The future (or lack thereof) of newspapers discussion is hitting a crescendo this week between Steve Ballmer declaring they're all toast in ten years and a columnist for the Seattle Post-Intelligencer firing back that we're more likely to see Microsoft's obituary printed in his paper.
While the plight of the New York Times, Los Angeles Times and various other papers tend to take center stage, the Seattle market is a great place to watch the wrenching adjustments the newspaper business is undergoing. Seattle is unique in that it is one of the few two newspaper towns left in the United States. When I last checked, oh 15 years ago, there were only six major cities left with more than one paper.
I checked as part of the initial research in the early 1990s that led to MSN Sidewalk. The analysis didn't consist of much more than "Wow, you make 40% of your revenues and over 60% of your profits from classified ads? Boy, that would be easy to do in software." Now Microsoft has long since sold off Sidewalk, because it turned out there was a political dimension to the news business as well, which the company was characteristically naive about. In the middle of the DoJ hullabaloo Microsoft didn't need any more bad press from newspapers who saw the company through a competitive lens. The lesson is you don't pick fights with people who buy ink by the barrel unless you're prepared to finish them. And the company wasn't.
The Seattle Times is family-owned (complete with scion who bangs the drum for local ownership of media and more regulatory restraints on his competitors) and the Post-Intelligencer is owned by the Hearst Corporation. The Times doesn't have significant diversified holdings (unlike say the New York Times or Washington Post) to mask or subsidize the core newspaper business, so it is a pure-play tell on industry fortunes. Hearst Corporation is more opaque as a privately held conglomerate but the fact the P-I is the weaker paper in town means they can't ignore the underlying economics too much.
The papers have a Joint Operating Agreement, which is a government-sanctioned antitrust exemption allowing the Seattle Times, the larger of the two papers in circulation, to provide advertising sales, production, marketing, circulation and even web operations for both papers. The Times gets paid its expenses and they split what is left over, with the P-I getting 40%. The news and editorial operations are separate. They even share a Sunday edition, to which the P-I contributes a few flimsy pages of mostly syndicated content.
Despite this cushy arrangement, the two have been at odds, spending five years battling over the terms of the JOA. Both papers have gone to great lengths to keep the terms of the JOA secret (transparency is kind of like anytime, anywhere communications -- it is great other people are always reachable, but we're not so sure we want it ourselves...). The area of greatest competition between the two papers in recent years has been around who claimed to be losing the most money, which was at least in part jockeying for negotiating leverage. Amidst these negotiations, the Times, historically the afternoon paper while the P-I was the morning paper, moved to the morning in what could only be characterized as a go-for-the-jugular move.
So while the Times and the P-I have made their peace around the JOA after five years of bickering, with the Times making a $24 million payment to Hearst, both papers continue to face the reality of the Internet disaggregating and sucking the life out of the traditional newspaper business model.
If they understand the secular forces they are facing, it is not clear from recent statements by the publisher of the Seattle Times:
Publisher predicts ad-revenue drop
Combined advertising revenue for Seattle's two daily newspapers is forecast to drop to $195 million this year, with an expected $41 million of that for the hard-hit classified-advertising category, Seattle Times Publisher Frank Blethen said in an e-mail to employees Tuesday.
The revenue figure would represent a 29 percent drop since 2000, a year that also saw classified ads total $125 million, nearly half the two papers' total ad revenue.
...
In his e-mail, Blethen said the revenue problems plaguing the Seattle papers and the entire industry probably "will continue until the recession ends, which could be several more quarters."
Blethen said The Times has lost a total of $49 million this decade. Earlier this month the newspaper reduced its staff by about 7 percent through layoffs and buyouts.
Does he really believe the sun will come out in "several more quarters" and double digit revenue declines and recurring layoffs will be a thing of the past?
We'll continue to monitor the situation.
I can't seem to resist commenting on industry anachronisms, but Sun's latest quarterly disappointment raises a question that I have not seen the commentariat comment upon. How has the MySQL acquisition by Sun impacted the relationship with Sun's biggest historical partner, Oracle? I may be misjudging Oracle's leadership, history and culture, but my guess is they view databases as their birthright and treat any real or proposed encroachment, even from a company with as poor an acquisitions record as Sun, as a serious matter. The telescope in Larry's office has been pointed north for a long time (first across San Francisco Bay, then up the coast to Washington state and more recently along the great polar route to Walldorf), but I'll bet it rotates south to Santa Clara. MySQL was already on Oracle's radar screen because it represents the logical end of the traditional database business, an outcome Oracle will do just about anything to forestall, including get into applications and middleware in a big way to entrench and diversify.
MySQL is a classic example of the open source playbook to turn a $10 billion business into a $1 billion business. In this case, the $10 billion business belongs to Oracle. Kudos to MySQL for getting about $1 billion from Sun, including $800 million in cash. The problem (for Sun anyway) is Sun paid $1 billion for what is reportedly about $60 million in revenue. Evidently Sun is somehow going to make its hardware work better with MySQL than that of any other hardware vendor with access to pretty much the same source code. And they hope to do the same thing with their software stack, particularly Solaris. There is no
S(olaris) in LAMP, despite McNealy dressing up in a penguin suit before he waddled off stage a few years too late. Watch how quickly the community scatters (forks) in the face of atavistic attempts to reestablish the vertically integrated, proprietary UNIX stack of yore (prominently featuring "open" in the name of course...). Or there might just be a sales "halo" effect. Companies that use MySQL and didn't buy Sun hardware in the past, might just reconsider now that it is under new ownership. Sun also seems excited about the (consulting) services revenue opportunities, which is always fertile ground for companies on the decline, and can provide revenue sustenance albeit with low margins and low excitement for years if not decades as they feed on their own legacy complexity tail.
The question is whether the MySQL revenue and any associated hardware and services halo revenue offset the revenue from their Oracle relationship. Oracle has to be one of the most popular workloads for Sun's hardware. But it isn't a particularly equal relationship -- Sun needs Oracle a lot more than Oracle needs Sun. It is possible this relationship had already deteriorated as Oracle increasingly partnered with the higher volume server vendors, but my guess is Sun's software megalomania drove this acquisition as opposed to a reaction. Sun doesn't even seem to be going through the motions of managing a tough partner situation. Employees are popping off about Oracle and their Q&A sort of relegates Oracle to the services bucket:
What happens to your relationship with Oracle?
Oracle's a very important Solaris ISV - and we have joint customers across the world that have relied upon the service and support Sun and Oracle provide in mission critical environments to run the world's banks, retailers, telcos, governments, etc. Absolutely nothing changes about that commitment as a result of this deal - just as nothing changes in our willingness and ability to support DB2, or Microsoft's SQL Server (which also happens to run quite well on our systems, btw). Customers want choice, and we maintain our commitment to offer it.
It's important to remember, our service organization focuses on our customers, not our products.
The fact the Oracle management team has said almost nothing is also interesting. They're normally quite loquacious, especially when it comes to the competition. My guess is Sun is no longer the go-to hardware partner choice for the Oracle sales force. Maybe we're seeing that in Sun's current quarter, where the downturn supposedly started with big systems in the US. Big systems -- that certainly sounds like Oracle. And the US salesforce will figure out corporate acrimony faster than the rest of the world because they're closer to it. Or I guess it is possible Sun was just big with the imploding CDO industry (they were big with Enron too 
.
I don't get Sun's strategy at all, beyond a fervent desire to be in the software business (makes sense) to the point where they give everything away and plan to make it up on volume or lower margin hardware and services (doesn't make so much sense). They seem to have a deep desire to go back in time to the halcyon days of the late 1990s when Sun happened to be at the right place at the right time. The odds of lightning striking twice seem low.
"Enterprise-Class Second Life"
Some days the jokes write themselves.
Did they mean "Second-Class Enterprise Life"?
It's like Second Life, only more expensive, with even fewer people, and minus the interesting bits?
Can "Enterprise-Class World of Warcraft" be far behind? "Enterprise-Class Grand Theft Auto"?
Imagine the resplendently rendered virtual bus that drives up to your virtual headquarters full of virtual consultants...
Coming soon no doubt: a push for the mainframe to run your enterprise-class Second Life. (IBM's mainframe site is a barrel of laughs all by itself. Slogan: "The Future Runs on System z". And don't miss Destination Z, "A vibrant community to help you make the most of your mainframe" featuring stock photography of cool kids at least three decades younger than the average mainframe operator. But I digress.)
It is a clever financial move. Once you've realized the cost savings from off-shoring your consultants, the next obvious step is to replace them with software agents that can be infinitely replicated and don't need salaries. A people business like consulting scales profitably when you get rid of the people. Who will know in a virtual world? Suggestion: start giving any consultants bidding for your business a Turing Test. Prepare now for the inevitable.
Meanwhile, on a more serious note, timesharing is back with a vengeance yet there is no sign IBM has ambitions to be a major player in the cloud computing era. Instead they're fiddling with avatars while the on-premise business starts a long, slow burn. Where is the "one billion dollar" data center capex announcement that signals their ambition to play with the Amazons, Googles and Microsofts? Perhaps it is harder to make a "billion dollar" commitment when it requires real dollars as opposed to "soft" and/or exaggerated dollars? Or has IBM committed all its free cash flow to financial engineering, forcing them to watch the next generation of computing from the sidelines? Selling servers and consultants by the hour is a far cry from offering (anything)-as-a-service. In the cloud world, if you build it as a vendor, you also have to be willing to operate it at scale. And enterprise-scale is dwarfed by Internet-scale, so enterprise chops are not enough. Outsourcing "your mess for less" isn't a service. One can only speculate that virtual conference rooms in Second Life are inhibiting IBM's ability to define their strategy. I am still hoping they do OnDemand 2.0 and kill two birds with one slogan.
Nick Carr made his name with the provocative Harvard Business Review article "IT Doesn't Matter" (free version here), its expansion into a less definitively titled book Does IT Matter? and his generally erudite blog. The charge of irrelevance hit the industry hard and elicited mostly incoherent and ineffective rebuttals (e.g. "hogwash"), which hampered real discussion of Carr's argument.
I have gently mocked his thesis previously but found it a mix of the obvious (yes, things get commoditized over time, so you focus on the top of the stack and of course further commoditize the rest of the stack) and the ridiculous (IT had apparently previously been a source of everlasting strategic differentiation, but with the democratization of computing making technology widely available, we should write off the industry in its entirety). It is like arguing that since everyone has a brain, don't bother thinking...
Carr has a new book, The Big Switch: Rewiring the World, From Edison to Google, in which he contemplates the future of computing and speculates on the broader societal impact of that future. The book is lucid, well-written and uses lots of historical examples to make the narrative and arguments come alive. The first half of the book looks back at the evolution of the electrical industry and argues the computing industry will follow the same path. The later half offers up social, economic and cultural consequences of the shift, again using electrification as an example of how new technologies have secondary and unforeseen effects. Carr is less than excited about the consequences of the technology path he believes is inevitable-- no one will mistake him for an Internet optimist.
Back in the 19th century, companies generated their own power locally, whether through water, steam or early electrical generation. The advent of alternating current meant power could be generated remotely and transmitted afar, allowing companies to get out of the power business and buy electricity from the new electrical utilities.
Carr tells the story of Thomas Edison and his former clerk Samuel Insull. Edison, with his bet on direct current which didn't lend itself to long distance transmission, focused on small-scale generators that ran "on-premise". His model was to sell every business equipment to generate their own electricity. Insull predicted the rise of the electrical utility, foresaw it would eclipse the equipment business and left Edison to join what became Commonwealth Edison. (Empires of Light is a great account of the battle between Edison and direct current versus Tesla and Westinghouse who championed alternating current).
By offering electricity to multiple customers, utilities could balance demand and reap economies of scale that drove a virtuous cycle, allowing them to drive down the cost of power and thereby attract even more customers. Their strategy was predicated on maximizing generator utilization and the standardization of electrical current. Companies that outsourced their power generation to utilities no longer had to worry about generating their own electricity, reducing cost, staff, technology risk and management distraction.
Turning towards computing, Carr reprises his "IT Doesn't Matter" death knell: IT is an infrastructural commodity that every company has access to, so there is no differentiation available, which means it is a dead cost. He recounts the history of computing, showing a particular fondness for the punch card, and excoriates the industry for cost, complexity and waste. Siebel is the chief punching bag (while deservedly so, it is an easy target).
His future trajectory for the industry has the Internet playing the role of alternating current, allowing computing to be performed remotely which in turn enables a new breed of computing utilities (with Amazon Web Services, Google and Salesforce as early poster children). The end result is companies no longer have to run their own complex computing operations. He calls this new era of computing the "utility age" and states "the future of computing belongs to the new utilitarians".
Enterprise computing vendors who sell "on-premise" solutions will be marginalized like Edison, unless they can reinvent themselves (as Edison's company ultimately did, shifting both technology and customer allegience - they're still around today, a little outfit called General Electric). Carr dwells on Microsoft's recent embrace of cloud computing, but questions whether the company can navigate the difficult transition of embracing a new model while continuing to harvest profits from the old model.
Is the Big Switch Big or Not?
I have two critiques of the first half of the book. The first is mild schizophrenia. The Big Switch is -- wait for it -- as follows:
"In the years ahead, more and more of the information processing tasks we rely on, at home and at work, will be handled by big data centers located out on the Internet."
Wow. Gather now at the knee of the S-curve to learn what the future holds. Perhaps he is aiming the book at a more general audience, but with over a billion people regularly accessing the Internet, there are an awful lot of people who have already made the "big switch". He does some hand-waving about broadband penetration to explain why the book isn't over a decade late, with no mention of the failure of the late 20th century's application service providers.
Carr can't quite decide whether the big switch to his utility age is a revolution or not. He equivocates about whether a wave of creative destruction is crashing down today or if it will take decades to play out. He also qualifies the move to the cloud and how far it will go with suggestions that the future may actually consist of cloud-based services working in conjunction with local computers in corporate data centers and/or local PCs. This qualification I think stems from his general tendency to paint everything with a very broad brush. In practice, there are many segments and technologies, each with their own dynamics. He also plays fast and loose with topology, enlisting highly distributed examples to support a centralized thesis.
The Fallacy of the Perfect Analogy
My second critique is that the book turns on the idea that computing is basically similar enough to electricity that it will inexorably follow the same path. While there are similarities, it is a mistake to assume they are alike in every aspect. There are enough differences that blind adherence to an analogy is dangerous:
- Electrons are fungible, CPU cycles arguably are, but information is not fungible. While the flow of electrons could be standardized, the flow of information can't. His tendency to blur, conflate or confuse hardware and software, clients and servers and individuals and IT doesn't help.
- Even when you do computing remotely, you still compute locally as well. A search engine query, for example, gets run in a giant data center somewhere off in the cloud, but there is still processing that happens locally to submit, display and act upon the results. The browser is hardly a dumb terminal and the trend is to exploit even more processing locally for cloud-based applications (with AJAX and RIA techniques). Further, there are strong business incentives to use local code to differentiate the user experience and allow eyeball businesses to push interaction rather than just relying on user pull. Computing is likely to be much more distributed than electricity production, especially when you consider...
- I am not aware of a dynamic like Moore's Law (and similar rapid improvements in storage capacity and bandwith) for electrical generation, which both projects significant performance improvements over time and introduces the concept of relative scarcity and abundance. This dynamic undermines the parallel of CPU utilization and generator utilization. Those who best exploit relative abundance and put the processing closest to the data will prevail (I remain a Jim Gray disciple).
- Distance still matters at scale. For the same reason that the aluminum industry located near cheap sources of electricity, the algorithm for siting new new half-billion-dollar data centers looks at proximity to both cheap power and end customers. Likewise, Akamai offers proximity with its edge caching network, which in turn means lower cost and more responsive services.
- Just as the computing industry is looking longingly at the electrical utilities, the electrical utilities are envious of the more distributed nature of the computing industry. A less centralized and more intelligent electrical grid promises greater efficiency and resiliency. The availability of real-time pricing information can increase conservation and reduce peak-loads. Distributed generation allows locally produced power to be sold back to the grid, making alternative energy sources more compelling. Digital power opens up new, differentiated offerings for utilities based on the quality of power. And a more decentralized grid means that a single point of failure doesn't take down power for 50 million people. All these trends suggest the electricity industry will look more distributed and information-rich in the future.
- There are probably other relevant differences as well.
So while the book gets the broad trend to more computing in the cloud right, Carr's extended analogy obscures a lot of the differences and subtleties that will make or break cloud computing endeavors. Between the caveats and the broad definitions, there is a lot of leeway in his technical vision (admittedly the mark of a savvy forecaster). Victory will go to those who best exploit both the cloud and the edge of the network. Carr's own examples -- Napster, Second Life and the CERN Grid -- make this case, even if he either misses their distributed nature or chooses to ignore it.
Utility, Not Utopia
The second half of the book focuses on the broader social and economic consequences of the move to utility computing. It is the bolder and more thought provoking part of the book.
Carr again begins by looking back through the lens of electrification. He succinctly credits electrification with ushering in the modern corporation, unleashing a wave of industrial creative destruction, improving working conditions by displacing craftsmanship for the modern assembly line and the gospel of Frederick W. Taylor, improving productivity which begat a broad middle class and white collar jobs to coordinate more complex organizations, the broadening of public education, expanding demand for entertainment, and enabling the suburbs (cheap cars relied on cheap electrical power to power the assembly line).
He also notes that the early years of electrification were accompanied by great optimism and even utopianism about what the future would hold. Carr, however, leaves his rose-colored glasses at home as he ponders his utility future:
"Although as we saw with electrification, optimism is a natural response to the arrival of a powerful and mysterious new technology, it can blind us to more troubling portents.... As we will see, there is reason to believe that our cybernetic meadow may be something less than a new Eden."
Carr basically finds his utility future dystopian. He spends the remainder of the book worrying about:
The Hollowing Out of the Workforce - the utility future has little need for workers, which reverses the positive virtuous cycle of employment driven by electrification. He points to increasing returns businesses like YouTube, Skype, craigslist, PlentyofFish and giant data centers with small staffs leading the way "from the many to the few". They are free riders on a fiber backbone paid for by others and are ushering in a world where "people aren't necessary". "Social production" (aka "user-generated content") is simply digital sharecropping and reduces the need for workers further. Unlike electrification which "played a decisive role" in building an egalitarian society, the utility age "may concentrate wealth in the hands of a small number of individuals, eroding the middle class and widening the divide between haves and have-nots".
The Decline of Mainstream Media - while electrification "hastened the expansion of America's mass culture" and gave rise to mass media, the Internet is undermining the media with its explosion of voices and "some of the most cherished creative works may not survive the transition to the Web's teaming bazaar". Newspapers are of course the foremost example. The shift from scarcity to abundance of content is not a good thing to Carr and "the economic efficiency that would be welcomed in most markets may have less salutary effects when applied to the building blocks of culture." The result is a decline of media and shared culture, the polarization of virtual communities (exacerbated by personalization engines) , "social impoverishment and social fragmentation".
Bad Guys - the Internet in the utility age promises to be a magnet for bad guys, including criminals, terrorists, botnet operators, spammers, perpetuators of denial of service attacks and fiber optic cable-snapping earthquakes. The underlying infrastructure is fragile and vulnerable yet critical to the global economy. This was the least forward-looking of his pessimistic projections. He mostly reiterates issues. About the only new claim about the future was that pressure to protect the Internet from "misuse and abuse" will stress the sovereignty of nations as utility functions migrate to countries with the lowest operating costs. He is surprisingly silent on whether we should expect the heavily regulated nature of electrical utilities to also apply to computing in the future.
Privacy and the Control Revolution - don't even think about having any privacy in the utility age:
"Few of us are aware of the extent to which we've disclosed details about our identities and lives or the way those details can be mined from search logs or other databases and linked back to us."
Carr believes computing always has and always will be fundamentally a tool of oppression for the Man, the computing revolution is really just part of a broader "Control Revolution" and the empowerment of the personal computer will be "short-lived" as the Man inevitably reasserts control:
"The sense of the Web as personally "empowering"...is almost universal. ... It's a stirring thought, but like most myths its at best a half-truth and at worst a fantasy. Computer systems in general and the Internet in particular put enormous power into the hands of individuals, but they put even greater power into the hands of companies, governments, and other institutions whose business it is to control individuals. Computer systems are not at their core technologies of emancipation. They are technologies of control. They were designed as tools for monitoring and influencing human behavior, for controlling what people do and how they do it. As we spend more time online, filling databases with the details of our lives and desires, software programs will grow ever more capable of discovering and exploiting subtle patterns in our behavior. The people or organizations using the programs will be able to discern what we want, what motivates us, and how we're likely to react to various stimuli. They will, to use a cliche that happens in this case to be true, know more about us than we know about ourselves."
Carr is particularly full of disdain for the PC as a device but is conflicted about personal computing. He readily acknowledges the empowering impact of personal computing, yet simultaneously promotes a dumb terminal future while lamenting the inevitable reassertion of control by the Man (somehow those seem related...).
He concludes on the cheery note that the utility future is no less than another front on "humanity's struggle for survival". Actually, I took that quote from the Gears of War 2 announcement, but it would not be out of place in Carr's conclusion. He fears the utility age may devalue quintessential human attributes, making us (even) more superficial, undermining the coherence of the family and relegating us to mere "hyperefficient data processors, as cogs in an intellectual machine whose workings and ends are beyond us". Bummer, dude.
The second half of The Big Switch is kind of a dour read and the utility future is boldly painted with a Luddite, elitist and generally defeatist brush:
"...we may question the technological imperative and even withstand it, but such acts will always be lonely and in the end futile."
In a book full of references to big thinkers, from Jean-Jacques Rousseau to Alexander Solzhenitsyn, Ned Ludd does not merit a mention, even though the Luddite fear of automation hollowing out the workforce is repeated almost verbatim. He doesn't acknowledge the parallel or make a case for why the Luddite fears are more warranted now, despite failing to come to pass in the Industrial Revolution.
And while he bemoans the rise of "a new digital elite", the shifts in media, and survival of our "most cherished" work, he manages to come across as an elitist himself (not that there is anything wrong with being an elitist of course...). I'm just not sure the Brahmins get to decide what is and isn't worthy media.
It is hard to argue with his position on privacy (read No Place to Hide to shatter any lingering techno-optimism on this front -- large-scale databases go awry, period), but he doesn't make the case that the black helicopters of the Control Revolution are just over the horizon. Individual freedom is pretty much at an all-time high in world history and information technology gets at least some credit for that. Carr does admit technology is "dual use", but you won't find much on the positive uses in the book.
The Big Switch is well worth reading if you're thinking about the evolution to cloud computing. It provokes and stimulates as this long-winded review shows. Carr's technical foundation is shaky, but he is a good social critic and forecaster, and a great polemicist (and that is a compliment). My view is Carr's dystopian future is not inevitable, but averting it will take a conscious and proactive effort. If nothing else, the later part of the book is a call to arms for what must be avoided. If the Control Revolution is indeed a revolution, it is time for a counter-revolution.