Early Indications

December 2011 Early Indications: Immigration and entrepreneurship

2011-12-29T12:28:00.000-08:00

In our time of economic stagnation, attention on the part of many
political figures is turning to the question of immigration.
Presidential candidate Michele Bachmann called for phased deportation
of 11 million illegal immigrants. The stated rationale for such a
stance includes a desire to "curb the unfair strain on our country's
job markets." Such dramatic proposals notwithstanding, with accurate
information by definition hard to collect at such a large scale, the
connection of immigration to employment is impossible to establish.

Thus, many questions exist: How often are native-born American
citizens pushed to the sidelines by "cheap" immigrant labor? When do
immigrants do the dirty work that employers need done in foodservice,
agriculture, and landscaping/construction? What is the ratio of
immigrants who put a load on municipal services such as schools and
emergency rooms, compared to people who may lack a passport but pay
taxes and spend money where they earn it? There is simply no way to
tell for sure.

In the pursuit of tight borders, however, current immigration policy
seems to be categorically turning away potential contributors to
economic strength: as the rules stand, tens of thousands of
international students who attend U.S. universities cannot compete for
jobs here. Robert Guest, an editor at the Economist, wrote a piece in
the Wall Street Journal last week (12/21/11) in which he compared
sending away international graduates to "Saudi Arabia setting fire to
its oil wells." New York Mayor Michael Bloomberg (who won election as
a Republican and knows something about entrepreneurship) calls the
practice "national suicide."

Speaking of fire, the flame war related to the Guest article burns hot
on the WSJ site: software programmers who lost their jobs to foreign
workers have their story to tell, as do employers who can't fill
technical jobs, or who, once they find a productive contributor, must
do battle with an extremely difficult bureaucratic process to get a
visa. Once again, the situation is so complicated and vast that any
single person's perspective is by definition limited.

I have no way of knowing how often H1B visa holders displace
native-born candidates nor how often they fill a gap for which
qualified applicants are scarce. My belief (following the argument of
my one-time co-author Erik Brynjolfsson at MIT) is that we are in the
midst of a structural shift in the global economy, which causes both
labor shortages in technical jobs and high unemployment in old-school
manufacturing and other sectors. After speaking both to job-seeking
students and candidate-seeking employers, I hear often that there is a
skills shortage: part of the unemployment issue may be that employers
are less willing to hire generalists (read, "liberal arts graduates")
in the era of ERP, social media, algorithmic decision-making, and
global supply chains. The structural shift argument also would explain
the rapid obsolescence of many 40- and 50-somethings' resumes.

My purpose here is not to try to adjudicate message boards or
presidential campaigns, but to argue from history: immigrant
entrepreneurs have helped make America great, and have created
literally millions of jobs. This is not a recent phenomenon, but the
changing makeup of the entrepreneurs reflects the relative openness or
closure of US borders over the centuries, as well as changing patterns
of migration: the relationship between who wants in and how welcoming
the U.S. border is has proven to be emotional and complicated.

Here is the beginning of a list of relevant examples, building on a
post from three years ago. Time after time, immigrant entrepreneurs
have altered the course of business history:

-Andrew Carnegie was famously Scottish. His fortune, about $300
billion in 2007 dollars, funded a wide range of philanthropies that
exerted substantial cultural influence long after his death.

-Alexander Graham Bell, also born in Scotland, invented or seriously
experimented in the fields of telecommunications, aviation, magnetic
storage, desalination of seawater, and even solar cells. He was a true
giant in human history.

-Henry Ford was the son of an Irish immigrant. His one-time business
partner Thomas Edison, who founded 14 companies including GE, was the
son of a Canadian immigrant.

-Ray Kroc, who grew McDonalds into a global giant, was the son of
Czech immigrants. He was enterprising from an early age, to the point
of talking his way into driving ambulances in World War I at 15 years
of age.

-Walt Disney's father left Canada to try to find gold in California;
Walt was born in Chicago.

-Steven Udvar-Hazy fled Hungary after the Soviets occupied his home
country. He founded one of the world's two biggest lessors of
commercial aircraft, International Lease Finance Corporation.

-An Wang, founder of the computer company of that name, was born in
Shanghai. At one point his firm employed 30,000 people.

-Amar Bose was born in Philadelphia to an immigrant fleeing pressure
from the British for his political activities on behalf of Bengali
liberation. The loudspeaker company was founded in 1964 as a sideline
to his professorship at MIT and now ranks among the three most trusted
U.S. electronics brands, according to Forrester Research. Bose employs
more than 9,000 people.

-Sidney Harman, born in Quebec, teamed with his boss Bernard Kardon to
make the first integrated hi-fi receiver; their eponymous company was
founded in 1953. Nearly 60 years later, Harman International employed
about 10,000 people. Harman himself was a fascinating person, devoted
to the arts and learning, and he bought Newsweek for $1 in 2010 from
the Washington Post Company.

--Vinod Khosla emigrated from India after university and co-founded
Sun Microsystems at the age of 27. After leaving Sun relatively
quickly, he has spent most of the last three decades as a venture
investor.

-Jeff Bezos founded Amazon after working at a hedge fund following his
undergraduate studies in electrical engineering at Princeton. The
immigrant connection? His adoptive father left Cuba.

-Pierre Omidyar was born in Paris to Iranian immigrants; his mother
holds a PhD from the Sorbonne and his father was a surgeon. After
growing up in Washington, DC and attending Tufts University, Omidyar
wrote the base code for eBay over a long weekend.

-Yahoo! co-founder Jerry Yang was born in Taipei and grew up in San
Jose, raised by a single mother after his father died.

-Google co-founder Sergei Brin's family emigrated from Russia after he
was born. His father is a math professor and his mother is, literally,
a rocket scientist at NASA.

-Elon Musk left his native South Africa at 17, wanting to head to the
U.S. because "It is where great things are possible." By the age of 40
Musk had co-founded PayPal, SpaceX, and Tesla Motors.

-Tony Hsieh was born to Taiwanese immigrants living in California. He
sold his first company to Microsoft for $265 million when he was 24
before co-founding a venture firm that backed Zappos, where he later
became CEO.

-Steve Jobs' biological father was Syrian, though he was adopted by
the Jobs family at birth. The company he co-founded currently employs
60,000 people, who generate a staggering $420,000 of profit (not
revenue) apiece.

These 17 people are mostly household names, but the pattern also works
in most any community: immigrants are frequently the risk-takers who
launch restaurants, convenience stores, dry cleaners, lawn care
operations, and other ventures. Immigration is central to the story
of the United States, and figuring out how to do it right in the 21st
century is both critically important and politically loaded to the
point where rational debate is impossible: nobody knew for sure
whether candidate Herman Cain's proposal for an electrified fence on
the Mexican border was a joke or not.

Open borders are not an option for any sovereign nation of significant
size. At the same time, periods of intense nativism in U.S. history
have spurred extremely restrictive policies. As history should show
conclusively, however, the cost of barring potential entrepreneurs is
high. In a global economy that runs on ideas and talent, former
Citibank CEO Walter Wriston's comment about money - "Capital goes
where it's wanted, and stays where it's well treated" -- holds true of
brainpower as well.

As the U.S. becomes less hospitable, formally and perhaps informally,
those bright, motivated individuals are being courted by New Zealand,
Israel, and Canada, not to mention the potential immigrants' native
countries. Atlassian Software (it specializes in developer tools) is
in Sydney; Weta Workshop generates world-class special effects for New
Zealand native Peter Jackson's movies at its facility in Wellington.
Skype's software was written in Estonia. Spotify's R&D operations are
in Stockholm. Vancouver is home to dozens of tech and software
companies, including the motion-capture studio for Electronic Arts. In
the global race for the next generation of startups, the U.S. has a
privileged position, but that status as a preferred destination is in
danger of being diminished as collateral damage in a debate with other
protagonists, motivations, and constituencies. We can only hope that
some good sense comes into play alongside the fear, stereotypes, and
lack of solid data that currently characterize the issue.

November 2011 Early Indications: The State of Online Music

2011-11-30T17:45:00.001-08:00

The past 20 years have been tumultuous, to say the least, for the recording industry. From a time when old formats (the LP and cassette) were declared dead and the compact disc was essentially the only way to buy music, through Napster, then Rhapsody, iTunes, and MySpace music, listeners now confront a confusing array of options that call into question some basic questions:

*What does it mean to "buy" a song? Or to "own" it without paying?

*How are artists discovered by publishers?

*How do listeners discover new music?

*Who pays, for what, and who makes money?

*Most fundamentally, is music a standalone industry or will it become a feature of a larger "content" business?

While much remains uncertain, six facts about the state of online music can be asserted.

1) The state of online music is puzzling.

Any venture capitalist will ask a few basic questions of a new venture, one of them being the size of the addressable market. According to the recording industry's trade association, which values CDs at retail and not at wholesale or purchase price, the total value of the U.S. music industry was only $6.8 billion in 2010, a 10.9% decline over the previous year. Just this year, Citigroup basically repossessed EMI, the #4 label, from the private equity firm to whom it lent money for its purchase and recently sold part to a Sony-led consortium and part to Vivendi's Universal label; Citi took a loss of more than $1 billion on the deal, best I can tell. Why are so many players fighting for a piece of a shrinking industry that is unprofitable for many?

2) The state of online music is crowded.

According to Wikipedia, there are 9 download sites with more than 10 million songs; nobody has more than Amazon's 18 million (iTunes is at 14):

*7digital
*Amazon MP3
*artistxsite
*eMusic
*Fairsharemusic
*Apple iTunes
*Napster
*Rhapsody
*Spotify
*Microsoft Zune

At the same time, there are 15 sites with more than 5 million tracks available for streaming, with Grooveshark the leader at 22 million:

*8tracks
*Deezer
*Grooveshark
*last.fm
*Mflow
*MOG
*Qriocity
*Rdio
*Rhapsody
*Simfy
*Spotify
*we7
*WiMP
*Zune

Also worth mentioning as a digital music resource is YouTube, for which music numbers are not readily broken out. The most-watched videos of all time, however, tilt heavily to music: how Justin Bieber could have 666 million views (the published number, not hyperbole from your cynical narrator) without click fraud is an open question. Finally, Internet radio is alive even after being hit with extremely high license fees. (One estimate I saw estimated that a station with 2,000 listeners playing 15 songs an hour would face $185,000 a year in fees.) Live365 coordinates more than 5,000 stations from more than 150 countries.

3) The state on online music is increasingly social.

If one takes a long view, music has traversed a complicated arc. Originally performed by performers sometimes backed by considerable cultural infrastructure (in the case of symphony orchestras and opera companies, not to mention large church bodies for organists and choirs) for massed audiences, or performed by amateur town bands and similar groups, music shrunk in the 20th century: singer-songwriters flourished, and consumer electronics and recording technologies made audiences of one common. The apex of solitary listening was probably iTunes on the iPod, with the iconic white earbuds. In this vein, with expensive celebrity models like Beats now fashionable, U.S. headphone sales nearly doubled in the past year, to $2 billion.

After the demise of MySpace, a great tool for music sharing and distribution if not much else, other social tools are emerging. Blackberry, Google, Grooveshark, Last.fm (owned by CBS), and other services connect people to other fans, to concerts, and to artists. Shared listening services including turntable.fm reconvene groups of people to play and listen to each other. Other startups of note include Flowd, a social network for music much like Apple's Ping. Thus music went from being physically communal, to private, to both solitary and electronically, and sometimes asynchronously, communal.

4) The state of online music is multi-platform.

In the "old" days of Napster or iTunes, one could store ripped CDs or MP3 files on a computer hard drive. iTunes and Zune could sync the files to a portable storage device (iPod or Microsoft player). Now, the complexity of the landscape is begetting both new solutions and consumer confusion. Some streaming services like Spotify have mobile apps that allow offline and/or streamed listening away from the PC, and Spotify just announced an app store platform -- a great idea. Given the complexity of the smartphone world, however, this means building and updating a series of apps for Windows, Apple, RIM, and Android, along with potentially Palm's webOS (if HP sells it off) and Samsung's Bada.

At the same time, PCs and smartphones are being joined by hard-drive-based home entertainment solutions for music and video. Some TVs, meanwhile, are USB and wi-fi compatible. Finally, depending on the model, blu-ray players can play multiple types of disks, or support games, or stream networked content. Thus the home entertainment and mobile entertainment worlds are recombining, with several billion-dollar markets up for grabs. Google tried an Internet-augmented TV; Apple is rumored to have one in the works. Confusingly, Apple TV isn't a TV at all, but a universal media streamer without storage. Western Digital, for its part, offers a hard-disk solution for music, videos, and movies that also supports streaming. The Olive and Sonos systems offer multi-room music playback, controlled by an iOS or Android device.

While MP3 is widely adopted, more and more higher-than-CD bitrate files are becoming available to enthusiasts. At the very expensive end of the market, high-resolution music files from the likes of UK firms Linn and Bowers and Wilkins, or Reference Recordings and HD Tracks in the U.S., can be played through megabuck hard-drive (as opposed to silver disk) systems from the likes of Linn, Meridian, Ayer, Berkeley Audio, and custom PC-based platforms.

Thus the "dematerialization" process continues: from owning physical polycarbonate, to storing files on one's hard drive, now to cloud-resident lockers, one's entertainment collection is getting more and more ethereal. Those cloud-based bits are also getting more and more agnostic about their playback/display device.

5) The state of online music is geographically determined

A quick look at the streaming services reveals considerable geographic specificity. While some services are worldwide, others are available only in one or two countries. Combine this rights-related limitation with the question of mobile platforms, and some degree of fragmentation becomes inevitable: uptake of different phone brands and types, recording artists, and payment systems varies widely. Unlike the compact disc, which was the universal medium for music (as product) distribution, online music might turn out to exhibit some degree of speciation.

6) The state of online music is potentially irrelevant

This could be misinterpreted: I would be the last person to say music doesn't matter. But music as a separate category may not stand alone much longer. Digital content types continue to converge (Amazon wants to hold my book bits, and my music bits, and my video bits on the server-in-the-sky; YouTube bridges music, TV, instructional videos, and other genres). Digital playback hardware diverges: in my house alone, I could play music on more than a dozen devices, many of which do lots of other things too.

Thus the proliferation of music file types, playback modes and devices, and available artists (a classic long-tail story) means that online music is diverging into more and more sub-markets: not only do music genres proliferate, but so do listening patterns. A Pandora user at a desktop PC in Canada will have relatively little in common with a YouTube viewer in Brazil or a Spotify mobile user in Sweden or a high-resolution Society of Sound member in the UK. All are listening to digital music files via the Internet, but the social layers, business models, hardware requirements, and connection mechanics are considerably different.

For the present, confusion reigns as niche players and mega-players compete to get big fast. One prediction: while free content will continue to be an option, the forces pushing paid content are not going away, and I would wager millions of people will at some point buy music they already own in yet another format: iTunes will not be forever, I don't think. A second prediction: the limits of ad-supported business models are accumulating. It works for TV, for sure, but not for movies, not to mention books (but it's fine for magazines). Where music will fall on the new continuum is anybody's guess as experiments like Nokia's now-dead Comes with Music (cell phone subscriptions included pre-paid rights payments) and Radiohead's Name Your Price exercise will continue.

Who will win? It's hard to bet against the Goliaths: rights fees are expensive, and music as a content type can increasingly be viewed as a feature of a larger bit-management regime, whether iTunes or Amazon's cloud or the Google/Android/YouTube mediaplex. As much as people love Spotify, or Pandora, or legal Napster, or the Internet Archive's amazing live-music treasure chest, it's hard to see any of these ever expanding beyond niche status alongside Disney, Sony, or other statutorily privileged content conglomerates. Outside the reach of said statutes, it's a pretty unappealing landscape for content owners, which means there might be innovation -- or merely more unpaid downloads. The wild card is in the social layer: music and friends will always travel well together, so the Facebook music partnerships may well change the landscape. In any case, it's unlikely to be either the hardware or carriage companies that set the tone: Apple is now a content company, essentially using high-margin hardware as "smart pipes" to carry bits of personal meaning, and along with Google and Amazon, likely to set the music agenda for the next 5-10 years.

October 2011 Early Indications: Heroes

2011-10-31T17:52:00.000-07:00

Watching the public reaction to the death of Steve Jobs has been a
fascinating exercise. The flowers, poems, tributes, and now biography
sales are certainly unprecedented in the infotech sector, and in
popular culture more generally. How many deaths have moved people this
way? Michael Jackson? Curt Cobain? Elvis? Each of these people was in
some way reaping the harvest of celebrity, and all were entertainers.
John Lennon might be the closest precedent to Jobs. Martin Luther
King was the last American martyr, but this phenomenon isn't in that
territory.

Jobs meant more to people than mere celebrity. Here is a random
tribute I pulled from an Irish blog:

"I never met Steve, but he meant a lot to anyone and everyone in the
technology community, and he was an idol of mine. The Apple chairman
and former CEO who made personal computers, smartphones, tablets, and
digital animation mass-market products passed away today. We're going
to miss him, deeply."

What led people to this kind of personal identification with "Steve"?
Perhaps it was the beauty of Apple products? But Jobs did not design
anything: he was instead a frequently tyrannical boss who extracted
the best from his underlings, albeit at a cost. Great -- really great
-- architects and industrial designers have come and gone, and even
today only Apple fanboys know of Jony Ive, who is our latter-day
Teague or Saarinen.

Does the prematurity of his death explain the extremity of the
reaction? Maybe partially.

Was it his philanthropy? No. Like many in Silicon Valley, Jobs was
not public about whatever charities he might have supported. There
was no Gates-like combination of focus and scale, no "think
differently" about his wealth's potential for the kind of social
change he admired as a young man, at least that we know of.

I think part of the fascination with Steve Jobs derived from his
extremes: throughout his adult life, Jobs had an extraordinary ability
to embody contradictions. The famous "reality distortion field"
surrounding the man from an early age meant that people suspended
disbelief in his presence, sometimes unwillingly. To take one example,
Apple never got hit with the same kind of "sweatshop" rhetoric that
was directed at Nike even though life in the Chinese assembly plants
was nasty, brutish, and often short: in 2010, 14 successful suicides
occurred, along with 4 other jumps. In response, a broad system of
nets was installed, and the management of the dorms improved, along
with other changes. It's worth noting that the factory suicide rate,
while alarming, is lower than in either urban or rural China more
generally: the outsourced manufacturer Foxconn employs a million
workers, nearly half of whom work in one facility in Shenzhen when
Apple products (along with others) are assembled.

There were other contradictions: think differently while telling
customers to conform to Apple's dictates of what constitutes fashion.
Build luxury goods while citing Buddhism. The image of artful
rebellion coexisting with a rigidly locked-down computing environment,
particularly for paid content.

None of these factors is a sufficient predictor of the Princess
Diana-like personal identification. Instead, the outpouring of
feeling speaks to several things, I believe.

1) Blogs, social media, Facebook pages, and YouTube make
self-expression to potential multitudes easy and accessible. These
tools, descended from the scruffy, anarchic origins of the public web
rather than the clean appliance-like aesthetic of Apple products,
allow for mass outpourings we would never have seen on public-access
cable or letters to the editor.

2) Jobs personified salvation from the stupidity millions of people
felt in the face of DOS prompts, device drivers, dongles, funny-shaped
plugs that never matched, and other arcana of computing. Used to
feeling inferior before a beige or gray box that would not do what we
wanted, people liked feeling more in control of the products that were
cute, friendly, and, after Jobs' death, now talk to us intelligently.

3) More broadly, perhaps, we have a shortage of heroes. Much like
Lennon, Jobs dared to imagine. As one commentator noted, envisioning
the future loosely connected Jobs to the saints and other religious
figures who truly had Visions. That connection does something to
explain the near-martyrdom that seemed to be shaping up in some
quarters. But even in purely secular terms, where are today's heroes?

Athletes? In part through the Internet and social media in
particular, we see these champions as sexual abusers, prima donnas, or
mercenaries whose multi-million dollar salaries remove them from the
pantheon. Super-sprinter Usain Bolt seems otherworldly, the product
of incredible gifts rather than perseverance and hard work to which
kids can relate. Pat Tillman, whose complex, troubling story will
probably never be fully told, is rapidly being relegated to footnote
status. Baseball is confronting the steroid era one Hall of Fame
candidate at a time, often awkwardly. Even worse than seeing athletes
as removed, perhaps, we also see them as human: Michael Phelps did
what millions of 20-somethings do after his successful transit of the
pressure-packed quest for gold in Beijing. Ignorant Tweets regularly
issue from the keyboards of the fast and gifted, ruling heroism
farther out of the picture.

Politicians? John McCain's story contains the elements of true
heroism, but he has the misfortune of living in a time of media-driven
political polarization, and his flavor of bipartisan citizenship is
out of fashion. Barack Obama did not inspire baby names in his honor
in 2009 the way John F. Kennedy seemed to, and he does not run for
re-election on a platform of traditionally Democratic accomplishments:
civil liberties, success in environmental protection, and a better
life for working person aren't looking promising. Instead, he can
claim foreign policy wins, usually Republican turf, particularly the
weakening of Al Qaeda. Among the Republicans, meanwhile, Mitt Romney
feels like a capable COO or maybe CEO, but falls far short of heroic
status, even within his party's faithful. More generally, public
approval with Congress is at historic lows.

What about business leaders? Only deep industry insiders know anything
about Ginni Rometty, recently named to run IBM. Meg Whitman joins
Rometty in an exclusive club of tech giant CEOs, but her California
political campaign (not to mention the titanic loss on eBay's Skype
deal) showed her to fall far short of heroic status. Outside of tech,
how many of these CEO names are familiar, or even close to iconic:
Frazier, Rosenfeld, Blankfein, Tillerson, Mulally, Iger, Pandit,
Oberhelman, or Roberts? (Their companies are, in order, Merck, Kraft,
Goldman Sachs, Exxon Mobil, Ford, Disney, Citi, Caterpillar, and
Comcast.) Warren Buffett may be the closest we get, but an object of
envy is not necessarily a hero.

Back to tech, the closest analogue I can think of to Steve Jobs in the
American imagination was Henry Ford, the person who made a liberating
new technology accessible to the masses. The great information
technology pioneers -- Shannon, Turing, von Neumann, Baran, Hopper --
are hardly widely known. Even our villains are scaled down: compared
to a Theodore Vail at AT&T or William Randolph Hearst, Larry Ellison
can hardly compare. As for Page, Brin, and Zuckerberg, they're mildly
famous for being rich, for certain, but so little is known about the
innards of Google and Facebook that the person on the street can't
really say for sure who they are or what they did -- or how their
companies make money. Facebook has become social oxygen, privacy
settings or no privacy settings, joining Google as a monopoly utility
(our analogues of AT&T) of the moment.

In the end, then, Steve Jobs was an elite, often inegalitarian figure
whose ability to bring forth usable, even likable technology inspired
the false familiarity of celebrity. His products -- running Photoshop
as well as they did, contributing to the ubiquity of wi-fi, or putting
multimedia in people's pockets -- fittingly contributed to the many
layers of paradox surrounding an extraordinary leader, manager, and,
yes, visionary. Apart from education reformer Sal Khan or perhaps
Ratan Tata (whose runway to global fame is getting short), it's hard
to see anyone on the horizon ready to occupy similar real estate in
the public imagination.

September 2011 Early Indications: The Innovation Moment?

2011-09-30T20:57:00.001-07:00

What follows is a selection from the opening to a book I'm completing. Recent tech-related news -- Apple's dominance, Amazon's alternative axis of competition, tablet and other woes at HP and Research in Motion, social media and social change all over the world, Anonymous, and sustained global un- and underemployment -- seems to reinforce the hypothesis that the rules of the game are in transition.

Thoughts and reactions are welcome, though they might not make it into the final product.
**********

Given the changes of the past 40 years—the personal computer, the Internet, GPS, cell phones, and smartphones—it’s not hyperbole to refer to a technological revolution. This book explores the consequences of this revolution, particularly but not exclusively for business. The overriding argument is straightforward:

1) Computing and communications technologies change how people view and understand the world, and how they relate to each other.

2) Not only the Internet but also such technologies as search, GPS, MP3 file compression, and general-purpose computing create substantial value for their users, often at low or zero cost. Online price comparison engines are an obvious example.

3) Even though they create enormous value for their users, however, those technologies do not create large numbers of jobs in western economies. At a time when manufacturing is receding in importance, information industries are not yet filling the gap in employment as economic theory would predict.

4) Reconciling these three traits will require major innovations going forward. New kinds of warfare and crime will require changes to law and behavior, the entire notion of privacy is in need of reinvention, and getting computers to generate millions of jobs may be the most pressing task of all. The tool kit of current technologies is an extremely rich resource.

Cognition

Let’s take a step back. Every past technological innovation over the past 300-plus years has augmented humanity’s domination over the physical world. Steam, electricity, internal combustion engines, and jet propulsion provided power. Industrial chemistry provided new fertilizers, dyes, and medicines. Steel, plastics, and other materials could be formed into skyscrapers, household and industrial items, and clothing. Mass production, line and staff organization, the limited liability corporation, and self service were among many managerial innovations that enhanced companies’ ability to organize resources and bring offerings to market.

The current revolution is different. Computing and communications augment not muscles but our brain and our sociability: rather than expanding control over the physical world, the Internet and the smartphone can combine to make people more informed and cognitively enhanced, if not wiser. Text messaging, Twitter, LinkedIn, and Facebook allow us to maintain both "strong" and "weak" social ties—each of which matters, albeit in different ways—in new ways and at new scales. Like every technology, the tools are value-neutral and also have a dark side. They can be used to exercise forms of control such as bullying, stalking, surveillance, and behavioral tracking. After about 30 years—the IBM PC launched in 1981—this revolution is still too new to reflect on very well, and of a different sort from its predecessors, making comparisons only minimally useful.

For a brief moment let us consider the "information" piece of "information technology," the trigger to that cognitive enhancement. Claude Shannon, the little-known patron saint of the information age, conceived of information mathematically; his fundamental insights gave rise to developments ranging from digital circuit design to the blackjack method popularized in the movie 21. Shannon made key discoveries, of obvious importance to cryptography but also to telephone engineering, concerning the mathematical relationships between signals and noise. He also disconnected information as it would be understood in the computer age from human uses of it: meaning was "irrelevant to the engineering problem." This tension between information as engineers see it and information that people generate and absorb is one of the defining dynamics of the era. It is expressed in the Facebook privacy debate, Google’s treatment of copyrighted texts, and even hedge funds that mine Twitter data and invest accordingly. Equally important, however, these technologies allow groups to form that can collectively create meaning; the editorial backstory behind every Wikipedia entry, collected with as much rigor as the entry itself, stands as an unprecedented history of meaning-making.

The information revolution has several important side effects. First, it stresses a nation’s education system: unlike 20th-century factories, many information-driven jobs require higher skills than many members of the work force can demonstrate. Finland’s leadership positions in education and high technology are related. Second, the benefits of information flow disproportionately to people who are in a position to understand information. As the economist Tyler Cowen points out, "a lot of the internet’s biggest benefits are distributed in proportion to our cognitive abilities to exploit them." This observation is true at the individual and collective level. Hence India, with a strong technical university system, has been able to capitalize on the past 20 years in ways that its neighbor Pakistan has not.

Innovation

Much more tangibly, this revolution is different in another regard: it has yet to generate very many jobs, particularly in first-world markets. In a way, it may be becoming clear that there is no free lunch. The Internet has created substantial value for consumers: free music, both illegal and now legal. Free news and other information such as weather. Free search engines. Price transparency. Self-service travel reservations and check-in, stock trades, and driver’s license renewals. But the massive consumer surplus created by the Internet comes at some cost: of jobs, shareholder dividends, and tax revenues formerly paid by winners in less efficient markets.

In contrast to a broad economic ecosystem created by the automobile—repair shops, drive-in and drive-through restaurants, road-builders, parking lots, dealerships, parts suppliers, and final assembly plants—the headcount at the core of the information industry is strikingly small and doesn’t extend out very far. Apple, the most valuable company by market capitalization in the world in 2011, employs roughly 50,000 people, more than half of whom work in the retail operation. Compare Apple’s 25,000 non-retail workers to the industrial era, when headcounts at IBM, General Motors, and General Electric all topped 400,000 at one time or another. In addition, the jobs that are created are in a very narrow window of technical and managerial skill. Contrast the hiring at Microsoft or Facebook to the automobile, which in addition to the best and the brightest could also give jobs to semi-skilled laborers, tollbooth collectors, used-car salesmen, and low-level managers. That reality of small workforces (along with outsourcing deals and offshore contract manufacturing), high skill requirements, and the frequent need for extensive education may become another legacy of the information age.

In the past 50 years, computers have become ubiquitous in American business, and in many global ones. They have contributed to increases in efficiency and productivity through a wide variety of mechanisms, whether self service websites, ATMs, or gas pumps; improved decision-making supported by data analysis and planning software; or robotics on assembly lines. The challenge now is to move beyond optimization of known processes. In order to generate new jobs—most of the old ones aren’t coming back—the economy needs to utilize the computing and communications resources to do new things: cure suffering and disease with new approaches, teach with new pedagogy, and create new forms of value. Rather than optimization, in short, the technology revolution demands breakthroughs in innovation, which as we will see is concerned with more than just patents.

There are of course winners in the business arena. But in the long run, the companies that can operate at a sufficiently high level of innovation and efficiency to win in brutally transparent and/or low-margin markets are a minority: Amazon, Apple, Caterpillar, eBay, Facebook, and Google are familiar names on a reasonably short list. Even Dell, HP, Microsoft, and Yahoo, leaders just a few years ago, are struggling to regain competitive swagger. Others of yesterday’s leaders have tumbled from the top rank: Merrill Lynch was bought; GM and Chrysler each declared bankruptcy. Arthur Andersen, Lehman Brothers, and Nortel are gone completely. How could decline happen so quickly?

Consider Dell, which achieved industry leadership in the 1990s through optimization of inventory control, demand creation, and the matching of the two. The 2000s have treated the company less well. Apple, which like Dell boasts extremely high levels of supply chain performance, has separated itself from the PC industry through its relentless innovation. Seeing Apple pull away with the stunning success of the iPhone, Google in turn mobilized the Android smartphone platform through a different, but similarly effective, series of technical and organizational innovations. In contrast to Apple and Google, optimizers like Dell are suffering, and unsuccessful innovators including Nokia are making desperate attempts to compete. Successful innovation is no longer a better mousetrap, however: the biggest winners are the companies that can innovate at the level of systems, or platforms. Amazon's repeated innovations, many of which came as stunning surprises, illustrate a profound understanding of this truth. At the same time, Microsoft's efforts to shift from the PC platform onto something new have met with mixed success: the Xbox has done well in a small market, while the results of the Nokia mobile bet will obviously be a top story for the coming year.

Given our place in the history of technology, it appears that structural changes to work and economics are occurring. To set some context, consider how mechanization changed American agriculture after 1900. Fewer people were needed to till the land, leading to increased farm size and migration of spare laborers to cities. Manufacturing replaced agriculture at the core of the economy. Beginning in 1960, computers helped optimize manufacturing. Coincident with the rise of enterprise and then personal computing, services replaced manufacturing as the main employer and value generator in the U.S. economy. In short, innovation could be to information what mechanization was to agriculture, the agent of its marginalization and the gateway to a new economic era.

How information technology relates to this shift from manufacturing to services and, potentially, a new wave of innovation is still not well understood; to take one example, as Michael Mandel argued in Bloomberg Businessweek, a shortfall of innovation helps explain the misplaced optimism that contributed to the financial crises of the past years. But rather than merely incant that "innovation is good," I believe that the structure of economic history has certain limits, and computers’ propensity for optimization may be encountering one such limit. It takes people to innovate, however, and identifying both the need as well as the capabilities and resources necessary for them to do so may be a partial path out of the structural economic stagnation in which we find ourselves.

Early Indications August 2011: Paradoxical Productivity

2011-08-23T17:51:00.001-07:00

There are some structural issues with our economy, where a lot of
businesses have learned to become much more efficient with a lot fewer
workers. You see it when you go to a bank and you use an ATM; you
don't go to a bank teller.
-President Barack Obama, NBC News, June 14 (?) 2011

The debate over the relationship between automating technologies and
unemployment is not new, as Adam Smith's famous example of pin-making
goes back to 1776. Things get particularly messy trying to understand
services productivity: that ATM does not merely replicate the pin
factory or behave like industrial scenarios. Finally, trying to
quantify the particular contribution of information technology to
productivity, and thus to the current unemployment scenario, proves
particularly difficult. Nevertheless, the question is worth
considering closely insofar as multiple shifts are coinciding, making
job-seeking, managing, investing, and policy formulation difficult, at
best, in these challenging times.

I. Classic productivity definitions

At the most basic level, a nation's economic output is divided by the
number of workers or the number of hours worked. This model is
obviously rough, and has two major implications. First, investment
(whether in better machinery or elsewhere) does not necessarily map to
hours worked. Secondly, unemployment should drive this measure of
productivity up, all other things being equal, merely as a matter of
shrinking the denominator in the fraction: fewer workers producing the
same level of output are intuitively more productive. Unemployment,
however, is not free.

A more sophisticated metric is called total factor productivity, or
TFP. This indicator attempts to track how efficiently both labor and
capital are being utilized. It is calculated as a residual, by
looking at hours worked (or some variant thereof) and capital stock
(summarizing a nation's balance sheet, as it were, to tally up the
things that can produce other things of value for sale). Any rise in
economic output not captured in labor or capital will be counted as
improved productivity. The problem here is that measuring productive
capital at any level of scale is extremely difficult.

TFP, while being hard to pin down, does have advantages. One strength
of TFP is in its emphasis on innovation. In theory, if inventors and
innovators are granted monopolies (through patents), their investment
in new technologies can be recouped as competitors are prevented from
copying the innovation. Skilled labor is an important ingredient in
this process: commercialization is much more difficult if the
workforce cannot perform the necessary functions to bring new ideas
and products to market.

II. Services productivity

As The Economist points out, quoting Fast Company from 2004, ATMs did
not displace bank tellers. Instead, the rise of self-service
coincided with a broad expansion of bank functions and an aging (and
growing) American population: baby boomers started needing lots of car
loans, and home mortgages, and tuition loans, starting in about 1970
when the first boomers turned 25. All those financial services
required people to deliver:

1985: 60,000 ATMs 485,000 bank tellers

2002: 352,000 ATMs 527,000 bank tellers

That a technology advance coincided with a shift in the banking market
tells us little about productivity. Did ATMs, or word processors, or
Blackberries increase output per unit of input? Nobody knows: the
output of a bank teller, or nurse, or college professor, is
notoriously hard to measure. Even at the aggregate level, the
measurement problem is significant. Is a bank's output merely the sum
of its teller transactions? Maybe. Other economists argue that a
bank should be measured by its balances of loans and deposits.

A key concept in macroeconomics concerns intermediate goods: raw
material purchases, work in process inventory, and the like. Very few
services were included in these calculations, airplane tickets and
telephone bills being exceptions. As of the early 1990s, ad agencies
and computer programming were not included. Thus the problem is
two-fold: services inputs to certain facets of the economy were not
counted, and the output of systems integrators like Accenture or Tata
Consulting Services or advertising firms such as Publicis or WPP is
intuitively very difficult to count in any consistent or meaningful
manner.

III. Services productivity and information technology

In the mid-1990s a number of prominent economists pointed to roughly
three decades of investment in computers along with the related
software and services, and asked for statistical evidence of IT's
improvement of productivity, particularly in the period between 1974
and 1994, when overall productivity stagnated.

Those years coincided with the steep decline in manufacturing's
contribution to the U.S. economy, and measuring the productivity of an
individual office worker is difficult (as in a performance review),
not to mention millions of such workers in the aggregate. Services
are especially sensitive to labor inputs: low student-faculty ratios
are usually thought to represent quality teaching, not inefficiency.
As the economist William Baumol noted, a string quartet must still be
played by four musicians; there has been zero increase in productivity
over the 300 years since the art form originated.

The late 1990s were marked by the Internet stock market bubble, heavy
investment by large firms in enterprise software packages, and
business process "reengineering." Alongside these developments,
productivity spiked: manufacturing sectors improved an average of 2.3%
annually, but services did even better, at 2.6%. In hotels, however,
the effect was less pronounced, possibly reflecting Baumol's "disease"
in which high-quality service is associated with high labor content.

Unfortunately, health care is another component in the services sector
marked by low productivity growth, and, until recently, relatively low
innovation in the use of information technologies. Measuring the
productivity of such a vast, inefficiently organized, and intangibly
measured sector is inherently difficult, so it will be hard to assess
the impact of self-care, for example: people who research their back
spasms on the Internet, try some exercises or heating pads, and avoid
a trip to a physician. Such behavior should improve the productivity
of the doctor's office but only in theory can it be counted.

In a systematic review of the IT productivity paradox in the
mid-1990s, MIT economist Eric Brynjolfsson and his colleagues
investigated what they saw as four explanations for the apparent
contradiction. Subsequent history suggests they are correct:

1) Mismeasurement of outputs and inputs

Services industries (led by the financial sector) are among the
heaviest users of IT, and services outputs are hard to measure. As we
saw, productivity statistics in general are complex and not terribly
robust.

2) Lags due to learning and adjustment

This explanation has grown in influence in the past 15 years. To take
one common example, the organizational adjustment to a $50-100 million
enterprise software deployment takes years, by which time many other
factors will influence productivity: currency fluctuations, mergers or
acquisitions, broad economic recessions, and so on.

3) Redistribution and dissipation of profits

If a leading firm in a sector uses information effectively, it may
steal market share from less effective competitors. The sector at
large thus may not appear to gain in productivity. In addition,
IT-maximizing firms might be using the technology investment for more
effective forecasting, let's say, as opposed to using less labor in
order fulfillment. The latter action would theoretically improve
productivity. But if the wrong items were being produced relative to
the market leader which more accurately sensed demand, profitability
would improve at the leading firm even though productivity could go up
at the laggard.

4) Mismanagement of information and technology

In the early years of computing, paper processes were automated but
the basic business design was left unchanged. In the 1990s, however,
such companies as Wal-Mart, Dell, Amazon, and Google invented entirely
new business processes and in some cases business models building on
IT. The revenue per employee at Amazon ($960,000) or Google ($1.2
million) is far higher than at Harley Davidson or Clorox (both are
leanness leaders in their respective categories at about $650,000).
"Mismanagement" sounds negative, but it is easy to see, as with every
past technology shift, that managers take decades to internalize the
capability of a new way of doing work before they can reinvent
commerce to exploit the new tools.

IV. IT and unemployment

Are we in a situation that parallels farming, when tractors reduced
the number of men and horses needed to work a given acreage? One way
to look at the question involves job losses by industry. Using Bureau
of Labor Statistics numbers from 2009, I compared the number of
layoffs and business closings to the total employment in the sector.
Not surprisingly, construction and manufacturing both lost in excess
of 10% of total jobs. It's hard to point to information technology as
a prime factor in either case: the credit crisis and China,
respectively, are much more likely explanations. Professional and
business services, an extremely broad category, shrank by 8% in one
year, which includes consultants among many other titles.

Another analysis can come from looking at jobs that never
materialized. Using the BLS 10-year projections of job growth from
2000, the computer and information industry moved in a very different
direction from what economists predicted. Applications programmers,
for example, rather than being a growth category actually grew only
modestly. Desktop publishers shrank in numbers, possibly because of
the rise of blogs and other web- rather than paper-based formats. The
population of customer service reps was projected to grow 32% in 10
years; the actual growth was about 10%, possibly reflecting a
combination of offshoring and self-service, both phone- and web-based.
The need for retail salespeople was thought to grow by 12%, but the
number stayed flat, and here is another example where IT, in the form
of the web and self-service, might play a role.

Neither sales clerks nor customer service reps would constitute
anything like a backbone of a vibrant middle class: average annual
wages for retail are about $25,000 and customer service reps do
somewhat better, at nearly $33,000. The decline of middle-class jobs
is a complex phenomenon: information technology definitely automated
away the payroll clerk, formerly a reliably middle-class position in
many firms, to take one example. Auto industry union employment is
shrinking, on the other hand, in large part because of foreign
competition, not robotic armies displacing humans. That same
competitive pressure has taken a toll on the thick management layer in
Detroit as well, as the real estate market in the suburbs there can
testify. Those brand managers were not made obsolete by computers.

President Obama gets the (almost) last word. In a town hall meeting in
Illinois in mid-August, he returned to the ATM theme:

"One of the challenges in terms of rebuilding our economy is
businesses have gotten so efficient that—when was the last time
somebody went to a bank teller instead of using the ATM, or used a
travel agent instead of just going online? A lot of jobs that used to
be out there requiring people now have become automated."

Have they really? The impact on the unemployment rate of information
technology and its concomitant automation is not at all clear. The
effect is highly variable across different countries, for example.
Looking domestically, travel agents were never a major job category:
even if such jobs were automated away as the number of agencies
dropped by about 2/3 in the decade-plus after 1998, such numbers pale
alongside construction, manufacturing, and, I would wager, computer
programmers whose positions were offshored.

The unfortunate thing in the entire discussion, apart from people
without jobs obviously, is the lack of political and popular
understanding of both the sources of the unemployment and the
necessary solutions. Merely saying "education" or "job retraining"
defers rather than settles the debate about what actually is to be
done in the face of the structural transformation we are living
through. On that aspect, the President is assuredly correct: he has
the terminology correct, but structural changes need to be addressed
with fundamental rethinking of rules and behaviors rather than with
sound bites and band-aids.

Early Indications July 2011: Place, Space, and Time

2011-07-29T11:56:00.000-07:00

For millennia, geography has defined human civilizations. As our communications capability increases, as measured by technical specifications if not necessarily emotional ones, the need to be physically located in a certain place to do a job, support a social movement, or complete a business transaction is becoming less of an absolute constraint. Mobile phones, cloud computing, and other tools (such as lightweight project management software or online social networks) allow people and resources to be organized without physical contact; this might be called the emerging domain of space, as in "cyber." People can put up virtual storefronts on eBay, let Amazon be their supply chain, rent computing from Google to run code written in India, and let PayPal be their treasury system. Salesforce.com keeps track of customers and prospects; ADP runs payroll once enough employees sign on. Thus, the actual "business" could physically be the size of a laptop PC.

As place becomes negotiable, so does time. Asynchronous television viewing, for example, is reshaping the cable TV landscape. Comcast bought NBC Universal, which in turn was part of the Hulu joint venture. Apart from sports, college students watch very little television at its scheduled time, or over its traditional channel for that matter. Shopping has also become time-shifted: one can easily walk into Sears, shop at a kiosk, and have the item delivered to physical address, or else shop on line and drive to the store for faster pickup than FedEx can manage. At the other end of the time spectrum, tools like Twitter are far faster than TV news, not to mention print newspapers. Voicemail seems primitive now that it's roughly 30 years old, a time-shifting capability now taken for granted.

Place and time increasingly interconnect. Real-time package tracking for a routine Amazon purchase contrasts dramatically with a common scene at an automobile dealership: a customer saw a vehicle on the website earlier in the week and none of the sales people know what happened to it. UPS can track more than a million packages per day while a car dealer can lose a $15,000 two-ton vehicle, one of a few dozen, from a fenced concrete lot. Customer expectations are set by the former experience and are growing increasingly intolerant of the latter.

The corollary of that place/time flexibility, however, is being tracked: everybody with digital assets is plugged into some kind of information grid, and those grids can be mapped. Sometimes it's voluntary: Foursquare, Shopkick, and Facebook Places turn one's announced location into games. More often Big Brother's watch is without consent: London's security cameras are controlled by the same police department accused of using official assets in the service of the Murdoch newspapers' snooping on innocent citizens. Unplugged from the Internet but still needing to distribute directives and communiqués, Osama Bin Laden relied on a USB-stick courier who proved to be his undoing. As we have seen elsewhere, the entire idea of digital privacy, its guarantees and redresses, for bad guys and for everyday folk, is still primitive.

Examples are everywhere: Google Streetview has proved more controversial in Europe, and Germany in particular. Local "open records" laws have yet to be rethought in the age of instant global access: it's one thing for the neighbors to stop by town hall to see how much the new family paid for their house, but something else entirely (we don't really know what) when tens of millions of such transactions are searchable -- especially within overlays of Streetview, Bing's Bird's eye aerial (as opposed to satellite) imagery, and other potentially intrusive mechanisms.

In 2009, a WIRED magazine reporter attempted to vanish using a combination of physical disguises and digital trickery: pre-paid cell phones, proxy servers for IP address masking, cash-purchased gift cards. He was found though a combination of old-fashioned detective work and sophisticated network analysis: he was signing on to Facebook with an alias, and the alias had few real friends. The Facebook group he was lurking in was comprised of people trying to find him. The intersections of place and space are growing more curious every year.

Virtuality

From its origins as a network perimeter tunnel (Virtual Private Network, the ability to see computing resources inside the firewall while being physically remote from the corporate facility), virtualization has become a major movement within enterprise computing. Rather than dedicating a piece of hardware to a particular piece of software, hardware becomes more fungible. In a perfect virtual world, people with applications they need to run can schedule the necessary resources (possibly priced by an auction mechanism), do their work, then retreat from the infrastructure until they next need computing. In this way, the theory goes, server utilization is improved: all the downtime associated with captive hardware can go offline, freeing computing to be used to the current work, whatever its size, shape, or origin.

Once again, physical presence (in this case, big computers in a temperature-controlled facility with expensive redundant network and power connections, physical security, and specialized technicians tending the machines) is disconnected from data and/or application logic. In many consumer scenarios, people act this way without thinking twice: looking at Google Maps instead of Rand McNally, using the online version of Turbotax, or even reading Facebook is similar: no software package resides on the user's machine, and the physical location of the actual computing is both invisible and irrelevant.

From the world of computing, it's a short hop to the world of work. People no longer need to come to the physical assets if they're not doing work on somebody else's drill presses and assembly lines: brain work, a large component of the services economy, is often independent of physical capital, and thus of scheduled shifts. "Working from home" is commonplace, and with the rise of the smartphone, work becomes an anytime/anywhere proposition for more and more people. What this seamlessness means for identity, for health, for family and relationships, and for business performance has yet to be either named or sorted out.

Another dimension of virtuality is personal. Whether in Linden Labs' Second Life, World of Warcraft, or any number of other venues, millions of people play roles and interact through a software persona. As processing power and connection quality increase, these avatars will get more capable, more interesting, and more common. One fascinating possibility relates to virtual permanence: even if the base-layer person dies or quits the environment, the virtual identity can age (or, like Bart Simpson, remain timeless), and can either grow and learn or remain blissfully unaware of change in its own life or the various outside worlds.

Practical applications of virtualization for everyday life seem to be emerging. In South Korea, busy commuters can shop for groceries at transparencies of store shelves identical to those at their nearby Tesco Homeplus store; the photos of the products bear 2D barcodes which, when scanned and purchased, generate orders that are bundled together for home delivery. Picking up ingredients for dinner on the way home from work is a time-honored ritual; here, the shopper chooses the items but never touches them until arriving at his or her residence.

Cisco is making a major play toward virtual collaboration in enterprise videoconferencing; their preferred term, "telepresence," hasn't caught on, but the idea has. Given the changes to air travel in the past ten years (longer check-in times, fewer empty seats, higher fares), compounded by oil price shocks, many people dislike flying more than they used to. Organizations on lean budgets also look to travel as an expense category ripe for cutting, so videoconferencing is coming into its own at some firms. Cisco reports that it has used the technology to save more than $800 million over five years; productivity gains add up, by their math, to another $350 million.

Videoconferencing is also popular with individuals, but it isn't called that: in July 2011 Skype's CEO said that users make about 300 million minutes of video calls per month, which is about the same as pure voice connections. when measured as web traffic; since video consumes more bandwidth, the number of voice-to-voice calls might well be higher. The point for our purposes is that rich interaction can facilitate relationships and collaboration in the absence of physical proximity, at very low cost in hardware, software, and connection. As recently as 2005, a corporate videoconference facility could cost more than a half million US dollars to install; monthly connection charges were another $18,000, or $216,000 annually. In 2011, Apple iPads and many laptop PCs include cameras, and Skype downloads are free.

Organizations

Given that vertical integration has its limits in speed and the cost of capital investment (both in dollars and in opportunity costs), partnering has become a crucial capability. While few companies can emulate the lightweight, profit-free structure of a hacker's collective like Anonymous, of Wikipedia, or of Linux, neither can many firms assume that they control all necessary resources under their own roof. Thus the conventional bureaucracy model is challenged to open up, to connect data and other currencies to partners. Whether it involves sharing requirements documents, blueprints for review, production schedules, regulatory signoffs, or other routine but essential categories of information, few companies can quickly yet securely vet, map, and integrate a partner organization. Differences in nomenclature, in signing authority or span of control, time zones, language and/or currency, and any number of other characteristics complicate the interaction. So-called onboarding -- granting a partner appropriate data access -- can be a months-long process, particularly in secure (aerospace and defense) or regulated settings. Creating a selectively permeable membrane to let in the good guys, let out the proper information, turn off the faucet when it's not being used, and maintain trade secrets throughout has proven to be non-trivial.

Automata

What would happen if a person's avatar could behave independently? If an attractive bargain comes up at Woot, buy it for me. If someone posts something about me on a social network, notify me or, better yet, correct any inaccuracies. If the cat leaves the house through the pet door and doesn't return within two hours, call the petsitter. Who would bear responsibility for the avatar's actions? The person on whose behalf it is "working"? The software writer? The environment in which it operates?

Once all those avatars started interacting independently, unpredictable things might happen, the equivalent of two moose getting their antlers stuck together in the wild, or of a DVD refusing to play on some devices but not others because of a scratch on the disc. Avatars might step out of each other's way, or might trample each other in mobs. They might adapt to new circumstances or they might freeze up in the face of unexpected inputs. Some avatars might stop and wait for human guidance; other might create quite a bit of havoc given a particular set of circumstances.

It's one thing for a person's physical butler, nanny, or broker to act on his or her behalf, but something else quite new for software to be making such decisions. Rather than being a hypothetical thought experiment, the above scenarios are already real. Software "snipers" win eBay auctions with the lowest possible winning bid at the last possible moment. Google Alerts can watch for web postings that fit my criteria and forward them.

More significantly, Wall Street transactions generated by the jacketed floor traders waving their hands furiously are a dying breed. So-called algorithmic trading is a broad category that includes high-frequency trading, in which bids, asks, and order cancellations are computer-to-computer interactions that might last less than a second (and thus cannot involve human traders). By itself, HFT is estimated to generate more than 75% of equities trading volume; nearly half of commodity futures (including oil) trading volume is also estimated to be computer-generated in some capacity. The firms that specialize in such activity are often not well known, and most prefer not to release data which may expose sources of competitive advantage. Thus the actual numbers are not widely known.

What is known is that algorithms can go wrong, and when they go wrong at scale, consequences can be significant. The May 6, 2010 "Flash Crash" is still not entirely understood, but the source of the New York Stock Exchange's biggest, fastest loss (998 points) in history lies in large measure in the complex system of competing algorithms running trillions of dollars of investment. The long-time financial fundamentalist John Bogle -- founder of the Vanguard Group -- pulled no punches in his analysis: "The whole system failed. In an era of intense technology, bad things can happen so rapidly. Technology can accelerate things to the point that we lose control."

Artifacts of the algorithmic failure were just plain weird. Apple stock hit $100,000 a share for a moment; Accenture, a computer services provider, instantaneously dropped from $40 to a cent only to bounce back a few seconds later. Circuit-breakers, or arrangements to halt trading once certain limits are exceeded, were tripping repeatedly. For example, if a share price moves more than 10% in a five minute interval, trading can be halted for a five-minute break. A bigger question relates to the HFT firms that, in good times, provide liquidity, but that can withdraw from the market without notice and in doing so make trading more difficult. Technically, the exchanges' information systems were found to have shortcomings: some price quotes were more than two seconds delayed, which represents an extreme lag in a market where computer-generated actions measure in the millions (or more) per second.

Implications

What does it mean to be somewhere? As people sitting together both text other people in college cafeterias, what does it mean to be physically present? What does it mean to "be at work"? Conversely, what does it mean to be "on vacation"? If I am at my job, how is my output or lack thereof measured? Counting lines of code proved to be a bad way to measure software productivity; how many jobs measure performance by the quality of ideas generated, the quality of collaboration facilitated, the quality of customer service? These are difficult to instrument, so industrial-age measures, including physical output, remain popular even as services (which lend themselves to extreme virtualization) grow in importance and impact.

What is a resource? Who creates it, gets access to it, bears responsibility for its use or misuse? Where do resources "live"? How are they protected? What is obsolescence? How are out-of-date resources retired from service? Enterprise application software, for example, often lives well past its useful life; ask any CIO how many zombie programs he or she has running. Invisible to the naked eye, software can take on a life of its own, and once another program connects to it (the output of a sales forecasting program might be used in HR scheduling, or in marketing planning), the life span likely increases: complexity makes pruning more difficult since turning off an application might have dire consequences at the next quarterly close, the next annual performance review, or the next audit. Better to err on the side of safety and leave things running.

What does it mean for information to be weightless, massless, and infinitely portable? Book collections are becoming a thing of the past for many readers, as Kindle figures and Google searches can attest: having a reference collection near the dining room used to be essential in some academic households, to settle dinnertime contests. Music used to weigh a lot, in the form of LP records. Compact discs were lighter, but the plastic jewel box proved to be a particularly poor storage solution. MP3 downloads eliminated the software, but still needed bits to be stored on a personal hard drive. Now that's changing, to the point where physical books, newspapers, music, and movies all share a cloud-based solution. The result is a dematerialization of many people's lives: book collections, record collections, sheet music -- artifacts that defined millions of people are now disappearing, for good ecological reasons, but with as yet undetermined ramifications for identity, not to mention decorating.

What does it mean to bear personal responsibility? If software operating in my name does something bad, did I do anything? If I am not physically present at my university, my workplace, or my political organization, how loosely or tightly am I connected to the institution, to its people, to its agenda? Harvard sociologist Robert Putnam worried about the implications of the decline in the number of American bowling leagues; are Facebook groups a substitute for, or an improvement on, physical manifestations of civic engagement? If so, which groups, and which forms of engagement? In other words, at the scale of 700-plus million users, saying anything about Facebook is impossible, given the number of caveats, exceptions, and innovations: Facebook today is not what it will be a year from now, whereas bowling leagues have been pretty stable for decades.

Thus the fluidity of (cyber) space, (physical) place, and time has far-reaching implications for getting work done, for entrepreneurial opportunity, and for personal identity. As with so many other innovations, the technologists who are capable of writing code and designing and building breakthrough devices have little sense of what those innovations will mean. The sailing ship meant, in part, that Britain could establish a global empire; the first century of the automobile meant wars for oil, environmental degradation, new shapes for cities, the post-war rise of Japan, and unprecedented personal mobility, to start a very long list. What barely a quarter century of personal computing, 20 years of the commercial Internet, and a few months of smartphones might mean is impossible to tell so far, but it looks like they could mean a lot.

Early Indications June 2011: Identity and privacy

2011-06-30T18:38:00.000-07:00

With the soft launch of Google Plus, it's an opportune time to think
about digital privacy, insofar as Google is explicitly targeting
widespread user dissatisfaction with Facebook's treatment of their
personal information. The tagging feature, for example, that was used
to build a massive (hundreds of millions of users) facial recognition
database has important privacy implications, for example. In standard
Facebook fashion, it's turned on by default, and opting out once may
not guarantee that a user is excluded from the next wave of changes.
If a government did that, controversy would likely be intense, but in
Facebook's case, people seem to be resigned to the behavior.

According to a 2010 poll developed at the University of Michigan and
administered by the American Customer Satisfaction Index, Facebook
scored in the bottom 5%, in the range of cable operators, airlines,
and the IRS. Even as Facebook is rumored to be holding off user-base
announcements for now-mundane 100-million intervals, users are
defecting. While the service is said to be closing in on 750 million
users globally, reports of 1% of that population in the U.S. and
Canada defecting in one month were not confirmed by the company, but
neither were they denied. A Google search on "Facebook fatigue"
returned 23 million hits. At the same time, Facebook delivers 31% of the 1.1 trillion ads served in the U.S. each quarter (Yahoo is a distant second at 10% share); those ads are expected to represent $4 billion in 2011 revenue.

With the Facebook IPO still impending, the questions about privacy
take on more urgency. What, really, is privacy? It's clearly a
fundamental concept, typically conceived of as a human or civil right.
According to the Oxford English Dictionary, privacy is "the state or
condition of being alone, undisturbed, or free from public attention,
as a matter of choice or right; seclusion; freedom from interference
or intrusion." It's an old word, dating to the 14th century, that is
constantly being reinvented as times change.

Being left alone in a digital world is a difficult concept, however.
Here, NYU's Helen Nissenbaum is helpful: "What people care most about
is not simply restricting the flow of information but ensuring that it
flows appropriately. . . ." Thus she does not wade further into the
definitional swamp, but spends a book's worth of analysis* on the issue
of how people interact with the structures that collect, parse, and
move their information. (*Privacy in Context: Technology, Privacy, and the Integrity of Social Life)

Through this lens, the following artifacts are not able to be judged
as public or private, good or bad, acceptable or unacceptable, but
they can be discussed and considered in the context of people's
values, choices, and autonomy: when I use X, is my information handled
in a way that I consent to in some reasonably informed way? The
digital privacy landscape is vast, including some familiar tools, and
for all the privacy notices I have received, there is a lot I don't
know about the workings of most of these:

-loyalty card programs
-Google streetview
-toll-pass RFID tags
-surveillance cameras
-TSA no-fly lists
-Facebook data and actions
-credit-rating data
-Amazon browsing and purchase history
-Google search history
-Foursquare check-ins
-digital camera metadata
-expressed preferences such as star ratings, Facebook Likes, or eBay
seller feedback
-searchable digital public records such as court dates, house
purchases, or bankruptcy
-cell phone location and connection records
-medical records, electronic or paper
-Gmail correspondence
-TSA backscatter X-ray

Does such lack of knowledge mean that I have conceded privacy, or that
I am exposing aspects of my life I would rather not? Probably both.
In addition, the perfection of digital memory -- handled properly,
bits don't degrade with repeated copying -- means that what these
entities know, they know for a very long time. The combination,
therefore, of lack of popular understanding of the mechanics of
personal information and the permanence of that information makes
privacy doubly suspect.

Scale

Given the climate of the past ten years in relation to privacy, the
events of 9/11 have conditioned the debate to an extraordinary degree.
The U.S. government was reorganized, search and seizure rules were
broadened, and rules of the game got more complicated: not only were
certain entities ordered to turn over information related to their
customers, they were obligated to deny that they had done so. More
centrally, the FBI's well-documented failure to "connect the dots"
spurred a reorganization of multiple information silos into a vast and
possibly suboptimally sprawling Department of Homeland Security.

Governments have always wanted more information than people typically
wanted to give them. Given the new legal climate along with
improvements in the technologies of databases, information retrieval,
and image processing, for example, more is known about U.S.
individuals than at any time heretofore. (Whether it is known by the
proper people and agencies is a separate question.) At the 2000 Super
Bowl, for example, the entire crowd was scanned and matched against an
image database. Note the rhetoric employed even before the terrorist
attack on the twin towers and the Pentagon:

"[Tampa detective Bill] Todd is excited about the biometric
crimestopper aid: The facial recognition technology is an extremely
fast, technologically advanced version of placing a cop on a corner,
giving him a face book of criminals and saying, Pick the criminals out
of the crowd and detain them. It's just very fast and accurate."

Note that the category of "criminals" can be conveniently defined: the
definition in Yemen, Libya, or Pakistan might be debatable, depending
on one's perspective. In Tampa, civil liberties were not explicitly
addressed, nor was there judicial oversight:

"Concerned first and foremost with public safety, the Tampa police
used its judgment in viewing the images brought up on the monitor. Although the cameras permitted the police to view crimes captured by the cameras and apprehend suspects for pick-pocketing and other petty
crimes, their real goal was to ensure crowd safety. The Tampa Police were involved in forming the database and determining by threat level who was added to the database." (emphasis added)

Letting a police force, which in any given locality may have
corruption issues as in large areas of Mexico, use digital records to
figuratively stand on a corner and pick "the criminals out of the
crowd" without probable cause is scary stuff. Also in this week's
news, a major story concerns an FBI agent who protected his informant
from murder charges. And police officers might not be corrupt:
Mexican drug gangs are now being said to threaten U.S. law enforcement
officers with harm. Once the information and the technology exist,
they will be abused: the issue is how to design safeguards to the
process.

Consider RFID toll passes. According to a transportation industry
trade journal,

"The first case of electronic toll record tracking may have been in
September 1997, when the New York City Police Department used E-Z Pass toll records to track the movements of a car owned by New Jersey millionaire Nelson G. Gross who had been abducted and murdered. The police did not use a subpoena to obtain these records but asked the Metropolitan Transportation Authority and they complied."

Again, the potential for privacy abuse emerged before protections did.
I could find no statistics for the number of EZpass and similar
tokens in current use, but it could well be in the tens of millions.
As only one in a number of highly revealing artifacts attached to a
person's digital identity, toll tokens join a growing number of
sensors of which few people are aware. The OBD system in a car,
expanded from a mechanic's engine diagnostic, has become a "black box"
like those recovered from airplane crashes. Progressive Insurance is
experimenting with data logging from the devices as a premium-setting
tool, which does not, significantly, include GPS information; the firm
discontinued a GPS-based experiment in 2000.

Invisibility

In its excellent "What They Know" investigative series in 2010, the
Wall Street Journal concluded that "they" know a lot. Numbers only
scratch the surface of the issues:

-Dictionary.com installed 234 tracking cookies in a single visit.
WSJ.com itself came in below average, at 60. Wikipedia.org was the
only site of 50 tested to install zero tracking software files.

-When Microsoft relaunched Internet Explorer in 2008, corporate
interests concerned about ad revenue vetoed a plan to make privacy
settings persistent. Thus users have to reset the privacy preferences
with every browser restart, and few people are aware of the settings
console in the first place.

-The Facebook Like button connects a behavior (an online vote, a
pursuit of a coupon, or an act of whim) to a flesh-and-blood person:
the Facebook profile's presumably real name, real age, real sex, and
real location. Again according to the Journal,

"For example, Facebook or Twitter know when one of their members reads
an article about filing for bankruptcy on MSNBC.com or goes to a blog
about depression called Fighting the Darkness, even if the user
doesn't click the "Like" or "Tweet" buttons on those sites.

For this to work, a person only needs to have logged into Facebook or
Twitter once in the past month. The sites will continue to collect
browsing data, even if the person closes their browser or turns off
their computers, until that person explicitly logs out of their
Facebook or Twitter accounts, the study found."

-Few people realize how technologies can be used to follow them from
one realm to another. The giant advertising firm WPP recently
launched Xaxis, which, according to the Wall Street Journal (in a
story separate from its "What They Know" series), "will manage what it describes as the 'world's largest' database of profiles of individuals that includes demographic, financial, purchase, geographic and other information collected from their Web activities and brick-and-mortar transactions. The database will be used to personalize ads consumers see on the Web, social-networking sites, mobile phones and ultimately, the TV set."

In each of these examples, it's pretty clear that all of these
companies ignored, or at least lightly valued, Nissenbaum's notion of
contextual integrity as it relates to the individual. Given the lack
of tangible consequences, it makes economic sense for them to do so.

Identity

Given that digital privacy seems almost to be a quaint notion in the
U.S. (European live and are legally protected differently), a deeper
question emerges: if that OED sense of freedom from intrusion is being
reshaped by our many digital identities, who are we and what do we
control? Ads, spam, nearly continuous interruption (if we let
ourselves listen), and an often creepy sense of "how did they know
that?" as LinkedIn, Amazon, Google, Facebook, and Netflix hone in our
most cherished idiosyncrasies -- all of these are embedded in the
contemporary connected culture. Many sites such as Lifehacker
recommend frequent pruning: e-mail offers, coupon sites, Twitter
feeds, and Facebook friends can multiply out of control, and saying no
often requires more deliberation than joining up.

Who am I? Not to get metaphysical, but the context for that question
is in flux. My fifth-grade teacher was fond of saying "tell me who
your friends are and I'll tell you who you are." What would he say to
today's fifth-grader, who may well text 8,000 times a month and have a
public Facebook page?

Does it matter that a person's political alignment, sexual
orientation, religious affiliation, and zip code (a reasonable proxy
for household income) are now a matter of public, searchable record?
Is her identity different now that some many facets of it are
transparent? Or is it a matter of Mark Zuckerberg's vision -- people
have one identity, and transparency is good for relationships -- being
implicitly shared more widely across the planet? Just today, a review
of Google Plus argued that people don't mind having one big list of
"friends," even as Facebook scored poorly in this year's customer
satisfaction index.

Indeed, one solution to the privacy dilemma is to overshare: if
nothing can possibly be held close, secrets lose their potency,
perhaps. (For an example, see the story of Hasan Elahi and his
Trackingtransience website in the May 2007 Wired and in Albert-László
Barabási's book Bursts.) The recent fascination with YouTube
pregnancy-test videos is fascinating: one of life's most meaningful,
trajectory-altering moments is increasingly an occasion to show the
world the heavy (water) drinking, the trips to the pharmacy and the
toilet, and the little colored indicator, followed by the requisite
reaction shots. (For more, see Marisa Meltzer's piece on Slate,
wonderfully titled "WombTube.")

The other extreme, opting out, is difficult. Living without a mobile
phone, without electronic books, without MP3 music files, without
e-mail, and of course without Facebook or Google is difficult for many
to comprehend. In fact, the decision to unplug frequently goes
hand-in-hand with a book project, so unheard-of is the notion.

At the same time, the primacy of the word represented by these massive
information flows leaves out at least 10% of the adult U.S.
population: functional illiteracy, by its very nature, is difficult to
measure. One shocking statistic, presented without attribution by the
Detroit Literacy Coalition, pegs the number in that metro area at a
stunning 47%. Given a core population of about 4 million in the
3-county area, that's well over 1 million adults who have few concerns
with Twitter feeds, Google searches, or allocating their 401(k)
portfolio.

In the middle, where most Americans now live, there's an abundance of
grey area. As "what they know," in the Journal's words, grows and
what they can do with it expands, perhaps the erosion of analog
notions of privacy will be steady but substantial. Another
possibility is some high-profile, disproportionately captivating event
that galvanizes reaction. The fastest adoption of a technology in
modern times is not GPS, or DVD, or even Facebook: it was the U.S.
government's Do Not Call registry. Engineering privacy into browsers,
cell phones, and very large data stores is unlikely; litigation is,
unfortunately, a more likely outcome. Just today a U.S. federal judge
refused to halt a class-action suit against Google's practice of
using its Streetview cars for wi-fi sniffing. The story of privacy,
while old, is entering a fascinating, and exasperating, new phase, and
much remains to be learned, be tested, and be accepted as normal.

Early Indications May 2011: Firms, Ecosystems, and Collaboratives

2011-05-30T13:37:00.000-07:00

The Internet and mobility are changing how resources can be organized to do work. The limited liability joint stock corporation remains useful for assembling capital at scale, which helps build railroads, steel mills, and other industrial facilities. But with manufacturing growing less important in the U.S. economy in the past 50 years, and new tools facilitating coordination and collaboration at scale without need for 20th century firms, we are witnessing some fascinating new sizes, shapes, and types of organizations. As Erik Brynolfsson noted in Sloan Management Review, we need to rethink the very nature of firms, beginning with Ronald Coase's famous theory: "The traditionally sharp distinction between markets and firms is giving way to a multiplicity of different kinds of organizational forms that don't necessarily have those sharp boundaries." Rather than try to construct a typology or theory of these non-firm entities, I will give a series of examples in which people can get things done outside traditional governmental and company settings, then try to draw some preliminary conclusions.

Kickstarter.com
How do art and creativity find funding? The answers have varied tremendously throughout human history: rich patrons, family members, credit card debt, and many forms of government funding. David Bowie issued an asset-backed security with the future revenue streams of the albums he recorded before 1990 as collateral. Given the decline in the audience for buying recorded music, Moody's downgraded the $55 million in debt to one step above junk bonds: Prudential, the buyer of the notes, looks to be the loser here while Bowie was either smart or lucky (but hasn't created much art of note since 1997 when the transaction occurred).

In 2009, a new model emerged: Kickstarter allows artists and other creators to post projects to which donors (not lenders) can commit. If I want to make an independent film, or catalog the works of a graffiti artist, or write a book, I can post the project, and any special rewards to funders, on the site. Donors might receive a signed copy of the finished work, or pdf updates while the work is in process, or tickets to the film's premiere, or other reciprocation.

Donors and artists alike are protected by a threshold requirement: if the required sum is not raised, the project never launches. Kickstarter takes 5% of the funds and Amazon Payments receives another 5% cut. Once completed, the works are permanently archived on the site. The site attracted some notice in 2010 when a user-controlled alternative to Facebook, called Diaspora, raised $200,000.

While it's too early to judge the longevity or scope of the model, Time named it one of the 50 best inventions of 2010.

Software developer networks
Microsoft enjoyed a huge competitive advantage here in the 1990s. As of 2002, one estimate showed about 3.25 million developers in the Microsoft camp. None of these men and women were employees, but were often trained, certified, and equipped with tool sets by Microsoft. The developers, in turn, could sense market demand for applications large and small and build solutions in the Windows environments for customers conditioned to seek out the Windows branding in the service provider.

More recently, the App Store model has attracted developers who seek a more direct path to monetization. Apple has hundreds of thousands of applications for the iPhone and iPad; Google's Android platform has nearly as many, depending on counting methodology. Tools are still important, but rather than certification programs, the app store model relies on the market for validation of an application. Obviously dry cleaners and other small businesses still need accounting programs, or whatever, and Google can't compete with Microsoft for this slice of the business. Even so, enterprise software vendors such as Adobe, Autodesk, Oracle, and SAP must navigate new territory as the app store model, along with Software as a Service, make such competitors as Salesforce.com and its Force.com developer program a new kind of market entrant.

The app store developers aren't really a network in any meaningful sense of the word: they don't meet, don't know each other, don't exist in a directory of members, affiliates, or prospects. There are developer conferences, of course, but not in the same form that Microsoft pioneered. The networks, particularly the app store developers, certainly aren't even remotely an extension of Apple's, Google's, or HTC's corporate organization: the market model is much more central than any org chart an be.

The market sifts winners from the mass of losers. According to Dutch app counters at Distimo, "We found that only two paid applications have been downloaded more than half a million times in the Google Android Market worldwide to date, while six paid applications in the Apple App Store for iPhone generate the same number of downloads within a two month timeframe in the United States alone." This model shifts risk away from the platform company, which gets a slice no matter which applications emerge as winners and invests nothing in losers.

Not all of these developer networks play inside the lines, as it were. Despite robust security technologies, Sony PlayStations and Apple iPhones have been "unlocked" by 3rd-party teams. The iPhone Dev Team, described by the Wall Street Journal as "a loose-knit but exclusive group of highly-skilled technologists who are considered to be the leaders among iPhone hackers," has contributed a steady stream of software kits for Apple customers to "jailbreak" their devices. The procedure is not illegal but can void certain warranty provisions. The benefit to the user is greater control over the device, access to software not necessarily approved by Apple, and sometimes features not supported by the official operating system.

Because they create value for the user base at the same time they have developed deep understanding of the technical architecture, the Dev Team and similar groups cannot be attacked too vigorously by the platform owners, as Sony is discovering in the PlayStation matter: the online group Anonymous explicitly connected the attacks (while denying that the group conducted them) to Sony's efforts to stop users from unlocking PS3s. Thus far Sony has stated that the attacks have cost $170 million.

The iPhone Dev Team, meanwhile, is so loosely organized that it functioned quite effectively, solving truly difficult technical challenges in elegant ways, even if its members did not physically meet until they were invited to a German hackers conference.

Kiva.org
Founded in 2005, Kiva.org is a non-profit microlending effort. The organization, headquartered in San Francisco, recruits both lenders and entrepreneurial organizations around the world. The Internet connects the individuals and groups who lend money to roughly 125 lending partners (intermediaries) in developing countries and in the United States, and the lending partners disburse and collect the loans. Kiva does not charge any interest, but the independent field partner for each loan can charge interest.

After six years, Kiva has loaned more than $200 million, with a repayment rate of 98.65%. More than 500,000 donations have come in, and nearly 300,000 loans have been initiated, at an average size of slightly under $400 US. While the recipients often are featured on the Kiva website, lenders can no longer choose the recipients of their
loan, as was formerly the case. Still, the transparency of seeing the effect of money for a farmer's seeds, or a fishing boat repair, or a village water pump is strong encouragement to the donors, so most money that people give to Kiva is reloaned multiple times.

Kiva and other microfinance organizations challenge the conventional wisdom of economic development, as embodied in large capital projects funded by the World Bank and similar groups. Instead of building massive dams, for example, Kiva works at the individual or small-group level, with high success rates that relate in part to the emotional
and economic investment of the people rather than a country's elites, the traditional point of contact for the large aid organizations. Make no mistake: the scale of the macro aid organizations is truly substantial, and Kiva has never billed itself as a replacement for traditional economic development.

At the current time, Kiva faces substantial challenges:
• the quality of the local lending partners
• currency risk
• balancing supply and demand for microcredit at a global scale
• transparency into lending partners' practices.

Still, the point for our purposes relates to $200 million in loans to the world's poorest, with low overhead and emotional linkages between donors and recipients. 15 years ago such a model would have been impossible even to conceive.

Internet Engineering Task Force (IETF)
More than a decade ago, the Boston Globe's economics editor (yes, daily newspapers once had economics editors) David Warsh contrasted Microsoft's pursuit of features to the Internet Engineering Task Force. In the article, the IETF was personified by Harvard University's Scott Bradner, a true uber-geek who embraces a minimalist, functionalist perspective. "Which system of development," Warsh asked, "[Bill] Gates's or Bradner's, has been more advantageous to consumers? . . . Which technology has benefited you more?" Bradner contends that, like the Oxford English Dictionary, the IETF serves admirably as a case study in open-source methodology, though the people making both models work didn't call it that at the time.

Companies in any realm of intellectual property, especially, should consider Warsh's conclusion:

"Simpler standards [in contrast to those coming from governmental or other bureaucratic entities or lowest-common-denominator consensus, and in contrast to many proprietary standards that emphasize features over function] mean greater success. And it was the elegant standards of the IETF, simply written and speedily established, that have made possible the dissemination of innovations such as the World Wide Web and its browsers. . . ."

The IETF's structure and mission are straightforward and refreshingly apolitical:

"The IETF's mission is 'to make the Internet work better,' but it is the Internet _Engineering_ Task Force, so this means: make the Internet work better from a engineering point of view. We try to avoid policy and business questions, as much as possible. If you're interested in these general aspects, consider joining the Internet Society."

A famous aspect of its mission statement commits the group to "Rough consensus and running code." That is, the IETF makes "standards based on the combined engineering judgment of our participants and our real-world experience in implementing and deploying our specifications." The IETF has meetings, to be sure, and a disciplined process for considering and implementing proposed changes, but it remains remarkable that such a powerful and dynamic global communications network is not "owned" by any corporation, government, or individual.

There are several conclusions to this line of thinking.

Infrastructure
The emergence of powerful information networks is shifting the load traditionally borne by public or other forms of infrastructure. The power grid, roads, schools, Internet service providers (ISPs) -- all will be utilized differently as the capital base further decentralizes. In addition, given contract manufacturing, offshore programming, cloud computing, and more and more examples of software as a service, the infrastructure requirements for starting a venture have plummeted: leadership, talent, and a few laptops and smartphones are often sufficient.

Rethinking size
The importance of scale can at times be diminished. For example, Jeff Vinik didn't need the resources of Fidelity Investments to run his hedge fund after he quit managing the giant Magellan mutual fund. In the 1950s, one reason a hotel investor would affiliate with Holiday Inn was for access to the brand and, later, the reservations network. Now small inns and other lodging providers can work word-of-mouth and other referral channels and be profitable standing alone.

Talent
As Linux and other developer networks grow in stature and viability, managing the people who remain in traditional organizations will likely become more difficult. What Dan Pink reasonably calls "the purpose motive" is a powerful spur to hard work: as grand challenges have shown, people will work for free on hard, worthy problems. Outside of those settings, bureaucracies are not known for proving either worthy challenges or worthy purposes.

One defining fact of many successful startups -- Netflix, Zappos, and Skype come to mind -- is their leaders' ability to put profitability in the context of doing something "insanely great," in the famous phrasing of Steve Jobs. Given alternatives to purpose-challenged cubicle-dwelling, an increasing number of attractive job candidates will opt out of traditional large organizations. Harvard Business School and other institutions are seeing strong growth of a cadre of students who resist traditional employment and more importantly, traditional motivation. Both non-profits and startups are challenging investment banking and consulting for ambitious, capable leaders of the next generation.

Revisiting Coase
In the end, the purpose of a firm, to be an alternative to market transactions, is being rescaled, rethought, and redefined. Firms will always be an option, to be sure, but as the examples have shown, no longer are they a default for delivering value. One major hint points to the magnitude of the shift that is well underway: contrasted to "firm," the English vocabulary lacks good words to describe Wikipedia, Linux, Skype, and other networked entities that can do much of what commercial firms might once have been formed to undertake.

April 2011 Early Indications: The iPad as a Teaching Tool

2011-04-27T19:17:00.001-07:00

Last year I was given an iPad by my university with which to
experiment. Here are my impressions at the end of the school year.

As a media consumption device, the iPad excels. I have written about
this previously, but in the interim the Economist has begun
simultaneous publication of iPad and print magazines, and I am
surprised by how little attention I now give the print book even as I
remain a dedicated reader: the iPad presentation of the magazine's
signature content is, on the whole, excellent. (Sometimes print pages
and tablet pages are a weird multiple, so half-sentence "widows" are
not uncommon.) I appreciate the eye candy of Flipboard but seldom
read it. Movies are a treat, and the combination of print and video
makes the iPad a perfect travel companion. As Walt Mossberg noted, it
can also do enough e-mail (given wi-fi access) to serve as a business
tool for lightweight communications on the road.

Similarly, gaming can become addictive given the intimacy of the
device. Much like the Kindle for bedtime reading, the iPad is compact
enough to live on the nightstand. Versus the machine I am 609-7
lifetime in Scrabble, and willingly demo it for word-addicted seat
mates on airplanes. Zynga's Words with Friends is far easier on the
tablet than on the iPhone.

The demands of teaching, however, are of a different sort, and here,
the iPad gets poor reviews. In part, I hasten to add, this grade
reflects the state of the surrounding infrastructure. Even so, there
are three serious hurdles to professorial adoption of the tool.

1) Even though I have the proper expensive dongle, the iPad does not
easily drive an external projector. At the time the control panel
lacked a video out control, so a separate app is necessary. I taught
the Harvard Business School case on the MLB iPad app development and
wanted to demo it for my class. I brought the tablet in the week
before with the cable only to find that no signal left the device.
Plan B was to use the document camera on the podium, so I came in
early to set that up, reduce the glare as much as possible, and get
ready to demo At Bat. This time, my undoing was the wireless network
in my building, a known issue that I had failed to test beforehand.
Fortunately my class included some sports fans whose raves about the
iPhone app carried the discussion.

2) I am typing this on the docking station, my first encounter with
the keyboard, whose action I particularly like as I work at the
kitchen table. In a future/retro juxtaposition, the portrait
orientation recalls decades-old word processors. The problem is the
lack of a mouse: mixing touch-screen and keyboard input is awkward.
To Apple's credit, however, the dock holds the iPad securely enough to
peck at it for corrections, even if the cover had to come off for the
dock to accept the tablet. I did not purchase the slideware app, and
am happy with my usual desktop rig for such purposes. Maybe the iPad
would work better on a plane than a laptop, given the tiny workspace
on most airline tray tables, but I build few enough decks that I never
performed that experiment.

3) My original goal was to replicate some of the benefits of grease
pencil with transparencies: I wanted preprinted slides that could be
marked up with underlining, emendations, updates, dramatic gestures,
and other tools to increase student engagement. My former colleague
Steve Sawyer used a circa-2005 Microsoft tablet to good effect in this
regard, but I have yet to make my finger-dragging look good in an iPad
app. Dan Bricklin's Note Taker is well designed, but my efforts at
freehand input were awkward at best and often illegible. Replicating
such scrawl in front of students was an unappealing prospect, so I
continue to wait for a tool that merges presentation slides, ease of
use, and real-time interaction. For all of the iPad's many strengths,
for handwriting capture, the stylus was the right tool for the job.

Stepping back, it's amazing how a general-purpose platform with great
form factor, battery life, graphical vividness, and wireless access is
transforming the hardware market. Single-function devices, whether
for gaming, automobile diagnostics, bedside patient care, GPS, or even
test instruments, now must be re-envisioned not as appliances but as
applications. The speed of this transformation is truly stunning: I
saw a full-feature oscilloscope the other day that basically makes the
tablet into a peripheral. And what can it mean when test instruments
can be networked, effortlessly, across geography? Just as with
medical diagnostics -- real-time EKG via the iPhone is old news --
being able to collaboratively troubleshoot without being tethered to
AC or Ethernet will bring new ways for teams to work.

Links:

Previous iPad reactions:
http://earlyindications.blogspot.com/2010_07_01_archive.html

Mossberg: http://ptech.allthingsd.com/20100922/an-american-in-paris-says-au-revoir-to-his-laptop/

VGA adapter: http://store.apple.com/us/product/MC552ZM/B?fnode=MTc0MjU4NjE&mco=MTc5MzExNTI

Portrait word processor screen:
http://www.utexas.edu/lbj/sites/default/files/image/37-Xerox-Alto.gif

Oscilloscope app:
http://www.appscout.com/2011/04/oscium_imso_app_and_connector.php

EKG: http://articles.latimes.com/2011/apr/04/business/la-fi-medical-device-20110404

March 2011 Early Indications: Reinventing Retail

2011-03-27T14:57:00.000-07:00

Despite its unquestioned status as an innovator and a leader in
customer experience, Amazon isn't typically credited with business
model disruption on the scale of Napster, Skype, or online brokerages
like E-trade. While major retailers including Amazon and Wal-Mart
appear to be weathering the current economy reasonably well, many
stores are in for a wave of changes.

Four overlapping forces are at work, two of them moving extremely
rapidly: economics, demographics, mobility, and social media. Taken
together, these powerful waves of change are creating new
opportunities, threats, and leaders in a well-established industry.

I. Economics

Consumers have less money to spend, particularly on discretionary
purchases. Three main drivers come into play here.

A) Mortgage equity

From 2000 until 2008, Americans withdrew more than $40 billion of
mortgage equity per quarter, riding an updraft in housing prices to
turn that change in market value into vacations, cars, or kitchen
renovations. Now, equity is increasing: people are investing more in
their mortgages than they are pulling out. Foreclosures certainly
skew this number, but the bottom line is that consumers are not
converting mortgage equity into consumption at nearly the same rate.

Perhaps the most visible symbol of the transition is the change in the
upscale home decor market: Home Depot's 34 Expo Design Centers closed
in 2009. Interestingly, the website is still up. A sampling of the
text illustrates the transition from the heyday of renovations, a long
way from current days when dollar store and McDonalds stocks top the
leaderboard:

"EXPO Design Center offers homeowners professional design and
installation services, and carries the most luxurious and innovative
products picked from around the world.
Each of EXPO's 10 showrooms features unique lifestyle vignettes so
that customers can walk from one to the other, visualizing full-room
scenes while pulling all of the elements of an interior design project
together."

B) Wages and unemployment

In addition to the shutoff of mortgage equity cash withdrawals,
unemployment remains high: by Gallup's numbers, fully one fifth of the
workforce is either without work or working part-time when full-time
would be desired. For the employed, meanwhile, wage pressure is high:
according to Labor Department statistics, year-over-year wage and
benefit growth has been slowing for at least the last decade. On
average, a worker can expect to see his or her pay packet increase
only about 1-2% a year. To take a slice of the population I see every
day, 40% of Americans in their 20s move back in with parents, in part
because expenses are high and job prospects are limited. For their
part, the parents themselves may need help making the mortgage.

C) Price pressure

Oil prices have surged since the wave of democracy movements has
spread across the Arab oil states. Food prices will head up because
oil supplies fertilizer feedstocks and powers tractors, but also
because of short, medium, and long-term factors: climatic conditions
(Russian wildfires, Chinese drought, Mexican freezes), competition for
crops from ethanol production, and increased meat in the diets of the
developing world. When a family spends more for food and fuel, and
most likely doesn't see big raises (if they're not in the 20% of the
underemployed workforce), discretionary purchases will have to shrink.

II. Demographics

As smartphones become more and more prevalent, distinctions based on
about the separation of physical retail from cybershopping are quickly
disappearing. According to Nielsen, U.S. smartphone users 15-24
trended 55/45 female, unlike the rest of the world. Significantly,
Groupon says its customers' usage overlaps heavily with smartphones:
68% of users (as of 2010) were 18-34 years of age, and 49% were
single. Following the Groupon direction, 67% of smartphone users
under 35 use smartphones while shopping, according to Chadwick Martin
Bailey. As fast as U.S. consumers are buying smartphones, however,
they lag southern Europe. According to year-end 2010 figures from
comScore, U.S. smartphone penetration moved 50% in a year, from 17% at
the end of 2009 to 27% a year later. Spain, meanwhile, leads all
countries at 38% smartphone market share. Italy is growing more
slowly, but still ranks second to Spain at 35%.

It shouldn't be a surprise that women are more social than men, but
online, they are clearly in the ascendancy. Consider what the
following sites all share in common: Women drive 62% of Facebook
activity. 60% of Zynga gamers (Farmville et al) are women. 77% of
Groupon users are women. Women follow more people and post far more
than men at Twitter. Women are notably more active than men at
dining-related sites including Yelp and Opentable. Why does this
matter? Women control 80% on consumer spending in the U.S.

Overall, the statistics suggest that

*this is a global phenomenon
*women are in the vanguard in the U.S. particularly
*growth rates are extremely high.

III. Mobility

Once people go mobile, what do they do? Among smartphone users in the
U.S., the overwhelming leader in shopping tasks is price comparison.
eBay bought the Red Laser startup in 2010 and quickly rolled out its
capability to a) turn a smartphone into a barcode scanner and b)
compare the UPC of the physical good in the store to prices across
virtual merchants. The speed and power of the services are most
impressive: if you haven't tried it, this is game-changing behavior.
Nine million downloads were reported as of early 2011, and eBay has
licensed the technology to more than 150 firms, including Coupons.com
and Shopkick (about which more in a moment). Amazon offers the same
functionality. I have heard rumors -- that I can't yet confirm --
that retailers are defeating the bar codes on their own merchandise
(black magic markers are quick and effective) to prevent in-store
price comparison.

The logic of these merchants is easy to understand. Amazon has
massive buying power, enjoys a ~6% structural advantage because of its
sharply limited exposure to state sales tax, and has built a powerful
lens into various product categories with its affiliate sellers: shop
for a camera, and J&R or Adorama will likely be featured on the page,
while in athletic shoes, Road Runner Sports might show up. Through
these and other means, Amazon knows and likely often makes the market
for a given item.

Apart from these shopping-specific applications, the power of the
smartphone platform as a general-purpose computing platform is being
explored at a stunningly rapid pace. As mobility becomes more
powerful and more flexible, retails will continue to be pressed to
match the innovations of the smartphone. The Apple app store,
operating since 2008, has a section of about 350,000 titles; the
Android platform is growing faster and hit the 250,000 mark this
quarter. Consider the variety of single-purpose devices that
smartphones and tablets can be programmed to emulate:

-audio mixing board
-DJ turntables
-star map
-OBD "check engine" light decoder
-language lessons
-decibel meter
-GPS
-remote control
-e-reader
-handheld haptic game
-audio-based song identifier

all in addition to a broad range of audio, visual, and text-based
communications.

Having access to such power while in motion has the effect of lowering
coordination costs. Services that not long ago required a formal
organization can be accomplished on a people-to-people basis. AirBnB
(an air mattress in your spare room turns you into a bend and
breakfast, hence the name) has booked a million room nights, and now
has launched an appealing mobile app, for example. Square, a
potentially disruptive credit card reader attachment for smartphones,
allows anyone to become a merchant. Kiva has loaned more than
$200,000,000 to more than 500,000 entrepreneurs in in just over 5
years. Zipcar operates a short-term car rental service that would be
impossible without distributed wireless technology. Each of these
innovations holds challenges and lessons for physical retailers.

For example, access to smartphones changes game play. Check-in games
such as Foursquare and Gowalla allow patrons to become "mayor" of
businesses they frequent. Shopkick, a two-year-old startup, gives
shoppers reward points simply for checking into a retail location.
The service employs a proprietary radio technology that both works
indoors and is more accurate that GPS. Best Buy and Sports Authority
are both customers.

More recently, 2D (QR) barcodes allow the retailer to leverage the
mobile platform to raise customer service capabilities, manage
promotions, and otherwise use the same smartphone to help turn the
tide of price-comparison and the concomitant commoditization. The
Home Depot launched a program using bar codes to drive in-store
purchase behavior, in part through the kind of detailed product
information and person-to-person reviews familiar to anyone who's
shopped on line. Macys and Best Buy are also experimenting with the
technology in selected markets.

IV. Social media

Shopkick is also significant in that it marries location/mobility with
social media. Many users of Facebook and other networks are
interested in social change, so Shopkick piloted with CauseApp, which
was downloaded more than 500,000 times. It donated money to
non-profits based on a consumer checking into participating retailers.
(SocialVibe offers similar functionality to such clients as Disney,
GE, and Microsoft, but not specifically on mobile.)

Apart from social causes, shopping is an inherently social activity.
Groupon is an obvious example: deals are not merely broadcast, but
engineered to be shared by social networks. Blippy allows members to
update each other on purchase behavior. LivingSocial began as a
social sharing site (tell your friends what's on your bookshelf), but
later launched daily coupon deals.

Back in the retail domain, shopping is taking on a social dimension as
it overlaps with gaming and entertainment. Calling it
"shoppertainment" isn't elegant, but the description fits. While
people have long passed on news of deals to their friends
(coupon-sharing sites are more than a decade old), the trend toward
merging entertainment and commerce can be clearly seen in the rapid
rise of one-deal-at-a-time sites. The grandddaddy here is probably
Amazon: the Gold Box was introduced in 2002 and has been expanded and
refined in the years since. More recently, woot! launched in 2005,
offering one deal a day, with the new product available at midnight
Dallas time. The social dimension is key: contests, blogs, and
user-generated content abound. Facebook refers significant traffic.
Product descriptions are written in a mock-literary tone that can be
equally grating, snarky, and humorous: the FAQ expressly states they
are written for entertainment purposes. The site expanded from its
core in electronics to include parallel wine and t-shirt offerings.
Amazon acquired the firm in 2010.

In that same time, Gilt Groupe was getting serious publicity. The
one-deal-at-a-time firm, founded in 2007, specializes in luxury goods,
available only to members for 36 hours. Annual revenues are in the
$300 million range. Given the firm's New York offices and proximity
to the fashion industry, media attention has been plentiful. The firm
states it is contemplating an IPO in 2012.

Far from New York, another one-deal-at-a-time (ODAT) business has
expanded. Backcountry.com is headquartered in Salt Lake City and
carries roughly 1,000 brands. Its family of sites sell bike,
snowboard, ski, and outdoor gear, sometimes at aggressive discounts.
As opposed to Amazon (which hosts Gold Box deals for a few hours),
woot (24 hours), or Gilt (36 hours), SteepandCheap usually sells in
30-minute windows. Matching the inventory, the price, and the time is
akin to television programming: much as local stations rely on David
Letterman to bring viewers to their 11:00 p.m. newscasts,
SteepandCheap and its sister sites like Bonktown (for cycling gear)
need people to sit on the site for more than one bargain.

Several tools are helpful here. First, social media and texting allow
people to clue fellow enthusiasts in to new deals. Second, the site
can send alerts to mobile devices, and smartphone owners can purchase
from mobile devices. Finally, affiliate sites, some of them
aggregators, also help spread the word among deal-hunters. Given that
these are discretionary purchases, the game elements of the
presentation help provide incentive: counters convey the number of
people on the site (for the website version, not the app), the current
inventory levels, and the time remaining. Deals may show up multiple
times per day; something less than 48 unique products are featured.
But because of the randomness, an average of about 10,000-12,000 users
can be watching the site during daylight hours.

The model clearly works. In one 30-minute segment, 168 Oakley
sweatshirts came up at $16.99 each; 152 sold, for a net revenue of
$2582. In another block, 339 pairs of cold-weather boxer shorts sold
at $14.00 apiece; that netted $4746. Averaging those random examples
gives about $3600 per half-hour, $7200 per business hour, or maybe
$75,000-$100,000 per 24-hour day. Guesstimating $500,000 per 7-day
week would extrapolate to $25 million a year just for one site;
others, devoted to bigger-ticket items, would have different profiles.
All together, Backcountry.com is a $250 million business, according
to Wikipedia.

Adding it up

Where is retail heading? Three overall trends appear to be mutually
reinforcing:

1) Physical and virtual shopping are becoming indistinguishable.
Shoppers can touch and compare physical items at the same moment
they're accessing extensive price comparisons, researching detailed
descriptions of features and benefits, and weighing word of mouth
(either archived on review sites or real-time via Twitter).

2) Retailing, particularly for discretionary purchases, must transcend
price, selection, and service. Involvement, whether through game
elements (including the in-store promotions made possible with
smartphone bar-code readers), user-generated content (ski videos at
Backcountry, for example), clever ad copy, or other features, is
becoming more important in some categories.

3) Price and performance pressure will not relent. Groupon and
LivingSocial are conditioning bargain-hunters to expect 50% off as the
baseline. Amazon's volume purchasing, supply-chain excellence, and
tax-advantaged status make them difficult to beat. At the same time,
their sites load fast, their mobile apps are appealing, and surveys
rank them at the top of on- or off-line customer service polls.
Regardless of prime real estate, customer goodwill, or previous
isolation from competition, local retailers cannot avoid confronting
the long reach of the Seattle superstore. In addition, Amazon never
stands still, constantly innovating, acquiring, and refining, making
them a moving target for anyone else to benchmark, much less emulate.

Early Indications February 2011: An Earthquake Every Year

2011-02-27T14:20:00.000-08:00

It's become a commonplace to state that we live in extraordinary
times. Rather than merely assert this, however, it doesn't take a lot
of digging to find data: in nearly every year for the past 15, a new
industry has been jump-started, an old one crippled, or a new way of
looking at the world propagated. Consider a quick timetable that
_ignores_ such developments as PayPal, Wikipedia, Twitter, Craigslist,
AOL, online mapping, or the iPod, and let me know what you think:

1995
The Netscape browser goes from 0 to 38 million users in 18 months, the
world's fastest technology adoption to date.

1996
Windows 95 sells 1 million copies in its first 4 days on the market,
and later serves as a launch pad to the Net for millions of users via
Internet networking support, CD-ROM, and native modem drivers.

1997
Dell focuses on supply-chain and related innovations as opposed to
lab-based R&D, the norm at IBM or HP. As the world's businesses and
households strive to join the online revolution, the build-to-order
model surges in popularity for desktop configuration. IBM soon exits
the business, while such manufacturers as Digital, Compaq, Gateway,
and others either fade or get absorbed in consolidations. From an
also-ran position in 1996, Dell more than doubled its global market
share in 5 years, becoming the #1 producer.

1998
Linux and Apache explode in market share for server operating systems
and web server software respectively. Linux shipments tripled, not
counting free downloads; Apache powered the majority of websites as
sampled by the Netcraft measurement firm, particularly as compared to
Microsoft's competing Internet Information Server. The fact that
neither product emerged from a traditional development process, from a
corporation, or from a monetary transaction stymied many industry
observers who contended that the open-source model simply could not
work.

1999
DVD player sales quadruple from 1 million to 4 million, an astonishing
rate of adoption for a physical product (as opposed to virtual
Netscape software downloads).

2000
Shortly after its launch in June 1999, Napster redefined the music
landscape. Rather than attempt to use the tool for promotion in the
manner of radio, the music industry wanted to shut down all
peer-to-peer file sharing. Because it employed a centralized
directory structure, Napster was vulnerable to legal action in ways
later distributed models were not; much of the enterprise's brief
history was spent in or around courtrooms. 25 million users, many of
them college students enjoying broadband speeds that few other
populations could access, flocked to the service, which shut down in
2001. In a fascinating secondary outcome to the ascendancy of MP3
music, manufacturers including Bose, Yamaha, and Harman International
witnessed a _93%_ drop in sales of standalone audio components over
the following four years -- an entire industry unrelated to the
much-maligned record companies essentially vaporized overnight.

2001
After indexing a billion Web documents and contracting with Yahoo to
power the latter's search bar in 2000, Google rapidly becomes
essential; the American Dialect Society called the verb its "word of
the year" for 2002 and the term entered both Merriam-Webster and the
Oxford English Dictionary in 2006. Counting partnerships, Google
handled about 85% of all web searches as of early 2004 before Yahoo
pulled out of the agreement and built its own capability. A
staggering succession of acquisitions -- including Pyra (Blogger),
Keyhole (Google Earth), YouTube, DoubleClick, and Hans Rosling's
Gapminder -- followed.

2002
According to Instat, wireless Local Area Network shipments rose 65%
from 2001 to 2002. Business shipments of 11.6 million units led the
way, and with home shipments of 6.8 million units, the total market
revenue of $2.2 billion. Given that the more familiar term for this
technology -- WiFi -- entered the Merriam-Webster dictionary in 2005,
it's no surprise that it became a multi-billion dollar industry only
three years after launch. Even more significantly, wireless
networking entered all those homes and businesses one at a time: there
was no "Sputnik moment," no tax credit, no policy mandate, no Big Blue
or Ma Bell. Instead, particularly on the consumer side, the rapid
adoption represents millions of trips to Best Buy or the equivalent.
Combined with wide deployment of cable modems and DSL connections in
this same period, the U.S. weaned itself off the acoustic modem in a
surprising short period of time, without anyone making much of a fuss.

2003
In yet another quiet transition that was barely remarked upon, cell
phones surpassed landline connections in the U.S., replicating the
norm in essentially every other country in the world. At about the
same moment, digital cameras overtook their analog equivalents (Kodak
stopped making film cameras entirely in 2004); soon the standalone
device would itself be usurped by cellphone cameras. In one brief
transition, two stable, ubiquitous technologies dating to the late
19th century were surpassed by digital counterparts.

2004
No technology can compare to the wireline phone for reach,
particularly in the U.S., where "universal service" is literally the
law of the land. After 100 years, more than 97% of households had
phone service; the average household had 1.3 lines. The 1-2 punch of
Voice over Internet Protocol (the phone service offered by Vonage,
Skype, and by cable operators' triple plays) and mobile changed that
in a hurry: wireline penetration is heading south of 40% less than 15
years after peaking. Equities markets took notice of the VoIP takeoff
and began depressing telecom valuations accordingly, their cellular
growth notwithstanding. Skype, meanwhile, has grown enormous: as of
March 2010, up to 23 million concurrent users are logged in. The
total installed base was roughly the same size as Facebook, with 560
million users at the end of 2009, at which time the service accounted
for 12% of all international calling minutes -- on the entire planet.
From launch through 2009, users had completed 250 billion minutes of
calls.

2005
GPS is another technology that seeped into mainstream adoption without
anyone making an editorial point of noticing a breakout year, yet its
ubiquity cannot be ignored. In 2004, GPS on a mobile phone was
successfully proven; it rapidly became a key component of the mobile
platform. The original $12 billion investment by the U.S. Department
of Defense spawned a commercial market worth $13 billion in 2003
alone; recent estimates predict a $70 billion market by 2013, with
location-based services comprising $10 billion by themselves.

2006
Following its launch the previous April, YouTube soared from 50
million page views per day after barely six months live to hit 7
billion on several days in August 2006. At the time of the Google
acquisition, 100 million videos had been uploaded. Every one of them
had the capacity to reach a worldwide audience for zero distribution
cost and minimal, if any, production expense.

2007
While Amazon refuses to release unit sales figures for the e-reader
launched in 2007, one statistic about electronic books merits
mentioning: Kindle book sales in the first quarter of 2010 were 1.8
times those of hardbacks. In other words, a technology dating back
nearly to Gutenberg was eclipsed in market share in about 30 months by
one retailer.

2008
According to Morgan Stanley analyst Mary Meeker's statistics, the
iPhone (counted along with its wi-fi-only iPod Touch sibling) reached
50 million customers faster than any piece of hardware in human
history and jump-started the entire smartphone market.

2009
Facebook claimed an incredible 600 million users in roughly six years
after launch. 2009 was the breakout year as membership surged from
about 150 million to 350 million.

2010

Apple sold three million iPads in less than one calendar quarter.
This matches the sales rate of the DVD after five years in the market.
Even more telling is the calculation by Deutsche Bank analyst Chris
Whitmore that if the iPad counted as a PC, it completely rewrites the
market share scoreboard, putting Apple on top by a comfortable margin.
In an unrelated corner of the industry, meanwhile, the Groupon online
coupon business went from revenues of $33 million to $760 million in
one year, making it most likely the fastest growing business in
history.

Early Indications January 2011: The Downsizing of the State?

2011-01-20T14:28:00.000-08:00

Data points from all over converge to announce a time of reckoning:

-According to the Pew Center on the States, the 50 states collectively have $3.3 trillion of pension obligations, with about a third, $1 trillion, unfunded.

-Those pensions can be extremely attractive: here in Pennsylvania, one state senator with 39 years of service will be paid a lump sum of $331,000 (three times his salary) then about $139,000 annually for the rest of his life.

-In part because the recession has reduced states' revenues, 48 out of 50 states faced budget shortfalls in 2009 and 2010; 46 had gaps this year. (The exceptions were resource-intensive Alaska and Montana, along with North Dakota and Arkansas.) The 2010 state budget shortfalls totaled $191 billion.

-Illinois, which ranked dead last in pension funding in 2008, just raised individual income taxes a full 75%. The state legislature also approved the issuance of $3.7 billion in bonds to more adequately fund pension obligations.

-At UCLA, the dean of the Anderson school of business is attempting to take the school private: state budget cuts leave California's support of Anderson at about 6 cents on the dollar. By withdrawing from the state system, Anderson can set its own tuition and pay superstar faculty superstar salaries, thus enhancing its ability to attract top talent. UCLA's board has passed the proposal, which could potentially be ratified by this summer.

-The U.S. government has a statutory limit on the amount of debt it can issue. That limit is close by being reached. If Congress does not raise the limit, some government activities will shut down, as they did in 1995.

-At all levels of government in the U. S., the wage differential of the 1990s has reversed and public-sector workers earn, on average, 30% more than private-sector counterparts. In addition to being paid more, government workers' health care, vacation time, retirement, and other benefits are typically more generous than in industry.

-Underperformance is seldom addressed with meaningful action: firing either incompetent or unaffordable public workers is far more difficult than doing layoffs in the private sector when companies or whole industries face transitions in technology, customer behavior, or competition. (According to The Economist, the Los Angeles school district spent $3.5 million trying to fire 7 underperforming teachers and succeeded with only 5. As the district's entire teaching force numbers 33,000, the effort was aimed at 1/50th of 1%. By contrast, private-sector organizations routinely churn the bottom 10% of performers.)

The Inevitable Downsizing

In the private sector, the cost of unsustainable labor arrangements, defined as payroll costs out of sync with revenues, is layoffs. While Ford can claim a lot of positive news in 2011, for example, the past decade was tough: total auto industry layoffs after 2006 were estimated at 200,000 jobs, and there were tens of thousands of jobs cut at Ford earlier in the decade as well. As services comprise more of the U.S. economy, manufacturing jobs are changing, and the big labor unions that represented these workers in the steel and auto heyday shrank after 1973, from about a quarter of private sector workers to less than 10% in 2010.

According to the Bureau of Labor Statistics, however, government employees, a key component of that services workforce, increased in membership from 23% to roughly 38% in the 20 years following 1973, and that membership has stayed pretty constant. But just as the auto industry painfully discovered after 2000 that it could no longer afford the small-C contract it had agreed to with the unions in the 1950s and 1960s, governments at every level are coming face to face with deficits that derive substantially from labor costs: expensive pensions and expensive current workforces (with expensive health care) that often lack performance accountability are and will continue to be unaffordable.

In short, given a protracted employment recession (and thus a downturn in both taxable income and taxable spending for revenue generation), governments are being faced with truly hard choices. At the federal level, conservative legislators are proposing drastic cuts in the defense budget, previously an approach that ideology would not permit. As he confronts a $28 billion deficit, California governor Jerry Brown (like his counterparts elsewhere) is proposing deep, politically and humanly painful cuts in the social safety net, in education (the community college budget would be reduced by $400 million), and in public safety.

U.S. governments at every level are facing their auto industry moment. About 100 miles from where I write, the Pennsylvania city of Harrisburg teeters on the edge of bankruptcy; it would be the biggest municipal entity to enter that process since Orange County in California lost billions of dollars in pension investments in 1994. While the likelihood is higher for some European nations than in most U.S. entities, the prospect of governments in any country defaulting on their obligations is obviously disturbing to markets and individuals alike. Whether it is debt, or pensions, or current expenses, governments are being forced to cut spending in bold strokes.

Government on the technology landscape

What does that have to do with a technology newsletter? Because the world we are in and entering is not the world that existed when those budgetary assumptions were being formed. The process of resizing government thus needs to begin with a look at what governments can and need to do, as well as how they do it. Furthermore, there are tasks that at one time were essential, but technological obsolescence is slow to alter governments. Thus at least five buckets of questions need to be asked: my topics under each heading are merely suggestive.

1) What must government do, and how can other entities help deliver necessary services?

This is a big category, obviously, but maybe not as big as it once was. Funding bridges, inspecting food and oil wells, testing new drugs, defending the nation -- lots of government tasks cannot go away and some may need to get bigger. At the same time, for-profit universities and hospitals might be better ways to approach some facets of education and health. At the primary and secondary levels, the National Home Education Research Institute asserts that more than two million U.S. students are home-schooled. Both schools and homes can have their place as loci of education, but the fact is that in many locales, the schools are no longer good enough, and parents have more resources than ever to meet the need. Some churches have proven effective at delivering social services, though of course issues of evangelization and discrimination can be tricky. Prisons, several types of security services, school cafeterias, and many other functions are outsourced or even privatized; perhaps more activities should be considered as well.

2) What can government stop doing entirely?

Agricultural extension agents provided a valuable function in their day. Today, however, if a farmer sees a pest or a leaf condition, his or her first stop is likely to be the Internet. The state of California is attempting to get out of the incarceration business for low-level offenses, shifting responsibility for these to the local level. Republican legislators are asking, sensibly, about federal support for rail transportation, which is expensive, especially when the benefits are highly localized. Telecommunications regulators were a necessary counterweight to a monopolistic AT&T, but now that wireline telephony participation is dropping and all segments are intensely competitive, the market can do much of what 50 state and one federal regulator did. California, to take one example, administers a billion-dollar universal service fund, dedicated, among other things, to "ensuring basic telephone service remains available and affordable to all Californians regardless of geography, language, cultural, ethnic, physical or income differences" -- even if fewer people than at any time in more than 50 years want that service.

3) What is the right level of organization?

The size of administrative units is typically a historical accident. Whether those units are currently the right size is, or should be, open for discussion. Water, sewer, fire, police, school, and recreational districts are rarely coherent. How big should a town be? When many towns are contiguous, why does each need a school superintendent (often with only one high school, which has at least one principal), a mayor and/or town manager, a chief of police? What is the optimum size for a school district, a fire department, a state park in a given part of the country? Most important, what government entity can mandate that other units consolidate, disband, or otherwise change shape?

4) How can interested parties self-organize?

On Wikipedia's 10th birthday, it's worth asking what other efforts formerly undertaken by government might be better accomplished by interested citizens. Mash-ups are one easy example: given good clean data (the collection of which remains an essential task of government), crimes, potholes, economic opportunity, underperforming schools, and other opportunities for improvement can be identified by the people. Noise measurements (near wind farms for example) are being crowdsourced. People can also organize on the revenue side: in Mill Valley, California, a community foundation has existed for nearly 30 years to supplement tax funding. To date the organization has raised more than $14 million -- that's a lot of bake sales and charity auctions. Similar parent-run organizations exist in many towns, and the question is what will mobile coordination and payment platforms mean for the future of such efforts.

5) How can government do what it needs to do, more efficiently?

IT in government remains a sore subject. President Obama's Chief Information Officer, Vivek Kundra, recently put forth a 25-step plan to reform federal IT management.* Many of the items are broad and seemingly self-evident to anyone familiar with industry ("consolidate data centers" and "develop a strategy for shared services" for instance). The fact is, however, that industry does not follow federal acquisition or implementation practices; getting federal IT to perform at a reasonable fraction of an Amazon or FedEx would be a massive achievement. Many of the most notable IT project failures of the past decade are government implementations: systems development disasters at the U.S. Census and the FBI are prime examples of the performance gap.

Compared to customer service in travel, banking, shopping, or information businesses (iTunes, anyone?), finding even basic information on most government web sites can be painful. Transparency can be difficult to track down. Control of bills passing through legislation is a key perquisite of power, and holding up the process with committee hearings that happen very slowly and/or erratically is common, so clear, open calendars are not always the rule. Like legislatures, regulatory bodies can be opaque, in that budget and headcount information is typically difficult to obtain, unlike the information readily available in a private company's annual report.

If information can be hard to find, the state of on-line transactions is even more dismal: compare getting a fishing license or renewing other permits to checking in for an airplane flight. While efficient government looks much better to citizens on the outside than to gainfully employed government workers on the inside of slow-moving bureaucracies with no incentive to improve customer service, perhaps the current crisis can provide the impetus for real change to commence. In a sector that lags private industry by many performance metrics, a combination of new tools and more focused motivation has the promise to improve service, cut costs, increase accountability, and enhance security.

* http://www.cio.gov/pages.cfm/page/White-House-Forum-on-IT-Management-Reform

December 2010 Early Indications: Prediction Scorecard

2010-12-17T12:57:00.000-08:00

Last year, on the cusp of a decade, I looked ahead and in essence
asked 24 questions. In some ways, the world did not change enough to
answer these kinds of questions, while dramatic events in other areas
occurred almost on cue. For brevity, the questions are condensed and
rephrased. (The full newsletter is here)

On a brief personal note, warmest holiday wishes to this virtual
community, which celebrated its 13th birthday in October.

A
Having brilliantly migrated from computers to MPs players to mobile
data devices, what will Apple do for its next adjacent market?

Score: hit. The iPad sold a million units in less than a month. (As
Samsung moved another million soon thereafter, 2010 will go down in
the record books as the year of the tablet.)

B
What business models, specifically for social media tools, will emerge?

Score: hit. Location-based services Gowalla and Foursquare, not to
mention Facebook Places, all surged in popularity this year.

C
What will be the fate of the global middle class as counties like
Brazil grow rapidly even as the U.S. is in some ways "hollowing out"?

Score: Too soon to tell.

D
Is the time ripe for a design renaissance on par with streamlined
toasters, or the neo-Bauhaus movement that poured so much concrete in
the 1960s?

Score: Too soon to tell. Niche products like the Mini Cooper, unique
structures like the Bilbao Guggenheim or Burj Al Arab "sail" hotel,
and well-designed Apple products do not yet a trend make.

D2
How will the U.S. address its drug problem?

Score: Change is afoot. Although California voters defeated
Proposition 19, as of January 1, 2011 possession of less than one once
of marijuana will be treated as a civil infraction rather than a
criminal misdemeanor. California is also supposed to release 40,000
prisoners, and financially challenged states across the nation may use
budget crises as an impetus to revisit sentencing guidelines.
Internationally, Mexico obviously remains a hot spot in this regard,
with presidential elections scheduled in less than 18 months.

E
Whether in oil prices, coal emissions debates, or nuclear power
lobbying efforts, competition for energy will have geopolitical
consequences, potentially including more armed ones.

Score: hit, if you count lightly regulated deep-water drilling in the
Gulf of Mexico that goes really wrong as a consequence of competition
for energy. Closer to Pennsylvania, gas drilling using hydraulic
fracturing in the Marcellus shale merited a 60 Minutes segment; the
core technology is the subject of an HBO documentary that won an award
at Sundance.

F
Will texts, Tweets, and web-hosted highlight clips related to
futball's World Cup be a global coming-out party for social media,
just as the 1958 NFL championship game or the JFK assassination were
for television?

Score: Hit. Twitter traffic reached 3,000 messages per second in the
aftermath of Spain's victory; the service's "fail whale" was busy
during the event as servers were overwhelmed. Multiple information
visualizations reinforced the point in clever ways. YouTube video of
the U.S. goal to beat Algeria traveled far and wide.

G
Can Google expand beyond its core search franchise?

Score: hit, at least in numbers if not revenues. Google recently
reported activating 300,000 Android devices per day.

H
What will happen with U.S. housing stock?

Score: hit, if "extreme bad news" is news. Existing home sales fell
to a 15-year low in the summer, even with historically low mortgage
interest rates. Housing starts nearly hit a record low in October.
Repossession numbers improved, largely in the wake of voluntary pauses
by several major lenders.

I
Regarding identity, as more people grow up breathing the oxygen of
online, all-the-time social broadcasting, what will be the unintended
consequences, the business opportunities, and the backlash?

Score: hit. Facebook's change to default privacy settings last spring
was a major event. This visualization made the point forcefully.

J
Where will jobs come from?

Score: hit. The economic recovery continues to feature high
unemployment, high underemployment, and high numbers of people who
give up trying to find work. The national unemployment rate of 9.8%
only begins to tell the story; part-timers who want full time work and
other categories push the number of people un- or underemployed to
probably twice that.

K
How much does the Kindle matter?

Score: hit. While Amazon releases no unit numbers, e-book sales
remain strong, and the Kindle constitutes an important piece of the
tablet revolution discussed above.

L
When talking about long tails, we clearly have hits and clearly have
infinite markets for niche tastes on eBay, YouTube, and elsewhere.
The question is, can the middle market -- smaller audiences than Harry
Potter or American Idol, more expensive than kittens-on-a-treadmill
videos -- thrive?

Score: maybe. The Hulu experiment, with deepening coverage of back
catalogs, remains ongoing. ESPN's superb 30 for 30 documentaries
would seem to validate mid-market success.

M
How fast and how momentous is the shift to mobile data?

Score: Really big and really fast. U.S. smartphone market share, for
example, was 21% in Q4 2009; it could be nearly a third by early 2011.
The number of mobile websites increased 2,000% between 2008 and 2010,
for 150,000 to more than 3 million. On Black Friday, mobile traffic
to shopping websites was up 50 times over 2009, much of the traffic
for price comparisons in-store.

N
Will Google's Living Stories experiment with the NY Times and
Washington Post spawn still more innovation?

Score: miss on Living Stories, which died a quick death. News sources
are aggressively moving content onto tablets, however, often at
ridiculous prices. (See Illustrated, Sports.)

O
Open records, or open meetings, laws were never intended to broadcast
local, paper-based information to the entire planet. At the same time,
"sunshine is the best disinfectant," as Louis Brandeis so aptly put
it. How and where will different people and groups trade off voluntary
and involuntary exposure of private information for what perceived
benefits?

Score: Hit: WikiLeaks repeatedly forced this issue, for example.

P
Will we see new platform wars?

Score: hit. Apple's app store is expanding to tablets and PCs.
Google is bringing out both Android and Chrome, in whatever
complementary or competitive relation to each other. Facebook marches
on, Salesforce is adding database as a service, and cloud vendors
jostle for primacy. Microsoft's Wii-killer (Kinect) sold a million
units in 10 days. So the answer is yes.

R
How does "real time" filter down to people?

Score: hit. Twitter and the location-based services continue to enjoy
rapid uptake. See here.

S
In software, who will be left behind? What further surprises still await?

Score: hit. SAP lost a $1.3 billion suit over its use of Oracle's
intellectual property in a support business it acquired. Microsoft
enjoyed considerable success with Windows 7 for the PC, moving 175
million copies in under a year. Microsoft's smartphone hopes,
however, appear to remain in the future, with new Windows phones
selling 2-for-the-price-of-1 soon after release.

T
Will the Internet of Things continue its low-hype, high-impact trajectory?

Score: hit. The use of smart electric meters in Bakersfield, CA
generated many unexpected consequences, a lawsuit against PG&E among
them. Smartphone-based sensor enablement is accelerating: Amazon and
eBay both released comparison-shopping barcode readers during the
holiday shopping season.

U
At both public and private universities, the next decade will force
tough decisions to be made.

Score: hit. "Strategic reviews" of programs, majors, campuses, and
funding models are underway at many campuses. New buildings aren't
being built, or are being scaled back. International alliances are
being aggressively pursued, but even these can be problematic:
Michigan State was having trouble filling a class at its Dubai
operation and so offered half-price tuition. Intercollegiate
athletics could be a canary in the coal mine: the University of
California-Berkeley dropped five varsity sports for the 2011 school
year. Rutgers is currently paying off more than $100 million in debt
for football stadium renovations; the team finished 4-8 this year.

V
Regarding virtualization: just as Descartes split mind and body for
the individual, will some latter-day philosopher distinguish
physically co-located groups and digitally "present" assemblages?

Score: still waiting. Cisco continues to brand "telepresence."
People's identities in Facebook and in Farmville and in Twitter
streams continue to evolve. Most any computing service can be
accessed from a location remote to its origin. But still we lack
vocabulary and deep cognitive understanding of what it means for a
group of people to "be someplace" vs. "be anyplace."

W
What will we see relative to the need for wireless bandwidth?

Score: hit. A scandal relating to cellular spectrum auctions is
front-page news in India. The FCC is pushing hard to release
additional spectrum in the U.S., but one sticking point among many
relates to rights fees.

Review Essay: Kevin Kelly, What Technology Wants

2010-11-14T18:38:00.000-08:00

In 35 years of reading seriously and often professionally, I have never a read a book like What Technology Wants. I dog-eared at least 30 pages and filled several margins with reactions. Over two long plane rides, I was by turns absorbed, consternated, and counter-punching. I think What Technology Wants gets the story wrong, but it lays out a bold, original, and challenging position with a complex array of evidence, analysis, and conviction. The core hypothesis is untestable, however, and enough counterexamples can be summoned that substantial uncertainty undermines Kelly's deterministic argument.

Make no mistake, optimism is the operative motif. As Kelly notes, when sages or prophets foretold the future in ages past, the outlook was usually bad. The very notion of progress, by contrast, is itself a relatively modern invention. As we will see, Kelly's book is best understood as part of a larger conversation, one that has found particularly fertile ground in America.

What exactly is the technology that "wants" things? From the outset, Kelly finesses a sweepingly broad definition:

"I've somewhat reluctantly coined a word to designate the greater, global, massively interconnected system of technology vibrating around us. I call it the _technium_. The technium extends beyond shiny hardware to include culture, art, social institutions, and intellectual creations of all types. . . . And most important, it includes the generative impulses of our inventions to encourage more tool making, more technology invention, and more self-enhancing connections." (11-12)

Several of the book's key themes become apparent early. Most centrally, technology is read as, if not alive ("vibrating" with "impulses"), then something very close to alive: connections between technology and biology, moving in both directions, are drawn throughout the book. For example, "if I can demonstrate that there is an internally generated direction within natural evolution, then my argument that the technium extends this direction is easier to see." (119)

The second, and more regrettable, tendency of the book is to argue along multiple slippery slopes. In the initial definition, for example, the technium includes everything from churches (both buildings and people) to cloned sheep to George Foreman grills to the Internet. If it includes so much, what is the technium _not_? I believe that understanding "social institutions and intellectual creations of all types" and their role in the technology artifacts that more commonly concern us -- things like end-of-life treatment protocols, ever-nastier methods of warfare, or high levels of carbon dioxide output -- requires a sharper knife.

The aforementioned slippery slope argumentative technique may have been most brilliantly parodied in the student court trial scene in Animal House:
***
But you can't hold a whole fraternity responsible for the behavior of a few sick, perverted individuals. If you do, shouldn't we blame the whole fraternity system?

And if the whole fraternity system is guilty, then isn't this an indictment of our educational institutions in general?

I put it to you, Greg. Isn't this an indictment of our entire American society?

Well, you can do what you want to us, but we won't sit here, and listen to you badmouth the United States of America!
***
Several sections of What Technology Wants raised red flags that suggest similarly deft rhetoric may be in play elsewhere in the book. In an argument structurally very similar to the Animal House logic, for example, the technium is given almost literally biological properties: "Because the technium is an outgrowth of the human mind, it is also an outgrowth of life, and by extension it is also an outgrowth of the physical and chemical self-organization that first led to life." (15) If, like me, one does not grant him this chain of logic linking single-celled life forms to Ferraris or credit default swaps, Kelly's argument loses some of its momentum: for him, the quasi-sentient life force that is the sum of humanity's efforts to create is ultimately life-enhancing rather than destructive or even indifferent.

Nowhere is this faith more clearly stated than in the book's conclusion. "[The technium] contains more goodness than anything else we know," Kelly asserts. Given that the technium is everything that people have ever made or written down, what is the alternative that could be "more good"? Pure nature? But the technium is awfully close to nature too: "the technium's wants are those of life." In fact, like Soylent Green, the technium is (at least partially) people: "It will take the whole technium, and that includes us, to discover the tools that are needed to surprise the world." (359)

But the fact of the matter is that much of the technium is built to kill, not to want life: the role of warfare in the advancement of technology dates back millennia. From swords and plowshares, to Eli Whitney's concept of interchangeable parts in musket-making, to nuclear weapons, people and governments have long used technical innovation to subdue each other. Even Kelly's (and my) beloved Internet can trace its origins directly to the game theoretics of John von Neumann and mutual assured destruction. Statecraft shapes technology, sometimes decisively, yet this influence is buried in Kelly's avalanche of technological determinism.

To be sure, some of Kelly's optimism has convincing grounding; it's his teleology I question. In What Technology Wants, the strongest sections combined clever data-gathering and analysis to express the power of compounding innovation: particularly where they can get smaller, things rapidly become cheaper and more powerful at a rate never before witnessed. Microprocessors and DNA tools (both sequencing and synthesis) are essential technologies for the 21st century, with Moore's law-like trajectories of cost and performance. In addition, because software allows human creativity to express and replicate itself, the computer age can advance very rapidly indeed. The key question, however, relates less to technological progress than to our relation to that progress.

In my discussions with Kelly back when we were affiliated with the same think tank in the 1990s, he had already identified the Amish as a powerful resource for thinking about the adoption of technology. Chapter 11, on Amish hackers, raises the issues of selective rejection to a level of depth and nuance that I have seen nowhere else. Four principles govern the Amish, who are often surprising in their technology choices, as anyone who has seen their skilled and productive carpenters (with their pneumatic nail guns carried in the back of pickup trucks) can attest.

1) They are selective, ignoring far more than they adopt.

2) They evaluate new things by experience, in controlled trial scenarios.

3) Their criteria for evaluation are clear: enhance family and community while maintaining distance from the non-Amish world.

4) The choices are not individual but communal. (225-6)

Remarkably, Amish populations are growing (fast), unlike the Shakers of New England who attempted similar removal from the world but could not sustain their existence either individually or collectively. Instead, the Amish often become expert in the use of a technology while eschewing its ownership. They are clever hackers, admirable for their ability to fix things that many non-Amish would simply throw away. At the same time, there are no Amish doctors, and girls have precisely one career trajectory: motherhood or a close equivalent thereof. As Kelly notes, the people who staff and supply grocery stores or doctor's offices, participate in a cash economy, and pay taxes for roads and other infrastructure enable their retreat. In the end, the Amish stance cannot scale to the rest of us, in part because of their radical withdrawal from the world of television, cell phones, and automobiles, and because of the sect's cohesive religious ethos.

Speaking of governments and economies, the role of money and markets is also remarkably limited for Kelly. Technologies evolve through invention and innovation. Those processes occur within a lattice of investors, marketers, sales reps, and other businesspeople who have different motivations for getting technologies into people's hands or lives. Not all of these motives support the wants of life, as Bhopal, cigarette marketing, and Love Canal would attest.

The capitalist underpinnings beneath so much western technology are ignored, as in this summary passage: "Like personality, technology is shaped by a triad of forces. The primary driver is preordained development -- what technology wants. The second driver is the influence of technology history, the gravity of the past . . . . The third force is society's collective free will in shaping the technium, or our choices." (181)

Profit motives, lock-in/lock-out, and the psychology of wants and needs (along with business's attempts to engage it) are all on the sideline. Furthermore, a "collective free will" feels problematic: what exactly does that mean? Market forces? I don't think that reading is in play here. Rather than economics, Kelly seems most closely aligned with biology, to an extreme degree at some points: "The most helpful metaphor for understanding technology may be to consider humans as the parents of our technological children." (257)

But understanding ourselves as "parents" doesn't help solve real technological problems: how do we address billions of discarded plastic beverage bottles (many fouling the oceans), or the real costs of long-term adoption of the internal combustion engine, or the systems of food and crop subsidies and regulations that shape diet in a age of simultaneous starvation and obesity? How does the technium want goodness in any of those scenarios? Maybe the polity and the increasingly vibrant non-profit sector are part of the technology superstructure, seeing as they are human inventions, but if that's the case, Kelly's definition is so broad as to lose usefulness: the book gives little idea of what lies outside the technium. If money and markets (and kings and congresses, as well as missiles and machine guns) are coequal with cathedrals and computers, getting leverage on questions of how humans use, and are used by, our technologies becomes more difficult.

With all of its strengths and shortcomings, Kelly has written a book at once unique and rooted in a deep tradition: for well over a century Americans in particular have simultaneously worried and effused over their machines. The distinguished historian of technology Thomas P. Hughes noted in 1989 that the 1960s had given many technologies a bad name, so that cheerleaders had become scarce even as technology was infusing itself into the conceptual and indeed existential ground water: "Today technological enthusiasm, although much muted as compared with the 1920s, survives among engineers, managers, system builders, and others with vested interests in technological systems. The systems spawned by that enthusiasm, however, have acquired a momentum -- almost a life -- of their own." (American Genesis, 12) The technology-is-alive meme is a familiar one, and a whole other study could position Kelly in that tradition as well.

For our purposes, it is sufficient to note that Kelly stands as a descendant of such enthusiasts as Edison, Ford, Frederick W. Taylor, Vannevar Bush, and, perhaps most directly, Lewis Mumford, now most famous as an urban theorist. Like Kelly, Mumford simultaneously delighted in the wonders of his age while also seeing causes for concern. Note how closely his 1934 book Technics and Civilization anticipates Kelly, excepting the fact that Mumford predated the computer:

"When I use the word machines I shall refer to specific objects like the printing press or the power loom. When I use the term 'the machine' I shall employ it as a shorthand reference to the entire technological complex. This will embrace the knowledge and skills and arts derived from industry or implicated in the new technics, and will include various forms of tool, instrument, apparatus and utility as well as machines proper." (12)

One man's technium is another man's machine. For all their similarity of definition, however, Mumford kept human agency at the center of his ethos, compared to Kelly's talk of inevitability and other semi-biological tendencies of the technium super-system: "No matter how completely technics relies upon the objective procedures of the sciences, it does not form an independent system, like the universe: it exists as an element in human culture and it promises well or ill as the social groups that exploit it promise well or ill." (6) Mumford focuses on the tool-builder; Kelly gives primacy to the cumulative (and, he asserts, mostly beneficent) sum of their tool-building. In the end, however, that technium is a mass of human devices, institutions, and creations so sprawling that it loses conceptual usefulness since no human artifacts are excluded.

The critical difference between the two perspectives becomes clear as Mumford resists the same determinism in which Kelly revels: "In order to reconquer the machine and subdue it to human purposes, one must first understand it and assimilate it. So far, we have embraced the machine without fully understanding it, or, like the weaker romantics, we have rejected the machine without first seeing how much of it we could intelligently assimilate." (6) Mumford's goal -- consciously understanding and assimilating technologies within a cultivated human culture -- sounds remarkably like the Amish notion of selective rejection that Kelly admires yet ultimately rejects as impractical at scale.

It is a tribute to Kevin Kelly that he forced me to think so hard about these issues. What Technology wants deserves to be widely read and discussed, albeit with red pencils close at hand; it is a book to savor, to consider, to challenge, and to debate. The book is not linear by any stretch of the imagination, and strong chapters (such as on deep progress and on the Amish) sit alongside weaker discussions of technology-as-biology and an arbitrary grocery list of the technium's attributes that feels like it could have been handled less randomly.

Those shortcomings help define the book: by tackling a hard, messy topic, Kelly was bound to have tough patches of tentative prose, partially unsatisfying logic, and conclusions that will not be universally accepted. For having the intellectual courage to do so, I tip my hat. Meanwhile I look for a latter-day Lewis Mumford to restore human agency to the center of the argument while at the same time recognizing that governments, markets, and above all people interact with our technologies in a contingent, dynamic interplay that is anything but deterministic.

Early Indications October 2010: The Analytics Moment: Getting numbers to tell stories

2010-11-02T15:52:00.000-07:00

Thanks in part to vigorous efforts by vendors (led by IBM) to bring
the idea to a wider public, analytics is coming closer to the
mainstream. Whether in ESPN ads for fantasy football, or
election-night slicing and dicing of vote and poll data, or the
ever-broadening influence of quantitative models for stock trading and
portfolio development, numbers-driven decisions are no longer the
exclusive province of people with hard-core quantitative skills.

Not surprisingly, the definition is completely problematic. At the
simple end of the spectrum, one Australian firm asserts that
"Analytics is basically using existing business data or statistics to
make informed decisions." At the other end of a broad continuum,
TechTarget distinguishes, not completely convincingly, between data
mining and data analytics:

"Data analytics (DA) is the science of examining raw data with the
purpose of drawing conclusions about that information. Data analytics
is used in many industries to allow companies and organization to make
better business decisions and in the sciences to verify or disprove
existing models or theories. Data analytics is distinguished from data
mining by the scope, purpose and focus of the analysis. Data miners
sort through huge data sets using sophisticated software to identify
undiscovered patterns and establish hidden relationships."

To avoid a terminological quagmire, let us merely assert that
analytics uses statistical and other methods of processing to tease
out business insights and decision cues from masses of data.
In order to see the reach of these concepts and methods, consider a
few examples drawn at random:

-The "flash crash" of May 2010 focused attention on the many forms and
roles of algorithmic trading of equities. While firm numbers on the
practice are difficult to find, it is telling that the regulated New
York Stock Exchange has fallen from executing 80% of trades in its
listed stocks to only 26% in 2010, according to Bloomberg. The
majority occur in other trading venues, many of them essentially
"lights-out" data centers; high-frequency trading firms, employing a
tiny percentage of the people associated with the stock markets,
generate 60% of daily U.S. trading volume of roughly 10 billion
shares.

-In part because of the broad influence of Michael Lewis's bestselling
book Moneyball, quantitative analysis has moved from its formerly
geeky niche at the periphery to become a central facet of many sports.
MIT holds an annual conference on sports analytics that draws both
sell-out crowds and A-list speakers. Statistics-driven fantasy sports
continue to rise in popularity all over the world as soccer, cricket,
and rugby join the more familiar U.S. staples of football and
baseball.

-Social network analysis, a lightly practiced subspecialty of
sociology only two decades ago, has surged in popularity within the
intelligence, marketing, and technology industries. Physics, biology,
economics, and other disciplines all are contributing to the rapid
growth of knowledge in this domain. Facebook, Al Qaeda, and countless
startups all require new ways of understanding cell phone, GPS, and
friend/kin-related traffic.

Why now?

Perhaps as interesting as the range of its application are the many
converging reasons for the rise of interest in analytics. Here are
ten, from perhaps a multitude of others.

1) Total quality management and six-sigma programs trained a
generation of production managers to value rigorous application of
data. That six-sigma has been misapplied and misinterpreted there can
be little doubt, but the successes derived from a data-driven approach
to decisions are, I believe, informing today's wider interest in
statistically sophisticated forms of analysis within the enterprise.

2) Quantitative finance applied ideas from operations research,
physics, biology, supply chain management, and elsewhere to problems
of money and markets. In a bit of turnabout, many data-intensive
techniques, such as portfolio theory, are now migrating out of formal
finance into day-to-day management.

3) As Eric Schmidt said in August, we now create in two days as much
information as humanity did from the beginning of recorded history
until 2003. That's measuring in bits, obviously, and as such Google's
estimate is skewed by the rise of high-resolution video, but the
overall point is valid: people and organizations can create data far
faster than any human being or process can assemble, digest, or act on
it. Cell phones, seen as both sensor and communications platforms,
are a major contributor, as are enterprise systems and image
generation. More of the world is instrumented, in increasingly
standardized ways, than ever before: Facebook status updates, GPS,
ZigBee and other "Internet of things" efforts, and barcodes and RFID
on more and more items merely begin a list.

4) Even as we as a species generate more data points than ever before,
Moore's law and its corollaries (such as Kryder's law of hard disks)
are creating a computational fabric which enables that data to be
processed more cost-effectively than ever before. That processing, of
course, creates still more data, compounding the glut.

5) After the reengineering/ERP push, the Internet boom, and the
largely failed effort to make services-oriented architectures a
business development theme, vendors are putting major weight behind
analytics. It sells services, hardware, and software; it can be used
in every vertical segment; it applies to every size of business; and
it connects to other macro-level phenomena: smart grids, carbon
footprints, healthcare cost containment, e-government, marketing
efficiency, lean manufacturing, and so on. In short, many vendors
have good reasons to emphasize analytics in their go-to-market
efforts. Investments reinforce the commitment: SAP's purchase of
Business Objects was its biggest acquisition ever, while IBM, Oracle,
Microsoft, and Google have also spent billions buying capability in
this area.

6) Despite all the money spent on ERP, on data warehousing, and on
"real-time" systems, most managers still can not fully trust their
data. Multiple spreadsheets document the same phenomena through
different organizational lenses, data quality in enterprise systems
rarely inspires confidence, and timeliness of results can vary widely,
particularly in multinationals. I speak to executives across
industries who have the same lament: for all of our systems and
numbers, we often don't have a firm sense of what's going on in our
company and our markets.

7) Related to this lack of confidence in enterprise data, risk
awareness is on the rise in many sectors. Whether in product
provenance (Mattel), recall management (Toyota, Safeway, or CVS),
exposure to natural disasters (Allstate, Chubb), credit and default
risk (anyone), malpractice (any hospital), counterparty risk (Goldman
Sachs), disaster management, or fraud (Enron, Satyam, Societe
General), events of the past decade have sensitized executives and
managers to the need for rigorous, data-driven monitoring of complex
situations.

8) Data from across domains can be correlated through such ready
identifiers as GPS location, credit reporting, cell phone number, or
even Facebook identity. The "like" button, by itself, serves as a
massive spur to inter-organizational data analysis of consumer
behavior at a scale never before available to sampling-driven
marketing analytics. What happens when a "sample" population includes
100 million individuals?

9) Visualization is improving. While the spreadsheet is ubiquitous in
every organization and will remain so, the quality of information
visualization has improved over the past decade. This may result
primarily from the law of large numbers (1% of a boatload is bigger
than 1% of a handful), or it may reflect the growing influence of a
generation of skilled information designers, or it may be that such
tools as Mathematica and Adobe Flex are empowering better number
pictures, but in any event, the increasing quality of both the tools
and the outputs of information visualization reinforce the larger
trend toward sophisticated quantitative analysis.

10) Software as a service puts analytics into the hands of people who
lack the data sets, the computational processing power, and the rich
technical training formerly required for hard-core number-crunching.
Some examples follow.

Successes, many available as SaaS

-Financial charting and modeling continue to migrate down-market:
retail investors can now use Monte Carlo simulations and other tools
well beyond the reach of individuals at the dawn of online investing
in 1995 or thereabouts.

-Airline ticket prices at Microsoft's Bing search engine are rated
against a historical database, so purchasers of a particular route and
date are told whether to buy now or wait.

-Wolfram Alpha is taking a search-engine approach to calculated
results: a stock's price/earnings ratio is readily presented on a
historical chart, for example. Scientific calculations are currently
handled more readily than natural-language queries, but the tool's
potential is unbelievable.

-Google Analytics brings marketing tools formerly unavailable anywhere
to the owner of the smallest business: anyone can slice and dice ad-
and revenue-related data from dozens of angles, as long as it relates
to the search engine in some way.

-Fraud detection through automated, quantitative tools holds great
appeal because of both labor savings and rapid payback. Health and
auto insurers, telecom carriers, and financial institutions are
investing heavily in these technologies.

Practical considerations: Why analytics is still hard

For all the tools, all the data, and all the computing power, getting
numbers to tell stories is still difficult. There are a variety of
reasons for the current state of affairs.

First, organizational realities mean that different entities collect
the data for their own purposes, label and format it in often
non-standard ways, and hold it locally, usually in Excel but also in
e-mails, or pdfs, or production systems. Data synchronization efforts
can be among the most difficult of a CIO's tasks, with uncertain
payback. Managers in separate but related silos may ask the same
question using different terminology, or see a cross-functional issue
through only one lens.

Secondly, skills are not yet adequately distributed. Database
analysts can type SQL queries but usually don't have the managerial
instincts or experience to probe the root cause of a business
phenomenon. Statistical numeracy, often at a high level, remains a
requirement for many analytics efforts; knowing the right tool for a
given data type, or business event, or time scale, takes experience,
even assuming a clean data set. For example, correlation does not
imply causation, as every first-year statistics student knows, yet
temptations to let it do so abound, especially as scenarios outrun
human understanding of ground truths.

Third, odd as it sounds in an age of assumed infoglut, getting the
right data can be a challenge. Especially in extended enterprises but
also in extra-functional processes, measures are rarely sufficiently
consistent, sufficiently rich, or sufficiently current to support
robust analytics. Importing data to explain outside factors adds
layers of cost, complexity, and uncertainty: weather, credit, customer
behavior, and other exogenous factors can be critically important to
either long-term success or day-to-day operations, yet representing
these phenomena in a data-driven model can pose substantial
challenges. Finally, many forms of data do not readily plug into the
available processing tools: unstructured data is growing at a rapid
rate, adding to the complexity of analysis.

In short, getting numbers to tell stories requires the ability to ask
the right question of the data, assuming the data is clean and
trustworthy in the first place. This unique skill requires a blend of
process knowledge, statistical numeracy, time, narrative facility, and
both rigor and creativity in proper proportion. Not surprisingly,
such managers are not technicians, and are difficult to find in many
workplaces. For the promise of analytics to match what it actually
delivers, the biggest breakthroughs will likely come in education and
training rather than algorithms or database technology.

Early Indications September 2010: The Power and Paradoxes of Usability

2010-09-28T08:19:00.000-07:00

Usability is among the most difficult of topics to define and analyze.
At one level, it is much like the famous Supreme Court justice who
noted of potentially criminal extreme sexual images, "you know it when
you see it." At another level, the number of daily moments that
reinforce the presence of poor design can be overwhelming. Examples
are everywhere: building entrance doors with a grab handle you're
supposed to push but that you instinctively (and unsuccessfully) pull,
all manner of software (in Outlook, does hitting "cancel" stop the
transaction or clear a meeting from the calendar?), and pinched
fingers and scraped knuckles. Usability may be easy to spot, but it
is clearly very difficult to engineer in.

Systems

Why is this so? As Don Norman, one of the heroic figures in modern
usability studies, puts it in a recent ACM piece, complex products are
not merely things; they provide services: "although a camera is
thought of as a product, its real value is the service it offers to
its owner: Cameras provide memories. Similarly, music players provide
a service: the enjoyment of listening." In this light, the product
must be considered as part of a system that supports experience, and
systems thinking is hard, complicated, and difficult to accomplish in
functionally-siloed organizations.

The ubiquitous iPod makes his point perfectly:

"The iPod is a story of systems thinking, so let me repeat the essence
for emphasis. It is not about the iPod; it is about the system. Apple
was the first company to license music for downloading. It provides a
simple, easy to understand pricing scheme. It has a first-class
website that is not only easy to use but fun as well. The purchase,
downloading the song to the computer and thence to the iPod are all
handled well and effortlessly. And the iPod is indeed well designed,
well thought out, a pleasure to look at, to touch and hold, and to
use. Then there is the Digital Rights Management system, invisible to
the user, but that both satisfies legal issues and locks the customer
into lifelong servitude to Apple (this part of the system is
undergoing debate and change). There is also the huge number of
third-party add-ons that help increase the power and pleasure of the
unit while bringing a very large, high-margin income to Apple for
licensing and royalties. Finally, the 'Genius Bar' of experts offering
service advice freely to Apple customers who visit the Apple stores
transforms the usual unpleasant service experience into a pleasant
exploration and learning experience. There are other excellent music
players. No one seems to understand the systems thinking that has made
Apple so successful."

One of the designers of the iPod interface, Paul Mercer of Pixo,
affirms that systems thinking shaped the design process: "The iPod is
very simple-minded, in terms of at least what the device does. It's
very smooth in what it does, but the screen is low-resolution, and it
really doesn't do much other than let you navigate your music. That
tells you two things. It tells you first that the simplification that
went into the design was very well thought through, and second that
the capability to build it is not commoditized." Thus more complex
management and design vision are prerequisites for user
simplification. (Mercer quoted in Bill Moggridge, Designing
Interactions (Cambridge: MIT Press, 2007))

Because it requires systems thinking and complex organizational
behavior to achieve, usability is often last on the list of design
criteria, behind such considerations as manufacturability or modular
assembly, materials costs, packaging, skill levels of the factory
employees, and so on. The hall of shame for usability issues is far
longer than the list of successes. For every garage door opener, LEGO
brick, or Amazon Kindle, there are multiple BMW iDrives, Windows
ribbons, European faucets, or inconsistent anesthesia machines:
doctors on a machine from company A turned the upper right knob
clockwise to increase the flow rate, but had to go counter-clockwise
on company B's machine in the next operating room over. Fortunately,
the industry has standardized the control interface, with a resulting
decline in human endangerment. (See Atul Gawande, Complications: A
surgeon's notes on an imperfect science (New York: Macmillan, 2003))

Paradoxes

As Ronald Rust and his colleagues have shown, usability presents
manufacturers of consumer electronics with a paradox. In purchase
mode, buyers overemphasize option value in their purchase
consideration: if multifunction device from company D does 13 things
and a competitor from company H performs 18 actions, the potential
utility is overemphasized even if the known need is only for, say, six
tasks. Watching the evolution of the Swiss Army knife testifies to
this phenomenon: very few of us, I suspect, have precisely the tools
we a) want or b) use on our knife.

Once they get that 18-way gadget home, however, option value recedes
and usability comes to the fore, and the extra controls, interfaces,
and other factors that drive complexity can make using the more
"capable" device frustrating at best and impossible at worst. At
consumer electronics retailers, most returned items function
perfectly, but are often returned because they are too hard to
integrate into everyday life. (They may also be returned because
consumers routinely seek better deals, get tired of a color or finish,
or use the purchase essentially as a free rental, performing a task
then returning the device.)

Hence the paradox: does the designer back off on features and
capabilities, and thus lose the head-to-head battle of shelf-side
calculus in order to win on usability, or do purchase rather than use
considerations win out? There are some ways out of this apparent
paradox: modular add-ons, better point-of-sale information, and
tutorials and other documentation (knowing that the vast majority of
people will never read a manual). The involvement of user groups is
growing, for both feedback on products in development and support
communities for stumped users. (Roland T. Rust, Debora Viana Thompson,
and Rebecca W. Hamilton, "Defeating Feature Fatigue," Harvard Business
Review, February 2006)

At its worst, overwhelming complexity and other forms of poor
usability can kill, as the anesthesia example makes clear. Nuclear
power plants, military hardware, and automobiles provide ready
examples. Especially with software-driven interfaces becoming the
norm (even for refrigerators and other devices with little status to
report and few user-driven options to adjust), the potential for
either bugs or unforeseen situations to escalate is becoming more
common.

Beyond Gadgets

This essay will not become a tribute to Apple or Southwest Airlines,
however, if only to escape the cliche. Instead, I'd like to discuss a
recent video by TED producer Chris Anderson. In it he looks at the
proliferation of online videos as tools for mass learning and
improvement. Starting with the example of self-taught street dancers
in Brazil, Japan, LA, and elsewhere, he argues that the broad
availability of video as shared show-and-tell mechanism spurs, first,
one-upmanship through imitation and then innovation. The level of TED
talks themselves, Anderson argues, provides home-grown evidence that
cheap, vivid multimedia can raise the bar for many kinds of tasks:
futurist presentations, basketball dunks, surgical techniques, and so
on.

Five things are important here.

1) The low barrier to entry for imitator/innovator #2 to post her
contribution to the discussion may inspire, inform, or infuriate
imitator/innovator #3. Mass media did some of these things (in
athletic moves, for example: watch a playground the week after the
Super Bowl or a halfpipe after the X games). The lack of a feedback
loop, however, limited the power of broadcast to propagate secondary
and tertiary contributions.

2) Web video moves incredibly fast. The speed of new ideas entering
the flow can be staggering once a video goes "viral," as its
epidemiological metaphor would suggest.

3) The incredible diversity of the online world is increasing every
year, so the sources of new ideas, fresh thinking, and knowledge of
existing solutions multiply as well. Credentials are self-generated
rather than externally conferred: my dance video gets views not
because I went to Julliard but because people find it compelling, and
tell their friends, followers, or colleagues.

4) Web video is itself embedded in a host of other tools, both social
and technical, that are also incredibly easy to use. Do you want to
tell someone across the country about an article in today's paper
newspaper? Get out the scissors, find an envelope, dig up his current
address, figure out correct postage (pop quiz: how much is a
first-class stamp today?), get to a mailbox, and wait a few days.
Want to recommend a YouTube or other web video? There are literally
hundreds of tools for doing so, essentially all of which are free and
have short learning curves.

5) Feedback is immediate, in the form of both comments and views
counters. The reputational currency that attaches to a "Charlie bit
my finger" or "Evolution of dance" is often (but not always)
non-monetary, to be sure, but emotionally extremely affecting
nonetheless.

With such powerful motivators, low barriers to participation, vast and
diverse populations, rapidity of both generation and diffusion, and a
rich ancillary toolset relating to online video, Anderson makes a
compelling case for the medium as a vast untapped resource for
problem-solving on multiple fronts. In addition, because it involves
multiple senses, the odds that a given person will grasp my ideas
increases as the viewer can hear, watch, or read text relating to the
topic.

Thus the power of extreme usability transcends gadgets, frustration,
and false-failure returns. When done right, giving people easy access
to tools for creation, distribution, interpretation, and
classification/organization can help address problems and
opportunities far beyond the sphere of electromechanical devices.
Apart from reducing frustration, improving safety, or increasing
sales, lowering barriers to true engagement (as in the web browser,
for example) may in fact help change the world.

Early Indications August 2010: Rethinking Location and Identity

2010-09-01T04:07:00.000-07:00

Even though they're sometimes overlooked in relation to spectacular
growth rates (50x increases in wireless data carriage), successful
consumer applications (half a billion Facebook users), and technical
achievement (at Google, Amazon, Apple, and elsewhere), location-based
technologies deserve more attention than they typically receive. The
many possible combinations of wired Internet, wireless data, vivid
displays, well-tuned algorithms running on powerful hardware, vast
quantities of data, and new monetization models, when combined with
location awareness, have yet to be well understood.

Digital location-based services arose roughly in chronological
parallel with the commercial Internet. In 1996, GM introduced the
OnStar navigation and assistance service in high-end automobiles.
Uses of Global Positioning System (GPS, which, like the Internet, was
a U.S. military invention) and related technologies have exploded in
the intervening years, in the automotive sector and, more recently, on
smartphones. The widespread use of Google Earth in television is
another indicator of the underlying trend.

Handheld GPS units continue to double in sales every year or two in
the North American market. As the technology is integrated into
mobile phones, the social networking market is expected to drive far
wider adoption. Foursquare, Gowalla, numerous other startups, and the
telecom carriers are expected to deliver more and more applications
linking "who," "where," and "when." Powerful indications of this
tendency came when Nokia bought Navteq (the "Intel inside" of many
online mapping applications) for $8.1 billion in 2007, when Facebook
integrated location services in 2010, and when the rapid adoption of
the iPhone and other smartphones amplified the market opportunity
dramatically. Location-based services (whether Skyhook geolocation,
Google Maps and Earth, GPS, and others) have evolved to become a
series of platforms on which specific applications can build, tapping
the market's creativity and vast quantities of data.

In the process, the evolution of location taps into significant questions:

-Who am I in relation to where I am? That is, what are the
implications of mapping for identity management?

-Who knows where I am, when I'm there, and where I've been? How much
do I control the "information exhaust" related to my movements? Who
is liable for any harm that may come to me based on the release of my
identity and location?

-Who are we relative to where we are? In other words, how do social
networks change as they migrate back and forth between virtual space
(Facebook) and real space (Mo's Bar)? What happens as the two worlds
converge?

Variations on a Theme

While location often seems to be synonymous with GPS, location-based
data services actually come in a variety of packages. Some examples
follow:

-Indoor Positioning Systems
For all of the utility of GPS, there are numerous scenarios where it
doesn't work: mobile x-ray machines or patient gurneys in hospitals,
people in burning buildings, work-in-process inventory, and
specialized measurement or other tools in a lab or factory all need to
be located in sometimes vast and often challenging landscapes,
sometimes within minutes. GPS signals may not penetrate the building,
and even if they can, the object of interest must "report back" to
those responsible for it. A variety of wired and wireless
technologies can be used to create what is in essence a scaled-down
version of the GPS environment.

-Optical
Such well known firms as Leica and Nikon have professional products to
track minute movements in often massive structures or bodies: dams,
glaciers, bridges. Any discussion of location awareness that neglects
the powerful role of precision optics, beginning with the essential
surveyor's transit, would be incomplete.

-WiFi mapping
As we have seen, the worldwide rise of wi-fi networking is very much a
bottom-up phenomenon. Two consequences of that mode of installation
are, first, often lax network security and second, considerable
coverage overspill. Driving down any suburban or metropolitan street
with even a basic wireless device reveals dozens of residential or
commercial networks. Such firms as Google have systematically mapped
those networks, resulting in yet another overlay onto a growing number
of triangulation points. The privacy implications of such mapping
have yet to be resolved.

-Cellular
Wireless carriers can determine the position of an active (powered-up)
device through triangulation with the customer's nearby towers. Such
an approach lacks precision when compared to approaches (most notably
GPS) that reside on the handset rather than in the network. In either
case, the carrier can establish historical location for law
enforcement and potentially other purposes.

-Skyhook
A startup based in Boston, Skyhook has built a database of 100 million
wi-fi physical coordinates then added both GPS and cellular
components, making Skyhook most precise (inside or near buildings)
where GPS is weakest. A software solution combines all available
information to create location-tracking for any wi-fi enabled device,
indoors or out. Skyhook powers location awareness for devices from
Apple, Dell, Samsung, and other companies, and is now generating
secondary data based on those devices.

Landmarks

Noting a few historic transitions and innovations in the history of
location-based services reveals the scale, complexity, and wide
variety of applications that the core technologies are powering.

OnStar
With roughly 5.5 million subscribers in mid-2010, OnStar has become
the world's largest remote vehicle-assistance service. In addition to
receiving navigation and roadside assistance, subscribers can have
doors unlocked and gain access to certain diagnostic data related to
that particular vehicle. The service delivers important information
to emergency response personnel: when extricating occupants from a
damaged vehicle, knowing which airbags have deployed can assist in
keeping EMTs, police, and firefighters safe from the explosive force
of an undeployed device that might be inadvertently tripped. Knowing
the type and severity of the crash before arrival on the scene can
also help the teams prepare for the level of damage and injury they
are likely to encounter.

The service was launched as a joint venture. General Motors brought
the vehicle platform and associated engineering, Hughes Electronics
managed the satellite and communications aspects, and Electronic Data
Systems, itself being spun out from GM in OnStar's launch year,
performed systems integration and information management.

GPS
The history of GPS is even more compelling when considered alongside
its nearly contemporary stable mate, the Internet. GPS originated in
1973, ARPANET in 1969. Ronald Reagan allowed GPS to be used for
civilian purposes after a 1983 incident involving a Korean Air Lines
plane that strayed into Soviet airspace. The Internet was handed off
from the National Science Foundation to commercial use in 1995; Bill
Clinton ordered fully accurate GPS (20 meter resolution) to be made
available May 1, 2000. Previously, the military had access to the
most accurate signals while "Selective Availability" (300 meter
resolution) was delivered to civilian applications.

Since 1990, GPS has spread to a wide variety of uses: recreational
hiking and boating, commercial marine navigation, cell phone
geolocation, certain aircraft systems, and of course vehicle
navigation. Heavy mining and farming equipment can be steered to less
than 1" tolerances. Vehicles (particularly fleets) and even animals
can be "geofenced," with instant notification if the transmitter
leaves a designated area. In addition to latitude and longitude, GPS
delivers highly precise time services as well as altitude.

Trimble
Founded by Charles Trimble and two colleagues from Hewlett-Packard in
1978 (the first year a GPS satellite was launched), Trimble Navigation
has become an essential part of geolocation history. From its base in
Silicon Valley, the company has amassed a portfolio of more than 800
patents and offers more than 500 products. Much like Cisco, Trimble
has made acquisition of smaller companies a core competency, with many
M&A moves in the past ten years in particular. A measure of Trimble's
respect in the industry can be seen in the quality of its
joint-venture partners: both Caterpillar and Nikon have gone to market
jointly with Trimble.

The company has a long history of "firsts": the first commercial
scientific-research and geodectic-survey products based on GPS for
oil-drilling teams on offshore platforms, the first GPS unit taken
aboard the space shuttle, the first circuit board combining GPS and
cellular communications. The reach of GPS can be seen in the variety
of Trimble's product offerings: agriculture, engineering and
construction, federal government, field and mobile worker (including
both public safety and utilities applications), and advanced devices,
the latter indicating a significant commitment to R&D.

Location, Mobility, and Identity

Issues of electronic identity and mobility have been playing out in
quiet but important ways. Each of several instances 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.

-Social Networking Goes Local
Whether through Dodgeball, (a New York startup that was bought by
Google in 2005 then left unexploited), Foursquare, or Facebook Places,
the potential for the combination of virtual and real people in
virtual or real places is still being explored. Viewed in
retrospect, the course of the Dodgeball acquisition raises the revenue
questions familiar to watchers of Friendster et al: who will pay for
what, and who collects, by what mechanism? Who owns my location
information and what aspects of it do I control? Much like my medical
records, which are not mine but rather the doctor's or hospital's,
control appears to be defaulting to the collector rather than the
generator of digital bread crumbs.

-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: the U.S. generates about 12 million
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 was
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 nearly
75% 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.

-Cell phone tracking
The wireless carriers offer a variety of services that give a relative
(often a parent, or an adult child of a potentially confused elder)
location information generated by a phone. the service has also been
used to help stalkers and abusive spouses find their wives in hiding.
Women's shelters routinely strip out the tracking component of cell
phones; according to the Wall Street Journal, a Justice Department
report in 2009 estimated that 25,000 adults in the U.S. were victims
of GPS stalking every year. In addition to the carriers, tracking
capability is being developed by sophisticated PC users that spoof the
behavior of a cell tower. Keystroke and location logging software is
also available; one package, called MobileSpy, costs under $100 per
year.

Conclusion

As the telephone system migrates from being dominated by fixed lines,
where identity resided in the phone, to mobile usage, where identity
typically relates to an individual, location is turning out to matter
a lot. Mobile 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.

July 2010 Early Indications: Living with an iPad

2010-07-31T13:25:00.000-07:00

I'm not typically a "gadget guy," one of those folks (Ed Baig at USA Today is one of the best) who regularly evaluate new devices. The iPad, however, stands as a milestone that redefines how people and technology inter-relate. A colleague is asking me to evaluate it as an educational tool, so I'm probably a bit more self-conscious than usual in my uptake of this particular technology. Herewith are a few thoughts.

The iPad perfectly embodies wider confusion over the intermingling of work and life. I have yet to load the office apps, so most of my reaction concerns the device used in "life" mode. That being said, the iPad is too convenient to ignore "just a peek" at e-mail. The screen is so bright and actually pretty that it's an attention magnet. The widely discussed aluminum case has just the right heft in the hand, just the right curve in the palm, that people (not just technologists) want to pick it up. From there, assuming a good wi-fi signal, I found everyone got up and running with very little coaching, usually without invitation.

I expect this will become more of an issue with work-related applications, but the iPad's limited text entry will be interesting to assess. Right now you can sort of double-thumb, sort of touch type, sort of trace letters with fingers (in 3rd-party applications). For short to medium e-mails, I did not mind, but a Crackberry addict might find the slow pace frustrating. The Apple case that folds back on itself to form a triangular base can be helpful here, from other people I've watched.

Similarly, I expect that at some point kludges or formal fixes will address the lack of printer support. Along the same lines, the single-threaded mode of operation can get annoying: leave an app to check something else (it does remember multiple web pages, however) and you face a full restart upon returning to whatever non-browser activity you were just doing. An update to the operating system should fix this issue in September.

The iPad rapidly changed some of my long-standing habits. Reading, however, is not one of them. I have yet to get on board the e-reader bandwagon, and have left several texts I should read for work untouched: I literally forget they're loaded and waiting for me. In part this is because I read scholarly books idiosyncratically, never starting at page 1 and proceeding to 347. Rather, I'll start by looking at the plates if the book has them, checking out the pictures bound somewhere randomly in the middle. From there I might look through the endnotes, or the jacket blurbs. I'll often skip chapter 1, at least initially, preferring instead to start with what often turns out to be the first body chapter with real evidence and real argument rather than introductory matter which some people find very hard to write. The point is that e-readers do not support non-fiction reading as well as they do a good mystery, where there's only one way through the story. Pagination also presents a real issue when you need to footnote a source.

To stay with the question of reading, what was widely called "the Jesus tablet" in the publishing industry can not yet serve as a replacement for a physical magazine -- particularly at the prices being suggested: $4.99 a week of Time or Sports Illustrated is not going to fly, I don't believe. Merely exporting static, dated dead-tree content to a new medium (which happens to be dynamic, real-time, and capable of multimedia) follows a familiar trap. The Wright brothers did not succeed by mimicking a bird. Printed books did not find a market mass-producing hand-lettered scrolls. Television quickly stopped presenting radio shows with visible people. Businesses are continuing to learn that the Web is not "television except different."

To their credit, the team at Flipboard is trying to transcend the paper magazine by integrating social networking feeds: "hey, did you see the piece in [wherever]?" The half-page-oriented turning metaphor looks clever at first glance, and some of the content is strong. The problem is it's too strong, too predictable: thus far it's hard to find fresh stories in the pretty format. Too many taps stand between "hmm, let's look at that" and the actual story, most of which I'd already seen in my other grazings.

In addition, the Flipboard business model looks extremely shaky: adding one more intermediary between any potential consumer and the brand creates disincentives all around. I'd also wager that the Web 2.0 Tom Sawyer approach -- let the crowd do your work for you and pay them in reputational or other non-monetary compensation -- can not run at the current pace forever. Sure, I recommend articles in my Twitter feed (38apples), but a) not at scale, b) not reliably, from an advertiser's vantage point, and c) not systematically, from a subscriber's standpoint. Dialing in the right balance between serendipity and editorial coherence (the current buzzword calls it "curated" content) is a new challenge. The New York Times, as good as it is at many things, has not yet found the key to this new medium, nor should anyone expect them to: it's simply too early. The same goes for AOL, for the BBC, for NBC, and for just about everyone else.

Because it is so relentlessly visual and was never trapped in a paper model, weather information can be arresting on the iPad. The Weather Channel app reminded me immediately of what I remember of Pointcast (which, as I pointed out on Twitter, would make a great iPad app: minimal text input, free-floating news and other topical links, ticker streaming, and other invitations to tap). Maps, graphs, videos, icons -- weather information works essentially perfectly on the iPad.

I did not find the same attractiveness true for Google maps. I believe this discomfort relates to the nature of wayfinding. If you're looking at a map, you're likely already doing something else: dialing a phone, looking out the window for a house number or street sign, holding a steering wheel, maybe grasping a slip of paper with an address. Given the iPad's two-handed operation, those other ancillary activities often make it the wrong tool for the job, particularly compared to a one-handed or voice-activated GPS.

I have yet to fly with the iPad but look forward to doing so: I never found the iPhone a desirable movie player, but expect my next long flight will pass faster with the iPad's vivid display of something I want rather than the typical choices on the airlines. One great feature of all operations: the iPad runs silently. The move to a world in which mobile devices rely far more heavily on broadband connections to "cloud" resources than they do on on-board storage will have many side effects, and the loss of noisiness is one of them. (I did not yet try any connection other than WiFi, but will attempt to assess how well 3G works once school starts.)

In my time with the iPad, the life-altering application has been Scrabble. It may actually be better than the physical board game. Let me count the ways:

1) You can't lose pieces.
2) You can't cheat by marking or memorizing tiles (as my late father-in-law was fond of doing).
3) The dictionary is hard-wired: no fights, though to be fair, in some circles the lexicographic litigation is part of the point, and that gets lost.
4) A partially completed game is trivial to save.
5) Lifetime statistics are kept automatically, including win-loss.
6) The touch screen allows automatic shuffling and very comfortable flicking of the letters in the tray, unlike the iPhone app Words with Friends, in which I sometimes must break out the physical set to parse a really tough rack.
7) You can play by yourself against the computer.
8) Virtual games against on-line strangers are also possible.
9) You can play in bed, on a train, on a plane, on a subway, unlike the original.

In sum, what do the various aspects tell us about the iPad? First, the device almost demands interaction, but limits its sphere. Highlighting and annotation, so far, have not worked well. The well-publicized exclusion of Flash from the device rules out many websites, such as those running Flash-based catalog apps. Typing remains problematic. Printing will have to be added soon.

Second, the rapid start (from sleep) and silent operation take the user away from the world of "computers" and into the domain of "appliances," which I say as a compliment. I will withhold analysis of the device's pricing for the moment, however.

Third, the particular combination of heft, touch-screen, and vivid display is so new to us as a user community that I do not think we have a large catalog of applications that exploit the new hardware to its fullest. While the iPad runs some games superbly well, it's not a PSP. Yes you can read books but the iPad is not really a proper reader, or if it is, it's a really expensive one. One can replicate laptop functionality, but the iPad is not conceptually a computer, unlike the Microsoft family of tablets from a few years ago.

Until we can say with subconscious certainty what this thing is (and does) and behave accordingly, just as we could identify a television and all that it embodied as little as five years ago, I believe the iPad's transformative potential remains only partially recognized.

(The best assessment I read while researching his piece is here)

June 2010 Early Indications II: Book Review of Clay Shirky, Cognitive Surplus: Creativity and Generosity in a Connected Age

2010-06-17T14:12:00.000-07:00

To those of us who for a long time have tried to understand the many impacts of the Internet, Clay Shirky stands among a very small group of folks who Get It. Usually without hyperbole and with a sense of both historicity and humor, Shirky has been asking not the obvious questions but the right ones. Explaining first the import then the implications of these questions has led him to topics ranging from pro-anorexia support groups to the Library of Congress cataloging system and flame wars to programming etiquette.

This book continues that useful eclecticism. Examples are both fashionably fresh and honorably historical: Josh Groban and Johannes Gutenberg appear in telling vignettes. Rural India, 18th-century London, Korean boy-band fans, and empty California swimming pools are important for the lessons they can reinforce. The usual cliches -- Amazon, Zappos, Second Life, even Twitter -- are pretty much invisible. As Shirky has done elsewhere, two conventional narratives of various phenomena are both shown to miss the point: in this case, neither "Young people are immoral" nor "Young people are blissfully generous with their possessions" adequately explained the rise in music file sharing.

In a career of writing cogently about what radical changes in connectivity do to people, groups, and institutions, Cognitive Surplus is, I believe, Shirky's best work yet. Not content with explaining how we have come to our peculiar juncture of human attention, organizational possibility, and technological adaptation, in a final chapter Shirky challenges us to do something meaningful -- to civic institutions, for civil liberties, with truth and beauty on the agenda -- with social media, mobility, ubiquitous Internet access, and the rest of our underutilized toolkit. At the same time, he avoids technological utopianism, acknowledging that the tools are morally neutral and can be used as easily for cheating on exams as for the cleanup of Pakistani squalor.

A core premise of the book holds that the Internet allows many people to reallocate their time. Specifically, the amount of time people in many countries spend watching television is so vast that even a nudge in the media landscape opens up some significant possibilities. Wikipedia, for example, is truly encyclopedic in its coverage: comprised of work in more than 240 languages, the effort has accumulated more than a billion edits, all by volunteers. At the time of his analysis, Shirkey noted, the estimated human effort to create Wikipedia was roughly equivalent to the time consumed by the television ads running on one average weekend.

So ample available time exists to do something, as opposed to lying on a coach passively receiving TV messages. What might people do with this "cognitive surplus"? Read War and Peace. Volunteer at a soup kitchen. Join Bob Putnam's bowling league. Thus far, however, people haven't tended, in large numbers, to do these things, even though civic participation is apparently on the rise. Rather, people are connecting with other people on line: the shift from personal computing to social networking (Facebook alone hosts roughly half a billion accounts) is well underway but not yet well understood. Once we can communicate with people, anywhere, anytime, at close to zero economic cost, what do we do?

Here Shirky is inclusive: people help other people write and maintain operating systems, web servers, or browsers. They recaption silly cat pictures with sillier messages. They identify election irregularities, or ethnic discrimination, or needs for public safety and public welfare resources in both Haiti and the streets of London. The state of the technology landscape makes many things possible:

-Individuals do not need to be professionals to publish ideas; to disseminate pictures, music, or words; to have an opinion in the public discourse; or to analyze public data on crime or what have you.

-Based on an emerging subset of behavioral economics, we are discovering that markets are not the optimal organizing and motivational principle for every situation. For many kinds of social interaction, whether in regard to fishing grounds or blood donation, reputation- and community-based solutions work better than a monetary one. At the collective level, belonging to a group we believe in and having a chance to be generous are powerful motivators. For their part, individuals are motivated by autonomy (shaping and solving problems ourselves) and competence (over time, getting better at doing so). In addition, the introduction of money into an interaction may make it impossible for the group to perform as well as before money, even after the financial rules are removed (think of certain Native American tribes as tragic examples here, but day-care parents who come late to pick-up hit closer to home).

-People in groups can organize to achieve some goal, whether it is the pursuit of tissue type registration for organ donation, a boycott of BP, or making car pools scale beyond office-mates.

In sum: amateurs can enter many fields of communication, performing at various levels of quality for free and displacing professionals with credentials who used to be paid more. Low overhead in both technical skill and capital infrastructure opens media businesses to new entrants. Finally, the combination of intrinsic motivation for cognitive work and low coordination costs means that informal organizations can outperform firms along several axes: Linux and Wikipedia stand as vivid, but not isolated, examples here.

This new order of things complicates matters for incumbents: record-label executives, newspaper reporters, and travel agents can all testify to being on the wrong side of a disruptive force. It also raises questions that can trouble some people:

-"Who will preserve cultural quality?"
Without proper editors guarding access to the publishing machinery, lots of bad ideas might see an audience. (The problem is not new: before movable type, every published book was a masterpiece, while afterward, we eventually got dime novels.)

-"What happens if that knowledge falls into the wrong hands?"
Previous mechanisms of cultural authority, such as those attached to a physician or politician, might be undermined.

-"Where do you find the time?"
Excessive exposure to electronic games, virtual communities, or the universally suspect "chat rooms" might crowd out normal behavior, most likely including American Idol, Oprah, or NCIS.

In sum, as Shirky crystallizes the objections, "Shared, unmanaged effort might be fine for picnics and bowling leagues, but serious work is done for money, by people who work in proper organizations, with managers directing their work." (p. 162)

These, then, are the stakes. Just as the limited liability joint stock corporation was a historically specific convenience that solved many problems relating to industrial finance, so too are new organizational models becoming viable to address today's problems and possibilities. At the same time, they challenge the cognitive infrastructure that coevolved with industrial capitalism.

That infrastructure, in broad outline, builds on the following:

-Individuals are not equipped to determine their own contributions to a larger group or entity.

-Money is a widely useful yardstick.

-Material consumption is good for psychic and economic reasons.

-Organizations are more powerful than disorganized individuals, and the larger the organization, the more powerful it is.

If each of those pillars is, if not demolished, at least shown to be wobbly, what comes next? In the book's final chapter, Shirky moves beyond analysis to prescription, arguing that with surplus time and massive low-cost infrastructure at our disposal, we owe it to each other and to our children to create something more challenging and beneficial than the best of what's out there: "Creating a participatory culture with wider benefits for society is harder than sharing amusing photos." (p. 185)

Patientslikeme.com, Ushahidi, and Responsible Citizens each represent a start rather than an acme. Digital society awaits, in short, its Gutenbergs, its Jeffersons, its Nightingales, its Ghandis. Shirky's concrete list of how-tos is likely to inform the blueprint utilized by this upcoming generation of innovators, reformers, and entrepreneurs. As a result, Cognitive Surplus is valuable for anyone needing to understand the potential ramifications of our historical moment.

Early Indications June 2010: World Cup special on sports brand equity

2010-06-11T13:51:00.000-07:00

It's a familiar business school discussion. "Let's talk about
powerful brands," begins the professor. "Who comes to mind?" Usual
suspects emerge: Coke, Visa, Kleenex. "OK," asks the prof, "what brand
is so influential that people tattoo it on their arms?" The answer is
of course Harley-Davidson.

There is of course another category of what we might call "tattoo
brands," however: sports teams. Measuring sporting allegiance as a
form of brand equity is both difficult and worth thinking about.

For a brief definition up front, Wikipedia's well-footnoted statement will do:

"Brand equity refers to the marketing effects or outcomes that accrue
to a product with its brand name compared with those that would accrue
if the same product did not have the brand name."

That is, people think more highly of one product than another because
of such factors as word of mouth, customer satisfaction, image
creation and management, track record, and a range of tangible and
intangible benefits of using or associating with the product.

The discussion is timely on two fronts. First, the sporting world's
eyes are on the World Cup, and several European soccer clubs are
widely reckoned as power brands on the global level. Domestically,
the pending shifts in college athletic conferences have everything to
do with brand equity: the University of Texas, a key prize, is one of
a handful of programs that make money, in part because of intense fan
devotion (one estimate puts football revenues alone at $88 million).

Our focus today will be limited to professional sports franchises, but
many of the arguments can be abstracted, in qualitative terms, to
collegiate athletics as well. If we consider the revenue streams of a
professional sports franchise, three top the list:

-television revenues
-ticket sales and in-stadium advertising
-licensing for shirts, caps, and other memorabilia.

Of these, ticket sales are relatively finite: a team with a powerful
brand will presumably have more fans than can logistically or
financially attend games. Prices can and do rise, but for a quality
franchise, the point is to build a fan network beyond the arena.
Television is traditionally the prime way to do this. National and
now global TV contracts turn viewership into advertising revenue for
partners up and down the value chain from the leagues and clubs
themselves. That Manchester United and the New York Yankees can have
fan bases in China, Japan, or Brazil testifies to the power of
television and, increasingly, various facets of the Internet in
brand-building.

Sports fandom exhibits peculiar economic characteristics. Compared
to, say, house- or car-buying, fans do not research various
alternatives before making a presumably "rational" consumption
decision: team allegiance is not a "considered purchase." If you are
a Boston Red Sox fan, your enthusiasm may or may not be relevant to
mine: network effects and peer pressure can come into play (as at a
sports bar), but are less pronounced than in telecom, for example. If
I am a Cleveland Cavaliers fan, I am probably not a New York Knicks
fan: a choice in one league generally precludes other teams in season.
Geography matters, but not decisively: one can comfortably cheer for
San Antonio in basketball, Green Bay in football, and St. Louis in
baseball. At the same time, choice is not completely independent of
place, particularly for ticket-buying (as compared to hat-buying).

Finally, switching costs are generally psychic and only mildly
economic (as in having to purchase additional cable TV tiers to see an
out-of-region team, for example). Those psychic costs are not to be
underestimated: just because someone lives in London with access to
several soccer clubs, allegiances are not determined by the low-price
or high-quality provider on an annual basis. Allegiance also does not
typically switch for reasons of performance: someone in Akron who has
cheered, in vain, for the Cleveland Browns is not likely to switch to
Pittsburgh even though the Steelers have a far superior championship
history.

Given the vast reach of today's various communications channels, it
would seem that successful sports brands could have a global brand
equity that exceeds the club's ability to monetize those feelings. I
took five of the franchises ranked highest on the Forbes 2010 list of most valuable sports brands and calculated the ratio of the estimated brand equity to the club's revenues. If the club were able to capture more fan allegiance than it could realize in cash inflows, that ratio should be greater than one. Given the approximations I used, that is not the case.

For a benchmark, I also consulted Interbrand's list of the top global
commercial brands and their value to see how often a company's image
was worth more than its annual sales. I chose six companies from a
variety of consumer-facing sectors (so long IBM, SAP, and Cisco), and
the company had to be roughly the same as the brand (the Gillette
brand is not the parent company of P&G).

Three points should be made before discussing the results. First, any
calculation of brand equity is a rough estimate: no auditable figures
or scientific calculations can generate these lists (see here). Second, Forbes and Interbrand used
different methodologies. We will see the consequences of these
differences shortly. Finally, corporate revenues often accrued from
more brands than just the flagship: people buy Minute Maid apart from
the Coca Cola brand, but the juice revenues are counted in the
corporate ratio. All told, this is NOT a scientific exercise but
rather a surprising thought-starter.

The stunning 8:1 ratio of brand equity to revenues at Louis Vuitton is
in part a consequence of Interbrand's methodology, which overweights
luxury items. Even so, six conclusions and suggestions for further
investigation emerge:

1) The two scales do not align. The New York Yankees, the most
valuable sports brand in the world, is worth 1/24 that of Amazon. One
or both of those numbers is funny.

2) Innovation runs counter to brand power. New Coke remains a
textbook failure, while Apple's brand is only worth about a third of
its revenue. Harley-Davidson draws its cachet from its retrograde
features and styling, the antithesis of innovativeness.

3) Geography is not destiny for sports teams. Apart from New York and
Madrid, Dallas, Manchester, and Boston (not included here but with two
teams in Forbes' top ten) are not global megaplexes or media centers;
London, Rome, and Los Angeles are all absent.

4) Soccer is the world's game, as measured by brand: five of the ten
most valuable names belong to European football teams. The NFL has
two entries and Major League Baseball three to round out the top ten
list. Despite the presence of more international stars than American
football, and their being from a wider range of countries than MLB's
feeders, basketball and hockey are absent from the Forbes top ten.

5) Assuming for the sake of argument that the Interbrand list is
overvalued and therefore that the Forbes list is more accurate, the
sports teams' relatively close ratio of brand equity to revenues would
suggest that teams are monetizing a large fraction of fan feeling.

6) Alternatively, if the Forbes list is undervalued, sports teams have
done an effective job of creating fan awareness and passion well
beyond the reach of the home stadium. Going back to our original
assumption, if tattoos are a proxy for brand equity, this is more
likely the case. The question then becomes, what happens next?

As more of the world comes on line, as media becomes more
participatory, and as the sums involved for salaries, transfer fees,
and broadcast rights at some point hit limits (as may be happening in
the NBA), the pie will continue to be reallocated. The intersection
of fandom and economics, as we have seen, is anything but rational, so
expect some surprises in this most emotionally charged of markets.

May 2010 Early Indications: Devising the cloud-aware organization

2010-05-22T08:38:00.000-07:00

As various analysts and technology executives assess the pros and cons of cloud computing, two points of consensus appear to be emerging:

A) very large data centers benefit from extreme economies of scale

B) cloud success stories are generally found outside of the traditional IT shop.

Let us examine each of these in more detail, then probe some of the implications.

The advantages of scale

Whether run by a cloud provider or a well-managed enterprise IT group, very large data centers exhibit economies of scale not found in smaller server installations. First, the leverage of relatively expensive and skilled technologists is far higher when one person can manage between 1,000 and 2,000 highly automated servers, as at Microsoft, as opposed to one person being responsible for between five and 50 machines, which is common.

Second, the power consumption of a well-engineered data center can be more efficient than that of many traditional operations. Yahoo is building a new facility in upstate New York, for example, that utilizes atmospheric cooling to the point that only 1% of electricity consumption is for air conditioning and related cooling tasks. Having people with deep expertise in cooling, power consumption, recovery, and other niche skills on staff also helps make cloud providers more efficient than those running at smaller scales.

Finally, large data centers benefit from aggregation of demand. Assume facility A has 10,000 users of computing cycles spread over a variety of different cyclical patterns while facility B has fewer users, all with similar seasonality for retail, quarterly closes for an accounting function, or monthly invoices. Facility A should be able to run more efficiently because it has a more "liquid" market for its capabilities while facility B will likely have to build to its highest load (plus a safety margin) then run less efficiently the majority of the time. What James Hamilton of Amazon calls
"non-correlated peaks" can be difficult to generate within a single enterprise or function.

Who reaps the cloud's benefits?

For all of these benefits, external cloud successes have yet to accrue to traditional IT organizations. At Amazon Web Services, for example, of roughly 100 case studies, none are devoted to traditional enterprise processes such as order management, invoicing and payment processing, or HR.

There are many readily understandable reasons for this pattern; here is a sample. First, legal and regulatory constraints often require a physical audit of information handling practices to which virtual answers are unacceptable. Second, the laws of physics may make large volumes of database joins and other computing tasks difficult to
execute off-premise. In general, high-volume transaction processing is not currently recommended as a cloud candidate.

Third, licenses from traditional enterprise providers such as Microsoft, Oracle, and SAP are still evolving, making it difficult to run their software in hybrid environments (in which some processes run locally while others run in a cloud). In addition, only a few enterprise applications of either the package or custom variety are designed to run as well on cloud infrastructure as they do on a conventional server or cluster. Fourth, accounting practices in IT may make it difficult to know the true baseline costs and benefits to which an outside provider must compare: some CIOs never see their electric bills, for example.

For these reasons, among others, the conclusion is usually drawn that cloud computing is a suboptimal fit for traditional enterprise IT. However, let's invert that logic to see how organizations have historically adapted to new technology capability. When electric motors replaced overhead drive shafts driven by waterwheels adjoining textile mills, the looms and other machines were often left in the same positions for decades before mill owners realized the facility could be organized independently of power supply. More recently, word-processing computers from the likes of Wang initially automated typing pools (one third of all U.S. women working in 1971 were secretaries); it was not until 10 to 20 years later that large numbers of managers began to service their own document-production needs, and thereby alter the shape of organizations.

The cloud will change how resources are organized

Enterprise IT architectures embed a wide range of operating assumptions regarding the nature of work, the location of business processes, clockspeed, and other factors. When a major shift occurs in the information or other infrastructure, it takes years for organizations to adapt. If we take as our premise that most organizations are not yet prepared to exploit cloud computing (rather than talk about clouds not being ready for "the enterprise"), what are some potential ramifications?

-Organizations are already being founded with very little capital investment. For a services- or knowledge-intensive business that does not make anything physical, free tools and low-cost computing cycles can mostly be expensed, changing the fund-raising and indeed organizational strategies significantly.

-The perennial question of "who owns the data?" enters a new phase. While today USB drives and desktop databases continue to make it possible to hoard data, in the future organizations built on cloud-friendly logic from their origins will deliver new wrinkles to information-handling practices. The issue will by no means disappear:
Google's Gmail cloud storage is no doubt already home to a sizable quantity of enterprise data.

-Smartphones, tablets, and other devices built without mass storage can thrive in a cloud-centric environment, particularly if the organization is designed to be fluid and mobile. Coburn Ventures in New York, for example, is an investment firm comprised of a small team of mobile knowledge workers who for the first five years had no
corporate office whatsoever: the organization operated from wi-fi hotspots, with only occasional all-hands meetings.

-New systems of trust and precautions will need to take shape as the core IT processing capacity migrates to a vendor. It's rarely consequential to contract for a video transcoding or a weather simulation and have it be interrupted. More problematically, near-real-time processes such as customer service will likely need to
be redesigned to operate successfully in a cloud, or cluster of clouds. Service-level agreements will need to reflect the true cost and impact of interruptions or other lapses. Third-party adjudicators may emerge to assess the responsibility of the cloud customer who introduced a hiccup into the environment relative to the vendor whose
failover failed.

In short, as cloud computing reallocates the division of labor within the computing fabric, it will also change how managers and, especially, entrepreneurs organize resources into firms, partnerships, and other formal structures. Once these forms emerge, the nature of everything else will be subject to reinvention: work, risk, reward, collaboration, and indeed value itself.

Early Indications April 2010 The Web of Opinion: Metadata as conversation

2010-04-29T11:47:00.000-07:00

In the beginning, there was data, enumerating how many, what kind,
where. Data was kept in proprietary formats and physically located:
if the library was missing the Statistical Abstract for 1940, or some
other grad student had sequestered it, you had little chance to
determine corn production in Nebraska before World War II. Such
statistics were the exception: most data remained unpublished, in lab
notebooks and elsewhere.

Once data escaped from print into bits, it became potentially
ubiquitous, and once formats became less proprietary, more people
could gain access to more forms of data. The early history of the web
was built in part on a footing of public access to data: online
collections of maps, congressional votes, stock prices, phone numbers,
product catalogs, and other data proliferated.

Data has always required metadata: that table of corn production had a
title and probably a methodological footnote. Such metadata was
typically contributed by an expert in either the technical field or in
the practice of categorizing. Official taxonomies have continued the
tradition of creators and curators having cognitive authority in the
process of organizing. In addition, as Clay Shirky has pointed out in
"Ontology is Overrated," the heritage of physicality led to the need
for one answer being correct so that an asset could be found: a book
about Russian and American agricultural policy during the 1930s had to
live among books on Russian history, agricultural history, or U.S.
history: it was arguably about any or all of those things, but someone
(most likely at the Library of Congress) assigned it a catalog number
that finalized the discussion: the book in question was officially and
forever "about" this more than it was about that.

In the past decade, the so-called read-write web has allowed anyone to
become both a content creator and a metadata creator. Sometimes these
activities coincide, as when someone tags their own YouTube video for
example. More often, creations are submitted to a commons, and the
commoners (rather than a cognitive authority) determine what the
contribution "is" and what it is "about." Rather than editors or peer
reviewers judging an asset's quality before publication, in more and
more settings the default process is publication then collaborative
filtering for definition, quality, and meaning.

Imagine a particular propane torch for sale on Amazon.com. So-called
social metadata has been nurtured and collected for years on the site.
If I appreciate the way the torch works for its intended use of
brazing copper pipe, I can submit a review with both a star rating and
prose. Amazon quickly allowed for more social metadata as you the
reader of my review can now rate my review, thus creating metadata
about metadata.

Here is where the discussion gets complicated and extremely
interesting. Suppose I say in my review that I use the Flamethrower
1000 for creme brulee even though the device is not rated (by whatever
safety or sanitation authority) for kitchen use. The comments about
my torch review can quickly become a foodie discussion thread: the
best creme brulee recipe, the best restaurants at which to order it,
regional variations in the naming or preparation of creme brulee, and
so forth. Amazon's moderators might truncate the discussion to the
extent it's not "about" the Flamethrower 1000 under review, but the
urge to digress has long been and will be demonstrated elsewhere.

Enter Facebook. The platform is in essence a gigantic metadata
generation and distribution system. ("I liked the concert." "The
person who liked the concert did not know what she was talking about."
"My friend was at the concert and said it was uneven." and so on)
Strip Facebook of attribute data and there is little left: it's
essentially a mass of descriptors (including "complicated"), created
by amateurs and never claimed as authoritative, linked by a
21st-century kinship network. Facebook's announcement on April 21st
of the Open Graph institutionalizes this collection of conversations
as one vast, logged, searchable metadata repository. If I "like"
something, my social network can be alerted, and the website object of
my affection will know as well.

Back in November, Bruce Schneier laid out five categories of social
networking data:

1. Service data. Service data is the data you need to give to a social
networking site in order to use it. It might include your legal name,
your age, and your credit card number.
2. Disclosed data. This is what you post on your own pages: blog
entries, photographs, messages, comments, and so on.
3. Entrusted data. This is what you post on other people's pages. It's
basically the same stuff as disclosed data, but the difference is that
you don't have control over the data -- someone else does.
4. Incidental data. Incidental data is data the other people post
about you. Again, it's basically the same stuff as disclosed data, but
the difference is that 1) you don't have control over it, and 2) you
didn't create it in the first place.
5. Behavioral data. This is data that the site collects about your
habits by recording what you do and who you do it with.

What does that list look like today? A user's trail of "like" clicks
makes this list or her Netflix reviews and star ratings, themselves
the subject of privacy concerns, seem like merely the tip of the
iceberg. As Dan Frankowski said in his Google Talk on data mining,
people have been defined by their preferences for millennia --
sometimes to the point of dying for them.

With anything so new and so massive in scale (50,000 sites adopted the
"like" software toolkit in the first week), the unexpected
consequences will take months and more likely years to accumulate.
What will it mean when every opinion we express on line, from the
passionate to the petty, gets logged in the Great Preference
Repository in the Sky, never to be erased and forever being able to be
correlated, associated, regressed, and otherwise algorithmically
parsed?

Several questions follow: who will have either direct or indirect
access to the metadata conversation? What are the opt-in, opt-out,
and monitoring/correction provisions? If I once mistakenly clicked a
Budweiser button but have since publicly declared myself a Molson man,
can I see my preference library as if it's a credit score and remedy
any errors or misrepresentations? What will be the rewards for brand
monogamy versus the penalties for promiscuous "liking" of every
product with a prize or a coupon attached?

While this technology appears to build barriers to competitive entry
for Facebook, what happens if I establish a preference profile when
I'm 14, then decide I no longer like zoos, American Idol, or Gatorade?
Will people seek a fresh start at some point in an undefined network,
with no prehistory? What is the mechanism for "unliking" something,
and how far retrospectively will it apply?

Precisely because Facebook is networked, we've come a very long way
from from that Statistical Abstract on the library shelf. What
happens to my social metadata once it traverses my network? How much
or how little control do I have over what my network associates
("friends" in Facebook-speak) do with my behavioral and opinion data
that comes their way? As both the Burger King "Whopper Sacrifice"
(defriend ten people, get a hamburger coupon) and a more recent
Ikea-spoofing scam have revealed, Facebook users will sell out their
friends for rewards large and small, whether real or fraudulent.

Finally, to the extent that Facebook is both free to use and expensive
to operate, the Open Graph model opens a fascinating array of revenue
streams. If beggars can't be choosers, users of a free system have
limited say in how that system survives. At the same time, the global
reach of Facebook exposes it to a broad swath of regulators, not the
least formidable of whom come out of the European Union's strict
privacy rights milieu. As both the uses and inevitable abuses of the
infinite metadata repository unfold, the reaction will be sure to be
newsworthy.

March 2010 Early Indications: Behaviorism, Online

2010-03-31T17:37:00.000-07:00

One of the consequences of the ubiquity of our communications tools is a shift away from fascination with and the need for expertise in the tools themselves; PC Magazine, for example, ceased physical publication last year. Instead, relatively transparent use of the tools supports our need to do a job: schedule a plane trip, send relatives some photos, or coordinate a social engagement. As we perform more of our social interactions online, our behavior will adjust to the tool's constraints and capabilities. Those behavioral adjustments are starting to accumulate, and the patterns are fascinating indeed.

In her book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Carlota Perez studied five technology breakthroughs in western history. In every case, a financial bubble burst after early enthusiasm, but then the technology became embedded in multiple processes and relationships, transforming the host society. (Think of the impact of automobiles after the crash of 1929 and the economic recovery driven by World War II: interstate highways, suburbs, Holiday Inns, drive-in and drive-through fast food chains, the rise of manufacturing labor unions as core elements of the middle class, and on and on.)

The trends in financial markets suggest that we might be moving into what Perez calls "synergy" after the bursting of the Internet bubble in 2001 as computing and communications technologies become deeply embedded in everyday life. Apple, Google, Nokia, and Samsung are key players in any list of global companies to watch. Facebook's population is bigger than the third-largest nation on earth. Video traffic on the Internet is projected to double every eight months or so for the foreseeable future.

The rapid growth of online social networks, across many cultures, is one major development, but there are many others. Spurred in part by Jesse Schell's highly compelling talk at DICE earlier this year, I am seeing important behavioral changes in many domains.

-One reason for Apple's success with the iPhone relates to the powerful attractor the App Store provides for independent software developers. Changing the traditional compensation model offloads risk from Apple (which could never have imagined, much less built, 100,000 applications in less than two years) while attracting innovation. First-mover advantage is proving to be substantial as other software companies try to catch up.

-When DARPA wanted to celebrate the Internet's 40th birthday last fall, they conducted a fascinating experiment. 10 red weather balloons were tethered in plain view and the first team to submit the correct coordinates of all 10 won $40,000. MIT's team won, in large measure because they devised a clever incentive model to grow the network of observers. The $4,000 per balloon was divided between referring parties and the observer him or herself, leading to increased participation. Other fascinating developments included the spoofing of competing teams with Photoshopped fake balloons.

-Online dating is clearly a huge business, but the rules of engagement are still being sorted out. The desire to attract appealing candidates with one's description leads to the temptation to lie. Researchers at Cornell and Michigan State looked at daters' actual height, weight, and age, then compared those to online representations. Unlike purely virtual environments, online dating ideally leads to face-to-face meeting, so the ability to lie is tempered by the possibility of real-world confirmation. Men lied about height and, infrequently, about age more than women did, while both sexes lied almost equally, and in the majority of cases, about weight. As the researchers concluded, "the pattern of the deceptions, frequent but slight, suggests that deception on online dating profiles is strategic. Participants balanced the tension between appearing as attractive as possible while also being perceived as honest."

-Behavioral economics has many insights to contribute to this domain. Stikk.com was founded by three Yale professors who saw the application of behavioral economics to personal aspiration. The model is simple: people select a goal, set the stakes, get a referee, and build a network of friends for moral support. Whether for weight loss, smoking cessation, or dissertation writing, there is evidence to suggest small, symbolically powerful incentives matter much more than substantial financial rewards.

-Symbolic rewards, paradoxically, can get people to spend real money. Many online games' business models feature large inflows of revenue for upgraded game elements (swords, shields, real estate). Disney's Club Penguin gives away game points, but charges $6 per month for players to redeem the points.

-Foursquare was one of the hot companies at SXSW this year, following Twitter's breakout there a few years ago. In Foursquare, people "check in" to the real-world places they visit via mobile phone, announcing their presence to friends and proprietor alike. It turns out you can check in to a place you are not visiting: to make a point, one guy became mayor (one of Foursquare's honorary titles) of the North Pole. Foursquare's founder replied to that effort in a blog comment by asking "We often wonder why people 'cheat' when there’s really nothing to win – it’s not like we’re giving away trips to Hawaii or Ford Fiestas over here. But I guess the combo of mayorships, local recognition and, hey, maybe a free slice of pizza is a little too much for some people to live without :)"

-Facebook games like Farmville, with extremely limited graphics and plotlines, contrast vividly with Playstation 3 titles with massive visual horsepower but high barriers to entry. Females especially appear to be gravitating to Facebook games, and helped drive the Wii to the top of console market share, so Microsoft and Sony are responding by mimicking Nintendo's simple but gesture-driven platform. The shift hit home hard at Electronic Arts, which bought a social network game company the same day that the firm laid off 1500 console-supporting employees.

Several tendencies appear to be emerging here. First, the barrier between real life and play life can get fuzzy. In 2008 two Dutch youths were convicted of stealing virtual goods from an online gamer by beating him up at school and coercing him into transferring the goods. A Chinese gamer was murdered over the sale of an online sword artifact. The Wii bowler uses a real arm motion to hurl a virtual ball toward virtual pins. People's Farmville opponents are their real-world friends. In addition, people are powerfully motivated by symbols, just as they are elsewhere, whether those artifacts are military service ribbons, flags, or luxury cars. Finally, as always, people work assiduously to game every system, whether of grades or Facebook friend counts or Stickk weight loss programs.

What's new here is both the degree of portability and the global scale: ten years ago, nobody could play Scrabble with hundreds of people while sitting on a bus. Now that we can, what comes next? With so many games now resident in the computational cloud, how will people remember or recreate them in the future? How will human relationships, whether intense or trivial, scale in these virtually physical or physically virtual settings particularly? Finally, how will other systems, currently driven by other incentive programs, be transformed by the permeation of game and other group dynamics? Schell points to education as an obvious target, but corporate HR, aging, personal fitness, and retirement savings are just as likely. As a result, nearly every field of endeavor could be affected by the clever application of behavioral carrots and sticks via new electronic media. Social engineering, in short, appears to be supplanting technical engineering in the vanguard of innovation.

Early Indications February 2010: Ticket Punching

2010-02-27T12:44:00.000-08:00

As one surveys the landscape of industries whose business models have
been transformed by the Internet, airline ticketing and travel agents
invariably come in near the top of the list. Southwest was at the
forefront of air carriers that offloaded customer service from call
centers to web browsers, reinforcing their lead in lean operating
budgets. At-home check-in is routine at most U.S. airlines, reducing
both costs and wait times.

For all the change that the Net brought to the distribution of airline
tickets, however, its impact on ticket pricing is difficult to tease
out from other macro forces such as increased security screening, fuel
prices, labor agreements and disagreements, and the transparency
afforded by online travel sites such as Expedia or Travelocity. In
addition, while Priceline has its niche, the effect of name-your-price
on the larger sector has not been widely discussed.

Compared to event ticketing, however, airline tickets appear to be a
coherent, rational universe. Although the recent controversy
surrounding the Live Nation merger with Ticketmaster has focused some
attention on the industry, much remains gray area. (A notable
exception to the rule is John Seabrook's excellent New Yorker piece in
the August 10/17, 2009 issue, entitled "The Price of the Ticket.")

Artists whose product revenue stream has been decimated by online file
sharing are now in effect giving away recorded music to drive interest
in the tour, which can get very big very fast. John Mayer, for example, has approved the posting of 80 live shows in the Internet Archive; fans of New Orleans favorites TheRadiators have uploaded over 1,000 shows, while Boston's Guster, a staple of the college circuit, has 331 shows up. The three mostfinancially successful rock tours of all time -- by the Rolling Stones, U2, and the Police -- have all grossed more than $350 million
apiece. As thought-provoking as the music industry is, that's all we can say about it for the moment. Given that this is a newsletter and not a dissertation, I'm going to narrow scope still further and explore sports ticket pricing, a subset of event pricing with its own
peculiar dynamics.

Particular shows on music tours are relatively fungible: it was more
convenient for people to see Springsteen in State College last year
than two hours away in Hershey 11 nights later, but the two
experiences were reasonably equivalent. Sports tickets, however, are
far more time-sensitive, as there will likely be only one game per
season with a particular matchup's unique characteristics. If I can't
see, say the Cleveland Indians host the Boston Red Sox on Saturday
June 10, flying a few hundred miles to see the Yankees play in Detroit
won't satisfy my demand curve, nor will Sunday's Indians-Sox afternoon
game be a functional replacement for Saturday night's experience.

Sports marketing is unique in the nature of its competitive framework,
from a business strategy perspective: in most cities, a franchise
holds a monopoly, competing for fans' dollars and emotional investment
with concerts, dinner out, or college sports. Even though the Chicago
Bears and Green Bay Packers compete on the field and in their
conference, the businesses really do not do so.

Given the unique challenges of sports marketing -- stars vs. teams,
championships vs. laser shows and dance squads, injuries and "off the
field issues" -- it's no surprise that ticket pricing occupies a place
of central importance in the industry. In this domain, rapid and
substantial changes have accumulated in the past 5 to 10 years. When
the economy was more robust, annual ticket price increases were a way
of life in many markets. When a new star was signed, or the venue was
improved, the team typically passed the revenue load onto the fan
base. (We won't touch the hairball of issues related to stadium
financing).

Even more important than revenue maximization, however, is the issue
of risk management. Baseball's season is long; a team can be out of
contention, and just plain stinking up the joint, by July. If club
ownership cannot sell a critical mass of season tickets in the winter,
the task of extracting revenue gets extremely difficult in the long
months of summer. It's also much easier to sell wholesale than
retail: in round numbers, assume a 25,000-seat field and 80 games.
That's 2 million seats if they're sold one at a time, versus 10,000
pairs of season tickets (not counting nosebleed and bleacher seats).
The bundle scenario is 200 times simpler; teams also group games into
batches of 5 or 10 that mix in visits from both losers and
front-runners: if you live in Kansas City, for example, and want to
see the Yankees or Red Sox visit, you almost certainly will have to
watch (or at least own a ticket to) the historically bumbling Orioles,
the Oakland club, or another also-ran.

This pricing strategy moves risk from the club to the fans, who
traditionally could only give or sell the tickets to private contacts;
going to the public market with secondary tickets was illegal. That
status changed in the past decade, as first eBay then StubHub (itself
now owned by eBay) and a number of other businesses matched buyers and
sellers in ways and at a scale that ticket scalpers (or touts, as
they're known in the UK) could not. the Internet also helps drive
both buyers and sellers to the market: the payoff for scale is
liquidity.

That risk management comes at a financial price: while bad teams are
pleased to offload future tickets to possibly worthless games onto
often long-suffering fan bases, good teams leave millions of dollars
to be claimed by secondary sellers, including "ticket brokers" such as
Ace Tickets in Boston. The Red Sox have sold out 550 games in a row,
so many of those season ticket-holders can sell single-game tickets at
a substantial profit -- a profit that could be going to the club, but
only if the club held inventory longer and thus rebalanced the risk.
Nobody knows in March what a September matchup (even with the hated
Yankees) might be worth: injuries, the economy, other teams' level of
play, trades, and other factors determine interest and demand in the
weeks before, not 6 months out.

Bill Simmons, an ESPN blogger, noted NBA owners' behavior in this
regard, particularly when good but expensive players are traded in
mid-season to augment an already losing record in the hopes of earning
a higher pick in the next season's draft of new players. As he noted
last week,

"Does [a terrible record and some bad luck] mean they're lowering
ticket prices for the rest of the year then? Nope. Over the past five
years, half the league's franchises crapped on their season-ticket
holders at least once with mismanagement, salary dumping and/or
tanking for lottery picks. Along with the Wizards, the following fan
bases have reached a breaking point with their respective teams:
Sixers, Pistons, Pacers, Nets, Knicks, Suns, Clippers, Warriors and
Timberwolves. Depending on how the summer of 2010 works out, we could
be adding Cavs, Heat, Raptors, Hawks and/or Grizzlies fans to that
list. And four other teams have tried to put out a quality product but
still hemorrhaged money this season: New Orleans, Milwaukee, Charlotte
and San Antonio. (Yes, I just mentioned 19 of the 30 NBA teams. You
counted correctly.)"

Enabling fans to buy single-game tickets to desirable games is not in
the clubs' interests, yet secondary markets make precisely that
practice possible. As Simmons noted, "Teams depend on season-ticket
revenue because it's guaranteed income. With the current setup, I
could skip getting season tickets, then use stubhub.com, ebay.com and
even team-endorsed ticket sites to cherry-pick choice seats for six or
seven big games per season. So if the NBA wants to keep me (or you, or
anyone) as a customer, it needs to prevent me from sampling instead of
buying. . . . . They don't want me for seven games. They want me for
all of them." But as ticket prices go inexorably up to support
sometimes ill-advised player contracts, the fans' incentive to buy
season tickets goes down, whether one is an individual, one of four
buddies who split a set, or a law firm writing off the tickets as
client entertainment.

The unique and time-sensitive nature of a sports ticket makes it
behave very much like a call option in a financial market (see Happel
and Jennings, "Creating a Futures Market for Major Event Tickets:
Problems and Prospects," Cato Journal 21 (Winter 2002), pp. 443-461).
The value of a ticket is highly contingent, as we have noted, which
means it is an ideal candidate for hedging behaviors. Teams already
do this by emphasizing season ticket sales, creating both technical
lock-in and what Simmons more euphemistically calls "the illusion of
regret" in which fans buy seats for yet another year because they
might miss out on something good. The utility of StubHub in this
regard has led to Major League Baseball striking a deal with the
reseller, giving a fans a reputable outlet for both buying and selling
tickets: fraud is a common concern on both sides of the transaction.
In response, will sports follow the lead of airlines and go
ticketless? No time soon, I don't believe.

Some clubs have experimented with dynamic ticket pricing. A startup
called Qcue helped the San Francisco Giants baseball team increase
attendance in about 2,000 seats inside the 42,000-seat stadium. For
an unappealing matchup, possibly made worse by bad weather, tickets
were as low as $5. When an eagerly awaited game, however, lined up
Randy Johnson (a future Hall of Famer) against the New York Mets and
Johan Santana (a potential HoF electee), the same seat was $33. In
such a scenario, the fan wins and the club gets its full share of
market value. Stadiums could be full every night, but bad teams will
no longer be able to charge the regret-inducing prices they currently
do. That outcome could potentially upset competitive balance: bad
teams might have less revenue from full houses than they currently do
from nearly empty ones. But they might also make more, and the
fairness issue would be more adequately addressed: the clubs would
collect a much closer approximation of what the experience was worth
to the buyer. For the franchises, would this arrangement be a bonanza
or a beatdown?

The answer would likely depend on how well the clubs hedged their
position. To that end, it's not difficult to imagine a futures market
for sports tickets much like YooNew used to provide. Clubs could also develop community relationships at various price tiers, fillingthe park with $5 Boy Scouts or youth soccer leagues when the matchupwas for whatever reason unfavorable, as opposed to the business
entertainers, celebrities, and politicians who show up for must-see
games. StubHub, like eBay, has a rich opportunity for data mining to
tell teams how historic pricing patterns have emerged from given
preconditions: stars getting hot, stars getting hurt, day versus night
games, various playoff implications, regional economic and
unemployment trends, and the like.

As labor disputes loom in pro basketball and football, as mobile phone
television traffic becomes more pervasive, as demographics continue to
shift, as social media evolves, and as dissatisfaction with ticket
prices mounts, it seems inevitable that sports ticket pricing is ripe
for some transformations and potentially dramatic disruptions much
like those that altered the travel and music landscape. In this
Olympic and World Cup year, we'll be watching for clues that might
point the ways forward.

Early Indications January 2010: Do You Remember?

2010-01-25T14:54:00.000-08:00

Looking back over the 30 or so years of the personal computing era, I'm struck by how easily we discard the past, how often we miss a revolution when we're in the middle of it, and how few moments stop us in our tracks, giving us reason to demarcate a historical transition. Everybody is different, of course, but I'll wager you may have some similar reactions to the thought experiment I played out over the holidays. Overall, I was struck by how few times I appreciated the historical importance of an event in the moment.

Do you remember . . . where you were when the Berlin wall fell?

I do not. As I argue elsewhere, 1989 marks a convenient beginning to the "modern" era of globalization, mobile telecommunications, and the rise of the Internet. After the 1960s, with the Kennedy assassinations, moon landing, and a "living room war," followed by the Munich Olympic terror and fall of Saigon in 1975, perhaps "culture fatigue" set in. For whatever reason (perhaps it was because I was on the academic job market, with dismal results), November 1989 does not register.

Do you remember . . . your first mobile phone?

This is much clearer. It was a Nokia 101 (still for sale here), used only "for emergencies." I had had friends whose wealthy parents had car phones, which were big, expensive, and exotic. As I was none of those, my pattern of usage had to reflect my station; the device was not to be used trivially. But it was still fun to know I could order pizza on the way home rather than arriving at my destination, calling, and setting out again.

Do you remember . . . the "video game war" in Iraq?

The incredible night shots, the 15 minutes of [U.S.] fame for Canadian Arthur Kent (aka the Scud Stud), and the television-centric news coverage feel like a very long time ago. After the USS Cole, 9/11, and Richard Reid, "asymmetric" warfare features extremely few visual highlights for the U.S. forces; our side has yet to see a positive iconic image of 21st-century warfare.

Do you remember . . . your first e-mail address? What about the second?

Here as so often, I was a late adopter. Teaching at Harvard in the early 1990s, I followed the lead of neither my Ph.D. advisor nor my students, instead getting e-mail pretty late: 1994, when I entered the commercial work force on the Lotus Notes e-mail infrastructure that was typical of consulting firms at the time.

Do you remember . . . the first time you saw the Web?

This was a lightning bolt for me, as vivid as the my first car. The CIO at my consulting firm showed me NCSA Mosaic (which looked like this), and all the stuff I'd been reading about WAIS, Archie, and Gopher faded as I heard from my Silicon Valley friends about this amazing startup called Netscape which was going to be even bigger than 3DO, the supposedly "can't miss" video game outfit. About a year afterward, I saw Pointcast, the way-ahead-of-its-time streaming service whose graphic intensity, profligate use of resources, and viral growth combined to make it a deadly network-killer. I still would love to see it again, for nostalgia's sake if nothing else: old browsers and web pages (remember the original gray Amazon.com with blue text?) can still be found. Pointcast exists only in [human] memory, I gather. (If you want to remember Windows 3.11, here's a brilliant rendition that runs in a browser, complete with Minesweeper.)

Do you remember . . . your first Internet purchase?

I don't, precisely, but would wager it was an Amazon book. Amazon no doubt knows that. The firm's status as a "gateway drug" to Internet shopping cannot be underestimated: because the navigation was good, because they delivered, and because the price/selection/convenience equation was so positive, Amazon initiated millions of consumers into behaviors they repeated in stock trading, travel booking, and medical care.

Do you remember . . . being misunderstood in an instant message or e-mail?

Both media are emotionally "flat," doing a generally poor job of conveying nuance. For someone with a deadpan mien and a frequent recourse to irony, they presented numerous opportunities for miscommunication and, when I was lucky, damage control. The development of new conventions with no real-life analog (haha, lol, emoticons) illustrates how human interaction adapts to the strengths and limits of the available media.

Do you remember . . . Windows 95?

Microsoft's ultimate launch was possibly the apex of the company's influence. Contrast the Rolling Stones to the Jerry Seinfeld ad of 2008, for example. People camped out at CompUSA stores (speaking of memory lane) to get their hands on the OS that unlocked the Internet for millions of users. Vista and even Windows 7, the best product Microsoft has introduced for a long, long time, have received only passing public buzz, the amazing launch party video notwithstanding.

Do you remember . . . your first text message?

This will vary wildly by geography. It's not so long ago that plumbers and doctors carried pagers, then mobile phones were essentially repurposed as interactive short massage devices. We now have the phenomenon of telephones (literally "sound from far away") that carry no voices.

Do you remember first seeing Google? If so, what search engine did it displace?

The clean, sparse interface posed a sharp contrast to the portal wars of the late 1990s. I heard about it pretty early, and as a heavy searcher, I was using a combination of Northern Light and Alta Vista at the time. Other companies you may have used, then forgotten, include Lycos, Excite, Infoseek, and Inktomi.

Do you remember . . . when a "conservative" investor sold after a 30% appreciation?

In 1998, I knew numerous friends and colleagues who were planning their life on the basis of a Netscape-like IPO (at the "-ents," for example: Scient, Viant, Sapient), saying sagely that "retiring at 40 really makes the most sense so that I can travel for a few years then give back to society, possibly by teaching."

Do you remember . . . your first flat screen display?

More important, do you remember your last CRT display? Here's a major change that took place so gradually, yet inevitably, that the CRT's demise was like a sinking ship slipping beneath the waves. LCD panels, meanwhile, continue on a march toward bigger displays, at lower prices, every year as new fabs come on line. I write this while staring at a display that's bigger than my first color TV, from about 18 inches away. And I'm leaning toward it, as if to crawl inside, rather than reclining or retreating.

Do you remember . . . the first video you saw on the Internet?

Before YouTube, uploading and hosting video online was a headache. Creating and editing it, meanwhile, was non-trivial. As if overnight, cell phones and cheap HD video cameras are capturing decent to excellent image quality. Editing can be done on any number of platforms, while Cisco a) draws steep graphs of traffic growth and b) holds the enviable position as prime supplier to a perpetual network upgrade to accommodate all this multimedia.

Do you remember . . . your last landline phone bill?

Whether replaced by a cable company's triple play or mobile substitution, the fixed Bell company telephone is in rapid retreat. Whereas the first cell phone might be a landmark, few of us pay much attention to letting go of an outdated technology. After the USB stick became ubiquitous, overnight it seemed, I can't name the last time I saved a document to a 3.5 inch floppy. More relevantly, neither can I remember archiving each generation of storage to its replacement.

Do you remember . . . your last roll of photographic film?

Once again, the seismic transition is accomplished one defection at a time, and those moments happen when the cost-benefit equation no longer makes sense (in this case, the price of a roll of Kodak or Fuji film, the cost of developing and printing even the worthless photos, and the difficulty of sharing the good ones). In other instances, the shrinking user bases make the economics of scale unattractive from the seller's perspective, meaning price increases, quality sacrifices, or both, and again, the customer may be driven away by vendors who may feel stuck between a rock and a hard place. The same dynamic seems to hold for newspaper subscriptions.

Do you remember . . . when GPS navigation was exotic?

Last week's announcement by Nokia that it will supply turn-by-turn directions to its smartphones obviously countered Google's foray into mobile hardware. Caught as collateral damage in this contest, meanwhile, are the standalone GPS makers like Garmin or TomTom, who not that long ago offered something clever and soon to be essential. In a matter of months, navigation on the mobile platform has become a commodity, table stakes in competitions for a global audience of hyperconnected nomads.

Do you remember . . . your first cross-generational "friend" on Facebook?

As the massive social network grows larger than the U.S. population, it has moved beyond its initial cadre of college students and recent graduates. Preteens join regularly, as do parents and relatives of teenagers hoping to a) stay relevant to or b) monitor their kin, as the case may be. Going forward, persona management for multiple publics will become second nature as the tool set increases in ease of use and flexibility.

Do you remember . . . when retail store replaced CD racks with vinyl?

This has been fascinating. Whether for reasons of its resistance to Limewire redistribution, or its purported fidelity, or the richness of cover art, or contrarian retro-hipness, the phonograph record is one of the few analog revivals in the digital tsunami. It is not impossible to envision turntable sales outpacing CD players, if not Blu-ray machines, within five years. For more, see this story in the New York Times from December 2009.

What will be next? Domestic robots (not just anthropomorphized vacuum cleaners)? Battery-powered cars? Implanted communications devices? Heavier reliance on analog storage methods like paper, for fear of snooping, blackouts, or cloud computing bankruptcies? The vinyl situation suggests that in some instances, analog may not be completely supplanted by digital competitors, so the 2010s will likely see some more surprising instances of both/and.

It would appear that we cut our ties with the past without much thought or regret, while true breakthroughs do not always capture our imagination: in November 2001, Apple Computer was struggling, and to suggest that its expensive, idiosyncratic MP3 player would eventually sell more than 225 million units would have been delusional. Somewhere, some entrepreneurs and inventors are similarly disregarding conventional wisdom and against all odds will be the heroes of January 2020.

Early Indications December 2009: Yet Another Predictions Issue

2009-12-23T05:31:00.000-08:00

In this last week of 2009, it's scary to think that it was a full ten years ago that the IT profession was holding its collective breath as midnight January 1, 2000 approached. Apart from spooking us with memories of how fast the decade sped by, the Y2K issue stands as a cautionary tale for any technology prediction.

Duly chastened, I remain intrepid, with 24 questions for the coming decade. The alphabetical mnemonic I last used in 2005 cues up a question for each letter, minus the usual suspects.

A
Having brilliantly migrated from computers to MPs players to mobile data devices, what will Apple do for its next adjacent market? Tablet rumors surface almost weekly, Apple TV has yet to fulfill its promise, and such areas as health (iDoc?) are huge in potential. In any case, it's difficult to see Apple hitting its revenue growth numbers without an addition to the product portfolio at some point.

B
In case you missed it, DARPA conducted a brilliant experiment last month. Ten red weather balloons were tethered in plain sight at various locations around the country, and teams competed to supply the latitude and longitude of each one using social networking technologies. MIT won in nine hours, an amazing accomplishment considering a) the continental U.S. presents a surface area of over 3,000,000 square miles and b) teams worked to spoof each other. In the end, MIT's clever compensation model to attract the widest interest group of observers helped secure the win. In light of that experiment and its many findings, the B is for business models, specifically for the plethora of social media tools that are exploding in popularity. Not to put too fine a point on the matter, but this past year Facebook alone grew at a pace of 770,000 new users -- a day.

C
Here are some surprising numbers: Brazil's GDP per capita income, in constant dollars, has risen 52% in the last ten years. Singapore's is up 79%. Chile has gone up 59%. These numbers, chosen at random, illustrate the emergence of a global middle class (the C). Such groups are historically important, typically signaling political stability, economic growth, and increased presence in international trade markets. Who else will join these countries, Korea, and other fast-growing economies? How will the world change with these new entries into the economic and cultural mainstream? (For contrast, U.S. GDP per capita in 2005 dollars rose only 17% between 1998 and 2008, and class-related tensions could be big news going forward, whether in regard to labor unions, health care, the 2012 election, or unemployment.)

D
The D question relates to design. As the documentary of the same name makes clear, the "modern" presence of the Helvetica typeface (or its Ariel cousin-once-removed) is now more than 50 years old, yet it remains ubiquitous. Apple has of course capitalized on great design, and the slowdown in consumer spending in the U.S. in particular may be an indication that people are buying from a less disposable mindset. If people buy less, they may follow a generally European pattern and buy better designed items. For all of these reasons and others, the time is ripe for a design renaissance on par with streamlined toasters, or the neo-Bauhaus movement that poured so much concrete in the 1960s.

D2
Drugs also merit mention. Marijuana is simultaneously a) being legalized under medical provisions in 13 states and counting, b) being decriminalized in some states, and c) contributing to political destabilization on both sides of the Mexican border. As states battle increasing social welfare and other costs in a time of declining revenues, taxing pot holds at least some appeal. In addition, mandatory sentencing laws are crowding prisons and generating hardened gang members at a staggering expense that many states simply may not be able to afford: $24,000 per year per inmate, not counting potential foregone wages and other indirect expenses. If, as The Onion memorably put it, "Drugs Win Drug War," what alternative strategies might be pursued instead?

E
As more of the world's citizens want automobiles, and electric lighting, and central heating, and meat in their diets (see C), the demand and competition for energy sources will intensify. That energy, usually provided by burning something, will in turn play into the global climate debate. Whether in oil prices, coal emissions debates, or nuclear power lobbying efforts, competition for energy will have geopolitical consequences, potentially including more armed ones.

F
Football (world football, not the U.S. version) will be huge news in 2010 as the World Cup is contested in South Africa. Apart from the intense fan interest in both powerhouses and upstarts, the role of mobile and new media will bear watching. Far more people own cell phones than own televisions, so the deluge of texts, Tweets, and web-hosted highlight clips could be a global coming-out party for social media, just as the 1958 NFL championship game or the JFK assassination were for television.

G
It's difficult to think of a G bigger than Google. The question before us relates to the company's many efforts to expand its presence (and eventually its revenue base) beyond the lucrative search franchise. Will the Android mobile, or the location-based ad service, or the office applications, or some new innovation break through to profitability? How will copyright-holders react to potentially universal access to their work?

H
H is for housing. The economic impact of the shelter industry is of course considerable, and everybody is watching home prices for both personal and analytical reasons. Beyond sales figures, however, some larger forces are coming into play. Demographically, the baby boomers now entering retirement (or an approximation thereof) want and need different things from real estate, and it will be a while until a later wave has enough children, income, and interest to buy up the empty-nesters' housing stock. In addition, as U.S. income stagnates, the average house size will likely retreat from its high point of circa 2005.

I
Identity is increasingly something people actively manage. What's your relationship status? How are you feeling today? What do you think about sports, politics, other people, your possessions? At the same time, lightweight and incredibly powerful tools lower the barriers to association. Whatever one's interests, whether obscure, weird, or outright criminal, finding like-minded individuals is now possible in ways that were simply inconceivable in physical space. As more people grow up breathing the oxygen of online, all-the-time social broadcasting, what will be the unintended consequences, the business opportunities, and the backlash?

J
Building on the July letter, jobs remain at center stage. How much will this recession prove to be an interruption in the way things were, and how much will it prove to mark a shift in underlying forces of globalization, the balance of product- and services-based work, or long-term costs and benefits of modes of agriculture, consumption habits, and population pyramids? What are the odds that GM, Citibank, or Sears -- and the industries they represent -- will return to their positions of past dominance? More likely, but similarly daunting, is the question as to how entrepreneurs could possibly generate tens of millions of new jobs, on any continent.

K
Kindlemania is in full flower, driving the publishing industry to confront some long-held assumptions. Back in May, CEO Jeff Bezos announced that Kindle sales had hit 35% of book sales when Kindle editions are available for a given title. In a matter of months, Amazon has disrupted 500 years of relatively stable technology that dated to Gutenberg. The implications will be all around us. At Princeton, for example, a trial using Kindles for textbooks was problematic insofar as page numbers (and footnotes to page numbers) needed to be rethought. Searching a textbook is useful; not being able to use sticky notes requires getting used to.

L
Long tails make the list -- no surprise, in the age of YouTube and eBay. What's interesting is the Economist's assertion that fat tails (hit movies or blockbuster drugs) are remaining as vital as ever. The surprising conclusion appears to be that the middle market could turn out to be no-mans-land, as the Harry Potters and Transformers movies (the latest of which merely grossed over $400 million) dominate the mass market while endless, hard-to-serve niches proliferate elsewhere.

M
In the developing world and the OECD countries alike, mobility is not only redefining the telecom sector, as major as that may be. In addition, the notion of always being reachable, or becoming accustomed to connecting to people rather than fixed locations, is becoming commonplace so fast that we may not realize all that is happening. Worldwide, the number of cellphone subscriptions per 100 people has soared from just over five in 1998 to nearly 60 in 2008. In the midst of it, this change can be lost in fashion wars (RAZR vs. iPhone vs. Blackberry Pearl, or whatever), but eventually, in hindsight, we will see the magnitude of what we lived through.

N
News is moving in new ways to new people. The broadcast model is augmented (not replaced) by millions of electronic conversations. The utility of owning a big antenna, a printing press, or a television studio has dropped precipitously as lightweight digital equivalents proliferate. Even though free societies need reliable news, at a time when such countries confront complex debates over everything from immigration to climate to aging to employment, the business model for news is highly unsettled. The conundrum of the need for news and the problem of organizations' being able to afford to report and provide it must be resolved, and such efforts as Google's Living Stories experiment with the NY Times and Washington Post will, I hope, spawn still more innovation.

O
O is for open book, shorthand for the myriad of issues relating to privacy and scrutiny. Open records, or open meetings, laws were never intended to broadcast local, paper-based information to the entire planet. At the same time, "sunshine is the best disinfectant," as Louis Brandeis so aptly put it. How and where will different people and groups trade off voluntary and involuntary exposure of private information for what perceived benefits? How will generationality play out, especially as data turned loose in one's early years may be uncomfortably or even dangerously revealing later, with different attitudes, tools, and agendas in play 10 or 20 years from now?

P
Given the speed and magnitude of the changes afoot, and given the essential characteristics of "being digital" as Nicholas Negroponte titled it, competition is playing out not just between products (Dell's PCs versus HP's or Lenovo's), it is also evolving to situate competing platforms (the P word). The choice between Nintendo Wii and Playstation 3, between an iPhone and a Nokia, or between a Chevy Volt and a Toyota Prius are more complicated than merely deciding on features and price. What are the two ecosystems -- of accessory makers, of software developers, or of product owners (and so of a current or future secondary market)? How will future innovations be incorporated into today's purchase? Will Google establish a beachhead in the browser as a quasi-operating system, on the mobile device, or in mapping? Where is Microsoft (see S)? Will still more industries begin to exhibit platform dynamics?

R
While the phrase "real time" is not new, the advent of people-powered notification means that rather than coming from capital-intensive air-traffic control, equities trading, or medical monitoring systems, real-time data is now the product of real people. Whether in natural disasters, social movements, or just a dozen families attending an out-of-town soccer tournament, the spread of lightweight, mobile coordination mechanisms will soon make many of us wonder how we ever got along without them.

S
The software industry is at a crossroads: enterprise vendors still work on adjusting the mix between license and maintenance revenue, between hosted and premise-resident installations, and between consumer, middle-market, and large enterprise sectors. Software as a Service sounds great in theory, but Salesforce still has bugs to work out (regarding scale, for one thing), and the industry is still in search of other viable exemplars. In consumer markets, meanwhile, the days of CompUSA or Computer City being the dominant channels for distribution of diskettes or CDs are over: Apple's app store model has redefined developer programs and consumer software distribution essentially overnight. Open- and closed-source models are still being sorted out. With so many dimensions of the business up for grabs, who will emerge in the coming years? Who will be left behind? What further surprises still await?

T
T is for thermostats, a proxy for an entire class of inanimate objects and devices that are increasing the reach and complexity of the global network. Whether implemented for energy savings, human comfort and well-being, or security reasons, building automation joins health monitoring, security cameras, and a vast number of other devices in a quietly but rapidly growing "Internet of things." While this domain frequently lacks glamour, the possibilities for drone vehicles, for dramatic cost and energy savings, and for increased human welfare (via care-giving robots for instance) verge on the realm of science fiction.

U
Whether in the U.S. or elsewhere, the place of universities is being questioned. While California's 32% tuition increase grabbed headlines and motivated nearly nostalgic building takeovers, the fact is that California education remains underpriced. The University of Texas, by comparison, has raised fees 60% in the past five years whereas California has a cumulative increase of only 20%. Such numbers appear to be unsustainable, raising the question of what will be cut when dramatic spending decisions will have to be made in the coming decade. One-time budget relief from the stimulus package is similarly unsustainable, while long-term curriculum directions scream out for reassessment. As desirable as it might be to add labor relations, African-American studies, or forensic science to the course catalog, how can universities simultaneously a) steer resources toward the future, b) respect their role as custodians of the past, and c) keep expenses under control? Classics is a frequent target for programmatic termination, but what about sociology, recreation management, or broadcast journalism? Does the U.S. need more than 200 law schools? Who decides? How? At both public and private institutions, the next decade will force tough decisions to be made.

V
While virtualization is a widely used term of art among computer architects, my sense here is broader: Webster's Second defines virtual as "being in essence or effect, but not in fact." Not only are computing resources not resident at the point of use, neither are people for more and more tasks. Very few people could work by telephone from their homes, yet today one's physical presence and one's "essence or effect" can be many miles and time zones apart. Whether in dating, or education, or telecommuting, or elder care, we are seeing the start of a particular kind of disembodiment: just as Descartes split mind and body for the individual, will some latter-day philosopher distinguish physically co-located groups and digitally "present" assemblages?

W
Whereas in M we discussed what it means for people to be mobile, the W refers to the coming demand for wireless bandwidth. On every populated continent, we're seeing dramatic increases in mobile data and telephony. AT&T is confronting the problem of the iPhone's success as its data networks are at times showing signs of overload. Countries from Pakistan to Estonia are leapfrogging wireline infrastructure, at which they never reached mass-market penetration, and getting the majority of these country's households connected via wireless in less than a decade. By contrast, it took nearly 100 years to bring 100 million wired phones into service in the U.S., at the time a nation of 200 million. As usual, there is no free lunch, and we will be seeing radio spectrum continue to be a political hot potato. Whether in regard to suspicions (not yet confirmed) about heath issues, to spectrum auction formats, to "interference" with other activities on other frequencies, wireless demand is driving a shortage that is invisible and intangible - until the call drops or the application crashes.

X
What is an electronic game? Despite the success of Modern Warfare ($550 million in sales in five days), console platforms such as the X-box find themselves in competition not only with each other but with unlikely channels: Electronic Arts (maker of Madden and other category-leading titles) laid off 1,500 people in November, while web-hosted low-resolution, lightweight games (often running in Flash) can command vast audiences. The Scrabble knock-off Scrabulous help drive Facebook's early growth, while more recently Farmville counts 73 million players per month. Put another way, Farmville grew to 11 million daily users in two months; World of Warcraft took four years to hit the same figure. Just as MP3 files convinced listeners to trade convenience for fidelity, perhaps the game industry will see further segmentation between low-resolution (but heavily social) Flash games and high-fidelity, computationally-intensive titles.

There you have it, minus entries for Q, Y, and Z (Scrabble value: 24). Additional questions of course remain, particularly in the areas of nutrition (water is a likely battleground), health (obesity, medical education, step-function gains in bureaucratic efficiency, and pharmaceutical risk/reward allocation), and aging: the time is due for an honest debate about age-65 retirement, and the role of families, villages, and societies in the care of elders.

Before any of these issues unfold further, I send my personal best wishes for a peaceful holiday and a prosperous new year. The community of readers has become virtual (see V) family over the years, and I take it as a solemn responsibility that so many of you keep reading and commenting. Thank you, and blessed holidays.

November 2009 Early Indications: Prediction Scorecard

2009-11-23T11:46:00.000-08:00

As is our custom, every November we revisit the previous year's predictions. Given that one of the dominant themes of 2009 has been stagnation -- of reform legislation, of job growth, of the housing market, how well did last December's outlook see into the future?

The predictions were divided into global and domestic spheres. Taking the former first, we noted that "a globalized world creates a new category of issue that requires multi-lateral response well beyond the scope of traditional definitions of sovereignty" and predicted that "with so much room between the cracks of law, enforcement, and reporting, expect to see more global equivalents of dropped fly balls in 2009."

Score: Hit

On the climate change front, expectations for the Copenhagen Conference next month are being managed downward. At the juncture of international crime and terror, as we noted last year, Mexico's particular mix of drug trafficking, organized crime, and para-military groups leaves it with a unique problem blending terror, crime, and unstable diplomacy to both north and south. Civil institutions including hospitals, schools, the press, and of course law enforcement are under brutal and continued attack. Given that the drugs are destined for the U.S. and Canada and originate, in many cases, in South America, a multilateral solution is needed but has yet to take shape.

The new reality of global information flows that transcend jurisdiction was illustrated vividly -- in strikingly different ways -- by the role of electronic media in the Iranian protests and the Indian elections. So-called social media are continuing to challenge the role of the nation-state with newly-mobilized ethnic and/or virtual communities with impressive powers of persuasion and coordination.

In the use of unmanned aerial vehicles (UAVs) such as the Predator to launch missiles at individuals suspected of terror connections, the U.S. is opening a new kind of warfare made possible by emerging technologies. The technologies and policies also illustrate the challenge of aligning innovation with written and unwritten rules of engagement. In the same year that Bush-era plans for targeted assassinations drew sharp rebukes, the fact that Obama-era UAVs often both miss or misidentify their targets and cause civilian casualties is a hot issue in Pakistan but little discussed in the U.S.; the attacks have been defined as "executions without trial" by Pakistanis and others.

The cost in political support and stability versus the purported benefit of killing terror leaders has yet to be debated or justified. The lack of debate notwithstanding, the situation amounts to a moral, legal, strategic, and tactical no-man's-land. In Pakistan last month, Secretary of State Clinton was confronted by angry audiences decrying the attacks, but she did not respond except to refuse to comment. The point here is that the combination of asymmetric warfare, new technologies, and new military tactics is raising entirely new sets of issues. For example, what is the U.S. liability for erroneous attacks? Under what jurisdiction and what laws do the operators and commanders of robotic assets fall? What are the human costs to contractors and other non-military personnel who in the morning drive to a nondescript air-conditioned facility, watch people (including civilians and children) die by their remote control thousands of miles away, then drive home at night to their families?

The Domestic Conundrum

In the aftermath of the Obama election, we "expect[ed] to see some combination of strong efforts that will have the effect of attacking boundaries between problems. Four key areas in particular are often attached: health care, demographics, consumer spending, and asset markets."

Score: Not much has happened.

We have more and better analyses outlining why health care reform is so necessary and so hard, but zero legislation to date. Regarding demographics, the high unemployment rate will affect all age groups, but falling fertility will counteract immigration in important ways, at least in the U.S. Even with the run-up in equity prices, I'm still quite worried about how the baby boom generation will retire: "It's not a 2009 prediction, but I believe a bail-out will eventually be required to address a massive shortfall between long lives and small retirement accounts. Unlike health care reform, or bank bail-outs, or wars, demographic change typically takes decades to unfold."

On consumer spending, retail continues to be depressed, nudged up temporarily by the Cash for Clunkers subsidies. Housing remains soft. Given high un- and underemployment and the sharp falloff in home equity cash-outs from the days of the real estate bubble, the pattern of change in personal consumption expenditures, as measured by the Bureau of Economic Analysis, is impossible to extrapolate.

As for soft asset markets, the climb in stock-market indexes remains somewhat mysterious. Systemic issues of risk and reward, executive pay, and bankruptcy are still live, and will not be settled for some time. I agree with The Atlantic's Andrew Sullivan: the massive burst of stimulus money that will be expended next year ($9 million for a pedestrian bridge at the [privately owned] Gillette Stadium complex outside Boston, to take a random sample) could well play a significant role in the midterm elections.

Five secondary questions

Score: too early to tell

I asked five questions that have longer timetables than one year. We got a few hints in 2009, but no clear answers.

-What will the civil rights movement of 2012 look like?
**While court-ordered recognition of same-sex unions was overturned by popular vote in Maine, heavily-Mormon Salt Lake City passed anti-discrimination legislation in the off-year election, and the state of Washington (led by Seattle-Tacoma) upheld Referendum 71, the "everything but marriage" guarantee of gay and lesbian rights. Might "everything but marriage" serve as a template for other same-sex-union ballot initiatives? The place, rights, and role of Latin Americans in North America, meanwhile, are all changing rapidly, and 2012 could well feature substantial debate over immigration, education, health care, and other issues as they unfold in the Latino/Latina community.

-How many non-profits will lay off social workers, administrators, and the like, adding to the unemployment rolls next year?
**Apart from the toll of the Madoff scam on non-profits, there's little regular reporting on the economic health of this sector. Food banks, job training centers, and alternative energy groups appear to be busy, but I have no sense of the long-term directions here.

-Can this semi-private philanthropic (e.g. Gates, Omidyar) sector outperform the NIH in finding a cancer cure, or the WHO in mass inoculations, or big pharma in breakthrough drug discovery?
**The global response to the H1N1 virus has been instructive. Social media, mash-ups (most including mapping), and online video are all in the arsenal of the CDC, the better to counter potential hysteria. Google.org (the philanthropic arm) is measuring search terms to extrapolate on influenza patterns. Thus far, activity appears to have peaked in October, whereas in six previous flu seasons, activity spiked in December (much more sharply) in 2003 and in February very other year. If it proves reliable, that kind of real-time tracking will introduce new elements to the practice of public health.

-What forces can reinvigorate American manufacturing?
**Many analysts propose clean energy as the key driver here: a short list might include windmills, smart electrical grids, mass transit, nuclear plants, batteries and charging stations, and energy-efficient building practices. For strategic or logistical reasons, all of these might be economically produced and deployed on home soil rather than be imported from China and elsewhere: shipping costs and the other implications of long, energy-intensive supply chains keep near-shore locomotive production, for example, viable. How government can best encourage this trend, however, remains to be seen: existing interests, such as GM, appear to have occupied far more attention than innovators and entrepreneurs.

-If present-day blogging isn't capable of replacing formerly great newspapers, what comes next?
**The key problem here was the formulation of the question: blogging and social media will not replace newspapers or cable networks. Rather, multiple media architectures will work in tandem. We saw this phenomenon last month in a particular college football broadcast: a University of Florida player gouged the eyes of a Georgia player at the bottom of a pileup, and the commentators saw and said nothing. Instant replay and high definition broadcasts, however, allowed a viewer in Pennsylvania to see the action away from the play, record it, and forward the clip. Thousands of Tweets and rants later, the action made it onto the highlight shows, the league and team took disciplinary action, and the party formally known as the audience, as Dan Gillmor put it, controlled the news cycle in one domain, for a few days. Big questions remain about investigative reporting, about foreign bureaus, and about credibility, but it's clear that the new media landscape will alter reporting, and entertainment, and leisure time, and institutional memory, and many other sectors besides.

Overall, the predictions that depended on the presidency were too high, underestimating the time it takes to form an administration, align congressional forces, and balance day-to-day crises with long-term vision. At the same time, the continuing rise of non-nation-state actors is facilitating new kinds of action, causing new kinds of problems, and challenging existing entities (whether the UN, the Indian navy, or the U.S. Department of Justice) to evolve.

Leaving behind the aughts, or whatever we end up calling this decade, what lies ahead in 2010? Watch for the annual predictions next month.

Early Indications October 2009: The Exploding Mobile Web

2009-10-31T07:56:00.000-07:00

This newsletter is about numbers, specifically these:

9

103,000

66

4,932

60

100,000

We'll take these in turn.

According to Morgan Stanley's Mary Meeker, whose Web 2.0 presentation should be required reading, the iPhone and iTouch surpassed 50 million units shipped in 9 quarters after launch. This would make it the fastest technology adoption, as measured by zero-50 million, in recorded history. Netscape's Navigator reportedly had 38 million downloads in 18 months, but that could include double-and triple-counting. In addition, Netscape's Internet distribution model allowed it a substantial advantage over conventional logistics, while Apple physically moved all those devices. Actually, an even faster technology adoption was a wireline phone feature: as I wrote in 2005, the federal Do Not Call registry surpassed 55 million users in less than a year, but no software or devices changed hands.

The iPhone has spurred a vast ecosystem of software developers. According to App Shopper, more than 103,000 applications for the iPhone have been approved. While about 20,000 are free and the average selling price is $3.25 for paid apps, GPS add-ons from MobileNavigator and TomTom sell for nearly $100. Other top sellers include mobile editions of both conventional (Uno) and electronic (Madden) games. By contrast, the Google Android Marketplace has 10,000 applications, followed by Blackberry App World at 3,000, Nokia's Ovi Store at 660, and Windows Mobile Marketplace with 246 -- less than 3/10s of 1 percent of the leader.

Those applications are helping drive truly staggering demands on bandwidth. Cisco estimates that global mobile bandwidth demand will increase 66 times (!) in the next four years. Based on AT&T's experience, that number is fully believable:
mobile data traffic has increased 4,962% (essentially 50 times) in less than three years. The wide dissatisfaction with iPhone performance is often blamed on AT&T's network, but provisioning that kind of growth would tax any organization.

As much as the iPhone has stressed the cellular network, the picture would be far worse if wi-fi, which is essentially ten times faster, had not picked up so much of the load. According to AdMob, between 40 and 60% of iPhone data transfer occurs over these ad hoc networks, which were not built with a government stimulus package, a spectrum purchase, or a conscious deployment plan. This offloading of bandwidth may explain why Verizon is allowing its new Google phone, the Droid, to connect to wi-fi, but it is not clear under what conditions or with what fees.

That last number, 100,000, approximates the size of the character set to be allowed by ICANN for Internet domain names in character-based (non-Latin) languages. Right now every root server can look up millions of domain names based on 37 characters: the Latin alphabet, 10 digits, and the hyphen. Starting next year, Cyrillic, Arabic, and other character-based languages will begin to be included.

Given how much of the world a) uses character-based language and b) how fast wireless Internet is penetrating the developing world, the implications of character set for handset design will be fascinating to watch: a RIM Blackberry with 6,000 Chinese characters is not in anyone's future, I don't think.

The expansion to character-based languages may have a deeper implication for the mobile Web. The essential structure of semantic programming is based on a subject (Ridley Scott) - predicate (directed) - object (Blade Runner) model. The semantic triple allows data to be handled more flexibly than in relational databases, where relationships need to be known at the time of the schema's creation. Triplesets, by contrast, can be expanded to form graphs (Blade Runner - grossed - $33,000,000, Ridley Scott - directed - Harrison Ford) in order that web data can become queryable (how many Oscar-winning actors did Ridley Scott direct?). As smartphones become the Internet access device for much of the developing world, how will the various semantics of their many languages inform the deeper structure of Web data and data retrieval? Down the road, the non-Latin Web may have implications for Oracle, Amazon, and IBM at the same time that it challenges carriers and device companies.

On the handset front, meanwhile, Apple has the Graffiti experiment to learn from, along with strong developer momentum as it confronts the question of how to reach the next 50 million users, and the next 50 million after that. Motorola, HTC, Samsung, and Nokia, meanwhile, each bring a distinctive package of strengths and weaknesses to the table as they fight for market share in a global contest for hardware supremacy in a new order. Whatever happens, we will be confronted by growth rates the likes of which no manager (or capital market) has ever seen, each with their own raft of unintended consequences.

For more on semantics, see Toby Segaran, Colin Evans, and Jamie Taylor, Programming the Semantic Web (Sebastopol, O'Reilly, 2009).

Early Indications September 2009: Universities and an Information Economy

2009-09-30T18:22:00.001-07:00

Apart from asserting, with Emil Faber, that "Knowledge is good," there
is little one can say with certainty about the role of the university
in an information, rather than industrial, economy. The connections
are many and complex, with as many exceptions as rules. My examples
will all be from the U.S., which is based on my merely anecdotal
understanding of promising developments in Australia, the Nordics, the
Arab world, and elsewhere.

In the light of 50 or so years that mark the rise of information and
services and the decline in the role of manufacturing in the U.S.
economy, what can we say about U.S. colleges and universities?

1. American colleges and universities have grown faster than
population growth. According to the U.S. Department of Education,
758,000 people enrolled in college in 1960. The post-war "baby boom"
kicked in shortly thereafter, as the number of high school graduates
rose by 64% in the following decade. As high schools turned out more
graduates every year, a greater percentage of them attended college.
In 1960, 45% of high school graduates attended college. Every year
after 1980, at least half did so, and since 2005, 2/3 of high school
graduates attend college. Accordingly, college enrollment has soared,
from 3.6 million in 1959 to 17.8 million in 2006, an increase of
almost 400%. In addition, the number of institutions, mostly branch
campuses of existing institutions I suspect, more than doubled in
those same years. By comparison, U.S. population in that period rose only 67%.

2. In the past half-century, American higher education has grown more
female. In the academic year 1959-60, men outnumbered women among the entering fall enrollment 2.3 million to 1.3 million. Only 20 years later, women had taken the lead 5.9 million to 5.7 million -- and note how much larger the entering class became in only a generation! In 2006, women outnumbered men 10.2 million to 7.5 million. Women have held or currently hold the presidency at every type of institution, including MIT, Duke, Harvard, Penn, Chicago, Michigan, and Princeton. Faculties, however, are still more male than female.

3. Tuition has grown much faster than inflation. According to the
College Board, since 1958 tuition has risen by less than the Consumer
Price Index in only 6 years, all in the 1970s, including one year when
the CPI jumped 11.5% In a typical year, tuition rises by twice
general inflation, and in some years it has gone up 4, 5, or 6 times
the CPI. Numerous explanations have been proposed, but the situation
is so big and so complex, it's likely nobody knows for sure.

Some considerations in that spending growth:

-Universities are heavy in human resources, and so have to pass along
increases in health care and related benefits costs. At the same
time, in part driven by a glut of Ph.Ds in the 1980s and '90s, many
universities have shifted teaching loads away from tenure-track
faculty to fixed-term, adjunct, and other types of instructors, which
should deliver some measure of cost savings.

-Headcount growth over the past 50 years has included many
administrative positions to oversee student life, minority affairs,
grant compliance, record-keeping (including IT posts), and alumni
affairs/fundraising. In contrast, teaching faculty has grown more
slowly than student populations: the ratio of American students to
faculty in 1959 was 9.6 to 1, while today it is over 13.5 to 1, nearly
50% higher.

-Medical schools and teaching hospitals are vastly complex and almost
universally lose money. Salaries can be astronomical - a Columbia
University dermatology professor makes over $4 million a year, and
heads of health systems can also earn seven figures. The university's
role in the emerging health care funding model has yet to be
determined, but it will be significant.

-To compete for students, universities have invested heavily in
facilities such as student unions, dorms, and fitness centers. To
compete for grants, universities have invested in researchers,
post-docs, and facilities; big science, in particular, is expensive.
Capital spending is an area of major growth, as a trip to your local
campus will reveal.

-Finding real estate to hold new buildings can be an issue,
particularly at urban institutions: Columbia and NYU are tightly
constrained, while Harvard's expansion into Boston across the Charles
from Cambridge is both expensive and controversial. Given the
performance of the university's investments, it is also on hold.

Harvard's Ivy League rivals in New Haven have had better fortune. In
2007 Yale purchased 137 acres of land home to 17 buildings totaling
1.5 million square feet from Bayer; three of the largest research
buildings were less than ten years old and would have cost about $700
per square foot to build. Large warehouse spaces, meanwhile, are
climate-controlled, making them potentially attractive for
conservation of art, scientific specimen, and manuscript collections.
Like many university expansion projects, such as Carolina North, which
is two miles from UNC's main campus, Yale will have to work through
the integration issues of separate facilities.

4. By definition, universities' responses to job supply and demand
lags the market. PhDs continue to graduate in fields with few or no
job openings. Nursing schools cannot fill demand, in part because of
a shortage in nursing professors. Some majors will surge in
popularity -- crime scene investigation and forensic science rode the
wave of TV detective shows, for example -- while others such as
accounting are perennially strong. Efforts to connect higher
education to job growth have had only mixed success: the number of
moving parts, and the lead times involved, and the degree of foresight
required on all sides of the table, make such a project a daunting
challenge.

5. Private universities are increasing their research role. For
years, Texas, California, and Michigan led the nation in Ph.D.
production. According to Washington Monthly's tables, the leaders are
now Berkeley, MIT, Stanford, Michigan, and Illinois. In terms of
research dollars won, Johns Hopkins is on top, followed by University
of Washington, Penn, Michigan, and Stanford. Powerful medical schools
tend to be the constant on this list.

6. Universities drive high quality of life. In such listings as
Cities Ranked and Rated, Money Magazine's Best Places to Live, and
others, college towns consistently score well. Pollution tends to be
low, cultural activities abound, teaching hospitals provide excellent
health care, and commutes tend to be short. Many such towns are so
desirable, however, that real estate prices drive a high cost of
living. Boulder, Charlottesville, and Hanover, NH have seen this
phenomenon, and Palo Alto is off-the-charts expensive. The impact on
adjunct faculty and university support staff usually means that food
service workers, administrative assistants, and HVAC technicians must
live far from campus in many college towns.

7. Documenting university economic contributions is difficult.
Stanford's record of launching companies is probably unmatched in
recent history: roughly 4,700 companies have been founded by graduates
and faculty, including tech heavyweights Cisco, Google, HP, Nvidia,
Sun Microsystems, and Yahoo!. Reaching farther back, MIT's company
list includes Gillette, Texas Instruments, McDonnell Douglas,
Raytheon, Bose, and Genentech. In terms of royalties deals,
Northwestern sold its rights to the pain drug Lyrica for $700 million
in 2008. Gatorade has earned between $80 and $100 million for the
University of Florida since its invention in the 1960s.

Economic mobility is harder to track than IP licensing or
entrepreneurial impact. Washington Monthly ranks colleges and
universities by the percentage of students receiving low-income Pell
Grants, and by the predicted graduation rate of those recipients. On
this measure, the leaders are not Penn or Chicago, but South Carolina
State, Penn State, and UC-Davis. Harvard, Stanford, Johns Hopkins,
Duke, and MIT have negative scores on this index, suggesting they
function more to reinforce class rigidity than drive social mobility.

8. Universities are not particularly transparent. Unlike public
corporations, government bureaus and universities (both public and
private) do not report their activities in any standardized form. The
University of California, for example, presented 180 pages of detailed
budget documentation to the Board of Regents that is public. The
University of Michigan's public budget documentation, meanwhile,
consists of a one-page summary of all major units that add up to $1.4
billion. For all of that state's economic turmoil, the university
budget is up over 3% for FY2010, including an increase of 12% in
spending on "ceremonial and presidential events."

9. University athletic programs are big businesses on their own, most
of them operating in the red. A few athletic departments turn a
profit: Michigan's brought in about $90 million last year and passed
$1.6 to the University's general fund. The Southeastern Conference
(state universities from South Carolina to Arkansas to Kentucky, plus
Vanderbilt) recently signed a contract with ESPN for $2.25 billion
over 15 years. Including another deal with CBS, the league will
receive over $200 million a year in media rights, not counting bowl
games. Payrolls at the top end are in line with entertainment scale:
the University of Alabama football coach makes an estimated $5 million
a year, including cars, country club memberships, use of the
university airplane, etc. A rough rule of thumb at football-centric
schools is that the head football coach earns four times what the
university president does, but at Iowa and Oklahoma, the multiplier is
about nine.

10. Going forward, colleges and universities face multiple challenges
that will shape the society and economy in both short and long terms.
Given the nation's front-burner issues with wars and terror, budget
deficits, economic regulation and stimulus, and health care policy,
education is not the stuff of blogs, talk radio, or Senate hearings.
A long list of macro-level questions will demand action at some
juncture, however:

-Tuition cost increases have priced private education beyond the
middle class, not just at elite institutions: cost is not proportional
to quality. Total annual fees at St. Olaf college in Minnesota, to
take a good school at random, are estimated at $45,600 compared to
$50,600 at Princeton -- and Princeton's massive endowment ensures that
its aid packages are better. The Bucknells, Loyolas, and Oberlins are
faced with a severe challenge in that most costs are fixed: dorms have
to be heated and professors paid whether the entering class is 100% or
80% full. State universities face a different set of issues given
their vast scale and the changing revenue patterns for state tax
receipts.

-High tuitions paid by wealthy families are to some extent a subsidy
to those on financial aid. Elite universities do a good job of
running that process as a "black box," but assuming continued tuition
growth, there will be increasing dissatisfaction with the arrangement
among some of those who are (on paper, if not in wallet) rich enough
to pay full freight. Once again, issues of social class are deeply
ingrained with educational institutions.

-Curricula may change more slowly than markets, but they must change
nonetheless, and the process is (for some good reasons and some
worrisome reasons) slow and politically sensitive.

-The customer satisfaction mentality, in which students are
"consuming" their education, has both upsides and downsides. As
tuition soars, it's impossible not to take seriously student concerns
about return on their and their parents' investment. At the same
time, education is not a vacation with professors serving as
recreation directors, and the customer is not always right.

-How will universities cope with globalization? Population growth and
market need are most vigorous in the developing world, and a wide
variety of partnerships is in place for U.S. institutions to tap into
such countries as India, Spain, and China. Will top universities
franchise their name, open branches overseas, dramatically expand
online offerings and experiences, or develop entirely new business
models?

-Demography is destiny, and a decline in the college-age cadre appears
to be coming coming in a few years: the U.S. population pyramid shows
fewer 10-year-olds than 15-year-olds.

-Do 2/3 of graduating seniors really need to attend college? If
tuition is priced out of reach for the middle class, and if the
education premium is shown to be lower than believed, colleges and
universities will be further pinched between high costs and decreasing
demand. The wild card here is of course international students, who
are already an increasing presence at many institutions.

For all their challenges, American colleges and universities are
over-represented among the best in the world. According to the Center
for World-Class Universities at Shanghai Jiao Tong University, U.S.
institutions occupy 17 of the top 20 positions, and 36 of the top 50.
Such excellence occurs despite low math and science test scores among
high school students, despite troubling patterns in research funding,
and despite foundational shifts in U.S. social, regional, and economic
patterns. Going forward, the biggest challenge may be balancing pride
in the magnitude of our achievements with forward thinking to meet the
needs of the next generation of research questions, employment trends,
and entering classes.

Early Indications August 2009: Informational Geography

2009-08-31T09:54:00.000-07:00

As the U.S. economy has shifted away first from agriculture and then
manufacturing as its core activity, numerous side effects have
emerged. In this newsletter we'll look at some of these, particularly
in regard to land and space issues. As we have witnessed, the
information age closely parallels the emergence of services as the
primary economic driver: the first commercial computer application
(payroll) was installed at GE's appliance operation in Louisville in
1955, so we'll look at roughly the past 50 years.

Macro Trends in Employment
As for the shift to a "services economy," the Bureau of Economic
Analysis numbers (sampled at 5-year intervals) tell several stories,
two of which focus attention on the 1970s. First of all, if we look
at "personal consumption expenditures," which are separated from
investment, the U.S. crossed over from spending more on goods to more
on services in 1970. From that 1:1 ratio, the momentum stayed with
services, to the point where in 2005 services spending approached a
2:1 advantage over goods. Second, at about the same time the U.S.
swung from a trade surplus to a trade deficit of roughly the same size
in only 5 years, a 181% swing between 1975 and 1980. Finally, and
significantly, we still export more products (70% of the total) than
services (30%).

From the employment side, was manufacturing ever dominant? As of
1919, according to the 1950 Statistical Abstract of the United States,
mining, construction, and manufacturing constituted only 47% of the
non-agricultural work force. Transportation and utilities, retail,
finance, services (as in auto repair but not domestic servants) and
government (excluding armed forces) added up to the remaining 53%. As
of 1959, according to the Bureau of Labor Statistics, the 19 million
goods-producing jobs unsurprisingly lagged services jobs, which
totaled 34 million, 8 million of which were government positions.
Since that time, several trends bear mention:

-In the goods-producing sectors, three distinct cadres emerge. The
number of miners and loggers in 2008 was nearly identical to the 1959
total of 789,000, yet wild swings can be seen repeatedly in that
50-year span: 658,000 was a two-decade low in 1971, then a 50-year
high of 1.2 million was achieved only 11 years later. In
manufacturing, current numbers are 2 million lower than 1959, but
population has nearly doubled, from 177 million to over 300 million.
The final goods-producing sector, construction jobs, grew even faster
than population, from 3 million to 7 million.

-Services-sector job growth reveals some truisms and some surprises.
Government employment more than tripled in 50 years. Leisure and
hospitality quadrupled. Education and health jobs (the category is
bundled) have multiplied six-fold, some of which adds further to the
government total. The financial sector grew 330%. The biggest
surprise since 1959 among services sectors is information, which
barely doubled by 2000 and has been shrinking since, presumably led by
newspapers.

Geography
The American geography reflects these changes in many ways, some of
them subtle. The boom in both construction and leisure sectors, for
example, helps explain Florida. Financial services consolidated first
in a few cities (Boston, metro New York, Charlotte, Atlanta, Dallas)
then in a handful of firms in those areas; other cities, most notably
Philadelphia, declined in banking prominence. The rise in
education/health and government sectors makes Austin, San Antonio, and
North Carolina's Research triangle logical beneficiaries. As the New
York Times pointed out, Detroit's steady decline contrasts sharply
with the rise of Washtenaw county, only 45 minutes away, powered by
the University of Michigan.

Other regions are seeing decline, of course. Buffalo may have been
the country's first victim of globalization as the St. Lawrence seaway
bypassed the former grain gateway and then the steel industry also
left town: the city's population has fallen by half in less than 60
years. Now, only 75 miles away, Rochester copes with the falling
fates of information industry pioneers Kodak and Xerox, with only
partially compensatory development in education and health care:
together, Xerox and Kodak employ fewer people than the University and
only 3,000 more than Wegman's grocery stores and its headquarters
operation. Population has declined by 37% since 1930.

Timber industries are in retreat as newsprint consumption goes down
and furniture-making moves offshore; home construction, while
cyclical, is not enough to compensate even in the boom years. Since
the 1960s Maine has lost shoe-making and other manufacturing jobs, and
even though there's no shortage of trees, the lack of saw- and paper
mills contributes to a downturn in both logging and the companies that
sell capital equipment to the paper industry. Pennsylvania is the
nation's leader in hardwood lumber, meanwhile, but that business is
hurt both by Chinese furniture factories (and the accompanying new
sawmills) and the housing bust: demand for oak and maple cabinets and
floors has fallen.

With the decline of the vast integrated steel mills that used to
dominate the industrial heartland in favor of lightweight minimills,
several things are happening. First, some cities including Pittsburgh
have reclaimed the real estate formerly occupied by mills to build
biotech and other facilities. The contrast between Boston/Cambridge
and Bridgeport or Worcester with regard to brass, leather, and similar
factories is playing out again, with Pittsburgh able to use education
and health care for economic growth while cities like Allentown and
Reading still struggle.

At the same time as steel mills have changed shape and location, coal
production for electricity generation has surged. West Virginia leads
the nation in coal mining employment, but productivity per miner is an
order of magnitude higher in the western open mines of Wyoming and
Montana. West Virginia also provides a fascinating contrast with its
close, intertwined neighbor (the states' northern borders overlap for
over 100 miles). Maryland is home both to unemployed crabbers and the
most highly-educated employees in the country. They work in such
units as the Department of Energy, National Security Agency, and the
biotech research complex at Fort Dietrich, where pioneering research
was done on surgical robots, for example. West Virginia, meanwhile,
ranks third in the nation in obesity, 49th in per capita income
(Maryland passed Connecticut to become #1), and in the bottom five in
educational attainment.

Sticking with commodities, no element is as intricately involved in
the information age as copper. Whether in microprocessors,
transformers, power lines and cables, or data networks, copper is
essential for both computing and communications. Michigan's upper
peninsula used to be an active producer, but starting in the 1960s the
emergence of open-pit mines in the American west, and more important,
Chile, made deep-shaft mining uneconomical. While iron continues to
be mined about 100 miles away, the "Copper Country" was transformed by
tourism and education as the former Michigan College of Mines emerged
as the area's economic engine, employing 1,600 people with an annual
budget of roughly $185 million. Nonetheless, both Houghton and
neighboring Keweenaw counties have been losing population in the 2000s
after staying flat the previous 20 years, according to Census Bureau
estimates.

Policy Implications
What generalizations can we make about the past 50 years, dominated as
they are by the dual (but mysteriously correlated) forces of
information and services? In the northeast, deindustrialization means
more forests, closed mines, decommissioned railroad tracks, and
smaller tax rolls. It also provides the necessity and the possibility
of repurposing of urban industrial real estate. The simultaneous rise
of the South and West, meanwhile, stress-test the infrastructure of
the states that are growing. The budget crises in Pennsylvania and
California that have such different origins, Atlanta's water
emergency, and Florida's real estate collapse all indicate how
internal migration is creating structural difficulties in both the
stagnant and destination states. At the state and federal levels, new
policy issues proliferate.

1) Who Rules?

In addition to reshaping Congress and thus domestic spending
priorities, the 2010 census will tell a fascinating story about
internal migration. Given that there was substantial activity in
certain information industries in the 1990s, and that manufacturing
certainly suffered its share of setbacks, are there migration patterns
that we might expect to intensify when the next measures are taken a
year from now? Between 1990 and 2000, no states shrank, but 11 states
grew by less than half the rate of U.S. population growth, which was
about 13% for that period. Note the presence of Electoral College
heavyweights New York, Ohio, and Pennsylvania on the list, possibly
portending a shift in campaign strategy for 2012 as they lose
congressional impact:

-Connecticut
-Iowa
-Louisiana
-Maine
-Massachusetts
-New York
-North Dakota
-Ohio
-Pennsylvania
-Rhode Island
-West Virginia.

It will bear watching to see if such states as Nevada (66% population
growth in the 1990s) and Arizona (40%) will exhibit any population
artifacts of their role in the mortgage crisis. California,
meanwhile, grew at scale in the '90s, essentially adding the
equivalent of the entire state of Minnesota circa 1990. As the
state's financial and physical infrastructure creak under the load,
where will people move next?

2) Who Pays?
One facet of the change in employment patterns emerges in the need for
tax revenues. Three stories illustrate the extreme difficulties
imposed by the shift to a more virtual economy. First, telecom taxes,
which formerly contributed roughly $30 billion a year to federal and
municipal budgets, will continue to fall as a result of VoIP and
cellular substitution. The city of Boston is attempting to recoup
some of this loss by taxing telephone poles as property. Confusingly,
electric poles are already taxed, but Verizon's predecessor company
got a tax exemption in 1915 for the encouragement of universal
service. In any case, today's reality would seem to require new
arrangements all around, and the discussion continues.

The second tax attempt came this summer in North Carolina, which
joined Rhode Island and several other states in attempting to tax the
transactions of small and medium businesses in the state that used
Amazon's storefront and payment engine to scale their market. Amazon
responded by cutting ties with the businesses to preserve the lack of
nexus.

Third, I have not seen any estimates of the tax impact of offshoring
jobs, but if a given company's call centers or IT shop shrinks by
thousands, the savings in payroll will undoubtedly affect state and
local tax collections even as demand for unemployment compensation and
social services typically rises.

3) Who Regulates What?
A final policy question relates to the role of broadband. As sparely
populated areas shed jobs and possibly population, the Obama
administration continues to stress the role of network connectivity
without yet specifying who, how, or how expensive. Stringing copper,
coax, or fiber can get extremely expensive, particularly as population
density decreases: part of the pressure on wireline businesses comes
from the cumulative effect of so many defections. A social good whose
costs were shared broadly becomes incrementally more expensive as the
infrastructure costs get shared by fewer and fewer people.

Note that in the "revestiture" of the U.S. telecoms industry, neither
SBC (later ATT) nor Verizon (originally Nynex plus Bell Atlantic)
wanted Qwest and its vast, mostly sparsely peopled service area
extending from Washington to Minnesota and south to Arizona. Verizon
is selling off landline businesses in states such as Maine. Sprint,
meanwhile, spun off its heavily rural wireline business entirely in
2006 as Embarq. Saddled both by customer defections (10,000 a week)
and heavy debt, Embarq was subsequently bought in 2008.

Meanwhile, wireline providers have limited options as universal
service provisions remain in place: firing unprofitable customers is
rarely possible. The universal service provisions could conceivably
be augmented to mandate broadband, but rules that applied to
monopolies have yet to be overhauled to fit a competitive landscape:
in our small town, I could obtain some flavor of telephone service
from at least seven providers. How many providers does a network
require to be called competitive, and thus lightly regulated? Sprint,
AT&T, and Verizon have laid off nearly 30,000 people the past 12
months alone, yet how many regulatory entities are shrinking
proportionately?

Conclusion
The shift in emphasis to services, along with global competition, has
changed the American landscape in myriad ways:

-People can move south and west as a) air conditioning makes the
climate tolerable and b) jobs no longer connect to natural resources
and rivers or ports: compare Atlanta, Dallas, or Phoenix (defined
instead by their interstates) to their northern counterparts. In
historical terms, meanwhile, when will construction activity and
employment slow down their rapid growth?

-As agribusiness grows in scale, farmland in the northeast is
returning to (mostly unmanaged) forest. Deer populations now
constitute a serious problem in many states as habitat increases while
hunting and predation do not. The lack of timber industries allows
these forests to become recreational and ecological resources.
Reforestation and healthy watersheds raise the question: when will
fresh water turn again to become a major economic driver, particularly
in industries where virtual work is a possibility?

-Universities and hospitals have replaced factories as economic
engines in many localities, but as non-profits pay different kinds of
taxes compared to factories.

-In many ways the people who most need broadband, for distance
learning and telemedicine for example, are the least likely to have it
because of the high cost to serve remote populations. Remedying the
access paradox may not be the challenge that health care reform is,
but that does not make it a simple matter.

-As Maryland's physical proximity to but economic distance from West
Virginia shows, the world is not fully flat: local advantage can still
matter, and matter decisively. Detroit, meanwhile, shows just how
"local" local advantage can be.

-Competitive forces that reshape industries are not reflected in the
government portion of the services economy. Even seeing the true size
of state and federal government agencies is a challenge, much less
altering them. The Japanese automakers successfully challenged the
Big 3 on quality, for example, but taxpayers can't similarly defect to
a better performing government. The population of metropolitan
Washington, DC, meanwhile, grew 29% between 1990 and 2007, giving it
the final word on the reshaping of the American landscape in the
information age.

July 2009 Early Indications: Love & Work part II

2009-07-27T07:01:00.000-07:00

Taking as our cue Freud's famous dictum that people are defined by
their love and their work, last month's letter looked at online
dating. This time around, the focus turns to work, prompted by both
the current economic situation and a few books on the topic.

What have computers and the digital revolution done to work? Answers
vary considerably. In 1992 Robert Reich (later Bill Clinton's
Secretary of Labor) devised a tripartite schema to classify the
workers of the world, seeing global work forces as already having been
divided into three groups: routine producers (e.g., call center reps
or assembly-line workers), in-person servers (waiters or nurses), and
symbolic analysts who manipulate pure information for large profits
(Wall Street quants). Digitization in the service of high leverage
made the "symbolic analysts" rich, and skewed income distribution.
Seeing the relation of rich to poor less than 20 years later, Reich
may have been onto something crucial, but his tepid solution --
training and education -- has failed to shift the terms of the debate,
partly because school systems change incredibly slowly and require
levels (and types) of investment that are for a number of reasons
politically impossible in the U.S.

A decade later, Richard Florida defined the engine of the new economy
as the "creative class," 38 million of whom comprised 30% of the
workforce. For the winners, digitization empowers flexible work that
gives great meaning:

"In this new world, it is no longer the organizations we work for,
churches, neighborhoods, or even family ties that define us. Instead,
we do this ourselves, defining our identities along the varied
dimensions of our creativity. Other aspects of our lives -- what we
consume, new forms of leisure and recreation, efforts at
community-building -- then organize themselves around this process of
identity creation." (Rise of the Creative Class, pp. 7- 8)

Surely 30% of the workforce can't work at ad agencies or Disney. No,
says Florida, "I define the core of the Creative Class to include
people in science and engineering, architecture and design, education,
arts, music and entertainment, whose economic function is to create
new ideas, new technology and/or new creative content. Around the
core, the Creative Class also includes a broader group of creative
professionals in business and finance, law, health care and related
fields." The core and the donut are linked not by geography or income
or skills but by a value set: "all members of the Creative Class --
whether they are artists or engineers, musicians or computer
scientists, writers or entrepreneurs -- share a common creative ethos
that values creativity, individuality, difference and merit. For the
members of the Creative Class, every aspect and every manifestation of
creativity -- technological, cultural and economic -- is interlinked
and inseparable." (p. 8)

Whatever its relation to life as most people know it, Florida's book
resonated. It led to a thriving consulting business helping cities
attempt to become more economically competitive. How? Not with tax
incentives for auto plants but by luring more of those 38 million
people with more tolerant attitudes, better mass transit, more
authentic espresso bars, and the other factors that separate Toronto
from Topeka or Minneapolis from Modesto.

In the intervening seven years, however, much has happened to cast
doubt on Florida's vision of the future. What exactly do those
creative people do to help the U.S. balance of trade deficit? Movies,
M&A deals, and Microsoft all contribute to exports, but not to the
degree that farm goods do, and none approaches the aerospace sector's
international impact. What happens when offshore competition
threatens large numbers of those 38 million jobs? Legal research,
programming, equity analysis, and even movie-making and distance
learning are already being produced and delivered from afar in
lower-wage settings -- what will be next?

More fundamentally, just how creative are those 38 million people?
Job titles can be deceiving: a good friend of mine was an architect at
HOK, the sports division of which has given us such modern monuments
as Camden Yards in Baltimore or ATT Park in San Francisco. What was
our young Howard Roark's creative contribution? Bathrooms for the
Hong Kong airport.

Matthew Crawford, in a new book called Shop Class as Soulcraft,
raises similar doubts. Beginning with the observation that many high
schools are dropping shop class because it fails to train people to be
symbolic analysts, Crawford challenges the reader to think deeply
about the value of work. Because it often lacks real output, modern
bureaucratic life, defined largely by office automation, can be
unfulfilling. In contrast to the carpenter whose windows can't leak,
or the farmer, who feeds people with tangible crops or livestock, the
office worker (creative or not) lacks physical boundaries to define
the real from the artificial or the possible from the impossible.

As Crawford notes, quoting Robert Jackall's Moral Mazes (now 20
years old), office memos are crafted to be unincriminating no matter
how subsequent events play out. Taking a firm stand is often seen as
career-limiting, so most eventualities remain unforeclosed; every
position is hedged. Along similar lines, after receiving a Ph.D. from
the University of Chicago, Crawford works for a think tank generating
position papers that begin not with the facts but with a position,
reasoning backward to convenient truths. It is intellectual bad faith
of the first order, and he quits. Worse yet, in his circles of
occupational hell, are jobs built on teams with their indeterminate
appropriation of credit and blame, along with the HR-driven
trust-building games that frequently pass the point of self-parody

In contrast, the author points to his work as a motorcycle mechanic.
No symbolic analyst he, Crawford confronts physical limits every day,
and pays a steep price for failure. If he drops a washer into a
crankcase, there are times when he must tear down the engine block to
retrieve it, and cannot in good conscience bill the customer for all
of the hours involved. Mistakes, stupid or otherwise, have concrete
consequences. On the positive side of the ledger, when he fixes a
broken fork, returns a dead bike to life after ten years off the road,
or hears the particular sound of a well-tuned engine, he derives great
satisfaction. He also contends that mechanical work can be more
intellectually engaging than "knowledge work," implicitly challenging
Florida's new world order.

In some measure, we are fighting a new stage of the battle joined by
Descartes, who separated thought from emotion and thereby physicality.
Craft work (fixing or building things) joins the practice of medicine,
certainly, but also full-throated singing as moments where mind and
body unite. Sport constitutes another similar realm, as does cooking,
the recent enthusiasm for which might be seen as a reassertion of the
satisfaction that can only come when head, hands, and palate unite in
a primal act -- that of feeding another person. Compare the gestalt
of today's many cooking shows to the treatment of the modern workplace
in current television programming and the contrast is obvious: Julia
Child, enshrined at the Smithsonian, is a hero while cubicle America's
cultural icon has yet to transcend Dilbert.

Shop Class as Soulcraft also makes the pragmatic point that fixing
things cannot be offshored; one can make a healthy living as an
electrician, for example, or an auto repairman. Last time I was in
for an oil change my mechanic was telling me about one manufacturer's
switch to a fiber-optic system bus -- he knows more computer
networking than I ever will. To service appliances or furnaces today
is to have studied hundreds of hours of digital control and monitoring
technology. High schools, however, generally operate under the
principle that college-bound students will have better careers than
those who work in jobs that require mere training. But what
economists call the education premium can no longer be assured today,
much less in 50 years when today's high-school graduates will almost
certainly still be working.

There's also the matter of permanence. As Crawford notes, many of
today's appliances are built to break and not be repaired. How does
today's work give people the opportunity to build something that will
last beyond their life span? For teachers, this is one of the true
joys of the profession. For most "knowledge workers," the answer is
less clear. True craftsmen raise a red flag. As Michael Ruhlman,
known more for his books on chefs and cooking, reported in a book on
wooden boats,

"I asked Gannon why wooden boats were important to him -- why had he
devoted his life to them? Ross seemed surprised by my apparent
ignorance regarding what to him was plain, and his blazing eyes burned
right through me.

'Do you want to teach your daughter [then 3 years old] that what you
do, what you care about, is disposable?' he asked. 'That you can throw
your work away? It doesn't matter?'"

Whether in passing down the family farm or painting "& Sons" on the
service van, craft work is often connected to future generations that
bureaucracy cannot sustain. This lack of long-term continuity may be
another reason why the modern office lacks heroic images in popular
culture.

A final reason for the current deep unease with the prevalent model of
work lies in the fact that we are undergoing several foundational
shifts. Global competition and offshoring are familiar, but the
aftermath of digitization changes so many aspects of life so quickly
that some sense of vertigo becomes unavoidable. As Carlota Perez
asserts in her book Technological Revolutions and Financial
Capital (p. 57), every major technology breakthrough in the western
world since 1750 progresses through two major historical phases,
installation (ending with a bubble popping) and deployment.

Between the two often lies a financial crisis: 1848 for the age of
steam, 1893 for the age of steel, and 1929 for the automobile and
associated industries. Her positioning of 2001 as the start of the
computer age's financial crisis is persuasive, meaning that if the
past is a guide, that deployment of these telecommunications and
computing technologies will bring both financial growth and structural
change. Work will undoubtedly be very different 20 years from now.

Tom Malone of MIT explores that future landscape through the lens of
its institutions. In his 2004 book The Future of Work, he lays out
various scenarios primarily concerned with the coordination and
collaborative facets of organizations. He sees the future as more
decentralized, less hierarchical, and more democratic. If it comes to
pass, Malone's vision foreshadows the demise of "The Office's" Michael
Scott and his kin. Pettiness and incompetence are eternal, however,
so it is worth pondering both what will happen to a Michael in a
Malone-ite world, and what manner of successor will emerge instead.

In the end of any analysis, work cannot be categorized with any
precision. It is both universal and specifically grounded in time,
place, and individual. It offers both rewards and challenges (some of
which may overlap), utilizes groups and solo contributors, and defines
us in multiple ways. The diversity of the perspectives mentioned here
is itself incomplete, missing, for example, the perspective of the
Japanese salaryman, the unionized autoworker, or the classic
professions of law or clergy (both of which themselves are in the
midst of deep change). We have made no mention of wages, which are
retreating in many settings. The appeal of Dan Pink's vision of Free
Agent Nation (2002), for example, has been replaced by the reality of
the less glamorous name for continuous partial employment, "temping."

As to the question, "what have computers done to work?" the answer is
probably less clear than it will be in another 25 years, when the
changes to economies, workplaces, and individual performance will
separate themselves from the end of the oil/automotive/steel age that
wound down in the late 20th century. The exciting news comes in the
realization that the future of work is not yet defined, making it
contingent on the attitudes and actions of many people, professors and
motorcycle mechanics hopefully among them.

Early Indications June 2009: Love, Online

2009-06-30T09:14:00.000-07:00

Love and work are the cornerstones of our humanness.
-Sigmund Freud

How have the technological changes of the recent past affected these two facets of our existence? As economies around the globe attempt to generate "good" jobs in the face of steep declines in such traditional sectors as news and media, automotive, and even law, the nature of work is at once a policy, economic, and existential question. As for love, we have seen misplaced romantic e-mail damage the careers of public figures including CEOs and a governor. Finland may show us the wave of the future: in 2006 the prime minister met a woman through an online dating service then broke up with her via SMS a few months later, stating economically, Että se ("that's it").

Let's take the love question first; we'll tackle work next month. I was struck by the number of anecdotal cases among my acquaintances involving structured dating services such as match.com or eHarmony. A little research shows how big these services have become, not counting the vast amount of flirting within the big social networks: paid online dating sites were essentially a billion dollar industry in 2008, according to Forrester, putting it ahead of pornography and making the industry slightly more than half as big as digital music and gaming.

Countries around the world are getting involved: in Japan, dating sites must register with the police, and over 1600 such companies did so. Between January and September 2008, eHarmony and Match combined to spend $140,000,000 on advertising. According to New Media Age, UK traffic to online dating sites grew 13% between September 2008 and February 2009: total visitors number about 5m, reaching 13% of the total UK online population. Harris Interactive estimates an average of 236 eHarmony users get married - every day. Match.com, part of InterActiveCorp, was recognized in 2004 as the largest site in the world and reported 1.35 million paying members as of May 2008.

Online matchmaking has many variations. One can search for potential spouses, for religiously or culturally similar partners, for friends, for same-sex prospects, for uncommitted physicality, or, at Toronto's Ashley Madison, be guaranteed an affair - or your money back. The various market segments each have multiple providers, varying by geography, matching method, and revenue model. Based only on online comments from users rather than any personal experience, claims of differentiation between different sites' matching accuracy and inventory may be inflated: many people use multiple sites and find the same people matching their profile.

Late last month, the American Press Institute convened a meeting of newspaper executives to discuss the state of their industry. They placed substantial blame on Google for being the "atom bomb" to the news industry. Left unlisted were the papers' many losses in the bigger content picture. The report did not acknowledge how many readers are defecting from the bundle model in favor of specialty providers: ESPN et al for sports, the likes of Edmunds for car-buying, Yahoo Finance and many other money sites for stock quotes, Realtor.com to house-hunt, eBay for used cars and household goods, Craigslist for apartments, etc. Personal ads are clearly a part of this erosion: Match, eHarmony, and the rest did not cannibalize all of that $957 million from newspapers, but clearly papers have lost some of their mojo in that department.

As for magazines, college alumni periodicals' listings appear to be shrinking. The New York Review of Books has long featured personal ads that were almost a parody of themselves. I found that, through the magic of the Internet, people can still browse for such appealing specimens as:

LOS ANGELES: bright, playful professional/academic MWM, 50s, tall, fit, good-looking, warmhearted, engaging, open, and present. In emotionally untenable marriage. Seeking woman, 40–58, with good heart, curious mind, sensual, open to exploring possibilities with like-minded good soul.

Some independent newspapers maintain a strong singles presence, as witness the Chicago Reader or The Onion. Mainstream papers, meanwhile, take a variety of approaches. Boston.com (the Globe's online operation) franchises singles from Yahoo. The LA Times points readers to eHarmony. Many papers, including the New York Times and Dallas Morning News, have no personal ads.

Just within my casual contacts, two adults have married based on their use of the services. One is an innkeeper in a small coastal town, while the other is a medical professional in a relatively remote market. In both bases, geography-based dating is problematic both in terms of sparse "inventory" and in terms of privacy given these individuals' relatively public day jobs. As a divorced charter boat captain told me of his use of Match, "It's great for people like me: in small towns like these, everyone knows everyone else's business. And while you can date the tourists, it's a bit tough starting a new relationship every week when the rentals turn over." The decoupling of physical location from the search process is a very big deal for market "thickness," not to mention the overall sense of romance and adventure in the process.

Secondly, the use of algorithmic matching tools is enhancing the matching process: eHarmony's "scientific" survey instrument includes 400 questions, far more than I ever answered on any unsuccessful first date (or the successful one, for that matter). As we will see, however, the comprehensiveness of the surveys has many implications.

Not surprisingly, the online dating phenomenon has generated sometimes hilarious commentary in the form of vast numbers of blog entries and a few books. Such titles as MatchDotBomb: A Midlife Journey through Internet Dating, Millions of Women Are Waiting to Meet You: A Memoir, and numerous how-to volumes (including a Dummies guide) testify to the pervasiveness of this cultural phenomenon.

The unintended consequences are fascinating to watch.

-Is it ethical for pay sites to count non-paying (former) participants in a match panel?

-How sustainable are the various business and operational models? Might one technology, celebrity endorsement, or other factor prove decisive in a particular market?

-What happens to my profile after I quit the service, either because it worked or because it failed? What rights do I have to my profile on either free or paid services a) after a month, b) after a year, or c) after the company goes bankrupt or gets acquired?

-What are the de facto (when people meet in person) and de jure (in court) standards for truthfulness? eHarmony, for example, insists that applicants be single: legally separated individuals are excluded, and could be banned if they lie to get on. We have a family friend who's a tall woman using some Internet dating resources, and her stories of men's various versions of their height and weight are funny and troubling. "Truth in advertising" has many nuances in this domain.

-What exactly are people paying for? What are the guarantees, warranties, or lack thereof?

-How can and will various systems be gamed? Some services have been accused, without proof, of employing "ringers" (professional first-daters) to exaggerate the quality of available singles.

-What will my profile be used for? Cross-selling opportunities, for example, are numerous and more than a little spooky.

-While the nightmare blind date has become a cultural stereotype, the prospect of meeting truly dangerous people online is more than a little scary, as the Boston Craigslist crimes suggest. It's also possible for bad first encounters to facilitate stalking. I have a colleague whose "thanks for coffee" and the implied "have a nice life" after a meeting drove the candidate to look her up using available search methods. He later turned up on her doorstep unannounced.

The role of such civic institutions as churches, service clubs, and bowling leagues in the wake of suburbanization, television, and more women in the workplace has changed slowly but significantly over the past 50 years. The matchmaking process has changed as well, and the state of online dating businesses will bear watching. In addition, the place of Facebook in 20-somethings' lives is undoubtedly generating its own set of changes to courtship.

As my former boss once said, "digits never die." The prospect of a lengthy profile, and potentially e-mail communications within a dating site, being brought into a congressional confirmation hearing or other process 10 or 20 years from now might give some of those millions of users a pause before they declare yet another preference or "fact" about their life.

May 2009 Early Indications: Clouded Over

2009-06-01T04:27:00.000-07:00

The proliferation of so-called cloud computing platforms has been rapid. Because there is so much material available that defines the phenomenon, we'll move here to an examination of some of the unexpected consequences and complicated implications of moving some or all of a computing environment to offsite, third-party environments.

To get the problematic and inevitable definitional question out of the way, here is one from Information Week's John Foley: "Cloud computing is on-demand access to virtualized IT resources that are housed outside of your own data center, shared by others, simple to use, paid for via subscription, and accessed over the Web."

There are of course other contending definitions, but Foley's is mercifully brief. Even so, it begs the questions of private clouds, how small a cloud can be before it starts being something else, and how individual uses of clouds (I don't own a data center but hit on most of the other conditions) vary from and overlap corporate ones. It does get us started in more or less the right direction.

First, here are some resources to get up to speed:

The Economist special report from last October

Accenture Cloud homepage

Amazon Elastic Compute Cloud

Google App Engine

HP Cloud Assure

IBM Cloud Computing

Microsoft Azure platform

Rather than handicap the vendors, or the vendors' definitions, I'd like to focus a bit farther out. In a series of conversations with our corporate and university advisors, a number of questions have surfaced. In particular, I'm building on remarks by Mssrs. Smith and Parkinson at our member meeting earlier this month.

1) What is a vendor's profit path? What can be differentiated and thus generate margins? Compared to the conventional model of data centers, which is often measured in $10,000 or $100,000 units, cloud computing usage at Amazon is measured in dimes.

2) How will incumbents respond? If I have an established business selling hardware as capital expenditure, and a competing model shifts MIPS to an operating-expense model, presumably I don't stand still. Oracle's plans for Sun will be relevant here.

3) How does cloud lock-in vary from existing software (a la classical Microsoft) or hardware (the vintage IBM model) variants?

4) As with so much of the world's infrastructure, what is the incentive to invest in "pipes" when the value-add lies elsewhere, or nowhere?

5) If for legal or other reasons I need performance, security, and/or reliability guarantees, how do I get them if I cannot see or physically access my assets?

6) There are no free lunches. Every one of the Web's elite destinations has suffered from major outages at some point. Just weeks ago, Google suffered a technical breakdown about which the company released few particulars, but it managed to slow down service to millions (or more) of users for several hours on May 14. Gmail also failed at scale in February. In light of that history, what does a fault-tolerant cloud environment look like, require, and cost? (For an amazing graphic of the "Great GoogleLapse," see here)

7) Can there be "one throat to choke" in a virtual environment? Just as outsourcers are arbitraging labor rates by shifting contracted work to other shores, so too will cloud vendors assemble services from multiple entities to create bundled offerings. What will be the unexpected consequences for customers?

8) How does optimization work in a cloud? The vendor may be managing to power consumption, say, while customer A wants stable (not necessarily fast, but predictable) transaction times for a shopping cart scenario. Customer B needs fast compute capability despite bag and frequent reads and writes to disk. How can all three parties go home happy at the end of the day?

9) How can virtual, hybrid environments be tested before major real-world events: a quarterly close, a consumer promotion, a currency meltdown? While there will be some greenfield successes, a big question relates to how well clouds can integrate with existing data centers and other assets. (What constitutes unit testing in a cloud?)

10) What can I as a customer ask for by way of customization? Who can and will provide it, and at what costs in money and performance? The price points reflect commodity economics, but sooner or later most of us stumble upon needs that surpass plain vanilla.

11) Long ago, factory layouts (and locations) changed as power shifted from waterwheels that drove a central shaft around which looms were arranged, to individual electric motors for each machine. White collar offices after the rise of the PC no longer feature typing pools. What will be the organizational innovations that cloud computing makes possible? Focusing on power savings in the data center is a useful first step, but the technology will have many other implications for the ways people come together to achieve goals.

12) The PC architecture flourished in part because of its interoperability: I could choose a big Maxtor hard drive or a faster Seagate, a Dell LCD or Sony CRT display, and my hardware maker could buy the cheapest CD drives, RAM, and power cords on a given day. USB made the platform more flexible yet. Once I choose a cloud provider, how must I choose my ISP, my system management vendor, my billing system? In short, what are the dependencies introduced by a cloud instance?

13) Companies don't switch casually from CA Unicenter to BMC Patrol, HP Openview, or IBM Tivoli, much less a promising startup, because the complexity issues are enormous. Will my Tivoli/Openview/whatever console be able to instrument both my owned hardware and my virtual assets, or do I rely only on the cloud vendor -- who will have good reasons for not exposing too much operational information? The various answers here will have implications for lock-in, for innovation, for risk management.

14) Cloud computing is a coherent-sounding phrase, but computing in turn has many facets. Think about the different time scales relating to

-network latency
-the laws of physics regarding hard drive access
-the laws of physics regarding hard drive failure
-various data structures (think of MapReduce versus SQL)
-load-balancing, failover, and other necessary housekeeping
-core vs. edge workload allocation.

At the end of the day, orchestrating all of those sets of events, each with their own timescapes, in a virtual world is a really, really tough technical and managerial problem. Getting the systems to work doesn't even scratch the questions of profitability, liability, audit and related requirements, etc.

The question is not, will cloud computing happen, but rather, how will this tendency unfold, and how will organizations, regulators, and other actors respond? Until the rhetoric and more important the base of experience moves beyond the current state of pilots and vaporware, the range of potential outcomes is too vast to bet on with any serious money.

Early Indications April 2009: Reexamining Offshoring

2009-04-27T17:18:00.001-07:00

When U.S. firms replace onshore technical and other resources with lower-cost labor in offshore markets, the logic is typically financial. Five years after some of the biggest such decisions, however, it has become clear that the calculations were incomplete. As some jobs repatriate (albeit on a small scale), we can suggest some additional decision criteria for future justifications.

Let's start with a generic decision to shift 3,000 applications programmers from onshore to offshore in 2004. The calculation assumes a 10% cost of capital, a 34% tax rate, and 2% savings per year as salaries both in the U.S. and abroad grow at similar rates. The base case presumes a net present value of $400,000 savings per job, times 3,000 workers, for a $1.2 billion projected cash saving. Given the realities of activist shareholders and relentless cost-cutting, it would be difficult, and perhaps an invitation to a shareholder lawsuit, to decline those kinds of cost savings.

As the past five years have unfolded, however, some incompleteness in the analysis has emerged. Eight additional factors would be worth addressing in future considerations.

1) Inflation
Compensation growth in India in the past five years significantly outpaced that of the U.S. to the point where Indian wage inflation ran in the double digits for some of those five years. That compares to flat wage growth (but not benefit costs) in the U.S.

2) Employee loyalty
The years with high wage inflation coincided with high turnover at some offshore firms. The resulting instability contributed to lower performance gains than some onshore clients were expecting.

3) Coordination costs
Another factor widely underappreciated in many cost projections was the increase in coordination costs. Highly compensated, and extremely busy, financial services experts at various firms, for example, have told me that they overestimated offshoring's value. In particular, they and their teams spent far more time generating and refining requirements documents for a team of programmers on the other side of the world as compared to the in-house resources across the hall who knew the baseline terminology and assumptions of the firm and industry in question. Producing code and generating business value through technology are not the same thing. Put another way, Brooks' law applies to offshore resources, albeit in new ways.

4) Technology changes in enterprise applications
The rise of software as a service, virtualization, and cloud computing is challenging old models of application development and deployment, as Oracle's play for Sun Microsystems would imply. In addition, scripting-based programming practices have the potential to transform software still further. 10-year payback scenarios with a traditional computing model held constant are likely to prove problematic as the late years of the model roll around.

5) Public perception
The loss of public goodwill in the performance of offshore call centers (less so in programming) has been unexpected. In 2009 alone, United Airlines, AT&T, Sallie Mae, and Delta Air Lines have pulled back from offshore call-center contracts. As Delta's CEO stated, "The customer acceptance of call centers in foreign countries is low. Our customers are not shy about letting us have that feedback." Dell experienced a broad wave of backlash in 2007; such companies as Royal Bank of Scotland's Natwest unit go so far as to advertise that they do not offshore customer care. Even in programming, offshore resources are prohibited for certain public-sector contracts.

6) Currency dynamics
Both the Indian rupee and the U.S. dollar have undergone significant currency fluctuations, dwarfing that 2% cost savings assumption. In one year alone, a dollar went from buying 39 rupees to crossing the 50 barrier, a swing of about 30% (in this instance, in the U.S. firm's favor).

7) Corruption
The cost-saving calculations implicitly assumed an apples-to-apples comparison of contract law, financial accountability, and other facets of firm governance. But when Satyam, one of India's leading offshore firms, disclosed that its founder and CEO had orchestrated a billion-dollar accounting fraud, attention turned to the differences between Indian and U.S. models of corporate governance. Auditors from PricewaterhouseCoopers, who have been suspended from the firm and jailed by authorities, earned "exorbitant audit fees" and are alleged to have falsified key discrepancies between sales figures and bank deposits.

8) Risk
The 2004 NPV model apparently priced risk at zero, a flawed assumption when India is experiencing political tensions with its nuclear neighbor Pakistan, itself a potential "failed state" in the words of the U.S. Joint Forces Command. The Mumbai attacks of 2006 and 2008 provide further evidence that the country is facing a significant threat, in this case from non-state actors. The story continues to unfold, up to the present day. Various insurgent factions are staging attacks connected to India's monthlong election; 17 deaths were reported on the first day of polling alone.

Even given these additional factors beyond the pro forma case, the economics must continue to be compelling as IBM recently continued its practice of laying off U.S. workers (somewhere between 5,000 and 10,000 so far year to date) and increasing staff in developing markets: employment in Brazil, Russia, India, and China totaled 113,000 in 2008 with the majority of those jobs in India, where headcount doubled (to 50,000) between 2005 and 2007.

Going forward, it will bear watching what happens next. India is becoming expensive, so its firms are in turn offshoring to the Philippines, Vietnam, and elsewhere. U.S. firms are revisiting the cost-benefit equation of onsite programmers as wages have declined, risk has increased, and user dissatisfaction has mounted. China, as in so many matters, bears watching. India's elections will by definition have unexpected results.

At the least, the past five years of offshoring have proven that the logic of the business case depends as much on what one leaves out as on the numbers assigned. The process of globalization will continue to amaze, frustrate, and surprise, despite the best predictions of smart people. Unexpected consequences, for both good and ill, will continue to challenge firms -- and individuals -- on all sides of the equation.

Early Indications March 2009: A Disruption Scorecard

2009-03-30T11:08:00.000-07:00

With the newspaper business in apparent freefall, it's perhaps useful to tally up some of the various winners and losers among the incumbent business models as compared to 1994, the year the commercial web began to take off. It appears that there are multiple ways to be disrupted, that some industries are far better off than they were 15 years ago, and that there may be more dominos yet to fall. In roughly reverse chronological order, here's one judge's scorecard.

Industry: Newpapers
Status relative to 1994: Critically ill
Primary disruption: Unbundling

Compared to old-school stockbrokers, who were disintermediated by $10 trades, newspapers have been undone in other ways. The power of the traditional newspaper was its bundling, in economic terms, along two axes. First, subscriptions bundle content by time: readers pay for delivery of papers that don't always get read thoroughly for the sake of convenience. In addition, a daily paper contains content that a given reader ignores: look at how many hundreds of pages of a 1990s Sunday New York Times were thrown away untouched. This daily bundling allowed profitable sections (such as food/cooking, with grocery store ads) to subsidize other efforts, such as foreign news bureaus, which could not afford to pay their own freight.

Many of these facets of a newspaper have been separated out by standalone web businesses, each taking some segment of the readership and unbalancing the former cross-subsidies. Sports readers can go to the league sites (with heavy video footage), television spinouts from Fox/ESPN/CNN+Sports Illustrated, fan-driven blogs and/or message board efforts, or to any number of sites updating them on favorite cricket, soccer, or other international sports the metro dailies can barely cover, if at all. News is still primarily gathered by the usual suspects, but commented on, linked to, and re-aggregated by everyone from Google News to bloggers to ideology-driven destination sites. Daily A-Z stock charts aren't a particularly helpful way to watch the financial world, opening the door to broad distribution of previously professional-grade charting, archiving, and analytics; less professional message boards, blogs, and other mechanisms spread the wisdom (or lack thereof) of crowds.

The papers' extremely profitable classified ads were hit hard by multiple competitors. eBay then later Craigslist took over the realm of random objects, Monster and others (including the hiring firms directly) redefined the help-wanted field, and Edmunds and Cars.com along with eBay Motors improved on the car-buying experience by improving information availability and transparency. Match.com and eHarmony improved on the user experience and inventory levels of the personal ads, while real estate agents alone and in their trade association aggregated and augmented millions of property ads with photos, maps, and video walk-throughs.

In the end, most any page of a 1990s-era newspaper was challenged by an online outlet. With the readership in decline, both ad and subscription revenue spiraled downward, and the splintered nature of the competition made coordinated response impossible. In addition, the culture of "free" has affected news nearly as much as music, but far less so than books, for example. Some observers, including The Economist, have speculated that a Kindle or other reader might play a part in a revitalized news distribution business model. This makes sense: books, newspapers, and magazines emerged as business opportunities following a technology disruption, so changing the technology implies change for both reading habits and business-building.

The advertising industry has been fundamentally challenged by targeted, interactive, and well-instrumented ads and all they imply. If e-readers do reinvigorate the news business, this sector will need to move sure-footedly to regain much of the ground it has lost to Google in the past few years. While the movement away from traditional print models is highly visible, YouTube and the phenomenal rise of Internet video will also force a reshaping of television's economics.

Industry: Telecom
Status relative to 1994: Reinventing
Primary disruption: New technology platforms

The telecom industry is in the middle of a fascinating process. Back in the mid-1990s, the MIT Media Lab's Nicholas Negroponte noticed that television was moving from airwaves to cable while voice telephony was going in the opposite direction. Now, the triad of video, voice, and data is increasingly defined simply as flavors of data, and data is moving over copper, ether, and glass: what I want how I want it at any given time. The legacy telecom business model is at once getting substantial lift from the optical and wireless pieces of the picture even as the copper segments are in steep decline from wireline voice defection to VoIP or raising big questions about the need for their eventual and massive (if not total) replacement by fiber to the premise. In the current economic climate, both communications and entertainment appear to be relatively resistant to recession. In the long term, though, the huge capitalization requirements of both the strung infrastructure and the hung infrastructure, particularly in multi-billion-dollar spectrum licenses, leave ample leeway for companies or even entire sectors to get themselves in deep trouble.

Industry: Enterprise computing
Status relative to 1994: Leaner and more concentrated
Primary disruption: Offshore, network computing

In 1994, Sun Microsystems stock traded at about $3.50 a share. Six years and four 2:1 splits later, it capped out at just under $250, a tidy 1,000-fold payback. Consulting plays with invented names like Viant, Razorfish, and Lante sprouted, grew like weeds, and died. Software firms enjoyed a similar burst of prosperity: a 1994 Oracle investment increased by a factor of about 150 in 6 years, while investors everywhere vied to spot "the next Microsoft."

That progress was slowed by a confluence of headwinds, several of them directly related to Internet business model disruption. Offshore programming firms in India built on their success in year 2000 code remediation to slice margins in systems integration and later outsourcing. Virtualization and so-called cloud computing are subjecting both software and hardware to commoditization tendencies. Finally, budget pressure on CIOs introduces cost constraints and further profit pressure for software, hardware, and services.

The recipe for success going forward appears to lie in some combination of low-cost human capital (Tata, Wipro, IBM), scale (Oracle, SAP, IBM), and integration of product and service at scale (HP, IBM). Such firms as SAP and IBM have invested heavily in vertical industry expertise. Going forward, it's possible that the horizontal attack of Salesforce.com in software and the twin forces of reduced energy consumption and commodity computing (in turn applied to standardized process and data structures) could potentially combine to lower the verticalization premium.

Insurgencies -- that benefit from the combination of alternative economics and smaller labor costs -- from Google and Amazon appear to be gaining force, leaving Microsoft in particular at a crucial juncture. Dell also confronts some formidable challenges: even as the shift from desktops to laptops diminishes the power of the build-to-order model, it faces off against a reinvigorated HP, the premium-priced consumer electronics and design expertise of Apple, and the diffuse forces of clouds. For all that Dell gained from the Internet in implementing its direct model, between iTunes, consumer message boards, and cloud computing, forces related to the Net are now also causing headaches.

Industry: Music
Status relative to 1994: An empty whiteboard
Primary disruption: Unbundling, cultural norms

Much like newspapers, the music industry has been forced to adapt to the digitization and subsequent liberation of its core information product. Once music stopped being a physical artifact and instead was moved, understood, and redeployed as a fungible bit-based resource, the old model's market characteristics failed. The pricing model, the sales channel, the promotion vehicles, and the margin structure all fell apart. Selling people one song for the price of 12, trying to fight the long tail, and relying on a radio industry itself in turmoil for airplay no longer worked. Perhaps more centrally, expecting to maintain traditional "Hollywood accounting" when people's allegiances, to the extent they had any, lay with the artist spelled further doom for the old music model.

That said, both newspapers and music face parallel challenges insofar as large numbers of people now value their offerings at or near zero. Suing customers or nearby victims failed to reverse the trend and increased people's already negative feelings toward the labels. Radiohead's "name your price" downloads worked because of the gestalt of the band and its fan base; the model is unlikely to be widely implemented. Potentially in part because so much listening is done in private through earbuds, it's easy to view music behaviors as invisible and personal rather than public or accountable -- and the old economics of artists being so widely ripped off don't help the morality of the labels' positioning.

Going forward, models that more directly connect artists and labels hold promise, so maybe the final diagnosis will be disintermediation of the labels by word of mouth, hard-core touring, and/or some new discovery mechanism.

Industry: Brokerage/travel
Status relative to 2004: Transformed
Primary disruption: Disintermediation, transparency, self-service

Unlike the businesses above, both travel and brokerage served as early case studies of middlemen who charged too much for too little value getting end-run. In both cases, the dominant providers have had to reinvent their core business to survive and when they did not, the industry consolidated. Carlson Wagonlit presents one example: rather than relying on ticket-printing fees, the firm manages corporate travel spending as a coordinated service. By contrast, Rosenbluth, a competitor, was bought by American Express in 2003, and American Express in turn manages travel within a much broader set of procurement management offerings.

In brokerage, Merrill Lynch never fully adjusted to online trading and its attendant customer mindset, cost structures, and competitive landscape. For a multitude of reasons, it was bought last year. An element of unbundling also played out here and in travel: expensive transactions included advice, whether it was needed, or qualified, or not. Once the core transaction was laid bare, the advisory component failed to commend its previously overpriced premium.

In contrast, crowds, whether of investors, ecotourists, or frequent business travelers, combined to offer more and more powerful research than had been available previously. Whether of the up-to-the-minute (is the flight late?) or in the realm of long-term trends (how will India's equities markets perform in 2010?), the Net contains more and often better advice -- along with substantial noise -- than any one person could acquire, organize, or dispense. The combination of do-it-yourself research and serve-it-yourself transactions is now so deeply ingrained it's impossible to envision going back at any scale for routine interactions.

Who's next?
The bell has tolled for several old business models. Who's on the watch list? Briefly, some combination of disintermediation, unbundling, transparency, and consumer affection for free stuff could pose dangers for industries as varied as retail, television/media, pharmaceuticals, education, health care, retail banking, and automotive (which has already been hit pretty hard). Other sectors have less to worry about: e-government is increasing efficiency in some functions in some places, but entrenched ways of doing things persist more here than perhaps anywhere else, in part because of the lack of competition.

Construction, energy, and agriculture are powerful and so intensely tangible that it's hard to see digital disruption in the near term. In part, this security relates to successful defensive positioning: monitoring my home's energy usage on an hourly basis is trivial from a computational standpoint, but impossible because the electric company so jealously hoards the data. The consumer products sector has lots to worry about right now, beginning with double-digit unemployment, but the business model looks secure for the medium term.

Finally, it would be inaccurate to focus only on the losses to the forces of business model disruption. Whether it's Apple's rebirth (largely at Sony's expense) as a consumer electronics power, or Amazon's continuing resistance to any conventional sector categorization, or the unrelenting adoption of mobile phones by the world's masses, disruption also carries with it upside potential. As the global recession gives way to new varieties of prosperity, who will capitalize on the wealth of opportunity and be the success stories of 2012, or 2020?

Early Indications February 2009 Miscellany: Trust, Loyalty, and Book Notes

2009-02-22T12:08:00.000-08:00

1) Trust in social networks

Several recent developments point to the big questions regarding trust in social networks. First, both Facebook and MySpace announced that registered sex offenders were removed from their sites: 90,000 over two years for MySpace, and 5,500 (out of 175 million users) for Facebook, which is still responding to the same subpoena as MySpace. For Facebook especially, those are extremely small percentages. Harvard's Berkman Center published a study that asserts that online threats to teenagers generally mirror real-world issues: bullying and intimidation are the most common problems in both school hallways and on line.

In addition to thinking twice about who the person on the other end of the online interaction might be, Facebook users are uncertain as to the service's policy regarding their data. Over the past few weeks, Facebook updated the terms of service to assert broad claims. According to the San Jose Mercury News, Facebook's current policy is as follows:

"Users retain ownership rights. However, when a person posts content to Facebook, the company is automatically granted 'an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content for any purpose, commercial, advertising, or otherwise.' If a person removes content from Facebook or deletes their account, this license expires but Facebook may retain a copy of the person"s material."

The legalese of even this modified version sounds pretty one-sided. But as Facebook founder Mark Zuckerberg pointed out on the corporate blog, making virtual trust work is a very tricky business:

"People want full ownership and control of their information so they can turn off access to it at any time. At the same time, people also want to be able to bring the information others have shared with them—like email addresses, phone numbers, photos and so on—to other services and grant those services access to those people's information. These two positions are at odds with each other."

Layer Facebook's global constituencies, many litigation environments, and rapid technology change onto the company's core business model problem -- lack of monetization and the implicit pressure from investors -- and one begins to grasp how fragile online trust really is.

2) New Tactics in Wireless Retention

Even though Sprint lost 1.3 million customers in the fourth quarter of 2008, the drop was lower than expected and the company's stock surged. One tactic that will bear watching is a recently-announced customer loyalty program, similar to grocery store loyalty cards or frequent flier miles. Longtime customers and high-value subscribers are targeted: people with 10 years of loyalty, or three months on a $69.99 monthly single-line plan, will be eligible. T-Mobile is rumored to be developing a similar program.

What do the customers get? Better handset upgrade policies (including first access to the Palm Pre), free minutes, and free ringtones comprise the telecommunications benefits. Subscribers' service plans will be evaluated periodically to see if they fit evolving needs. Sprint also plans to more randomly award "Just Because" benefits such as sports or entertainment tickets.

3) Book notes

I recently read a study of innovation at The Economist that illustrated, unintentionally, the difficulty of getting startup-like behavior from employees at established institutions. Amidst the publishing collapse, The Economist has actually grown in the past few years, but in the spirit of looking beyond the headlights, in 2006 the magazine initiated a project (Red Stripe) to generate new Internet-based business models adjacent to the print operation. The ultimate ideas from the team were never formally approved, but several have seeped into deployment. Thus by one definition the team failed, but by others, its members succeeded in spurring change.

The book's subtitle -- "Incubating Innovation and Teamwork" -- hints at a deeper problem. The issue of team performance in an organization of any size or status is critical, and while much has been learned, many issues crop up reliably: people commonly feel confused about mission, view some colleagues as free riders, or are unable to incorporate learning into earlier commitments that were made in the inevitable state of not knowing what you don't know.

Similarly, innovation has been widely studied, yet few durable prescriptions can be cited. Innovation can be open or closed, inside-out or outside-in, capability-driven or requirements-driven, and on and on. The problem in both the book and the project is that the two pursuits get conflated: even if a better-performing team would have generated better or more acceptable ideas to the Economist management team, could it have made them into a profitable business? Doubtful.

That said, there's a lot to be learned about organizational behavior from Project Red Stripe. In facing a problem, for example, one approach is to strengthen your solution -- but, as the book states, "it's often as fruitful to consider how to diminish the forces working against [the team]." [83] The book also features excursions into corporate story-telling, untested assumptions, and the perils and necessity of commitment to a position or idea. On niches, for example, one advisor told the team "although there may be a gap in the market, the key is whether there's a market in the gap." [111]

In the end, the team's ideas were plenty viable: a financial information site for kids, a social networking service for NGOs ("A Facebook for good"), and an Economist video site begin a long list. Each member of the team was a salaried employee with a "home" office and function. None would enjoy the upside potential of the equity shares of a startup. In short, it feels like the term "entrepreneurial committee" might be fatally oxymoronic. But the story contains useful lessons nonetheless.

Andrew Carey, Inside Project Red Stripe: Incubating Innovation and Teamwork at The Economist (Triarchy Press, 2008)

On the same plane flight, I dipped into Don Tapscott's new study of what he calls "the net generation." Seeing samples of said demographic on a daily basis, I compared notes, and there's definitely overlap. Tapscott identifies eight "norms" to describe people born in the 1980s as they diverge from their elders:

1) Freedom and freedom of choice

2) Customization

3) Collaboration

4) Scrutiny of outsiders

5) Integrity

6) Fun, including at school and work

7) Speed

8) Innovation

All of these are readily evident when you spend time with people under 30. To call them a generation, however, overreaches the evidence. Tapscott relied on an online survey instrument that suffers from considerable self-selection bias: active net users found the survey and proceeded to discuss how actively they used and internalized various facets of the net. Based in large measure on the behavior of his admittedly talented, bright, and insightful children and their friends, Tapscott says on page 2 that "I came [in 1996] to the conclusion that the defining characteristic of an entire generation was that they were the first to be 'growing up digital.'" (emphasis added) That statement is problematic for any number of reasons; let's list four:

-Middle-class white and Asian kids, such as those in big-city U.S. and Canadian locales like Tapscott's Toronto, absolutely exhibit some of those eight traits from time to time. They are not, however, a "generation": according to the Pew Hispanic Center in 2007, only 31% of Latinos without a high school degree (that group counts for 57% of the constituency) go on line. Given that the U.S. Latin population is a) big, b) fast-growing, and c) less educated than whites, they cannot be bundled into Tapscott's "generation" without qualification.

-Just as off line, the online world is hardly homogeneous. To connect any two users of various elements of the Internet only on that basis makes as much sense as to say that everybody who drives, or watches television, is a generation. danah boyd's observations on social class differences between Facebook and MySpace users are instructive here (and absent from Tapscott's bibliography). Video-watchers and uploaders are [at least] two different species, as are flame warriors versus lurkers, or Columbine-searchers versus Amazon-shoppers. Web 2.0, Tapscott's pole star, while undeniably a powerful force is not yet universally embraced by members of any broad demographic, not even the 20-somethings.

-As far as "integrity" being a generational attribute, think about the business school students at Duke: 10% of the class of 2008 was caught cheating despite honor code posters prominently posted in the building and multiple adjustments to the curriculum in that direction. A separate study of 54 universities found that 56% of MBA students admitted to cheating; how many more cheaters lied? In 2005, dozens of applicants to Harvard Business School tried to view acceptance letters before they were mailed by poking around in the school's website after a security hole was reported. HBS denied admission to all 119 net-savvy snoopers.

-This cadre is still young. To define a generation, before they reach 30, by a set of technology artifacts embraced in different ways to various degrees by only some of them feels premature if nothing else. How many of the Paris/Chicago/Prague 1968 generation similarly embraced "fun" or "freedom" as core values back in the age of typewriters? Short of World War II, has any American generation been defined (to the extent that a generation can be defined) before they reach 30?

We're now looking at a global recession (or worse), and the results could well include the first generation in memory, if not American history, whose economic prospects are worse than those of their parents. That is, if the "net generation" experiences widespread downward social mobility, that's considerably more defining than the fact that some of them like to blog or watch funny videos at work.

Don Tapscott, Grown Up Digital: How the Net Generation is Changing Your World (McGraw Hill, 2008)

4) Correction

Regarding last month's assertion about the largest federal government employers, my colleague Russell Barton pointed out that the Department of Veterans Affairs is the largest non-peacekeeping employer. At 278,000 employees (most working at one of 153 medical centers) as of January 2009, it dwarfs Agriculture. Treasury, at 101,000 (lots of those in the IRS), was also bigger than Agriculture.

Here is a complete listing, in rounded 2006 numbers, of federal headcounts courtesy of the Partnership for Public Service's Best Places to Work in the Federal Government 2007:

Agriculture 85,000
Commerce 32,000
Defense (no services) 611,000
Education 3,800
Energy 14,000
Health & Human Services 53,000
Homeland Security 128,000
Housing & Urban Dev. 9,400
Interior 57,000
Justice 102,000
Labor 14,000
Social Security 61,000
State 19,000
Transportation 52,000
Treasury 101,000
Veterans Affairs 205,000

January 2009 Early Indications: The Job Issue

2009-01-30T06:16:00.000-08:00

Writing just days after roughly 60,000 layoffs were announced, it's difficult to look anywhere else for stories to analyze. Many facets emerge as one studies the employment question, and some historical context provides some surprises.

Scale

It used to be said that the bigger they are the harder they fall. More recently, industry consolidation was partially justified by both "synergy" and economies of scale. The result was companies that may have been too big to manage: Ronald Coase's theory of the firm implies that when the costs of bureaucracy limit market responsiveness, it's time to scale down. While some firms are currently said to be "too big to fail," I think we will see proof to the contrary relatively soon.

Where will all the new jobs come from? Mass hirings are infrequent even in the best of times: "GM adds 4,00 new machinists" wasn't something one saw in the news, regardless of the era. Jobs get added far more slowly and in more dispersed fashion than they get cut, especially when some firms are measuring severance in the tens of thousands. Part of the policy challenge is the asymmetry between the big cuts and the reality that small, growing firms add jobs by the handful or dozen.

The Biggest Employer

One key element of the story is the role of government as a direct employer even before stimulus-related jobs are counted. Ever since World War II, the federal government has been increasing as an employer, either directly or indirectly. For example, seven new cabinet departments (plus the EPA, founded in 1970) are less than 50 years old and reflect the growing scope of government:

Housing and Urban Development (1966)
Transportation (1966)
Energy (1977)
Health and Human Services (1979)*
Education (1979)*
Veterans Affairs (1989)
Homeland Security (2003)

*Broken out of Health Education and Welfare

Headcount at these agencies is significant: the Department of Agriculture employs about 85,000 people, making it a) the biggest federal organization not involved with domestic (DoJ, DHS) or foreign peacekeeping and b) about half as big as Cargill, a $120-billion food processor.

As of Q1 2008, the biggest employer in Pennsylvania was the State of Pennsylvania (no figures were released in the document, compiled by the state Center for Workforce Information & Analysis). #2 was the U.S. government, even after the closing of the Philadelphia naval yard in 1995. As private sector employment and profits drop for the foreseeable future, how will public-sector employers maintain their payrolls? The state of California, ahead of the curve in some matters, may be the bellwether here, and the story looks grim as the shortfall through 2010 reaches $40 billion.

Information-age Stimulus

Borrowing from the title of a recent newsletter, I want to return to the question of how a government stimulates a services-driven, information-centric economy. As a state Pennsylvania is reasonably representative, with a relatively large economy (#6 out of 50 states), and a per capita income almost perfectly at the median, ranking 26th of 50. Agriculture is important but not predominant, and 25 Fortune 500 companies are headquartered here.

To continue that list of Pennsylvania's top employers, note the paucity of private-sector job-generators:

3) Wal-Mart

4) City of Philadelphia

5) University of Pennsylvania (roughly 35,000 jobs, including a big medical center)

6) Philadelphia school district

7) Penn State University (not counting the affiliated medical center)

8) Giant Food Stores

9) UPS

10) University of Pittsburgh Medical Center

11) University of Pittsburgh

12) Weis Supermarkets

13) State System of Higher Education (public colleges and universities excluding Penn State, Pitt, and Temple)

All told, 20 of the top 50 employers in Pennsylvania are not businesses in the traditional sense of the word: that's 40% of the leader board, including six of the top seven. Half of the 30 largest private-sector employers, including eight of the top 12, are retailers, known for relatively low wages and, according to the BLS, the highest turnover among major sectors. As Circuit City demonstrated, they are also sensitive to economic downturns and could themselves be at further risk.

More significantly, Pennsylvania is officially a services economy: only one employer (Merck) in the top 25 and four in the top 50 make something. Many kinds of services are represented, with health care in the lead, followed by education, and grocery, retail, financial services, and fast food/convenience stores.

The contrast to the intermediate past is shocking. Courtesy of researchers at the Pennsylvania Department of Labor and Industry, here are the top 25 employers of 1965 (the earliest year for which they have available records):

1) United States Steel

2) Bethlehem Steel

3) Westinghouse Electric

4) Bell Telephone of Pennsylvania

5) Jones & Laughlin Steel

6) General Electric

7) Sears, Roebuck

8) A&P

9) Acme Markets

10) Western Electric

11) Philco

12) Budd

13) Philadelphia Electric

14) Boeing

15) Crucible Steel

16) Pittsburgh Plate Glass

17) Allegheny Ludlum Steel

18) Sylvania Electric

19) Sun Oil

20) Pittsburgh Steel

21) Armco Steel

22) Aluminum Company of America (Alcoa)

23) RCA

24) Armstrong Cork

25) Rohm and Haas

(Methodology was not made clear: government entities, hospitals, and universities are not listed, but the absence is unexplained.)

Of the 25, services are only represented by retailers and utilities: no banks or health care providers make the top 40. Seven steelmakers dominate the list, joined by Alcoa. The state's heritage in energy was still represented by Atlantic Refining in Philadelphia, Sun Oil, and Gulf Oil. Transportation is more of a factor today, with UPS at 9 and US Airways at 30; in 1965, no railroads made the list, even though their suppliers (Budd, GE, Westinghouse Air Brake) did.

The composition of the 1965 and 2008 lists illustrate several germane points with regard to the current downturn. First, it's hard to stay on top: almost all companies that at one time appeared to be powerfully untouchable sooner or later fall by the wayside. Bell of Pennsylvania, the #4 employer, morphed into Verizon, presently ranked 28th. Among retailers, A&P disappeared, as did Gimbels and G.C. Murphy, while Sears fell from seventh to 32nd. Second, the stimulus packages of the 1930s -- when manufacturing, agriculture, transportation, labor unions, and foreign trade were unrecognizable even from the vantage point of the mid-1960s -- would appear to present few lessons for current policy-makers. Finally, the kinds of firms traditionally targeted by economic development agencies -- addressing dynamic markets, paying high wages, and anchoring a community or region -- are in the Pennsylvania case not particularly large employers:

14) Merck

19) The Vanguard Group (headquartered outside Philadelphia)

25) Comcast (headquartered in downtown Philadelphia)

39) General Electric (which makes railroad locomotives in Erie).

Are We All in the Same Boat?

Given the speed at which the U.S. economy fell into recession (recall that oil prices dropped $100 a barrel in a quarter), the dust is clearly not fully settled. At this juncture, are there some states that might start attracting internal migration given relatively healthier economies?

According to the Bureau of Labor Statistics, December 2008 U.S. unemployment ranged from a low of 3.4% in Wyoming to a high of 10.6% in Michigan. Given that Wyoming is attractive for retirees, miners, and ranchers, it is unlikely to be an employment destination of choice for the kinds of people being displaced elsewhere; North and South Dakota are in a similar situation. Unemployment remains in the 4% range in Iowa, Nebraska, New Hampshire, New Mexico, and Oklahoma -- tellingly, three of those states formed the heart of the Depression-era "Dust Bowl" memorialized in John Steinbeck's The Grapes of Wrath as a place to leave. Unlike the "new South" in the 1970s and '80s, or Arizona and California over the past half-century, these states a) will not serve as a magnet for the unemployed and b) are sufficiently distinctive that they don't serve as a model for other states to emulate.

Those BLS numbers tell a similarly fascinating story: while Rhode Island's December unemployment (10%) is the worst since statistics were standardized in 1976, nine states recorded their record _low_ unemployment month in calendar 2007-2008, including West Virginia, which had its best unemployment month in over 30 years just last August. All told, the unemployment figures have a long way to rise, even in Michigan, which reported 16.9% unemployment less than 10 years ago, in March 2000.

So who's the exemplar, the state others want to emulate on the jobs front? Considerable debate in the literature revolves around a concept associated with Harvard's Michael Porter, that of economic clusters. As the classic formulation puts it, clusters are "Geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions (for example, universities, standards agencies, and trade associations) in particular fields that compete but also co-operate." Classic examples can be found in and around Detroit, Palo Alto, Los Angeles (aerospace and Hollywood), and New York/Greenwich (hedge funds). Does cluster theory explain the health of the currently healthiest states?

Not so much. At 6% unemployment in December, Texas falls pretty much in the middle of the pack. Its worst month since 1976, however, is only 9.3%, relatively low and surprising in that Texas has been hit hard by economic crises related to real estate (the savings & loan scandal), low oil prices, Enron, and the bursting of the tech bubble in 2001. Texas combines mineral wealth, oilfield-related services, high tech, agriculture, less location-specific service industries (including American Airlines), and tourism to construct a reasonably well-hedged, recession-resistant economy.

With the exception of California, no other state has so successfully balanced natural endowment, knowledge-intensive industries (including military bases and hospitals), ranching and farming (including some ranches spectacularly successful in attracting agricultural subsidies), and cultural distinctiveness: even the state's anti-littering campaign, admonishing "Don't Mess with Texas," was a huge success, one widely emulated elsewhere. Given all these factors, it would not be surprising to see the state attract some decree of internal migration this time around.

Morals of the Story

-Like politics (and closely related thereto), all unemployment is local. Congress could face massive pressure as the mid-term elections are only 21 months away and the economy cannot bounce back that fast everywhere.

-At the state level of job generation, it helps (as in Virginia) to host lots of federal government jobs.

-Exception to the rule above: when a military base closes, the hurt is broad and immediate. Maine's Brunswick Naval Air Station will lose about 5,000 people (including dependents) as it shuts down, with an estimated annual impact of $200 million.

-For all the appeal of brand, brainpower, and other intangible assets in the "new economy" lore, the healthiest states in the Union right now are sitting on mineral or dirt-based wealth for a portion of a balanced economy.

-Cluster theory has failed to be proven as most university-based economic development efforts relate more to quality of life than direct linkage to a given university's academic focus areas. Stanford provides a glaring exception that proves the rule.

-Cluster theory also generates economic monocultures, which tend more to boom-and-bust cycles than do more diversified economic ecosystems. Clusters are also proving difficult to undo, as Michigan's limited success in luring materials science, biotech, software, and other non-automotive firms illustrates.

The rapid shift of the U.S. economy to a services-driven structure with a massive trade imbalance presents the Obama recovery team with many new challenges. Government employment is already high, and will be limited by falling tax revenues. The M&A activity of the previous decade has generated some very large organizations that, along with Detroit's Big Three, are shedding jobs at a rapid rate. Even though a "knowledge economy" sounds intuitively appealing, at some point U.S. manufacturing will need to be redefined for employment and trade to behave more sustainably. Finally, the biggest intangible of all -- consumer and investor confidence -- will play a critical role in a recovery, and the relationship between $819 or however many billion dollars and that elusive quantity remains to be determined.