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.
Saturday, May 22, 2010
Thursday, April 29, 2010
Early Indications April 2010 The Web of Opinion: Metadata as conversation
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.
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.
Wednesday, March 31, 2010
March 2010 Early Indications: Behaviorism, Online
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.
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.
Saturday, February 27, 2010
Early Indications February 2010: Ticket Punching
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.
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.
Monday, January 25, 2010
Early Indications January 2010: Do You Remember?
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.
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.
Wednesday, December 23, 2009
Early Indications December 2009: Yet Another Predictions Issue
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.
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.
Monday, November 23, 2009
November 2009 Early Indications: Prediction Scorecard
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.
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.
Saturday, October 31, 2009
Early Indications October 2009: The Exploding Mobile Web
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).
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).
Wednesday, September 30, 2009
Early Indications September 2009: Universities and an Information Economy
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.
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.
Monday, August 31, 2009
Early Indications August 2009: Informational Geography
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.
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.
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