It only took on the order of $110 billion in additional "sweeteners" to get enough votes to pass the $700 billion bailout bill (a bill almost certain to be a disaster, we just don't yet know what the unintended consequences will be).

The "sweeteners" took the form of new or extended tax breaks.  One can only assume the legislators believed the use of tax exemptions (reducing revenue) as opposed to earmarks (increasing spending) was a significant concession to our fiscal plight and further evidence of their wise and decisive leadership.

And the "sweeteners" got larded out despite vows not to do so:

"We will not Christmas-tree this bill," [New York Senator Charles] Schumer said. "The times are too urgent. Everyone has their own desires and needs. It's going to have to wait."

"We don't need 535 members of Congress adding their best idea to this bill," [House Minority Leader John]Boehner said. "We need to keep it clean, simple, move it through the House and Senate, and get it on the president's desk."

This historical piece of legislation promises to get the credit markets moving again through such targeted measures as:

• Relief for manufacturers of children's wooden practice arrows from the Federal excise tax on wooden arrows.  Who knew we had an excise tax of 39 cents per wooden arrow?  I can only assume this tax is a forgotten anachronism dating back to previous bold Congressional action in the wake of Custer's Last Stand.
• NASCAR's accelerated depreciation schedule for racetracks is extended by a year.  The $100 million cost to taxpayers is a small price to pay in the name of rectifying the present injustice of amusement park owners having a more favorable depreciation schedule.
• "Increase in the limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands".  I don't even know what this means, but I assume it helps distraught and financially strapped taxpayers, homeowners and mortgage bankers drown their sorrows in rum.

I can't find a list anywhere that links the "sweeteners" with their Congressional champions/beneficiaries, but I hope someone compiles it so they can be named and shamed.  If the politicians are already worried about their vote on the main bill affecting reelection in November, anyone who adorned this bill with pork should spend the next month justifying their inability to get their noses out of the trough, even briefly.

Amidst a story about Somali pirates capturing a Ukrainian ship carrying 30 Russian T-72 tanks and ammunition is this gem:

The pirates are highly organized. They work in teams. There is even a pirate spokesman (who could not be reached for comment on Friday).

Who says PR is dead?

I was wondering a few months ago how Sun's MySQL acquisition would impact their relationship with Oracle:

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 answer is becoming clearer:

• Oracle has entered the hardware appliance business, partnering with HP
• Sun's stock is trading near a 13-year low
• Sun's CEO got a 44% pay raise

(Ok, the last one isn't so clear).

The next question is what is the end game for Sun?  Do they circle the drain like Silicon Graphics (yes, they are still in business) or do they get consumed by the likes of Fujitsu or perhaps a rising dynamo from the developing world?  Leave your predictions as comments and maybe we'll start a pool.

In what is otherwise the least humorous piece ever by Andy Kessler, he suggests a possible upside to the Wall Street bailout:

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

It isn't often I have occasion to praise IBM, but they deserve kudos for at least threatening to pull out of formal standards bodies and openly questioning their once-beloved "standards process":

International Business Machines Corp. will review its membership in the bodies that set common standards for the technology industry and may withdraw from some, potentially undermining the system that makes electronic equipment and software interoperable world-wide.

The Armonk, N.Y.-based computer maker is expected to announce the review Tuesday, according to company officials. IBM has become frustrated by what it considers opaque processes and poor decision-making at some of the hundreds of bodies that set technical standards for everything from data-storage systems to programming languages, those officials said.

It would be all the more noble a stance if IBM didn't have decades of culpability in making standards bodies into cesspools of cynical politics and half-baked outputs (incomplete standards being a consultant's best friend...).  They also lose points for making this move in a fit of pique after losing the Open XML battle.  I guess the appeal of standards dims when you don't reliably get your way. 

The good news is perhaps IBM has figured out that "standards" are not the high order bit.  They certainly might make greater in-roads against Microsoft Office with an actual product strategy as opposed to just trying to make the Office file formats "illegal".

Maybe more disconcerting is Microsoft's embrace of IBM's long-held comfort with the standards muddle:

A Microsoft spokesman said standards bodies are "invaluable" because they provide "an even and predictable playing field" to the industry. Their decisions reflect the views of a preponderance of members, "not the interests of any single party," he said.

I will leave it to someone like Gartner to define the lifecycle of a company based on their evolving perspective on standards.  During ascendency, you have better things to do and your vitality and antipathy to standards scares people.  Then, you reach the comfortable, middle-aged embrace of standards, and start hiring employees for their ability to sleep sitting up during standards meetings.  To be followed by the post-partisan-whatever-it-is that IBM is now advocating.  Unless of course this is just a cynical maneuver to improve their position in the standards bodies they are threatening to leave, particularly by lowering membership requirements in order to expand the voting ranks with their allies for the next battle...

Two of the most-widely-read technology journalists/bloggers for the Seattle newspapers have left the building:

The Puget Sound Business Journal got significantly stronger today. Two of Seattle’s best-known technology journalists, John Cook and Todd Bishop, have resigned from the Seattle Post-Intelligencer to take new jobs at the crosstown Business Journal.

In an unbundled world, the vertical specialist should have an advantage.

Extraordinarily timely Taleb essay on Edge.org:

Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let's face it: use of probabilistic methods for the estimation of risks did just blow up the banking system).

He actually is turning his attention to generating constructive advice for "how to live in a world we don't understand", but not without a few shots at the French, Ben Bernanke, Nobel Prize-winning economists and of course Wall Street along the way:

It appears that financial institutions earn money on transactions (say fees on your mother-in-law's checking account) and lose everything taking risks they don't understand. I want this to stop, and stop now— the current patching by the banking establishment worldwide is akin to using the same doctor to cure the patient when the doctor has a track record of systematically killing them. And this is not limited to banking—I generalize to an entire class of random variables that do not have the structure we thin[k] they have, in which we can be suckers.

Forget reality game shows.  Forget drinking games.  Forget competitive spelunking.  My new choice for choosing our political leaders is steer wrestling.  You ride after a running steer (aka a cow with horns), leap off your horse, tackle the steer and pin it to the ground. 

Sometimes the steer wins.

From a Wall Street Journal article on otherwise nuanced diplomatic reactions to Russia recognizing Abkhazia (which I am pretty sure was in the title of one of the Harry Potter books) and South Ossetia as independent nations:

"In South Ossetia's capital, Tskhinvali, President Eduard Kokoity celebrated by drinking a three-liter bowl of wine on the main square, news agencies reported."

Forget reality game shows to pick the president, lets just make it a drinking game.

The Atlantic’s trove of internal memos from Hilary Clinton’s campaign is fascinating reading if you are interested in strategy, positioning and messaging.  The accompanying analysis puts the documents into the context of events as they unfolded.  It highlights the zero-sum nature of politics that magnifies errors due to the binary outcomes.

Hilary explicitly ran on the notion she was ready to be President “from Day One”, a position presumably grounded in a belief about her qualifications, both absolute and especially relative to her competitors. But the evidence suggests she didn’t do a very good job managing her own campaign.  In fact, after you read the Atlantic piece, you'll conclude she did a pretty poor job.  She ducked hard decisions, ignored or failed to understand critical issues like the rules for delegate allocation, couldn't or wouldn't control a staff crippled by divisive infighting and avoided until too late difficult but necessary personnel decisions.

Given we have two more Senators still vying to be President, there is a question of whether being Senator is even remotely good preparation to be President.  There is a big difference between taking principled positions in "the world’s greatest deliberative body" and actually being an executive.  Like many stereotypes, "Senator Blowhard" has a firm grounding in reality. 

Senate is structured to drive mean reversion.  It requires a higher degree of agreement to get anything done than the House.  The minority has great power and even a single member can put a "hold" on various actions.  Six year terms insulate Senators from the winds of public opinion.  Your (negative) power actually grows the further you are from the center of opinion in the Senate.  Meanwhile, a President actually has to get things done, as opposed to the "advise and consent" role of the Senate.

The electorate seems to understand being Senator requires a different skill set than the Presidency as evidenced by how few sitting Senators have become President.  That, of course, doesn't stop a half dozen or more supremely self-confident Senators from throwing their hats in the ring on behalf of an insufficiently grateful country every four years.

Management skills matter.  George W. Bush’s presidency could be politely characterized as suffering from some “managerial lapses”, despite a much-touted MBA (perhaps the lapses are not such a surprise...) and executive experience as governor of Texas.  Managing any organization with millions of employees requires skills, but the President also steers the world's most powerful nation, with implications for the whole planet.

Our remaining two Senatorial candidates have no significant executive experience.  Just looking at them as legislators, McCain has a history of being an outsider and "maverick" even by Senate standards while Obama’s legislative accomplishments are thin at best.  Managing a Senate office is not quite the same as running the whole Federal government.

Both are also running as change agents.  And change agents they will be, just not in the way they expect.  Sure, they have their simultaneously far-reaching yet ambiguous campaign promises, but more important is their ability to react to and deal with surprises.  Once you're in office, stuff happens and it lands in your Presidential lap.  Dealing with change is a fundamental executive task.  The Presidency is the ultimate Black Swan job.  Administrations have a tendency to end up on very different paths than they thought they would pursue.  Think about Clinton pre-1994 versus post-1994 or Bush the younger pre-9/11 versus post-9/11 as recent examples.

Change is coming fast and furious in a turbulent world.  Foreign affairs matter again, and not just terrorism.  Geopolitics are in the midst of a significant realignment.  New powers are rising.  The world economic system is restructuring in fundamental ways.  Traditional policy levers don't work any work.  And the pace of this change will probably increase in coming years.

In order to better gauge the fitness of our candidates to manage the challenges of today's world, I propose we augment the debates and their pre-packaged sound bites with something the American electorate understands: a reality game show.  I'm torn between calling it American Crisis,  Survivor: The Presidency or Who Wants To Be President? but the idea would be to see how the candidates deal with a crisis.  Lets drop an unexpected event on them on live television and see how they do: economic meltdown, terrorist strike, foreign invasion, natural disaster, national tragedy, extraterrestrial contact, an outbreak of bipartisanship, whatever.

Give each of them a staff they don't know (they don't get to bring their usual handlers, although we should probably have other events to evaluate their staffs' qualifications given the degree to which they end up running the show) who will provide the facts as the event unfolds.  A good executive has the ability to take over a new organization.  The staff will propose various options for dealing with the crisis.  Lets see what principles the candidates apply, how they listen, what they decide is and isn't important, how they deal with conflicting views from their staff, how they make decisions under uncertainty and generally how they perform under stress.  Naturally, the crisis would be a messy, real-world situation with no clear-cut answers and involve hard trade-offs.

You do a couple elimination rounds and weed out the also-rans (probably mostly Senators).  Candidates get one "lifeline" call to a randomly selected household for common-sense advice and insight from the common American.  Sell sponsorships and product placement to help reduce the Federal deficit ("the situation room's live footage from the ongoing crisis in West Eastbekistan brought to you tonight by Samsung..." and "this cease fire brought to you by GE, who bring good things to life...").  The electorate can vote via text message.  Nielsen counts the votes.  Bet it gets better ratings than the debates.  Lets see how Senators Blowhard do (beyond the press conference).

A nice Times of London profile of Nassim Nicholas Taleb from earlier in the summer including his top ten tips for life like be sure to dress up for your execution...

My thoughts on his Black Swan book here (my most popular post).

Following up on our previous examination of the newspaper business in Seattle, two breaking developments have emerged this weekend.

All The News That Fits in the Pits

A special correspondent sends photographic evidence of a local marketing effort by the New York Times in Seattle:

This is near the hydroplane pits at SeaFair, an annual summer event in Seattle dedicated to drinking beer in the sun under the pretext of watching hydroplanes turn left around Lake Washington and periodically flip over.  I read that there was a thrilling ending this year in which the Beacon Plumbing boat was disqualified for being "off plane", allowing the Ellstrom E-Lam Plus to win with the O Boy! Oberto taking second.  Think aquatic NASCAR, only louder and more provincial.

It is great to see the Times experimenting creatively and aggressively as they seek to revoke their "death watch" status.  No one can deny it is a bold move to place the Times alongside the  powerhouse plumbing (Beacon Plumbing), machine tools (Ellstrom E-Lam), dried meats (O Boy! Oberto) and replacement window (above) sponsors that dominate the hydroplane circuit today.  Presumably this outreach to new demographics is part of an well-orchestrated plan that extends to the editorial side of the house.  I, for one, would welcome more O Boy! Oberto and less opera in the Times.

While bold, the effort does look like it could use a little refinement, starting with actually having someone in the booth.  And West Coast Vinyl next door still tops them in tech savvy, with a prominent free Wii offer.  But in all, a commendable effort.

All News is Only Fit to Print

Meanwhile, over at the Seattle Times, there is continued focus on the core challenges they see facing the business.  No, not the Internet.  Not even inroads by national newspapers amongst local hydroplane and vinyl window fans.

Evidently the problem really is consolidation of the media by large, publicly-traded conglomerates that have the gall to diversify beyond the newspaper business.  Never mind that those same conglomerates are "getting killed" by the Internet as well, one wouldn't want to lose focus on your eternal nemeses.  Ryan "The Scion" Blethen, from his fifth-generation, family-owned Seattle Times opinion page pulpit, calls upon journalists to speak up and take a stand against media consolidation.  The editorial itself suggests there isn't much interest amongst journalists in this topic, but is having journalists "speak up" really the best strategy a publisher can come up with to stop industry consolidation?  A time machine might be a better approach given the consolidation in question happened decades ago.  And if you're a journalist, do you really want to denounce consolidation that might provide a way for newspapers to continue to exist through subsidies from healthier businesses?

My suggestion: more energy on the web site, less time hoping the FCC will somehow hobble your fellow buggy whip competitors.

I nearly missed this industry first, following last quarter's related announcement:

Linden Lab and IBM Achieve Major Virtual World Interoperability Milestone
Open Grid Protocol Enables Avatars to Teleport Between Second Life and OpenSim Virtual Worlds

NEW YORK & SAN FRANCISCO - 08 Jul 2008: Linden Lab®, creator of the virtual world Second Life®, and IBM (NYSE:IBM) have successfully demonstrated virtual world interoperability by teleporting avatars between the Second Life Preview Grid and an OpenSim virtual world server. The joint development project represents an industry first of a quantifiable milestone for virtual world interconnectivity.

Here is a screen shot from the demo:

Evidently the tumbleweed avatar was successfully teleported from Second Life into an enterprise-class IBM virtual world running on a mainframe (which they want you to know are more relevant than ever, especially for really popular applications like interoperable, enterprise-class virtual worlds...).  Unfortunately, no observers were present in either virtual world to verify the claim.

Looking ahead, with enterprise suitability and interoperability now firmly in hand for the burgeoning enterprise virtual worlds market, IBM will no doubt turn its attention to the security problems raised by interoperability.  After all, you wouldn't want more typical Second Life denizens teleporting into your enterprise-class virtual world.  Expect a hue and cry about illegal virtual immigration, foreign avatars soaking up system resources and taking virtual jobs away from local avatars.  Politicians, responding to virtual outrage, will demand action.  And then, enter the virtual world lock-down solution with IBM Tivoli Avatar Access Firewall Manager for zSeries Enterprise Class Virtual Worlds.  Because sometimes you have to create the problem before you can solve it...

We used to joke at Microsoft in the twilight of the 20th century at the height of the dot com bubble and amidst the DoJ proceedings that things had gotten "a little Nixon White House" in terms of tumult and the disconnect with the outside world.

Evidently now the Nixon White House isn't a joke but rather a source of inspiration for the Windows marketing team:

“The quiet majority of million and millions of Windows Vista users out there are going to have a great experience.”

One wonders if this new "silent majority" is quiet because they're still waiting for their Vista PCs to boot?  (Disclaimer: I am a Vista user who simply tries never to hibernate or reboot).  What next, a secret plan to end the war over Yahoo?  Not sure I'd be taking pages out of the Nixon playbook.  It is a short leap to midnight massacres, secret bombing campaigns, dirty tricks, unexplained gaps in the record, wage and price controls and "you won't have... to kick around any more" protestations. 

I'll be watching closely for signs of other presidential inspiration, especially the Van Buren administration, but I really just wanted an excuse to post the picture above.

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.

The cover story in The Atlantic suggests the threat of an asteroid hitting the Earth is much higher than previously thought and NASA has other priorities.

Podcast of Rusty Schweickart here goes into more detail.

Delightful to see Sony CEO Sir Howard Stringer getting called on the carpet by Walt Mossberg for Sony's status as the industry leader in craplets.  I bought one of the little Sony TZ-series laptops earlier this year and it came with 25 separate "offers".  Many of these "offers" ran as startup processes and some were evidently such compelling "offers" they warranted more than one process.  The result was a machine so slow it was unusable, plus the annoyances of the actual "offers".  And since Sony doesn't provide the DVD for the operating system, it is a pain to flatten the machine and start over.  Needless to say no more Sony laptops for me.

Stringer's response to Walt pushing for a craplet moratorium is priceless:

"I have to determine whether the joy of craplets is worth preserving.”

You'd assume that would be a pretty straight-forward determination given the repeated drubbing Sony has taken on this issue in recent months.  But you also have to wonder just how deep the Orwellian instinct runs at Sony when you see things like this from them (which was introduced after my purchase unfortunately):

I'm not sure which is more remarkable:

1. That Fresh Start is not the default, yet they make no effort whatsoever to sell the virtues of their default craplet load.
2. That someone at Sony actually spent the time to brand and trademark the craplet-free option.  Perhaps they plan to take the Fresh Start brand to other Sony products ("we'll restore channels 10-99 on your new Sony TV, which by default we set to loop some bad infomercials, but only if you opt for the non-default Fresh Start option").  If you ever wondered what was beyond planned obsolescence, now you know.
3. The irony of Sony out bemoaning low cost competitors like the ASUS EeePC for precipitating a "race to the bottom" based on price as if Sony's business didn't have other significant vulnerabilities due to their inability to understand and respect basic customer desires.  I can't find anything on ASUS' site suggesting an optimized system is not the default.

Ok, enough venting.

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.

One of the last things I helped kick off before I left Microsoft was a simulated robotics competition for developers called RoboChamps.  The first season of RoboChamps is now underway.

Because it runs in a simulated environment, you don't need actual robotics hardware (which tends to be expensive for the really fun stuff).  The first season's challenges includes maze navigation, controlling the Mars rover, a version of the DARPA urban challenge and more.  And the code you write works with real robots too, which you can win in the competition.  Nice work Commissioner Mercuri.

"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.

Marc Andreessen just initiated a deathwatch on the New York Times and it is unfortunately hard to disagree.

As much as I enjoy the New York Times, on the web, through the very cool Times Reader and in finger-smudging print, the last time I dug into the numbers for the flagship New York Times newspaper (inside the broader New York Times Company), it was an exercise in turning a billion dollar print business into a tens of million dollar on-line business.  The print business is declining faster than the online business can fill the breach, which eventually has to get ugly.  The NYT Digital group has done some great work, but they're bailing out the Titanic with a teaspoon.

There is another point worth adding to Marc's list of issues fit to print: Rupert Murdoch.  He smells blood in the water and is deploying his new Wall Street Journal accordingly.  You could even argue one of the more compelling reasons to make an acquisition in the troubled newspaper business is if you thought you could pretty much take out your primary national competitor.  When asked if he intended to kill the New York Times, Murdoch merely replied: "That would be nice."

(For me anyway).  Today was my last day at Microsoft.  I'm going to see if there is life beyond the 98052 zip code and make sure I avoid any future tolls on the 520 bridge.

Microsoft was a phenomenal experience and I had the opportunity to work with an amazing array of people.  The company has set the benchmark for business success (if you haven't looked at a Microsoft financial report recently, go check out all the digits, especially on the profit line).  Even the most successful of those who passed through are likely to fall far short of what Microsoft has accomplished.  I wish my co-workers well and continued success.

I probably could have stayed at Microsoft for a long time, but ultimately decided it was time for a self-inflicted change.  Among the things I have considered:

• Spend more time with my family although they argue they have not done anything to deserve being subjected to that.
• Start preparing for the singularity and get a jump on all the disappointed Y2K millenialists who will be hunkering down again for the big one.
• Go full-time on my personal foundation where I could spend my time distributing pennies every hour.
• Head for Iowa, declare my candidacy and immediately start campaigning for the 2012 caucuses.
• Save the world by disrupting the energy industry, bring lasting peace to the Middle East, explore space, mentor a few startups and clean out my garage.
• Travel the world as an ambassador for Philly Cheese steaks.

Stay tuned for more on my actual choice.  I am going to revel briefly in being unemployed.

Not sure what it means for this blog yet.  I may post more, I may post less.  I did find I couldn't really blog about my job at Microsoft, so a lot of my posts were historical or irreverent (with the posts about IBM being both).  Hopefully, there should be less of that going forward (unless IBM continues to do things that are really egregious, and you don't dare bet against them on that count) and I can be more topical.

A little over a month ago OpenSocial was hailed as "checkmate" and mesmerized the blogosphere.  Now, the chorus of Kumbaya has been replaced by the cacophony of competition.  As I argued earlier, OpenSocial was a game plan we've seen before, just not a particularly successful one.  It transpires that:

• The OpenSocial spec remains incomplete and has been described as "half-baked".
• Erstwhile supporters are scattering to offer their own widget platforms (LinkedIn, Friendster) and even choosing to clone Facebook's platform instead (Bebo).
• Facebook is embracing Bebo's cloning and offering to license their platform broadly (nice move Ami).
• Some like LinkedIn are returning to the much more interesting problem of programmatically opening up the "social graph" as opposed to the distraction of just trying to create a least common denominator widget container.

Despite my old buddy Vic's pioneering use of a large wooden stump in the cause of developer evangelism, OpenSocial is much closer to being checkmated than doing any checkmating itself.

The Explorer went down Friday off the South Shetland Islands.   The ship had a double bottom but not a double hull and evidently the side was punctured by ice.  A "fist-sized hole" resulted in it slowly taking on water and losing power which disabled the pumps.  They abandoned ship after several hours and the passengers and crew were picked up by two other ships in the area after four hours on the water.

We took this ship to Antarctica six years ago (then owned by a different operator).  It was a spectacular trip and one I highly recommend.  Here are some photos of the Explorer in more buoyant times:

The passengers and crew were very lucky this happened in such calm seas. 

They were between the Drake Passage, which is the stormiest water in the world, and the Antarctic Peninsula, which is much more sheltered.  The seas could have been much rougher.  We went through two Force 10 gales getting to and from Antarctica, which means 30 foot seas and 60 mile-per-hour winds.  These photos don't really do it justice but they were taken from the square windows above the red stripe on the hull and the waves are at or above the same level:

They were also lucky that there were other ships in the area.  It is obviously incredibly isolated and ungoverned so there is no coast guard to call.  Any human activity - a plane, ship or base - is transfixing for its rarity.  Yet there is a very strong community amongst the tourists, adventurers, students and scientists running around down there.  People would bum rides between different ships and bases and anyone would readily open their doors/hatches to visitors.  There are a surprising number of smaller vessels down there and we detoured at one point to rescue some kayakers (and no one even questioned their sanity for being there).  The Explorer was always good for providing a hot shower and a warm meal.  In nearly forty years of Antarctic cruising, I am sure the Explorer banked some goodwill.

Ironically, the ship was on a cruise retracing some of Shackleton's incredible voyage.  His ship was crushed by the ice and he and his crew made it to the same South Shetlands, crossing ice and water in three small boats.  Shackleton and five others then sailed 800 miles to South Georgia Island in an open boat, which is a spectacular feat of navigation, and doubly spectacular in stormy seas.  If they'd missed South Georgia, the next stop was Africa.  They landed on the uninhabited side of South Georgia so had to traverse a glacier-covered mountain range to get to the whaling station on the other side and then go back and rescue the rest of the crew.  Everyone survived (although none probably ever wanted to eat penguin again).  There is a great account of this epic journey with spell-binding pictures from the expedition's photographer.

IBM announced something today they called the "Blue Cloud" initiative that is a "game-changing model for Internet-scale computing".  Some thoughts and questions:

1. This is a seriously half-baked announcement.  The press release rambles on and on yet says very little.  This "next major advance in computing" merits a single page on IBM's web site with two paragraphs of text and a stock photo.  IBM is the ultimate in top-down companies and tends to broadly execute against a single marketing theme.  Their current Innovation campaign seems to be ramping down and the replacement will no doubt start up in the spring heralding "the next major advance in computing".  So why this rushed announcement?  Why allude to the broad theme if you're not ready to execute against it?  Who needs to know today that "IBM's first Blue Cloud offerings" will ship next year even if it isn't clear what those offerings are?
2. What is Blue Cloud exactly?  What makes it "game-changing"?  IBM repackaging some relatively obscure open source software?  IBM trying as usual to position the mainframe as the answer to whatever the question is?  Another offering delivered via a few busloads of consultants?
3. Why do the announce in Shanghai when the only customer was the Vietnamese Ministry of Science and Technology?
4. What ever happened to OnDemand?  They're revisiting the same themes.  They could have even called it OnDemand 2.0...
5. Where is the statement about spending "$1 billion" or more on this initiative?  IBM doesn't do anything without promising to spend at least <Dr. Evil voice> $1 billion </Dr. Evil voice>. 
6. Shouldn't there have been a press conference in Second Life?  Or is this a sign that IBM's previous game-changing, next major advance for computing is officially over?
7. Is IBM just going to package up some open source software or are they going to put their money where their mouth is and make the capital expenditures to build out serious data center capacity to support cloud computing by their customers?  Microsoft spent about $2.3 billion on datacenter capex last year and will likely spend even more this year.  Google was around $2 billion.  Yahoo came in a distant third with only about $600 million.  Given all their financial engineering needs to support their private LBO strategy, does IBM have the money to play in this game for real or will they settle for hazy press releases?

(And it is only Wednesday)

Symbian's vice president of strategy John Forsyth noting that the Open Handset Alliance is not exactly the first time vendors have proclaimed Linux the future of mobile phone operating systems:

"It's a bit like the common cold. It keeps coming round and then we go back to business."

There are a couple of basic business strategies:

1. Obtain more marketshare than anyone else.  This should be considered the preferred approach.
2. Failing that, gather up the rest of the also-rans and band together against the dominant player.  This approach is usually accompanied by frequent use of the word "open".
3. If/when that fails, hire some lobbyists because it is inconceivable that you lost, the competition must have cheated.

The OpenSocial API announcement is being portrayed as an savage attack on Facebook, with MySpace's endorsement being described as possibly "checkmate".  We've seen this playbook run many times before and it is a mistake to confuse the sound and fury of an announce with the likely impact. It actually underscores the weakness of the hand held by Google and their fellow travelers.  While nominally about making it easier for developers to write widget applications that can be hosted across multiple sites, it really shows how few options Google has to try to deflate the twin nightmares that Facebook poses to Google.

First, Facebook is a huge and rapidly growing walled garden that Google can't index, provide search results about or sell ads against.  Facebook's privacy controls that keep out the crawlers have proven to be very compelling and the cornerstone of Facebook's success.  That of course flies in the face of Google's willingness to sacrifice any semblance of privacy on the altar of their business model. 

Second, the profile data of Facebook allows more targeted and therefore more lucrative advertising.  This has been borne out by some of the ad-supported applications developed for Facebook.  Lacking an asset of similar scale (insert obligatory comment here about how Orkut is big in Brazil...) or access to Facebook's profile information, this puts Google's ad business at a disadvantage to ad systems that can take advantage of this information.

Google hopes to either 1.) see Facebook eclipsed in popularity by any and all other social networks they can actually crawl (not necessarily their own - this strategy is driven by the search business, not Orkut) and thereby make the problem go away or 2.) somehow shame Facebook into opening up their crown jewels for the greater convenience of Google's business model.  Neither outcome seems likely.  These kind of industry efforts have a very poor track record because they are primarily about competitive positioning as opposed to significant customer benefit.  Nevertheless, they remain an almost reflexive impulse if you have UNIX genetic material.

While Facebook's platform play has significantly helped the service's popularity, both in breakthrough buzz and actual usage, an ecosystem of applications that can be hosted by multiple social networks is not likely to make a dent in Facebook.  The OpenSocial announce has shifted the spotlight away from Facebook, at least for this week.  But it is a move that even if successful, only helps the also-rans catch up to where Facebook is today.  Parity isn't usually enough to displace the leader.  Moreover, the availability of applications is still a secondary factor in what makes a social network successful in the first place.  Facebook's phenomenal growth curve predates its platform strategy.  And then there are the problems specific to these kind of "lets gang up on the leader" efforts. 

The fundamental problems are all the participants compete with one another and they're uniting around an admittedly least common denominator specification (we'll assume for the moment the spec is coherent and can be implemented consistently - a generous assumption).  In the days of yore when UNIX roamed the earth, vendors would gather together on stage on Monday to praise their commonality, sing Kumbaya and then have to go out and compete with each other for the rest of the week.  One of the ways they competed with one another, not surprisingly, was to differentiate their products, which tended to undermine the commonality claim.  The OpenSocial announce is deja vu all over again, right down to the bickering over whether the target of the announce was or was not in fact invited to participate.

Now, if you're one of the small social networks participating, there is probably nothing but upside for you.  You likely get more applications for your service than you would otherwise.  But the bigger players are where it falls apart.  When I first drafted this post, I had a line about there undoubtedly being many messengers from the OpenSocial camp prostrated before MySpace representatives.  That begging obviously was successful and MySpace endorsed the spec today.  For MySpace,  it was an cheap opportunity to steal some of the spotlight back from Facebook.  Beset by slowing growth and the loss of cool kid status to Facebook over the last year, it was an easy PR gesture to make.  What's not to like about being anointed kingmaker and people writing that your major competitor may be on the ropes because of a press release?

The real test is what happens when MySpace rolls out their platform.  Will they really limit themselves to the least common denominator spec?  Might they not expose some of their unique functionality to developers?  Could they have their own, richer widget model as well as supporting OpenSocial?  Given their historic resentment towards services built on the back of their user base, might they not want to have some control points for which applications are accessible?  Will they leave the monetization to the application developer like Facebook does?  Are they really more committed to "openness" than using their scale for competitive advantage?

From a developer perspective, many of the Facebook apps were developed in just days or weeks and if MySpace offers additional functionality that lets developers differentiate or offer MySpace users better integration, they're likely to quickly take advantage of those MySpace-specific functions.  Even if that model is (horror of horrors!!!) "proprietary".  Because OpenSocial does not facilitate viral adoption of applications across networks, developers are likely to focus their efforts on the network with the largest user base and that is MySpace by a mile.  I suspect most of the developers who play around with OpenSocial in the meantime will decamp and focus on MySpace when their platform arrives.  But enjoy the frenzy in the meantime.  Like many announcements before it, you can bask in the "openness" for a while, at least until business considerations kick in.

Some august commentator recently wrote:

Evidently IBM decided in September of 2006 they would stress filing patents with "significant technical content".  They are going to "sharply reduce" the filling of bogus, aka business method patents.  The company had no comment on their tens of thousands of patents filed and awarded before that date.

Further questions are emerging about whether this memo was ever actually circulated inside IBM.  This latest patent was filed after IBM's sanctimonious change in policy and drips with irony as it is a business method for extracting more revenue out of a patent portfolio.  The company had no comment on how they reconcile a billion dollars of annual patent licensing revenue with their corporate embrace of the GPL.

For the uninitiated, Fake Steve Jobs originated as a blog purportedly written by the CEO of Apple (but whose author was eventually revealed to be Dan Lyons who writes for Forbes), where he shares his inner-most thoughts in a way the head of a public company would never even remotely consider, not even in a world without Sarbanes-Oxley, the SEC or trial lawyers.  The blog offers funny and often trenchant industry analysis and portrays Jobs as a neurotic, perfectionist, aesthetic, ruthless, monochromatic, quantitatively- and geographically-challenged, mock turtleneck-wearing, '60s-throwback/New Age-devotee waging a lonely battle against ugly things and pretty much the entire world.  Options puts the blog's character into a book (a medium about which I believe Gutenberg once said "Dude, I friggin invented the printing press".  I'll leave the shared middle name and resemblance of Johannes in the Wikipedia image to Osama Bin Laden for another post).

Both the blog and the book really shine in their characters and the language.  In addition to wonderful caricature of Jobs himself, Bono, Larry Ellison, Al Gore and Yoko Ono all make recurring and larger-than-life appearances.  Larry's introduction as a great humanitarian is one of the funniest parts of the book.  Fake Steve has a whole set of catchphrases including "I'm Steve Jobs, I invented the friggin' iPod - have you heard of it?" and the desire to "re-instill a child-like sense of wonder".  The blog has propelled the  epithet "frigtard" into broader usage in my circle anyway along with its open source cousin "freetard", the ecological "greentard" and other *tard derivatives.

The blog regularly marinates the technology industry news of the day in these characters and voice, plus regularly cuts through industry absurdity straight to the bone (e.g. Second Life, open source inconsistencies and politics, pretty much any Sun initiative), to great effect.

The book keeps the same cast and style, but instead of bite-sized pieces on the daily antics of the technology industry, its backdrop is the investigation into the backdating of stock options at Apple.  The on-going prosecution of Apple's former general counsel and CFO plus Steve Job's upcoming deposition where it is not clear if he is simply a witness in that case or a target for future charges gives this fictional work some topicality.  Dan's publicist is probably praying for an indictment.

Overall, Options features the same posse of great characters from the blog, makes for a quick and crisply-written read, is laugh-out-loud funny in parts and holds together as a real book and not just a bunch of random blog posts strung together.

Great piece in the New York Times today on the future of advertising.  But it isn't the dramatic (and oft-discussed) shift from off-line to more relevant and accountable on-line advertising.  Rather, it zeros in on the shift of focus and spending to what happens after you've found a prospect, because finding a potential customer is just the beginning of marketing's job.  How do you convert, retain, up-sell and satisfy that prospect?  More and more, the answer will be through digital experiences.  And along the way, basically every company becomes a media company (and as a side-effect of that, every company becomes a software company).  Nike is the poster child in the story:

“We’re not in the business of keeping the media companies alive,” [Nike's] Mr. Edwards says he tells many media executives. “We’re in the business of connecting with consumers.”

Nike wants to engage directly with customers through their own experiences/services (the fact they sell shoes is almost incidental):

Behind the shift is a fundamental change in Nike’s view of the role of advertising. No longer are ads primarily meant to grab a person’s attention while they’re trying to do something else — like reading an article. Nike executives say that much of the company’s future advertising spending will take the form of services for consumers, like workout advice, online communities and local sports competitions.

“We want to find a way to enhance the experience and services, rather than looking for a way to interrupt people from getting to where they want to go,” said Stefan Olander, global director for brand connections at Nike. “How can we provide a service that the consumer goes, ‘Wow, you really made this easier for me’?”

Note the aside that the majority of digital marketing dollars are going to bolstering Web presence and experiences as opposed to advertising:

Digital media spending is doubling every year at many big companies, industry data indicate. But the research firm Outsell found this year that 58 percent of marketers’ online spending went to their own Web sites, rather than to paid ads. More than two million people visited Nike-owned Web sites in July, according to Nielsen//NetRatings.

The digital marketing revolution is much broader than just advertising.  No aspect of marketing will be unscathed.  And that revolution is software-driven...

With a $6.66 billion (numerologists take note) unsolicited, all-cash bid for BEA Systems, Oracle further cements their role as the new Computer Associates, i.e. the ecosystem scavenger.  BEA seems to have accepted they're in the endgame, quibbling only about valuation and not their independence.  Quick thoughts:

1. The acquisition suggests Oracle's Fusion middleware may not be quite the juggernaut the company has claimed it to be.  Oracle seems to have dropped any pretense of rationalizing their acquisitions, and are content to milk the maintenance revenue, cross-sell whatever they can and make parallel albeit shallow R&D investments in each codebase.  But the side effect of maintaining all those silos is they are making the integration mess even worse.  Now that is a business opportunity for Oracle middleware, but customers are not going to appreciate the Oracle cross-sell requiring higher cost and integration complexity.
2. Another big acquisition means more churn for Oracle's financials, further postponing judgment day on the financial outcome of their acquisition binge.  No doubt this transaction will be timed like other deals to start adding to Oracle's year-to-year comparisons just as other deals have contributed a full four quarters of apparent growth.  The question is about their organic growth.
3. I doubt any other bidders emerge.  Speculation has centered on HP and SAP.  HP is plausibly interested but I don't see them getting into a bidding war for the likes of BEA.  SAP still believes in architectural coherence so hard to see them getting into the fray.  Maybe there is another bidder with a similar financially-driven roll-up strategy to Oracle (e.g. Infor) or a private equity company trying to find something to do with all their cash.
4. There are a couple key things to understand about BEA.  It derives most of its revenue from a very small number of customers (around 100) so they don't provide any scale in terms of customers or technology.  The majority of their revenue is from consulting services, not software (shades of IBM's acquisition strategy).  And the legacy Tuxedo business is stronger of late than the newer WebLogic and AquaLogic products.
5. Given BEA hasn't actually filed financials with the SEC for multiple quarters (due to stock option backdating), I am sure Oracle will insist upon some serious due diligence.

The ridiculous IBM "Outsourcing of Services" patent has been withdrawn and magnanimously returned to "the public domain".

Evidently IBM decided in September of 2006 they would stress filing patents with "significant technical content".  They are going to "sharply reduce" the filling of bogus, aka business method patents.  The company had no comment on their tens of thousands of patents filed and awarded before that date.

IBM, whose position atop of the ranks of companies with the most patents awarded each year never quite holds up upon inspection of their actual patents, is offering up another gem.

While still not a match for their all-time title holder of absurd patents, the infamous "restroom scheduling" patent (see the story and great headline from CNET), IBM continues to push the envelope with dubious business process patents.

Spotted not by the Onion but by Eric Savitz at Barron's Tech Trader Daily (proposed slogan: We Read the Westchester County News Journal So You Don't Have To), IBM has filed an application for the "Outsourcing of Services" to help determine which jobs to keep in-house and which to outsource.  The application itself is largely gibberish but the "invention" does appear to require a mouse and a "diskette drive" is optional:

The world has become a global economy. As a result, more and more domestic based companies are taking advantage of cheaper resources, such as labor and materials, available in other countries. In recent years, corporations have looked increasingly to outsourcing of services, development, and manufacturing work as a strategy to reduce labor, administration, development, and manufacturing expense.

...

SUMMARY OF THE INVENTION

The present invention provides a system and method for identifying at least a portion of a human-resource within an organization for outsourcing. In an embodiment of the present inventions, the method includes receiving a list of a plurality of tasks being performed by a plurality of individual human resources within a given portion of an organization and grouping each of the tasks into a plurality of functional groups so that each of the functional groups represent an end result for the plurality of tasks associated therewith. The method also includes receiving an amount of the individual human resources spent on each of the tasks within the functional groups and aggregating the amount of the individual human resource spent on each of the tasks to provide a total aggregate time for each of the tasks within the functional groups across the organization. In an additional step, tasks are identified based upon the total aggregate time for outsourcing to a lower cost supplier.

Maybe they're patenting Frederick Winslow Taylor's prior work, figuring whatever crazy business process patents he had will have long since expired.

No comment from the company on whether this patent will be freely licensed to the open source community or not (i.e. is it a useful patent or not).

Welcome to the new IBM.  Between the self-induced LBO and the consulting services center of gravity, this is not your father's IBM. Some rebranding may be in order as business machines are just a sideshow these days.  A few ideas:

• IBM = I've Been Moved (Offshore)
• IBM = It Beats Manufacturing
• IBM = International Business_Process Mania
• IBM = Indian Business Model
• IBM = IPR Boosting Megalomania
• IBM = IPR + Buses = Method (consultants are counted by the busload)
• IBM = IBM Bites Mankind (to be coupled with adding Richard Stallman to the board...)

Got any others?

It is not often I rally to Larry Ellison's defense.  In fact, it has never happened, unless you count that incident involving two underage interns, the failed MiG fighter acquisition and ten thousand cubic yards of Jello, but the legal settlement thereof bars further elaboration.

Larry recently made a statement which people are assuming is just a typical, cynical, self-serving, Machiavellian exercise in spin and depositioning as befits a disciple of Sun Tzu and Miyamoto Musashi (bonus points for the commenter who can connect the advice of either of those strategic gurus with dumpster diving).

But what if he actually spoke the truth?  Past performance admittedly might lead you to overlook such a possibility, but Larry's comment came during Oracle's quarterly earnings call with financial analysts last month.  It slipped out in the midst of the ritual competitive bashing, in this case of SAP's new midmarket offering, that Oracle uses to distinguish its conference calls from those of other publicly traded companies:

"So while we think it’s an interesting market — the small market — because it’s large, we just haven’t figured out a way to make a substantial profit in that market. We think it’s hard to make money. Our strategy: add more value, go upstream, sell industry-specific software to our existing customers, and we’ll watch and see how SAP does going after small companies. Especially with in Software as a Service which we think is very interesting, but so far no one has figured out how to make any money at it."

Focus on the last line about the bottom line where Larry questions whether people can make money off of SaaS in the SMB market.  The SaaS euphoria has been driven largely as a technical imperative by enthusiastic new market entrants.  The SMB market has been held up as a green field that lets providers sidestep the myriad complexities of the enterprise.  And there is no doubt this is a vast and underserved market that would love to eliminate the hassles of deployment and operations.

But what about the profit opportunity?  Now Oracle is a company run by investment bankers these days, but it is a company that banks serious profits - over $4 billion last year with net margins approaching 25%.  When they look at business opportunities, they are looking for big profit pools.

Larry Dignan at ZDNet jumped in and channeled his namesake:

What Ellison could have said [is that] no one has found a way to make gobs of money in SaaS. Salesforce.com is profitable but you could find the $481,000 the company made in its latest fiscal year in Ellison’s couch. Indeed, without maintenance fees SaaS may be less profitable in the long run.

...

However, Ellison can make these comments precisely because Oracle has its SaaS plan ready–it’s called NetSuite.

I think he was a lot closer with the first paragraph than the speculation in the second paragraph.  Larry does have a personal investment in NetSuite that is raising interesting questions as NetSuite tries to go public, but I believe that is irrelevant.  No matter how you look at it, a subscription-based SMB-focused SaaS model at scale looks like a tough business model.  NetSuite certainly has no solution to the financial challenges as we'll see below.

Nick Carr also noticed Larry's comment in a good piece on the shifting sands of enterprise software although he displays less than his usual level of certainty:

How will the competition play out? I wish I knew. There are at least two unknown variables: the speed with which the SaaS model penetrates larger companies, and the ultimate profitability of the SaaS model. There are some indications that the adoption of SaaS is advancing more quickly than expected, but there are also indications that the hype may at the moment be getting out ahead of the technology. As for profitability, about all we can say is that Ellison is probably right: SaaS is unlikely to be as lucrative as the old licensing model that it's replacing - which happens to be very good news for customers.

Profitless prosperity may be great for customers, but at some point companies and their investors will have to find some profits or the activity will come to an end (unless you're in the airline business).

ART OF WAR OR JUST ACCOUNTING?

That was a really verbose motivation to take a look at Salesforce.com's financials and make a prediction about their stock price direction.  As the SaaS poster child, they offer some interesting lessons in the search for potential profits from SMB SaaS.  My conclusion is that the poster child's economics are not only not the shining beacon for the industry you'd expect but actually a disappointment.  Lets go to the numbers:

• Revenue: $613 million over the last four quarters.  Up from $497 million for the last full fiscal year (we're half way through the latest fiscal year), which in turn was up 60% on the prior year.  No doubt Salesforce has been a great revenue growth story.
• Earnings: $8.17 million over the last four quarters, up from Dignan's $481,000 in couch money for the last full fiscal year (but below 2006's $28 million).  They're not doing a great job turning that revenue growth into profits, and this is a company that has been around since 1999.
• Interest income: $22.43 million in the last four quarters, which is nearly three times the company's overall net profit in the same period.  Hmm...
• Valuation: Salesforce has a market capitalization of over $6 billion as I write this and trades at a forward P/E of over 500.  That valuation is supported by less than a million dollars per month of profit and no profit if you take out interest income.  Wall Street has some mighty big expectations for future profits.

So where will those profits come from?  The problem is there is a giant sucking sound on the income statement that exerts massive drag on profits: sales and marketing which is a proxy for what it costs to acquire customers.  Bruce Richardson at AMR computed the numbers:

Over the last six quarters, salesforce.com has spent between 49.7% and 51.1% of revenue on sales and marketing.

NetSuite is no better  and could be worse, again from Bruce Richardson:

As NetSuite’s Zach Nelson pointed out in The Wall Street Journal (September 19, 2007), even with free trials, it takes two months and three to five product demonstrations to close a sale. He was quoted as saying, “It isn’t easy to figure out how to acquire customers and keep them happy at a low enough cost that you still earn healthy margins.”

A cursory review of NetSuite's financials in their recent S-1 filing to go public shows they lost $23 million on $67 million in calendar 2006 and while they have a nice revenue hockey stick over the last three years, the profit line is borderline horizontal and well below the x-axis (i.e. in the red).  They also call out explicitly the challenges of SMB customer acquisition:

Our customers are small and medium-sized businesses, which can be challenging to cost-effectively reach, acquire and retain.
We market and sell our application suite to SMBs. To grow our revenue quickly, we must add new customers, sell additional services to existing customers and encourage existing customers to renew their subscriptions. However, selling to and retaining SMBs can be more difficult than selling to and retaining large enterprises because SMB customers:

• are more price sensitive;

• are more difficult to reach with broad marketing campaigns;

• have high churn rates in part because of the nature of their businesses;

• often lack the staffing to benefit fully from our application suite’s rich feature set; and

• often require higher sales, marketing and support expenditures by vendors that sell to them per revenue dollar generated for those vendors.

If we are unable to cost-effectively market and sell our service to our target customers, our ability to grow our revenue quickly and become profitable will be harmed.

The subscription model Salesforce, NetSuite and many other SaaS vendors use is extremely sensitive to the interplay between the cost to acquire a customer (which is an up front cost before you see any revenue), the average revenue per user (which dictates how long it takes to pay back the up front cost, never mind COGS and overhead) and the rate of churn (which tells you how many customers will stick around long enough to pay back the up front cost).  Small deltas in these numbers can make a big, big difference in terms of profitability.  Vonage is a great example of what happens when those numbers don't add up harmoniously.  And these parameters are interdependent.  Raising prices likely increases churn, for example.

One argument to support Salesforce's valuation is they are a young company that is investing for growth and just need to get to scale for their business model.  The difference however is they are not like the traditional software company trying to grow into a relatively high, relatively fixed R&D budget where above some threshold additional revenue falls largely to the bottom line.  Salesforce spends relatively little on R&D and their capex on infrastructure is surprisingly low.  The issue is their sales and marketing cost which seems to scale with revenue.

Looking at Salesforce's future, they face a couple challenges.  Revenue growth will continue to slow.  It has been slowing for five years.  It is always harder to sustain your percentage growth on a bigger base.  And with minimal profit growth, revenue growth seems to be the proxy for the sky-high multiple, and assumes a big profit payoff is coming some time in the future.

They also will face intensifying competition.  Microsoft will soon offer a hosted version of Dynamics CRM, which has only been available as an on-premise offering to date.  The product offers native Office and Outlook integration, deep customization  and broad partner support.  SAP and Oracle are also peripherally in this market, although both have pricing above Salesforce and haven't really been serious to date about the SMB CRM market.  There also are other startup competitors like NetSuite.  Competition can impact the key variables in a couple ways, all negatively:

• Acquisition cost - it is likely to cost more, not less for Salesforce to win a customer in the face of more competition.  Today Salesforce spends over $700 to acquire a new user.  Competitors like a Microsoft or an Oracle may have a structural advantage in terms of acquisition costs because they are global players with an instantly recognizable brand who can spread their sales and marketing investments across both on-premise and SaaS deployment options for their software.
• Average Revenue Per User - competition also tends to reduce prices.  Microsoft's pricing of $39-59/user/month for the SaaS version out of the gate will undercut Salesforce's approximately $71/month in average revenue per user. 
• Churn - when customers have more choices, they're more likely to go somewhere else.  Today Salesforce needs about ten months to pay off the initial acquisition cost of a subscriber.  When you add in COGS, R&D and corporate overhead, it is more like 18 months.  And unilateral competitive spite gestures on par with cutting off the nose to spite the face probably don't help on the churn front either (see The Fat Guy's blog).

Small perturbations in these parameters can have a huge impact on the attractiveness of the model, and it is easy to see downward pressure on all of them.  It is hard to see how Salesforce can reduce their marketing spend as competition heats up unless they want to stop growing.  So what happens?

• Salesforce will continue to pursue more "enterprise" customers and try to move up market.  Their average seat size per deal has almost doubled in the last five years and a very small number of customers (<100) may account for upwards of 40% of their seats.  The enterprise may prove a more cost effective marketing environment, but it also brings with it many more requirements and competition (in their favor, one of those competitors is Siebel, now owned by Oracle, who have the least satisfied customers I have ever seen).
• Salesforce will continue to push their platform strategy.  It is a nice story, but it hasn't contributed any discernable network effects to date that reduce acquisition costs.  But they seem to be doubling down that it might, suggesting a lack of other promising strategies.
• You will see serious multiple compression for Salesforce (meaning their stock price goes down).  Baring some kind of miraculous breakthrough in terms of a more efficient marketing model for the SMB market, slowing revenue growth without any concurrent growth in profits is going to squeeze the stock.  Going from an insane forward P/E of 500 to an almost-as-insane 250 means the stock halves.  But the reality is when the sentiment flips, the compression is likely to be more extreme.  I think the stock hits the wall in the next 9 months (and the company likely will continue to see good revenue growth in that time).  The frenzy of insider selling suggest this possibility may not lost on management.
• Salesforce will try to sell out and the challenge for Marc Benioff is the timing.  They simply can't get to the scale needed to be a viable, standalone, long-term company on their current path with their current scope.  Most of the buyers probably understand that even with sustained revenue growth, in the absence of commensurate profits emerging, the company will likely get cheaper over time.  So who might be a buyer?  Some say Google but Salesforce's inefficient, unautomated marketing model is anathema to Google's economic model.  My best guess, to bring this now way-too-long post for the three readers still with us full circle, is none other than Larry Ellison, who was perhaps being both truthful and crafty in his comments far above.  He once said of the old Computer Associates: "every ecosystem needs a scavenger".  That idea evidently grew on him and he's made it the strategy at Oracle, spending tens of billions to roll up business applications companies, where they can jack up and harvest maintenance revenues from relatively price-inelastic customers and cross-sell across the installed base.  It is a strategy fundamentally based on leveraging their sales and marketing model.  Buying Salesforce would give Oracle a more powerful CRM franchise than the legacy lineup they have today.  It would give them a stronger SaaS offering in addition to their on-premise offerings, although they would not have the advantages of a single code base for both deployment models unless they packaged up Salesforce to license to others to run.  They could continue to push Salesforce up into the enterprise market or use their existing marketing machine to at least sell into the mid-market.  And if the platform play starts to kick in, Salesforce does run on the Oracle database (unlike, ironically, some of Oracle's other SaaS offerings...).  Obviously Benioff goes way back with Ellison, who had an early investment in Salesforce.  If Tom Siebel can be welcomed back to the Oracle mothership, so too can Marc Benioff.  Just a matter of the right price.

Disclaimer: I am not a financial analyst, don't play one on TV but do think the above prediction is far more probable than some of the things that have surprised the best and brightest of the financial analysts of late.  I have no positions in CRM or ORCL.

(Image copyright The Cartoon Network)

More on the poor applicability of financial models to the real world from the Economist:

Goldman Sachs admitted as much when it said that its funds had been hit by moves that its models suggested were 25 standard deviations away from normal. In terms of probability (where 1 is a certainty and 0 an impossibility), that translates into a likelihood of 0.000...0006, where there are 138 zeros before the six. That is silly.

Sun changed their ticker from SUNW to JAVA today, going so far as to say "JAVA is a technology whose value is near infinite to the internet".

Curious minds wonder what the value of Java is to Sun.  By making Java the heart of the company, one can only assume Sun's financial reports will start breaking out Java revenues, or at least software revenues collectively.

The comments in response are not so enthusiastic.

From last week's WSJ (requires a paid subscription for now, pending Rupert's next move):

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

The Black Swan has been on bestseller lists for a couple months and we've seen multiple 1 in 10,000 year events over the last decade, but some people still seem to believe in their models...

Reverence for models does seem to be breaking down on other fronts.

Today's New York Times Book Review has Christopher Hitchens  weighing in on the latest Harry Potter book as only Hitchens can.  Hilter, Stalin, George Orwell, Eton, Sir Oswald Mosley, Tom Brown, Kipling, Shakespeare, Beowulf, Latin incantations, "his holiness the pope", Kantian, Russellian, Manichean, Gestapo, gulag, George W. Bush, anti-Semitism, Perry Mason, Ian Fleming, Walter Bagehot and Arthur Conan Doyle are all invoked.  It may even be a positive review although one can't really be sure.

It was bound to happen eventually Dan.  I had you pegged but have to admit my theory included a west coast co-conspirator.  Please sustain it even if all the 'tards now know your name.  And don't let Forbes.com split every post across ten pages as they are wont to do...

[From last week's IBM earnings announcement]

Revenue up $1.8 billion for the quarter.  Hard to tell what organic growth was but probably very low single digits.

Repurchased $14.6 billion in stock  and the number of outstanding shares down over 6% in the quarter.

Debt to fund the buyback up $12 billion in the last six months (up 53%).

Most of the earnings release is adjustments and caveats about various acquisitions and divestitures.  Lots of churn that muddies the view of the underlying business.

I won't pretend to know whether this is prudent financial engineering or not, but no doubt they are leveraging up.

Put IBM on the list of companies to watch when the private equity frenzy starts to unwind.  That may have started in earnest today...

More fodder for the irrelevance of trade deficit figures in a piece by Hal Varian in the New York Times via a reader of Greg Mankiw's blog (whew!) on the contributions of various countries involved in the manufacture of the iPod and the associated accounting in the trade statistics:

I found this article by Hal Varian, and a sentence at the end caught my attention. It says that although the Chinese only add 1% of the iPod's value, each unit exported to the US contributes about $150 to the bilateral deficit. This left me wondering: could bilateral trade numbers, namely the US deficit with China, be a fiction?

Mankiw's response focuses on the meaningless of bilateral trade deficits but the broader question is how meaningful are aggregate trade deficits or surpluses?  Just as you wouldn't judge a company without looking at its profits, you can make the same argument for nations.  China looks remarkably like Japan pre-1989: big surpluses, but tiny or non-existent profits.  Don't tell Lou Dobbs.

The money quote from Varian:

Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.

The iPod example supports the arguments made by Andy Kessler (whose How We Got Here is the best cutting room floor product ever, assembled from a lengthy aside on the history of technology and markets cut from another of his books) and "Mr. Black Swan" Nassim Nicholas Taleb that I mentioned previously:

He [Taleb] arrives at a similar conclusion as Andy Kessler on globalization and division of labor.  Don't sweat the US's trade deficit.  That is just revenue: just look at the balance of profits (where the US runs a surplus).  He believes the US has focused on scaleable businesses where your revenue is not limited by your number of labor hours, but rather those that involve creativity and are often winner-take-all in the global economy.  We export jobs for the non-scaleable elements to others who are happy to be paid by the hour: "There is more money in designing a shoe than actually making it; Nike, Dell and Boeing can get paid for just thinking, organizing and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind".

I also remember a wry comment in The Economist years ago that if you added up all the reported trade balances, the world ran something like a $70 billion trade deficit with itself (cursory search on the site doesn't turn it up, but they say things like "trade deficit" and "$70 billion" a lot).  So not only is it a questionable metric to act upon, but the data itself may be questionable as well.

24/7, except when it's not.  Geometrically I guess that would be a single line of failure.

Glass half full view: welcome the occasional capriciousness of cloud services like a snow day.

Glass half-empty view: maybe highly centralized architectures that assume everything always works are not the best approach...

The BBC reports the French security service has told French government officials not to use Blackberries because their data is stored in foreign countries and could be susceptible to prying eyes.

Expect many more such awakenings going forward to the tradeoffs to putting data in the cloud.  Not just national security concerns, but trade secrets, privacy and compliance requirements will all require people to think more explicitly about the risks and tradeoffs of where you put your data and what can happen to it.  Today's all or nothing approach is a crummy way to do it.

Three contenders for the most amazing part of this story:

1. They're just realizing this now?  Did they just figure it out or did some incident precipitate this decision?  There is probably a pretty good spy novel in if you combine this with almost any headlines from France in recent years.
2. French officials are "flouting the ban".  I predict the upcoming ban on smoking in public places in France takes "flouting" to a whole new level.
3. RIM insists the US National Security Agency can't read content on their service.  Disciples of Taleb might call that epistemological arrogance.

Historically, the wheels have come off the bus in spectacular fashion shortly after companies make big, bold revenue forecasts in the high tens of billions of dollars.  If my memory serves, Compaq, Dell and IBM all hit the wall after stating ambitions of $50 billion, $60 billion and $100 billion respectively.  If you have time to talk about big revenue dreams, there is probably something else you're not paying attention to that warrants your attention.

Oracle is evidently predicting $50 billion in revenue in five years, up from the about $18 billion expected for the fiscal year that ended a couple weeks ago (but not yet reported).  That is over 22% compounded growth on a pretty hefty base.  Finding $4 billion in new revenue in the next year is no easy task (especially when they are forecasting less than half that).  Even after 31 acquisitions over the last couple years, Oracle only grew by 89% over the last five years.  To hit the target, they have to do 227% in the next five years.

Maybe it is just a hardware company curse and they have nothing to worry about.

Maybe the hubris threshold is higher for Oracle based on past performance.

Maybe they haven't actually invoked the curse as it wasn't a public statement and can dismissed as just motivational sales meeting chatter.

Maybe this means maintenance fees for the installed base are going to go through the roof.

Maybe it signals that Oracle is going to stop dorking around with the dinky acquisitions they have been doing and get serious about rolling up the industry and/or getting into some new businesses.  Oracle could buy the next ten software companies in size below them and just about get to their target.  It would diversify them into a few new businesses.  Imagine your friendly Oracle sales rep peddling Madden NFL Football and Mario Party 8.  Sorry, that would be Mario Party 8i...

I am fascinated that both IBM and Oracle have essentially adopted the private equity strategy without the actual buyout and are focused on financial engineering more than technology engineering.

The Black Swan, by Nassim Nicholas Taleb is sort of a follow-up to his earlier Fooled By the Randomness, which dealt with why people are poorly suited to decision-making in the face of uncertainty.

The Black Swan deals with the "impact of the highly improbable" and argues that these events, dubbed Black Swans, are far more common then we think, in part because of the perverse influence of modern statistics which assumes all kinds of things are normally distributed except for the minor detail that they aren't.  When they make the book into a movie, Carl Friedrich Gauss will be the villain (who should be played by Max Von Sydow).  Events like 9/11, the collapse of Long-Term Capital Management and most wars are Black Swans.  No one sees them coming, but in retrospect people manage to explain them.

The book is full of wide-ranging applications of his thesis, great asides and mildly misanthropic comments about businesspeople, anyone in finance, economists, particularly Nobel Prize winners, German philosophers, forecasters of any kind, opera fans and the French.

The core of the book is the distinction between Mediocristan and Extremistan.  Mediocristan is the world of the normal distribution, where outliers are extremely rare.  Many physical characteristics have a normal distribution, such as height or weight.  In Mediocristan, it is not at all likely that an additional observation will impact the sum of all observations in any significant way.  Extremistan is very different and is the domain of the power law distribution (think of the power law curve in The Long Tail except the Taleb is all about why the head is way more important than the tail because in the real world you don't know whether you've observed the head of the head yet).  An outlier observation can dwarf the sum of all previous observations, such as Bill Gates entering the room when you're observing wealth.  Big swathes of the real world, particularly social dynamics and informational goods, are in Extremistan, are not normally distributed and we treat them as Mediocristan at our peril.

The bulk of the book examines why we are so blind to Black Swans and gets into a fair amount of behavioral psychology like the earlier book.  Not surprisingly, we tend to look for things that reaffirm our beliefs as opposed to contradict them; we're good at constructing stories to explain things after the fact; we tend to ignore the silent evidence "of cemeteries" and focus disproportionately on the winners (think survivorship bias); assume the real world abides by clear and understandable rules; and we generally overestimate what we know and underestimate what we don't.

The book is kind of a bummer in that he doesn't have much of a prescription for how to survive and thrive in Extremistan: 

"I care about the premises more than the theories, and I want to minimize reliance on the theories, stay light on my feet and reduce my surprises.  I want to be broadly right rather than precisely wrong.  Elegance in the theories is often indicative of Platonicity and weakness - it invites you to seek elegance for elegance's sake.  A theory is like medicine (or government): often useless, sometimes necessary, always self-serving, and on occasion lethal.  So it needs to be used with care, moderation and close adult supervision."

Basically, he attributes success to "undirected trial and error" and encourages you to maximize your exposure to as many positive Black Swans as possible.  Better to be lucky than good:

"Capitalism is, amongst other things, the revitalization of the world thanks to the opportunity to be lucky."

"Everything is transitory.  Luck both made and unmade Carthage; it both made and unmade Rome."

He applies his thinking to a variety of different realms with very intriguing results.  As a former options trader, he basically denounces Modern Portfolio Theory as complete bunk, a castle built on shifting Gaussian sands.  He asserts that a mere ten days over the last fifty years account for HALF of the market's performance (I assume it to be true but will adopt his stance of skeptical empiricism in the absence of verifying it).  Needless to say, that means some very fat tails.  He also revels in the various explanations of the blow-up of Long-Term Capital Management (which Roger Lowenstein chronicles quite well in the succinct When Genius Failed) and needles the Nobel Prize winning economists who were involved at length.  Taleb implied in an interview that his own portfolio is roughly 80% T-bills and 20% exposure to positive Black Swans with unlimited upside which sounds like venture capital of some form.

He arrives at a similar conclusion as Andy Kessler on globalization and division of labor.  Don't sweat the US's trade deficit.  That is just revenue: just look at the balance of profits (where the US runs a surplus).  He believes the US has focused on scaleable businesses where your revenue is not limited by your number of labor hours, but rather those that involve creativity and are often winner-take-all in the global economy.  We export jobs for the non-scaleable elements to others who are happy to be paid by the hour: "There is more money in designing a shoe than actually making it; Nike, Dell and Boeing can get paid for just thinking, organizing and leveraging their know-how and ideas while subcontracted factories in developing countries do the grunt work and engineers in cultured and mathematical states do the noncreative technical grind".

He also looks at innovation.  I've always believed that any successful technology has a strong element of serendipity in its adoption (standards body denizens hate it when you point this out and this would be a wonderful area to add up the "silent evidence" of failures) and he makes the same point, even using the word serendipity:

"If you think that the inventions we see around us came from someone sitting in a cubicle and concocting them according to a timetable, think again: almost everything of the moment is the product of serendipity." 

I'll save a discussion of the role of Black Swans in Microsoft's history for my oft-mentioned, but entirely un-started book.

In short, it is a great and thought-provoking read.  It is rife with parentheticals and asides like the following that also make it entertaining:

"You can even include Frenchmen (but please, not too many out of consideration for the others in the group)..."

"Line up a thousand authors (or people begging to get published, but calling themselves authors instead of waiters)..."

"The person becomes more vulnerable to all manner of fads, such as astrology, superstitions, economics. and tarot-card reading."

"They will probably take up, depending on their temperaments, bird-watching, Scrabble, piracy, or other pastimes."

"Everyone has an idea of utopia.  For many it means equality, universal justice, freedom from oppression, freedom from work (for some it may be the more modest, though no more attainable, society with commuter trains free of lawyers on cell phones)."

"Eventually, authors who are not often cited will drop out of the game by, say, going to work for the government (if they are of a gentle nature), or for the Mafia, or for a Wall Street firm (if they have a high level of hormones)." 

"When you are employed, hence dependent on other people's judgment, looking busy can help you claim responsibility for the results in a random environment.  The appearance of busyness reinforces the perception of causality, of the link between results and ones' role in them."

"Being an executive does not require very developed frontal lobes, but rather a combination of charisma, a capacity to sustain boredom, and the ability to shallowly perform on harrying schedules.  Add to these tasks the "duty" of attending opera performances."

"Economics is the most insular of fields; it is the one that quotes least outside itself!  Economics is perhaps the subject that currently has the highest number of philistine scholars -- scholarship without erudition and natural curiosity can close your mind and lead to the fragmentation of disciplines."

"Optimization is a case of sterile modeling...  It had no practical (or even theoretical) use, and so it became principally a competition for academic positions, a way to make people compete with mathematical muscle.  It kept Platonified economists out of the bars, solving equations at night."

"Alas, it turns out that it was [Paul] Samuelson and most of his followers who did not know much math, or did not know how to use what math they knew, how to apply it to reality.  They only knew enough math to be blinded by it."

IBM is out touting their profit growth prospects (perhaps in response to having been eclipsed by HP in both performance and absolute size?). 

They are outlining their potential earnings growth by 2010 on moderate expected revenue growth.  Today's WSJ reports:

"Of the roughly $5 increase in earnings per share that IBM says is possible by 2010, 75 cents comes from the assumption that IBM's recent growth rates will continue. IBM sees another $1 coming from wide-ranging efforts already underway to cut costs and boost profit margins; $1.10 from more than $40 billion worth of stock buybacks; $1.20 from acquisitions and other future growth initiatives; and 90 cents from retirement-related savings. IBM is freezing accruals in its pension plan after this year."

So organic growth is predicted to be about 12.5% in total over three years and is exceeded by the savings from cutting employee pensions, which in turn is smaller than the contribution of "wide-ranging" cost cutting.  Organic profit growth is roughly 15% of the overall forecasted growth.  What does that say about IBM's business?  Their engineering capabilities have evidently migrated to the financial realm.

There may be something to Cringely's reporting (and here) on how they plan to achieve the cost cutting.

UPDATE: I missed the fact they are taking on debt to do this.  IBM is doing the private equity thing without getting the private equity firms involved...

Two posts in one week and both about the same issue of Wired no less.

Yesterday's kerfuffle in which Wired is "shocked, shocked" to learn there is a PR industry has been all over the blogosphere.  Microsoft screwed up by accidentally sending Fred Vogelstein of Wired the internal briefing document written for the folks he was interviewing.  This has been portrayed as a nefarious "secret dossier" about the reporter, never mind that Fred only merited a whopping five bullet points in said document (and Fred doesn't contest the characterizations). Reactions were bimodal: 1.) this is how the PR business works although forwarding the briefing document is definitely not best practice and 2.) you mean there is a PR business that does this?

We'll see if it sells more magazines, but it was disappointing to see the publication spent so much time on the backstory and generating controversy around the "secret dossier" that the story of how transparency works on  Channel 9 (the nominal subject) was lost.  Channel 9 is a developer community that has roughly five times the number of users as Wired's own site with far deeper user engagement.  Explaining how and why is left as an exercise for someone else.

As an aside, the fact stories like this can be told so subjectively is why the world finds a use for PR agencies.

Wired may be happy in the sense that controversy probably generates buzz and drives traffic, but poor Fred is having to take one for the team.  Not just the comments about him in the briefing document and here (from the oh-so-non-transparent Fake Steve, my favorite source of industry news and analysis, ironically sponsored by Wired) but longer term because every company in the world now has the briefing on him and he'll likely have to change his journalism modus operandi.  Perhaps we can just fast forward to having Wikipedia entries on every journalist, summarizing their past prose, proclivities and peccadilloes, thereby saving the energy involved in every company preparing for their own interviews.  The Channel 9 team did have some fun turning the tables by interviewing their interviewer (video is here on Channel 9's sibling TEN).

I am a big believer in transparency but the interesting discussion is where are the limits.  There are and will be limits.  I think Wired did a disservice making the leap to "radical transparency" without much substantiation (even the cover image stopped short of "radical" transparency).  Perhaps Wired will embrace their own mantra and practice what they are preaching.  They could post the stories they're working on, let people vote on who to put on the cover and might as well share all their financials (no Reg FD issues when you're privately held).  Reporters like Fred could post all their interview notes and logs of what PR people they have met and been pitched by.  Put the ad revenue per page right by the page number.  Letting readers have the data to look for any correlations between editorial coverage and advertising revenue would be a radical blow for transparency.

And just for the record, I should note that it was a Microsoft employee, not Waggener Edstrom our PR agency, that accidentally sent Fred the briefing document.