Rosewater

Declining Cost of Production

I went through a phase of reading books that related economics to biology. If you think about it, when you've got a really good theory of economics, it should help you explain the things we observe in nature (animal behavior, evolution, etc).

During this time, I ran into this "law" -- the cost of to produce a unit of any thing declines on an inverse power law relationship with the number of units produced (on a global basis). And it turns out this is true for many things, including such basic things as eggs. This was first observed by Kenneth Arrow, in his 1962 paper "The Economic Implications of Learning by Doing". I ran into it in Bionomics by Michael Rothschild.

You hear a lot about Moore's law and Metcalfe's law. I'm always surprised you don't hear more about this one, since its at least as profound in its impact on new technologies.

(not) the formula for business success

There are a number of really great books about business strategy and the challenges of managment for high tech company (e.g. Crossing the Chasm, Innovator's Dilemma, etc). What makes them great is that they provide a theory of business -- they provide an analytical framework for understanding where your business is and a set of principles for guiding your future actions. The problem with them is that people misunderstand the role of theory in business: they treat these theories like they are a set of rules -- a formula for success -- often at the encouragement of the authors of those books. There is no substitute for first hand knowledge of your market and a detailed understanding of your business; no business strategy can truely be successful unless it has been informed and shaped by those factors. Theory should play a supporting role in the formation of strategy, not a determining one. In fact, the misuse of theory is quite rampant. Beyond the books, there are folk theories about everything -- why is Microsoft/Oracle/etc so successful, what makes open source so popular, etc. And it seems many people think that if they could simply repeat the formula, their business will be a success too (e.g. Sun seems to have a terminal case of Microsoft Envy). The thing is, it wasn't the formula that made Microsoft so successful, it was seeing that the time was right and that company was in the right position to play out a strategy like they did. This really became clear to me when I was reading this summary of von Clausewitz, a 19th century military theorist. He was working in the time of the scientific revolution; there was a wide spread belief that it would soon be possible to reduce many fields to a set of governing rules. One school of military thought believed war would soon be reduced to a set of rules for maneuvering troops to achieve advantage. Clausewitz opposed this school of thought arguing that theory existed not to proscribe behavior but merely to inform the thought of the general in battle. Great strategy came from great generals who had coup d' oeil -- the ability to read the state of battle in progress and intuitively see the opportunities it offered. Theory didn't exist to be applied dogmatically, but simply to help develop the general's coup d'oeil. Do you think you could learn to be a chess grandmaster by rote learning of a collection of class openings and end games? Of course not -- the number of possible chess games is far too large for that to be feasible as a chess playing technique. When they psychologists study chess grandmasters, to see what allows them to play such a computationally intractable game so well, one thing that stands out is their ability to very quickly read a board and understand it as a set of strategic groupings. Why should business be different?

Google's "Do no evil"

People make fun of Google's "do no evil" motto. But, in their case, its not just ethics but good business. Google lives and dies by the good will of its users and customers -- none of whom have, in a practical sense, very strong lock in to Google's technology. At the same time, much of the low hanging fruit for a search company like Google, involves doing kinda creepy things (like pay-for-placement, selling data mined from users, etc) . In order to last and avoid the fate of their predecessors, they have to walk a fine line -- "Do no evil" seems like an excellent guide.

thought provoking discussion of group size in social settings

Chris Allen, over at Life with Alacrity has posted a thought provoking discussion of group size. The post takes the Dunbar Number (i.e. the upper bounds on human groups is about 150) as it's starting point and considers the affect of the purpose of the group (ie survival vs other activities) on the optimal size. Along the way, he provides some interesting references to empirical data from the on-line multi-user gaming. Check it out.

Tom Peters: 16 hard truths about off-shoring

Tom Peters has a list of 16 hard truths about off shoring. I found the list thought-provoking. These two were my favorites: There are also some quotes at the end that are worth a read.

google and the price of IPOs

The Entrepreneurial Mind has an entry on Google and their IPO. The question in the post: is it worth it. He goes on to question if they'll be able to support their lifestyle (e.g. the Googleplex) after a bad quarter or two. My IPO experience was that the corporate culture changes once you've decided to IPO, not after the IPO. It starts with the ramp up in hiring -- standards for new hires in terms of ability and cultural fit decline, because every day the decision of who to hire moves farther and farther away from the founders. Inevitably, more people who are there just for the IPO start to sneak through the filter and the culture starts to focus more and more on the the IPO and public valuation. By the time you get to IPO, the company has changed so much that many of the founders feel alienated. As their options vest, they cash out and leave for greener pastures or move off on to "special projects". After the IPO, because the investors and the new managers are focused on valuation, the business is optimized for near term stock price. That means delivering steadily increasing profits, if possible. You'd be surprised the games people will play to extend the curve just one more quarter. This can be just as bad when things go south -- stock driven execs pursue the numbers single-mindedly even at the expense of the companies basic ability to execute on its strategy. For example, at a software company, I understand trimming staff in some areas where the staffing requirements scale with number of customers. But why would you do across the board trimming? Why does it suddenly take you fewer engineers to meet the market requirements for next quarters release? It doesn't. It takes fewer engineers to meet next quarters profitability because revenue has gone down.

AP: greenspan defends handling of 90s tech bubble

AP ran a story about a speech Greenspan gave recently defending his management of 1990s bubble as the only safe option for economy. . Not quite true: he did make some effort to curtail the bubble with his comments about "irrational excuberance". The alternative was to raise interest rates quickly to make saving an attractive alternative to investing. I can't imagine how high interest rates would have had to have gone to do that, but safe to say, it was high. I believe, concurrently, he was trying to manage for Y2K by increasing the money supply (aka lowering interest rates). Some have pointed to Y2K spending and the flood of money as one of the root causes of the tech bubble.

strategery in the software business

related to Microsoft envy, is the fixation by many strategists in the software business on emulating the tactics Microsoft used on its climb to the top. The biggest fixation is on creating lock in -- getting a customer committed to your product by packaging a feature in such a way that switching to a competitors product would entail paying some substantial cost, e.g. by exposing a unique/desirable feature via a proprietary API; by making it easy to get your data in but hard to get it out; etc. In principal, there's nothing wrong with this; it can generate sustainable competitive advantages. Where most companies seem to go wrong is in (1) underestimating the degree to which customers are sensitive to switching costs; (2) by going out of their way to increase the switching costs unnecessarily. This particularly true in areas where customers have a fair bit of experience buying, e.g. the enterprise software business, where buyers often have a decade or more of experience working with software vendors. In their pursuit of strategic sustainability, they blunt the competitive advantage of the feature. Which would you rather have: a feature with weak but sustainable competitive advantage? or a feature with strong but unsustainable competitive advantage? My personal opinion is that, in most cases, you'd rather have strong competitive advantage. You should focus on generating advantages and let the sustainability of the advantage sort itself out. All you get from sustainability is complacency.

why warren buffet is buying foreign currency now

Fortune magazine had an article by Warren Buffet about why he is buying foreign currencies for the first time in hist life.

In a nutshell:

The article contains an extended analogy about two islands to illustrate the point. It also contains a proposal for how to deal with the trade imbalance.

I don't understand the way trade is measured well enough to agree or disagree with what he's saying. Regardless, always interesting to listen to what America's most successful investor is thinking about.

microsoft envy

Always On interviewed Bill Gates this week. They talked about a number of things (linux, security, stock vs options). I thought this was the most interesting quote:

So true.

Coveting Microsoft's position on the desktop has a led to a host of bad decisions. They all scream bloody murder when they see Microsoft (ab)using its power, all the while they're running around trying to copy the strategies and tactics that got Microsoft where it is. And waste millions on futile attempts to take the desktop from Microsoft.

For example, you may recall that Java, when it was originally pitched, was all about applets -- the idea was that your desktop software would be delivered to you over the network, in a form that could run on any machine. This was Sun's attempt to take the desktop. How this would have benefitted them is completely unclear. They got lucky that the "write once, run anywhere" resonated with enterprise developers, who quickly co-opted the technolgy for servlets, so they could stop porting their software from platform to platform. The only way this currently benefits Sun, as far as I can tell, is that they get some license revenue via their certification and trademarking programs. It certainly doesn't seem to have benefited much from the generation of Enterprise software that can run as easily on Intel or HP as it does on Sun.

Apple pursued its attempts to compete with Microsoft much longer than they should have trying to regain the desktop they once held. They tried beat microsoft at it's game by producing a better operating system and application suite long after the market had tipped in Microsoft's favor. They even went as far as starting to commoditize their hardware (remember those Mac compatibles that were available for a year or two?).

From my point of view, this is the fundamental thing Steve Jobs did after his return -- convince Apple it didn't need to be Microsoft; it could be great without beating Microsoft. By doing so, he's been able to get Apple on to sound strategic footing (control the hardware to reduce the amount of hardware supported; move the OS to one better able to harness open source efforts) and steer it into niche markets where it was uniquely positioned to compete. Apple may never be as big as Microsoft, but it will continue to exist and may even thrive.

More than I will say for Sun, who's big annoucnement this week was the Java Desktop.

demand draws supply

The NYT has an article, New Economy: Markets Shaped by Consumers, about how consumers shape markets in a more direct sense than is often appreciated. An unmet demand, if its strong and left long enough, will creates its own supply.

The same was true of fiberglass surfboards, wet suits, and skateboard decks and wheels.

It was also true of digital music sharing in 97-98. I was consulting for the RIAA at the time -- they were worried people using CD burners to copy CDs; the internet seemed like distant concern. But there was this frenzy of activity around ripping digital audio off CDs (as trivial as this seems today, there are some technical challenges and the pioneers had to roll-their-own ripping software to do it) and compressing it (also an area where the pioneers had to write a lot of their own software). By 1999, there were neatly packaged tools, Napster had been born, and the music world had changed.

When a publishing association asked me when they had to worry about the same thing happening to them, I essentially told them to watch for the lead users -- people developing clever new ways to digitize printed media. So far, this advice will have served them well.

An interesting question is what would have happened had the lead users for digital music had their needs met before they'd had to resort to writing their own rippers, compressors, and players and developing their own distribution networks. Would all this innovation still have happened?

[via Many-to-Many]

fedex study: entrepreneurship is the american dream

The Entrepreneurial Mind has a post summarizing the results of a study FedEx conducted. A surprisingly large percentage of Amercians dream of starting their own business -- 56% of all Americans (76% of African Americans). Add to that the 10% who already own their own businesses, and you end up with 2/3s of Americans. I had no idea.

intel's strategic shift

WSJ has a nice article on Intel's shift in Strategy, from "more speed" to segment specific goals such as "less power", "smaller size", "better wireless", etc. [via techblurbs]

carol coye benson on federation and liability transfer

Carol Coye Benson of Glenbrook Partners has a article, Liability and Federated Identity: Much Ado About Nothing on why Federated identity probably may not live up to expectations: they will likely never provide a basis for transferring liability for between the parties to an on-line transaction. But, as she points out, this probably won't matter. This is the thing I think most security wonks miss -- it's tilting windmills to try to make risks disappear or to transfer them all away. But this doesn't mean you can't do business. It just places a burden on you as the business manager to understand the risks and how they affect the prospects of turning a profit. Its perfectly reasonable to take an informed risk, and often significantly cheaper than trying to eliminate the risk altogether.

pricing technology

TJ's Weblog "Technology, Venture Capital and Entrepreneurship": pricing technology is a nice summary article on the approaches to setting prices companies use and the companies that off products to support it. This a topic in which I have an interest. At one point, some colleagues and I, were trying to get a company funded that would have done dynamic pricing of online goods for the entertainment industry -- I still think its an idea that has some merit. At the time (3 years ago), the VCs we talked to felt that it was ahead of the market.

carnival of the capitalists is up

The Official Carnival of the Capitalists Site for the Week of November 17th is up over at this week's host, ProfessBainbridge.com. Carnival is a weekly "best of" of business related blog postings.

Belkin Highjacks Browser, Delivers Ad

Wow, and I was just starting to think of Belkin as a semi-respectable peripheral vendor. Apple should rethink its affiliation with them after this. Not cool. [marketingwonk] The innocuous box on your network known as the router may not be so innocuous after all. A Belkin wireless router has been found to highjack your browser and redirect you to a page that promotes Belkin's parental control service. Every eight hours an offer for a free six-month trial is delivered to your browser. This is no technical glitch. Belkin openly admits the offer was programmed into the box. Steve Hall comments.

The question is - did they openly advertise this behavior on the box?!? I would want my money back.

repudiating non-repudiation

One of the most frequently sited benefits of public-key based digital signatures is that they are theoretically non-repudiable. Unlike conventional cryptography, where the same key is used to encrypt and decrypt, public key crypto uses a pair of keys: one that encrypts and one that decrypts. The advantage of this is that the originator can create a key pair, keep one key private and make the other public. When the holder of a private key encrypts a document with the private key, people can verify the that the encrypted document came from the holder by simply decrypting it with the public key from the key pair. In practice, digital signatures are a bit more complicated, but that's the core of it. With conventional crypto, the encrypter would be able to deny having encrypted the message: the sender has to know the encryption key in order to decrypt it, so they might also have been the one to encrypt the document. With public key crypto, the holder can't deny having creating the encrypted document -- only they have the private key, after all. Very cool, right? Unfortunately, that's just the theory. The practice is significantly less elegant. To turn the theory into practice, your ability to rely on non-repudiation hangs on your ability to do three things right: implement the technology, put in place proper business practices and agreements, and make your case in court. So, there are three questions you should ask: Relative to other means, how much does using digital signatures lower my risk over other technologies? how much will it cost me to setup up and operate a the business end? how will my chances in court be affected? If you're not put off by your answers to the first two questions, then you should definitely take a long, hard look at the third question. While the signer may not be able to deny that their private key was used to sign the document, they may be able to repudiate the signature on a host of other grounds: They didn't keep their key secure and someone stole it; they didn't understand their obligation under their user agreement to keep the key secure; they didn't understand what authority they had granted signatures generated with their private key, etc. I suspect you'd have better luck enforcing an agreement built around usernames and passwords than you would one built around private keys and digital signatures. So, what technology would give you the biggest return (reduction of risk) on your investment? The theory of non-repudiation is great, in practice, it tries to do something that is unnatural: it tries to transfer all the risk of a transaction to one party -- the signer. My bet is that you get better returns by accepting a more natural distribution of risk.