Thursday, June 26, 2008

June 2008 Early Indications: Crossing Over

Rather than looking at the somewhat ambiguous "tipping points" that Malcolm Gladwell helped popularize (much to my colleague David McIntosh's despair; see also here), I'd like to look this month at several crossover points: moments in history where one way of doing something overtakes a previous one. Three broad areas come into play: performing a task on a PC, connecting to another person, and making a living.

1) PCs

Sometime in the past five years, more people completed a task using software based elsewhere than did people who utilized an application running locally. Here are the numbers: according to comScore data from August 2007, 754 million unique searchers averaged 80 searches for the month. (Rolled up, that's 61 billion searches per month, 37 billion served by Google.) While figures for desktop-resident applications are harder to come by, Microsoft estimated in 2003 that 150 million copies of Office had been sold, 80 million of them Office XP. This breakout suggests that there might be double counting as customers migrated through various versions: by myself I own three current licenses, never mind how many past versions that were attached to me at different times. More recently, a March press release spoke of 500 million Office users worldwide. ERP seats and PC games (#1 all time is The Sims), both at roughly 100 million, don't even come close.

Taking that Microsoft number at face value and assuming no double-counting, and not including web browsers as application software, as of last year 50% more people completed a task on a remote server compared to the number using the leading resident application.

Why does this crossover matter? As PCs become more affordable and can be purchased by more people, the advantages of non-resident processing will become more pronounced: upgrades do not require downloads or shipments of physical disks, training requirements are reduced, and the utility of the PC can often be enhanced by offloading processing-intensive activities to a server somewhere. In some ways this is bad news for Intel and AMD as devices for the developing world will require low price points and moderate processing power, with concomitantly lower margins.

It's also fitting that Bill Gates is retiring from Microsoft at the precise moment when the desktop software model is being forced to evolve. No company has more at stake in the transition to new generations of networked computing, and the handoff to Ray Ozzie as the architect (literally and figuratively) of Microsoft's future occurred when the company's desktop franchise was quantitatively eclipsed by a model that remains foreign to the company's historical financial, technical, and brand fundamentals.

2) Connections

The world is going a) untethered and b) toward video. a) Depending on who's doing the counting, last year or this the world is crossing the point where more than 3.3 billion mobile phones are in use. While they are not distributed this way, that's one mobile for every second person on the planet. Because of unequal distribution, however, there's another crossover: more than 250 million people live in countries with more cellphones than people. b) According to Cisco figures analyzed by Morgan Stanley, consumer Internet traffic will overtake commercial traffic this year. YouTube (the #3 destination on the Web, according to Alexa) and related services are driving much of this growth, estimated at 58% annually.

Several noteworthy stories are embedded here.

-The distribution of countries with teledensity over 100 is most surprising. According to International Telecommunications Union figures from 2006, over thirty countries qualify. No, wealthy Luxembourg is not a shock -- but the figure of 151 phones per 100 people is. Sweden is surprisingly listed at only 100.5, while Portugal recorded a figure of 116 for 2006. Perhaps the most stunning entry is Germany, by far the biggest country in the 100+ club: a nation of 82 million citizens (compared to 5-10 million for the Nordics and 20 million for Australia) had 102 cellphones per 100 population as of two years ago.

-The geographic spread of 100+ teledensities also comes as a surprise. Qatar and the UAE represent the Middle East/North Africa, Aruba and Trinidad and Tobago the Caribbean, and Singapore Asia. As one colleague from this part of the world told me, many Mediterranean cultures love to talk, and they literally put their money where their mouths are: Italy (123), Spain (106), Israel (123), Greece (100), and the aforementioned Portugal uphold the stereotype.

-About 100 years ago, the economist Thorstein Veblen posited that there are penalties for technological leadership, largely because any generation of technology imposes switching costs on the adoption of something newer. Many states are proving his point as they leapfrog poor wireline infrastructure by building wireless capacity at blinding speed: Lithuania had a fixed line teledensity of only 32 as of 2000, but a mobile quotient of 138 only six years later.

-According to the ITU, the number of cellphone subscribers worldwide passed the number of wireline subscribers in 2001. In developed countries, landline conventional connections are dropping, which serves to accentuate the shift toward mobility. The best countries at wireline broadband (the Nordics and Korea) only reach about a third of their populations, suggesting that wireless broadband could behave similarly to wireless voice -- which is to say, wireless broadband could devalue still more fixed-line assets in the coming years.

Making a Living

According to the most recent "Key Indicators of the Labour Market" published in September 2007 by the International Labour Organization (part of the UN), humanity crossed a significant milestone: for the first time since people learned to stay and farm rather than hunt and gather, agriculture was not the dominant focus of human endeavor. In a development that would have been unforeseen even 30 years ago, it was not manufacturing but services sectors that claimed the mantle.

The KILM document is worth quoting at length:

In recent years agriculture has lost its place as the main sector of employment and has been replaced by the services sector, which in 2006 constituted 42.0 per cent of world employment compared to 36.1 per cent for agriculture. As for the industry sector, it represented 21.9 per cent of total employment, which is almost unchanged from ten years ago. Although textbook theory suggests that economic development entails a structural transformation with a shift away from agriculture to the industry sector, this no longer seems to be reflected in reality. Instead of moving into high-productivity jobs in the industry sector, people are moving directly into the services sector, which consists of both high- and low-productivity jobs. Therefore, it is unclear if the sectoral shift goes hand in hand with productivity increases and thereby a better utilization of the workforce. (KILM, 5th edition, section 4, p. 6)

Numerous implications cascade from this transition. As the quotation suggests, measuring productivity of many services -- whether school teaching, nursing, litigation, or government activities -- can be nearly impossible. Economies of scope and scale behave very differently compared to manufacturing. Services sectors can change more rapidly than manufacturing because so much of the capital base is intellectual rather than physical: compare Google's rate of change to Intel's, much less GE's or GM's. Education and mid-career reorientation become more important for service-sector labor forces.

Perhaps most important, the state of computing and communications allows many services to be performed remotely from their customers. Compared to classical economics, in which the haircut often stands as a proxy for everything from an oil change to psychotherapy, some services do not have to be performed with both parties in the same place at the same time. As the economist Alan Blinder suggested in Foreign Affairs a few months back, the implications of services mobility will be as big as the Industrial Revolution. Equity analysis, credit scoring, and radiographic interpretation are being done in Australia, India, and Estonia even though the client/applicant/patient lives thousands of miles away.

Other changes that follow from the new primacy of services are promising. Compared to pollution and other forms of environmental degradation that typically accompany factories -- China surpassed the U.S. as the planet's largest emitter of CO2 in 2006 -- the externalities of services sectors have tended to be positive: spillover economic productivity, for example.

Adding It Up

Big, messy questions emerge as we consider these changes in parallel. What is the impact of information and communications technologies, most of which have emerged in the past 50 years, on the shift to predominance of services employment, which was tens of thousands of years in the making? How will global mobility of computing and telecommunications shape existing and future services industries? How will an increasingly searchable base of knowledge and information affect interpersonal relationships and employment patterns, not to mention notions of privacy, ownership, and redress?

As government becomes a major services sector in its own right, how will it generate sufficient revenues without killing off fragile but fast-growing industries? African countries have for decades depended on the hard currency brought into the nation by long-distance interconnect charges. With the decline of transatlantic faxes and the rise of Skype, for example, those revenues must be replaced. A promising revenue source, from the government's perspective, is the mobile phone industry: in such countries as Malawi and Ghana, over 1/3 of the cost of mobile phone ownership is tax, according to the GSM trade association.

This is not new. At the time of the 3G spectrum auctions in the UK in 2000, major debates were concerned with what to do with the 37-billion Euro windfall: not without controversy, it went to pay off national debt, rather than improve the Health Service, cut taxes, or rebuild infrastructure. In manufacturing industries, it's difficult to imagine similar tax booms -- although resources can pay off handsomely, insofar as North Sea oil has behaved similarly for England and Norway, for example.

Lots of questions remain, probably best discussed non-virtually, over a beer. Until we can approximate that scenario, what do you think will be the next historic crossover? Given sufficient input I'll build the next letter on the answers.