January 21, 2010

Want to Reduce Deficit Spending? Prove it.

The tea bag crowd is outraged at our out of control spending. It is THE positioning issue for the GOP - which is smart given the deficit is a massive issue facing our nation. We absolutely have to get it under control over time. But, if you want to fix it, you only have a few options. You have to hurt one of 3 groups:

1. The old (entitlements)

2. The military (defense)

3. The rich (tax increases)

Fact is all the other options don't add up to much. For details here is a pie chart.

So if you are someone sick of all this spending you have to prove it. What do you want to cut?

Republicans number one attack on the health care bill was that it would CUT Medicare (this is not your Mother's Republican Party). They want to perpetually cut taxes and they would never consider hitting the military. So what is the plan? I want to hear it. Until then, it is just marketing. As for the Dems, well, Obama is going to put them to the test on it in the coming years (post recession when deficits actually do make sense). My hunch is the special interests will win again. Raise retirement age? Good luck. Streamline the military? The terrorists win. Increase taxes? We live in a socialist state.

At some point, we will have to make some hard calls. Who will have the guts to actually do it?

January 4, 2010

Hey Print Media, the Tablet is Your (Last?) Big Chance

Tablet mania has hit tech blogging circles with the world all abuzz about Apple's announcement of their new product later this month.

I think there is a good chance the tablet products coming could be a major disappointment - at least in terms of short term adoption. I have two main reasons for this concern. One, I am not sure what problem it is solving. Without a problem, there is no demand for a solution. And two, whatever problem it is solving, people change slowly unless it is remarkably better (or cheaper) than the current behavior.

There are all sorts of issues the tablet could solve. Some are not big enough issues (mobile browsing - thanks to the other Apple phenom, the iPhone people can already do this pretty well). Others have massive adoption hurdles (paperless offices and collaborating - we can't even get doctors to go electronic and they have a ton to gain).

I can see one place where the set of problems, human behavior issues and incentive all line up really well: print media.

I have discussed the path to survival for print media previously. Well, now is their chance to put the plan into action. Print media has a few things that are a real asset to tablet makers today. One, they have paid subscribers. Yes, it is declining, but the Wall St Journal has 2 million readers a day. People Magazine has 4 million a week. Two, they have an outrageously expensive and inefficient distribution system - mail and home delivery. Three, they have event based publishing (i.e. the issue).

All three add up to something pretty big. Your subscribers want and are willing to pay for your content. You can replace an expensive system with a cheap one by subsidizing the one time switching cost. And, you can make the tablet really useful without full time internet access - a big hurdle for the tablet.

Imagine this offer: renew your NY Times for 3 years and get a free Apple tablet. Or renew 2 magazines and get half off. The economics will work. The hard part is you need to go cold turkey. Make the tablet the de facto way of consuming your content. You have to get all the cost savings from shutting down the printing press and paperboys. And, you have to guarantee traction to the tablet guys. In return you take control of the new medium. Get great at it. Leverage it to gain access to your real time content once wifi is ubiquitous (or 3G is cheaper). Use it to get great real estate on the user interface. Do this:

Make the content king not the device. Make the device work for you, don't wait for Steve Jobs to figure it out so you have to come begging.

Yes, there are a million details to work out. But, signs suggest that media companies are getting after it. The time to be bold is now.

January 3, 2010

10 Essentials of 2009 Culture

I love Top 10 lists at year end. Cultural options are exploding and these lists collectively help us wade through it. I have no way to do a top 10 list for any one medium because I just can't consume enough of it. But, here is my list (in an order that promotes variety) of 10 things that I think were great in 2009.

Up in the Air. This one is on almost every top 10 film list out there, and I think for good reason. Jason Reitman took a mediocre (but hilarious) book by Walter Kirn and turned it into the perfect fable for the Lost Decade. Our obsession in the 2000s with perceived progress (see: Iraq, Real Estate Bubble, Pets.com) over real success has no better hero than George Clooney's rootless, airline-elite-status seeking layoff consultant.

I and Love and You, The Avett Brothers. No other album did I keep coming back to more than this one. Hard core fans seem to think these North Carolinians sold out given the big name producer (Rick Rubin) and more polished sound. For me, it is as good as it gets.

Morning Joe. I don't watch much TV, but in the mornings I like to have it on. After years of being a CNBC junkie, I just can't stand it anymore. The endless parade of people predicting the day's stock market direction just feels like a lie. Morning Joe is the perfect antidote. Varied topics, great guests, discussion not yelling, and the great Mika Brzezinsky leading the way.

Await Your Reply, Dan Chaon. Most of my year reading was spent on award winners from year's past (great stuff from the likes of Zadie Smith, Jhumpa Lahiri, Michael Chabon, Gabriel Garcia Marquez), but Chaon's literary page turner was a highlight. I could not put down this cautionary tale of the new era of virtual identity and reinvention.

(500) Days of Summer. The romantic comedy has to be one of the most bankrupt genres out there. Until 500 Days breathed new life into it. I just don't remember enjoying a movie more than this one (I Love You Man was right there too). Simple in plot and ambition, but super creative and well acted, this one nailed the joys and pitfalls of youthful romance. And, nothing was funnier than the dance sequence above celebrating the consummation of a long, awkward, yearning crush.

Far, Regina Spektor. There is something wholly original in Regina Spektor. Part pop and part indie, at times challenging and others completely accessible, this album (and her previous debut) is a must have.

Kindle 2. Not since Oprah has something made reading so cool as Amazon's e-reader. They nailed the basics (wireless downloading, readable screen) and are reaping the rewards. They also raised the bar on the mobile tech world and whole slew of innovation is coming in its wake. Whether it ends up the dominant platform is irrelevant to its legacy of starting it all. Bonus: if you get one, make sure you check out Feedbooks to get free classics in the Kindle format.

The essays of Thomas Friedman and Atul Gawande. No one is doing better thinking on the issues of our time than these two commentators. Friedman continues to lay out the challenges of our oil import obsessed nation and the creeping erosion it is inflicting on our competitive advantage. Gawande brings common sense and perspective to the health care debate based on real world experience as a surgeon. They are also two examples of how the main stream media still has a lot to offer.

The Hurt Locker. Not my favorite movie to sit through, but I just have not been able to get this one out of my mind. If you want to understand what we are up against and what we are putting our soldiers through physically and mentally, there is no better 2+ hours you can spend.

Oscar Dudamel. I am ignorant when it comes to classical music, but Dudamel, who took over the LA Philharmonic this year, is truly a rock star. I am not sure if it is his wild hair or the incredible performances with Youth Orchestras (both are in full display in above clip), but he makes you want to listen. And, given he is only 28, he is just getting started.

So that's what I liked. I am sure I will spend most of 2010 catching up on what I missed in 2009. Any suggestions?

August 2, 2009

We Are All Software Companies Now

HP recently admitted they might not be making calculators much longer. Their geeky financial and scientific calculators are now iPhone apps.

I got to thinking about all the products or even industries that the iPhone app store will disrupt towards pure software businesses. Here are a few I came up with: calculators, remote controls, video cameras, point and shoot cameras, organizers, GPS devices, mobile gaming, and I am sure many many more.

Truth is almost any industry you can imagine is being driven increasingly by software. Cars, media, computers, home appliances, switches and routers - you name it, it has a huge and growing software component. We at Rackspace are not immune. We are investing heavily in our software development capabilities as our offers grow from core dedicated computing services to include software powered cloud computing services. Making software is at the center of our future. I bet you it is at the core of your company's future too.

Here is a story about FreshDirect, an online grocer, writing "thousands of lines of code" to optimize how they pack boxes. Below is a photo of the upcoming Tesla dashboard - one big screen powered by software. The world is changing.

What does this mean for most businesses? A few things, I think:

1. IT and software/product engineering are not the same thing. Both are really important, but one supports the business, the other builds the business. Do not treat them as the same. Especially as businesses transition to needing more software development in their core offer, they tend to rely on their traditional IT organization to deliver. You need to create a focused group on building customer value.

2. You cannot outsource something core. Used to depending on an outsourcer or offshoring shop? Those can be tools, but if software hits your core (and the argument is it is hitting your core faster than you think), you better get good at it. Invest accordingly.

3. If you don't keep your best developers happy (and challenged), be careful. They will have opportunities. In fact, have them email me!

July 12, 2009

Microsoft Will Prevail, But Say Goodbye to Monopoly Profits

As everyone knows, Google is going after the core of the Microsoft franchise: Windows and Office/Exchange. They face incredibly long odds. Why? In the long run, Google has only one real weapon against Microsoft: lower cost. Yes, the Windows OS is bloated and not web centric. Windows 7 will close these gaps. Office and Exchange work well despite poor web integration, but expect this shortcoming to evaporate soon (this week?). Google is not offering something substantially better. They are offering something cheaper.

This is not to say Google v. Microsoft won't be a vicious war. It will. Google will be aggressive. They will get hardware makers to take Linux seriously. They will engage with big companies to use their products. They will get some victories. But, they will mostly invest money with little return.

By embracing the browser and web application model, Google will lower the network effect of the Windows OS, the source of their monopoly power. But, even with this strength diminished, there are still lots of benefit to using Windows: habit, ecosystem, sunk investment, etc. Everyone will dabble with leaving (partial enterprise use, threats, etc.), but in the end, they will get Windows and Office at an acceptable price and stay.

And, that's the best thing about this war: the consumer is going to win big time.

Google will raise the bar. Free, online services, unlimited storage. MS will respond. More investment, more features and lower prices. Goodbye monopoly rents.

In the end, the two best business models we have seen in the last 50 years are colliding. The massive profits from these business models are now going after each other. What will we end up with in 10 years? Two massively successful companies, a lot more innovation and lower prices. And how about for shareholders? Well, get ready for lower returns.

May 29, 2009

FriendFeed's Path to Relevance

Despite Robert Scoble's constant evangelizing of FriendFeed (we pay him and we don't get half the love!!), it remains a niche service. Since getting to know Robert, I have taken the time to understand FriendFeed. He is right about its potential: it is unlimited. But unfortunately, their current path will continue to keep it marginalized.

Here is the crux of the issue: is FriendFeed a social network or a feed service that aggregates other social networks?

Right now they are both. This is a losing strategy. They need to go full force on the latter.

Here is why doing both does not work. In terms of being a social network or microblogging service Twitter and Facebook have won. They are the engines that will drive most of the basic communicating. The good news is there are two (creating aggregation needs). And, they don't own all the relevant content. Blogs, flickr and other services are still very much alive. So, the opportunity is there to help people consume all of these better. FriendFeed tries, but fails. Why? I can't see all my twitter friend updates or all my Facebook friends, only those that have FF accounts. And, when it comes to blogs, the content creator determines if it shows up on Friendfeed, not the consumers. What? Content has to be pulled not pushed.

All this said, FF still has a huge opportunity. If they did the following, I would spend a lot of my Internet time on their site:

1. Realize your competitor is TweetDeck and Tweetie, not Twitter and Facebook. Kill your actual standalone microblogging engine.

2. Import all Twitter and Facebook friend posts - no FF account required.

3. Allow users to import their RSS feeds so they come in the steam as well. Potential side effect: become the de facto blog comments site.

4. Adjust the user interface to allow multiple streams (as customized) to flow on one screen. We all can't have screens draped across our house a la Scoble.

5. Create standalone apps or make it easy for your partners to do it

6. Just make the service plain easier to understand and work with.

I spend a ton of time on Tweetdeck and my RSS reader. This move would replace all of those. Why? Scoble has the key insight on why FF is so powerful. Their voting, searching and commenting is awesome and hugely powerful to users. The "like" system is much better than retweeting and much more efficient. The searching is highly customizable. I can set up a search to see posts by my friends that have 5 or more "likes." This guarantees I will see the key stories. This is Twitter and RSS with a community filter. Very powerful. And, the commenting means you can have real discussions on point and in real time right below the topic. Much better than the replies concept in twitter. All of this is why you are 10x better than tweetie or tweetdeck. This is a market you can lead. And, it will matter.

Now, there could be technical trades to be made. You might not be able to get the real time stream from twitter. But, updates every few minutes are not bad. There could be other issues. I am not an expert on the technologies and APIs. All I know is FF will remain a rarely visited site for me until it does more with its strengths and abandons its weaknesses.

May 10, 2009

The biggest issue facing America

It is not Pakistan. It is not the banking crisis. It is not even education.

It is healthcare. The future of our prosperity, the ability of America to wield power, our standing in the world, and our capacity to afford to educate our young all depend on us solving this one. Without solving it we cannot afford to tackle the other ones. I think most of America is clueless on how bad the healthcare mess is.

I am going to spend some of my reading time to getting smart on on it. I suggest you do too.

Here is why:

Look at the yellow and red. THEY are the issue. The purple (or interest) is just an echo of their impacts. Any budget forecast looks the same for one reason: healthcare burdens are looming and overwhelming.

Social security can be solved (raise retirement; tax benefits on the wealthy). Healthcare has no easy answers. It it strangling our public and private sector. Yet, any suggestion of reform gets all of America in a panic. I am here to tell you: change is coming. Or, we are doomed.

The situation looks the same for businesses. Their costs are either ballooning or they are passing them on to employees, lowering real income.

The debate is about to heat up. All of us need to get more educated on this issue.

Here are some of the things I want to figure out:

1. Why do we spend 2 times more than Europe per capita but live slightly less?
2. What value do insurance companies add to the equation?
3. How does the legal system contribute to the costs?
4. How do we deal with the ethical issues around treating very old members of society (e.g. heart surgery for a frail 90 year old)?
5. Where are we overspending or over treating (ie where can we save)?
6. How do we create incentives to ensure preventative care?
7. Is the system of creating supply for doctors flawed?
8. How do we trade universal healthcare needs with incentives for invention?
9. Do we know how well our treatments work? Is the default to act misinformed?

Know any good books or articles on the subject? Would love suggestions.

I don't have any firm answers. I am open to any proposal, Republican or Democrat. But, doing nothing is not an option. We have to all open our minds to the right set of adjustments. Will let you know what I learn.

April 29, 2009

Generational warfare

My town is having an election in early May that has become quite the scandal. The hubbub is due to a ballot initiative to freeze property taxes on citizens over 65 years of age.

When I heard about this proposal, I was immediately opposed. Since then I have learned this is a trend all over the country and already in place for many taxes in our area. Furthermore, I have been shocked by the friends and family all for it despite their conservative desire for personal accountability.

I think this issue is a microcosm of endemic bad thinking in America right now. And, to prove this is not generational war and selfish greed, I will have a compromise proposal.

So here are the arguments I have heard to give this preferential tax treatment to the elderly:

1. Its not that much money (and we can afford it). Even if you believe this, it has absolutely nothing to do with it. If we don't need the taxes, let's drop them slightly for everyone. The key issue is how we allocate burdens and should we give preferential treatment to a class of citizens?

2. It allows older people to plan. Since their ability to work is diminished, older people do have a reasonable case when it comes to fluctuating burdens. The problem with this logic is the old slippery slope. Isn't this true with almost all costs? Utility prices change radically. Food prices change. Income tax rates change. Should we exempt older people from all these headwinds? Shouldn't planning for retirement include some contingency for cost of living changes?

3. We can't just kick people out of their homes. First off, this is rarely the issue and generally used for dramatic purposes. Second, are we as a country prepared to make living in the home you want a right? Not any home, but the one you want? Is stopping the move from a house to an apartment a public policy issue that really needs to be prioritized? I simply think this is a right that does not exist and as a society we simply can't afford.

4. They don't use the services as much as younger people. Well, this one is just not true. The only key service it can be applied to is schools, but that is such false thinking. Not only do they likely have grandkids in these schools, the purpose of education is not micro, it is macro. The safety of their community and the development of the economy, depends on strong education. Saying they don't benefit from it is simply insulting.

Those are the most pronounced arguments I have heard for this initiative. All pretty weak in my mind. So, let me tell you the main reasons I am opposed.

1. We are sending a signal not to plan. We are just leaving an era of the most pronounced irresponsibility in our history. And, here we are sending a message that if you plan poorly for retirement, we will make concessions to help out. We have to send my generation an edict that saving is critical if you want to maintain your lifestyle in retirement. This does the opposite.

2. Old people are no more deserving than others. What about families with handicapped children? Or families whose breadwinner just got laid off? Or families who have been hit with expensive health issues that are forcing them to leave the neighborhood? These are all everyday realities for people just as deserving of special treatment. My wife (the nice one in the family) says help them all. While that is nice, we simply can't afford to and it is not how our system works.

The truth is these measures keep passing because older people are organized and vote. While I say vote NO on all these measures, I have a compromise should they pass. Have them expire in 10 years. The truth is the current generation of older folks are being hit with an economic crisis and have not planned for it (as a generalization, I admit), so let's help them. But, let's not let bad policy become a right and expectation.

UPDATE: The initiative failed. No freeze for those over 65. Vote was within 1%.

April 9, 2009

Saving Print Media #2: Making Paid Content Work

Traditional media is in a crisis. I recently posted 6 steps for print media to survive. To summarize: collaborate; stop printing; own the digital reader; give to all; reap cost benefits; make your content work for the technology. It leaves one question open: what do you do about website content?

Here is the basic problem: good content drives traffic; good content costs money; traditional online advertising around content is not effective enough to cover the costs. Read this about the Seattle Post Intelligencer experiment: traffic down 20% since they cut staff and just went online only. Even a really well run newspaper just on the web and just based on ad revenue will not work.

So, I have one more step in my plan. Start charging for web content. But, you can't follow the Wall St. Journal model. It is too expensive and will only attract your most die hard readers.

Here's how you make it work:

If you are working with other media to standardize and distribute free media readers, work together to create a major media subscription. $50/year or $5/month and you get access to all the content you want. Every paper, every magazine, every premium online media site. Pool the money and distribute it based on traffic. If you create better content, you get paid more. Ad revenue would also be there to help.

Most comments on my posts about these industries is you will never get them to do something this radical. Could be. But, if traditional media does not admit they need to change everything, they will continue to fade away.

April 5, 2009

Want to buy Twitter? Better find $3 billion.

Valuing Twitter is a purely theoretical exercise. There are no revenues and we know little about their cost structure. That said, there is lots of speculation on Twitter's suitors and the potential price they should pay. From my own back of the envelope view of the potential of Twitter, I think all the speculation wildly underestimates Twitter's value.

Here is how I think about their value. First off, Twitter, as I have argued, is a search business. Regardless of how they monetize it in the future, the biggest value lies in the ability to siphon off search volume from the current leaders. So, the key questions to answer in coming to a value are: how much share can they get and what is that share worth? Let's start with the second question first. Here are the current search market share stats:

So, what is a point of search share worth? There really are only two semi-pure play search companies:

Google: Market cap ($115bn) divided by share (81%) = 1.5bn per point of share

Yahoo: Market cap ($18bn) divided by share (10%) - 1.8bn per point of share

Is this a fair way to get search share value? Both these companies have other businesses that certainly contribute to value. Of course, they also have businesses that detract (lots of high cost projects), but there is no question, search drives the vast majority of these market caps. Yahoo has more diversified revenue source thus creating a premium. Let's take the Google value and discount it since they get a dominant position premium. So, let's cut it by 20%. Therefore, for these purposes, a point of search share is worth $1.2bn.

Twitter is not even on the share map. Why? Well, they are not a search engine. But, people are increasingly using Twitter to get information on products, reviews on events, news updates, etc. And, this does not include anything creative they could do by aggregating links, retweets, influencer appeal, etc. to build real search results.

In the last week, I did about 1 twitter search for every 3 on google (this does not include my constant search streams I have in Tweetdeck). Twitter has about 25% of my search volume. Now, I am not your typical Internet user. Let's say only 5% of people are like me. That is 1.25% share.

That creates a current value of $1.5bn (the discounted $1.2bn per share point x 1.25% share). Now, you can poke all kinds of holes in this logic. Even if you cut it in a third, you are looking at 1bn of real value TODAY. Google and Yahoo are increasingly valued as mature companies - not on potential. Their growth is slowing massively, so their market caps are based on mostly current results. Does Twitter have upside on their current position? You better believe it.

The potential of Twitter is enormous. It is just hitting the mainstream. The search model is not even developed. The data created has option value above search. And, the costs of running twitter have to be low. No need to index the internet. No need for millions of servers.

3x current value seems very reasonable to me given the current momentum. So, $3bn to buy Twitter. Not only is it worth this much, but the founders don't need to sell. They have made money and they know the downsides being bought. It will take an incredible offer to even create consideration. $3bn could be low.

If you think this is crazy, consider Ballmer was willing to pay $20bn plus for Yahoo - a business with many assets but decreasing traction and tons of complexity. Is the hottest Internet property, with huge search game changing potential not worth 1/7th of that? I think it is a no brainer.