than they proselytized for the Mac computer mainly because iTunes took much of the geek factor out loading up MP3 players. And yes, iPods were filled with music ripped from CDs or illegally downloaded. The number of songs actually sold by iTunes compared to the number of songs sitting in iPods today is quite low.

So I see two major scenarios, and people can only guess at how market share will be split between them. The Apple wins scenario is this: there have been 100 million iPods sold (my guess is that about 40 million are now broken, so 60 million are still in use). Starting as soon as a lower cost iPhone comes out, whenever these 60 million people either break their current iPod or their cell phone, they are going to buy an iPhone. Yep, that is 60 million iPhones that could sell in the next 3 years. It could become uncool to own anything but an iPhone. Three years from now an iPhone could conceivably be priced around $100. Another factor pushing this scenario: people who have actually bought iTunes will only be able to play them on iPods or iPhones, so they won't be shifting much to non-Apple products.

The other scenario is that the cell phone makers and telecom companies succeed in pushing their various versions of 3G, music-enabled cell phones. Perhaps the Apple brand is tarnishing; perhaps some new fad will jump to the head of the cell phone pack. Given that iPhones are not for sale except for in Apple stores and AT&T stores, to some extent this is bound to happen.

What Napster lacks so far is a fan base that will show friends how to use Napster-enabled music players and cell phones. Sales people at cell phone stores could fill this role, but it is not likely to be a priority for them.

An early indicator comes from Japan. At the Napster analyst conference Wednesday (see my summary), management reported that in Japan they already have more cell phone subscribers than traditional computer subscribers. They have a deal with DoCoMo, which is promoting and selling Napster-enabled phones. The numbers are low so far and at least the first month is free, but expect to see this add to Napster revenues in the December quarter.

I believe both Napster and Apple are set to prosper in the next few years. Apple is the safe bet, so the returns, while good, are not likely to be as significant as Napster's will be if it succeeds.

I own some Napster stock; I do not currently own Apple stock.