The Network Garden - Mark Sigal's Blog

LABOR PAINS: Innovation, economics, and messy, complex truths (New Post @GigaOM)

Andy Kessler, whose take on things I generally like, recently wrote a piece for The Wall Street Journal called, “Robots, 3-D Printers and Other Looming Innovations.”

In it he posed the question of whether the internet and other disruptive trends have destroyed more jobs than they’ve created. Could innovation actually be fueling the stubborn unemployment that has persisted in much of the country?

But Kessler was merely tossing some rhetorical “chum” into the waters to bait naysaying Luddites. Sure, people are hurting now, Kessler noted, and probably more jobs have been destroyed than created, but eventually things will more than even out, so suck it up!

Kessler then delivered his list of future job creating “game changers” with the certitude of a preacher sermonizing to his flock (it’s WSJ, after all).

But, Kessler’s truth ignores a messy paradox; namely, that while the innovations of tomorrow are most certainly worth working toward, that doesn’t obviate the parallel truth that the depth and duration of pain being experienced throughout much of the country is chronic, systemic, and arguably, must also be dealt with.

Reassessing the calculus of ‘value’

There is a Koan that is running through my head. Maybe you can help me suss it out.

In an era where cheap, commoditized and free are celebrated as democratizing virtues of plenty, when does a shirt for $6.99 cease being an asset, and when does it become a liability?

Read the full post at GigaOM by clicking HERE.

UPDATE: Fred Wilson of AVC (and Union Square Ventures) has blogged on my piece on Jobs and the Economy. 

Related Posts:

1. The Great Reset: Why tomorrow may NOT be better than today
2. The tyranny of the ‘All or None’
3. Assessing the Internet: Great Creator or Destroyer?
4. How Uber is like Southwest Air: The art of reinventing an industry

NIKEiD and the Uber-ization of Global Logistics

"Any sufficiently advanced technology is indistinguishable from magic." - Arthur C. Clarke

"You mean, I simply push this button, and it just shows up?"

**It**, in this case, is the magical Uber Black Car; magical being relative to the pedestrian, unreliable yellow taxi.

What Uber did in re-thinking the gray space between taxis and private car services is instructive.

Logistically speaking, they rejiggered the following:

1. The Ordering Process (it's push-button simple via an app; no interminable waiting on hold for a dispatcher)
2. The Transparency of Availability (you can literally see how many cars are nearby, and how quickly your car will arrive)
3. The Nature of the Transaction (no money ever comes out of your pocket; you never have to think about the tip again)
4. The Reliability of Your Order (you are notified on your mobile when Uber arrives, the driver confirms that you are indeed the orderer; no more pickups that don't show up, or taxis 'stolen' by pedestrians on the street)
5. Your Relationship to the Driver (most drivers feel like entrepreneurs; Uber is a new revenue source for them; all drivers are identifiable, and subject to being rated and reviewed)

Part of the magic of Uber is that the company is able to create this transformative experience without owning any of the cars or hiring a fleet of drivers.

Given the above, is it any wonder then that "uber-ization" has become my go-to term for industry re-invention through new combinations of design, user experience, workflow and logistics -- as enabled by broadband, mobile and the cloud. 

NIKEiD: Re-Thinking What a Shoe Can Be

The power of great technological waves and re-invention in general is not merely that they change how things are made, or what they cost. 

Rather, it's that they change our concept of what is possible, and what a given medium can be.

In the realm of motion pictures, adding sound (and talking) to films, completely transormed the industry.

In the case of ecommerce, the boundarly-less and friction-free nature of Amazon, has completely disrupted retail.

In the realm of mobile, building a unifed platform around iPhones, iPads, iTunes and iOS, has catalyzed the post-PC era. 

I thought about this truth yesterday, as the pair of fully customized NIKEiD shoes showed up at my door.

Not only were they beautiful (okay, beauty is in the eye of the beholder), but what left me feeling awed was the fact that what had begun as a series of push-button simple clicks in San Francisco, had traveled across the globe, navigating an unimaginably intricate manufucturing and logistics process to find its way back to my front door.

The UPS route home alone (see above) shows stops in China, Hong Kong, Taiwan, Philippines, back to China, Alaska, Kentucky, Oakland, and finally, San Francisco. 

Simply magic, and I wonder how many other products, services and industries are ripe for such reinvention. 

If you are sitting in an industry where commoditization and/or disruption is your future (through de-localization, re-invention and digitization, you need to heed the words of Google CEO Larry Page.

His guidance? "I encourage more companies to do things that are outside their comfort zone. It gives you more scalability."

Food for thought.

Related:

1. Uber-ization: The art and science of reinventing an industry (GigaOM)
2. Retail needs a reboot to survive (GigaOM)
3. You say you want a revolution? It's called post-PC computing (O'Reilly)

(GUEST POST) A New Engine of Growth: "Paint the Gutters"

I have written a lot about the state of the US economy, especially as it pertains to the multiple industries undergoing painful disruption and related to this, the lack of catalysts for job creation in America (see HERE, HERE, HERE, HERE, and HERE).

What follows is a guest post from a conversation post election night with Richard Knight of Korts and Knight, a kitchen and cabinetry design firm. Richard has a unique perspective, being a business man in a true "brick and mortar" segment that been been dually impacted by the rise of "showrooming" (see my piece 'Retail Needs a Reboot') and the weakened housing market.

Plus, having lived through many economic cycles over a 40 year career, his narrative and sensibility is both basic and profound:

"Quite a night last night. Glad that the campaign is finally over. Seeing the election map it is all too apparent that the country is really two countries, and that it is very hard to talk about it in one breath.

Those red states are all over the middle and the South. And then there is the blue West Coast. We are the multi ethinic, racial, diverse country that believes in the future, and is willing to embrace the holy trinity of Globalization, etc.

Then there are those undereducated white men and women, who are looking for some magic pill to restore the good old days. If we just cut back on everything, start saving, cut off the medical to poor people, and send the foreigners back home, everything will be OK.

Seems to me that it is hard to bring the entire country into the future and that whatever solutions we find will continue to add to the polarization of the country. 

Regarding an engine for growth and for job creation, your example of Uber and Southwest (in my post on 'The Age of Indivisibility') are two fine examples.

And surely we will see more of this. But its kind of like my gardener. He provides a personal service for me, and his job is safe from globalization. It is the globalization that seems to me to me the immutable fact of the future.

Uber and Southwest avoid that issue by providing a local service. There are so many people in this world who are willing to work so much harder than us, for so little money, that it is hard to deny that they will provide the products that we need. Seems that either way manufacturing jobs are gone forever. Either they are made in this country with highly automated factories, or they are made abroad with millions of little fingers. 

The US is not the first to find that changing times see great cities degrade and crumble. Cairo is a typical example. It was once a very fine and Western (maybe European) city. But time has passed it by and it is a crumbling as its infrastructure has long sense been overwhelmed.

You will see the same all over the world. The ascendent cities of China represent the new and shiny and awe inspiring result of a rising culture. I think the USA is headed down the same road as Cairo. We have stopped dealing with maintenance.

Now, I see that very clearly in the suburbs. There was a time when personal pride kept everyone's home a source of pride. Green lawn out front, the painted porch, etc etc. If you take a ride into the suburbs, you will see quite a mess. I live in what I will call a typical middle class neighborhood, and you will see that people are not keeping up.

Lawns have died, fences are falling down, and there are more and more cars parked on the streets. And if you go into the heartland, something we did this summer when we motored across the country, Ohio is really third world. Once great neighborhoods, boarded up, overrun, abandoned. 

We have seen a slow degradation of life in America. In order to keep up our "standard of living" we have resorted to working longer, putting Mom to work, and living off our equity line to finance our lifestyle.

Now, it is becoming a case of, "Where can we cut further?" I think there is a lot of "hidden" belt tightening going on. We don't quantify maintenance, but houses are starting to fall down around people. We finally did some work around our house, I hired out some painting of gutters, some fences, and little stuff, and quickly spent 10k. It looks better, was overdue, but I could have just left it alone too. My guess is that people give up on insurance, don't go to the dentist, and cut back in lots of invisible ways. 

So much of what consumers want to spend their money on, represent things to "improve" their life experience. We define that as a new sweater, or a new gadget, (iPad mini). These are the things that are highly promoted, and we are convinced that we need. And these are the things that are made abroad, and where our money leaks out of the economy.

And so my grand idea is that what we need is more maintenance. If Americans would spend their money to paint the gutters, and learn to find satisfaction in that, (rather than a new gadget) then that money would have a multiplier effect on our economy. That painter could then have the money to spend on his own house. 

Now the idea is actually much bigger than that. The recent storm on the East Coast has exposed the vulnerability of our cities to calamity. Huge amounts of money needs to be spent to "fix" the problems that we did not see coming.

Global warming, rising sea levels have changed the game from "it would be nice", to "we NEED to go to work on it."

Take NYC. Seems that electrical grid is largely underground or in basements. Seemed like a good idea when it was conceived, but not so much now. Buildings all over need to think about moving things to the roof, or to the second floor, in order to protect themselves from being put out of business by a flood. In a million ways, our cities need to reinvent themselves to deal with the climate and to refresh themselves. The 100 year flood seems to be happening every 10 years. 

And so I understand that at one time, the initiative to build the interstate highway system was a great engine of prosperity. Lots of jobs, improved prospects for commerce, and sold lots of cars, too. Our economy managed to commit lots of money to this, but it did not put a product into someone's hand. But it improved our quality of life nonetheless.

Today, we know that the roads, the bridges, the infrastructure is badly in need of repair. I think this is the place that we will find the jobs to replace the manufacturing jobs that have gone away. And this is an example where global location matters. This has to happen on our terra firma. And this money that gets spent will circulate back into our economy.

It would be nice to see money spent to make our cities shiny and new and to find a way to take pride in that, and to enjoy that rather than to seek satisfaction in products made in China. 

The ramble is over, time to get moving. Your trinity of change is real enough. The solutions may not have enough scale to solve the nations problems. Too many people need work.

So my word for the future is "maintenance". Its local, cannot be digitized, and is largely not a commodity."

Related Essays:

1. The Age of Indivisibility, and the Rise of Integrated Systems Design (GigaOM)
2. Retail Needs a Reboot to Survive (GigaOM)
3. HP, Dell and the Paradox of the Disrupted (GigaOM)
4. Assessing the Internet: Great Creator or Better Destroyer (GigaOM)
5. The Great Reset: Why Tomorrow May Not be Better than Today (O'Reilly)

The Jobs Engine: On Indivisibility and Integrated Systems (GigaOM)

There is a looming sense, a dark narrative that America’s best days are behind it. Why? A clash of civilizations. A sense in many pockets of the country that we are living in a time of anomie, inequity and worry.

Everywhere you look, there is disaster. At ground zero are the remnants of a 100-year flood known as the 2008 financial crisis; it’s a flood that never completely receded.

Put another way, whether you are politically right or left, believe in trickle down or trickle up,  the hard truth is that there are few catalysts for significant job growth in America right now.

Take a look at that one great wonder and power of our age, broadband internet. In many ways it has been an engine of growth and created whole new industries. Yet it has also set off a wave of painful disruption, through the triumvirate forces of:

• Digitization: Anything that can be turned into bits, will be.
• Globalization: Where location can be rendered moot, it will be.
• Commoditization: When bits and logistics can commoditize, they will.

In its wake it has permanently broken or even destroyed multiple industries. In fact, Bureau of Labor Statistics data shows quite clearly how such industries that were rocking and rolling prior to broadband are now sucking wind, including electronics stores, book stores, electronic components, employment services and information services, to name a few.

Less obvious, but equally troubling, is the fact that when these industries break it also disrupts the ecosystems that surround them as well, cascading in a domino effect. 

Here’s how it works: When an industry like print media goes sideways, not only do publishers and the employees housed within them go away, but so too do printers, production houses, delivery trucks, book stores, newsstands, book reviewers, sales reps and publicists. Worse, this hits regional hubs especially hard. And we now know those jobs are not coming back. Ever.

The immutability of this dynamic hearkens to a signature line in Oliver Stone’s ever timely, ‘Wall Street,‘ when broken trader Bud Fox (Charlie Sheen) asks corporate raider Gordon Gekko (Michael Douglas), “Why do you need to wreck this company?” Gekko retorts, “Because it’s wreckable, all right?”

Read the full post HERE.

UPDATE 1: Kevin Kelly, author of 'What Technology Wants' (one of the more thought-provoking books of recent years), and long time Wired writer, has written an excellent article on what he calls 'The Post-Productive Economy.' Most fundamentally, he argues that sustaining growth waves take decades to reach full bloom, yet our measures are tailored to both the wrong kinds of metrics and the wrong sense of periodicity. I think that it further underscores the truth that the strongest counters to Commoditization, Digitization and De-Localization is Integration.

Related:

1. Retail Needs a Reboot to Survive (GigaOM)
2. HP, Dell and the Paradox of the Disrupted (GigaOM)
3. Assessing the Internet: Great Creator or Better Destroyer (GigaOM)
4. The Great Reset: Why Tomorrow May Not be Better than Today

Pattern Recognition: Apple Vindicated; Retail Schadenfreude; Disruptive Paradox

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Apple Vindicated: What protection does the industry's innovator merit against shameless knock-off artists? Does anyone really want to argue that what Apple has created is NOT uniquely proprietrary? That it merits less consideration than a Gucci bag or a new erection pill? Yes, I get it. Our patent laws suck, and there are ridiculous numbers of frivolous lawsuits, but Apple v. Samsung is not one of them. Feel free to pick apart this aspect or that of the IP that Apple is claiming, but know this. Apple has built proprietary differentiation, and by simple sniff test logic, they've earned the right to protection. It's not a god-given right that I can enter your house, eat from your refrigerator and not pay for it. To me, there is justice in this ruling; and vindication for The Legacy of Steve Jobs. No less, it's one year to the day from when he resigned as CEO of Apple. Talk about tributes!
2. Retail Schadenfreude: I love retail. My first career was in retail real estate. My brother is a shopping center developer. I can wax poetic about the magistry of Cheesecake Factory. But, I also love Amazon, and feel that they are a great retailer, and consistent innovator. Obviously, bricks and mortar has a place, wherever it can create differentiation. Otherwise, it will get Amazon'd on price. That's why I have little pity for Staples, just as I had little pity for Circuit City or CompUSA before that. These are businesses that either never had heart (CompUSA and Circuit City), or simply lost it (Staples); who killed the Mom and Pop just because they could. Now, Amazon is killing the Big Box. Karma's a bitch, isn't it? 
3. The Disruptive Paradox: In the movie 'Joe Strummer: The Future Is Unwritten,' a documentary about the life of the founder of The Clash, there is a great line uttered by Bono talking about the vibe in England and Dublin in the 70s. Bono says, "I was frightened...I was excited." That sentiment is applicable to our present time. Many, many industries in a deeply screwed mode. A completely unhealthy, ineffectual political system. Oh, and institutionalized conflicts of interests between Big Business and the government apparatus (I am intentionally distiguishing between Policy Creation and Policy Adminstration). Yet, something HAS to give. The patient will not simply get better with time. You can look at this pessimistically, and with cynicism. Or, you can be a little scared, but also be excited. Because we are at the end of a cycle, and approaching the beginning of a new one. It's post-global, post-digital, and post-commoditization. The new cycle is about making the inefficient more efficient, and creating differentiation where commodization exists. This is the 'stop the film and discuss' portion of the program. It stands to reason that some companies will figure this one out, providing the essential case studies for many others to get to the higher ground of re-invention. Be scared. But also be excited.

On co-creation, contests and crowdsourcing (O'Reilly Radar)

I had decided to update the branding at one of my companies, and that meant re-thinking my logo.

The creative exercise started with a logo design contest posting at 99designs, an online marketplace for crowdsourced graphic design.

When it was all done, I had been enveloped by an epic wave of 200 designs from 38 different designers.

It was a flash mob, a virtual meetup constructed for the express purpose of creating a new logo. The system itself was relatively lean, providing just enough “framing” to facilitate rapid iteration, where lots of derivative ideas could be presented, shaped and then re-shaped again.

The bottom line is that based on the primary goal of designing a new logo, I can say without hesitation that the model works.

Read the full post HERE.

Related

1. Makers, Marketplaces and the Library of the Commons
2. Ruminations on MacWorld and the Future of Trade Shows
3. Creating New Synapses in the Global Brain: Notes from Foo Camp

 

Pattern Recognition: Caveat Platform; Atomic Units; 'Too Big To Fail' Nation

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Caveat Platform: Ok, I am mucking with Latin in places that I shouldn't, but the moral of the story this week is that trusting platform makers that you don't give any money to is a recipe for getting lathered up, and given the "special" treatment. There is no free lunch, as Dalton Caldwell lamented this week with respect to Facebook. There is no honor (or even recognition) for your contributions, as Howard Lindzon lamented this week about Twitter. Folks, when will we learn? Free is just too expensive when you are counting on building your business on top of it. Free can disappear tomorrow, change course, or in the case of Twitter, turn from idealist to carnivore in a snap. And why not? It's free. You got what you paid for, right? It's ironic that when I wrote my article, ''The Scorpion and the Frog,' about the then-nascent iOS, I actually wondered if Apple would fall back into its old ways of screwing over its developers. Yet, they have been practically saintly in contrast to everyone else. Then again, I could just as easily add "open' to this rant, but I've already done that in another piece, which you can read here, if you'd like.
2. The Atomic Unit of Your Product/Service: Man, I hate Fred Wilson. Rich, successful, reasoned, humble, inclusive...and a great writer and thinker. Fred, leave some morsels for the rest of us, will ya! Every week, it seems that there are two pieces he writes that cut through the cobwebs in my brain, giving me a wee bit more clarity. This week, it was Fred's piece on understanding the atomic unit of your product or service; namely the fundamental object at the root of your offering. Why is this important? Because it cuts away all of the bullshit that gets us to focus on the wrong stuff. In Twiter, it's the act of tweeting, or the tweet. In Instagram, it's the photo. Now, while all businesses need to understand their atomic unit of value, early stage REALLY needs to focus on this, as otherwise, your minimal viable product (MVP) will be a slathering bunch of ingredients, a discordant messs. What's interesting about Apple in this context is that their universe seems to built around the very concept of reducing complex systems to atomicity. They are the builders of russian nested dolls, executed across multiple dimensions. In any event, read Fred Wilson. Do it. Now.
3. When Even Sandy Weill knows TBTF is Unstainable: When a guy like Sandy Weill recognizes that Too Big Too Fail is unsustainable, isn't that akin to rats leaving a sinking ship? I mean, who else really needs convincing? After all, Weill's legacy is predicated on the ongoing viability of Citigroup, itself a by-product of his ability to stick a shiv in the back of the Glass-Steagall Act, the 'hit' that started it all. A big vainglorious ego doesn't abandon its life creation unless a great power dictates otherwise. As Matt Taibbi suggests, that greater power is money; namely the fact that Citigroup is worth a tiny fraction of what it was when Weill left the company, which, given the precipitous and dramatic nature of its collapse in 2008, he is probably still holding a lot of beaten down stock shares from. Break it up; value is unleashed, and Sandy gets to enjoy the mega-rich life again (ok, he is plenty rich), something his 2004 bio underscored his love of quite well. The bottom line is that when the folks at ground zero say, "enough," that should be good enough for the rest of us. Or, as Weill's former co-CEO John Reed says best, "I would compartmentalize the industry for the same reason you compartmentalize ships. "If you have a leak, the leak doesn’t spread and sink the whole vessel." Amen. Don't we know this already?

Matt Taibbi wonders, "Where's the outrage on the LIBOR kickbacks scandal?" Maybe he should ask Kübler-Ross

Matt Taibbi of Rolling Stone wonders why is nobody freaking out about the LIBOR Banking Scandal (read: HERE).

After all, shouldn't you all be in a populist froth about reports suggesting that the manipulation of a key interest rate impacting trillions of dollars of loans often occurred with senior regulatory officials in the know? What the frack!?

I have a theory about why no one is up in arms. We're in the throws of 'The Five Stages of Grief,' a set of constructs espoused by Elisabeth Kübler-Ross in her seminal book, 'On Death and Dying.'

Kübler-Ross' work suggested that people in catastrophic loss situations go through five stages of grief - Denial, Anger, Bargaining, Depression and Acceptance.

Hello? That's us.

It would not be exaggeration to say that for a MAJOR chunk of the American populace, the past four years has felt like one catastrophic loss after another. Right?

For these people, the progression looks like this:

1. DENIAL: "Nothing to see folks. Everything's fine." (The Bush Years)
2. ANGER: "Dammit, we don't need facts, we just need to blame someone." (Tea Party Populism)
3. BARGAINING: "Look, I don't need a nice house; just don't trash my 401K." (Stock Market Pleas)
4. DEPRESSION: "Why bother? The ones supposed to protect us are working for the bad guys." (Lost faith in our Institutions)
5. ACCEPTANCE: "The first step in getting better is admitting you have a problem." (You, somewhere in the post-NOW)

Enough. This is our time, our planet. We can be passengers. Or, we can get into the driver's seat, and commit to a: A) narrative of truth; and B) peristent drive to create enduring value.

It's trickle up economics, and well within each of us.

It's simply a pose, a set of perceptions and a commitment to maintaining certain performance levels.

I call it the 'Occupy Self' movement. 

Pattern Recognition: Caught Red-Handed; Re-thinking the 'I' in IT; Twitter-nomics

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Caught Red-Handed in the LIBOR Cookie Jar: If you wonder why Americans are losing faith in their institutions, look no further than our Banking System, where Matt Taibbi of Rolling Stone has done exceptional reporting on the systematic manipulation by Big Banks of LIBOR, the London Interbank Offered Rate. If you are not familiar with LIBOR, it is 'only' one of the most common metrics that lenders use to set lending, credit card and bond rates for consumers, businesses and municipalities. In other words, the fact that major banks could manipulate the rate to grab additional profits, speaks to the endemic corruption across the banking industry. In this particular case, several of the major banks (Barclays, GE Capital and Royal Bank of Scotland are the known names so far) were caught red-handed in bid rigging scandals constructed to skim billions of dollars from the already thinning coffers of cities and small towns across America. This particular industry, whereby the banks help municipalities by issuing municipal bonds on their behalf, is a $3.7 trillion dollar market. If you read HERE, HERE and HERE, you get a sense of the persistent, ubiquitous nature of this type of thievery, where good old-fashioned graft expedites the process. If anything, the challenge for folks like Taibbi is to reduce the mind-numbing numbers and complexities of the transactions themselves into memetic pictures, graphs and narrative that forevermore changes public sentiment about 'too big to fail.' Or, as Stalin once said, "The death of one man is a tragedy; the death of millions is a statistic." Money shot from the Taibbi piece: "You find yourself thinking, America's biggest banks ripped off the entire country...every day, for over a decade!"
2. Does IT Still Matter? Ashlee Vance writes in today's Businessweek, 'It Took Less than Ten Years for IT Not to Matter.' In the article, he essentially argues that most companies have no business trying to tackle IT in-house and that they should rent such services, which generally speaking, translates to "trust the cloud."  Talk about confusing attributes with outcomes. As I wrote for GigaOM in a recent analysis of the travails of 'bricks and mortar' retailers (' Retail needs a reboot to survive'), businesses need to differentiate, which fundamentally is about integration. Sure enough, the most successful companies on the planet hugely use IT to differentiate. Thus, if there is any moral of the story from enterprise struggles with IT over the past decade, it's that too few of them had a clear, reasoned understanding of: A) The role that technology could play in their business; B) The cultural barriers to overcome; and C) The specific outcomes needing to be realized to make it worth the effort. Netting it out, a big part of the problem is that the 'I' in IT stands for information, when it needs to stand for integrated, coupled with the fact that most companies tend to be silo'd into business units, which is the antithesis of integration, something that I wrote about in 'DIS-Integrated Systems: A Parable.'
3. Twittter-nomics: Twitter continues its path to maturity. On the positive side, they are building serious conviction about delivering a great and consistent user experience via Twitter Cards, a structured tweet model that I suggested should their path to monetization way back in 2008 (see 'Twitter-nomics: Envisioning Structured Tweets.'). One the other hand, under the double-speak of delivering a consistent user experience, they are starting to clamp down on third-party clients. You know, the same third-party clients that made the Twitter experience so great before Twitter decided to co-opt them. It sucks, but then again, it amazes me how few grok that APIs (and platforms in general) are like toll bridges. They can lift up and disappear, or change their fare structure at any time. Forewarned is forearmed, and free is often too high of a price to pay. 

Pattern Recognition: Mad as Hell; Playing by the Rules; Cyclical Markets

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Mad as Hell: Henry Blodgett of Business Insider has written a fire and brimstone piece intoning that Americans should be 'mad as hell' at big business and the greed mongering 1% for squashing our sense of egalitarianism. But in digesting the piece, I was left with three thoughts. One, it's reminsicent of the story that I read about in junior high school of how totalitarian societies actually encourage symbolic protests by their citizenry. Why? That way, their beleaguered populaces let off some steam, making them less likely to actually rebel. In other words, Blodgett's "get angry" piece feels very similar, encouraging us all to go hit a pillow. Two, is that the most powerful incentive systems are ones that offer variable rewards, and so long as the stock market goes up more often than it goes down, the prevailing narrative will remain, "Keep trying. You still have a chance." (If that goes, look out.) Three, reading the comment thread of the piece frames our collective inability to have anything other than a one-track, linear discussion about what ails our society. It's as if our economy, industry, governance and way of life is just a big black box of inputs and outputs. The truth, however, is: 1) There are NO catalysts for net job creation; 2) Both parties are completely conflicted based upon the revolving door between government and private industry, and the role of big money lobbying and PACs in instituting policy behind closed doors; 3) Even if there was a spirit of adult compromise in Congress, 270 members of Congress and Mitt Romney have signed Grover Norquist's Pledge, stating that under NO circumstances will they approve any legislation that creates new taxes. A policy that costs $2, but cuts $8? Can't do it under The Pledge. Think about that one if you have ever been responsible for negotiating an operating budget with others; 4) Whether you appreciate the power of Creative Destruction or not, the reality is that it moves on its own timeline. It could be 5, 10 or even 20 years before a new job-creating catalyst arrives. Hence, simpletons that suggest that government should "do nothing but cut taxes and get out of the way," blissfully would have us play the societal version of Russian Roulette by ignoring this inconvenient truth that's playing out in countless pockets across the country; and 5) "Greed is good," as the only rationale that you need for any decision in business (or life) can't end well since it incents businesses and citizens to make decisions that provide short term rewards blind to long-term costs. Moral of the story: A wise person once said that the real challenge in life is learning to manage the paradoxes, for true quality and true sustenance comes from embracing the AND, not the OR. To be clear, though, being an AND means that there are a lot of things that you CAN'T do. Case in point, it's the reason that Apple can be hardware, software, service, tools, marketplace, ecosystem AND retailer, but fundamentally, has only one platform, and only one SKU per device type. In other words, rather than us being 'distracted' by being mad, we should focus instead on codifying a coherent mission statement for America in the 21st century, and the requisite plan of record, collective sacrifice, proper incentives, and checks & balances required to bring it about.
2. Playing By the Rules: There is an axiom that it is better to ask for forgiveness than to ask for permission. Sadly, playing by the stated rules is NOT a winning recipe. It's for chumps, and there's certainly no glory in being a martyr. Remember, Google didn't ask to link, YouTube didn't ask to encode, Facebook didn't ask to create the social graph. And, Wall Street? If there's an industry that more fully lives by the ethos "loophole," I don't know of one. By the same token, when you live by the sword, you should be prepared to die by it. A little moral hazard goes a long way. 
3. Cyclical Markets: Before I got into tech, my first career was in real estate as a retail shopping center asset manager. Having cut my teeth professionally in Los Angeles during the Savings and Loan Crisis of the late 1980s, I understood the dynamics of managing through markets where over-development and desperation created a death spiral of high vacancies, high rates of business failures and plummeting rental prices. As luck should have it, when my business partner and I expanded the operations to the San Francisco Bay Area, we found a market that was a picture of the 'calm before the storm.' In other words, all of the environment variables were similar to what had played out in LA; it was just that the Bay Area was ~12 months earlier in the cycle. Hence, while prospective client after client proudly told us how the Bay Area was 'different,' we knew better, and cautioned them accordingly. When the tide turned, we looked like visionaries, and cleaned up, building a business that would become one of the Top 20 Real Estate firms in the Bay Area. The moral of the story is that markets evolve cyclically, and if you can read the tea leaves of markets that are further in the cycle, and apply them to markets that are earlier in the cycle, you can make serious coin. Consider, that for the past 20+ years, the democratization of the PC, led by horizontally focused Microsoft and Intel, taught companies not only in the computer industy, but in orthogonal industries as well, that you couldn't win by building the whole enchilada. Being horizontal, so the conventional wisdom went, created bigger markets, more diverse ecosystems and more opportunities to create wealth. Flash forward, and now horizontal has played its course, resulting in too many hollowed out industries where the product has become a commodity and the customer won't pay a penny more than its worth. We've seen this trend play out in big box retail, personal computing, media and many other segments. Meanwhile, Apple has taught us that through vertical integration (based on a coherent differentiation plan), comes margins, profits, customer loyalty and thus, defensibility. In other words, if the last 20+ year cycle was all about riding the coattails of commodization through horizontal orientation, the next 20+ year growth cycle is all about building new differentiated growth vehicles that are powered by vertical integration. Thus, if you want to look and feel like a visionary, and make a mint in the process, focus on identifying segments where this type of disruption is available. Best of all, most of these segments will already be in a world of hurt. Buy low, and some day you will be able to sell high.

Pattern Recognition: That Was Then; Losing My (Institutional) Religion; Mobile Native

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. That Was Then, This is Now: Reading about Morgan Stanley's role in screwing retail investors in the Facebook IPO, and JP Morgan's hedge fund safely nestled in a too big too fail mega-bank (with an implicit US government guarantee), I am reminded that Wall Street wasn't always an amoral, scumbucket octopus. Back in the mid-70's, New York City was teetering on the edge of bankruptcy. Dark days, to be sure. Then, Walt Wriston, the visionary CEO of Citibank (now Citigroup), stepped in, and quite literally, helped save the city. Talk about a juxtaposition. Today's Citigroup not only had to be rescued by TARP, but its CEO was recently rebuffed by angry investors over his excessive pay package. All of which leads me to conclude that if the circumstances of a major municipality going bust were to repeat itself in America today, couldn't Wall Street be "trusted" to find a way to profit from the bust vs. acting socially responsible? How times have changed.
2. Losing My (Institutional) Religion: A few weeks back, I saw an intuitive, yet troubling, chart on how Americans are losing faith in our greatest instituitions (e.g., Congress, Banks, Schools, the Presidency, the Supreme Court). Then, I read Apple's legal response today to the Department of Justice's E-Book Case. The specific way that Apple frames it (it's worth a read), put a bow around how fucked up so many of our intitutional processes are. This point was lain especially clear in a conversation I had with a friend of mine in the real estate industry. Regardless of whether you consider yourself pro-businesss, anti-business, liberal or conservative, his point was illuminating. He told the story of how everyone in his industry is worried about the capricious way that the government has gone about changing the rules for banks about lending, from reserve requirements to constraints on where they can make loans. His point was less that the government shouldn't be coming up with policies for these things, and more that the government bodies typically step in with broadstroke policies that are completey disconnected from the outcomes they want to encourage or discourage. As a result, we end up with policies that by virtue of their superficiality, just institute random risk, which is obviously not a good thing if you want business investing in growth. To me, this speaks to a false dichotomy that we find ourselves in with respect to the role of government. Today, it feels like a choice between: A) laissez faire policy/enforcement (which led to an SEC completely asleep at the wheel, culminating in the 2008 economic crisis); and B) broadstroke governance, which results in policy that's akin to the "successful" surgery where the patient dies. It's why the health care reform sucked so bad for the very people it was supposed to help most, at a time when they needed it most. The net effect of this false dichotomy is that it only serves to perpetuate the gridlock in Washington. 
3. Go Native (Mobile): It's the nature of technological waves, that the first stage of a new wave always looks derivative of the old wave. But, the new wave doesn't lead to lasting, transformational change until 'native' applications are born that could only exist within the new medium. The silent film gave rise to the talkie, and while it took a while for the new medium took find its footing, our concept of what a motion picture could be was never the same again. The first TV shows were basically redux versions of their radio show parentage, but ultimately the medium became something entirely unique. So, too, the PC and then, the Web, completely transformed what came before it. Now, we are sitting at the precipice of 1 billion post-pc devices, on our way to 10 billion devices globally. Respected VC and Blogger Fred Wilson suggests that this confluence is due to give rise to legions of Mobile Native Services. In other words, apps and services that are not simply 'children of the Web,' but rather, new DNA entirely, powered my untethered mobility, GPS-locative attributes, perpetual connectivity, unparalleled scale, social fabrics, big data graphs and application platforms that are part hardware, software, service and tool. Metaphorically speaking, we are at the moment in the 1950's when everyone thought that TV was simply 'radio with pictures.' But very soon, that will change, and what rises on the other side is destined to be the Golden Age.

 

Pattern Recognition: The Integrator's Dilemma; iTV Disconnects; Buy a House

I read a ton, and while much of what I read captivates me in the moment, very little gets under my skin, and into my bone's by week's end. These three narratives are the ones that kept percolating to the top:

1. The Integrator's Dilemma: There was an interesting article written by Horace Dediu on the topic of 'What retail is hired to do: Apple vs. IKEA.' It basically looks at IKEA's global success, its dearth of competitors, durability, and relativity to the Apple Store model. As a devotee of Strategyn's 'Jobs, Outcomes and Constraints' model, which is one of the primary inspirations for Clayton Christensen's excellent book, 'The Innovator's Solution,' I am a firm believer in the precept of hiring products and services for specific jobs. In parallel, I have have been ruminating alot on how the Internet is changing the job that retail can viably perform from an economic perspective (see 'Retail Needs a Reboot to Survive' at GigaOM), so the topic is near and dear to me. When I net it all out, I am left with a narrative that goes like this. Once upon a time, the premise was that businesses should be horizontal and focused on solving just one piece of the product or service equation, and outsource the rest. The rise of the PC and the growth of Big Box category killers (Comp USA, Best Buy, Barnes and Noble) all seemed to affirm this approach. As the Internet took hold, the idea that this model was universal became conventional wisdom, as Google was all about being open and loosely coupled; and Amazon become the biggest online retailer by (seemingly) building very little, but selling everything. But now, this wisdom is getting turned on its head, as undifferentiated retail is dying, commodity PC makers are dying, commodity mobile and tablet device makers are dying, and the winners are folks like Apple and Amazon and Nike that are the antithesis of loosely coupled. In other words, conventional wisdom is dead. Not only are these companies integrated across their value chains, but they have built into their DNA truly differentiated positions. To me, this is The Integrator's Dilemma. It's not enough to assemble a bag of components. You have to do it in a way that is truly differentiated, which often means, a hybrid of hardware, software and service, which is hard to execute. In retail, I look at someone like Gap as an example of a company that confused brand and hit-making with clear vision, agility and differentiation, and once they stumbled, they never came back. The irony here is that most individuals would get fired for not taking a holistic (integrated) approach to getting their jobs done, yet paradoxically, few companies embrace this ethos, preferring the path of comfort, entropy and obsolescence to the path of discomfort and reinvention. And we wonder why there are so few catalysts for job creation in our economy.
2. iTV Disconnects: Ever since Apple analyst Gene Munster starting asserting that Apple was going to build a full-fledged TV set, I have struggled to get my head around the concept (see my analysis HERE). TVs, after all, are low margin, bulky to deal with from an inventory perspective, and infrequent buys. Plus, the actual TV viewing experience is essentially "good enough." By contrast, Apple's last three game changing devices -- iPod, iPhone and iPad -- are the kind of devices that several members of the family might buy, and those same members would likely replace and upgrade every 2-3 years. Moreover, those devices created entirely new experiences to fix fundamentally broken models or to define new ones. In the big picture, the TV set is closest to, but doesn't even look as good as, the Mac model, where you buy 1-2 Macs for the household every 4-5 years. It just doesn't fit that Apple would build a device that looks more like the relatively low unit Mac model when their universe is all about high unit sales and high device refresh frequency. And the only scenario where content is a compelling, high margin business for them as rationale for such a device, is where Apple is partnering with the cable and satellite providers for a slice of the monthly subscribers' bill. But, that's a set-top box play, more so than a TV play, in my opinion. The only other scenario I can theoretically see is where the so-called iTV is really an iWall; a widget device that is flat like an iPad, but made to perform the task of the smartest, most interactive wall frame ever. Yet, the rumors persist. (See also: 'Your iPad Could be Your TV' in MIT Technology Review.) 
3. Let's Go Buy a House: Felix Salmon did some interesting analysis looking at the correlation between rental rates and mortgages in America, on the premise that when you can get a mortgage (if you can qualify) for equal or less to what it would cost you to rent in the same market, housing values are, or should be, compelling. This truth is even more so when you weigh the fact that the historical market data shows that rents go up pretty predictability over time. In other words, the value of your house today, if nothing changes, should only get relatively less expensive than renting over time. You can even rent it out. So, let's go buy a house! 

 

 

Predator, Parasite or Protected Class: The NEW Theory of Relativity

So we completetely borked the budget ceiling negotiation last week, leading to the S&P downgrade of America (read, 'What Happened to Obama' for a brilliant analysis on Obama's utter failure to establish a coherent narrative as president).

And if that wasn't enough, last week also underscored how completely the patent laws are screwed up to the point that they're officially a drag on innovation - the exact opposite of what patents were designed to do (read the transcript from the NPR program, 'When Patents Attack' to see what I mean).

Somehow, we can no longer figure this stuff out, yet recent history suggests that we can figure out how the universe works, can figure out how to thwart Hitler and rebuild Europe after World War II, can put a man on the moon, can create the Internet, etc.

Given this seeming asymmetry between the two realms, let me submit the following:

1. While everything is more complex than you give it credit for; and 
2. The weight of self-interest meaningfully incentivizes people who **should** know better to nonetheless screw the pooch for everyone else;
3. We don't have to be dumb and blind about it.

Much of this starts with changing the old memes (i.e., ideas that virally propagate), and replacing them with new memes.

Simply put, while form logically follows function, there is a larger truth that our thoughts on the "definition of the situation," including both specifically desired outcomes and tangible constraints, fundamentally instructs function.

In other words, our thoughts codify function, which give a mandate for form to manifest in a particular way.

In fact, there is a specific term that defines how we process congruities and incongruities called Cognitive Dissonance.

It basically suggests that if your actions and perceptions are out of whack, either you need to change your actions OR you need to change your perception of the situation as it exists. To NOT do so is physically and mentally uncomfortable.

A simple example is that if you think that you are fat and need to change your diet, one of two things is going to happen the next time that you are chowing down on a deliciously greasy pizza.

One, you will feel that eating that pizza is incongruent with your new aspirational image for yourself, and stop eating pizza so much.

Or, two, you will decide that being thin is over-rated, all relative, and more to the point, life is too short not to eat pizza, which is so delicious.

So, what does this have to do with the mess in our economy, our governance mechanisms, and the rot festering within society in general?

Most fundamentally, it's that changing the narrative and the actual words that we use to establish that narrative is a first, integral step to manifesting real change.

Putting it to the Test

Therefore, next time you encounter a story about Wall Street, Insurance Companies, Congress or Special Interest Groups (like Unions, Patent Lawyers, Environmentalists, etc.) start training your mind to be on the look out for:

1. Predatorial Behaviors: Ask yourself if the behavior being discussed is a case where one individual or group is taking advantage of another group by virtue of power, influence, wealth or knowledge.
2. Parasitic Entities: In order to maintain its existence or position in the economic, societal or organizational system that it participates within, does the entity leech off of the lifeforce, blood, energy or money of others? Does it remove more from the system than it puts in?
3. Protected Classes: Does the indvidual, industry group or company have undue influence on the rules that define its governance, and the methods and consequences by which those rules are enforced?

Now, recognize that most stories will be presented according to False Dichotomies, such as being "pro" this (e.g., business, big government, unions or jobs) or "anti" that.

It's far easier to tell a story, and sell a desired outcome, such as passing a bill or changing a rule, when the conclusions are presented in black and white terms.

Don't get fooled by this anymore. When you hear the facts presented in a way that frame the topic as an either/or scenario, be willing to question if the scenario presented is indeed a false dichotomy, and be rigorous about: A) consistently calling it such; and B) codifying what a reasonable "and" scenario looks like.

Understanding "Relative Yields: Everything is Relative

Similarly, the efficacy, or goodness, of specific outcomes are defined by the qualitative and quantitive content of what they yield.

Most yields are relativistic to multiple variables. Ask yourself what the yield is locally in your own backyard, for the larger region or nation as a whole, and/or globally.

Think about the actual impact both in the short term, measured in days, weeks, and months, and in the long term, over many years.  

Also, ask yourself if there are collateral impacts that further shape yield. For example, a program that results in less expensive clothes for consumers, but that also has the collateral impact of jobs moving overseas can be good or bad, but the collateral impact is real, and needs to be factored into relative yields.

Finally, when all else fails, simplify the topic and be surgical about the words that you use to codify it. If an individual did this same type of action to another individual, would that action being considered reasonable or lawful?

If not, then ask yourself, why it's reasonable at the governmental or corporate level. There may be valid reasons, but learn to articulate and understand the "What" so as to ask "Why," and be willing to challenge conventional wisdom by saying, "So What."

UPDATE: Mark Cuban has written an excellent post arguing that we should get rid of software and process patents completely. Worth a read.

Related Posts:

1. The Great Reset: Why tomorrow may not be better than today (O'Reilly Radar)
2. Why the Malaise in our Economy (and Society) is a case of The Innovator's Dilemma
3. Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitrage
4. Assertion-based Reasoning: What, Why and So What

Why the Malaise in our Economy (and Society) is a case of The Innovator's Dilemma

 

So the Republicans play chicken with not only the US economy, but the global economy as well, and the President, always wanting to be seen as the "most reasonable guy in the room," once again lets smart tactics, lead to poor strategy and an even worse outcome. 

What's going on? Is the President just clueless? Are the Republicans just evil? 

Meanwhile, our economy sits in a 'dirty diaper,' with literally no catalysts for significant job creation, and yet, the story being conveyed by the media is focused on the false narrative of "compromise" narrowly averting disaster (a pyrrhic victory, if there ever was one).

And count on this: when the next set of bleak economic numbers come in, they will again be presented as "surprising," as opposed to predictable from a mile (and many quarters of data) away.

It's a case of Spin, Cycle and Repeat.

What's the Definition of the Situation?

In 'Why This Crisis Isn't Going Anywhere--And What To Do About It,' Umair Haque frames the problem as being just as much a case of a failure to properly diagnose what ails the patient, the US Economy, as a case of malpractice:

What's going on here? Why continued stagnation, and perhaps more interestingly, why is the status quo always "shocked" by it, every dismal quarter? Here's what it suggests, in no uncertain terms: they're struggling to discern what this crisis is yet.

As noted in my earlier piece, 'The Great Reset,' he's right. There is a disconnect.  This is no ordinary cycle that just needs to bide its time until the sun magically rises again. 

Rather, we are in the midst of a systemic disruption that is, at a minimum, as significant as the stifling days of Stagflation in the 70s, and on the cusp of the true horror that was The Great Depression.

The Innovator's Dilemma and the US Economy

I won't recite the Whats and Whys of my analysis -- read the piece if you'd like -- but I will say this.

As a student of disruptive innovations, I would argue that the pattern that we are seeing is a textbook example of the principles espoused in Clayton's Christensen's, The Innovator's Dilemma.'

Let me explain. In 'Dilemma,' Christensen shows how smart enterprises can make catastrophically bad decisions by using the following, seemingly sound, logic:

1. Does the innovative approach have a compelling return on investment?
2. Does our core constituency want this innovation?
3. Does this innovation leverage our core competencies?

In the PC era, we see how Microsoft outflanked much bigger companies, IBM and DEC, specifically because the PC was disruptive to the mainframe and minimcomputer.

IBM's best and brightest using the above litmus test, could "easily" evaluate the logic of trading in historically-proven product sales that were measured in the millions of dollars per sale for speculative ones that would be measured in the thousands of dollars per sale, and conclude that there was no "there" there economically speaking.

Moreover, their best customers could tell them plainly that the last thing that they wanted was an undepowered machine that couldn't be centrally managed.

Finally, back then, all of IBM's bones, muscles and sinew were designed for selling vertically integrated, proprietary solutions, something that a more horizontally oriented PC harnessing commercial-off-the-shelf components was to be an anathema to.

The moral of the story then, as now, is that disruptive technologies often serve a different audience, start off as small opportunities, and bit-by-bit, work their way up the stack until they destroy the incumbent's position.

Upstarts often win these battles because they have no base to protect, and thus, can think and act outside the box.

Flash forward to the present. We are in an economy absolutely gasping for new jobs and, at the very least, a "fig leaf" of hope.

What are your priorities, Mr. President, Mr. and Ms. Congress? Do you disrupt big business by taking away favorable taxation? Do you tighten governance so squishy lines of business go away? Do you play chicken with the companies that make up the Fortune 2000, risking jobs and the stock market?

After all, YOU are the incumbent, and the ultimate return on investment is getting re-elected, right? Your best customer tells you repeatedly via lobby and specific interest group that he/she absolutely does not favor any new products (taxes, legislation) that promise short-term pain, even at the cost of long-term gain.

The market doesn't reward it, the electorate doesn't reward it and the media only tells stories with binary narratives.

Plus, your core competency is taking pork and making it into sausage.

Such is the Innovator's Dilemma. That, and the hard truth that one should never under-estimate the ability of people to convince themselves of anything when their livelihood depends upon it.

Related Posts:

1. The Great Reset: Why tomorrow may not be better than today
2. A Contract to Fuck America: Ruminations on Good Governance and Corporate Irresponsibility
3. Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitrage
4. Assessing the Internet: Great Creator or Better Destroyer?