Early Indications June 2009: Love, Online

Love and work are the cornerstones of our humanness.
-Sigmund Freud

How have the technological changes of the recent past affected these two facets of our existence? As economies around the globe attempt to generate "good" jobs in the face of steep declines in such traditional sectors as news and media, automotive, and even law, the nature of work is at once a policy, economic, and existential question. As for love, we have seen misplaced romantic e-mail damage the careers of public figures including CEOs and a governor. Finland may show us the wave of the future: in 2006 the prime minister met a woman through an online dating service then broke up with her via SMS a few months later, stating economically, Että se ("that's it").

Let's take the love question first; we'll tackle work next month. I was struck by the number of anecdotal cases among my acquaintances involving structured dating services such as match.com or eHarmony. A little research shows how big these services have become, not counting the vast amount of flirting within the big social networks: paid online dating sites were essentially a billion dollar industry in 2008, according to Forrester, putting it ahead of pornography and making the industry slightly more than half as big as digital music and gaming.

Countries around the world are getting involved: in Japan, dating sites must register with the police, and over 1600 such companies did so. Between January and September 2008, eHarmony and Match combined to spend $140,000,000 on advertising. According to New Media Age, UK traffic to online dating sites grew 13% between September 2008 and February 2009: total visitors number about 5m, reaching 13% of the total UK online population. Harris Interactive estimates an average of 236 eHarmony users get married - every day. Match.com, part of InterActiveCorp, was recognized in 2004 as the largest site in the world and reported 1.35 million paying members as of May 2008.

Online matchmaking has many variations. One can search for potential spouses, for religiously or culturally similar partners, for friends, for same-sex prospects, for uncommitted physicality, or, at Toronto's Ashley Madison, be guaranteed an affair - or your money back. The various market segments each have multiple providers, varying by geography, matching method, and revenue model. Based only on online comments from users rather than any personal experience, claims of differentiation between different sites' matching accuracy and inventory may be inflated: many people use multiple sites and find the same people matching their profile.

Late last month, the American Press Institute convened a meeting of newspaper executives to discuss the state of their industry. They placed substantial blame on Google for being the "atom bomb" to the news industry. Left unlisted were the papers' many losses in the bigger content picture. The report did not acknowledge how many readers are defecting from the bundle model in favor of specialty providers: ESPN et al for sports, the likes of Edmunds for car-buying, Yahoo Finance and many other money sites for stock quotes, Realtor.com to house-hunt, eBay for used cars and household goods, Craigslist for apartments, etc. Personal ads are clearly a part of this erosion: Match, eHarmony, and the rest did not cannibalize all of that $957 million from newspapers, but clearly papers have lost some of their mojo in that department.

As for magazines, college alumni periodicals' listings appear to be shrinking. The New York Review of Books has long featured personal ads that were almost a parody of themselves. I found that, through the magic of the Internet, people can still browse for such appealing specimens as:

LOS ANGELES: bright, playful professional/academic MWM, 50s, tall, fit, good-looking, warmhearted, engaging, open, and present. In emotionally untenable marriage. Seeking woman, 40–58, with good heart, curious mind, sensual, open to exploring possibilities with like-minded good soul.

Some independent newspapers maintain a strong singles presence, as witness the Chicago Reader or The Onion. Mainstream papers, meanwhile, take a variety of approaches. Boston.com (the Globe's online operation) franchises singles from Yahoo. The LA Times points readers to eHarmony. Many papers, including the New York Times and Dallas Morning News, have no personal ads.

Just within my casual contacts, two adults have married based on their use of the services. One is an innkeeper in a small coastal town, while the other is a medical professional in a relatively remote market. In both bases, geography-based dating is problematic both in terms of sparse "inventory" and in terms of privacy given these individuals' relatively public day jobs. As a divorced charter boat captain told me of his use of Match, "It's great for people like me: in small towns like these, everyone knows everyone else's business. And while you can date the tourists, it's a bit tough starting a new relationship every week when the rentals turn over." The decoupling of physical location from the search process is a very big deal for market "thickness," not to mention the overall sense of romance and adventure in the process.

Secondly, the use of algorithmic matching tools is enhancing the matching process: eHarmony's "scientific" survey instrument includes 400 questions, far more than I ever answered on any unsuccessful first date (or the successful one, for that matter). As we will see, however, the comprehensiveness of the surveys has many implications.

Not surprisingly, the online dating phenomenon has generated sometimes hilarious commentary in the form of vast numbers of blog entries and a few books. Such titles as MatchDotBomb: A Midlife Journey through Internet Dating, Millions of Women Are Waiting to Meet You: A Memoir, and numerous how-to volumes (including a Dummies guide) testify to the pervasiveness of this cultural phenomenon.

The unintended consequences are fascinating to watch.

-Is it ethical for pay sites to count non-paying (former) participants in a match panel?

-How sustainable are the various business and operational models? Might one technology, celebrity endorsement, or other factor prove decisive in a particular market?

-What happens to my profile after I quit the service, either because it worked or because it failed? What rights do I have to my profile on either free or paid services a) after a month, b) after a year, or c) after the company goes bankrupt or gets acquired?

-What are the de facto (when people meet in person) and de jure (in court) standards for truthfulness? eHarmony, for example, insists that applicants be single: legally separated individuals are excluded, and could be banned if they lie to get on. We have a family friend who's a tall woman using some Internet dating resources, and her stories of men's various versions of their height and weight are funny and troubling. "Truth in advertising" has many nuances in this domain.

-What exactly are people paying for? What are the guarantees, warranties, or lack thereof?

-How can and will various systems be gamed? Some services have been accused, without proof, of employing "ringers" (professional first-daters) to exaggerate the quality of available singles.

-What will my profile be used for? Cross-selling opportunities, for example, are numerous and more than a little spooky.

-While the nightmare blind date has become a cultural stereotype, the prospect of meeting truly dangerous people online is more than a little scary, as the Boston Craigslist crimes suggest. It's also possible for bad first encounters to facilitate stalking. I have a colleague whose "thanks for coffee" and the implied "have a nice life" after a meeting drove the candidate to look her up using available search methods. He later turned up on her doorstep unannounced.

The role of such civic institutions as churches, service clubs, and bowling leagues in the wake of suburbanization, television, and more women in the workplace has changed slowly but significantly over the past 50 years. The matchmaking process has changed as well, and the state of online dating businesses will bear watching. In addition, the place of Facebook in 20-somethings' lives is undoubtedly generating its own set of changes to courtship.

As my former boss once said, "digits never die." The prospect of a lengthy profile, and potentially e-mail communications within a dating site, being brought into a congressional confirmation hearing or other process 10 or 20 years from now might give some of those millions of users a pause before they declare yet another preference or "fact" about their life.

May 2009 Early Indications: Clouded Over

The proliferation of so-called cloud computing platforms has been rapid. Because there is so much material available that defines the phenomenon, we'll move here to an examination of some of the unexpected consequences and complicated implications of moving some or all of a computing environment to offsite, third-party environments.

To get the problematic and inevitable definitional question out of the way, here is one from Information Week's John Foley: "Cloud computing is on-demand access to virtualized IT resources that are housed outside of your own data center, shared by others, simple to use, paid for via subscription, and accessed over the Web."

There are of course other contending definitions, but Foley's is mercifully brief. Even so, it begs the questions of private clouds, how small a cloud can be before it starts being something else, and how individual uses of clouds (I don't own a data center but hit on most of the other conditions) vary from and overlap corporate ones. It does get us started in more or less the right direction.

First, here are some resources to get up to speed:

The Economist special report from last October

Accenture Cloud homepage

Amazon Elastic Compute Cloud

Google App Engine

HP Cloud Assure

IBM Cloud Computing

Microsoft Azure platform


Rather than handicap the vendors, or the vendors' definitions, I'd like to focus a bit farther out. In a series of conversations with our corporate and university advisors, a number of questions have surfaced. In particular, I'm building on remarks by Mssrs. Smith and Parkinson at our member meeting earlier this month.

1) What is a vendor's profit path? What can be differentiated and thus generate margins? Compared to the conventional model of data centers, which is often measured in $10,000 or $100,000 units, cloud computing usage at Amazon is measured in dimes.

2) How will incumbents respond? If I have an established business selling hardware as capital expenditure, and a competing model shifts MIPS to an operating-expense model, presumably I don't stand still. Oracle's plans for Sun will be relevant here.

3) How does cloud lock-in vary from existing software (a la classical Microsoft) or hardware (the vintage IBM model) variants?

4) As with so much of the world's infrastructure, what is the incentive to invest in "pipes" when the value-add lies elsewhere, or nowhere?

5) If for legal or other reasons I need performance, security, and/or reliability guarantees, how do I get them if I cannot see or physically access my assets?

6) There are no free lunches. Every one of the Web's elite destinations has suffered from major outages at some point. Just weeks ago, Google suffered a technical breakdown about which the company released few particulars, but it managed to slow down service to millions (or more) of users for several hours on May 14. Gmail also failed at scale in February. In light of that history, what does a fault-tolerant cloud environment look like, require, and cost? (For an amazing graphic of the "Great GoogleLapse," see here)

7) Can there be "one throat to choke" in a virtual environment? Just as outsourcers are arbitraging labor rates by shifting contracted work to other shores, so too will cloud vendors assemble services from multiple entities to create bundled offerings. What will be the unexpected consequences for customers?

8) How does optimization work in a cloud? The vendor may be managing to power consumption, say, while customer A wants stable (not necessarily fast, but predictable) transaction times for a shopping cart scenario. Customer B needs fast compute capability despite bag and frequent reads and writes to disk. How can all three parties go home happy at the end of the day?

9) How can virtual, hybrid environments be tested before major real-world events: a quarterly close, a consumer promotion, a currency meltdown? While there will be some greenfield successes, a big question relates to how well clouds can integrate with existing data centers and other assets. (What constitutes unit testing in a cloud?)

10) What can I as a customer ask for by way of customization? Who can and will provide it, and at what costs in money and performance? The price points reflect commodity economics, but sooner or later most of us stumble upon needs that surpass plain vanilla.

11) Long ago, factory layouts (and locations) changed as power shifted from waterwheels that drove a central shaft around which looms were arranged, to individual electric motors for each machine. White collar offices after the rise of the PC no longer feature typing pools. What will be the organizational innovations that cloud computing makes possible? Focusing on power savings in the data center is a useful first step, but the technology will have many other implications for the ways people come together to achieve goals.

12) The PC architecture flourished in part because of its interoperability: I could choose a big Maxtor hard drive or a faster Seagate, a Dell LCD or Sony CRT display, and my hardware maker could buy the cheapest CD drives, RAM, and power cords on a given day. USB made the platform more flexible yet. Once I choose a cloud provider, how must I choose my ISP, my system management vendor, my billing system? In short, what are the dependencies introduced by a cloud instance?

13) Companies don't switch casually from CA Unicenter to BMC Patrol, HP Openview, or IBM Tivoli, much less a promising startup, because the complexity issues are enormous. Will my Tivoli/Openview/whatever console be able to instrument both my owned hardware and my virtual assets, or do I rely only on the cloud vendor -- who will have good reasons for not exposing too much operational information? The various answers here will have implications for lock-in, for innovation, for risk management.

14) Cloud computing is a coherent-sounding phrase, but computing in turn has many facets. Think about the different time scales relating to

-network latency
-the laws of physics regarding hard drive access
-the laws of physics regarding hard drive failure
-various data structures (think of MapReduce versus SQL)
-load-balancing, failover, and other necessary housekeeping
-core vs. edge workload allocation.

At the end of the day, orchestrating all of those sets of events, each with their own timescapes, in a virtual world is a really, really tough technical and managerial problem. Getting the systems to work doesn't even scratch the questions of profitability, liability, audit and related requirements, etc.

The question is not, will cloud computing happen, but rather, how will this tendency unfold, and how will organizations, regulators, and other actors respond? Until the rhetoric and more important the base of experience moves beyond the current state of pilots and vaporware, the range of potential outcomes is too vast to bet on with any serious money.

Early Indications April 2009: Reexamining Offshoring

When U.S. firms replace onshore technical and other resources with lower-cost labor in offshore markets, the logic is typically financial. Five years after some of the biggest such decisions, however, it has become clear that the calculations were incomplete. As some jobs repatriate (albeit on a small scale), we can suggest some additional decision criteria for future justifications.

Let's start with a generic decision to shift 3,000 applications programmers from onshore to offshore in 2004. The calculation assumes a 10% cost of capital, a 34% tax rate, and 2% savings per year as salaries both in the U.S. and abroad grow at similar rates. The base case presumes a net present value of $400,000 savings per job, times 3,000 workers, for a $1.2 billion projected cash saving. Given the realities of activist shareholders and relentless cost-cutting, it would be difficult, and perhaps an invitation to a shareholder lawsuit, to decline those kinds of cost savings.

As the past five years have unfolded, however, some incompleteness in the analysis has emerged. Eight additional factors would be worth addressing in future considerations.

1) Inflation
Compensation growth in India in the past five years significantly outpaced that of the U.S. to the point where Indian wage inflation ran in the double digits for some of those five years. That compares to flat wage growth (but not benefit costs) in the U.S.

2) Employee loyalty
The years with high wage inflation coincided with high turnover at some offshore firms. The resulting instability contributed to lower performance gains than some onshore clients were expecting.

3) Coordination costs
Another factor widely underappreciated in many cost projections was the increase in coordination costs. Highly compensated, and extremely busy, financial services experts at various firms, for example, have told me that they overestimated offshoring's value. In particular, they and their teams spent far more time generating and refining requirements documents for a team of programmers on the other side of the world as compared to the in-house resources across the hall who knew the baseline terminology and assumptions of the firm and industry in question. Producing code and generating business value through technology are not the same thing. Put another way, Brooks' law applies to offshore resources, albeit in new ways.

4) Technology changes in enterprise applications
The rise of software as a service, virtualization, and cloud computing is challenging old models of application development and deployment, as Oracle's play for Sun Microsystems would imply. In addition, scripting-based programming practices have the potential to transform software still further. 10-year payback scenarios with a traditional computing model held constant are likely to prove problematic as the late years of the model roll around.

5) Public perception
The loss of public goodwill in the performance of offshore call centers (less so in programming) has been unexpected. In 2009 alone, United Airlines, AT&T, Sallie Mae, and Delta Air Lines have pulled back from offshore call-center contracts. As Delta's CEO stated, "The customer acceptance of call centers in foreign countries is low. Our customers are not shy about letting us have that feedback." Dell experienced a broad wave of backlash in 2007; such companies as Royal Bank of Scotland's Natwest unit go so far as to advertise that they do not offshore customer care. Even in programming, offshore resources are prohibited for certain public-sector contracts.

6) Currency dynamics
Both the Indian rupee and the U.S. dollar have undergone significant currency fluctuations, dwarfing that 2% cost savings assumption. In one year alone, a dollar went from buying 39 rupees to crossing the 50 barrier, a swing of about 30% (in this instance, in the U.S. firm's favor).

7) Corruption
The cost-saving calculations implicitly assumed an apples-to-apples comparison of contract law, financial accountability, and other facets of firm governance. But when Satyam, one of India's leading offshore firms, disclosed that its founder and CEO had orchestrated a billion-dollar accounting fraud, attention turned to the differences between Indian and U.S. models of corporate governance. Auditors from PricewaterhouseCoopers, who have been suspended from the firm and jailed by authorities, earned "exorbitant audit fees" and are alleged to have falsified key discrepancies between sales figures and bank deposits.

8) Risk
The 2004 NPV model apparently priced risk at zero, a flawed assumption when India is experiencing political tensions with its nuclear neighbor Pakistan, itself a potential "failed state" in the words of the U.S. Joint Forces Command. The Mumbai attacks of 2006 and 2008 provide further evidence that the country is facing a significant threat, in this case from non-state actors. The story continues to unfold, up to the present day. Various insurgent factions are staging attacks connected to India's monthlong election; 17 deaths were reported on the first day of polling alone.

Even given these additional factors beyond the pro forma case, the economics must continue to be compelling as IBM recently continued its practice of laying off U.S. workers (somewhere between 5,000 and 10,000 so far year to date) and increasing staff in developing markets: employment in Brazil, Russia, India, and China totaled 113,000 in 2008 with the majority of those jobs in India, where headcount doubled (to 50,000) between 2005 and 2007.

Going forward, it will bear watching what happens next. India is becoming expensive, so its firms are in turn offshoring to the Philippines, Vietnam, and elsewhere. U.S. firms are revisiting the cost-benefit equation of onsite programmers as wages have declined, risk has increased, and user dissatisfaction has mounted. China, as in so many matters, bears watching. India's elections will by definition have unexpected results.

At the least, the past five years of offshoring have proven that the logic of the business case depends as much on what one leaves out as on the numbers assigned. The process of globalization will continue to amaze, frustrate, and surprise, despite the best predictions of smart people. Unexpected consequences, for both good and ill, will continue to challenge firms -- and individuals -- on all sides of the equation.

Early Indications March 2009: A Disruption Scorecard

With the newspaper business in apparent freefall, it's perhaps useful to tally up some of the various winners and losers among the incumbent business models as compared to 1994, the year the commercial web began to take off. It appears that there are multiple ways to be disrupted, that some industries are far better off than they were 15 years ago, and that there may be more dominos yet to fall. In roughly reverse chronological order, here's one judge's scorecard.

Industry: Newpapers
Status relative to 1994: Critically ill
Primary disruption: Unbundling

Compared to old-school stockbrokers, who were disintermediated by $10 trades, newspapers have been undone in other ways. The power of the traditional newspaper was its bundling, in economic terms, along two axes. First, subscriptions bundle content by time: readers pay for delivery of papers that don't always get read thoroughly for the sake of convenience. In addition, a daily paper contains content that a given reader ignores: look at how many hundreds of pages of a 1990s Sunday New York Times were thrown away untouched. This daily bundling allowed profitable sections (such as food/cooking, with grocery store ads) to subsidize other efforts, such as foreign news bureaus, which could not afford to pay their own freight.

Many of these facets of a newspaper have been separated out by standalone web businesses, each taking some segment of the readership and unbalancing the former cross-subsidies. Sports readers can go to the league sites (with heavy video footage), television spinouts from Fox/ESPN/CNN+Sports Illustrated, fan-driven blogs and/or message board efforts, or to any number of sites updating them on favorite cricket, soccer, or other international sports the metro dailies can barely cover, if at all. News is still primarily gathered by the usual suspects, but commented on, linked to, and re-aggregated by everyone from Google News to bloggers to ideology-driven destination sites. Daily A-Z stock charts aren't a particularly helpful way to watch the financial world, opening the door to broad distribution of previously professional-grade charting, archiving, and analytics; less professional message boards, blogs, and other mechanisms spread the wisdom (or lack thereof) of crowds.

The papers' extremely profitable classified ads were hit hard by multiple competitors. eBay then later Craigslist took over the realm of random objects, Monster and others (including the hiring firms directly) redefined the help-wanted field, and Edmunds and Cars.com along with eBay Motors improved on the car-buying experience by improving information availability and transparency. Match.com and eHarmony improved on the user experience and inventory levels of the personal ads, while real estate agents alone and in their trade association aggregated and augmented millions of property ads with photos, maps, and video walk-throughs.

In the end, most any page of a 1990s-era newspaper was challenged by an online outlet. With the readership in decline, both ad and subscription revenue spiraled downward, and the splintered nature of the competition made coordinated response impossible. In addition, the culture of "free" has affected news nearly as much as music, but far less so than books, for example. Some observers, including The Economist, have speculated that a Kindle or other reader might play a part in a revitalized news distribution business model. This makes sense: books, newspapers, and magazines emerged as business opportunities following a technology disruption, so changing the technology implies change for both reading habits and business-building.

The advertising industry has been fundamentally challenged by targeted, interactive, and well-instrumented ads and all they imply. If e-readers do reinvigorate the news business, this sector will need to move sure-footedly to regain much of the ground it has lost to Google in the past few years. While the movement away from traditional print models is highly visible, YouTube and the phenomenal rise of Internet video will also force a reshaping of television's economics.

Industry: Telecom
Status relative to 1994: Reinventing
Primary disruption: New technology platforms

The telecom industry is in the middle of a fascinating process. Back in the mid-1990s, the MIT Media Lab's Nicholas Negroponte noticed that television was moving from airwaves to cable while voice telephony was going in the opposite direction. Now, the triad of video, voice, and data is increasingly defined simply as flavors of data, and data is moving over copper, ether, and glass: what I want how I want it at any given time. The legacy telecom business model is at once getting substantial lift from the optical and wireless pieces of the picture even as the copper segments are in steep decline from wireline voice defection to VoIP or raising big questions about the need for their eventual and massive (if not total) replacement by fiber to the premise. In the current economic climate, both communications and entertainment appear to be relatively resistant to recession. In the long term, though, the huge capitalization requirements of both the strung infrastructure and the hung infrastructure, particularly in multi-billion-dollar spectrum licenses, leave ample leeway for companies or even entire sectors to get themselves in deep trouble.

Industry: Enterprise computing
Status relative to 1994: Leaner and more concentrated
Primary disruption: Offshore, network computing

In 1994, Sun Microsystems stock traded at about $3.50 a share. Six years and four 2:1 splits later, it capped out at just under $250, a tidy 1,000-fold payback. Consulting plays with invented names like Viant, Razorfish, and Lante sprouted, grew like weeds, and died. Software firms enjoyed a similar burst of prosperity: a 1994 Oracle investment increased by a factor of about 150 in 6 years, while investors everywhere vied to spot "the next Microsoft."

That progress was slowed by a confluence of headwinds, several of them directly related to Internet business model disruption. Offshore programming firms in India built on their success in year 2000 code remediation to slice margins in systems integration and later outsourcing. Virtualization and so-called cloud computing are subjecting both software and hardware to commoditization tendencies. Finally, budget pressure on CIOs introduces cost constraints and further profit pressure for software, hardware, and services.

The recipe for success going forward appears to lie in some combination of low-cost human capital (Tata, Wipro, IBM), scale (Oracle, SAP, IBM), and integration of product and service at scale (HP, IBM). Such firms as SAP and IBM have invested heavily in vertical industry expertise. Going forward, it's possible that the horizontal attack of Salesforce.com in software and the twin forces of reduced energy consumption and commodity computing (in turn applied to standardized process and data structures) could potentially combine to lower the verticalization premium.

Insurgencies -- that benefit from the combination of alternative economics and smaller labor costs -- from Google and Amazon appear to be gaining force, leaving Microsoft in particular at a crucial juncture. Dell also confronts some formidable challenges: even as the shift from desktops to laptops diminishes the power of the build-to-order model, it faces off against a reinvigorated HP, the premium-priced consumer electronics and design expertise of Apple, and the diffuse forces of clouds. For all that Dell gained from the Internet in implementing its direct model, between iTunes, consumer message boards, and cloud computing, forces related to the Net are now also causing headaches.

Industry: Music
Status relative to 1994: An empty whiteboard
Primary disruption: Unbundling, cultural norms

Much like newspapers, the music industry has been forced to adapt to the digitization and subsequent liberation of its core information product. Once music stopped being a physical artifact and instead was moved, understood, and redeployed as a fungible bit-based resource, the old model's market characteristics failed. The pricing model, the sales channel, the promotion vehicles, and the margin structure all fell apart. Selling people one song for the price of 12, trying to fight the long tail, and relying on a radio industry itself in turmoil for airplay no longer worked. Perhaps more centrally, expecting to maintain traditional "Hollywood accounting" when people's allegiances, to the extent they had any, lay with the artist spelled further doom for the old music model.

That said, both newspapers and music face parallel challenges insofar as large numbers of people now value their offerings at or near zero. Suing customers or nearby victims failed to reverse the trend and increased people's already negative feelings toward the labels. Radiohead's "name your price" downloads worked because of the gestalt of the band and its fan base; the model is unlikely to be widely implemented. Potentially in part because so much listening is done in private through earbuds, it's easy to view music behaviors as invisible and personal rather than public or accountable -- and the old economics of artists being so widely ripped off don't help the morality of the labels' positioning.

Going forward, models that more directly connect artists and labels hold promise, so maybe the final diagnosis will be disintermediation of the labels by word of mouth, hard-core touring, and/or some new discovery mechanism.

Industry: Brokerage/travel
Status relative to 2004: Transformed
Primary disruption: Disintermediation, transparency, self-service

Unlike the businesses above, both travel and brokerage served as early case studies of middlemen who charged too much for too little value getting end-run. In both cases, the dominant providers have had to reinvent their core business to survive and when they did not, the industry consolidated. Carlson Wagonlit presents one example: rather than relying on ticket-printing fees, the firm manages corporate travel spending as a coordinated service. By contrast, Rosenbluth, a competitor, was bought by American Express in 2003, and American Express in turn manages travel within a much broader set of procurement management offerings.

In brokerage, Merrill Lynch never fully adjusted to online trading and its attendant customer mindset, cost structures, and competitive landscape. For a multitude of reasons, it was bought last year. An element of unbundling also played out here and in travel: expensive transactions included advice, whether it was needed, or qualified, or not. Once the core transaction was laid bare, the advisory component failed to commend its previously overpriced premium.

In contrast, crowds, whether of investors, ecotourists, or frequent business travelers, combined to offer more and more powerful research than had been available previously. Whether of the up-to-the-minute (is the flight late?) or in the realm of long-term trends (how will India's equities markets perform in 2010?), the Net contains more and often better advice -- along with substantial noise -- than any one person could acquire, organize, or dispense. The combination of do-it-yourself research and serve-it-yourself transactions is now so deeply ingrained it's impossible to envision going back at any scale for routine interactions.

Who's next?
The bell has tolled for several old business models. Who's on the watch list? Briefly, some combination of disintermediation, unbundling, transparency, and consumer affection for free stuff could pose dangers for industries as varied as retail, television/media, pharmaceuticals, education, health care, retail banking, and automotive (which has already been hit pretty hard). Other sectors have less to worry about: e-government is increasing efficiency in some functions in some places, but entrenched ways of doing things persist more here than perhaps anywhere else, in part because of the lack of competition.

Construction, energy, and agriculture are powerful and so intensely tangible that it's hard to see digital disruption in the near term. In part, this security relates to successful defensive positioning: monitoring my home's energy usage on an hourly basis is trivial from a computational standpoint, but impossible because the electric company so jealously hoards the data. The consumer products sector has lots to worry about right now, beginning with double-digit unemployment, but the business model looks secure for the medium term.

Finally, it would be inaccurate to focus only on the losses to the forces of business model disruption. Whether it's Apple's rebirth (largely at Sony's expense) as a consumer electronics power, or Amazon's continuing resistance to any conventional sector categorization, or the unrelenting adoption of mobile phones by the world's masses, disruption also carries with it upside potential. As the global recession gives way to new varieties of prosperity, who will capitalize on the wealth of opportunity and be the success stories of 2012, or 2020?

Early Indications February 2009 Miscellany: Trust, Loyalty, and Book Notes

1) Trust in social networks

Several recent developments point to the big questions regarding trust in social networks. First, both Facebook and MySpace announced that registered sex offenders were removed from their sites: 90,000 over two years for MySpace, and 5,500 (out of 175 million users) for Facebook, which is still responding to the same subpoena as MySpace. For Facebook especially, those are extremely small percentages. Harvard's Berkman Center published a study that asserts that online threats to teenagers generally mirror real-world issues: bullying and intimidation are the most common problems in both school hallways and on line.

In addition to thinking twice about who the person on the other end of the online interaction might be, Facebook users are uncertain as to the service's policy regarding their data. Over the past few weeks, Facebook updated the terms of service to assert broad claims. According to the San Jose Mercury News, Facebook's current policy is as follows:

"Users retain ownership rights. However, when a person posts content to Facebook, the company is automatically granted 'an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content for any purpose, commercial, advertising, or otherwise.' If a person removes content from Facebook or deletes their account, this license expires but Facebook may retain a copy of the person"s material."

The legalese of even this modified version sounds pretty one-sided. But as Facebook founder Mark Zuckerberg pointed out on the corporate blog, making virtual trust work is a very tricky business:

"People want full ownership and control of their information so they can turn off access to it at any time. At the same time, people also want to be able to bring the information others have shared with them—like email addresses, phone numbers, photos and so on—to other services and grant those services access to those people's information. These two positions are at odds with each other."

Layer Facebook's global constituencies, many litigation environments, and rapid technology change onto the company's core business model problem -- lack of monetization and the implicit pressure from investors -- and one begins to grasp how fragile online trust really is.

2) New Tactics in Wireless Retention

Even though Sprint lost 1.3 million customers in the fourth quarter of 2008, the drop was lower than expected and the company's stock surged. One tactic that will bear watching is a recently-announced customer loyalty program, similar to grocery store loyalty cards or frequent flier miles. Longtime customers and high-value subscribers are targeted: people with 10 years of loyalty, or three months on a $69.99 monthly single-line plan, will be eligible. T-Mobile is rumored to be developing a similar program.

What do the customers get? Better handset upgrade policies (including first access to the Palm Pre), free minutes, and free ringtones comprise the telecommunications benefits. Subscribers' service plans will be evaluated periodically to see if they fit evolving needs. Sprint also plans to more randomly award "Just Because" benefits such as sports or entertainment tickets.

3) Book notes

I recently read a study of innovation at The Economist that illustrated, unintentionally, the difficulty of getting startup-like behavior from employees at established institutions. Amidst the publishing collapse, The Economist has actually grown in the past few years, but in the spirit of looking beyond the headlights, in 2006 the magazine initiated a project (Red Stripe) to generate new Internet-based business models adjacent to the print operation. The ultimate ideas from the team were never formally approved, but several have seeped into deployment. Thus by one definition the team failed, but by others, its members succeeded in spurring change.

The book's subtitle -- "Incubating Innovation and Teamwork" -- hints at a deeper problem. The issue of team performance in an organization of any size or status is critical, and while much has been learned, many issues crop up reliably: people commonly feel confused about mission, view some colleagues as free riders, or are unable to incorporate learning into earlier commitments that were made in the inevitable state of not knowing what you don't know.

Similarly, innovation has been widely studied, yet few durable prescriptions can be cited. Innovation can be open or closed, inside-out or outside-in, capability-driven or requirements-driven, and on and on. The problem in both the book and the project is that the two pursuits get conflated: even if a better-performing team would have generated better or more acceptable ideas to the Economist management team, could it have made them into a profitable business? Doubtful.

That said, there's a lot to be learned about organizational behavior from Project Red Stripe. In facing a problem, for example, one approach is to strengthen your solution -- but, as the book states, "it's often as fruitful to consider how to diminish the forces working against [the team]." [83] The book also features excursions into corporate story-telling, untested assumptions, and the perils and necessity of commitment to a position or idea. On niches, for example, one advisor told the team "although there may be a gap in the market, the key is whether there's a market in the gap." [111]

In the end, the team's ideas were plenty viable: a financial information site for kids, a social networking service for NGOs ("A Facebook for good"), and an Economist video site begin a long list. Each member of the team was a salaried employee with a "home" office and function. None would enjoy the upside potential of the equity shares of a startup. In short, it feels like the term "entrepreneurial committee" might be fatally oxymoronic. But the story contains useful lessons nonetheless.

Andrew Carey, Inside Project Red Stripe: Incubating Innovation and Teamwork at The Economist (Triarchy Press, 2008)

On the same plane flight, I dipped into Don Tapscott's new study of what he calls "the net generation." Seeing samples of said demographic on a daily basis, I compared notes, and there's definitely overlap. Tapscott identifies eight "norms" to describe people born in the 1980s as they diverge from their elders:

1) Freedom and freedom of choice

2) Customization

3) Collaboration

4) Scrutiny of outsiders

5) Integrity

6) Fun, including at school and work

7) Speed

8) Innovation

All of these are readily evident when you spend time with people under 30. To call them a generation, however, overreaches the evidence. Tapscott relied on an online survey instrument that suffers from considerable self-selection bias: active net users found the survey and proceeded to discuss how actively they used and internalized various facets of the net. Based in large measure on the behavior of his admittedly talented, bright, and insightful children and their friends, Tapscott says on page 2 that "I came [in 1996] to the conclusion that the defining characteristic of an entire generation was that they were the first to be 'growing up digital.'" (emphasis added) That statement is problematic for any number of reasons; let's list four:

-Middle-class white and Asian kids, such as those in big-city U.S. and Canadian locales like Tapscott's Toronto, absolutely exhibit some of those eight traits from time to time. They are not, however, a "generation": according to the Pew Hispanic Center in 2007, only 31% of Latinos without a high school degree (that group counts for 57% of the constituency) go on line. Given that the U.S. Latin population is a) big, b) fast-growing, and c) less educated than whites, they cannot be bundled into Tapscott's "generation" without qualification.

-Just as off line, the online world is hardly homogeneous. To connect any two users of various elements of the Internet only on that basis makes as much sense as to say that everybody who drives, or watches television, is a generation. danah boyd's observations on social class differences between Facebook and MySpace users are instructive here (and absent from Tapscott's bibliography). Video-watchers and uploaders are [at least] two different species, as are flame warriors versus lurkers, or Columbine-searchers versus Amazon-shoppers. Web 2.0, Tapscott's pole star, while undeniably a powerful force is not yet universally embraced by members of any broad demographic, not even the 20-somethings.

-As far as "integrity" being a generational attribute, think about the business school students at Duke: 10% of the class of 2008 was caught cheating despite honor code posters prominently posted in the building and multiple adjustments to the curriculum in that direction. A separate study of 54 universities found that 56% of MBA students admitted to cheating; how many more cheaters lied? In 2005, dozens of applicants to Harvard Business School tried to view acceptance letters before they were mailed by poking around in the school's website after a security hole was reported. HBS denied admission to all 119 net-savvy snoopers.

-This cadre is still young. To define a generation, before they reach 30, by a set of technology artifacts embraced in different ways to various degrees by only some of them feels premature if nothing else. How many of the Paris/Chicago/Prague 1968 generation similarly embraced "fun" or "freedom" as core values back in the age of typewriters? Short of World War II, has any American generation been defined (to the extent that a generation can be defined) before they reach 30?

We're now looking at a global recession (or worse), and the results could well include the first generation in memory, if not American history, whose economic prospects are worse than those of their parents. That is, if the "net generation" experiences widespread downward social mobility, that's considerably more defining than the fact that some of them like to blog or watch funny videos at work.

Don Tapscott, Grown Up Digital: How the Net Generation is Changing Your World (McGraw Hill, 2008)

4) Correction

Regarding last month's assertion about the largest federal government employers, my colleague Russell Barton pointed out that the Department of Veterans Affairs is the largest non-peacekeeping employer. At 278,000 employees (most working at one of 153 medical centers) as of January 2009, it dwarfs Agriculture. Treasury, at 101,000 (lots of those in the IRS), was also bigger than Agriculture.

Here is a complete listing, in rounded 2006 numbers, of federal headcounts courtesy of the Partnership for Public Service's Best Places to Work in the Federal Government 2007:

Agriculture 85,000
Commerce 32,000
Defense (no services) 611,000
Education 3,800
Energy 14,000
Health & Human Services 53,000
Homeland Security 128,000
Housing & Urban Dev. 9,400
Interior 57,000
Justice 102,000
Labor 14,000
Social Security 61,000
State 19,000
Transportation 52,000
Treasury 101,000
Veterans Affairs 205,000

January 2009 Early Indications: The Job Issue

Writing just days after roughly 60,000 layoffs were announced, it's difficult to look anywhere else for stories to analyze. Many facets emerge as one studies the employment question, and some historical context provides some surprises.

Scale

It used to be said that the bigger they are the harder they fall. More recently, industry consolidation was partially justified by both "synergy" and economies of scale. The result was companies that may have been too big to manage: Ronald Coase's theory of the firm implies that when the costs of bureaucracy limit market responsiveness, it's time to scale down. While some firms are currently said to be "too big to fail," I think we will see proof to the contrary relatively soon.

Where will all the new jobs come from? Mass hirings are infrequent even in the best of times: "GM adds 4,00 new machinists" wasn't something one saw in the news, regardless of the era. Jobs get added far more slowly and in more dispersed fashion than they get cut, especially when some firms are measuring severance in the tens of thousands. Part of the policy challenge is the asymmetry between the big cuts and the reality that small, growing firms add jobs by the handful or dozen.

The Biggest Employer

One key element of the story is the role of government as a direct employer even before stimulus-related jobs are counted. Ever since World War II, the federal government has been increasing as an employer, either directly or indirectly. For example, seven new cabinet departments (plus the EPA, founded in 1970) are less than 50 years old and reflect the growing scope of government:

Housing and Urban Development (1966)
Transportation (1966)
Energy (1977)
Health and Human Services (1979)*
Education (1979)*
Veterans Affairs (1989)
Homeland Security (2003)

*Broken out of Health Education and Welfare

Headcount at these agencies is significant: the Department of Agriculture employs about 85,000 people, making it a) the biggest federal organization not involved with domestic (DoJ, DHS) or foreign peacekeeping and b) about half as big as Cargill, a $120-billion food processor.

As of Q1 2008, the biggest employer in Pennsylvania was the State of Pennsylvania (no figures were released in the document, compiled by the state Center for Workforce Information & Analysis). #2 was the U.S. government, even after the closing of the Philadelphia naval yard in 1995. As private sector employment and profits drop for the foreseeable future, how will public-sector employers maintain their payrolls? The state of California, ahead of the curve in some matters, may be the bellwether here, and the story looks grim as the shortfall through 2010 reaches $40 billion.

Information-age Stimulus

Borrowing from the title of a recent newsletter, I want to return to the question of how a government stimulates a services-driven, information-centric economy. As a state Pennsylvania is reasonably representative, with a relatively large economy (#6 out of 50 states), and a per capita income almost perfectly at the median, ranking 26th of 50. Agriculture is important but not predominant, and 25 Fortune 500 companies are headquartered here.

To continue that list of Pennsylvania's top employers, note the paucity of private-sector job-generators:

3) Wal-Mart

4) City of Philadelphia

5) University of Pennsylvania (roughly 35,000 jobs, including a big medical center)

6) Philadelphia school district

7) Penn State University (not counting the affiliated medical center)

8) Giant Food Stores

9) UPS

10) University of Pittsburgh Medical Center

11) University of Pittsburgh

12) Weis Supermarkets

13) State System of Higher Education (public colleges and universities excluding Penn State, Pitt, and Temple)

All told, 20 of the top 50 employers in Pennsylvania are not businesses in the traditional sense of the word: that's 40% of the leader board, including six of the top seven. Half of the 30 largest private-sector employers, including eight of the top 12, are retailers, known for relatively low wages and, according to the BLS, the highest turnover among major sectors. As Circuit City demonstrated, they are also sensitive to economic downturns and could themselves be at further risk.

More significantly, Pennsylvania is officially a services economy: only one employer (Merck) in the top 25 and four in the top 50 make something. Many kinds of services are represented, with health care in the lead, followed by education, and grocery, retail, financial services, and fast food/convenience stores.

The contrast to the intermediate past is shocking. Courtesy of researchers at the Pennsylvania Department of Labor and Industry, here are the top 25 employers of 1965 (the earliest year for which they have available records):

1) United States Steel

2) Bethlehem Steel

3) Westinghouse Electric

4) Bell Telephone of Pennsylvania

5) Jones & Laughlin Steel

6) General Electric

7) Sears, Roebuck

8) A&P

9) Acme Markets

10) Western Electric

11) Philco

12) Budd

13) Philadelphia Electric

14) Boeing

15) Crucible Steel

16) Pittsburgh Plate Glass

17) Allegheny Ludlum Steel

18) Sylvania Electric

19) Sun Oil

20) Pittsburgh Steel

21) Armco Steel

22) Aluminum Company of America (Alcoa)

23) RCA

24) Armstrong Cork

25) Rohm and Haas

(Methodology was not made clear: government entities, hospitals, and universities are not listed, but the absence is unexplained.)

Of the 25, services are only represented by retailers and utilities: no banks or health care providers make the top 40. Seven steelmakers dominate the list, joined by Alcoa. The state's heritage in energy was still represented by Atlantic Refining in Philadelphia, Sun Oil, and Gulf Oil. Transportation is more of a factor today, with UPS at 9 and US Airways at 30; in 1965, no railroads made the list, even though their suppliers (Budd, GE, Westinghouse Air Brake) did.

The composition of the 1965 and 2008 lists illustrate several germane points with regard to the current downturn. First, it's hard to stay on top: almost all companies that at one time appeared to be powerfully untouchable sooner or later fall by the wayside. Bell of Pennsylvania, the #4 employer, morphed into Verizon, presently ranked 28th. Among retailers, A&P disappeared, as did Gimbels and G.C. Murphy, while Sears fell from seventh to 32nd. Second, the stimulus packages of the 1930s -- when manufacturing, agriculture, transportation, labor unions, and foreign trade were unrecognizable even from the vantage point of the mid-1960s -- would appear to present few lessons for current policy-makers. Finally, the kinds of firms traditionally targeted by economic development agencies -- addressing dynamic markets, paying high wages, and anchoring a community or region -- are in the Pennsylvania case not particularly large employers:

14) Merck

19) The Vanguard Group (headquartered outside Philadelphia)

25) Comcast (headquartered in downtown Philadelphia)

39) General Electric (which makes railroad locomotives in Erie).


Are We All in the Same Boat?

Given the speed at which the U.S. economy fell into recession (recall that oil prices dropped $100 a barrel in a quarter), the dust is clearly not fully settled. At this juncture, are there some states that might start attracting internal migration given relatively healthier economies?

According to the Bureau of Labor Statistics, December 2008 U.S. unemployment ranged from a low of 3.4% in Wyoming to a high of 10.6% in Michigan. Given that Wyoming is attractive for retirees, miners, and ranchers, it is unlikely to be an employment destination of choice for the kinds of people being displaced elsewhere; North and South Dakota are in a similar situation. Unemployment remains in the 4% range in Iowa, Nebraska, New Hampshire, New Mexico, and Oklahoma -- tellingly, three of those states formed the heart of the Depression-era "Dust Bowl" memorialized in John Steinbeck's The Grapes of Wrath as a place to leave. Unlike the "new South" in the 1970s and '80s, or Arizona and California over the past half-century, these states a) will not serve as a magnet for the unemployed and b) are sufficiently distinctive that they don't serve as a model for other states to emulate.

Those BLS numbers tell a similarly fascinating story: while Rhode Island's December unemployment (10%) is the worst since statistics were standardized in 1976, nine states recorded their record _low_ unemployment month in calendar 2007-2008, including West Virginia, which had its best unemployment month in over 30 years just last August. All told, the unemployment figures have a long way to rise, even in Michigan, which reported 16.9% unemployment less than 10 years ago, in March 2000.

So who's the exemplar, the state others want to emulate on the jobs front? Considerable debate in the literature revolves around a concept associated with Harvard's Michael Porter, that of economic clusters. As the classic formulation puts it, clusters are "Geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agencies, and trade associations) in particular fields that compete but also co-operate." Classic examples can be found in and around Detroit, Palo Alto, Los Angeles (aerospace and Hollywood), and New York/Greenwich (hedge funds). Does cluster theory explain the health of the currently healthiest states?

Not so much. At 6% unemployment in December, Texas falls pretty much in the middle of the pack. Its worst month since 1976, however, is only 9.3%, relatively low and surprising in that Texas has been hit hard by economic crises related to real estate (the savings & loan scandal), low oil prices, Enron, and the bursting of the tech bubble in 2001. Texas combines mineral wealth, oilfield-related services, high tech, agriculture, less location-specific service industries (including American Airlines), and tourism to construct a reasonably well-hedged, recession-resistant economy.

With the exception of California, no other state has so successfully balanced natural endowment, knowledge-intensive industries (including military bases and hospitals), ranching and farming (including some ranches spectacularly successful in attracting agricultural subsidies), and cultural distinctiveness: even the state's anti-littering campaign, admonishing "Don't Mess with Texas," was a huge success, one widely emulated elsewhere. Given all these factors, it would not be surprising to see the state attract some decree of internal migration this time around.

Morals of the Story

-Like politics (and closely related thereto), all unemployment is local. Congress could face massive pressure as the mid-term elections are only 21 months away and the economy cannot bounce back that fast everywhere.

-At the state level of job generation, it helps (as in Virginia) to host lots of federal government jobs.

-Exception to the rule above: when a military base closes, the hurt is broad and immediate. Maine's Brunswick Naval Air Station will lose about 5,000 people (including dependents) as it shuts down, with an estimated annual impact of $200 million.

-For all the appeal of brand, brainpower, and other intangible assets in the "new economy" lore, the healthiest states in the Union right now are sitting on mineral or dirt-based wealth for a portion of a balanced economy.

-Cluster theory has failed to be proven as most university-based economic development efforts relate more to quality of life than direct linkage to a given university's academic focus areas. Stanford provides a glaring exception that proves the rule.

-Cluster theory also generates economic monocultures, which tend more to boom-and-bust cycles than do more diversified economic ecosystems. Clusters are also proving difficult to undo, as Michigan's limited success in luring materials science, biotech, software, and other non-automotive firms illustrates.

The rapid shift of the U.S. economy to a services-driven structure with a massive trade imbalance presents the Obama recovery team with many new challenges. Government employment is already high, and will be limited by falling tax revenues. The M&A activity of the previous decade has generated some very large organizations that, along with Detroit's Big Three, are shedding jobs at a rapid rate. Even though a "knowledge economy" sounds intuitively appealing, at some point U.S. manufacturing will need to be redefined for employment and trade to behave more sustainably. Finally, the biggest intangible of all -- consumer and investor confidence -- will play a critical role in a recovery, and the relationship between $819 or however many billion dollars and that elusive quantity remains to be determined.

December 2008 Early Indications: The Predictions Issue

Given a year in which oil prices inflicted broad economic pain -- then fell $100 a barrel, a Republican president nationalized key banks, and an African-American first-term U.S. Senator won the presidency, it's pretty tough to predict the encore. Volatility is obviously on everyone's mind, bad people from Wall Street to Mumbai are doing outrageously bad things, and the quality of news we receive about the state of the world is up for grabs. What framework can possibly explain what might happen next?

Despite arguing that interconnectedness of many factors matters a lot, I'm going to start by dividing the world into a domestic sphere (U.S., in this case) and a global sphere, then discuss the latter first.

Externalities of Globalization

An externality, in simplified form, is a spillover cost or benefit that accrues to someone outside an economic transaction. Pollution is a classic negative externality, but positive ones also exist, as when my health prospects improve in proportion to the percentage of the population that get flu shots.

Two main points of view delineate the globalization debates. Thomas Friedman carries the flag for the "flat" (level playing field) school, while the "lumpy" camp, which asserts that places, notably cities, are far from being fungible, is associated with urban theorists like Richard Florida. Wherever one comes down on that spectrum, there's no denying that the world has changed dramatically in the past decade or two. Whether one looks at Russia, or Korea, or Iraq, or India, huge changes are afoot in communications, life style, crime and warfare, ethnic relations, and other important realms.

All that is known; what's the prediction? As we have seen with armed conflict, capital flows, disaster relief, and other phenomena, a globalized world creates a new category of issue that requires multi-lateral response well beyond the scope of traditional definitions of sovereignty. A few examples illustrate the issue:

-Efforts to address the effects of climate change are impossible to restrict by nation-state: it's not as though Canada, let's say, could bear responsibility for some number of square miles of the ozone layer or the Gulf stream. Action and impact are impossible to connect in either time or space, except at a macro level, if then. As environmental concerns lead to the "internalization" of previously external phenomena (end of life disposal for goods with toxic components, cross-border pollution lawsuits, carbon taxes, and other arrangements), the need for both new definitions of sovereignty and new types of multi-lateral institutions will increase.

-Dealing with bad guys proves similarly problematic. The Somali pirates are a case in point: if some were to be caught, where might they be lawfully (and practically) imprisoned and tried? Guantanamo, for all its controversy, does serve a useful purpose, as the "not in my back yard" discussions related to its closure illustrate: at both the state and international level, there are few practical options for relocating the current detainees, many of whom are now men without a country. The international reaction to the Mumbai terror attacks supplies yet another example of the issues: much terror is now a global as well as a regional, tribal, and/or national question, yet we lack the institutions with which to prevent and fight these sorts of actions.

Furthermore, as the case of Mexico illustrates, the line between criminality and terrorism is extremely fuzzy. When narcotics gangs kill law enforcement and judicial officials, invade hospitals to kill survivors of prior attacks or threaten doctors, and shake down schoolteachers to surrender annual bonuses, they systematically undermine conventions of civil society. Conventional police forces are outgunned by such gangs, but as the Italian example shows, soldiers with adequate firepower, when mobilized to reassure tourists and citizens, lack training in even the basics of policing. Extend the conflict across borders, and the need for new kinds of multilateral action and coordination becomes an issue yet again.

Immigration -- whether in China, Greece, Norway, South Africa, or the U.S. -- provides another example of the need to address the externalities of globalization, as do several other new-era problems:

-Information flows matter in intellectual property, news media, or business transactions. These include offshore programming, contracts, or ingredient provenance as in the melamine matter. One could argue that information technology amplified the destructive potential of both the Mumbai terrorists (via satellite phones, GPS, Google Earth imagery, IP telephony, and other tools) as well as the Wall Street catastrophe (in part by enabling risk exposure far greater than models could accommodate).

-The governance and monitoring of global capital flows by nationally-delimited regulators have already been a topic of conversation at the G20 and G8 levels.

-Reporting standards for everything from land mines to life expectancy to laboratory results rarely coordinate or enable effective (and cost-effective) information across continents and often borders.

With so much room between the cracks of law, enforcement, and reporting, expect to see more global equivalents of dropped fly balls in 2009. (Speaking of sports metaphors, the internationalization of professional leagues including soccer, American football, and perhaps most successfully basketball bears watching.)

The Domestic Conundrum

As we noted in the October letter, many of the challenges facing U.S. public- and private-sector leaders, most notably President-elect Obama, are sticky and intertwined: it's hard to reduce the inventory of unsold houses with rising unemployment, no matter what the interest rates, but cheapening the dollar by lowering these rates causes problems of its own (a probable increase in oil prices for starters).

Given the high stakes, and the relative freedom to address the issues (provided by the combination of a friendly but not veto-proof congress and the perception of a honeymoon period with the electorate), expect to see some combination of strong efforts that will have the effect of attacking boundaries between problems. Four key areas in particular are often attached:

-Health care

Can a broadly inclusive appetite for change retie this massive knot into something more manageable? Demographics (see below) is driving unprecedented demand for care as the baby boom generation starts needing stroke care, diabetes treatment, heart surgery, and hip replacements in massive numbers: what will be the de facto or de jure rationing mechanisms? Managed care is historically credited with curbing cost increases but also blamed for unsustainably low morale among primary care providers -- and for today's thin pipeline of internists in medical schools. Defensive medicine, in part attributable to the American litigation climate, is estimated by the McKinsey Global Institute to cost $150-190 billion annually. Pharmaceutical pricing in the U.S. is 50% higher for equivalent molecules compared to other countries, but even concerted pressure on this sector cannot turn the tide without similarly dramatic changes in the status quo elsewhere. One number may be the scariest of all: 45 million Americans lack health insurance, and the number will rise given the trend in unemployment.

-Demographics

Big shifts are underway across groups defined by age, education, and sex. According to the Labor Department as reported in the Boston Globe (Dec 5), 1.1 million fewer men are working than were a year ago; 12,000 more women are now employed. Job losses in financial services and construction, for example, hit men hard, while health care, which is about 80% female, added 400,000 jobs. Intergenerational wealth transfer, often achieved via real estate, may in a rising number of cases be negative for the current generation of adult children. For a slightly younger cadre in their 20s, what Don Tapscott calls the Net Generation is integrating its experiences with technology into work, play, and social interaction -- and one study in the Archives of General Psychiatry controversially found roughly half of the college-age population to suffer from mental health disorders, some of which may relate to the dynamics of online interaction.

The biggest factor in demographics may be the collapse of many people's retirement assets. As one executive noted to me, people who retired two or three years ago made any number of assumptions that have been shattered, and jumping back into the labor market with old skills, contacts, and resumes is extremely tough in this economy. Even without the stock market drop, the shift in retirement funding from defined-benefit pensions (which aren't always defined or beneficial, as Motorola is proving right now) to defined-contribution proceeds always appeared to be a long-term gamble. A professionally managed pension plan costs 20% of salary to fund a full-salary pension. The fact that most 401(k) accounts, almost all run by amateurs, run less than 10% including employer match, should be cause for alarm even before adverse decisions and/or market performance exact their toll. It's not a 2009 prediction, but I believe a bail-out will eventually be required to address a massive shortfall between long lives and small retirement accounts. Unlike health care reform, or bank bail-outs, or wars, demographic change typically takes decades to unfold.

-Seeking consumers

Given high unemployment, what will be the source of customer demand to restart shuttered factories, reduce inventories, and stimulate hiring? The federal government, through a myriad of programs, is on pace to assume responsibility for a World War II-sized proportion -- of a much larger economy. On the private-sector side, growing verticals are hard to locate amidst broad and often deep layoff news. Just two chains of home improvement centers -- Home Depot and Lowe's -- together added over 250,000 jobs between 2000 and 2007 on the strength of the building and renovation boom, but it's hard to see a similarly promising retail (or other) sector on the horizon. Early retirement (see below) is less of an option than it might have been with less damage to retirement portfolios. Cashing out home equity fueled substantial spending earlier in the decade: according to a 2002 paper in the Federal Reserve Bulletin (Canner, Dynan, and Passmore 2002), over 50% of funds liquified in 2001 refinancings went for home improvement and consumer expenditures. The numbers were staggering: according to a paper by researchers at the New York Federal Reserve Bank (McConnell, Peach, and Al-Haschim 2003), the annualized withdrawals of Q2 2003 amounted to $450 billion. Where can similar sums of cash originate in the near future?

-Soft asset markets

Lack of demand for consumer goods is echoed in equity, credit debt, and housing markets as all four suffer from imbalances between supply and demand, and/or uncertainty:

-How will bank balance sheets appear and be analyzed under a TARP model? How will investors react?
-Should people buy cars from a manufacturer in or near chapter 11? Should banks loan them money to do so?
-If an individual of Bernie Madoff's reputation can take down $50 billion, who else is hiding bad news?
-Should people try to improve or even maintain the value of their houses given a) the mortgage is upside-down and/or b) the number of repossessions in the neighborhood may make it impossible to sell my home?
-With 10 years or more of equity gains wiped out, can I ever plan to retire?

Secondary questions

In addition to the four big issues noted above, a number of other questions loom large. With only minor comment, these include the following:

-50 years after the birth of the modern civil rights movement, the election of an African-American to the presidency will shift the terms of the affirmative action debate. At the same time, the status of gay and lesbian couples in the eyes of the state is being framed in terms of both civil rights and religious authority. What will the civil rights movement of 2012 look like?

-The non-profit sector, including private colleges and universities, charities, and religious organizations, has been hit hard by the downturn in financial markets. Given that the end of the calendar year is a traditionally active time for donations, the true impact will be much clearer in January. Schools in the St. Olaf, Colby, and Beloit mold are reporting double-digit drops in the application pool in a year with a huge graduating class of high school seniors. Lower demand poses another challenge apart from the diminished endowments, yet health care, heating, and other fixed costs continue to rise. How many non-profits will add to the unemployment rolls next year?

On the supply side, meanwhile, philanthropy is being reinvented by the Gateses, the Omidyar network, Google.org, Lance Armstrong, and other innovators such as the Multiple Myeloma Research Foundation (profiled in The New Yorker last January). These efforts, running counter to the traditions of the United Way and Rockefeller/Ford/Mellon foundations, bear watching. Can this semi-private sector outperform the NIH in finding a cancer cure, or the WHO in mass inoculations, or big pharma in breakthrough drug discovery?

-For all the concern with jobs lost to overseas locales with lower labor costs, automation (including on-line self-service) remains an important factor in the employment equation. Labor costs at the Big Three automakers, while under scrutiny, disproportionately reflect retiree health care and pension costs: even major wage concessions by active UAW workers would only save about $800 per car -- and would not turn an unsold pickup truck into a Honda Accord/Toyota Camry/VW Jetta competitor. What forces can reinvigorate American manufacturing?

-The timing told a powerful story: on the day that the Chicago Tribune broke the story of Governor Blagojevich's arrest, the paper's parent company declared bankruptcy. In a time and in a world with so much up for grabs and such a pressing need for informed citizenries, the demise of the daily newsprint-driven business model raises critically important questions about accountability, about investment, and about the role of advertising. Meanwhile, Jason Calacanis, a founding father of blogging, quit doing so in July, saying "Today the blogosphere is so charged, so polarized, and so filled with haters hating that it’s simply not worth it." If present-day blogging isn't capable of replacing formerly great newspapers, what comes next? My prediction, not an original one, is that some foundations or other not-for-profits will be organized to fund critical elements of an effective press, potentially including bureaus, archives, and editors.

Why is this time different?

In classes and seminars, I've been asked several times this fall whether this recession is like or unlike the tech slowdown of 2000. The short answer: it's very, very different.

1) More sectors are involved. While Cisco, Intel, et al felt real pain, homebuilding and commercial construction were booming, cheap gas allowed Detroit to sell lots of trucks and SUVs, and the sectors that rely on demand in those areas -- banking, chemicals, steel, for starters -- all could thrive. Job losses in one place -- bank consolidation, let's say -- were partially offset by growth in mortgage lending or real estate.

2) The baby boom generation is farther through the python, demographically speaking, and is about to start drawing down their retirement assets, such as they are. The pace of change in the workplace means that people in their 40s and 50s now being laid off have less chance of re-landing a similar job to the one they lost. Early retirement, geographic relocation, and extended unemployment are all unattractive options for people at this stage of the life cycle. People gearing toward retirement need "less house," making a large component of the population more likely real estate sellers (or downsizers) than upwardly mobile buyers.

3) Many individuals are hit with some combination of a "triple whammy" of equity loss, job loss, and house value loss. In 2001, unemployment hit certain cities hard, but home prices continued to appreciate and extreme liquidity made selling a property reasonably simple for those who wanted to do so. Job losses are far more broadly shared now, and the stock market as a whole fell far less in 2001 than we are witnessing today.

4) Foreign competition is more mature: India's and China's economies have grown significantly, removing a proportional slice of U.S.-based production capacity from the 2001 mix. IBM, for example, has added 70,000 jobs in India in this decade.

All told, it's perfectly likely that next year's big stories come from as-yet unexpected sectors -- natural disasters, say, or mass ethnic violence -- thus making 2009 a completely logical follow-on to one of the wildest years in recent memory.