Facebook Moves to Limit Hate Speech as ‘Times’ Scandal Swirls

Mark Zuckerberg would like you to know that despite a scathing report in The New York Times, which depicts Facebook as a ruthless, self-concerned corporate behemoth, things are getting better—at least, the way he sees it.

In a lengthy call with reporters Thursday, and an equally lengthy “note” published on Facebook, the company’s CEO laid out a litany of changes Facebook is making, designed to curb toxic content on the platform and provide more transparency into the decisions Facebook makes on content. But perhaps the most consequential update is that the Facebook News Feed algorithm will now try to limit the spread of sensationalist content on the platform, which represents a major change from how the company has traditionally approached moderation. All of it is in service of restoring trust in a company whose public reputation—and the reputation of its leaders—have taken near constant body blows over the past two years.

“When you have setbacks like we’ve had this year that’s a big issue, and it does erode trust, and it takes time to build that back,” Zuckerberg said on the call. “Certainly our job is not only to have this stuff at a good level and to continually improve, but to be ahead of new issues. I think over the last couple of years that’s been one of the areas where we’ve been most behind, especially around the election issues.”

Zuckerberg’s words come a day after the Times published a damning report that portrays Facebook as not merely behind on issues of election interference, as Zuckerberg suggests, but actively working to downplay what it knew about that interference. It suggests that Facebook’s executives, wary of picking sides in a partisan battle over Russian interference in the 2016 election, aimed to minimize Russia’s role in spreading propaganda on the platform. The story states that Facebook’s former head of cybersecurity, Alex Stamos, was chastised by the company’s chief operating officer, Sheryl Sandberg, for investigating Russian actions without the company’s approval and berated again for divulging too much information about it to members of Facebook’s board.

In his remarks, Zuckerberg flatly denied this allegation. “We’ve certainly stumbled along the way, but to suggest that we weren’t interested in knowing the truth or that we wanted to hide what we knew or that we tried to prevent investigations is simply untrue,” he said. (Stamos, for his part, tweeted earlier on Thursday that he was “never told by Mark, Sheryl or any other executives not to investigate.”)

The Times story also alleges that Facebook waged a smear campaign against its competitors through an opposition research firm called Definers Public Relations. The firm repeatedly worked to tie Facebook’s detractors, including groups like the Open Markets Institute and Freedom from Facebook, to billionaire George Soros. Critics say that in doing so, Facebook engaged with the same anti-Semitic tropes that have been used by white nationalists and other hate groups that regularly villainize Soros.

Zuckerberg denied having any personal knowledge of Definers’ work with Facebook, and said he and Sheryl Sandberg, Facebook’s chief operating officer, only heard about the relationship yesterday. That’s despite the fact that Definers often coordinated large-scale calls with the press on behalf of Facebook and its employees and, in at least one case, sat in on meetings between Facebook and the media.

After Zuckerberg read the story in the Times, he says Facebook promptly ended its relationship with the firm. “This type of firm might be normal in Washington, but it’s not the type of thing I want Facebook associated with, which is why we’re no longer going to be working with them.”

But while Zuckerberg said he had no knowledge of Definers’ work or its messaging, he defended Facebook’s criticism of activist groups like Freedom from Facebook. He said the intention was not to attack Soros, for whom Zuckerberg said he has “tremendous respect,” but show that Freedom from Facebook “was not a spontaneous grassroots effort.”

Zuckerberg declined to assign blame for the tactics allegedly employed by Definers, or to comment on broader personnel issues within Facebook itself. He said only that Sandberg, who has been overseeing Facebook’s lobbying efforts and who is portrayed unfavorably throughout the Times story, is “doing great work for the company.” “She’s been an important partner to me and continues to be and will continue to be,” Zuckerberg said. (Sandberg was not on the call.)

For the umpteenth time this year, Zuckerberg found himself working overtime to clean up Facebook’s mess, even as he wanted desperately to tout the progress the company’s been making. And it has made important progress. In Myanmar, where fake news on Facebook has animated a brutal ethnic cleansing campaign against the Rohingya people, the company has hired 100 Burmese speakers to moderate content there and is now automatically identifying 63 percent of the hate speech it takes down, up from just 13 percent at the end of last year. Facebook has expanded its safety and security team to 30,000 people globally, more than the 20,000 people the company initially set out to hire this year. It’s also changed its content takedown process, allowing people to appeal the company’s decisions about content they post or report. On Thursday, Facebook announced that within the next year, it will create an independent oversight body to handle content appeals.

But by far the biggest news to come out of Thursday’s announcements is the change coming to Facebook’s News Feed algorithm. Zuckerberg acknowledged what most observers already know to be one of Facebook’s most fundamental problems: That sensationalist, provocative content, even content that doesn’t explicitly violate Facebook’s policies, tends to get the most engagement on the platform. “As content gets closer to the line of what is prohibited by our community standards, we see people tend to engage with it more,” he said. “This seems to be true regardless of where we set our policy lines.”

This issue is arguably what undergirds most of Facebook’s problems the past few years. It’s why divisive political propaganda was so successful during the 2016 campaign and why fake news has been able to flourish. Until now, Facebook has operated in a black-and-white environment, where content either violates the rules or it doesn’t, and if it doesn’t, it’s free to amass millions of clicks, even if the poster’s intention is to mislead and stoke outrage. Now Facebook is saying that even content that doesn’t explicitly violate Facebook’s rules might see its reach reduced. According to Zuckerberg’s post, that includes, among other things, “photos close to the line of nudity” and “posts that don’t come within our definition of hate speech but are still offensive.”

Zuckerberg called the shift “a big part of the solution for making sure polarizing or sensational content isn’t spreading in the system, and we’re having a positive effect on the world.”

With this move, Facebook is taking a risk. Curbing engagement on the most popular content will likely cost the company money. And such a dramatic change no doubt opens Facebook up to even more accusations of censorship, at a time when the company is fending off constant criticism from all angles.

But Facebook is betting big on the upside. If outrage is no longer rewarded with ever more clicks, the thinking goes, maybe people will be better behaved. That Facebook is prepared to take such a chance says a lot about the public pressure that’s been placed on the company these last two years. After all of that, what does Facebook have to lose?


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U.S. lawmaker says Facebook cannot be trusted to regulate itself

FILE PHOTO: The entrance sign to Facebook headquarters is seen in Menlo Park, California, October 10, 2018. REUTERS/Elijah Nouvelage/File Photo

WASHINGTON (Reuters) – Democratic U.S. Representative David Cicilline, expected to become the next chairman of House Judiciary Committee’s antitrust panel, said on Wednesday that Facebook cannot be trusted to regulate itself and Congress should take action.

Cicilline, citing a report in the New York Times on Facebook’s conduct, said on Twitter: “This staggering report makes clear that @Facebook executives will always put their massive profits ahead of the interests of their customers.”

Reporting by Eric Beech; Editing by Mohammad Zargham

Cisco beats as network gear demand rises, new bets pay off

(Reuters) – Cisco Systems Inc beat analysts’ estimates for quarterly revenue and profit on Wednesday, as the network gear maker benefited from demand for its routers and switches and growth in its newer focus areas such as software.

FILE PHOTO: A logo of Cisco is seen during the Mobile World Congress in Barcelona, Spain February 27, 2018. REUTERS/Yves Herman/File Photo

Shares of the company, which also forecast second-quarter revenue largely above expectations, rose 4 percent in extended trading, putting them on track to add to the nearly 16 percent gain for the year.

Cisco pivoted to software and cyber security to cushion the impact from slowing demand for its routers and switches from companies increasingly shifting to cloud services offered by Amazon.com Inc, Microsoft Corp and Alphabet Inc instead of building their own networks.

Revenue in its application software businesses rose 18 percent to $1.42 billion, beating analysts’ average estimate of $1.37 billion, according to IBES data from Refinitiv.

Sales in its security business, which offers firewall protection and breach detection systems, rose 11 percent to $651 million. That fell short of IBES estimate of $656.4 million, but beat research firm FactSet’s estimate of $648.1 million.

Deals such as the $2.35 billion purchase of cyber security provider Duo Security in August have played an important part in driving growth in Cisco’s newer business.

Acquisitions provided an 80 basis point boost to the company’s first-quarter results year-over-year, Chief Financial Officer Kelly Kramer said on a post-earnings call with analysts.

Revenue in its infrastructure platform unit, which houses the switches and routers business, rose about 9 percent to $7.64 billion, topping expectation of $7.39 billion.

Subscriptions, which provide a more steady revenue flow, accounted for 57 percent of total software revenue in the first quarter, the company said. The share was 56 percent in the preceding quarter.

“Cisco is executing on its plan to move its business model to software and subscriptions while benefiting from a strong IT spending environment,” said Mark Cash, an analyst with Morningstar.

Cisco said tariffs were immaterial for the reported quarter, but added that the impending 25 percent duties could weigh on third-quarter results.

The company said it expects second-quarter revenue growth of between 5 percent and 7 percent from a year earlier. This implies a range of between $12.48 billion and $12.72 billion, while analysts were expecting $12.53 billion.

For its first quarter ended Oct. 27, the company reported an adjusted profit of 75 cents per share, above the average estimate of 72 cents.

Total revenue rose 7.7 percent to $13.07 billion, topping estimate of $12.87 billion. However, the company said deferred revenue fell 9.4 percent to $16.81 billion.

Reporting by Akanksha Rana in Bengaluru; Editing by Sriraj Kalluvila

Advertisers Are Giving People With 1,000 Instagram Followers Endorsement Deals

Want to shill yoga pants on Instagram like your favorite Kardashian but only have 1/100,000 of her reach? According to a new report from the New York Times, you might be in luck.

Business reporter Sapna Maheshwari writes that brands are now reaching out to nanoinfluencers, a term “used by companies to describe people who have as few as 1,000 followers and are willing to advertise products on social media”, to proliferate their social stream with #ads.

According to the Association of National Advertisers, as many as 75 percent of national advertisers currently partake in influencer marketing and 43 percent of those companies are planning to expand their influencer budget in the next year.

And nanoinfluencers don’t come with a Kardashian price tag.

While WWD reports that Kylie Kardashian yields $1 million per Instagram post to her 119 million followers, and Digiday estimates that microinfluencers charge approximately $1,000 per 100,000 followers, Maheshwari writes, “For most nanoinfluencers, money isn’t part of the deal. Free products are viewed as fair compensation for the ads they post outside their day jobs.”

Although many nanoinfluencers aren’t old enough for day jobs.

Last February, skincare brand Clean & Clear reached out to teens with under 500 followers to post about its product. As Simon Geraghty, U.S. acne portfolio lead for Johnson & Johnson, told Ad Age, the brand was “trying influencers who weren’t famous per se but [are] doing things that other kids responded to authentically, letting them tell their story and building the products and brands from there.”

And authenticity is everything.

Principal analyst at Altimeter Group Brian Solis told PR News Online that 70 percent of consumers say that they’re influenced by friends and family members online, while only 32 percent claimed to be influenced technical “influencers.”

So get ready for a lot more #sponcon on your feed.

Spotify Is Rolling Out Its Official Apple Watch App This Week

Spotify is delivering on its promise to release a music-streaming app for the Apple Watch after testing a beta version of the app earlier this month.

With the new app, Spotify users can use an Apple Watch to control music, favorite songs playing on a connected iPhone, and choose which device to play songs on. Some features are still missing, however, such as downloading songs to play offline. And Apple Watches with built-in 4G LTE can’t stream music to wireless headphones, a feature that would appeal to music-loving runners.

Part of the appeal Apple imagined the Watch having was to avoid having to pull a smartphone out of a pocket to control an app’s functions. Streaming music is tailor-made for such a device, as listeners frequently want to change volume, switch tracks, or move around playlists.

“With this new app, users can enjoy an improved experience with better control and the ability to seamlessly connect to your speakers or devices,” Spotify said in a statement announcing the app. “The new integration with Apple Watch makes accessing your recently played songs simple, even with your phone in your pocket.”

Spotify is the most popular music app, with more than 190 million users. Apple Music has been growing quickly, however, having a user base of more than 50 million users. Releasing a Spotify app for the Apple Watch may strengthen the music service’s appeal among Apple’s loyal customers.

Spotify said it will be rolling out the new app to Apple Watch owners during the coming week. Spotify users will need to install the latest iPhone version of Spotify from the App Store.

The US Is the Only Country Where There Are More Guns Than People

Americans could be forgiven for becoming numb to the swarm of stories reporting gun massacres. In the last five years, ordinary Americans have been murdered in mass shootings in a synagogue, in churches, at elementary and high schools, at a nightclub, at a bar, at a music festival, at a center for people with developmental disabilities, among countless others. After a shooting in Isla Vista, California, in 2014, The Onion wrote, “‘No Way To Prevent This,’ Says Only Nation Where This Regularly Happens.”

The Onion got it right—at least for the “only nation” bit. The US is the only country where this keeps happening. And the US also claims the dubious distinction of being the only rich nation to see so many deaths from firearms, as the chart below shows. (We kill ourselves even more than we kill each other: Worldwide, the US ranks second only to Greenland in the rate of suicides by firearm; when you remove suicides from the equation, the US falls to number 28 worldwide for deaths from firearms, both from violent acts and accidents. But even subtracting suicides, the US’s death rate from guns remains far ahead of every single European nation and nearly every Asian one.)

Most countries that see high rates of gun violence are also economically depressed; El Salvador, for example, which claims the world’s highest rate of deaths from gun violence, has a per capita GDP of around $4,000—roughly 7 percent of the earnings per citizen in the US. The chart below shows that, generally, it’s the poorer countries that see high rates of violence, while rich countries—Luxembourg tops the list—tend to lose very few residents to gunfire. The US, again, stands alone for having a relatively high GDP per capita (number 8 worldwide) and a high level of gun violence (number 12 worldwide).

Rich countries that see virtually no deaths from firearms include Japan, the United Kingdom, Singapore, and South Korea, according to data from the World Bank and the Institute for Health Metrics and Evaluation’s Global Burden of Disease survey.

Unsurprisingly, firearm deaths are correlated with firearm proliferation. American companies manufacture millions of guns each year and import many more. Domestic firearm manufacturing increased dramatically during President Barack Obama’s first term, in part because of fears that, after eight years of a Republican White House, a pro-gun-control president would take away citizens’ weapons.

That didn’t happen. By 2017 the number of handguns, shotguns, and rifles available in the United States was nearly three times higher than it was two decades earlier, according to the US Bureau of Alcohol, Tobacco, Firearms, and Explosives. Today, the US boasts more firearms than residents.

Canada, for its part, may have a lot of guns as well, as the chart below shows, but its citizens don’t often die from gunfire; the country ranks 72nd in the world for deaths from firearms. Despite having one firearm per every three Canadians, the country’s death rate from gun violence is about one-tenth that of the US (though still four times that of the UK). While mass shootings have been on the rise in Canada, only 223 Canadians died from firearm violence in 2016, compared with more than 14,000 in the US. Prospective gun buyers in Canada must pass a reference check, background check, and a gun-safety course before receiving a firearm license; the country also imposes a 28-day waiting period for new gun licensees. The AR-15 rifle—which was used to kill high school students in Parkland, Florida, moviegoers in Aurora, Colorado, and worshippers at a Pittsburgh synagogue, among many others—is a “restricted” firearm in Canada, meaning owners must pass an additional test and obtain a special license.

If Barack Obama had succeeded in passing stronger gun laws, would it have helped save lives? Maybe. On a state-by-state basis, there’s a general correlation between stronger gun laws and lower rates of firearm deaths. A May 2018 paper in JAMA Internal Medicine that sought to evaluate whether strong gun laws resulted in fewer deaths concluded, “Strengthening state firearm policies may prevent firearm suicide and homicide, with benefits that may extend beyond state lines.” Still, a February 2018 analysis by The New York Times found that most weapons used in mass shootings had been obtained legally.

The Giffords Law Center to Prevent Gun Violence gives the states of Alaska and Louisiana a failing grade for their gun-safety laws; those states also claim the nation’s highest per capita rate of deaths from firearms. Massachusetts, New York, and New Jersey all receive higher marks for their laws and have comparatively lower death rates from guns.

But as long as it’s easy for firearms to be transported from, say, a gun-friendly state (like Nevada) to a state with strong gun laws (like California), as long as lawmakers fail to enact strong policies to restrict sales to people with mental illnesses or a history of violence, as long politicians continue to take money from the gun industry, as long as the gun lobby continues to pressure medical doctors to stop advocating for their patients with bullet wounds, and as long as a box of ammunition for an AR-15 rifle costs $20 for 50 rounds, the shootings will no doubt continue.


More Great WIRED Stories

How Amazon's Marketplace Supercharged Its Private Label Growth

In 2009, Amazon launched its first private label brand AmazonBasic. Today, Amazon has 100+ private label brands that offer over 4,600 products. That explosive growth has been supported by rich data that Amazon mines from its marketplace. The modern monopoly’s control over search results on its website, mobile app, and Alexa voice queries further exacerbates the problem by giving its own brands premium listing space (or in the case of some voice searches, the only listing).

Reinventing the private label game

To be clear, Amazon is a late comer to the private label game. For decades large retailers such as Walmart, BJ’s, and CVS have placed private labels on their shelves at a cheaper price than other brands.

In the decades before the rise of online marketplaces, retailers stocked their shelves by making deals with big manufacturers like Proctor & Gamble or Nestlé. Those big consumer good conglomerates wielded the power to shove out smaller brands, demand premium shelf space, and trade for other perks as part of their deals with big retailers like Walmart. Consequently, Walmart could, and did, use the data it gathered in its stores to build its own private label brands.

On its face, Amazon’s approach looks no different – that is, it gathers data on products sold of the website and builds out a private label strategy with that data. However, Amazon’s platform business and market share gives it advantages that brick-and-mortar retailers could only ever dream of.

Predatory pricing in Amazon’s private label brands

The proliferation of Amazon’s private label brands has consumer good sellers squirming. Because Amazon prioritizes growth over profits, the tech giant has been able to move quickly across many product categories from electronics to fashion to home and kitchen, pet products, cosmetics, health and beyond. Like the private label brands of traditional retailers, Amazon’s products often sell for cheaper than other brands on its own market, and often (though not always) at a loss.

As Lina M. Khan wrote in the Yale Law Review in an article discussing antitrust issues with Amazon, “The economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational.”

Amazon’s multi-channel revenue, including the revenue it makes from third-party sellers on its marketplaces, subsidizes its private label experimentation and dominance. But Amazon’s platform has done more than provide financial cover for Amazon’s private label brands, it has also provided the right data.

Data richness and search results

Amazon’s marketplace catalog dwarfs even the largest traditional retailers, such as Walmart’s catalog (especially pre-marketplace). Amazon democratized access to the consumer for sellers. Soon small brands and living room product startups could open shop on a marketplace that commanded over half of online sales.

That boon cut both ways. Amazon gained access to all the data for itself, and the quality of the data is much richer and more granular than any data collected by traditional retailers at their stores.

The combination of granular data and the democratization of access has quickly benefited Amazon in a matter of years. Consider Anker, a smaller brand of portable battery packs, speakers, and other electronic goods. Before 2017 they were sold almost exclusively on Amazon’s marketplace. Compare and contrast Anker’s portable bluetooth speaker with Amazon. Anker’s is $40 and Amazon’s is $20.

Both even come in black, blue, and red! Notice Amazon is out of stock of its blue speaker. Most of its private label brands carry a limited stock of each item to test their performance.

In addition to hyper specific data mining, Amazon also accounts for 49% of online product searches, while another 36% of product searches start on Google and point to Amazon first (according to research firm Survata). Amazon can, and does, list its items before competitors. In the case of voice shopping via Alexa using generic product terms such as ‘batteries’, the smart speaker chooses an Amazon brand for the consumer (a practice that, among others, is inviting antitrust scrutiny).

How manufacturers and resellers should respond

Given Amazon’s monopolistic advantage, what can product sellers do? In the short term, pulling your product from Amazon simply isn’t practical. Amazon accounts for over half of all online sales. They have the consumer goods retail market by the wallet.

Rather than just hoping that antitrust regulation is successfully brought against Amazon, product vendors should build or acquire a marketplace of their own. Listing stock on competing marketplaces is a good idea, but it isn’t enough. The publishing industry tried that approach with books, and it found little success. By building or buying a competing marketplace, product companies can scale niche, specialized marketplaces that can serve as a competitive moat against Amazon.

Democrats to probe Trump actions on AT&T, Amazon: aide

WASHINGTON (Reuters) – When Democrats take control of the U.S. House they plan to investigate the Trump administration’s attempt to block AT&T Inc (T.N) from acquiring Time Warner, and whether officials sought to punish Amazon.com Inc (AMZN.O) by prodding the U.S. Post Office to hike shipping prices for the world’s largest e-commerce company, a senior Democrat and a congressional aide said on Sunday.

An AT&T logo is pictured in Pasadena, California, U.S., January 24, 2018. REUTERS/Mario Anzuoni

Speaking to online publication Axios, Representative Adam Schiff, who is expected to be the incoming chairman of the House Intelligence Committee, said Democrats will review if Trump used the powers of the federal government to punish the companies.

Representative Elijah Cummings, the likely incoming chairman of the House Oversight and Government Reform Committee, said the committee “may want to look into” if the White House retaliated against Amazon and AT&T.

A House Oversight and Government Reform Committee aide said on Sunday that the committee has “already been investigating these matters, but the Trump Administration to date has not complied with our requests. We fully expect that to change now that we are in the majority.”

Cummings also said on ABC’s “This Week” that he intends to investigate if Trump killed plans to relocate the new headquarters of the FBI because moving it could harm his business interests in the Trump Hotel across the street.

Cummings in September asked the White House and the Trump Organization for documents about Trump’s “failure to accurately report debts and payments” to his personal attorney Michael Cohen “for silencing women who alleged extramarital affairs before the election.”

Another committee aide said on Sunday “the requested information was not provided because we were in the minority, and this should change now that we are in the majority.” Cohen pleaded guilty in August to eight felony counts.

Since winning control of the House of Representatives in the midterm elections last week, Democrats have vowed to launch investigations on a wide range of topics involving the Trump administration.

FILE PHOTO: The logo of Amazon is seen at the company logistics centre in Boves, France, August 8, 2018. REUTERS/Pascal Rossignol/File photo

Amazon Chief Executive Jeff Bezos privately owns the Washington Post, while Time Warner’s holdings include CNN. Trump has lambasted both outlets frequently for their critical coverage of him.

“It is very squarely within our responsibility to find out,” Schiff told Axios in an interview that will air Sunday on HBO.

Schiff said Trump “was secretly meeting with the postmaster (general) in an effort to browbeat the postmaster into raising postal rates on Amazon… This appears to be an effort by the president to use the instruments of state power to punish Jeff Bezos and the Washington Post,” Schiff said.

It is not clear what committees may probe the corporate issues, since Schiff’s Intelligence Committee would not have oversight. A Schiff spokesman declined further comment.

AT&T and Amazon.com both declined to comment on Sunday. The White House did not immediately comment.

Trump has repeatedly complained Amazon does not pay the U.S. Postal Service a fair rate for package delivery. Trump has said, without citing evidence, that this costs U.S. taxpayers billions of dollars, and he has threatened to raise the company’s postal rates.

Trump opposed the AT&T-Time Warner merger as a candidate and has repeatedly attacked CNN and last week a CNN reporter’s White House press pass was suspended.

The Justice Department is appealing a federal judge’s approval of the $85.4 billion AT&T acquisition of Time Warner.

With a split decision in last week’s congressional elections, Democrats plan a cautious approach. House Democratic Leader Nancy Pelosi told CBS’s “Face the Nation” that Democrats will not conduct “any investigation for a political purpose, but to seek the truth.”

Cummings vowed a “methodical” approach in approaching investigations. “I’m not going to be handing out subpoenas like somebody’s handing out candy on Halloween,” Cummings said.

Reporting by David Shepardson and Sarah N. Lynch, Additional reporting by Ginger Gibson Editing by Lisa Shumaker and Sandra Maler

A Slow Motion Strategic Train Wreck With The Color Blue

Welcome to another “morning after idea”. From time to time I use this format to present my quick thoughts for a ticker already covered in greater depth with existing research released in my prior body of work here on Seeking Alpha. My scope is limited to my considered opinion after allowing the dust a few days to settle from a key event.

It doesn’t take a long and ponderous dig through the 10-Ks of International Business Machines (NYSE:IBM) and Red Hat (NYSE:RHT) to detect the sweet smell of success or the pungent odor of a rotten deal. Here you will find a current fair value appraisal of each of the two companies, and my thoughts on why this is a shot in its own foot for IBM rather than a marriage made in heaven. Although I view this deal as strategic management at its worst, I expect it to be a very long and slow train wreck, with fatal damage taking years to appear. Therefore, I close by presenting some attractive covered option writing ideas for IBM with current market pricing at the time of release.

International Business Machines’ values for YDP and for traditional metrics are as shown on this current appraisal chart. The P/S valuation is probably the best correlated of those and indicates a current fair value of $154.50. So, IBM is trading at what seems to be a bargain at this time

However, that may just be the market anticipating a poor performance with the slight smell of desperation going forward for IBM. The recent buyout of Red Hat, folding the Linux brand into its main arsenal, instead of simply continuing to treat Linux as a tool that IBM is well skilled in dealing with for its customers, may be cheapening the entire IBM brand. This may in fact be a deja vu moment for IBM ala its move to non-proprietary PC operating system and bus architecture. While that strategy certainly created a multi-trillion dollar industry for the world, it ultimately saw IBM largely wash its hands of the entire personal computer market.

I am somewhat disturbed by IBM’s recent $34 billion ($190.00 per share) purchase of Red Hat. Surely, IBM already has an intimate knowledge and high working ability with respect to Linux, both for itself and as a service to customers. So, just what the heck did they buy that for and why at such a price? I cannot find any way to justify the $73.32 (62.8%) premium over market that IBM has plunked down for RHT. Valuation based on both P/S and P/E metric ratios show good historical correlation to actual market price and thus can be considered proven as high confidence numbers. In the absence of clear and convincing synergies or other value added, IBM has simply overpaid. Beyond that, the imprimatur of IBM declaring Linux services such as Red Hat to be worth such a high premium sends the exact wrong message from Big Blue to the markets.

The synergies and leverage simply are not there. Perhaps IBM’s own existing internal staff can handle the Red Hat workload and they plan massive layoffs. If that is the case, then they merely seed the future with all those Linux whiz kids to create their own boutique companies and come back knocking on the IBM door for their own outrageous buyouts a few years from now.

I can only conclude it was a defensive move to eliminate competition in the cloud space instead of simply competing for the Linux cloud space based on IBM’s own internal Linux expertise. I find that, like paying ransom, this move will only encourage more kidnapping by other Linux service providers to rush into the space and force IBM to toss bags of cash at them also.

So, perhaps some short-term IBM investment strategies are worthwhile for now, but I am leery of IBM long term in this environment based on this very weak way they appear to be ready to address services in the open source O/S competition space.

Covered Option Opportunities:

Investors should keep a short-term focus. Investors not currently holding shares should consider writing the 70-day cash secured puts for $120.00 @ $3.10 premium for an annualized yield rate of 14.1%.

Those currently holding IBM should also maintain a short-term focus with flexibility. Consider writing covered calls for the 70-day 1/18/19 $135.00 strike @ $1.20 premium. This provides a 5.12% annualized yield rate. When combined with the 5.09% dividend yield, the total annualized rate is then 10.21%. If called away, the added intrinsic gain further boosts the yield return. Of course, if your share cost basis is above $135.00, then adjust your strike price upward accordingly.

Those willing to accept more market risk than the put writing idea might consider a buy-write with market leg of $123.38 and the covered call leg described above for the 1/18/19 $135.00 @ $1.20 premium for a net debit of $122.18. Annualized yield rate is 5.12%. Coupled with the dividend, total annual rate is 10.21%. If called away, the additional $11.62 (9.51%) intrinsic gain boosts the annualized yield by 49.6%, to a total yearly rate of 54.72% on the net $122.18 investment for a 70-day total holding period.

Closing Thoughts:

You can earn strong double-digit annual yield rates while sharply reducing (but never fully eliminating) market risk by using engineered income investing strategies. Stop chasing yield from high-risk stocks and ETFs. Engineer better yields with lower risk.

Thank you for taking the time to read this analysis. I welcome your comments and questions. If you find this article thought-provoking, please consider becoming a follower by scrolling back to the top and clicking the orange “Follow” link next to my name. This ensures you are notified of all my work as it is published and gives me feedback to know what readers find of interest.

I am not a licensed securities dealer nor certified financial advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.


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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IBM over the next 72 hours.

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