Friday, May 27, 2005

May 2005 Early Indications I: O Brother, Where Art Thou?

(shipped 5/16)

Issues of electronic identity and mobility have recently been playing out in quiet but important ways. Each of three instances from last week's news is a classic case of social or economic problems being tangled up with a technology challenge. To see only one side of the question is to create the possibility of unintended consequences, allow hidden agendas into play, and generally confuse the allocation of sometimes-scarce resources. The emergence of location-sensitive services has occurred in sometimes unpredictable ways: rather than driving by the mall and getting an ad on my cell phone or satellite radio telling me about the sale at Penny's (to quote Airplane!), I and many others have much more pressing concerns about being identified and found - on our terms rather than someone else's.

-Google Buys Dodgeball
Dodgeball is a social networking service built - literally - by two guys, possibly in a garage. It combines mapping and location-awareness with connections to friends and friends-of-friends. Right now it has achieved its greatest traction in New York city, where people can find each other and meet up with help from the software that runs on cell phones. Last week Google announced that it had purchased the company for an undisclosed sum.

The connections to Google's expanding portfolio are fascinating to contemplate. The more I use Google Maps, toggling between a map location and a satellite photo or seamlessly dragging a map into a viewable window, the more impressed I am. It's a useful exercise to compare Mapquest and Google Maps, given that the underlying map data comes from the same source (NAVTEQ): the implementations have significant differences. Dodgeball also could connect with the Orkut social networking work, the Hello and Picasa photo sharing tools, and of course Google Local.

Viewed in isolation, the Dodgeball service raises the revenue questions familiar to watchers of Friendster et al: who will pay for what, and who collects, by what mechanism? But in the context of the Google suite, Dodgeball becomes a feature rather than a product, and those revenue concerns vaporize, particularly in light of the massive runup in online ad spending that's enriching both Yahoo and Google.

-Real ID Becomes Law
Buried in a Senate appropriations bill devoted to funding the war in Afghanistan, the Real ID provision mandates that states adhere to a federal standard for issuing drivers' licenses, effectively creating a national ID card. According to F. James Sensenbrenner, the Republican Chair of the House Judiciary Committee and the bill's author, "American citizens have the right to know who is in their country, that people are who they say they are, and that the name on the driver's license is the real holder's name, not some alias." Opponents of the bill - which numbered 600 - included states, pro-immigration groups, and privacy watchdogs. Encapsulating the Real ID language deep in the appropriations bill prevented consideration of the proposal on its own merits, a fact that both Republican and Democratic Senators bemoaned.

The Smart Card Alliance announced its support for the measure, which will cost an estimated $100 million to $750 million to implement. Expect other technology lobbies to follow; Oracle, for one, has been active in the debate for some time. That cost will be paid by the states, which are now in the position of having to make their licenses "machine readable" without any further guidance. The Departments of Homeland Security and Transportation will set standards for deployment; states that opt out will have their citizens kept off airplanes and out of Federal buildings.

More chillingly, as Bruce Schneier points out, nobody can use post office boxes on their license - even judges and undercover police officers. Illegal aliens, or "undocumented workers," will be forbidden from holding driver's licenses, which in purely statistical terms will result in more uninsured motorists and higher insurance premiums. States will be required to retain the documentation (such as a birth certificate) on the basis of which they issue a given license, in sharable digital form, for years afterward, increasing the risk of identity theft still further. As Schneier points out, a national ID requires a national database, and the abuses of the database, not the card, are the main cause for concern. Substantial breaches have already occurred at current leaders in identity management: credit card companies, state DMVs, health authorities. With more agencies connected into a de facto national identity database, the scale of risk magnifies. But Congressional leadership decided that a debate over the costs and benefits of such a system was not as important as preventing Latinos from driving to work. Expect those 600 groups of opponents to fight this battle further.

-The Breakdown of 911
After a series of implementations beginning in 1968, Americans on wireline voice connections could reliably dial the same three-digit emergency number anywhere in the country. As the Bell System of the twentieth century fades farther and farther from view, the presumption of 911 reliability declines proportionately with the old business model even as demand increases: New York handles about 30,000 calls a day to 911. The problem comes in two variants.

First, a number of Voice over IP customers with life-threatening - and as it turned out, life-ending - emergencies could only reach a recording at Vonage saying to call 911 from another phone. The Texas Attorney General is raising the question after a 911 call failed during a home invasion in Houston. A baby's death in Florida is being blamed on a Vonage 911 failure. According to the Wall Street Journal, "In a letter to Florida's Attorney General, [the mother] said the Vonage customer-service representative laughed when she told her that Julia had died. 'She laughed and stated that they were unable to revive a baby'. . . ."

For their part, Vonage includes bold-print instructions for manual 911 mapping during the sign-up process, but it's been estimated that up to a quarter of the U.S. population is functionally illiterate. One feature of VoIP is its portability: plug the phone into an RJ45 jack anywhere and receive calls at a virtual area code of the customer's choice. Navigating firewalls, dynamic IP addresses, wireless connections, and frequent network outages taxes anyone but the most technically adept Internet user. Children are also a key 911 constituency. Taken collectively, these overlapping populations raise dozens of tricky questions. At the infrastructure level, the FCC and other agencies face the substantial challenge of determining the fairest, safest set of technical interconnection requirements incumbent on the Regional Bells and VoIP carriers.

From the Bell perspective, 911 obviously costs money to implement and maintain, and declining wireline revenues translate to declining 911 funds. Connecting 911 to the Internet in a reliable, secure manner is nontrivial - network attacks have used modems to target the service in the past - and until contractual arrangements are finalized there is reluctance to subsidize the same firms that present themselves as full wireline replacements.

911 isn't just a VoIP problem either: cellular users represent about a third of emergency callers, but math and economics conspire to make finding them difficult or impossible. In rural areas, cell towers often follow roads, so attempting to triangulate from three points in a straight line can limit precision. States have raided 911 tax revenues for budget relief. According to the National Emergency Number Association, quoted in the Wall Street Journal, "sixteen states, including New Jersey, Arizona and Ohio, have upgraded less than 10% of their counties. Six of those states haven't finished a single county."

It's turning out that the phone is a major platform in the identity debate. Number portability was an unexpectedly popular mandate a few years ago, and the fastest technology adoption in history was a phone feature: 55 million people signed up in a matter of months for a service - the Federal Do Not Call registry - that didn't exist when it was announced. That's even faster than the previous champ, Netscape Navigator's zooming to 38 million users in 18 months. Given the global nature of some of these questions, not to mention numerous issues with ICANN and DNS, the discussions and solutions will only get more complicated. As the examples illustrate, getting social arrangements to keep pace with technology innovation is if anything more difficult than the innovation itself.

Tuesday, May 03, 2005

April Early Indications II: My Way

Until further notice, I'll be posting at the Guidewire Group site (I'm on their advisory board). The posts will be archived here, however.

April 2005 Early Indications II: My Way

One of the great but difficult thinkers of the twentieth century, the economist and satirist Thorstein Veblen, wrestled with people's interconnected relationships both to what Marx named the means of production and to the consumption of mass produced goods. Veblen attributed a nobility to work that he called the "instinct of workmanship": man the maker "has a sense of the merit of serviceability or efficiency and of the demerit of futility, waste, or incapacity." By contrast, what he memorably named "conspicuous consumption" was "ceremonial" in that it sorted people by reputation, the basis of an ultimately unwinnable competition.

By mentioning Veblen I raise an unanswerable question. The people who buy mass-produced stuff, often called "consumers," want in some deep-rooted way to shape their environment beyond just piling up purchased goods. How much people want to stand out as unique, and how much they want to create something tangible, is of course impossible to differentiate or quantify, and of course sometimes an artifact embodies both consumption (or conspicuousness) and workmanship. But the current business landscape provides too many examples for this to be a fad: there's something very potent afoot in the rise of personalization and customization.

-Nike's ID ( mass-customization site has been up for a long time now. Back in 2000, an MIT grad student wanted his custom label to read "sweatshop," and Nike's refusal turned into a PR bonanza for both the grad student and the site itself. I don't know when it was most recently upgraded, but the current range of product and color options is truly dazzling: the Flash visualization tool is a lot of fun, to the point where designing your own stuff can get addictive. The price points have come down too: you can get a customized bike messenger bag for $50 or a watch for $85, while shoes seem to sell for $10 over retail.

There's a lot of cleverness embedded in the site. The color palettes, for example, are constructed such that it's truly hard to get two adjoining colors to clash. In some shoes, you can order two different sizes - 8 right and 8 1/2 left, for example - at no extra cost. The number of potential configurations is huge, but the volume is sufficiently small to justify the cost with customer "delight" - it's clearly an opportunity to surpass expectations.

Nike in turn plays directly to Veblen: university sports teams and elite athletes frequently get shoes in custom color schemes. It used to be a mark of distinction, or perhaps what Thorstein would call "invidious [unfair] comparison," to have shoes that aren't available in stores. Now, anyone can just do it - and not only with youth-oriented brands either: for the same $10 premium, you can design your own L.L. Bean canvas tote.

-One of the many reasons for Japanese automakers' success in the U.S. relates to their conscious courtship not of the NASCAR audience (which with few exceptions has been offered unmemorable racing-related products to buy by the American Big Three) but of the street-racing subculture central to "The Fast and the Furious." Honda, Mitsubishi, and Subaru have sold inexpensive cars that have serious upgrade and customization potential, and while some offerings such as the Dodge Neon SRT have come from U.S. badges, they're clearly late to the game. The difference between car as finished artifact and car as a platform for creativity was grasped first by some astute observers of Asian-American teenagers.

-Rupert Murdoch recently told the U.S. newspaper industry convention that paper news is in danger missing the key young adult demographic: circulation numbers are off, so badly that many big papers have been caught padding them to maintain ad revenue. TV news is also in decline: viewership is off by a third since 1993. In contrast, the most comparable online sites are either highly opinionated and interactive, or else highly selectable: Yahoo and Google News are growing far faster than any mainstream online news operation.

-Keeping with the TV theme, TiVo may have made it out of the woods with the Comcast deal. The future of TV ad revenues is being reshaped not by the remote control, which was frequently used to skip advertising, but by an automated device that does the same thing. Broadcasters are accustomed to control over the viewing experience: even mighty Microsoft has its logo disappear at bootup, as do cellular carriers and handset makers, so people can display any pictures or colors they choose on their computer and mobile phone screens. The networks, meanwhile, are fighting time-shifting and time-compression even as they find new ways to insert logos, promotional announcements, and other reminders of whose interface we're watching. Viewer annoyance with Jim Nance during the NCAA basketball tournament reached new highs, for example. By contrast, the cellular industry has supported customization and is profiting: U.S. ringtone sales were $850 million last year, double the 2003 total.

-One of the most powerful trends in electronic gaming is the creation and maintenance of virtual worlds. SimCity originally went nowhere among distributors because there was no winning and losing. Now, there is a cottage industry of Sims furnishers, not to mention players: in a hot industry, the Sims 2 was 2004's top-selling PC title. In racing games, players often configure their own cars. The examples go on from there.

-Burger King has had over 30 ad slogans, and the chain recently adopted the second, most memorable one: "Have it your way." Returning to that message was part of a turnaround that took average annual franchise sales from $970,000 to $1.3 million.

-At the top of the digital camera mass markets are "prosumer" models that mimic the functionality of the top 35mm film cameras. Canon's Digital Rebel was the first to market at the $1,000 price point, and it has sold 1.2 million units; Nikon's D70, released slightly later, sold over a million units between March 2003 and February 2005. These single-lens reflex cameras allow the photographer to compose the picture based on what the lens "sees," and, significantly for our discussion, to interchange lenses. These cameras also support file formats that better facilitate complex manipulation software like Adobe Photoshop. The range of possibilities is a long way from taking film to the neighborhood drugstore for processing.

-The music industry has yet to adjust to a model in which listeners choose what they play and in what order, as opposed to embracing the album or CD as the unit of consumption. Playlists are a textbook example of user customization, and unlike the old Uplister business, which only published playlists, Apple has integrated playlist publishing into the iTunes operation.

-Under the radar, Creative Memories has become a substantial business. Never heard of it? The Minnesota-based company began in 1987 as a spinoff of a photo album-manufacturing company and now uses 90,000 "consultants" to help people build personalized scrapbooks. 2004 sales were roughly $425 million; for comparison in the direct-sales industry, the Longaberger basket company made $1 billion in 2000, at which time it employed 8,000 people - a figure cut in half since then as demand fell with the economic slowdown.

-Not-so-random facts: Do-it-yourself (DIY) has helped drive Home Depot and Lowes to strong, sustained growth. As we discussed in February, O'Reilly Media has tapped a nerve with MAKE magazine, aimed at people "who don't mind voiding the warranty." Home entertainment digitization is being led by hobbyists building PCs to serve as music and video servers. One of the most popular campus and young adult activities is reported to be knitting; celebrity knitters include Julia Roberts and Cameron Diaz.

What does this batch of widely-ranging examples suggest? Companies that fail to understand and market to the customization mentality will face an uphill climb: General Motors and Ford, the paragons of mass production, are in deep financial trouble. Toyota and Honda serve more niches more profitably and are thriving. Subway, where each sandwich is made to order, has severely dented McDonalds' industrial model. Dell's dominance of the PC market begins with customization. Financial services companies that rely on brokers and brokers' commission structures like Merrill Lynch have had to respond to the Schwabs of the world - but now that firm is fighting a two-front battle against lower-cost low-service brokerages and established firms like Fidelity that provide a range of interaction options.

As I noted at the outset, it's difficult but important to separate and identify a number of forces. Daniel Bell identified "The Coming of Post-Industrial Society" thirty years ago, but it took the Internet for us to feel what it's like to transcend factories the way factories had trumped farming roughly a century before Bell. As information about stuff becomes more valuable than stuff, the activities of creation and individualization take on a new shape in both tangible and intangible realms. First, in an economy largely devoted to non-essentials there exists some [essential?] desire to make meaningful stuff, not just ideas and decisions. Secondly, we can see a broad-based quest to differentiate oneself by differentiating one's stuff. Finally, there's a sense of entitlement, related to the "affordable luxury" trend embodied by Starbucks, itself a primo customizer: I want the best (of something) made for me because I'm worth it.

The digital world both contributes to the desire for and enables the fulfillment of customization, but, returning to the theme of last month's "Being Analog," we still have a lot to learn about the boundaries, permeable and otherwise, between the worlds of ether and of earth and its offspring.