Monday, January 23, 2006

January 2006 Early Indications II: Eight Predictions

I've had some very thoughtful responses to the Macro Issues newsletter, and I'll bring those into an upcoming edition. Because January has already rolled around, however, it's time for some polishing of the crystal ball. I'll repeat the fact, true since the newsletter started in 1997, that I hold no direct financial positions in any of the companies mentioned.

1) The second half of the year will be stronger than the first half in the PC sector

Dell has been running uncharacteristically behind projections and targets, as has Intel. My guess (and it's nothing more than a guess) is that enterprise IT shops are holding off buying PCs until Microsoft ships Vista: why would you want to deploy thousands of boxes in February only to have to upgrade them less than a year later? Microsoft, meanwhile, is ramping up the machine for its most highly publicized and marketed product launch ever.

2) "Services" will become the corporate IT buzzword outside IT

Services-oriented architectures, or SOAs, have soared in recognition in the past 18 months, and vendors are responding: you can see the term on Oracle's and BEA's front web pages, and extensive marketing support is showing up at HP, IBM, and SAP. Two questions should be kept in mind: 1) As one senior architect at a Fortune 50 company told me, "If SOA is the answer, what was the question?" 2) I defy anyone who's touting SOA to name the architecture it's replacing.

3)Google will launch a breakthrough business outside web advertising

The stock price contains lots of speculation that the company will reinvent another market, and downward pressure on that price along with increasing competition will perhaps accelerate the entry into the data center, Internet telephony, network computer, or other adjoining space. To hedge my prediction, the breakthrough new application may still be in public beta as of December 31.

4) HDTV will have collateral effects

After at least two decades of being a commodity item eclipsed in allure and economic power by the PC, the television is returning to primacy as a driving economic force. (To be fair, HDTV is in some ways a hybrid of computing and video display if you consider how much processing power is required for smoothing algorithms, for example, or how important computer memory is for the base technology.) Cable TV coax, for example, can't support as many HD streams into a residence as fiber can. Demand for those streams will somehow benefit fiber-focused companies, like Verizon and SBC/AT&T. Similarly, demand for HD-caliber content will force the Blu-Ray and HD DVD camps to reconcile. Finally, demand for flat-panel HD displays is driving a rapid increase in price-performance relationships, favoring efficient companies like Samsung over rivals with less disciplined supply chains and slower new product development.

5) The relentless reinvention of business markets by the Internet and digitization will continue

Here's a top-of-mind list of businesses that have had their economics radically altered thus far:
-travel agents, hotels, and airlines
-record labels and music distribution
-computer programming
-dating and matchmaking
-computer and network hardware
-video rentals
-government services such as motor vehicle registration, unemployment compensation, or the mails
-electoral politics
-secondary markets like garage sales, auctions, antique dealers, classified ads, and flea markets

That's a lot of change in a decade.

Who might be next? Television is my best guess, given the presence of Apple (iPod video purchases), Microsoft, Google, Yahoo, Cisco (with its newly-purchased set-top box business), and AOL/Time Warner along with the RBOCs: that's a lot of intellectual and financial capital being focused on a mature industry that is becoming more digital every day. Automobile manufacturers and dealerships, health care, and education are further down the list of potential breakthroughs.

6) The quiet march of robot progress will continue

iRobot now has two consumer offerings, a vacuum cleaner and floor-mopper, to go with their four publicly announced military and commercial products; the company sold almost $100 million worth of products last year. Stanford and Carnegie Mellon both enjoyed spectacular success at the 2005 DARPA Grand Challenge: a year after every vehicle in the field failed, some literally crashing and burning, five driverless entries completed a 132-mile off-road path. Countless industrial tasks are accomplished robotically with products from companies including ABB, Epson, Fanuc, and Panasonic. The fact that much of this innovation happens away from public relations firms and tradeshows like CES means that it's hard to get an intuitive feel for what's happening below the radar.

7) Sensors and other location-awareness technologies will make the news for an unexpected consequence

In 12 years, the EZ Pass electronic toll collection system expanded beyond New York, New Jersey, and Pennsylvania to reach from Maine to Virginia and as far west as Illinois. Such systems can facilitate other objectives as well as increasing traffic flow: variable road pricing (as is the case in London and elsewhere), crime-solving, and payment tokens. RFID tags are used by horse breeders (and have been for roughly the past 25 years), wildlife biologists, and supply chain managers. Cell phones can be both bar code readers (in Japan and probably elsewhere) as well as beacons. Sensor communications are becoming standardized, as with the ZigBee protocol for building automation and other tasks. The bottom line is that a system designed to do one thing will be manipulated to do something markedly different, and the side effect will be newsworthy.

Cell phone providers, for example, know how fast traffic is moving because of how fast their subscribers change cells. Will they sell that information to newsradio stations whose helicopters can only cover one road at a time? RFID tags in passports can be read from a far enough distance that the design criteria were recently changed by the US immigration authorities to include a metallic shield. If sensors are embedded in humans for authentication and payment, as has been suggested, will muggers kidnap people rather than demand their wallets? Who has the authority to download OBD II sensor data from automobiles, which can record how fast a vehicle was moving along with other parameters? Can such data be subpoenaed in civil litigation? If drivers don't want governments tracking their movement, it's often harder to pay tolls with coins than use transponders - and even then, the toll booths frequently record license plate numbers to catch evaders. What are the actual costs and benefits of anonymity versus facilitating tracking?

8) The developing world will once again make headlines for innovation and not just cheaper production costs

Brazil is leading the world in some facets of cloning and alternative energy development. China is developing a state-backed Linux distribution. Korea leads the world in broadband deployment. The Microsoft Developers Network has 6.5 million people in India, which is second only to the U.S. What has been called the BRICK cluster - Brazil, Russia, India, China, and Korea - is evolving extremely rapidly, although the political instability of Russia is impeding its progress as investors back away. Look for a major announcement from one of the four remaining countries, potentially in biotech, optics and displays, or networking.

Wednesday, January 11, 2006

January 2006 Early Indications I: A Macro View

Before we get into the business of predicting what might happen in
technology-related areas in 2006, I wanted to step back and note six
macro-level factors that, if they break in a certain way, will make
discussions about Google vs. Microsoft, cable vs. DSL, Intel vs. AMD,
or Blu-Ray vs. HD DVD utterly irrelevant. The other factor here is
timing: it's impossible to know when a hurricane, epidemic, or
political uprising might hit, so these kinds of long-wave changes
don't fit neatly into a chronological prediction. Nevertheless, all of
them have the potential to rearrange the landscape of hundreds of
millions of individuals.

Of the six macro trend areas, three are political, two are natural,
and one straddles the line between the two.

-Two natural areas of potential disruption-

1) Climate change

Regardless of one's interpretations of various claims as to causation
and severity, evidence for the _existence_ of what's called "global
warming" mounts yearly. Foreseeing the _consequences_ is another
matter. How much will coastlines be altered by rising water levels
caused by melting polar ice? What will be the political and economic
consequences of newly exposed mineral resources in the Arctic?
Normally peaceful nations, including Canada and Denmark, are
contesting several previously ice-bound islands and surrounding areas
that could include such attractive resources as diamonds and oil; the
former country recently staged military exercises in the region to
bolster its presence.

Much was learned in the twentieth century about the interconnectedness
of ecosystems, but the scale of those connections seems to be
increasing as knowledge expands. Researchers at the Woods Hole
Oceanographic Institute have hypothesized dramatic shifts in what they
call the Atlantic Conveyor: a loop that begins with warm water flowing
north along the eastern U.S. coastline, powered by equatorial warmth
and related energy. After warming the Canadian Maritimes, the water
flows toward Europe, then south toward the equator. During this
stage, the cold, fresher water falls because it's heavier, further
helping fuel currents.

Shifting the balance of fresh versus salt water at different places in
the loop generates climate change, which changes what foods will grow
where and how much heat is needed for the resident populations.
(Migration patterns of butterflies, for example, are being found to be
much more dynamic than previously thought as they discover newly
hospitable habitats.) In the extreme case, currents could actually
flip directions, as they have in the distant past. The climatic
consequences of the Gulf stream's moving only slightly, or cooling by
a few degrees -- as a result of melting ice caps -- involve not only
hotter summers or fewer hard frosts in the winter (and a probable rise
in mosquito-borne disease) but also, paradoxically, colder
temperatures in parts of North America and/or Europe. And nobody knows yet if there's a connection between global warming
and all those hurricanes.

2) Avian flu

Nature is at base a system of checks and balances: growth and decay,
life and death, order and disorder all exist in dynamic tension. As
some forms of disease like bacterial infection or smallpox come under
attack from improved hygiene, medications, or new social practices,
new ones emerge. (It was fascinating to hear President Bush
supporting Intelligent Design in the same week he authorized a
relatively aggressive government response to a disease that doesn't
exist yet but will if a virus mutates in a certain way.)

No current adults in leadership positions have ever seen a pandemic.
The last one was in 1918, and had the nasty trait of attacking people
with the strongest immune systems in what is called a cytokine storm:
People's faces turned purple and they coughed blood as their lungs
were destroyed in 24 to 36 hours. Having thousands or tens of
thousands of prime-of-life adults would have unforeseeable
psychological and economic effects this time around.

Here's a back-of-the-envelope estimate of how bad an H5N1 pandemic
could be, courtesy of public-health expert Dr. Larry Brilliant via the
Strategic News Service:
First, assume that over the three-year period that pandemics usually
run their course, one-third of humanity contracted the disease (about
the same proportion as the 1918 flu and the same order of magnitude as
other flu pandemics). Then, assume that the death rate from H5N1 drops
from the currently reported 50% human fatality rate (it is almost 100%
fatal in chickens) reported today.

Assume that as a result of both better surveillance (so that we find
more mild cases, reducing the denominator of the case fatality rate,
which is number of deaths divided by number of cases) and the virus
becoming less virulent over time - as do most viruses as they pass
through the human population - the case fatality rate drops by
nine-tenths. That would reduce the case fatality from H5N1 to 5%. Even
then, we face a disaster of unimaginable proportions: if 33% of the
6.5 billion people in the world get infected, and 5% of them die, we
are looking at over 100 million deaths from the disease.
The economic consequences would be a massive extrapolation from what
we saw with SARS, which caused 44 deaths in Canada but paralyzed the
economy: imagine the world's airlines being grounded, for example.
Slowdowns in just-in-time logistics will quickly shut down
manufacturing lines that lack inventory buffers. Public places like
office buildings, arenas, and train stations will empty out. People
are already hoarding vaccines, but even anti-viral hand wipes could
become coveted items. The picture gets worse from there, if (and it's
a huge if) H5N1 mutates to spread by human-to-human contact.

-One area of natural and political overlap-

3) Unstable energy prices

The reasons for oil's being dramatically more expensive are of course
many and varied; they're also sometimes secret. Even visible records
are suspect: Shell downgraded its published statement of proven oil
and gas reserves five times in a twelve-month period. The lack of
transparency into the operations of key producers (OPEC nations), key
decision-makers (Vice President Cheney), and major markets (China)
means that tracing cause to effect will be effectively impossible,
particularly when catastrophic events (earthquakes, tsunamis,
hurricanes) disrupt matters further.

The Iraq war is of course a major factor in this instability; so is
Israel's current political situation. China's surge in urbanization
and manufacturing capacity is spurring demand, while, in the near
term, supply is unlikely to grow from either new discoveries of
current fuels or commercialization of new fuels. One exception may be
biofuels: Brazil's calorie-rich sugar cane converts to ethanol costing
about a third of what American grain-based ethanol does. Biodiesel,
made from used fryer grease and similar byproducts, can also be made
from soybeans, another major crop in Brazil.

But the rise of alternative fuels will not reduce oil's primacy any
time soon, and the imbalance between growth in consumption, speed of
depletion, and available reserves looks like it will widen before it
can stabilize. Add a climate shift (what if London used as much
heating fuel per capita as Stockholm?), a political disruption in
supply or distribution (whether from terrorists, taxing authorities,
or regime change), or a natural disaster, and oil prices could shock
the global economy since virtually every product and service folds
energy into the final price.

-Three long-wave political shifts-

4) The end of the bi-polar world

From the 18th century through most of the twentieth, prosperous
nations organized competing networks of far-away, less developed
territories. France had possessions everywhere from Louisiana to
Algeria to Vietnam, England's empire truly spanned the globe, and more
recently the U.S. used economic, military, and cultural incentives to
maintain if not an empire at least a sphere of influence from Korea,
Japan, and Taiwan to Canada to NATO.

Now, World War II fades into the past and less frequently dominates
policy debates. Differentials in birth rates create population
imbalance between religions and regions. Communications
simultaneously reinforces local cultures and connects disparate
peoples into a global cultural fabric. For these and other reasons,
the model of the big countries shaping smaller and poorer countries'
destinies is falling from favor. Arms deals can be had from the U.S.,
France - and China, with the wild card of the former Soviet states
selling off armaments for hard currency, no questions asked.
Intellectual capital comes less exclusively from the
Harvard-Sorbonne-Oxbridge axis given that China, India, and the former
Soviet states are both home-growing and temporarily exporting hundreds
of thousands of motivated and talented students.

For many years, conventional wisdom held that the U.S.-USSR two-camp
world, albeit with fatefully high stakes for live conflict, kept
smaller "rogue" states in line. The two superpowers held many
interests in common, and countries like Libya and North Korea, as well
as non-state actors, were held in check. Now, what some call the
"unipolar" world, with the U.S. as the sole superpower, works
differently. Europe is attempting to organize itself as a
countervailing force via the EU, Japan is moving out of its post-WW II
stance, and the "nuclear club" includes many relatively minor
countries who now carry potentially big sticks. China, meanwhile, is
modernizing in its distinctively Chinese way, becoming the world's
factory, extending some freedoms while curtailing others, and
reinventing itself at an unprecedented scale as millions of people
relocate every year.

There's no consensus understanding of the current world. Tom
Barnett's "core and gap" view probably has few fans in Europe and
fewer in Riyadh. The Bush administration's stance of unipolarity,
which both permits and necessitates unilaterality, has been fought
both within American politics and in Europe, never mind in the eastern
hemisphere. The simultaneous attack on and retreat from modernity,
meanwhile, joins religious fundamentalists from many faiths in
focusing on common or similar enemies, even as they differ in their
chosen path forward. Indeed, the single most important geopolitical
result of the fall of the Berlin wall may be the resurgence in the
number and power of non-state actors (such as clerics, media
personalities from Berlusconi to Murdoch to Ailes, and
non-governmental organizations like the Gates Foundation and
Greenpeace). Whatever their power, however, none of the emerging
entities can either countervail U.S. dominance or hold a cadre of
nation-states in loose alignment. The result is the instability that
we see today and a war fought not against a geopolitical entity but a
mode of political conflict.

5) Decreased faith in government and authority

The lack of faith in political institutions extends far beyond a
simple dislike or disapproval of a given politician's performance.
Across the globe, politics as an exercise is being viewed with less
trust and confidence than at any time in recent memory. George Bush's
approval rating, ever since New Orleans, has been less than 50%, a
stunning reversal for the apparently decisive winner of the 2004
election who at the time claimed a mandate. Even the process by which
that election was conducted, relying as it did on electronic voting
machines that lacked audit trails and hard copy but featured visibly
insecure code, is now widely distrusted.

Italy's Silvio Berlusconi has used his media holdings and government
powers to reinforce his position (in part by clamping down on
publications that satirize and criticize his alleged law-breaking),
but even with a hand-tailored legal code, a facellift, and a hair
transplant, Berlusconi trails his opponent in the upcoming April election.

Germany's Angela Merkel was hardly swept into office on a wave of
confidence and good feeling. After confusing gross and net income
twice in a single debate and later allegedly plagiarizing a Ronald
Reagan speech, her party limped into a first-place finish in the
election for Chancellor. After two months, her party (the Christian
Democratic Union/Christian Social Union, at 35.2% of the vote) and its
strongest challenger (the Social Democrats, with 34.2%) agreed to a coalition government.

Even England's Tony Blair, seemingly invulnerable to Tory opposition,
lost his first House of Commons vote in November. Much like George
Bush in the U.S., Blair faces public disapproval but has no credible
political opponent to contend with. History's grade on his handling
of the Iraq war is still incomplete, to say the least, but right now
voters seem ambivalent: when asked when he should act on his promise
to voluntarily leave government in the next several years, only 25% of
respondents hoped he would change his mind and stay on past the next
General Election.

In all four of the above-mentioned countries, public dissatisfaction
derives in part from a lack of confidence as old slogans and solutions
fail to address current reality. Economic uncertainty builds as jobs
and wages are being reoriented away from high-paying, often
unionized, positions toward part-time or otherwise lower-paying work.
An increasing number of jobs (and types of jobs) are being moved to
lower-wage nations, whether Mexico, Poland, India, or China.

6) Increasing signs of class conflict

Under the Bush presidency, the gap between rich and poor has
dramatically widened. The notion of a broad-based middle class,
serving as a buffer between the extremes and as a target for the
striving poor, can no longer be assumed. Even mainstream economists
like Mark Zandi at contend that the middle class is
splitting, unevenly, into those who are doing well and those who,
largely because of globalization, are struggling.

According to venture capitalist Stephen Rattner writing in Business
Week (8 August 2005),

"Every serious study shows that the U.S. income gap has become a
chasm. Over the past 30 years, the share of income going to the
highest-earning Americans has risen steadily to levels not seen since
shortly before the Great Depression.

JUST HOW DRAMATIC A SHIFT over the past three decades? Economists
Thomas Piketty and Emmanuel Saez calculated (using data from the
Internal Revenue Service, hardly a hotbed of partisanship) that the
share of income going to the top 1% of households nearly doubled, to
14.7% in 2002, up from a low of 7.7% in the early 1970s. By
comparison, the income share for the top 1% peaked at 19.6% in 1928
before beginning its long slide. What is particularly alarming is that
at every step up the ladder, the disparity has progressively widened.
Over the past 30 years, the share of income garnered by the top 10% of
Americans has grown by about a third; the share of the top 0.01% --
the 13,000 or so households with an average income of $10.8 million in
2002 -- has multiplied nearly four times."

Turning her focus away from the rich, Harvard Law School professor
Elizabeth Warren analyzes the rise in middle-class wages from a
different perspective: risk. Given that both spouses in a two-parent
family are often working full-time to meet recurring, fixed expenses
like day care, insurance premiums, mortgage, and taxes, (and not
discretionary items like food, travel, and clothing that can be
adjusted), there's no slack in the budget for time taken off to care
for sick kids or recuperating elders. Nor can the spouse working in
the home serve as a backup wage-earner in the case of layoff or
disability involving the main wage-earner. The notion of safety nets
has fallen from the center of public attention of late, but the fact
remains that there are complex moral, political, and economic
questions about caring for our fellow citizens that are not going

The Katrina disaster linked several of these themes into a complex
tragedy. Decisions to evacuate and/or shut down oil wells and
pipelines were made in close conjunction with energy companies.
Racial tension has been a facet of New Orleans life for well over a
century as French treatment of blacks (and intermarriage) starkly
differed from Confederate and then Reconstruction attitudes and
policies. Class tension, meanwhile, followed the pattern of many
tourist-driven economies: to cite but one example, the status, and
stature, of the poorly-paid police department remains fragile even
now. When natural disaster hit and was compounded by the consequences
of bad human decisions made over decades, the decay of civil order was
frightening and remains poorly understood.

Nor is class redefinition and its resulting tensions solely a North
American issue. The riots in France last year sprang from complex
sources, but religious affiliation, economics, and government's mild
response to astounding unemployment figures were part of the mix.
Similar tensions are less volatile but equally present across Europe,
where immigration policies are being hotly debated and often
redrafted. The class component of much of the violence in the Arab
world is also impossible to ignore as differences in education, social
mobility, and personal prospects (as in arranged marriages, for
example) mix with religious intolerance across much of Africa and
through Asia.

If a rising tide was formerly said (reportedly by everyone from
Herbert Hoover to John F. Kennedy) to lift all boats, what happens
when there are areas of the bay where the less fortunate stay stuck in
the mud while they can see better-off brethren differentially profit
from war, globalization, oil shortages, and other burdens widely
shared? As we contemplate what 2006 will bring, seeing the magnitude
and complexity of these kinds of long-term developments that could
become either urgent or inexorable forces in our lives can be a
useful, if perhaps overly sobering, exercise.

For further information:

Tuesday, January 03, 2006

December 2005 Early Indications: 2005 Predictions Revisited

(distributed 12/19/05)
A year ago this week I tried to highlight some areas of instability,
opportunity, and uncertainty that might be resolved in calendar 2005.
Reviewing this list, it’s striking how little some things change (the
DVD standards battle) and how much other industries (search in
particular) simply exploded.

I won’t march through the entire list but will instead highlight a few
entries with comments after a double asterisk.

A is for Apple, which has to address some big questions. Having
reinvented the mass-storage market by equipping the iPod with a great
interface and compelling legal content, the leadership must anticipate
the eventual margin erosion in the hand-held segment and decide how long
to ride the premium-price position in computational jewelry (i.e., what
used to be called PCs).
**Steve Jobs had a great ’05 by any measure, cannibalizing his own
markets with new, far superior products (the Nano) and getting new
services (video) into the market before most analysts predicted. Even
the one misstep, the iTunes cell phone, will be tied more to Motorola
than to Apple. Regarding the prediction, it may be that Apple doesn’t
need to worry about the desktop or laptop markets.

B is for business intelligence, the fancy name for data warehousing. For
information to enhance business outcomes, it has to fit more closely
into real processes. The MBA analyzing data cubes has far less leverage
than the people at the point of customer activity making better
decisions in the moment. That objective means that data analysis tools
will have to become more industry- and process-specific rather than
generic, and they can no longer be so detached from operational systems.
**Looking back, B should have been for blogging, which evolved faster
and delivered more mainstream impact than Cognos/SAS/Hyperion et al did.

D is for distributed development. The issue isn't really India per se,
because there will be new low-cost environments for certain kinds of
work as India develops inflation, a middle class, and/or heightened
political tensions with Pakistan. Managing distributed development is a
more general issue than merely signing up resources in India or Spain or
Estonia, and the tools for doing so are still generally immature.
**The other story here was weather: tsunamis, hurricanes, earthquakes,
and blizzards reinforced again how hard it is to manage infrastructure
and business processes on a global scale.

E is for energy, which remains a constraint for everything from
mobility, in the form of battery life, to data centers, in the form of
heat. Intel recently had to switch over to dual-core processors to
maintain its stream of new microprocessor introductions because of heat,
and the marketing strategy for Centrino (slower clock speed, better
battery life) doesn't immediately translate into a parallel pitch for
desktop and server chips that will no longer be positioned solely on speed.
**The other energy factor that came into play this year was of course
price volatility: running a cooler data center can repay in serious
dollars not spent on utility bills.

F is for fiber optics, which remain a wild card in the the quest for
widespread residential broadband access. Relatively speaking, Verizon is
taking an aggressive position with fiber to the premise (rather than the
node) in the Keller, Texas trial. Longer term, both capital and
regulatory uncertainty loom. Meanwhile, wireless broadband deploys far
faster and at lower cost, and it's completely possible that anyone who
spends billions of dollars digging up yards in 2005 could be aced out by
a wireless carrier within five years.
**Verizon and SBC/ATT continue to be caught in the regulatory conundrum
of being neither conventional voice services nor cable operators as they
try to enter the broadband sweepstakes. At the same time, one of the
potentially huge stories of the year, if proved true, is the rumor that
Google is preparing to deploy thousands of data centers (connected to
fiber they have quietly been buying) to deliver applications over the
network with low latency.

J is for jail. Sarbanes-Oxley section 409 is still being interpreted,
but some provisions for timely disclosure took effect in August. The
legislation uses the terms "real time" and "urgent" for these
disclosures, which will add to the CIO's already substantial compliance
burden - and provide tough penalties for failure. "Real time" for some
purposes is four days, but retrieving a given e-mail or category of
instant messages, for example, within that time is impossible for most
**Possibly in the manner of Y2K, this fear may have been overstated.

K is for killer application, or more properly the lack thereof. Intel
has suffered as both consumers and business users find it difficult to
justify new hardware purchases for such predominant tasks as e-mail, web
browsing, and spreadsheets. On mobile platforms, meanwhile, cultural
differences drive divergent adoption patterns of everything from mobile
messaging to cameraphones to geolocation. Personal digital media
management, in the form of iPods and TiVos, has sold well, but not all
that well. In a global market, it's worth reflecting on total TiVo
sales: 4.6 million for 2003, and probably less than 10 million total
worldwide as of mid-2004.
**Much to the concern of many in the PC and related industries, this
prediction came true, to the point where Dell had troubling results
despite having some of the best managerial execution in the world.

M is for management software. Given that headcount remains a large and,
thanks to health care costs, growing component of IT budgets, and given
that the complexity of the IT shop is still growing despite efforts to
rein it in, better tools for running the IT business are essential. Some
are in early deployment. Consider that front office, back office, sales
force, shopfloor, and field service all have been automated, but the IT
organization typically runs on spreadsheets rather than audit-able,
robust enterprise systems.
**Unfortunately, it’s hard to sense how this is playing: Mercury
Interactive, a leading company in IT governance software, is battling
against being delisted from the NASDAQ after its CEO, CFO, and general
counsel resigned amidst an investigation into financial criminality.

R is for RFID. Retailers already have the business case and many of the
business practices in place to exploit the consumer-products and
pharmaceutical tags; what will change dramatically are the behaviors and
expectations in such places as hospitals, unionized warehouses, and
courts. What are the rules for using tags (or automobile "black boxes")
as evidence? What are the privacy rights of an employee suspected of
theft or even of slacking? How will the black market adapt to the
presence of tagged Oxycontin in both legitimate and shadow supply chains?
**While the big questions are no closer to articulation, much less
resolution, the operational results appear to confirm the assertion that
retailers, if not manufacturers, can benefit: a study done out of the
University of Arkansas compared stores with RFID systems to stores
without them and found that the former had 16% fewer out-of-stock
events. Generally speaking, the industry average for stockouts is 8%, so
a 16% reduction takes the number down into the high 6s. Dollar savings
were not projected. (
(The other big R in 2005 was robotics, as four teams succeeded in
mastering DARPA's Grand Challenge a year after the whole field failed in
both mundane and spectular fashion.)

S is for search. Google's ambition and capability are both formidable:
their agreement with leading university libraries to digitize some of
their holdings parallels a less-visible effort at the Internet Archive
and will be a landmark in information access. Yahoo, Amazon, and
Microsoft, meanwhile, are devoting major investment and brainpower to
various categories of search challenges. Given the magnitude of
information volumes both at rest and in motion, traditional methods for
storing, finding, and manipulating data will have to be reinvented - and
more layers (in the form of geospatial, audio, and other aspects) are
still in the queue.
**The arms race in search is astonishing, as are stock valuations. The
big players are hiring talent across the world, and dispersing to do so:
Google is opening a lab in Pittsburgh to get access to more Carnegie
Mellon folks, while both Yahoo and Google are launching initiatives in
New York. Microsoft, meanwhile, finds itself in an uncharacteristically
defensive posture and has handed much of the responsibility for a
reinvention to an outsider, Ray Ozzie from Groove, who came on board
with the acquisition of the company he founded after leaving Lotus.

W is for Windows, still the world's most profitable software franchise.
Security remains a major question mark, as does the issue of platform
extension: how can Microsoft most successfully maintain look, feel, and
branding across PCs, cell phones, game consoles, TV set-top boxes, MP3
players, handhelds, and home entertainment centers? Where does extension
inhibit rather than enhance entry into new markets?
**Microsoft has confronted the security and reliability challenges
head-on as it prepares for Longhorn, now named Vista, to launch in late
’06. How well it has done so will shape the company’s future prospects.

Z is for zero latency, otherwise known as real time enterprise. Driven
by compliance requirements, customer requirements, and competitors,
often from unfamiliar sectors, businesses often confront "impossible"
performance requirements that can't be met simply by tweaking existing
processes and procedures. As with so many other technologies, the really
tough part of real time is behavioral and cultural rather than engineering.
**While IBM maintained its “On Demand” branding, the industry excitement
for real time as a performance ideal feels like it’s waning. Despite
what is or isn’t being said or written, however, the demands -- on
people, on management technique, on systems -- will continue to mount as
margins for error decrease.

November 2005 Early Indications II: The Disintermediation That Wasn't

(distributed 11/30)
It's hard to believe that it's almost 2006, and that it's been over a
decade since the notion of Internet disintermediation first received
widespread attention in Bill Gates' book, The Road Ahead. If you look
at travel agents who collected a lot of money for printing airline
tickets, the prophecy has come true.

Residential real estate was another field predicted to be toast. John
Baen and Randall S. Guttery predicted in 1997 that jobs would be lost to
automation, commissions would drop, and more sellers could sell
direct. The logic of the argument is strong, even in hindsight, but it
doesn't hold up. Instead of being pushed aside by the Internet, real
estate agents, individually and in powerful trade associations, have
been aggressive in their adoption of emerging technologies. Rather than
being disintermediated, the National Association of Realtors has become
the subject of Federal Trade Commission and Department of Justice
inquiries into price maintenance: U.S. house sellers generally pay a 6%
commission, while in the U.K., the figure is only 2%.

What happened that the prediction could be so far off?

The picture is not unambiguously successful. Real estate agents in the
U.S. enjoyed a year of extremely high market activity in 2004, but
average commission income went down, in part because average selling
prices were accompanied by a drop in the average commission to 5.1%, and
in part because the barrier to entry for the field is low enough that
lots of new aspiring agents got their licenses. Still, this largely
means that the field is a victim of its own success.

1) Real estate is a relationship business
Whether he or she is hunting for scarce properties in a hot market or
scarce buyers in a cool one, good real estate agents embed themselves in
deep social networks. The trust required for a buyer to make what is
typically the biggest purchase of his life does not translate to a
browser-based form. As recent house sellers, we found our buyer through
a real estate agent who had been working with him as a buyer's broker
for nearly a year. Could a website, however thorough, have broken that
trust if we had tried to sell the property ourselves?

2) Houses aren't plane tickets
To the extent that house purchases are deeply personal and given that
every buyer is different, the matching of buyer to property requires
both architectural and psychological understanding, patience, and some
luck. Real estate agents spend a lot of time behind the scenes learning
the market, tracking trends, and generally becoming informed as to what
combinations of features will match up best with a given buyer.

3) Control over information confers power
A real estate transaction involves multiple layers of information:
comparable sales, future uses for nearby vacant land, whether the
neighborhood kids are nice and the schools good, what kind of builder
put up the structure, etc. Little of this exists in standardized
databases, and it's both hard and expensive to generate in a channel
outside traditional real estate firms. Where data does exist in
structured form, access both to add and to view important kinds of
information is tightly controlled.

4) Organization is power
The National Association of Realtors is large, well-funded, and
effective in influencing legislation. Many attempts to create
alternative business models, involving less than full service but more
than For Sale By Owner behavior, have been literally or effectively
outlawed in certain states. No comparable organization exists for
travel agents, for example.

5) Real estate has embraced emerging technologies
I can recall seeing the iPix 3-D photographic demo at a trade show in
the late 1990s; now flythroughs, often sophisticated, are a staple of
real estate websites. In last Monday's Boston Globe (November 28), a
local agent discussed how a new tool integrates access to listings,
personal contact management, and other tools in a PDA. Some brokers
have taken to using blogs as another tool to build relationships, confer
authority, and generally keep their names in play. Even so, the most
powerful tool for most agents remains the mobile phone, a device and set
of capabilities that the Web has a hard time replacing.

6) Home-buying is a complex transaction
As my Penn State colleague Steve Sawyer and his co-authors have found,
it's naive to speak of disintermediation, singular, in the process of
purchasing a house or condominium. The Web has clearly changed the
process, but there are too many moving parts in the transaction for it
to be conducted completely on line. Some business-to-business aspects
are moving toward standards like XML to smooth workflows between, say,
mortgage lenders and title insurers, but conceiving of the process as
analogous to even car-buying ignores the coordination and other roles
played by a trusted party in a complicated, emotional, and large
purchase. As Sawyer et al state,

"The analytic simplicity of categorizing complex transactions as either
intermediated or not belies the web of connections and actions that make
selling and buying real estate a multi-state and multi-step process."

It's good counsel to observe as we analyze other predictions in the future.

John Baen and Randall Guttery, "The Coming Downsizing of Real Estate,"
Journal of Real Estate Portfolio Management 3 (1)

Kimberly Blanton, "Realtors get their hands on technology," Boston
Globe, November 28, 2005

Waleed Muhanna, The impact of e-commerce on the real estate industry:
Baen and Guttery revisted," Journal of Real Estate Portfolio Management
8 (2)

Steve Sawyer, Rolf Wigand, and Kevin Crowston, "Redefining Access: Uses
and Roles of Information and Communication Technology in the U.S.
Residential Real Estate Industry from 1995-2005" Journal of Information
Technology (20) 4