Switching Jobs? Your 401(k) Balance Could Be Automatically Transferred Under a New Federal Rule

Workers changing jobs could have their retirement savings automatically transferred to plans at their new jobs under a proposed federal rule.

The U.S. Department of Labor is considering allowing Retirement Clearinghouse LLC to run a program that automatically transfers small 401(k) balances into individual retirement accounts when employees leave a job. Then, when they start a new job, RCH would automatically transfer the savings into the new employer’s 401(k) plan.

Why This Matters

This would help solve what Retirement Clearinghouse calls a “cash-out crisis.” Many people cash out their 401(k) savings when they change jobs rather than going through the process of transferring them to a new job. This hurts their long-term savings, the company said in a statement. Spencer Williams, CEO of Retirement Clearinghouse, did not immediately return a call seeking comment.

How the Program Works

The RCH Auto Portability Program rolls over balances of less than $5,000 from the old 401(k) plans into an IRA (here’s a cheat sheet on the difference between the two). The company sends a letter to departing employees tell them their 401(k) will be placed into an IRA unless they respond.

The company uses technology called “locate, match and transfer” to detect when the IRA owner starts a new job. It then moves the money from the IRA into the new job’s retirement plan. Employers and plan providers can sign up for the program.

Dennis R. Nolte, a certified financial planner and vice president of Seacoast Investment Services, said most planners would be happy to be rid of the headache of dealing with small leftover account balances. More programs like this could help make sure retirement savings stay invested in a plan, he said.

Are There Downsides?

Jon L. Ten Haagen, certified financial planner and founder of Ten Haagen Financial Group, said he wouldn’t want a company deciding on its own what to do with his retirement savings. Moving your money into a new company’s 401(k) isn’t always the best choice, he said, because it “may or may not be a piece of garbage.” The company managing the IRA in between jobs may also not make the right investment choices for you, he said.

Companies should educate departing workers about their best options for their retirement savings instead.

“There are many questions to be answered,” Ten Haagen said.

What’s Next?

The Department of Labor is taking comments on whether to allow RCH to take a fee when it transfers money to a new employer’s account without the IRA holders explicit permission. The comment period lasts until December 24.

Starting a new job? Aside from dealing with your old retirement plan, don’t forget these money tasks.

This article originally appeared on Policygenius and was syndicated by MediaFeed.org.

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How Blockchain Technologies Can Enhance Cross-Industry Transparency

Now, blockchain technologies are poised to enhance cross-industry transparency via improvements to charity and donation programs.

I spoke with Changpeng Zhao, CEO of the cryptocurrency exchange company Binance, which runs the Blockchain Charity Foundation (BCF)–a wing of the company that’s devoted to global sustainable development. He shared how blockchain technologies can enhance transparency within a huge range of industries by making donation and charity systems easier to track and understand.

The Trouble with Current Donation Systems

There are so many disparate industries these days that it can be challenging to find any commonalities beyond death and taxes. But here’s one thing most industries have in common: At least some people and organizations within said industries are likely to participate in charity or donation programs.

That’s good news for society, but there’s just one problem: Donation systems notoriously lack transparency, which can lead to corruption and wear down the public’s trust–thereby decreasing the odds that people and organizations will continue to donate to worthy causes.

After piloting disaster relief donations via a campaign for West Japan flood donation, Zhao is intimately familiar with the lack of transparency that pervades so many charity programs.

“It was quite hard to push money to the ultimate beneficiaries–to identify who they are and who needs help,” Zhao says. Because the process of collecting and distributing donations is generally an opaque one, Zhao says not many people can understand where the money goes unless they’re provided with a detailed written report.

“Everyone sees one layer of transaction,” Zhao says. “The people who donated to us trust us to make good use of the money, but they no longer know where the money went until we publish that report.”

Zhao is concerned this can limit people’s willingness to donate. “In addition to being worried that the money may or may not be put to good use, the lack of transparency also reduces the sense of personal achievement,” he says. “If you can see where the money is going, that will help a lot in terms of personal feelings of achievement–so that’s very important.”

All of this helps explain why the BCF is committed to developing a fully transparent charity platform.

Making Charity Programs More Transparent

Zhao and his BCF maintain that employing blockchain technology within the charity ecosystem will yield a more efficient and transparent system and enhance the odds that donations will be distributed to those most in need.

“When it comes to the BCF program, our aim is to focus on transparency through this tracking portal,” Zhao says. “We want a completely transparent system.”

“Looking at the UN Sustainable Development Goals, the first few in the list could all be easily enhanced with a more transparent charity program,” Zhao says. “This increased transparency will prompt people to donate more and that will help a number of the initiatives including poverty, health, quality of education, gender equality and more.”

Rather than advocating for a specific charity, the BCF aims to help all charity initiatives via its blockchain charity platform.

Making Donation Systems More Transparent

In order to establish a fully transparent charity system, it’s necessary to track donations through multiple layers of donors, charity programs, NPOs, local supporters, and the ultimate beneficiaries.

That’s a tall order, but Zhao says Binance’s blockchain donation portal is capable of achieving it.

“As long as all of the transactions stay on-chain (done via cryptocurrency), blockchain tracks everything automatically,” Zhao says. “The job of the BCF portal is to collect the information on the blockchain and present it in an easy to understand manner. You can see the number of transactions of the incoming donations and the number of outgoing transactions for beneficiaries. And in between these two, there could be multiple layers for NPOs, local partners… etc., so we can track all of those in an easy to visualize way.”

The emphasis here is on easy to understand. Revealing oodles of data in and of itself doesn’t enhance transparency; it’s making that data accessible and understandable by all parties involved that provides greater clarity within donation systems.

The Importance of Education

In order to onboard more charitable organizations, governments, corporations, and grassroots communities, Zhao says the BCF first has to educate people about the value of the blockchain and cryptocurrencies.

The foundation is approaching this effort in several ways. For starters, the BCF is beginning to partner with universities and governments to educate teens and university students about cryptocurrency, blockchain, and so on.

“We also try to push very hard for the ultimate beneficiaries to accept cryptocurrency, so that will be a good way [for] people to learn,” Zhao says. “If users receive donations via crypto and these users need to learn about cryptocurrency or require help installing a wallet to receive the donation, there is a high incentive to learn that.”

Zhao is also hopeful that an increasing number of people and organizations from far-ranging industries will get on board with the blockchain in pursuit of a transparent charity platform.

“There [are] a lot more people that understand blockchain… [compared to a] few years ago, so today it is easier to push,” Zhao says. “I think the most significant challenge in expand[ing] BCF’s impact is really just educating people on blockchain. The more people who understand blockchain, the easier it is for BCF to push our impact.”

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Who Should Sit on Facebook’s Supreme Court? Here Are 5 Top Candidates

Facebook CEO Mark Zuckerberg said this week the company will create an oversight board to help with content moderation. The move is a belated acknowledgement Zuckerberg is out of its depth when it comes to ethics and policy, and comes six months after he first floated the idea of “a Supreme Court … made up of independent folks who don’t work for Facebook.”

The idea is a good one. If carried out properly, a “Supreme Court” could help Facebook begin fixing the toxic stew of propaganda, racism, and hate that is poisoning so much of our political and cultural discourse.

But how would a Facebook Supreme Court actually work? Zuckerberg has offered few details beyond saying it will function something like an appeals court, and may publish some of its decisions. Meanwhile, legal scholars in the New York Times have suggested it must be be open, independent and representative of society.

As for who should sit on it, it’s easy to imagine a few essential attributes for the job: The right person should be tech savvy, familiar with law and policy, and sensitive to diversity. Based on those attributes, here are five people that Facebook should select if it is serious about creating an independent Supreme Court.

Zeynep Tufekci

(Julia Reinhart/ Getty Images)

(Julia Reinhart/ Getty Images)

A Turkish sociologist and computer programmer, Tufekci was one of the first to raise the alarm about the moral and political dangers of social media platforms. She is a public intellectual of the internet age, using forums like the New York Times and Harvard’s Berkman Center to denounce Silicon Valley’s failure to be accountable for the discord it’s fostered. Tufecki has also taken aim at Facebook’s repeated use of “the community“—a term that is meaningless to describe 2 billion users—to defend its policies.

Peter Thiel

(Photo by Stephanie Keith/Getty)

(Photo by Stephanie Keith/Getty)

An iconoclast who has built several public companies, Thiel is also a lawyer who started the venture capital firm Founders Fund. A gay conservative and a supporter of Donald Trump, Thiel is deeply unpopular with Silicon Valley’s liberal elites—which is why his appointment would ensure ideological diversity on Facebook’s Supreme Court. Thiel is an early investor in Facebook and a longtime board member, which gives him a deep knowledge of the company. He would have to give up these positions to preserve the body’s independence.

Judge Lucy Koh

Koh has presided over numerous high-profile technology trials and is highly regarded in Silicon Valley. Her work as a federal judge includes the long-running patent trial between Apple and Samsung, as well as a case involving an antitrust conspiracy between Google, Adobe, and other firms. Her work on the bench and inspiring personal biography made her the subject of a flattering 2015 Bloomberg profile. Koh’s familiarity with the political and legal strategies of tech giants would provide invaluable expertise for Facebook’s Supreme Court (provided federal ethics rules permitted her to do so).

Tim Berners Lee

(Nicolas Liponne via Getty)

(Nicolas Liponne via Getty)

Sir Berners Lee is a computer science professor at Oxford University and MIT, who is best known as the inventor of the World Wide Web. Highly regarded in tech circles for his humility and vast knowledge, Berners Lee in recent years has become a vocal critic of the advertiser-based business models of the Silicon Valley tech giants. Appointing him to Facebook’s Supreme Court would show the company is serious about fixing its systemic problems with privacy.

Bozoma Saint John

(Wesley Hitt/Getty Images)

(Wesley Hitt/Getty Images)

Saint John, who was raised in Ghana, became a familiar name in tech circles when she became Apple’s head of music marketing after the company acquired her former employer Beats. She also worked at Uber before moving to the talent agency Endeavour. Saint John’s outspoken views on Silicon Valley’s white male culture would help inform Facebook’s Supreme Court in tackling hard issues of diversity.

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Recent Purchase: Apple

It wasn’t long ago that I wrote a focus ticker article on Apple (AAPL) that raised concerns that I had about its weighting in my portfolio and the potential for me to trim shares. Ultimately, I didn’t follow through (though it’s too bad because in hindsight, I would have timed that trade up pretty well). However, I decided that there wasn’t another company in the market that I would rather own (which is why AAPL is by far my largest holding in the first place), so selling any shares would just result in a downgrade of quality. More recently, I penned a piece highlighting the potential for AAPL’s share price to rise above the $300/share mark in the next 12-18 months, in response to an analyst’s call. Obviously with that sort of short-term price target, I remain really bullish on shares. So, with that in mind, I put my asset allocation concerns and added to my AAPL position today as shares dipped more than 20% below their recent 52-week highs, buying shares at $186.50.

The reason that my AAPL position has grown so large is because I’ve bought shares on just about every dip that the company has experienced since I began my investing career. I’ve said it time and again, AAPL shares are the easiest stock in the market for me to buy and own. These shares check all of the boxes that I’m looking for from both a fundamental perspective and a shareholder rewards one as well. AAPL is the core building block on my long-term dividend growth portfolio. Even after recent weakness, I see no reason to change that sentiment.

Speaking of dividend growth, that seems like the best place to start here. AAPL is not included in many DGI portfolios because it doesn’t have a very long annual dividend increase streak. The company didn’t begin paying its dividend until 2012; however, since then Apple management has rewarded shareholders with annual increases each and every year. Since initiating its dividend AAPL’s dividend growth CAGR is ~10%. Being that AAPL’s dividend payout ratio remains low at ~24% and the company is expected to continue to post double digit EPS growth into the foreseeable future, I expect for these double digit annual increases to continue. Simply put, if I had to pick one company to give me double digit dividend growth over the next decade or two, the pick would be AAPL.

Assuming that the current ~10% annual increase rate is maintained over the long-term, the passive income that AAPL generates for me will double every 7 years or so. I know that some investors look at AAPL’s low, ~1.5% yield and like to place negative focus on that. However, I think it’s important to point out that the reason AAPL’s yield is currently so low is because of the stock’s recent price appreciation. This is a great problem to have.

Furthermore, as a long-term investor, I think it’s probably more important to focus on the compounding potential of Apple’s dividend rather than its yield in the short-term. I’ve only been a shareholder of AAPL for 6 year or so, yet my yield on cost has already risen significantly. After my recent AAPL purchase, the cost basis of my overall position has risen to $106.79, meaning that my yield on cost is ~2.75%. At the current 10% annual increase rate, it won’t be long before that percentage rises significantly higher. This is the beauty of owning an equity that posts double digit dividend growth.

But, as amazing as AAPL’s dividend growth potential is, it’s honestly dwarfed by the power of the other half of the shareholder return proposition: buybacks. For years, AAPL has been known for its enormous cash hoard. With so much of its cash locked up overseas due to unfavorable tax rates, AAPL’s wealth grew and grew to levels that the majority of countries on earth were envious of. And now that the tax rates have changed, AAPL management has mentioned that it would like to go cash neutral on the balance sheet, meaning that there are hundreds of billions of dollars that the company is looking to spend.

AAPL will undoubtedly continue to investing billions into R&D. There is potential for large scale M&A as well, though historically, AAPL management has been hesitant to go with route, favoring organic innovation for growth. AAPL used some of its repatriated cash hoard to give investors a slightly largest dividend increase than normal in May, but it appears that the vast majority of those funds will be dedicated towards AAPL’s share buyback. Management authorized $100b+ for share buybacks earlier in the year and we’re beginning to see he power of this repurchase with management spending ~$73b on share repurchases during the trailing twelve months.

I know that many investors wish that these billions were paid out in dividends, but looking out longer term, we really begin to see the power of AAPL’s share buyback. Since 2013, AAPL has reduced its outstanding share count by 22.7%. This plays a large role in the company’s strong EPS growth, which in hand, lowers the payout ratio and makes long-term dividend growth more sustainable.

Here’s how I look at it. Since 2013, AAPL has retired ~1.4b shares. Right now, AAPL’s quarterly dividend payment is $0.73/share. This means that AAPL’s buyback program is saving the company $1b+ per quarter in dividend related expenses. This cost savings figure will only continue to grow as more and more shares are retired and the quarterly dividend in continued to be increased.

I think that AAPL management can realistically retire 5-8% of the company’s outstanding share count over the next year or so. A lot of the recent pullback has been centered around fears of a sales slowdown. Well, even if that were to the case and AAPL only posted moderate revenue growth and margins stayed flat (which is unlikely due to the fact that ASP’s and high margin service revenues are rising) AAPL will post strong bottom line gains because of the reduced share count. Supply and demand is on my side as a long-term shareholder with AAPL reducing its float.

What’s more, Warren Buffett and Berkshire Hathaway (NYSE:BRK.A)(BRK.B) continue to increase their position and I can only assume that they’re planning on AAPL being a long-term stake for them. Between the buyback and Berkshire, I suspect that a large percentage of AAPL’s shares are going to be removed from the market which should help to put a floor under the stock in the short-term.

But even if Buffett wasn’t bullish on the name, I would still consider the recent sell-off to be irrational. I understand that the market doesn’t like question markets. Apple removing the hardware unit data from its future reports is probably a concern to certain analysts who try to make short-term projections, but to me, it doesn’t matter much. Actually, I agree with Apple CEO, Tim Cook, and his belief that the company is valued too low because of the market’s focus on hardware and if removing the unit sales data shifts that focus to the fundamentals (like rising sales, margins, earnings, etc) then I think it will be a great thing for the stock.

I know that some analysts and investors alike see the data reporting change as a dubious means to hide demand issues, but I simply don’t see it. Apple remains the leading brand globally in the smart phone space. Apple’s brand is aspirational and synonymous with success across the world. If I had an Apple share for every time that I’ve heard someone talk about the death of the smart phone/iPhone, then I’d be a millionaire many times over. Sure, peak smart phone may be on the horizon. Maybe hardware refresh cycles will continue to grow longer as it becomes harder for companies like Apple to make meaningful innovations in the hardware space. Either way, the service revenue streams will likely continue to grow alongside the global active user base.

Shares are irrationally cheap at this point even if the company’s sales are flat (or slightly negative). Sure, if iPhone sales fall off of a cliff, then an AAPL sell-off is justified, but I see no catalyst for this to happen. My point is this: Apple doesn’t need to continue to post double digit iPhone growth to be a great investment.

Why? Because the company’s share are cheap, valued at ~14x 2019 EPS expectations. This means that the most profitable company on earth is valued with a premium below the broader market’s. With this in mind, i’s no wonder that Apple is willing to spend so much money on a buyback.

Source: F.A.S.T. Graphs

Any shift in sentiment should result in multiple expansion. I think a 17x multiple is fair for a company with Apple’s fundamentals. If this were to happen, we’d be looking at gains of nearly 20% from here based upon 2019 EPS expectations. And, as previously discussed, I think those EPS estimates are low and will end up being well above the current $13.50 average. I think it’s feasible for AAPL to earn $15 or so in 2019, meaning that shares could easily rise to a $250/share price or more in the next 12 months or so and still be priced fairly.

Source: F.A.S.T. Graphs

As you can see on the F.A.S.T. Graph above, even if shares continue to trade in this sub-market 15x range, investors are likely to experience double digit long-term total returns. Only time will tell. But, in the meantime, I’m content to accumulate shares alongside Buffett and collect this rising dividend.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Netflix Subscribers Will Pay Less (Or Possibly More) Depending on Where They Live, According to 2 Surprising Reports. Here Are the Details

It’s releasing 700 new shows this year. Think about that. It’s almost two new shows per day, counting new seasons of existing series.

And it turns out many subscribers absolutely love it. In fact, a new study by a Wall Street firm says a majority of U.S. Netflix users would be willing to pay a lot more for the service –40 percent or more than they currently pay.

That has to be tempting to Netlix, which simultaneously has spent $8 billion to produce and license new shows.

And it’s why the same Wall Street firm, Piper Jaffray, is predicting that Netflix will “bump pricing up across many of its markets in 2019,” according to Business Insider, because a “primary determinant in the ability of Netflix to raise price is subscriber perception of content quality.”

Or to put it a bit more plainly: people like it, so they’re willing to pay more, so you can expect Netflix to charge more.

That makes sense. But the news comes in the context of another report–one that says Netflix is actually playing around with an idea to charge less in other parts of the world.

Last week, a Malaysian news site called The Star Online reported that Netflix was trying a somewhat stripped down, mobile device-only subscription plan that goes for 17 Malaysian ringgit a month–which works out to about $4.25 in U.S. currency, and is less than half what a regular Netflix subscription costs in Malaysia.

Netflix confirmed to TechCrunch and USA Today that it’s running these cheaper, mobile-only subscriptions “in a few countries,” but didn’t provide further details. But it’s in keeping with what CEO Reed Hastings told Bloomberg last week, about want to experiment with different pricing strategies around teh world.

Of course, as Netflix users know, the content that you see in one part of the world isn’t always the same as what you’ll see in other parts of the planet. And Netflix has been emphasizing local content recently in Asia, where it faces stiff competition from lower-priced streaming services.

Besides meaning that Netflix, not Apple or Alphabet, keeps the customer data, it also means Netlix doesn’t have to pay a 15 or 30 percent cut to those companies to reach its own subscribers.

That could free up more opportunity to drive prices down in some markets. But not, analysts predict, in the United States and perhaps other wealthier countries. 

It might literally be a first world problem, but if these analysts’ predictions are right, we’ll likely be paying a bit more before long. Either way, you’ll probably keep watching.

By the way, I contacted Netflix via email to ask them for comment on these reported price fluctuations, but I haven’t heard anything back. If they do reply I’ll update this column. 

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Is Apple Stock A Buy After The 16% Decline?

Apple (AAPL) stock has declined by about 16% from its all-time high of $233.47 reached on Oct. 3, 2018. The sell-off has mainly been driven amid worries of the slowing demand for iPhones, Apple’s biggest revenue-generator. Should you consider buying Apple stock following the dip?

Source: Yahoo Finance

Apple’s suppliers are cutting forecasts

One of Apple’s key suppliers to watch is Lumentum Holdings. The company provides Apple with 3D chips for the facial recognition system on Apple’s iPhones. The company reduced its earnings forecast for the current quarter, expecting it to be between $1.15 and $1.34, and lowered its sales forecast by $20 million. The company stated that this was due to lower demand from a customer it did not name, which the market strongly believes is Apple.

Furthermore, another supplier, Japan Display, also reduced its sales and earnings forecasts, which is further pulling down Apple’s shares. The fact that suppliers are cutting their financial forecasts is certainly a sign that Apple’s iPhones sales growth is in jeopardy. Given that 60% of the company’s revenue comes from iPhones, a significant slowdown in this segment spells trouble for its future financial performance.

Services segment is delivering strong growth

The ‘services’ segment of Apple’s revenue consists of app-store sales, use of AppleCare, Apple Pay and music-streaming subscriptions. While Apple’s unit sales are declining, one positive thing to note is that Services revenue is showing strong revenue growth. Apple has been focusing on shifting the company from a hardware company to a services-led company. The company has experienced great success in this segment, as revenue from Services grew by 17% yoy according to its latest earnings data, contributing about $9.98 billion in revenues.

However, it is important to note that Apple can only continue maintain this growth in Services if people continue using Apple’s devices, most notably the iPhone. Therefore, the decline in the unit sales numbers for Apple’s hardware devices is a major concern, because this could translate into lower use of Apple’s services. In fact, the services segment is already showing slower growth than the previous quarter that ended June 2018, in which it delivered Services revenue growth of 31%. Hence, while the 16% decline in Apple’s stock may seem overblown to some, there are solid reasons to be less bullish on the stock at the moment.

Valuation

Valuation Metric

Apple

S&P 500

Price to Earnings Ratio

17.2

19.1

Price to Book

9.1

3.1

Price to Sales

3.8

2.8

Price to Cash Flow

13.2

12.8

Data Source: Morningstar

Apple is trading at a Price to Earnings ratio of 17.2, which is quite an attractive multiple to pay for a financially solid company like Apple, and in comparison to the P/E ratio of the S&P 500 at 19.1. Furthermore, the company is trading at a mere 15.2x forward earnings, hence the pullback in the stock has certainly brought the company down to quite appealing earnings multiples. However, as the table above shows, every other valuation metric for the stock is notably above that of the S&P 500.

Bottom Line

The fact that Apple’s key suppliers are cutting earnings forecasts is a negative signal for the outlook of Apple’s unit sales, which are already in decline. While the company’s services revenue is growing, its future growth is heavily dependent on use of Apple’s hardware devices. The 16% decline in Apple’s stock price has brought certain valuation multiples to enticing levels for this financially sound company. However, investors that are looking to buy into the dip should remain cautious of further stock price volatility as the market digests the slowdown in Apple’s unit sales.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Apple finds quality problems in some iPhone X and MacBook models

The new Apple iPhone X are seen on display at the Apple Store in Manhattan, New York, U.S., September 21, 2018. REUTERS/Shannon Stapleton

(Reuters) – Apple Inc said on Friday it had found some issues affecting some of its iPhone X and 13-inch MacBook pro products and said the company would fix them free of charge.

The repair offers are the latest in a string of product quality problems over the past year even as Apple has raised prices for most of its laptops, tablets and phones to new heights. Its top-end iPhones now sell for as much as $1,449 and its best iPad goes for as much as $1,899.

Apple said displays on iPhone X, which came out in 2017 with a starting price of $999, may experience touch issues due to a component failure, adding it would replace those parts for free. The company said it only affects the original iPhone X, which has been superseded by the iPhone XS and XR released this autumn.

The screens on affected phones may not respond correctly to touch or it could react even without being touched, the Cupertino, California-based company said.

For the 13-inch MacBook Pro computers, it said an issue may result in data loss and failure of the storage drive. Apple said it would service those affected drives.

Only a limited number of 128GB and 256GB solid-state drives in 13-inch MacBook Pro units sold between June 2017 and June 2018 were affected, Apple said apple.co/2AXkeEw on its website.

Last year, Apple began a massive battery replacement program after it conceded that a software update intended to help some iPhone models deal with aging batteries slowed down the performance of the phones. The battery imbroglio resulted in inquires from U.S. lawmakers.

In June, Apple said it would offer free replacements for the keyboards in some MacBook and MacBook Pro models. The keyboards, which Apple introduced in laptops starting in 2015, had generated complaints on social media for how much noise they made while typing and for malfunctioning unexpectedly. Apple changed the design of the keyboard this year, adding a layer of silicone underneath the keys.

Reporting by Ismail Shakil in Bengaluru and Stephen Nellis in San Francisco

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Roku: Time To Buy Again

After the bell on Wednesday, streaming media company Roku (ROKU) announced its third quarter results. The company beat on the top and bottom lines and again raised its yearly guidance, yet the stock sold off on the news. As this business continues to grow and repeatedly impress, the pullback makes the name quite attractive again.

The company reported revenues of $173.4 million, up nearly 40% over the prior year period and beating estimates by more than $4 million. On the bottom line, a 9 cent per share loss beat by three cents. While player revenues handily beat estimates, platform revenues fell about $3 million short of expectations, and this is the more important part of the business moving forward. This also lead to ARPU (average revenue per user) coming up shy. While Roku has beaten top and bottom line estimates every time it has reported since going public, this was the smallest beat as seen below.

(Source: Seeking Alpha Roku Earnings page, seen here)

Overall, Roku continues to make progress. The chart below shows how active accounts have soared, up 7.1 million in the past 12 months. At the Q3 2017 report, the year over year gain was 5.4 million. This was the first quarter where platform revenues topped $100 million, and this is the higher margin side of the business. As platform revenues become more of the company’s total, overall gross margins rise even though platform margins are down, so the total gross margin jump was 560 basis points year over year.

(In millions. Source: Q3 2018 shareholder letter and S-1 filing from 2017)

The company’s overall loss did increase a bit thanks to higher operating spending to support the growing business, but Adjusted EBITDA swung from a negative in last year’s period to a positive in Q3 2018. Roku also finished the quarter with about $180 million in cash and investments against no debt, meaning the balance sheet is quite strong. I do not see a need to raise additional funds unless the company wants to make a big acquisition or some major capital expenditure.

One of the things I like the most about Roku is that management continues to raise guidance. As you can see in the table below, every guidance item for the full year 2018 is well above where the original forecast was. Should the company’s progress continue in the near term, we could see more than $1 billion in revenues next year, and perhaps a profit too depending on spending.

(Source: Roku quarterly reports, seen here)

Thursday actually marks one year to the day when I first covered Roku, at which point shares were less than half of where they stand now. I was a big fan of the company’s growth, and results have only improved since. Shares that were in the teens skyrocketed to the high $70s, but they’ve lost a third of their value since then. My last article on the name came with shares in the low $30s, so those who bought on that pullback have done very well.

Since everyone likes to look at streaming giant Netflix (NFLX), I mentioned last year how Roku only needed to get 1/10th of Netflix’s valuation to get to an $8 billion valuation. After the recent pullback, Roku is worth about $5.5 billion, but 10% of Netflix would be over $14 billion now, despite Netflix shares nearly $100 off their all-time high. With the revenue picture and account base growing quite strongly, I now think a $10 billion valuation for Roku is eventually possible. That probably equals a price in the mid to high $80s if you assume some dilution, mostly from stock based compensation, over the next couple of years.

In the end, Roku announced another strong quarter, but the street didn’t totally like the results. The top and bottom line headline beats weren’t as large as previous quarters, and platform revenues were a little short of estimates. However, the company continues to grow its active accounts base very nicely, and Roku should only be about a year or so away from hitting a billion in annual revenues. As streaming media becomes an even larger part of our lives moving forward, the recent pullback provides another good opportunity for investors to buy.

Author’s additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Sen. Wyden Proposed a CEO-Felling Data Privacy Law. Is Big Tech Ready for It?

Consumers who have clamored for data privacy reform since Equifax’s ransacking and, more recently, Facebook’s Cambridge Analytica debacle have cause to celebrate.

On Thursday, Senator Ron Wyden (D-Ore.), a prominent privacy hawk, unveiled a draft bill that seeks to slap harsher penalties on companies—and chief executive officers—who run afoul of new rules that expand government oversight of the tech industry. The Consumer Data Privacy Act, as the bill is tentatively named, takes its cue from Europe’s General Data Privacy Regulation, or GDPR, which can fine companies up to 4% of their global, annual revenues for infractions. But Wyden’s bill goes even further; in addition to that penalty, the proposed law would jail chief execs up to 20 years with individual fines reaching as high as $5 million for CEOs who knowingly mislead regulators.

If GDPR has teeth, Wyden’s proposal has fangs—set on the jugulars of corporate heads. The proposed law would require big firms—ones with revenues exceeding $1 billion or ones that store data on more than 50 million consumers or their devices—to submit “annual data protection reports” to the government that lay out their data-securing practices. It would force companies to comply with “do not track” policies while offering alternative payment options to consumers, such as subscription fees instead of ad-supported “free” models. And it would boost the power of the Federal Trade Commission, adding a tech-focused division with a broader mandate alongside an arsenal of stronger enforcement actions.

Lindsey Barrett, an attorney and teaching fellow at Georgetown Law’s Communications & Technology Clinic within the school’s Institute for Public Representation, commented on Twitter that the proposed legislation “injects sorely needed accountability into our equif*cked information ecosystem.” Wyden’s own statement was a little more sanitized: “It’s time for some sunshine on this shadowy network of information sharing,” he said.

But the proposed reform isn’t all sunshine and rainbows. Jake Williams, an alumnus of the National Security Agency who has since cofounded Rendition InfoSec, a cybersecurity consulting shop, said he doubts the bill will pass. “Even if it does, it won’t mean what you might think. It won’t create a SOX style environment around cyber. Sorry,” he wrote on Twitter, referring to Sarbanes-Oxley, a 2002 financial reform enacted in the wake of the Enron scandal to prevent similar accounting blowups.

The main thrust of Williams’ criticism is that the proposed law will box in cybersecurity practitioners and will subjugate and constrain an industry that is still finding its feet. The bill effectively grants corporate governance, risk, and compliance departments the right to “rule infosec,” Williams warned. If it passes into law, it will likely lead to licensing requirements within the cybersecurity industry, akin to the hoops people must jump through to become certified public accountants, he said. “Professional licensure is not good for a profession this young,” he said.

Data privacy reform is long overdue, but this bill presents questions. Is Big Tech—and its CEOs—ready to face the formalized wrath of guillotine-thirsting regulators? Does the bill unfairly target CEOs, leaving other C-Suite executives and board members off the hook? Could companies end up shoving the blame onto scapegoat CEOs of subsidiary businesses? And finally, as Williams noted, is the cybersecurity industry really ready to grow up and professionalize, accepting all the responsibility and regulatory constrictions that entails?

Be careful what you wish for.

A version of this article first appeared in Cyber Saturday, the weekend edition of Fortune’s tech newsletter Data Sheet. Sign up here.

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The Next Billion Dollar Disruption. You Read About It Here First

If there’s anything true about high tech, it’s that the big fortunes are made when a new technology disrupts an existing industry. The money to be made is greatest when 1) the industry being disrupted is bureaucratic and inefficient, and 2) the new technology transcends, rather than merely automates, the previous processes.

Early in my career, I lived through and participated in, one of the biggest disruptions of all time: desktop publishing. Within ten years, photo-offset printing setups that cost millions of dollars each were replaced by PCs and laser printers. Entire job categories and companies disappeared. Millions lost their jobs but entrepreneurs made untold billions of dollars.

While I built my career riding that wave, I was too young and inexperienced to start my own company until the revolution was over. Now, as I see another, even more amazing technology about to massively disrupt another hidebound, inbred industry, I’m past the point where I want to start my own company. Too much damn work. (I’m a lazy S.O.B., truth be known.)

So I’m going to share with all you readers what I absolutely know is about to happen. I say “absolutely” because entirely by accident I’m uniquely positioned to see the disruption coming and uniquely qualified to explain how it’s going to happen. And, strangely perhaps, it has nothing whatsoever to do most of the stuff I write about in this column.

So let’s get started but, bear with me and be patient, because I’m going to explain this in my own way and without trying to package the concept with a nice, neat bow. Put on your thinking cap.

Rick and Morty

About two weeks ago, I attended a live interview with Bryan Newton, one of the animation directors of the hit cartoon series Rick and Morty. He’s been involved with the project since its inception and has become a bit of a legend among animators for pioneering some of the crazed look-and-feel of that style of animation.

Why was I at that interview? Well, it was presented by AniMAtic Boston, a group of student and professional animators, mostly graduates of local colleges, most of whom work in the fields of commercial and corporate animation but many of which are true artists in this field.

I belong to that group and support it because, in addition to all the business writing and experiences I’ve had over the years (and which I chronicle in this column), I’ve also been a hobbyist in the field of computer animation since the mid 1980s. I’ve animated using several programs; I also made a feature-length film that’s pretty well-known in some circles. (Let’s just say it gave me permanent nerd cred.)

From time to time, I’ve played around with the idea of changing careers and becoming a professional animator, probably in the field of cut-scene animation for computer games, which is a field I know pretty well. Anyway, I was interested in Newton’s perspectives about working in a big studio.

Well, I don’t know whether it was because he had had a long day and was tired, but he made it very clear that he was no fan of the studio system. As he ragged on all the inefficiencies and politics, I realized that I’d heard all this before. It seems like EVERY creative person in Hollywood hates the studios–especially the executives with their “notes.”

Anyway, it turns out that even shows like Rick and Morty–which involves relatively simple animation–must go through an insanely Byzantine process to move from conception to writing to animation to completion. Over a hundred people are involved and from what I can see a great deal of them aren’t adding much or any value.

And, don’t kid yourself, animated entertainment–TV, movies and Internet–is a multi-billion-dollar business. More important, it’s a business that’s weighed down by bureaucratic overhead and entrenched power-brokers who essentially drag down the creative process.

Revolution in Real-Time

At the end of the interview with Newton, he speculated about what animation technology might look like in the future. He said that writers could create characters by morphing standard characters, use libraries of animations to make them move, use motion capture to customize and add dialog. And then release it directly to the Internet.

Essentially he described an environment where creatives like himself would not require the infrastructure, investment, and meddlesome overhead of a studio to develop and release an entertainment product. As I heard him describe this, I considered pointing out that all of this was not just possible but day-to-day reality, at least in the real of 3D animation. 

The technology is called “Real-Time Animation” and it’s been flying under the radar for about a decade. So much under the radar that although I’ve brought up the subject with several people at AniMAtic Boston, I have yet to run into anyone who has even heard of the software-;even though they’re recent graduates of top animation college programs.

The reason I know about Real-Time is that I’ve been working with Real-Time animation software since 2004, probably because I have no formal training in animation. I suspect that most “real” animators have tended to ignore it because up until about two years ago real-time animations have been fairly crude.

However, as CPUs and GPUs (graphics cards) have gotten more powerful in order to handle ultra-realistic games, it’s become possible to create reasonably high-quality 3D animation using real-time tools. These tools are to traditional animation what desktop publishing was to typesetting and paste-up. You create animation on a WYSIWYG (What You See Is What You Get) environment.

A few (very few) traditional, high-end animation shops are getting wise to the incredible power and productivity of developing animation in Real-Time. One of these is UK-based Axis Animation, which created the computer graphics world for the excellent Netflix series Kiss Me First, and which does specialty work for several big name organizations.

I recently had a long conversation with Michael Zaman, who is the supervisor of Real-Time Computer Graphics at Axis. He noted that while in the past they used Real-Time primarily for prototyping, they’re now using it for actual project because the technology can now create quality that rivals the more laborious CG processes of the past.

Zaman had the same “knowing grin” that I’ve come to associate with the handful of people who “get” what’s coming; I have a feeling that he and Axis will end up being major players in the disruption that’s just around the corner. I’m going to save the best part of our conversation for the end of this post, so you’ll want to read the entire thing.

The Underlying Tech

There are four reasons that Real-Time animation has vastly increased in quality. (I’ll be giving some examples soon; bear with me.) 

  1. The first trend is the need to develop video games quickly; real-time animation more naturally emulates the environment in which computer games will be played.
  2. The second trend is the desire among consumers for video games that are more realistic and cinematic; to satisfy his desire, companies like NVidia have developed specialized hardware to process complex 3D graphics.
  3. The third trend is the commoditiziation of high-end technologies, like motion capture (mocap). Ten years ago, a full-body/facial mocap system cost a million dollars; a functionally identical system can be had today for $6,000.
  4. The fourth and final trend is a lively market in pre-created 3D models, including sets, props, and characters, along with the ability to very easily modify those models to suit individual projects.

The result is very much like the “next generation” environment that Bryan Newton described on stage–not just for simple 2D animation like Rick and Morty–but full-on 3D animation similar to major Disney releases.

More important, Real-Time technology makes it possible to do all of this without the overhead of the studio system; in fact, developing a short animated film is considerably less effort than writing a novel.

How do I know this? Because I’ve actually written a novel and have also been using the best (IMHO) Real-Time animation tool–iClone from Reallusion–to do exactly that over the past two years. Here are excerpts from my last three major projects, showing the incredibly rapid development of this technology (very short video):

[embedded content]

I’m not saying any of the above is great art, although The Blood Pope did get selected for several film festivals and won two awards and I have hopes that Salvage may be included in a fairly major Sci-Fi film festival. What’s important for the purposes of this post is that all three projects were created by a single person (me) who has NO formal training in animation and with a very limited budget.

The total cost for this kind of Real-Time animation comes out to less than $500 per minute, maximum. For perspective, a typical Disney feature, done with traditional animation tools in a studio setting, costs upwards of $50,000 per second which calculates out to $3,000,000 per minute. 

I’d say that a cost reduction from $3,000,000 to $500 definitely qualifies as disruptive technology, eh? And that’s just for creating animated cartoons which, although a multi-billion dollar business, is only the tiniest tip of the proverbial iceberg.

What’s Next Is Insane

Real-time animation technology is developing so quickly that even people inside the industry are struggling to catch their breath.  However, what all the insiders see very clearly is that the studio technology that Disney uses to insert deceased actors (like Carrie Fisher) into the Star Wars movies will rapidly become available to individuals.

We’re already seeing this kind of thing with the so-called “deep fake” technology where AI pastes a celebrity’s head onto a video with another actor’s body on it. But the real power happens when you combine mocap with ultra-realistic real-time rendering.

And that’s happening already. Real-Time is currently experiencing is a quantum leap in quality from a technology called iRay, which is being built into the newest graphics cards. Here’s a very short video showing how iRay radically increases realism inside Reallusion’s Character Creator tool:

[embedded content]

To understand where this is all going, here’s a demonstration of a high-end system (it uses the Unreal gaming engine) being used to create ultra-realistic animation in Real-Time–so realistic that it’s hard to tell that it’s not a real person:

[embedded content]

While the setup used above is more expensive than most independent film-makers are likely to be able to afford, it’s still geometrically less expensive–and insanely faster–than the systems used inside the studios.

The point here is that the technology shown in the video above will soon drop in price so that it will be widely available to anybody who can spend, say, $5,000 or $10,000. And that’s what’s going to completely change not just animation but the entire filmmaking industry.

Here’s what’s going to happen, based on my conversations with insiders like Michael Zaman from Axis Animation. Within five to ten years, it will be possible for a single person or a small group of people to make entire movies in virtual worlds, without ANY of the overhead of a traditional studio.

And I’m not just talking about animated cartoons. I’m talking about actual feature films with massive special effects. People like you and me will be able to create, with very little investment, content that resembles high-end cinematic work that today costs hundreds of millions of dollars.

So here’s what we’ve got: rapidly developing technology that will upend a massively inefficient and bureaucracy bloated studio system. This revolution will be more disruptive than Amazon was to the book business, or than Netflix was to the TV business. We are about to experience the kind of massive market disruption that happens only once or twice in anybody’s lifetime.

And almost nobody sees it coming. But now YOU do, because you read about it here first. The question is: are you going to start a business that surfs the tsunami? Or are you going to sit back and watch it happen?

Your move.

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