Early Indications April 2008: Oil, Bits, and Steel

It used to be an economic commonplace that value was added in increasing amounts the farther one moved from raw material extraction. Farms, fishing villages, and mines have often created less affluent locales and involve dangerous work, while factories paid higher wages. Bankers fared better still. In today's information economy, that hierarchy bears revisiting.

Those who invest in the rise or decline of an asset class are still rewarded best of all, as the recent hedge fund salary report in Institutional Investor's Alpha magazine reveals: five individual money managers each made more than $1 billion in 2007. But even though the U.S. pure manufacturing sector no longer stands astride the global economy as it did 50 to 100 years ago, information’s role in international trade remains hazy.

Prices for goods from extractive industries have been soaring: copper has quadrupled in five years, and nickel went up a factor of five in just over four years, before dropping in the middle of 2007. Wheat soared, then has fallen 40% in recent months. Oil is visibly surpassing all-time highs. How much these increases relate to speculation, and how much to underlying demand, is difficult to tease out. Changes in diet, for example, contribute heavily: as developing nations eat more meat, more grain is needed to feed the livestock that feeds the people. Tariffs and subsidies, administered locally, have an enormous effect, especially when considered cumulatively. Corn’s use in ethanol shapes land use decisions from coast to coast, and beyond. One effect of powerful networks is to amplify noise: local distortions (corruption, protectionism, and subsidies) ripple farther, faster today than they did 100 years ago.

Whatever the impact of culture, Malthusian population pressure, and trade barriers, when capital is global and government (and therefore regulation) is not, money managers enjoy extensive leeway. When food shortages spur riots in several countries, however, the role of hedge funds in high grain prices should come in for scrutiny. As is so often the case, information about stuff is more valuable than stuff, and information about money is, as Walter Wriston opined, more valuable than money.

Away from investing, knowledge-intensiveness can add value but be difficult to monetize. In part, manufacturing is a victim of its own success: goods can be produced so efficiently, at such high quality, that margins often shrink. A descendant of the personal computer that sold for $2000 in 1992 ($3073 in 2008 dollars) can now be purchased for roughly $500. The Eclipse very light jet airplane is selling for only $1.5 million, compared to $3 million for a more traditional (and only slightly bigger) Cessna Citation Mustang. Refrigerators and other major appliances have dropped in price by 20% or more in industrialized countries - with a potentially decisive impact on women's participation in the labor force as a side effect. The reach of such manufacturing pioneers as Deming, Dell, and Ohno (father of the Toyota factory system) is broad indeed. (See Cavalcanti and Tavares, "Assessing the 'Engines of Liberation': Home Appliances and Female Labor Force Participation," Review of Economics and Statistics 90 (2008): 81-88)

Some manufacturers address this dilemma by increasing the content of manufactured goods. Automobiles have become a classic example. While the 1976 Honda Accord that launched this successful franchise was 162 inches long, the 2008 model is nearly 3 feet (32 inches) longer. Significantly, the 1990 Accord came with a 125-horsepower engine and got 30 miles per gallon in highway driving with a manual transmission. 18 years later, an Accord weighs 500 pounds more, has 177 horsepower -- and gets 31 highway miles per gallon under a tougher measurement standard. Honda is not alone as other manufacturers have made similar moves: a 2008 Ford F-150 pickup weighs 700 pounds more than its 1991 forebear, while a BMW 3-series sedan has added 455 pounds in 20 years.

Given how manufacturing has evolved in the U.S., it is not surprising that the status of the US economy in the world has changed dramatically. According to the U.S. Census Bureau's Foreign Trade Statistics, the U.S. has trade deficits with 13 of its top 15 trading partners. Only the Netherlands at number 10 and Singapore at 15 buy more from us than we do from them. It's noteworthy that the United Kingdom, the manufacturing empire from which the U.S. took the mantle, now sells the U.S. about $6.5 billion more than it buys – but North Sea oil rather than textiles is now the mainstay. Counterintuitively, the U.S. also imports more automobiles and pharmaceuticals from the U.K. than it exports back.

Canada was the U.S.’s biggest trading partner until just last year, when China took that spot. A close look at the figures reveals that the U.S. imports both extractive products (pulp and paper, metals, and energy comprising the big three, worth well over $100 billion) and manufactured goods, primarily automotive and aerospace. In return, the biggest U.S. exports to Canada are food, car and truck-related goods, and energy. Evidence of an information economy is hard to discern in the U.S. government statistics: motion pictures, patent licenses, and investment banking services do not appear. Even something as IP-intensive as pharmaceuticals was only about 1% of U.S. exports to Canada, and smaller in dollar volume than “toys, games, and sporting goods.”

The numbers with China tell an entirely different story. While U.S./Canada trade figures are close to being in balance (a gap of $64 billion, or about 20% of imports), the Chinese buy very little from the U.S., especially if raw materials and foods (including $4 billion in soybeans) are removed. Highlights include about $6.5 billion in both semiconductors and civilian aircraft, but these are dwarfed by the imports, starting with over $50 billion in computers and related equipment and another $50+ billion in apparel and footwear. The list goes on from there.

What are we left with? First of all, it’s clear that the record-keeping lags reality. How, if at all, are such real services as Bloomberg or Thomsen subscriptions, legal advice, or investment banking factored into trade figures? Services are far more portable than traditional economics reckoned them to be in the days when haircuts were invoked as the archetype: when every U.S.-based accountancy and every major law firm has Chinese offices, their work may not be an export in a technical sense, but it should play some part in the trade picture. Once again, the statistics presume a manufacturing-based economy that no longer employs a majority of Americans.

Second, America’s “dependence on foreign oil” is more complicated than the phrase suggests. According to the U.S. Energy Information Administration, here are the top seven importers of U.S. crude oil for the month of February 2008:

Canada 71.5 million barrels
Saudi Arabia 47.2
Mexico 38.5
Venezuela 32.8
Nigeria 29.7
Iraq 22.6
Russia 13.1

Note that only two Persian Gulf states are included; numbers one and three are our NAFTA neighbors. For the trade imbalance even to be dented, each country in slots two through seven will have to change its consumption patterns, and most likely central government, quite radically from what they are today. It’s difficult to see any information-based goods making a dent in those imbalances, in those countries. In just one month, those seven countries sold the U.S. over $25 billion of oil (assuming $100/barrel): that annualizes to $300 billion a year, a tough number to scale no matter how many MRI machines, bags of genetically modified seed corn, corporate branding campaigns, or copies of Grand Theft Auto we could sell in any of these countries excepting Canada. Rather than an “information economy,” we may well be more accurately defined by transportation.

In sum, there seems to be a “hollowing out” of many Western economies: extraction, whether of corn, copper, or oil, sits on one side opposite information/services (both of which are hard to capture statistically) on the other as the main drivers; manufacturing -- with some notable exceptions such as medical imaging and devices, excavating equipment, and aircraft -- appears to play a smaller and smaller role in export numbers. The Detroit-based automotive sector has become largely domestic, with imports and import subsidiaries gaining ground every year.

The next U.S. president will have many hard problems to address, but this series of hidden transformations in trade, as yet underappreciated by both statistics and policy, will be lurking in many of them: health care, the Iraq war, energy strategy, immigration, monetary policy, and taxation merely begin a long list.

Early Indications March 2008: Engines of Complexity

Any time a new technology is introduced, the market traditionally extends conventional modes of use and understanding from the new thing's nearest neighbor. In their initial instantiations, automobiles were horseless carriages, television was visual radio, and cellular phones were phones without a wall plug. It took time and creative genius, both individual and collective, to find these technologies' transformational power. Automobiles changed everything from courtship rituals to urban planning. Television news was transformed by such visionaries as Reuven Frank, while Ernie Kovacs, Sid Caesar, and their successors invented new forms of comedy and entertainment. In many parts of the world, mobile phones have evolved to the point where they are only marginally voice devices.

In the early years of enterprise computing, information technology accelerated known processes such as billing, statement generation, and basic accounting. Finding return on investment was fairly straightforward because the baseline time and/or cost metrics could be compared to the results of automation. Even without networking, advances in business practice complicated this relationship: as spreadsheets such as Lotus 1-2-3 transformed the trading of financial instruments, and e-mail made real-time global communications possible and cheap, computation no longer automated existing practice. Rather, it facilitated entirely new ones.

With the move from a processor-intensive computing architecture (for mainframes, minis, then PCs) to a network-centric model, these tendencies appear to have intensified: calculating ROI on networked services such as antivirus or e-mail, or on services-centric architectures in the SOA vein, is difficult if not impossible. The costs and benefits are highly distributed - and disputed, the speed of change can be rapid, and the baseline for cost savings is difficult to calculate for activities that have only loose or no precedents. The contested claims and experiences of business value can make deploying systems supporting such processes as analysis, collaboration, and visualization difficult, more for managerial than technical reasons.

From a management standpoint, the situation gets worse. With local applications running on desktops or servers, risk, cost, and other consequences can be reasonably well anticipated and controlled. In a network of networks, I can not only catch your cold when you sneeze, but also the cold of virtually anyone on the networked planet even when not even a sniffle is heard. With multiple dependencies, latency, and other facts of network computing life, monitoring service levels, tracing root causes, and validation become significant challenges. Being able to sign off on a process's robustness, auditability, replicability, accuracy, and level of protection becomes an act of faith.

One key factor is an essential network property, the so-called fat tail. Whereas many routine algorithms in business and industry assume Gaussian bell-curve distributions of probabilities, many network scenarios adhere to power law distributions in which notions of "normal" and median" lose all meaning.

-Chris Anderson's "long tail" has become a commonplace in Silicon Valley. Rather than living on large-selling hits, virtual retailers such as eBay, Amazon, and Netflix make money from onesies and twosies that their physical counterparts cannot afford to stock. In fact, Netflix would much rather you watched their one copy of a Hungarian banjo documentary than wait in line for one of their thousands of copies of Pirates of the Caribbean that they will have to dispose of in a few months' time.

-The predilection of networks toward winner-take-most outcomes inspired Anderson in the first place. It's no secret that a small number of sites collect the vast majority of Internet traffic. Rather than follow a 80/20 rule, power laws are more like 95/1: less than 1% of the site population accounts for 95% of traffic.

-The extreme scale of adverse events in networked scenarios is easily understood. While the absolute tallest and shortest human adults in any population may be a factor of 2 or 3 different, with both extremes falling symmetrically off a Gaussian median, networked phenomena such as money or traffic can be millions of times different, and there is not necessarily any central tendency. The dramatic exposure to adverse events such as Amaranth's or Long Term Capital Management's meltdowns, or a global liquidity crunch, would be impossible in a world in which banks were local, investment was primary (rather than derivative), and neither trade nor capital moved fluidly around the globe.

Given these dynamics, Stan Davis's notice of the shift from "crunching to connecting" can be expanded. It seems a short leap to postulate the following: whereas enterprise computing in its first two to three decades automated calculation and therefore increased efficiency, networked computing amplifies complexity, including noise. The consequences of this tendency are both positive and negative.

Downsides include increased difficulty to accommodate these environments to hierarchical forms of organization in that collaboration extends across "home" enterprises. Whose money is the vendor team spending? To whom are they proximally and ultimately accountable? E-mail was a classic example as it removed layers of bureaucratic organization and aligned with a tendency toward greater social informality. The cost of e-mail (in both anti-spam technology and people's time and attention) is vast, but no payback metric is forthcoming: "just do it" becomes the managerial justification.

"Securing the perimeter" of a networked organization (whether in the technological or organizational sense) becomes a contradiction in terms. This week's news about a sophisticated attack on Hannaford Brothers supermarkets raises the stakes considerably: rather than hack into repositories of credit card data, this distributed attack essentially compromised then transmitted payment information from point of sale systems on the fly. There are other complications, to be sure.

The upsides of exposure to increased complexity befit a global economy premised more on services than products. One benefit lies in increased access to search space: a given problem can be addressed by solutions garnered from a potentially vast pool of suggestions, local optima, or combinations of disparate elements. Time can be dramatically accelerated: numerous examples confirm the potential for what Alfred Chandler called "economies of speed" to be realized by networks of various kinds.

The importance of improvisation, about which we've written previously (summer 2007) grows in such dynamic environments in which resources are ample and diverse; curiously, improvisation in a strict sense works less well in scenarios characterized by extreme scarcity. This is not the place to explore how organizational hierarchies, which manage physical scarcity better than they do virtual surplus, may have to evolve amidst information and relationship abundance.

Thus it may be past time for new managerial metrics and practices within traditional enterprises. Hierarchical (bureaucratic) norms don't appear to do a very good job of governing a mindset and a body of technology that fit poorly into paper-based, slow-moving, and strictly delimited organizations. Complexity is painful when compared to order, but once attributes such as ambiguity, emergence, and adaptation enter the vocabulary, that same complexity can be viewed (and exploited) as a resource rather than only being "managed" as a constraint.

Early Indications February 2008: Bicycles

Anyone who has been to Paris in the last six months has seen a major change to the iconic city's landscape: a plan to deploy over 20,000 rental bicycles at 1400 stations is well underway. It's a complex story, with some interesting tech angles, that points to even bigger changes that are not limited to either The City of Light or two-wheeled locomotion. Paris's mayor, a socialist named Betrand Delanoe (with an umlaut), has aimed to decrease car traffic and congestion ever since his election in 2001. The mass transit systems are also near saturation, so he has been building bike paths and otherwise reconfiguring roadways to favor foot and bike traffic - a move that has not been universally appreciated. Last July marked the launch of Velib' (the name of which is a play on "free bicycles" or, more poetically, "bicycle freedom"). It's quite ambitious: -The custom-made bikes are free for the first 30 minutes, based on research into the average commuting times and distances. Rental stations are springing up all over town (often displacing precious parking spaces), near mass transit where possible. At one's destination, the bike locks into a networked pedestal. -Compared to other bicycle programs elsewhere - some run by Clear Channel communications - Velib' is much bigger: Copenhagen's program offers only 1,300 cycles, and Amsterdam and Toronto have both shut down their efforts. -The funding is in an odd way related to Google's model. The outdoor advertising firm JCDecaux is building the technology (including the custom-designed heavy-duty cycles, the locking infrastructure, and the billing system) and a maintenance infrastructure that includes 400 new hires. In return, the firm gets free use of Paris's 1600 city billboards and kiosks. -A deposit of 150 Euros is intended to focus riders' minds on either dropping the cycle into a pedestal at the end of a ride, or using the attached cable lock during trips inside a building. Even if the bike is stolen, the rider still forfeits 35 Euros. -There's ample evidence the system is working: spot-checks of rental stations in both the fall and winter have showed many to be empty. While city residents are a primary target, Paris's many tourists are catching on. (For a comprehensive description en Anglais, see here.) The system has its critics, of course. One substantive issue relates to traffic: where do all these armies of riders go? In many places, the answer is "in the bus lane," which is also used by taxis. And while they are not as terrifying as, say, Rome's, Paris's motorbikes are not kind or gentle lane-mates. Many streets are made of cobblestone, which can challenge even the professionals in the Tour de France's ceremonial final ride. It's early, but I would be surprised to see the bike stations gone after five years. Paris is in many ways (scale, layout, and culturally) favorable to cycling, people like the freedom, and after several experiments around the world in the past decade, many practical lessons have been learned and incorporated into this implementation. ********* Travel to a different global destination, as of 2003 the most-visited museum in the world (the title is now held, post-Dan Brown, by the Louvre). That would be the Air and Space museum on the Mall in Washington, D.C. The two most famous bicyclists in human history are celebrated there for launching the era of powered flight. What the Wright Brothers accomplished remains dazzling, for they did not just invent the airplane. In fact, the Wrights had to solve, from the mechanical side, three related problems, all of which are formidable. The craft had to travel fast enough on land to create sufficient lift, then maintain speed while in the air. The craft had to maintain lift, obviously, and the pilot had to be able to steer and land the device. The combination of these three - thrust, lift, and control - is common sense after the fact, but even breaking the problem into those logical domains was an achievement. Here is where the bicycle heritage comes in: the Wrights had to invent the processes whereby a human could fly a plane. Having made their living in a business that was not "natural," they recognized that people could learn to control mechanical forces through muscle-driven inputs. In a broad sense comparable to a child's conquest of dynamic balance riding his or her first two-wheeler, the invention of the method of flying itself counts as yet another accomplishment for Wilbur and Orville. (Even more daunting, Igor Sikorski did the same for the far more complicated and finicky helicopter and managed not to die devising the control protocols, difficult even today, on prototypes.) ******** I think we're at a cultural moment in which similar dynamics are at work as people "learn to fly" in a new domain. Rather than automate the brochure with a webpage, or the paper memo with e-mail, social computing is giving individuals and groups new things to say and new ways to say them. The unease many feel with Facebook and Twitter's modes of expression might be compared to the Wrights' parallel accomplishments of inventing both a step-function technical innovation and a method for getting comfortable using it. Those in the midst of a demographic cleavage historically have a hard time analyzing what's happening. Instead, there are often resigned sighs of "you just don't get it" from the young and "what a waste of time" from their elders. That these are emerging as two prominent reactions to social computing may be a sign of a deeper split. At the same time, college students seem in general to be anything but alienated from their parents, so I expect the relationships enabled by social software to include some degree of familial, if not workplace, generational inclusion. Informally, I would assert that texting appears to be doing this, at least in the U.S., but that's a two-way rather than n-way exchange - a crucial distinction. Just as running doesn't help people learn to cycle and flapping our arms doesn't allow people to mimic birds, facility with old modes of online interaction may not prepare folks for Tweets, Super Walls, or Seesmic. I don't have 1200 friends (by the former definition) any more than my students do, but they do maintain social networks of contacts they call "friends" at a truly impressive scale -- and the fact that we still don't have a word for recognized but not proximate Facebook contacts is an important clue as to the disruption underway. I'll avoid the obvious metaphors about skinned knees, but confess to feeling older than I have in a while: 40 years after 1968, a powerful stream of which unfolded in Paris, we may be seeing another youth-driven upheaval that will be felt for decades after.
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Early Indications January 2008: Looking Ahead

At the start of a new year, we can assess a few areas of major uncertainty and activity. Somewhere in the next 12 to 18 months, I expect to see major news unfold in some combination of the following five domains. 1) The Fragility of Democracies In the U.S. elections, electronic voting machines are being questioned more each year, and hopefully will not introduce uncertainty or unfairness into the November tallies. And even though the U.S. elections are getting front-page treatment, it's important to see the broader perspective, in which the global news is troubling. In Kenya and Pakistan, blood is being shed as elections are being contested. Russia and Venezuela, meanwhile, are rewriting the rules of competition, with predictable consequences for dissenters. China's emergence as a world power implies a balancing act between human rights and political order. The attention of the world's media on the Beijing Olympics this summer, combined with ongoing issues of Internet openness, could highlight bubbling issues related to democracy here as well. Finally, as to the question of whether democracy can be imported, the war in Iraq leaves it unanswered in at least one case, and it's hard to find any examples where democratic government has not had indigenous roots. 2) Life in the Food Chain Food is very big news these days. Let's look at grain prices first. As developing nations increase their wealth, citizens often increase demand for meat, which is more resource-intensive to produce than grains: beef takes seven pounds of grain per pound of meat, chicken three. In addition, as market demand, incentives, subsidies, and tariffs interact in unanticipated ways, the drive toward corn-derived biofuels is increasing the price of both food corn and other grains when farmers gravitate toward corn. Beer is the latest casualty as hop prices have soared, but overall, U.S. food prices increased dramatically last year, and there's no reason to think the trend will reverse. The production of protein at large scale also has unintended consequences. Whether it's the threat of avian flu from chickens in close captivity, "mad cow" disease in cattle, or escaping salmon weakening gene pools of sport fish, concentrating protein production carries risks, including the creation of large lagoons of manure that have the nasty habit of flooding, during hurricanes for example. Given increasing consumer awareness (Michael Pollan, whose "The Omnivore's Dilemma" continues to sell well, was called a "cornographer" by his son) along with higher prices, we can expect to see new market dynamics, particularly in the "buy local" movement, which appears to be eclipsing some of the earlier fervor for organics, regardless of their carbon footprint. Certification of organic status is also far from standardized, with the machinations of a powerful food lobby still underway. Finally, many people would rather keep the relatively inefficient Farmer Smith down the road in business than pay FedEx a whole lot of money for the jet fuel embedded in that allegedly organic Chilean asparagus. 3) Cheap Computing It's amazing to think about what one can do for free: -obtain a legal supercomputer operating system -plot a map from anywhere to anywhere, including the stars -edit a video using tools that derive from studio-grade gear -look up words, concepts, titles, stock price histories, genealogies -create word processor documents and share them among a team -and many, many more. Hardware is also dropping in price. The recent dispute between the One Laptop Per Child organization and Intel is in part motivated by the enormous market opportunity at stake. In 1994, one could say, inaccurately but plausibly, that one out of two world citizens had not placed a phone call; later this year, one in two people on the planet will own a cell phone. There's a lot of buzz surrounding a startup called Chumby, a new breed of Internet appliance. The capabilities of an iPhone and its offspring (iPod Touches, LG Voyagers, Nokia N series) are phenomenal. I have no idea how it will play out, but we will see some interesting (both scary and exciting) developments as a result of the increase in low-cost options. This is not to say that paid package software will disappear, but having a growing set of inexpensive options will certainly change the industry, and the market. 4) Organizing Augmentation Every year we see more computing done outside "computers." In medicine, radiologists are being outperformed by digital scanners for some classes of interpretations. The da Vinci surgical robot from Intuitive Surgical is bringing minimally invasive techniques to many types of procedures, and the company is growing explosively. In fitness, your bike plus your PC plus a magnetic trainer equals an interactive workout. In your car, antilock brakes began a series of digital augmentations. High-end cars now include traction control, stability control, and electronic throttles. Lexus has a feature that automates parallel parking; Nissan just announced a sensor in the front bumper that automatically initiates braking if the car gets too close to the one in front. Guitars can tune themselves automatically. Cameras correct picture quality for shaking hands. Software can enhance images and sounds to the point where the concept of "real" has become rather fuzzy, whether when we see a picture or hear a singer, not to mention experience "movie magic." In the realm of decision making, CNN has popularized the Iowa political markets concept with a presidential prediction market, while the Hollywood Stock Exchange has in some years correctly predicted eight out of eight Oscar winners. The point here is that just as there's a large category of enterprise software that we use to run other software, we'll soon need digital assistance to manage our digital assistance. 5) Consequences of Visible Social Networks As more of us can see and organize who we know, and the people they know, expect to see some unexpected outcomes. Apart from valid concerns about new forms of stalking and identity theft, which absolutely must be addressed if the market is to retain confidence, we're already seeing changes in demographics. My students have a very different experience of interpersonal connectedness than did their predecessors of just a few years ago. There's a buzzword I don't particularly like - "reality mining" - used most recently (but not originally) by MIT researcher Sandy Pentland. He's analyzing 350,000 hours of data collected from people's cell phones, including who they call, where they called from and to (geospatially), and the like. It's clear from this research and empirical evidence that we will learn to manage new types of relationships, and set priorities accordingly: it's a new phenomenon, for example, to see two students at lunch together both talking on mobile phones to other people. When I have a text message from my brother, and an email from my boss, and a Tweet from an old colleague, and a voicemail from my mother, it doesn't take long for some form of pecking order to emerge. In the presence of so many channels, what is meant by "real time"? How my various networks are represented, and made secret or shared, and archived or destroyed, is in the process of being decided. Just like a medical record, I may have some form of ownership over the information elated to the sum of people I called or texted last month - but the phone companies have a claim on the data too. Who will benefit from selling some of that information to marketers, or insurers, or dating services? What happens if Google buys Twitter and maps yet another of my networks onto GIS, information, and communications landscapes? Who wins, who loses, who pays, who profits, who bears risk relative to who collects reward? ******* All told, we're in for an extremely important next few years as we address some of the most elemental of all issues: food, shelter (as mortgages and home prices correct), friendship and marriage, aging and dying, immigration, political expression, and others. Given how connected we've become, as the recent bestseller The Black Swan points out, the world have become more nonlinear: when weird things happen, they affect more people and move faster than such events in the past. In other words, as Digital's Jeff Harrow used to be fond of saying in his wonderful newsletters, Don't Blink!

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Early Indications December 2007: Prediction Scorecard

How did we do?

Last December I wrote that "we see a collision between systems based
on old and new models of regulation, remuneration, protection,
privacy, and so forth. At base, we are having to redefine some of the
core systems that make the world work: money, contracts, civil rights
and civic responsibilities, identity, possession, and others. This
year, I believe that several of these collisions will reach new
heights of unexpectedness, expense, and impact."

Prediction 1:
"This year, look for a still grander failure of data protection
[relative to the VA], either in one highly visible episode or a
cumulative increase."

Result: Hit
The British Ministry of Revenue and Customs loss of 25 million names
is truly spectacular: it's roughly half of England's population, and
sensitive information included naming 350 people in witness protection
programs. The costs and risks of providing new identities for those
affected could be extreme. The TJX breach, meanwhile, was initially
reported to have involved 46 million records but according to a recent
court filing could have exposed 94 million credit card-holders -
nobody can say for sure, but the affected banks and the retailer are
said to have settled. The amount of the settlement was undisclosed,
but the company, which books about $18 billion in annual revenue, set
aside over $100 million for litigation settlement.

Prediction 2
"YouTube and related content distribution mechanisms will push the
envelope too hard, with a high-profile episode of unauthorized copy
distribution prompting legislation, litigation, and potentially
business failure."

Result: Too early
Litigation, yes, courtesy of Viacom, business failure, no.

It's also worth watching a court case in the adult entertainment
industry, since that sector is often a forerunner of changes in the
wider business environment. According to the Los Angeles Times, on
December 10 "Vivid Entertainment Group filed [a] lawsuit in Los
Angeles federal court against PornoTube and its parent, Data
Conversions Inc., which does business in Charlotte, N.C., as AEBN
Inc." The YouTube-like web business is said to be posting copyrighted
material, costing one of Vivid's competitors 35% in revenues,
according to the article.

Prediction 3
"Some new activity - whether job referrals, recipe swapping,
rotisserie baseball, genealogy, Christian evangelism, or something
similarly below radar - will break through using a Google-like
monetization model and approach the growth rate we saw for video in
2006."

Result: Hit
Facebook was clearly the big story of 2007, but even as early as June,
it was reported that digg had passed Facebook in number of unique
visitors, having grown 1400% in one year. May 2007 data from Compete
show digg with 22.6 Million unique visitors, while Facebook had 20.2
Million. It's important to note, however, that people spend far more
time on Facebook. Fantasy [American] football has about 12 million
players, up 33% since 2005; overall, fantasy sports are a $2 billion
industry, or about 13 times Facebook's estimated 2007 revenues.

Prediction 4
"For all their amazing capabilities, communications and computing
systems still can't cheat physics. 2007 will see the so-called virtual
world continue to encounter the physical environment in important
ways. A few examples suggest the breadth of the issue:
*Data centers are beginning to scale up to the size of factories and
even foundries in their energy consumption."

Result: Hit
So-called "green" computing is indeed front-page news. Google's data
centers are setting the pace as 40-70 megawatt facilities are coming
on line. Large single points of failure in any system increase the
potential scope of damage if an outage were to occur.

Prediction 5
"A different facet of the energy and transportation systems relates to
automobiles. While Chevrolet just introduced a good-looking electric
car, the Volt, that anticipates developments in battery technology,
Tesla Motors will ship over 200 Roadsters at $100,000 apiece that
out-accelerate a Porsche 911 and achieve the equivalent of 135 miles
per gallon fuel efficiency. [The enthusiasm for ethanol will continue,
despite severe limitations.] How politics and markets react to rising
oil prices, from a systems-of-systems perspective, will determine
quite a bit about the shape of the next 10-20 years."

Result: On hold
Tesla found car-building more complicated than the founders thought,
and slipped its ship date again. The Volt is being touted as a signal
of rejuvenation at GM under Bob Lutz, while Honda announced a major
commitment to less expensive hybrid engine technology. Ethanol mania
seems to be subsiding slightly. A huge oil discovery off Brazil must
be countered by growing political instability in many oil-rich
regions, and high prices reflect a combination of that political risk
with booming demand in the developing world.

Prediction 6
"2006 did not see a major disruption to the world's transportation and
communication systems. Such good fortune cannot last indefinitely, yet
readiness for the unexpected remains lower than it could be."

Result: Glancing blow
Yahoo's merchant servers melted down on "Cyber-Monday," leaving many
of its 40,000 businesses searching for new commerce providers after
seven hours of outage and another five of slow performance. Air
travel is suffering both meltdowns both macro and micro (as at LAX in
August, when one bad network card shut down the airport and stranded
about 20,000 fliers, or when JetBlue infamously mismanaged weather
delays in February), but we saw nothing that qualified as a major
disruption.

Prediction 7
Paradoxically, even as people and devices grow more connected, with
access to more information, the need for intermediaries evolves rather
than disappear.

Result: Hit
Apple's iPhone was clearly one of the year's big stories, as were
YouTube, Facebook, Amazon (particularly its Kindle reader, but also
Mechanical Turk's role in the Steve Fossett search) and Google's
unrelenting command of search and advertising. All are
intermediaries, or filters. As Facebook discovered, matching
advertising to audiences in return for money is very appealing in its
revenue potential, but hard to do and easy to get wrong. Microsoft
just announced a major ad placement deal with Viacom. Along with its
Facebook investment, this puts Microsoft in excellent position to
learn at the front-ish edge of ad serving and measurement,
realistically behind Google and perhaps Yahoo. The biggest noise of
the year was made by the social networking model, which is such a
powerful filter we have yet to devise cogent models or names for what
might be possible: the filtering and sheer time-consumption of
MySpace, Flickr, LinkedIn, and the rest may finally have driven the
final nail into the 1990's mantra of disintermediation.

*****
Overall, it was a decent showing as no assertion fell wildly off the
mark, and another several areas appear to be unfolding in line with
the prediction, just not quite in this calendar year.

I hope every reader finds joy and peace in the holiday season, and
we'll start the new year off with an

November 2007 Early Indications: 10 Predictions for the Next 10 Years

As promised last month, here are ten information-technology-related areas to watch over the next ten years. Rather than attempting to be systematic, this list will merely suggest topic areas and point to some relevant data points; otherwise, a ten-item list would soon get unwieldy. Key areas such as liquidity in financial markets, global immigration policies, warfare and diplomacy, and credibility of government, financial, and cultural institutions also merit close watching, of course, but will be outside our scope for the moment. (Note that this material is also available in a presentation.)

1) The New Physical Layer

Although everything from power grids to bridges and ports to railways is being built or rebuilt, our focus here is on computing and networking. In particular, power and bandwidth will be transformed in the next decade.

Taking power first, cloud computing vendors are waging an arms race as they build data centers to power a range of offerings loosely called "web services." Because of the intensity of their power consumption, these often appear near cheap hydroelectric power sources (which themselves may be affected by global climate changes). It's estimated, for example, that Google's data center, housed in two adjacent buildings in Oregon, contains 1.3 million computing cores on 9,000 racks per structure, and photographs of the cooling towers are staggering.

Something else is going on: Caterpillar reported that its Q2 07 revenues from sales of backup generators, such as those used in data centers, were up 41% at a time when overall U.S. construction equipment sales are slumping. The growth of "cloud computing" feels as though it's related to the trend toward virtualization, where resources can be located, physically and/or logically, away from their locus of deployment. At the end of the day, however, servers have to sit somewhere, and when they do, lots of heat follows.

At the same time, the need for portable power to support an increasingly mobile user base means that fuel cells, batteries, and associated technologies will also attract investment and talent. Solar power, meanwhile, is a complicated issue: there's clearly a lot of froth around silicon panel plays, which compete with the computing sector for resources, talent, and production capacity. How much solar helps address computing's need for portable power and how much it constrains it will be important to watch.

Bandwidth consumption is exploding as video expands farther and farther into a global customer and user population. In both wired and unwired domains, a lot is happening. On one side, perhaps even the term "wired" should be amended as optical connectivity proves its superiority; while glass can be fabricated into cables, maybe the word "wire" has become misleading. Delivered in the U.S. by Verizon and to a lesser extent AT&T, fiber is driving wider delivery of 20, 50, and potentially 100 MB/sec download speeds along with faster multiplayer gaming action and multiple high-definition television signals. Over the ether, WiMax's future got a bit less rosy recently as Sprint dissolved its partnership with Clearwire as the stumbling cellular carrier searches for a new CEO. Even so, whether it's that particular technology or potentially a cellular variant, mobile broadband will be a key area for the next decade.

2) Enmeshed

The Japanese have already named a relevant demographic better than Americans have: "oyayubizoku," clan of the thumb, is far more evocative than "digital natives." Whatever they're called, people under 30 around the world are redefining mobility: who is supposed to say (or otherwise convey) what message to whom, in what contexts, with what expectations in return is being defined in fascinating ways. I'm reminded of the need for a new greeting at the introduction of the telephone, as people of manners were not supposed to speak to someone unless they had been introduced. Many languages differentiate between telephonic greetings and spoken ones ("bonjour" vs. "allo" in French), but before "hello" was carried over, Alexander Graham Bell preferred "ahoy" as the English-language telephone greeting.

The distinction between telephones and PCs is getting fuzzier every year, as we have noted, and the iPhone presents a clear case in point: running a Unix variant, it can be spoken at, but performs best moving and manipulating images and data. Mobile phones, ultra-mobile PCs (UMPCs), gaming devices including Nokia's N-Gage, handheld PCs, televisions, and other devices (such as standalone GPS trackers) will continue to converge. Note that the success of this sector depends heavily on commercialization of the power alternatives listed above.

GPS phones are estimated to be a $30 billion segment next year. Some of the most promising applications involve the combination of mobility and convenience, location awareness, and social networking: as Google enters the phone market, expect to see some variation on the Dodgeball service it acquired in 2005. Being able to visualize a list of friends, in their current physical locations, in order to coordinate seems like a truly harmonic convergence of capabilities.

Television over mobile handsets is estimated to reach over 100 million users by 2009, and the number should soar further in conjunction with the 2010 World Cup. Expect to see spirited competition among content owners like News Corp, handset manufacturers, network equipment firms (including heavyweights Qualcomm, Nokia, and potentially Intel), and carriers such as Vodaphone and T-Mobile. Finally, given that [lots of] advertising is involved, expect something unexpected from Google. There's little question as to demand, particularly after seeing adoption in Japan and Korea, but allocating the money may prove to be difficult.

3) Healthy, Wealthy, and Wired

Entire books need to be written on various facets of information, technology, and health. A few bullets suggest the reach of potential issues:

-Electronic medical records have the potential to improve care, save money, and enhance the patient's experience with his or her health care system. EMRs also could help transform the economics of health insurance, lead to data breaches of untold pain and economic impact, and alter the role of physicians relative to insurers, employers, and patients. Automating the current, broken U.S. system (I can't speak for other countries), feels unappealing, which means that implementing EMRs implies deeper transformation, parallel to but much bigger than the changes brought about by corporate ERP implementations.

-Better information regarding public health statistics is essential, particularly given the experience with SARS and fears about future pandemics. But once again, social, cultural, economic, and legal questions emerge. Ranging from "who owns the data?" to "who defines how data is shared across jurisdictions?" to "who pays and who benefits?," these questions will test an already under-funded global public-health infrastructure. For an upbeat and visually riveting vital statistics story, see "No More Boring Data," a video of a lecture on global demographics.

-What does it mean to be human? Mechanical joints and prostheses are rapidly becoming more sophisticated and digitized. When does a disability become an unfair advantage? Oscar Pistorius is a South African sprinter whose 400 meter time is about a second slow of Olympic qualifying. He's also a double amputee whose carbon-fiber "legs" are challenging old ideas about fair competition. Or take Jesse Sullivan, a former lineman from Tennessee who lost both arms in an electrical accident. He has a nerve-controlled robotic arm connected to his chest. Told by his doctors not to baby the device, he returned one time carrying his hand, which he had detached while starting a lawn mower. Cochlear implants are already common solutions to hearing loss (Rush Limbaugh has one) and electrical implants also help patients with Parkinson's Disease, so it is a short hop to implanted chips that enhance brain function: when will 14-year-olds start getting "Harvard chips" to enhance test-taking, piano-playing, physical endurance, and other competitive traits that will help college admissions - and beyond?

-What will be the long-term effects of nearfield electromagnetic emissions, particularly after they have been focused through the ear directly into people’s brains? Cell phone antennas are a potential hazard, but so are earbuds and Bluetooth radios, and nobody knows yet what might or could happen across broad populations with widely varying spectrum allocations, cultural patterns, and governmental regulations.

4) Connection Machines

As more kinds of things get connected to information networks, the potential for unexpected consequences gets ever more interesting to contemplate. Just listing the number of classes of devices that can or will soon interoperate gives a sense of scale:

-telephones, the wireless variety of which can be understood as beacons, bar-code scanners, and network nodes - potentially in a mesh configuration
-computers
-thermostats
-motor- and other industrial controllers
-vehicles
-surveillance cameras (of which there are over 2,000 in Chicago alone)
-sensors, whether embedded in animals, affixed to pharmaceutical packaging, or attached to engine components to predict mechanical failure.

All told, there are dozens of billions of items that can connect and combine in new ways.

Look at robotics in the realm of warfare. Small portable robots, literal cousins of the Roomba vacuum cleaner, can investigate caves or tunnels, while the last two DARPA autonomous vehicle challenges (one across open terrain, the most recent at an abandoned Army base simulating urban conditions) have produced multiple successful entrants. Unmanned Aerial Vehicles are flown by crews remote from the battlespace. The pace of successful deployment will certainly continue, raising a wide variety of heretofore purely theoretical questions about the ethics and costs of combat.

Other machines are less visible. Amazon Mechanical Turk was recently used in the search for pilot Steve Fossett: aerial photographs were loaded into the system, which then systematically presented volunteers with images to scan visually for evidence of wreckage, a parachute, or other clues. Combined computing power with human pattern recognition will become more common in a wide variety of domains.

5) Virtual Fences

It's extremely difficult to delimit this space. Risk, trust, identity, and security are all intertwined, and each has implications for the others. Just this week New York Governor Eliot Spitzer backed off on a plan to issue illegal immigrants New York driver's licenses. This in turn means none of these people can fly on commercial flights unless they hold a passport. The 50 states, meanwhile, are in various degrees of agreement with a federal plan for regularizing driver's licenses to create a de facto national identity card. Both driver's licenses and passports, meanwhile, will get embedded RFID chips, which have been cracked already in a variety of trials. At base, the questions of "who are you," "can you prove it," and "who else knows your information" are all in play, all over the world.

Spam is more prevalent than ever, and creative code-writers are unleashing new technologies to build networks of dormant, compromised computers waiting future instructions. The so-called "Storm" worm is actually a worm, Trojan, and bot combined: it changes its payload every 30 minutes, effectively mutating far faster than antivirus software definitions can be written, much less applied. It operates on evolving IP addresses and in a peer-to-peer network configuration, so very few infected machines point to a central point of control (thought to be Russian). Between 1 and 50 million machines are believed to be at risk, but because there is no spike of malware traffic, as there was in the incredible spread of the Slammer worm (which spread to 75,000 machines in 10 minutes), Storm is nearly undetectable. Given the numbers of networked devices listed above, one must assume viruses will attack everything from powerplant controls to cellphone networks to several types of security systems.

The biggest data breach I'm aware of is the 47 million credit-card numbers lost by TJX (parent company to TJ Maxx, Marshalls, and HomeGoods) as a result of improperly configured in-store wireless networks. Last month, a group of banks alleged in a court filing that in fact 94 million records were lost. Currently liability rests with the banks and credit-card entities even though the merchant was responsible, so expect new legislation to reallocate the blame (and financial responsibility) when the next leak occurs.

6) Of Memory and Forgetting

As more of humanity's mental output is digitally recorded and preserved, we will see new kinds of challenges and opportunities related to the storage of said output. My colleague John Parkinson was fond of saying that "digits never die," and anyone who posted stupid newsgroup utterances 15 years ago or candid MySpace pictures seen by a potential employer will understand. Insofar as much of the "web 2.0" traffic is about "me" (and my opinions, and my friends, and my pictures, and my goings-on), it feels like there will be an emerging dialectic between asking for attention and asking for, if not privacy, at least some control over one's cumulative bitstreams.

Many questions relating to monetization of data are relevant here. Who owns my trail of digital breadcrumbs that everyone from Axciom and Amazon to Vodaphone and Yahoo is trying to use for commercial purposes? In healthcare, who holds, owns, and controls my lifelong record of prescriptions (filled and unfilled), medical test results, over-the-counter and supplement purchases (helpfully recorded by loyalty cards), public health data, and even caloric intake and, at the health club, expenditure?

Embedded metadata is another area to watch. Many digital cameras embed information into the image file relating to camera, shutter speed, lens, and time and date. If you look at the most recent versions, what the privacy types call PII (personally identifiable information) also shows up: latitude and longitude of the location, the photographer's name (handy for claiming artistic royalties), and other information that is not obvious when looking at the image. Various generations of Microsoft Word embedded sometimes embarrassing information relating to authorship, editorial changes, and the like: more than one consulting firm has been caught repurposing a proposal (or deliverable) when hidden layers of information told their tale.

As more bits are generated and stored in networked contexts, we will see a reinvention of the public record; just this week a D.C. circuit court judge ordered the White House to stop deleting e-mails, given that 5 million are alleged to be missing. At the level of less prominent individuals, we will see extremes from privacy fanatics that try to commit as little as possible to digital media, all the way to Microsoft researcher Gordon Bell, who is attempting to digitize his entire life, from birth certificate forward, the last few years in real time. (Here's a New Yorker story on Bell.) How the rest of us sort out the middle will be unpredictable.

7) The Human Peripheral

Traditionally, people connected to the computer through punch tapes or cards, keyboards, and screens. That list is getting longer, quickly.

-Haptics
It's been five years already since Cambridge and MIT researchers shook hands across the Atlantic. Haptic (3-D touch-based) interfaces are entering the mass market, most visibly via the Nintendo Wii, which is outselling conventional game consoles from Sony and Microsoft.

-Thought
The Audeo system processes human intentional thought and converts it to speech. That is, it acts on "I want to say 'hello'" rather than broadcasting one's daydreams.

-Electrodermal
Vyro has developed a Bluetooth device about the size of a gum eraser. It measures stress through sweat gland activity in the skin, so one application is a clever game in which two players race their cars on a Bluetooth phone, the winner being the one who's more relaxed.

-New screens
Organic Light Emitting Diode (OLED) technology is coming to market soon, in Sony televisions for instance. Compared to LCD, OLED is brighter, more power efficient, and thinner - but it reacts badly to water. E-ink and other flexible displays are making similar progress.

-Devices
While Microsoft's SPOT technology has not made much of an impact, datacasting is still viable. Ambient Devices make products that convey information at a glance. Those who have been to Boston know that the Prudential building's spire tells the weather: steady blue for clear, blinking red for rain. Ambient's Orb conveys weather, stock market performance, and other complex information by its color, and there's an energy monitor that tracks the price of electricity, weather forecast, and other information relevant to deciding whether or not to run the dryer or air conditioner.

8) Education

Officially, we now live in a services economy: at the global level, the switchover from agriculture happened only last year, which means that at scale, manufacturing was never earth's dominant economic activity. Education systems everywhere are struggling to adapt to digitization, to services, and to new demographic realities. In the U.S. for example, in 2050 there will be a huge blip of elderly women who are now just finishing childbearing. Who will support them, what will they do for both economic and other rewards, and how will they learn to do those things? In the developing world, projected demographic pyramids are even more striking as life expectancy changes dramatically in just a few decades.

How do schools prepare young people for jobs and organizational designs that have yet to be invented? To take two current examples, where did today's generation of sushi chefs and yoga teachers get their training? Where will robot mechanics, Internet addiction counselors, and Chinese lawyers get started? Getting computers (possibly through One Laptop Per Child or Project Inkwell) to the masses will start a process but by no means finish it.

As online course delivery ramps up, questions arise about architecture: what should a virtually-enabled classroom look like? Where should schools be built, particularly in developing environments? What should they look like? What is the role and function of a public library in a world in which the place of print is in major upheaval?

9) {Your Theme Here}

As blogging, social networking, and user-generated content proliferate, we're seeing one manifestation of a larger trend toward delegitimization of received cultural authority. Doctors are learning how to respond to patients with volumes of research, expert and folk opinion, and a desire to dictate rather receive treatment. Instead of trusting politicians, professional reviewers, or commercial spokespeople, many people across the world are putting trust in each other's opinions: Zagat is a great example of formal ratings systems being challenged by masses of uncredentialed, anonymous diners. Zagat also raises the issue of when crowds can be "wise," cannot possibly be "wise," or generally do not matter one way or the other.

Information markets hold great potential, but like real markets, suffer from bubbles, information asymmetry, and other externalities. Nevertheless, such exemplars as Hollywood Stock Exchange (now owned by financial information giant Cantor Fitzgerald), the Iowa Stock Market, and startups like Fluid Innovation are leading the way toward wider implementation. At the same time, we've seen markets process information for a long time: when the NBA addressed its betting referee, the situation highlighted the secrecy with which the league assigns refs to games. Referees are prohibited from telling anyone but immediate family about travel plans, because the Las Vegas point spread moves if the reffing crews are revealed ahead of game time. That point spread is a highly nuanced information artifact of a market compensating for new information.

So-called crowdsourcing will bear watching. Gracenote, the service that lists a CD's track names when you load them into iTunes, began with volunteer labor. What would happen with Wikipedia if Jimmy Wales followed Gracenote's history and monetized all of the volunteer labor? Another new business, Satisfaction applies crowdsourcing to customer service issues. As Google moves away from the idiot-proof search bar into applications, who delivers tech support? Two Google employees currently answer queries at Satisfaction, but it remains unclear who pays whom for what in various tiers of service, who's liable for the consequences of advice, and how might the system be gamed.

Clay Shirky has suggested that flame wars are essentially inevitable outcomes, rather than side effects, of social software. Many blogs have comments turned off because of abuse that imply takes too long to monitor and manage. Given that more people will be in contact with more people in new ways, how will new rules of behavior take shape? Will the lack of interpersonal civility (exemplified in the golden age of the ad hominem attack, offline and on-) evolve? If so, in which direction?

10) Silicon Emotion

People are interacting with other people with multiple layers of computing and communications in between. The nature of emotional expression is changing as a result.

-Dancing alone
What does it mean when tens of millions of music lovers listen in isolation, through headphones, rather than in rooms, or concert halls?

-Friend-nodes
Back when the average MySpace user had 347 "friends," what did that really mean? Might Facebook, which has suffered in the eyes of some users from its retreat from exclusivity, be surpassed by a Ning or other network with express provision of firewalls between sub-communities?

-Inhibition deficiency
In addition to flaming, people will say things electronically they would be much more
hesitant to articulate verbally. Watching teenagers IM each other fluently and unabashedly, then stand with each other awkwardly after school, is a fascinating exercise. In the Nordics, the second-most prevalent use of text messaging (after coordination), is "grooming" - flirting.

-Robot love
The Roomba has inspired tremendous affection in its brief lifetime. (See the fascinating paper by Ja-Young Sung, Lan Guo, Rebecca E. Grinter, and Henrik I. Christensen, all of Georgia Tech, entitled "'My Roomba is a Rambo': Intimate Home Appliances" for compelling evidence on this point.) Sony's Aibo dog and Honda's Asimo can trigger similarly rich emotional responses in some people. iRobot, the Roomba folks, recently introduced a beta version of ConnectR, a "virtual visiting robot" projected to sell for $499. According to the website,

"Combining the latest in Internet communications and robot technology, ConnectR lets you virtually visit with loved ones, relatives and pets anytime you wish – seeing, hearing and interacting with them in their home as if you were there in person."

I can't imagine that this kind of technology will do anything but surprise people with its unintended consequences.

***
One final word: ten years is probably too long a time horizon for some of these areas, but institutional change, in education for instance, is always the slow part that will balance out some of the blink-of-an-eye things we’re about to witness.

October 2007 Early Indications II: Ten big technology-related busts in the past ten years

Earlier this month we marked ten years of this newsletter's publication by noting ten developments that quickly permeated the market after being nonexistent or invisible in 1997. This time out, I'll list ten big failures that at one time or another looked like can't-miss propositions.

1) Online grocery

Grocery is a notoriously tough retail category, with thin margins, fickle and price-sensitive customers, and perishable inventory. At the same time, it's an enormous market -- absolutely everybody eats -- so in the late 1990s, the perceived invincibility of online grocery made for failure of dramatic proportions. Webvan combined aggressive expansion, a long leash from investors, and questionable management to create an $800 million sinkhole. The firm was operating in Chicago, Los Angeles and Orange County, Portland, San Diego, San Francisco, and Seattle at the time of its demise, and many customers were disappointed at the loss of a convenient, time-saving service, particularly after Webvan undid many of the successes of the HomeGrocer chain it acquired. The customer base remains tantalizing, particularly as commutes grow longer and free time shrinks, but the logistics of automating picking out a cart-load of groceries from among 200,000+ SKUs, some fresh, makes this a daunting entrepreneurial challenge.

2) AOL and Excite@Home

For a time, AOL ruled the world of dial-up Internet access. Its carpet-bombed floppy disks (later CDs) helped introduce millions of Americans to the Internet, or at least an isotope thereof. It combined access with content (in some measure, in the form of other people) to reach an astonishing price/earnings ratio of 700. But when broadband delivered by incumbent telcos and cable companies split AOL's access from its content, the supposed synergy broke down and the bubble burst.

Beginning slightly later than AOL, the Excite search engine (like Yahoo and Google, a Stanford creation) was bought by the @Home broadband startup in hopes of another content+pipes goldrush. The merger was a disaster: $7 billion of market capitalization vaporized. Cox, TCI/AT&T, Comcast and the other cable companies who owned physical plant and had operational responsibilities, were ill matched with the Silicon Valley engineering culture that emphasized features and glamour over reliability and customer service. That Kleiner Perkins owned stakes in both @Home and Excite compounded the enthusiasm for a rush to synergy, but the operational realities of rebuilding physical infrastructure, combined with the regulatory scrutiny drawn by @Home's proprietary relationships with one of several competing portals, meant that the cultural and leadership issues helped precipitate a train wreck of epic proportions in 2001.

(On AOL, see Kara Swisher, There Must Be a Pony in Here Somewhere (2004); on Excite/@Home, see Frank Rose, "The $7 Billion Delusion")

3) Iridium

Motorola was a major shareholder in and primary supplier to this satellite telephony venture. After its 1997 IPO, Iridium faced loan covenants that required it to sign up 213,000 customers soon after it began offering service in 1999. When only about 10% of that number materialized, Iridium filed for bankruptcy: $5 billion in assets was liquidated for $25 million, and only last month Motorola -- itself Iridium's largest creditor, to the tune of $2 billion -- appeared to have escaped further liability with a court ruling in New York. The service was never aimed at a mass market, with phones costing $3,000 and calls $7 per minute. Coverage was good in open oceans and deserts, but not in moving cars or cities -- and the handset, while technically sophisticated, was big, heavy, and sported an antenna "the size of a toothbrush," in the words of the Wall Street Journal. Satellites, meanwhile, have been similarly costly to rival radio providers XM and Sirius, which between them have accumulated historic losses of $8 billion and are now trying to merge.

4) Super Audio Compact Disc/DVD-Audio

Roughly 20 years after the launch of the compact disc audio format, which itself came about 35 years after the introduction of the LP record, the entertainment industry brought out competing high-resolution optical disc formats for audio. Sony and Philips introduced SACD in 2000, while the DVD Forum, led by Panasonic and Toshiba, brought out DVD-A at about the same time. Audio quality is much higher than CD from both formats, but market confusion has been a major limiting factor. Customers of a certain age who already had to buy music collections twice over were reluctant to commit to one of two competing formats, and while hybrid players now support multi-channel audio playback from either source, software is not widely available: artists and labels had to bet on one standard or the other, and the slow market penetration has resulted in relatively few, and expensive, titles being available. The format war coincided with the explosion of digital file sharing (hence strict and cumbersome copy protection schemes for both SACD and DVD-A), and customers have widely defected to portable, lower fidelity media such as MP3 files. The net result is that both high-resolution audio formats are essentially irrelevant, and the DVD standard itself is in the early stages of a similar format fight, with potentially similar results.

5) Quokka Sports

Rereading ten years of Early Indications and its predecessors, I was struck by how amazed I was by three or four software demos. One was Keyhole, the technology that became Google Earth after the company was acquired. Another was Quokka, which was devoted to delivering data-rich sports coverage over the web. From its origins in Australia, Quokka began with immersive feeds of long sailing races such as Sydney-Hobart: data relating to biometrics, meteorology, speed, absolute and relative position, and participant narratives made for engrossing viewing. Quokka bought the Internet rights to the Sydney Olympics in 2000 after moving to San Francisco, but the lack of a viable advertising model combined with common dot-com management failures to force a shutdown in April 2001.

Partnerships with NBC and Major League Baseball, along with further Olympic rights, cost money but failed to deliver returns. In retrospect, Quokka was probably better aligned with low-viewership sports like sailing and mountain-climbing that could find Webcast niches than with big-audience events with established television techniques and politics. Sports remains unevenly instrumented: NASCAR races are data-rich, but the single biggest predictor of a pass play's success on a football field -- how long the quarterback holds the ball -- is not recorded. Baseball, meanwhile, has generated hugely popular online fantasy leagues, with football following suit, in ad-supported models of which the Aussies could only dream.

6) OpenFund

If open-source works for software, why not try the model elsewhere? MetaMarkets, founded by two veterans from Barclays Global Investors, launched in August 1999 on the basis of full transparency as fund managers disclosed every trade, often with commentary. The fund started fast out of the gate: at year-end 1999, it was up 91% (by comparison, the NASDAQ was up nearly 50% in the same period). The fund fell 42% in 2000, and dropped another 26% between January and August 2001, when it shut down. In part, the fund was a victim of small scale: whereas most mutual funds need to run at least $100 million in assets for viability, OpenFund was at about $10 million when it was liquidated. Both management and critics compared OpenFund to a finance chatroom with real money: a Morningstar analyst noted after the fund's demise that "the entertainment, the gimmick, doesn't really have anything to do with investing." This sounds plausible: if my money is in free fall, I'm not sure chatting with the fund managers is going to help either my mood or the fund's performance.

7) General-purpose Speech Recognition

Ever since at least 1997, Bill Gates has been predicting that speech recognition will be an integral aspect of the PC experience. In his 5-to-10-year timeframe, it never happened, but not for lack of trying: Dragon Systems, headquartered in the U.S., was losing money selling speech recognition software before it was bought by Belgian competitor Lernout & Hauspie in the spring of 2000, just after L&H paid $1 billion for Dictaphone. The Dragon founders, however, had the misfortune of watching their company go into reorganization after accounting irregularities made the L&H stock worthless. Revelations of fictitious transactions in Korea and over-stated earnings elsewhere eventually sent the L&H founders as well as CEO Gaston Bastiaens (an industry veteran who helped launch the compact disc at Philips and later worked on the Apple Newton) into criminal proceedings that remain ongoing six years later: before Enron, Lernout & Hauspie was the archetype of corporate scandal. ScanSoft, which made optical character recognition products, bought the assets, but even now, neither Nuance (as ScanSoft renamed itself) nor Microsoft has made speech interfaces work for general-purpose computing. In vertical domains, however, speech interfaces -- particularly telephonic customer service and medical transcription -- are working well.

8) Digital Appliances

From high-profile efforts at Oracle (the NC) and Sun (JavaStation) to consumer efforts from the likes of Uniden, the late 1990s witnessed a variety of efforts to displace the personal computer with a network-intensive, easy-to-use, easy-to-manage device. The ideal of plugging a device into the Internet without need for hard-disk-resident applications or storage was motivated by a variety of factors, but ten years on, the vision has yet to catch on. For one thing, wireless devices allow much of the NC's functionality to be experienced on the go (cf. the Blackberry). Terminals and emulators never left the list of enterprise alternatives, as Citrix-based Windows systems illustrate: the PC remains a flexible platform that can be configured into diskless, mobile, or other alternatives. The relentless improvement in PC performance, particularly from 1990 until 2002 or so, made the PC's price-to-performance ratio continually appealing, until processing began to outstrip most of the application stack's needs. Finally, the lack of true broadband, until recently, made the devices slow in many environments.

9) Business-to-Business Exchanges

Talk about a shakeout: from 1520 exchanges in 2001, only about 10% were still active only two years later. VerticalNet, one of the first B2B exchanges, had 1700 employees and a $10 billion market capitalization at its peak; shortly afterward the CEO was faced with keeping 50 people on the payroll, using about $11 million that remained in the bank. Covisint, designed to make automobiles parts-buying more efficient, had a similar fate. That both survive today, albeit operating at minute fractions of their projected volumes, illustrates that while business-to-business commerce is huge, it is also difficult to reinvent.

Sellers stayed on the sideline as auction models presented the specter of purely price-based competition. Buyers, while wanting the price leverage, also realized that a) customer service and relationships matter and b) that bankrupt suppliers (as in the auto industry) are not in the buyers' long-term interest. Many exchange providers turned into merchants of purchasing efficiency inside the firewall, relying more on software and process expertise than on convening power. Running a market is also not necessarily attractive: as this newsletter noted in April 2000, in 1998 the New York Stock Exchange only made $101 million on 169 billion trades totaling $7.3 trillion.

10) Business Models Based on "Free"

At one time, at least two dozen Internet Service Providers offered free connections, usually over dialup. Free-PC was one of multiple attempts to get consumers to watch ads in return for hardware. Netscape famously gave away browsers to sell server software, a strategy that backfired for a number of reasons, one of which was Microsoft's anti-competitive behavior with Internet Explorer. Stocks in VA Linux, a company with real hardware sales but ample "free" hype, rose from $30 to $320 on December 9, 1999, the first day of trading, but later fell to 54 cents in July 2002.

More recently, eBay has encountered major difficulty making Skype pay off; Sunrocket and other VoIP providers are either shuttered or weathering tough times. There are also many businesses that have been collateral damage in free scenarios, some of them illegal or otherwise of dubious ethical standing. Music companies that have been slow to respond to file-sharing with appealing alternatives are the most visible of these. Even so, it has been repeatedly proven that you can in fact "compete with free" and in fact usually win.