Wednesday, December 01, 2004

November newsletter: Ten Years On

Last month, Silicon Valley's Churchill Club held its annual Top Ten Technology Trends dinner, featuring VCs John Doerr from Kleiner Perkins, Esther Dyson, Roger McNamee from Silver Lake Partners & Integral Capital Partners, and Joe Schoendorf from Accel. Doerr started things off by positing that the internet was in fact underhyped. The browser is over ten years old and showing its age, but there's a burst of innovation in such areas as search, localization and mapping, and messaging. What he called the NextWeb (or Web 2.0 in others' nomenclature) has enormous potential. For example, Google recently bought Keyhole, the spectacular mapping site that does truly breathtaking things with satellite images; here's a free trial version: There's a lot to think about if you combine Google's search acumen with this dazzling visual capability.

History suggests Doerr is right. Carlota Perez, an economic historian at the University of Sussex, studied the persistent patterns underlying five techo-economic eras: the industrial revolution; steam and railways; steel, electricity, and heavy engineering; oil, cars, and mass production; and information and communications technologies. Each of these sometimes overlapping periods has followed a rough sequence of four phases: a new technology appears in the market, often disrupting existing arrangements. There's a period of rapid, often silly adoption from which a bubble emerges. After the speculative excesses burn off, the economic potential of the new technology is explored and exploited, until such time as the market matures and the potential is exhausted, often by a new technology paradigm. Speaking of "paradigm shifts," Perez's work might be seen as a close, and useful, parallel to Thomas Kuhn's classic The Structure of Scientific Revolutions.

Doerr is also probably right because we're still too close to the original event to have much perspective. Most of us can still remember seeing our first website or sending our first e-mail, and much of the first wave of any innovation typically automates existing practices: early cars were horseless horse carriages, television initially broadcast actors reading radio scripts, and oil from the Pennsylvania boom was first used for lighting more than locomotion. It's no surprise that the 1990s Internet accelerated existing processes of finding things: travel-related information, materials specifications, and undifferentiated goods like books or stocks. Now, technology promises to help people change many other activities. Compare how far we've come in a decade to the half-century it took for the automobile to reshape America's cities after the passage of the Federal-Aid Highway Act of 1952 that initiated the Interstates that both partitioned the inner cities of the North and created suburbs abound every major city.

We are now living through our own variety of unexpected consequences, including whole new processes invented in the past ten years that could not have occurred at any prior historical moment. Here's a short list:

*New economics of production and distribution
Linux and other forms of open-source software could not have been developed and tested with postage rather than electronic communication. Hedge funds and other hair-trigger financial arrangements exploited instant messaging and cheap computation; some have suggested the first chapter of this story is the invention of the spreadsheet about twenty years ago. Online movement of digital music (and soon video) is forcing Hollywood to reinvent its core business model and trading practices. The migration from proprietary to open networks and protocols is forcing some of the world's oldest and most visible companies - AT&T for starters - to completely reinvent their cost structure, go-to-market position, and customer set.

But as an excellent survey in the November 13 Economist illustrates, perhaps the most powerful economic upheaval caused by our technology is in the globalization of white-collar work. Detroit and Pittsburgh long ago lost their primacy as the world's factories; heavy industry has been migrating offshore for decades. What's shocking now is how fast such skilled positions as call-center troubleshooter, radiologist, and R&D engineer are moving to India, China, and the former Soviet Union. As with Linux, this trend would be severely inhibited if the Internet had not fueled education, communications, and aspirations in the developing world. The article points out that Toyota must allow between 25 and 37 days for an engine to move from Nagoya to Chicago, but communication of white-collar "products" faces very different and smaller uncertainties. For example, if a manager includes breaks for Thanksgiving, Christmas, and New Year's in a 12-week project plan, when are the holidays in India, Canada, or China during that same time span? If code is being written, how can the U.S. customer be assured that the offshore test setup is identical to the deployment environment?

There are some who think that this speed factor will accelerate the globalization of work, and indeed, a new report from a bipartisan Congressional commission, to be released in January, estimates the U.S. 2004 job loss at slightly over 400,000 - twice the estimate of the national Chamber of Commerce. While any estimates of job migration will be subject to wide variation in interpretation and credibility, 400,000 is nearly a quarter of the 1.8 million new jobs thought to be created in the same period, a number big enough to make a difference. Economists are busy fighting over whether migration of work to low-cost producers ultimately creates more and better new jobs higher up the stack in the country that lost the jobs, but nobody has conclusive results. A number of facts are beyond dispute: 1) workers are not immediately fungible (a call-center operator in Omaha typically can't answer a help-wanted ad in Sacramento for oncology nurses); 2) the process of job migration and invention takes time and ripples throughout an economy in unpredictable ways: education, health care, housing, and numerous other areas feel the impact; 3) low-cost producers face inflationary pressures (15-17% annually for wages at Wipro and Infosys, for example) and have limited barriers to erect against subsequent global competition. All in all, there's a lot of disruption still ahead of us.

Finally, as the Economist survey rightly insists, even though you can use one to do the other, there are substantial differences between sending work and/or jobs overseas (offshoring), and hiring someone else to do them (outsourcing). For example, Steven Bigari is a McDonald’s franchisee who used outsourcing of a business process - order-taking at the drive-through window - to increase the efficiency of his 12 McDonald's locations: drive-through order time dropped by 30 seconds to a little more than one-minute per transaction, which beats the chain's average of two-minutes thirty six seconds. Drivers are actually talking to a call center in Colorado Springs rather than to an employee at the restaurant, which are located in several states including Colorado. Doing so has helped increase the number of cars his drive-throughs handle by 15%, from 226 cars per hour to 260 cars. Other franchisees are buying the service from him as well.

The distributed, firewalled nature of radical Islamic cells makes them difficult to monitor and infiltrate. Ad-hoc modes of coordination, using principles similar to those underlying packet-based networks, prevent a simple quest to kill off the head so the body will die. What the defense analyst John Robb calls "global guerrillas" are also students of network theory in their target selection, particularly in regard to social networks (especially foreign infrastructure-support workers), the power of publicity, and oil pipeline topologies. It is no surprise that Gulf War II is behaving very differently from the first such conflict, if only because of the technologies involved.

From the U.S. perspective, re-orienting the armed services both to fight non-nation-state actors (albeit highly coordinated ones) and to fight so-called network-centric warfare (NCW) against more conventional enemies has been difficult. The very fact that NCW cannot be defined succinctly or consistently starts a long list of issues; other factors include the "revolving door" between the Pentagon and its suppliers that creates habits that are tough to break, and the hardened career paths that culminate in the command of very large and not terrifically mobile fighting assets. Military prestige continues to collect near the likes of aircraft carriers rather than squadrons of drones or software agents.

The iPod as a form factor is changing how people hear music, books, and other material; I'd probably rate it the most important tech development of the century so far. The mini-movies at BMW and Amazon, or the non-studio breakthroughs like 405 or Homestar Runner, give us a taste of what might come next, but it's hard to see the endgame in these early developments that have yet to truly unseat TV from its prime position. Many people predict photography will be the next "killer application" for the Internet, and Kodak's sad fortunes already testify to the technology displacement that's underway.

The daily newspaper is under heavy, multi-pronged attack: job seekers migrate to Monster, sports fans to ESPN and CNN/SI, stock-pickers to Yahoo! or any of a dozen other sites, car-researchers to Edmunds, and hard-news addicts to either serious outlets like the New York Times or BBC or to highly focused weblogs. Hobbyists that get only a nod from the dailies (gardeners, cooks, chess players, classical music enthusiasts) can get a firehose of information directed at any particular interest. Personal ads are similarly moving to consolidated Internet operators like, Yahoo, and e-Harmony. Where does that leave the mid-market daily paper? The fact that so many print media companies have been caught lying about circulation is no accident: many are caught in a race to see who will leave first, a critical mass of advertisers or readers.

Here's another reminder of how early we are in the Internet's lifecycle. In his book The Rise of the Novel, Ian Watt shows how the narrative form we now call the novel arose only after cheap printing presses and generalized literacy had made broad advances in a nascent middle class. Before Gutenberg, oral traditions gave the West epics and the Bible; it was impossible for authors to get an audience without the literal wrist-power of the clergy. Thinking in century-long cycles, what kinds of literacy and literature will we or our progeny invent to stand alongside the 30-second TV spot, the two-minute-thirty-second AM radio single, or even the sonnet or the epic?

*New forms of social interaction
Flash mobs, whether on line or connected by mobile phones, rely on the many-to-many capabilities that pen and paper and wireline telephony cannot mimic. Community, a word I've always distrusted in the Internet context, is in fact emerging as people meet and learn about each other online, to the point where a strong desire for physical meetings is not uncommon. Fark, a satirical site featuring news and user-driven commentary, has regular meet-ups in cities across the US and often Europe. Fine Homebuilding, a magazine aimed at high-end builders and architects, has a superb web operation in which tradespeople swap tips and approaches; earlier this summer 70 people, many of them physical strangers, met in person for a lobster cookout in Jamestown, Rhode Island. Webloggers frequently convene, and document the convocation, when physical schedules overlap.

Online interactions don't merely automate existing traffic. Think of how the cc: field is used and abused in corporate e-mail, then imagine trying to generate and distribute that many physical memos. Or as the ever-astute Clay Shirky argues, while it's common to think of flaming in online communities as a bug in the system, he says instead that such behavior is an innate part of the architecture, albeit an unexpected and not particularly pleasant one. We as an industry (broadly defined) are still learning how software behaves in conjunction with both particular users and groups. Massively multiplayer games, or worlds, are examples of environments that were inconceivable only a few years ago, and that do not automate any known pattern of interaction. The same can be said for eBay auctions, for that matter.

Clearly a lot of the utopians' hopes for the Internet to enrich their lives and their politics are silly, or worse. At the same time, webloggers both as news reporters and as fact-checkers (in a strong parallel to the open-source development model) had a marked impact on the recent election. Regarding news reporting, it was a dismal performance, one not approximated by the tired old media that waited for verification from real rather than phantom and/or wish-fulfilling sources. Dan Gillmor's We the Media (a book about bloggers as news sources) may be 60, 70, or 80% wrong - but it would be folly not to watch the trends he's describing to see what happens with regard to the parts he got right.

In a quarter-to-quarter business timescape, it's often difficult to assess these sorts of long-wave transitions. That is, unless there's a spike in some metric of usage, it's hard to realize when we're in the midst of change that will take decades to play out. The market for prediction remains more robust than that for assessment. Exercises in reflection are valuable, but the first one that comes to mind - James Gleick's What Just Happened - was disappointing. The alternative, for the moment, is to suspend consciousness long enough to remember what the world looked like before Amazon, before Google, before AOL - and try to make sense of where the road could lead from here.

*Carlota Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (ISBN: 1843763311)
*Economist survey of outsourcing:
*2004 offshore job losses: Kimberly Blanton, "Offshoring accelerating," Boston Globe, November 15, 2004
*McDonalds process outsourcing: New York Times, July 18, 2004 and
*For more on outsourcing, see also Tom Malone's book, The Future of Work, which may be more accurately called "the future of organization structures") and
*John Robb:
*Clay Shirky: