SMART Letter
#29
NEW ECONOMY
November 7, 1999
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SMART Letter #29- November 7, 1999
Copyright 1999 by David S. Isenberg
isen.com -- "you can telephony, but you can't tell him much"
isen@isen.com -- http://www.isen.com/ -- 1-888-isen-com
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CONTENTS
> Report on "The New Economy Conference"
> Conferences on my Calendar, Copyright Notice, Administrivia
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Report on THE NEW ECONOMY CONFERENCE, NYC, Oct 27-29, 1999.
By David S, Isenberg
Lots of people define "New Economy" in lots of different ways
-- I think it has three characteristics:
1. Knowledge is wealth,
2. Bigger ain't necessarily better, and
3. There are more opportunities and fewer guarantees.
If there were a fourth, it would be that everything happens
faster, maybe even instantaneously.
The New Economy conference, held last week in New York City,
is one of a growing array of George Gilder branded meetings.
(Gilder's "Telecosm" was held in September and his next
"Disruptive Innovation" conference will be next week in
Vancouver. Find more information at
http://www.gildertech.com/).
The hosts for New Economy were Spencer Reiss and John
Browning, who were largely responsible for defining the term
"New Economy" in their previous life at Wired. The Wired
issue with the green Godzilla picture and the headline, "Here
comes the New Economy" was their work -- it introduced their
Wired New Economy Index.
MR. PRODUCTIVITY PARADOX
Reiss and Browning took a daring step -- they opened the
first day of the conference with the most articulate, most
respected critic of the New Economy concept. Stephen Roach,
the Chief Economist at Morgan Stanley, has been speaking of
"the productivity paradox" for years. He says that any
economic benefits of the new information tech and
communications tech are hard to measure -- if they exist at
all. In addition, he says, much of the supposed benefit of
the New Economy is due to people being able to work more
hours
Roach says that productivity is defined by "work done per
unit time." He then goes on to define "unit time" to be the
hour. Clearly, we work more hours thanks to cell phones,
home computers, PDAs, etc. Productivity per hour, says Roach,
might even be going down.
But suppose that the "unit time" were the week? Then
productivity per worker per week would be going up, wouldn't
it? (I'd damn well better be adding value when they call me
during a nice dinner out with my friends!) Roach never did
say why he chose "the hour" to be the unit of time that
mattered. And I betcha he thinks that productivity can be
measured in money, too. Hours, money -- these are old
economy ideas.
Roach does seem to be softening a bit -- he now believes that
infotech allows companies to do things they never did before,
such as globalization. But he doesn't know how to measure
the benefits of globalization.
Throughout Roach's talk, I kept thinking about Clayton
Christensen's analysis of how incumbents are locked into
their value space by their products and their customers.
Roach, though a brilliant economist and an articulate man,
seems the essence of incumbency. Somebody at the conference
confided to me that he decided not to become a Morgan Stanley
customer precisely because Roach seems not to get it.
Not too long ago, they used to measure output by counting
boxcar-loads, somebody said. How many boxcars does the idea
of hyperlinking fill? Gosh, it must not be a productive idea.
Eric Brynjolfsson, of the MIT Sloan School, spoke after
Roach. He said that we don't see Automatic Teller Machine
effects in macroeconomic measures of banking productivity.
But he was willing (whereas Roach was not) to concede that
there was value in customers being able to get cash without
having to stand in line at only certain hours. He seemed to
think that "the new economy" meant new business processes,
new markets, et cetera. One interesting statistic he
presented: a typical Enterprise Resource Planning (ERP)
system costs $4 million for hardware and software, but 16.8
million to implement and deploy -- no wonder ERP consultants
are doing so well. Despite an interesting talk, I still
didn't find a solid New Economy peg to hang my hat on.
HE WASN'T THERE AGAIN TODAY . . .
One of my favorite explainers of the New Economy, former Wall
Street Journal columnist Tom Petzinger, who today creates the
free e-zine The Petzinger Report (www.petzinger.com) was not
at the conference, except in my mind. He writes:
"Unless some dough changes hands, even the biggest
commercial developments are trees falling in the
forest, unobserved quanta stuck in the never-never
land between wave and particle. The data mavens at
Commerce have no idea that . . . I just downloaded
RealAudio 3.0 for nothing. They're blind to the value
created when Yahoo! adds a new Web site listing or
when Mapquest shaves 0.6 miles off my trip. When the
Labor Department calculates the Consumer Price Index
it has no idea that its own Web pages are being dished
out on free source code . . . When Dr. Greenspan and
the poo-bahs at the Fed deliberate over the "irrational
exuberance" of the stock market, how much weight do you
suppose they're giving to the fact that the marginal
cost of a transaction in a world of e-commerce has
essentially dropped to zero?"
In the same vein, now that I am working at home (thanks to
the new technologies), what value do Morgan Stanley's
economists place on the fact that I no longer spend an
unproductive hour and a half stuck in traffic? Answer:
probably none. They probably think the "economic activity" I
produce with my car, hence my contribution to the economy,
has declined.
OPEN SOURCERERS
Presently the New Economy Conference turned to the new (?)
laws of software. Java and Jini squared off against Linux.
Java/Jini was represented by Bill Joy, who is also the brain
behind much of Berkeley unix, and the vi full-screen editor.
Linux, indeed the whole Open Source Movement we know today,
was represented by expository genius Eric Raymond, who wrote
"The Cathedral and the Bazaar", the must-read analysis of why
Open Source software works, and Robert Young, the CEO of Red
Hat, purveyor of a turnkey version of Linux.
Open Sourcerers publish everything. They, meaning anybody
who wants to write code, have developed Linux from Linus
Torvald's original kernel to full-functioned operating system
right out in the open. Eric Raymond explains that this
creates a community of practice with a hands-on, practical
understanding of the software. This community provides a lot
of minds to work on the problems (and bright minds are
attracted to challenging problems). Furthermore, it subjects
an individual's code to skeptical, independent peer review.
PEER REVIEW
Peer review is practiced with vigor in today's "pure
research" scientific community. It is the system that
debunks bad experiments, ferrets out trivial explanations for
a seemingly profound result, and grudgingly admits bodies of
work to "law-of-nature" status when they are found un-
debunkable.
Eric Raymond explains that this peer-review process, applied
to software, leads to incredibly robust code. Lots of
different people can look at a given bug, or bug-fix, in many
different ways. And the community can compare and contrast
several bug-fixes, so that the best features can be gleaned,
perhaps combined.
Raymond points out that business has not figured out how to
do effective peer review. Too often, some form of expediency
rules the day. It could take the form of "good enough," or
the form of cronyism (if I don't cause her problems now, she
will be good to me later), or the form of "good corporate
citizenship," or the form of the "it's not my department"
syndrome, etc. To be effective, peer review must be truly
independent, and it must come from experts and peers.
Raymond says that Linux is taking big chunks of Microsoft's
NT market. It is not eating much of the upscale unix market
that is owned by, e.g., Sun. He says that Linux is way, way
more reliable than NT. I want to believe it, but I am
skeptical. If anybody has empirical, independent Linux vs.
NT reliability information, I'd love to see it (contact me at
isen@isen.com).
CHAORDIC SOFTWARE
Bill Joy spoke to an entirely different problem. (He didn't
tell the Java or Jini stories -- too bad, 'cause he is an
articulate spokesman for these new paradigm-defining
architectures.) Instead, he pointed out that when everything
is published, when there are no secrets, then innovators are
not rewarded for their innovations. (Yet another smart
person equating reward and money.) And he pointed to a new
organizational form, the Chaordic Organization, which might
be able to solve this problem.
Dee Hock, the founder of Visa, invented the Chaordic
Organization as Visa's organizational form. Chaordic is
Hock's made up word. It is a combination of chaos and order.
He calls Visa a chaordic organization. Hock also calls Visa
an inside-out holding company. In other words, its members
own it, rather than vice versa. The members agree on the
minimum that they need to own in common. For VISA, this
minimum is the brand and a small set of rules for clearing
transactions. Then, once that core agreement is set, Visa's
members are free to innovate, to set their own rates, to go
after each other's customers, to do their own advertising,
etc., etc., etc.
Bill Joy wants to port the chaordic idea to software. It
would be a brilliant move. A chaordic software organization
could own a certain minimum set of standards -- the Java
Virtual Machine, for example. (Other examples might include
an improved IP stack or a core (kernel + other essentials)
Linux code set.) Then companies could innovate -- and
compete -- around that, each in its own proprietary,
idiosyncratic, even harebrained way. It is a brilliant idea,
and quite consistent with Eric Raymond's thinking on how
people make money in an Open Source environment.
IDEOLOGICAL IDIOCY or WHAT ABOUT MICROSOFT?
But suddenly the session disintegrated into a "Methodists
versus Presbyterians" debate. Neither Eric nor Bill seemed
to understand that they were explaining two different
problems. They started sniping at each other. In
frustration, I jumped up, waved my arms and protested, "What
about Microsoft?" Both Bill and Jim denied that their ideas
were about Microsoft. (These days, what software issue isn't
about Microsoft?) Nevertheless, if I coulda taken it back, I
woulda. I shoulda pointed out that they were addressing two
different, but not necessarily incompatible issues. What's
wrong with a chaordic Open Source movement?
(Dee Hock would have been a fabulous addition to this New
Economy Conference. He is one of my heroes, one of "The New
Capitalism's" great thinkers. I had the good fortune to host
him during my last months at AT&T. At the time, he told me,
"An organization can tolerate, even celebrate its change
agents -- until they start to succeed." These were prophetic
words -- in a few more months I was gone.)
(Unfortunately, Dee Hock belongs to the Peter Drucker
consulting fraternity that believes that people will only
value your ideas if they pay you until it hurts -- last I
checked, he charged $25,000 a talk. This would price his
participation beyond all but the ritziest conferences. The
$25k might be necessary, but it is not sufficient -- did AT&T
listen?)
At the end of this New Economy Conference panel, I was left
with three big questions.
1) What was Robert Young doing in that session? He stood up
there with his red hat and his red sox and his big Adam's
apple looking geeky. I don't remember most of what he said,
except that what mattered about Red Hat was the brand. Yeah?
Anybody see the Cobalt IPO last Friday?
2) So how *do* you make money with Open Source software?
Fortunately, Eric Raymond told me a few days later -- in
another, decidedly older-economy venue. See Eric's new book,
or his "Cauldron" essay (at numerous websites).
3)Why did the Open Source Movement get so enthusiastic about
re-doing unix? Unix is an old, centralized, hierarchical
system -- it is the OLD Software, hooked to the OLD Economy.
Why doesn't it do an Open Source Java-like system? It
doesn't have to be Java per se. But maybe there's a way to
write a small virtual machine that can run anywhere, one that
can support applications that are small enough to travel with
their data. Now that'd be a hard system for Microsoft to
beat, and an easy one for tomorrow's world of tiny
distributed devices to use.
KOZMO: DOT.COMFUSION or DOT.CON?
Some of these .coms can't possibly work. That's what I
thought when Yossi Vardi told me about his ICQ (the instant
chat app). But in a couple of years -- with no revenues, but
lots of users -- he sold it to AOL for $300 million. And
that's what I thought about Yahoo, too. (But one factoid I
learned at the conference was that Yahoo's price at the end
of its first public trading day was only 10 times its 1998
earnings.)
Notwithstanding, when it comes to Kozmo.com, I *really* can't
see how it will work. CEO Joseph Park thinks that Kozmo can
deliver real-world physical stuff -- e.g., a pint of Cherry
Garcia -- to I-hate-to-wait people in less than an hour. But
delivery costs are critical -- when the business is
established and delivery efficiencies asymptote out, back-of-
the-envelope arithmetic indicates that each urban delivery
will cost four bucks or so. Costs rise even higher in the
burbs, where Park says the bulk of his business is. And Park
is building his business around single-item delivery (at list
price!). Kozmo.com made big buzz at the conference --
skeptical, negative buzz. Maybe there is something Park is
not telling us. Or maybe (how to say this nicely?) he is
riding the backs of greater-fools towards a lucrative, but
empty, IPO. Or maybe my old-economy eyes need rose-colored
lenses with a stronger prescription.
CUSTOMER-SHAREHOLDER: for love and money.
Loyalty is a problem when old-economy frictions liquefy.
Customers follow price, quality, and expediency.
Shareholders will sell in an instant if the numbers look
greener on the other side of the fence. But the customer-
shareholder stays attached for love and money.
Consider the book buyer who also owns 100 shares of
Amazon.com -- they wouldn't think of shopping Barnes & Noble
to save fifty cents. Consider the Boston Celtics fan and
shareholder -- they will only root harder and follow the team
more closely.
Holland Carney, of PR firm Alexander Ogilvy, introduced this
new, simple, powerful concept in one of the best talks of the
conference. She says that the IPO is the ultimate branding
event -- that NASDAQ has become a consumer marketing medium.
The IPO lets the little guy, the one who's also your
customer, participate. Carney thinks that PR firms might get
disintermediated by VCs and investment banks in this process.
Is her own company listening?
Now that we understand this, companies that depend on
building relationships with their customers can use the
phenomenon consciously. Are you listening, Metamarkets?
THE ANTITRUST GUY
In another gutsy move, conference organizers Reiss and
Browning put Joel I. Klein, the lead antitrust official of
the U.S. Government, in front of the New Economy Conference
audience of free-marketeers, Republicans and Libertarians.
(Klein's face is all over recent news media because his
office is prosecuting the Microsoft trial. The judge's
"finding of fact" was released last Friday, November 5. But
Klein spoke well before this, on October 28.)
Klein made a strong case that a vigorous government anti-
trust watchdog is one of the U.S. economy's success factors.
Consider that Japan was only yesterday an economic leader.
But in today's Japan, "keiretsu" is short for lazy cronyism
and monopolistic malfeasance that has been tragically
unresponsive to the harsh hand of market reality.
Klein did not comment directly on the Microsoft trial. But
he pointed out that active enforcement is almost a side
effect. The main benefit of having aggressive anti-trust is
what *doesn't* happen when the function exists. In such an
environment, one "unthinkable" uttered by a government
official can deflect a potential power grab that might take
decades of court proceedings to undo -- this is cost-
effective deterrence.
Given who this audience was, they let Klein off easily.
Nobody took the ideological saw of government interference to
Klein's position. If George Gilder had been there (his other
obligations caused him to leave the conference early) he
might have pointed out that government prosecutions are
costly, slow, and anti-innovative. Furthermore, Gilder might
have said that by the time such proceedings grind to a years-
later conclusion, they're likely to be totally irrelevant
because the marketplace has moved on. It could have been a
juicy, highly topical confrontation.
OLD, OLD, OLD MEDIA
The "media" panel was old, old, old economy. It was about
intellectual property that was owned by publishers and record
companies, it was about conventionally structured newspapers
that happen to have a web presence, it was about video
entertainment from NBC and Murdoch. It was hosted by Forrest
Sawyer.
None of the participants evidenced understanding that these
days I get my news from my friends via email and from primary
sources readily available on the net. They didn't
acknowledge the growing role of, e.g., Dave Farber's IP List,
or the Metamarkets.com discussion board, or my own SMART
Letter, or the power of personal relationships that develop
among members of such lists. They didn't seem to understand
what MP-3 (and user-controlled audio-on-demand in other
forms) represents, nor why the audio entertainment incumbents
are screaming in panicked anger. Nor did they seem to see
the coming video-over-IP tsunami (and the death of video
entertainment as we know it today) that MP-3 presages.
WHIPPING THE FRAYED END
There were many events at this conference that I will not
report on. Some, like Gilder's opening speech, and Clayton
Christensen's presentation, covered already-familiar ideas --
I want to write about new stuff. At others, most notably the
professional investor panel featuring Henry Blodget, David E.
Shaw, and others, the specialized jargon whiffed past me in a
cloud of dust. Still other presentations disappear into the
sulci of my cortex as time passes -- I am not the world's
best note taker, and I forget what I . . . where was I?
During other presentations, my mind or my body was elsewhere.
I am especially sorry I missed a big chunk of economist Hal
Varian's talk. And other highlights, such as Chuck Frank's
masterful MC shtick, John Perry Barlow's after dinner speech
and the fabulous Umbilical Brothers performance that followed
it, couldn't possibly survive my translation to mere words.
In hindsight, the conference was a gusher. Browning and Reiss
will reprise it in October 2000. If they're really corageous,
we'll explore this "money" thing, the decoupling of money and
governments, and life in a post-monetary world. In any case,
I hope to meet an expanded assemblage of the drink-from-the-
fire-hose set.
[A version of the above report first appeared (in several
pieces) on the Metamarkets.com website, home of Openfund.com,
the world's first on-line mutual fund.]
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CONFERENCES ON MY CALENDAR
November 10-12, 1999. Vancouver BC. DISRUPTIVE INNOVATION
with Clayton Christensen, George Gilder and many others. I
will be on stage with Bill St. Arnaud to discuss what comes
after "telephony." http://www.gildertech.com.
November 29-30, 1999. Toronto ON. CANARIE ADVANCED NETWORKS
WORKSHOP. The topic is "Optical Internet: From Information
Highway to Information Main Street." I'll be speaking on
Nov. 30 on innovation at the edge.
http://www.canarie.ca/frames/workshop.html
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Copyright 1999 by David S. Isenberg isen@isen.com --
http://www.isen.com/ -- 1-888-isen-com
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