System Economics
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Wednesday, June 04, 2003

MySQL Nabs Venture Capital

MySQL AB, the open source database software provider, gained a $20M investment from Benchmark Capital.  MySQL is often used as a primary example of how open source can be a component of a real business model.  May be a harbringer of things to come, but their case is unique in that the core product is a commodity and they have achieved massive penetration.

Had a chance to meet their CEO, Mårten Mickos, at PC Forum.  Terribly nice guy, wish the best for him.

1:14:00 PM    comment []

Wednesday, May 28, 2003

Vonage, Hacks & Arbitrage

The way Joi and Gen are using Vonage is a new arbitrage method for international long distance.  International telephony has always been about arbitrage (risk free profit).  Technology driven cost reduction outpacing regulatory regimes that prop up prices.  Here's a brief history of international long distance arbitrage and a suggestion for a next stage.

International telephony was originally governed by the ITUs Global Accounting Rate system.  A body of national PTTs that would convene and negotiate bilateral settlement rates.  For example, the US and German would tally up the traffic imbalance as measured in minutes and agree on a settlement rate.  Problem was, country code #1 had significantly greater amount of outbound call volume.  With the Public Switched Telephone Network (PSTN), to this day, calls are paid by the originating carrier to transit and teminating carriers.  The US negotiated volume discounts that were significant for its outbound calls.

When the PC came around some smart entreprenuers realized an arbitrage condition existed and the technology to take advantage of it was affordable.  They invented Call-Back.  An individual customer living abroad calls to a PC in the US, enters the country code of the final destination number (the hub country or another)  and then hangs up.  The individual is called back by the PC while the PC calls the destination country and recieves a dial tone for the destination country.  The settlement fee is paid from the hub country (the lower outbound US rate).

Next came Refile, which turned this arbitrage method from a consumer service to a wholesale operation.  Competitive carriers in foreign countries (many were cropping up because deregulation was taking place at the same time, first in the US, then the EU and culminating with the Uraguay round WTO accord that liberalized 90 countries) sent calls in aggregate over International Private Lines to the US.  A re-file carrier re-originated calls from the US to foreign countries, initially saving in most cases over 500%.

Calling cards allowed re-file carriers to provide consumers a way circumvent originating carriers and get to their re-file hub.

Next came Internet Telephony.  Initially it was used for transit on private lines to take advantage of compression.  Then some carriers used the public Internet for transit with some sacrifice for quality.  Some new businesses like ITXC leveraged redundancy in transit to increase quality.

Consumer Internet Telephony didn't prosper until now because of the variable quality of transit as well as the interface at the ends.  Vonage has changed that with some success (just reached the 25,000 subscriber mark).  But its primary focus is domestic long distance.  It probably doesnt provide the service internationally both because of the quality of transit, complexity of serving diverse markets and potential regulatory backlash in foreign countries.

What's interesting about Joi & Gen's use, and they aren't the only ones, is they are setting up their own arbitrage method -- originating calls abroad, transiting over the Internet and terminating through Vonage's network (mostly over the Internet) and re-file agreements.  Vonage's greatest value is a persistent circumvention of local monopoly carriers (where most of the cost of a call resides because of the above driving efficiency in international markets), but its value for international transit is worth consideration.

It will be interesting to see what Vonage hacks arise.  There are a few options created by its bridge feature -- If you're on the phone with party A, you can flash, dial #90, dial party B's number, # and hang up. It then calls party B and the call continues between A and B.  A hack that allows you to call to your Vonage box from your wireless phone and have it bridge you to an international destination seems tantilizing.

A hardware hack to make the box more portable would be invaluable (I would rather pay for a dedicated DSL connection from a hotel room and then use Vonage to bypass their telephony toll trolling).  Particularly with WiFi support.

When arbitrage conditions exist, as with wireless carrier rates compared to terrestrial or hotel customer capture, the market ultimately converges upon it.  Vonage has the potential to be a platform.  But if regulators try to stem its diffusion another call delivery method will just take its place.

9:06:58 AM    comment []

Monday, May 19, 2003

The Matter of IT

As the technology industry emerges from the bottom, it criticism has been lowered to the nature of being.  Information Technology has always been a source of competitive advantage.  At the bottom of the business cycle, advantage is basic survival, risk taken only on low hanging fruit.  But now, as the leaky pipes have stopped dripping, some wish to relegate the job of IT to that of a plumber.

Friday's article in the NY Times by Steve Lohr asks the question, "Has Technology Lost its Special Status?"  Technology as an industry is 10 percent of the economy and 60 percent of business spending.  According to John Gantz of IDC, technology spending has increased 2-3 times the rate of economic growth since the 1960s.  The question is if the industry will return to its historical growth rates, the driver of valuation multiples.  Lohr reports:

That assumption about technology's special role is questioned in a provocative article this month in The Harvard Business Review, titled "IT Doesn't Matter." The article asserts that information technology, or I.T. for short, is inevitably headed in the same direction as the railroads, the telegraph, electricity and the internal combustion engine — becoming, in economic terms, just ordinary factors of production, or "commodity inputs."

"From a strategic standpoint, they became invisible; they no longer mattered," Nicholas G. Carr, editor at large of The Harvard Business Review, wrote in the article. "That is exactly what is happening to information technology today."

John Hagel and John Seely Brown believe this is an important article because it very effectively captures the backlash sweeping through executive suites against IT spending...But Carr’s article is also dangerous because it endorses the growing view that IT offers only limited potential for strategic differentiation....and are preparing a rebuttal in the July issue of HBR:

  • Extracting business value from IT requires innovations in business practices. In many respects, we believe Carr attacks a red herring – few people would argue that IT alone provides any significant business value or strategic advantage.
  • The economic impact from IT comes from incremental innovations, rather than "big bang" initiatives. A process of rapid incrementalism enhances learning potential and creates opportunities for further innovations.
  • The strategic impact of IT investment comes from the cumulative effect of sustained initiatives to innovate business practices in the near-term. The strategic differentiation emerges over time, based less on any one specific innovation in business practice and much more on the capability to continuously innovate around the evolving capabilities of IT.

Some tech executives have countered in the NY Times article:

"I.T. is the vehicle by which you turn ideas and content into intellectual property products," Mr. Craig Barrett (of Intel) said. "As a nation and as a company, you either upgrade your I.T. infrastructure or you won't be competitive."

Samuel J. Palmisano, chief executive of I.B.M., made the case for his industry's growing at twice the rate of the economy when he spoke to analysts on Wednesday. "The industry is fundamentally a growth industry because it underpins productivity," he said.

Kevin Werbach speaks of new models in the Post-PC era in his Supernova report:

...The point of the article is not that tech is dying, or that innovation is drying up. It's that enterprise technology is moving into a new phase. Bigger, faster, and more feature-laden are no longer selling points in the same way. Smarter, simpler, more efficient, and more flexible are the new criteria. It's much harder to make powerful system simple than to make them complex....

Zack Lynch points how IT drives growth in other sectors:

For instance, although not a punctuated leap in competitive advantage, social software has the potential to accrue significant value for companies that leverage its potential to accelerate innovation. In some industries, two product cycles can be the difference between corporate life and death.

For example, decreasing innovation cycle times in the pharmaceutical industry by 10% could slash years off product research, development and approval processes.  When translated into revenue and market capitalization impacts, intelligent adoption of social software could significantly disrupt the balance of power in this multi-billion dollar industry.  Who says IT competitive advantage is dead?

What is unique about IT compared to other revolutions is how it extends the capabilities of people and groups.  IT fuels competitive advantage by enhancing productivity.  Erik Brynjolfsson of MIT has demonstrated that productivity gains occur not through IT in and of itself, but when it is introduced with new business practice and process.

This is actually a contrarian point for many.  Some private equity investors shy away from technologies that require change of behavior, for example, because it adds risk that users will resist change.  But in fact, that's the real promise of IT, to extend our capabilities in new ways.  Changing behavior is good in a changing world.

Brynjofsson's studies have been in process-intensive areas of organization.  Areas where economies of scale can be easily realized.  When business process is defined, it is almost immeadiately outdated because environmental conditions change presenting new sets of information. This underscores the need for business practice that realizes economies of scope (agility), but also the limits of process itself.

What remains is knowledge work.  Most jobs in the service sector spend the majority of their time undertaking unstructured tasks in social context.   And this time is where innovation occurs (Palmisano points to IP creation, but that's just one set of montetizable outcomes). 

IT will continue to drive competitive advantage for business because an incremental enhancement of how groups work still yields exponental benefits.

11:38:47 PM    comment []

Monday, May 12, 2003

Boyd's Law

Stowe Boyd highlights a research report he just wrote on Time to Get Real: Challenges for the Real Time Enterprise.  Most of the report is on systems that realize economies of speed, but he also offers his own law:

I get the opportunity to dig into the value of real-time communities, explore the rapidly emerging real time enterprise architecture from folks like Microsoft, IBM, and Oracle, and examine the explosion of instant messaging and its impact on business. I explore Reed's law and extend it into the real time context:

"The third law [explored later on as Boyd's Law] is what I call synchronization amplification: As companies seek to increase their individual responsiveness and decrease the impacts of volatility in their markets, they will increase their synchronous communications with partners, but the net effect will be an increase in asynchronous operations of the meta-enterprise. This seeming paradox is simply explained. A real-time enterprise will have more frequent communication with its partners – passing information from application to application, or conducting real-time communication between people. As a result, the latency in information transfer decreases. This means that companies in the meta-enterprise are free to take action on this lower latency information, increasing overall performance across the meta-enterprise."

Boyd's Law is one method of achieving economies of span.  When a company effectively integrates vertical production functions, sequencing results in lower transaciton costs.  This can happen both at the system economics and firm-level

2:29:42 PM    comment []

Tuesday, April 29, 2003

Google's Exponential Returns

There is more to Google than useful, simple and powerful products.  In the end there will be less Harvard business school cases about its product than its organization.  At Etech, first employee Craig Silverstein discussed Google's product development process and the systems that support it.  What's different is the use of smaller organizational units (groups of 3 on average) supported by lightweight inter-group communication with a culture of sharing.

The danger of smaller organizational grouping is the potential redundancy or splintering; and the difficulty of realizing economies of scale.   The danger and difficulty is overcome through systems, but not the typical enterprise systems that seek to automate processes. The benefit is greater speed and agility (scope). 

But in such knowledge intensive work you can't automate what is largely practice.  Instead, light weight tools like wikis and weblogs support what people need to get things done and in scale the system yields emergent properties.

Google uses product much like a wiki called Sparrow Web to develop community-shared pages.   Originally developed by Xerox PARC it offers lightweight editing without knowing HTML.  Its less flexible than a wiki, but works well for functions like submitting great product ideas, launch process forms, reporting and weekly snippets to a common knowledge base.  Craig said its "suprisingly good for communication."

It also helps that they acquired the leading blogging software company and they are eating their own dog food.  When Pyra's first move when they joined the company was to set up Intranet blogging, "they knew they hired the right people."  Blogger serves a relatively older tradition of having people contribute snippets of what they worked on during the past week.  But now their software, widely adopted, is giving different people their own voice in the system.

Unlike other organizations they have more people freely communicating about what they are up to and sharing what they learn.  Allowing teams to be smaller, yet effective as a whole.  And because each communication creates linkages, stays with the organization and builds upon the past -- there are exponential returns to sharing.

What happens when these simple tools are combined with Google's search engine is fairly obvious.  The best content and experts emerge. 

When an organization scales, its systems and organization are a key component of its competitive advantage.  Knowledge intensive companies have struggled to find a mix of both for leverage.  Google's greatest innovation may prove to be within and seductively simple.

Without formalized information flows imposed by many enterprise systems, Google has been able to let its employees make their own associations.  The right systems and organizational openness fosters social capital within the organization -- which decreases risk and is foundation of intellectual capital.

8:18:49 PM    comment []

Tuesday, March 11, 2003

Keep It Simple, Stupid

John McDowall on the unnecessary complexity of groupware and knowledge management tools:

Effective Social Networks on Ross Mayfields blog brings up the point of the complexity of groupware tools - I would add to this the whole field of knowledge management as being guilty of the same sin. There is a self perpetuating myth that there needs to be a complex set of software to manage large amounts of unstructured information. The myth appears to be that this information is hugely valuable and needs sophisticated tools to ensure you can squeeze the last drop of value out of it. One of my professors taught his class a key rule in any engineering project - always do a rough estimate for any calculation/project to get an idea of the size before doing a detailed analysis. This serves several purposes - makes sure you understand the variables in the problem and makes sure you do not misplace any zeros in the detailed analysis. Doing the same in any groupware or knowledge management application is a similarly revealing exercise - take a representative sample of information and reduce it to the key facts - it quickly shows there is not much there and what is there does not benefit from complex tools. So what is all this unstructured data - mainly attempts to create the evidence to prove the few facts that we are all trying to reach agreement on. Perhaps we should be looking for tools to assemble evidence in favor of the few key truths that we all hope exist.

Besides the resulting cost of complex tools, there is an even larger problem -- people don't use them.

9:28:14 AM    comment []

Thursday, March 06, 2003

World of Ends

Dr. Weinberger and I decided to sum up a whole bunch of stuff in one big site: World of Ends: What the Internet Is and How to stop Mistaking It for Something Else. Dr. W. explains more here.[The Doc Searls Weblog]

The Nutshell

1. The Internet isn't complicated
2. The Internet isn't a thing. It's an agreement.
3. The Internet is stupid.
4. Adding value to the Internet lowers its value.
5. All the Internet's value grows on its edges.
6. Money moves to the suburbs.
7. The end of the world? Nah, the world of ends.
8. The Internet’s three virtues:
a. No one owns it
b. Everyone can use it
c. Anyone can improve it
9. If the Internet is so simple, why have so many been so boneheaded about it?
10. Some mistakes we can stop making already

It all begins with Simplicity, turns out bandwidth is a commodity, and let's be stupid and not screw it up.

10:41:48 PM    comment []

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