“The $59 Computer” — Riches coming?

By Travis Johnson, Stock Gumshoe, February 4, 2010

There’s a small stack of potential teasers just sitting and waiting for the attention of the Thinkolator, but your friendly neighborhood Gumshoe is but a humble servant to the masses of the assembled Gumshoe faithful … so when I start getting hundreds of questions about one specific teaser, that moves to the top of the list.

And so today, the $59 computer. This is a teaser for a newsletter we’ve looked at many times before, Phase 1 Investor from the folks at Stansberry — it tends to be a biotech and small-cap tech newsletter, but they also use it when they’re picking the smallest companies from any sector, including some gold miners last year … it’s their most expensive newsletter (retail price $5,000, though it’s of course “on sale” now for about half that), which keeps subscriber levels down and lets them recommend microcap stocks without sending the share price through the roof.

Unless, of course, the Gumshoe jumps into the party and we mess up the stock chart — so I’ll be telling you who this company is in a moment, but don’t go off and get all hot and bothered about it on my account.

What is the $59 computer? Well, they go into this for several pages of sales blather, but here’s a bit of the tease:

“‘Who makes the $59 Computer?’

“Not one single company owns sole rights to the ‘$59 computer,’ or the technology that powers it.

“As scientist Peter Meli of the National Institute of Standards and Technology points out, the ‘$59 Computer’ represents “the convergence of many technologies.”

“In other words, it’s all still very much up for grabs.

“As you’ll see, that’s great news for investors. Even better than if one single company owned the rights to it.

“As I write, companies are scrambling to stamp their name on some part of this new computer.

“Dell — the world’s 3rd largest computer manufacturer – recently tried to steal the whole thing for itself! The Texas-based company quietly filed an application with the U.S. Patent and Trademark Office.

“Of course, Dell’s application was denied. Too many technologies have gone into the evolution of this computer for any single entity to claim sole rights.

“But the purse is so large that companies – big and small – are fighting to develop their own versions of the ‘$59 computer.’

“IBM has invested at least $360 million, according to public records… and has assigned 200 researchers to work on its own ‘$59 computer’ project.

“Google – the Palo Alto search engine giant – has invested $600 million.”

OK, so that lets us at least explain the basic marketing conceit here — when they talk about the “$59 Computer” they’re really just talking about the general concept of cloud computing. And yes, Dell did try to trademark the term “cloud computing” a couple years ago, an attempt that was thankfully turned back by the USPTO.

And yes, almost every company in the computer business is investing in cloud computing, either to develop services or use the cloud for their own data or work. Cloud computing, if you’re unaware, is a very broad term that encompasses everything from remote storage to software as a service to web-based email, it’s keeping more data and applications in the “cloud” of remote servers rather than on a personal computer or on an office mainframe, and it’s part of what we’re probably all doing with our electronic lives, with some of us more gradual than others. Heck, I do it too — most of the data and the website files for Stock Gumshoe are sitting in data centers in the Midwest that I’ll never see, and I use Google Docs to share my tracking spreadsheets and other files with folks.

The cloud has been coming for a long time, and it has also been the source of a lot of investment teasers — but the strongest pusher so far has been the Motley Fool, which has been teasing cloud computing as the “two words that Bill Gates doesn’t want you to hear’ and teasing a trio of cloud-computing companies in a dozen different ways. If you’re curious about the Fool’s take (this was a teaser for their Rule Breakers newsletter), you can see the older Kings of Cloud Computing article that I wrote here, the companies were (and still are, I assume), Google, VMWare, and Akamai.

But who is this little cloud computing company teased for us today by Phase 1 Investor?

The ad goes on to provide a few clues, though they’re definitely making the Gumshoe work on this one.

First, they tell us that this company was a critical omission in the recent Barron’s cover story on cloud computing — that this little firm is half the size of the smallest company they listed in that article, Terremark World. That article is a good place to start if you don’t know anything about the “cloud,” by the way, but we can at least take away from that the clue that Terremark has a market cap of about $500 million, so this little company must have a market cap in the neighborhood of $250 million.

So that’s one clue. What else? We get one more bit of teasermania that includes some good clues, here it is in their words:

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“They’ve developed proprietary software that makes the ‘$59 computer’ faster.

“What they offer is one of a kind…

“Basically, their new technology allows them to speed up the Internet – and GUARANTEE fast and failsafe delivery of Web-based applications to the ‘$59 computer.’

“Their new technology is so good at doing this they’ve developed a stranglehold on a niche within the ‘$59 computer’ market…

“‘After unsuccessful attempts by nearly a dozen other companies, the results from implementing [this company’s] solution were both effective and dramatic,’ said Stuart Ross, President and CEO of a private ‘$59 computer’ company.

“‘It’s like having a license to print money,’ said Dave Kochbeck, Director of Technology at Friendster, a privately owned social networking site in Sydney.

“In the technology world, if you have something valuable, you’d better build a moat around it.

“That’s exactly what this tiny little firm has done.

“They’ve received SIXTEEN patents in total—seven in the past year alone:

“November 26, 2009
“October 20, 2009
“September 1, 2009
“July 14, 2009
“June 30, 2009
“February 12, 2009
“February 10, 2009

“Because this technology is so valuable…

“This tiny company’s been lining up contracts with major ‘$59 computer’ players – Hewlett-Packard, Microsoft, Motorola, and Sony, to name a few.”

So who is it? Well, we can throw all that info into the mighty, mighty Thinkolator, and out the other end comes the answer:

Internap Network Services (INAP)

Why Internap? Well, those two quotes in the teaser are from customer testimonials that INAP includes on their own website, so that’s pretty solid confirmation. And the company and its employees and officers probably hold a lot more than 16 patents, but Internap did receive patents on those dates given — at least a half dozen or so of them, I didn’t check each one. And no, I don’t understand much of the actual patent language (September 1’s patent, for example, was for “topology aware route control” to help route data in networks).

And that’s a large amount of what Internap does — they run data centers and provide content delivery network (CDN) and other IP services that try to make data routing faster and more reliable, much like other companies do (including Akamai, which is the giant of the CDN business and a stock I’ve profiled for the Irregulars as well as an oft-teased Motley Fool pick). I don’t know a lot about INAP, but they seem to be effectively a turnaround story in a business where investors have been fairly cautious over the past year.

Part of Internap’s turnaround strategy is a move to do less reselling of data center services and start providing more of those services themselves — which means building up their data center footprint, something they’re trying to do over the next year or so (there’s a quick article about this strategy here, and they went into more detail in their last conference call, you can read the 3Q transcript here). There may be reason for some skepticism about INAP and their expansion and strategic