Wednesday, October 24, 2007

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.

Sunday, October 21, 2007

Early Indications October 2007 issue 1: 10th Anniversary Breakthroughs

In October 1997, the Ernst & Young Center for Business Innovation in Cambridge, Mass had just hosted its first meeting of a corporate consortium investigating emerging directions in e-commerce. Since that time, the newsletter that initially was called "Networked Commerce Update" and then "Early Indications" has appeared monthly. It has attempted to spot trends, situate developments in broader contexts, and share some of my excitement and occasional dismay over the state of information technology and the many uses thereof.

This month, we'll look at ten developments that, while feeling routine today, still lay in the future only ten years ago. We'll also review ten can't-miss technology stories that somehow went bad. Next month, look for a list of ten trends for the next ten years.

First of all, however, it's important to thank some of the many people who have helped make this ten-year run possible. Jamie Taylor, since before issue 1, and John Parkinson since soon thereafter have served as my go-to technical tutors. Christina Winquist and Dan Stevens from Capgemini, along with the ever-helpful John Parkinson, helped fill in the gaps in my archive as I reread the entire run this summer. My former assistant Lesley Livingstone helped assemble an earlier archive and kept the issues of that era carefully posted; Heather Weikel, my current assistant, is doing those jobs now. My Capgemini research colleagues, particularly Tim Simcoe (now a professor at the University of Toronto), Geoff Cohen, and Karina Funk, guest-wrote columns, tracked down obscure but valuable facts, and saved me from errors of many sorts. Andy Mulholland, Lanny Cohen, Stew Bloom, and John Parkinson delivered executive air cover, market observations, and sage advice. Finally, Lawrence Baxter has been the most visible of a very small number of readers who have been on the list from issue 1, but thanks go, in the end, to the many readers around the world who have found the newsletter useful, told their colleagues, and kept me honest.

And now to the list: Ten breakthroughs that have become mainstream since 1997, in no implied order, and not of equal magnitude.

1) Distributed infrastructure
The power of the personal computer and its associated hardware has given millions of individuals and small businesses the ability to perform tasks that not long ago required technical skills and expensive capital goods. The list of newly technically sophisticated establishments is getting longer every year. Initially, compact disks could be broken apart and recombined, much like mix tapes but at higher quality, so CD pressing plants were supplemented: some record chains in 2001 estimated they sold one recordable blank CD for every four music titles. At the same time, prices for audio and video production facilities are now falling from hundreds of thousands of dollars into the nearly free category: last week I bought Apple's iLife software, which includes a reasonably powerful video editing and DVD authoring platform, for $39 at academic discount. Millions of YouTube videos are being made outside a/v production houses. Whether with travel agencies with their formerly prized ticket printers, recording studios, photo labs, or printing of various kinds, the capital base is becoming lighter and cheaper. Capabilities are being distributed at the edge of the network rather than consolidating as they used to. In short, if someone wants to make a demo (or production) music disk, produce a TV commercial (Heinz recently asked for exactly this, paying over $50,000 to a context winner), manipulate a color image, print a book, broadcast an editorial, print a boarding pass, or create an animated short, he or she can likely find an inexpensive desktop production environment.

2) Offshoring
In 1997, the Year 2000 bug was beginning to be addressed. As volumes of code rewrites climbed, several firms discovered the excellent quality and low prices offered by Indian firms in particular. After the turn of the century, several astute businesspeople began repositioning the offshore firms from code remediators to code writers, architects, and business process outsourcers. At the same time, India's heritage of English-language education helped drive call center business in much the same way. By 2005, it was impossible to find any sizeable services company or software company that had not moved aggressively into India. The industry will never be the same: whether the low-cost producer of the moment is the Philippines, China, Vietnam, Estonia, Portugal, or someplace else, services-labor arbitrage, made possible in large measure by the Internet and voice over IP, has become perhaps the dominant factor in tech-sector economics.

3) Always-on People
The phrase is Chris Shipley's, but the phenomenon is widely observed: countless newspaper articles have focused on the etiquette of checking your mobile message device away from the office, whether at home (one guy ducked into his closet), out socializing, or in business meetings. That the RIM device is so often called the "Crackberry" gives some sense of the addictiveness in play, but the phenomenon is as broad as it is intense: in April of this year, Rim broke the 8 million subscriber barrier, and millions of GSM phones allow their owners to maintain seamless global connectivity. In 1997, by contrast, text pagers were in their earliest stages, only plumbers and doctors had beepers, and world phones were strictly a niche luxury. Now, whole negotiations are carried out in motion, with little regard for time or place. For millions of managers, the notion of being “out of the office” is almost quaint, and the blurring of work and personal time is less clear than ever before.

4) Architectures of Participation
The phase is, I believe, Tim O'Reilly's. The Internet has allowed entirely new kinds of social groups to identify themselves, assemble, mobilize, and persist. Whether it's Linux and the associated Internet infrastructure tools and environments, Wikipedia, the social networking businesses, or user feedback currencies at Craigslist, eBay, or Amazon, we are seeing the voices of identifiable individuals connected to much larger assemblages to build fashion, trust, and, sometimes, insight. In addition, one in four eligible Americans (and many ineligible Americans as well) uses an online dating service, of which there are now over 1,000. According to one measure, the average MySpace account-holder had 347 "friends," which begs the question of what indeed a friend is as opposed to an acknowledged network contact. In such settings, opting out is known as "Facebook suicide," suggesting that we are also witnessing the emergence of new architectures of exclusion.

5) The Telephonic Inversion
Despite (or perhaps because of) being some of the oldest tech firms on earth, telecommunications companies have had a tumultuous decade. Customers are defecting from landline service at staggering rates: according to the Telecommunications Industry Association, U.S. landline subscriptions declined by over 20 million in the five years to 2005, and perhaps another 10 million since then. But 2005 was the year U.S. wireless subscriptions surpassed wireline -- and on the global scale, this is pretty late. Technical developments such as dense wave division multiplexing made infrastructure investments in fiber optics stretch farther, and new revenue sources -- particularly texting and ringtones -- helped offset the wireline decline. Any way you slice it, however, the telecom business model of 2007 is upside down from what it was a decade ago as mobility surpasses fixed connections, data traffic outpaces analog (goodbye fax machines), and perhaps the most troubling competitor -- Skype and its 200 million users of nearly free international calling -- is itself a major headache to eBay, which has yet to monetize its original $2.6 billion investment.

6) The Digital Home
According to the U.S. Consumer Electronics Association, DVD players went from zero in March of 1997 to 132 million a decade later, in roughly 100 million households. Broadband penetration (using an admittedly generous definition of the term) went from zero to 84% of connecting U.S. households in that same period. HDTV penetration is currently between 25% (2006) and will hit an estimated 50% in 2008. Five years after launching, iPods can be found in one in five US households. Digital video recorders, which hadn't been invented in 1997, are estimated by Jupiter to be in one third of US homes by sometime next year. Digital cameras were estimated to reach 70% market penetration in 2007 by IDC. Roughly 10% of U.S. households have a wireless data network. Taken together, the uptake of all these new technologies represents a wholesale reinvention of the entertainment platform in just a few years.

7) Search
Remember Lycos? It began as a research project at Carnegie Mellon in 1994, went through an IPO in 1997, and was sold in 2000 to the Terra Networks arm of Spanish Telefonica phone company for $5.4 billion. Four years later, Terra sold Lycos to the Korean Daum Communications firm for $95 million - less than 1% of the purchase price. What about Altavista? Originally a research project inside Digital Equipment, it was for a moment the troubled company's most powerful brand, making it logical to extend the search engine's name to . . . firewalls and other products. After DEC was sold to Compaq, CMGI (remember them?) bought Altavista for $2.3 billion. AltaVista was subsequently sold to Overture, and then Overture was bought by Yahoo. Prime mover Louis Monier remains a force in the industry, recently having left eBay to join Google.

The rapid grown in the scale of the web presented new challenges to the search companies, making Google's page rank and related algorithms particularly valuable: rather than focusing on text-matching, Mssrs. Page and Brin looked at the structure of networked documents, cracking the problem in an elegant and, from a subsequent advertising-centric perspective, extremely profitable form. In the meantime, advancements in image, geospatial, video, and domain-specific search continue to advance both the state of the art and the potential for new business models.

8) Mapping
In 1996, GM introduced the OnStar navigation and assistance service in high-end models. The division has yet to drive significant revenues for the parent company, but there's no question that GPS and related technologies have exploded in the intervening decade. The widespread use of Google Earth in television is one indicator of the underlying trend, as is the fact that the top two sites ranked by traffic (Yahoo then Google), as well as #4 Microsoft and #13 The Weather Channel rely heavily on interactive mapping. Handheld GPS units are doubling in sales every year, in North America anyway, to an expected total of five million this year. As the technology is integrated into mobile phones, the social networking market is expected to drive far wider adoption. Google's Dodgeball and other capabilities, numerous startups, and the telecom carriers are expected to deliver applications linking "who," "where," and "when." A powerful indication of this tendency came earlier this month when Nokia bought Navteq, the "Intel inside" of many online mapping applications, for $8.1 billion.

9) Peer-to-Peer
It's impossible to envision what the 2007 Internet would look like without peer-to-peer file distribution. While the business model disruption of the music and telecommunications industries has been significant, the sheer volume and velocity of information in motion (much of it admittedly of the copyrighted variety) staggers the imagination. In a recent Siemens patent application, it was claimed that 50 to 80% of all Internet traffic is handled by p2p arrangements. Starting in 1999 with Napster and Gnutella, continuing through Kazaa and BitTorrent, and now through Morpheus, BearShare, Skype, Joost, and dozens of others, it's clear that these services are a permanent part of the landscape.

10) Networked Pestilence
Not all the developments have been improvements. Spam was certainly with us in 1997, entering as it did Oxford English Dictionary in 1998, but the volumes have skyrocketed: according to the IEEE, spam increased 100,000% between 1997 and 2004, but recent trends, including remote enlistment of so-called "zombie" computers, is raising the total to the point where legitimate e-mail could be only 5% of total traffic. Phishing is a newer blight, but potentially more profitable; the potential for identity theft is higher as well. Data breaches have been well cataloged, whether from a local government agency that prints personally identifiable information in directories, to the 47 million names exposed in the break-in through one TJX store's wireless network, to lost data backup tapes, to the infamous (and unencrypted) 26 million records lost on a Veterans Administration laptop.

It's clear that the last ten years have been a time of momentous change, but it's also sobering to see what hasn't happened: we have no cure for AIDS or malaria, commuting times get longer rather than shorter, incarceration is up, bridges and other critical infrastructure are decaying, air travel is in many ways quantitatively and qualitatively worse. Before we look ahead to the next ten years, in the second October letter we'll look at some of the biggest busts of the past decade.