Thursday, August 25, 2005

Surging Profits, Booming Markets
(...and Frowning Prophets?!)
Or, Is It All Too Good To Last?

Companies all over the world have been seeing bumper profits over the last year. The Economist reports that corporate profits have been outpacing GDP growth on both sides of the Atlantic, as well as in the Asia-Pacific. Business Week informs us that companies all over have surpassed profit growth expectations, and are flush with over a trillion dollars in cash. Technology companies are especially doing well - Microsoft, Dell, Intel, Oracle alone have amassed large surpluses.

What factors have led to this? Outsourcing to cheaper destinations is producing savings that go straight to the bottomline. Low-cost goods and services from China and India are keeping inflation low, freeing up spending money in consumers' hands which shows up as increased demand for all types of products that companies sell. Better use of technology is helping too, as companies have got smarter and more finicky about how well they use technology.

Meanwhile, the China-India effect* is helping produce some related, and largely pleasant, macroeconomic developments:
- the low inflation, caused by these countries "exporting deflation", is also keeping interest rates low worldwide
- thanks to more money in consumers' hands and low interest rates, people are investing in asset-building with renewed vigor - particularly in stocks and houses
- this in turn is leading to steep rises in asset prices and, most economists agree, asset price bubbles in most countries
- the resulting 'wealth effect' (people feel richer as their stock portfolios and real estate values shoot up) is further spurring consumer spending, as people spend more when they feel wealthier!

Can this last, and what can go wrong? This is admittedly a happy state of affairs. But while profits and asset prices are soaring, some worries are rising too.

- the asset price bubble can burst (or at least deflate)
- continued sluggishness and job growth stagnation in the EU countries can drag down world GDP growth
- economic policy responses from Governments need to be right (low-cost products can keep inflation low only in the short term - in the long term, only macroeconomic policy matters)
- consumer spending may slowdown in the US, the current engine of growth
- resistance to outsourcing can build up (on grounds of job losses, security concerns,...)
- worrisome or cataclysmic geopolitical events can happen (such as energy supply volatility, terrorism, nuclear arsenal buildup etc.)
- imbalances have been accumulating in the world economy, setting up stresses which may get released in unexpected ways and at unexpected times. (China's recent re-evaluation of the Yuan, although widely criticized as too little and too late, is a welcome step towards reducing one such imbalance). However even Alan Greenspan, that doyen of economic prophets, has admitted that there are forces at work in the world economy that we do not fully understand. Indian Finance Minister P Chidambaram said last week that he would be "worried" if the Bombay Stock Exchange's key Sensex did not stop its rampaging rise soon (the market duly lost some of its ardor).

If anything, all of this shows the world of business and economics has been changing - and so far, the positive effects outnumber the negatives. In general, history teaches that happy positive cycles such as the above tend to be fragile (and often too good to be true). This one looks robust, but how long it can last, only time will tell. Meanwhile, let us hope that we do all the right things to prolong the boom as long as possible, and cushion the fall when it comes.
* The China-India buzz has been getting hotter. Business Week ran a cover story on the two countries recently. Business Week's Mike Mandel is also addressing the question of how the US should perceive the two countries' ascendant R&D prowess.

Saturday, August 20, 2005

Blogging: Just How Much of a Phenomenon?

Towards a measure for the success of blogging

In a previous post , I talked about blogging’s future. Here we will try and arrive at a “measure" for how successful blogging has become, and how much more it is capable of achieving.

It is pertinent to note that we are not talking about measuring the success of a specific blog, but of blogging as a phenomenon.

Before tackling the admittedly difficult question of measuring its success, let’s pause and ask, What is blogging? At one level, it is a tool which individuals use for communication and self-expression. Indeed, this was the only use conceived initially. As its usage soared, it also emerged as a tool for on-line 'communities' to interact and disseminate news or useful information. The most recent emerging use (completely unanticipated in the early years of blogging's existence) is for commercial organizations to interact with various stakeholders.

Thus, a reasonably general definition of blogging would appear to be, a technology that lends itself for use by individuals, communities or organizations as a means of communication, information dissemination or interaction.

How do we go about establishing a measure of the success of anything? One way is to identify its "potential", and measure what proportion of that potential has been achieved. For example, if your company sells flat-panel TVs, the potential market would probably be equal to the number of households in the world having a household income of more than a certain figure. If you are trying to popularize a new 'world language' that you have invented, the potential probably corresponds to every human in the world speaking the language. If you sell beer, the potential sales would probably correspond to each adult in the world drinking 150 liters a year!*

However, it is frequently difficult to assess potential in this manner. A surrogate, more practical approach would be to identify the 'best' achieved by anybody so far. If you are an athlete, your 'best achievable' may be the current world record in your event. In the TV example above, the ‘best achievable’ may be the sales volume achieved by the market-leading company.

Thus, the problem reduces to discovering the 'best achievable' usage of blogging. To do this, we must stretch our imagination a bit and ask, what are the "best" technologies** that meet roughly the same needs that blogging does, and what is the usage they have achieved? The “best” technologies we have that allow communication, information dissemination or interaction are probably telephones, email, and conventional web sites.

The number of telephone lines (fixed and mobile) in the world is estimated at around 2.1 billion. Similarly, the number of email users is in the region of 600 million.

How many websites exist in the world? Yahoo indexes 19 billion web pages, while Google indexes about 9 billion. Taking the smaller of the two, and assuming the average website has around 20 pages, the number of websites may be approximated as about 500 million.

Let’s be conservative, taking the smallest of the 3 figures (for telephones, email users and websites) which is 500 million. To be play it even safer, let us assume that many websites represent uses that blogs just cannot. So let us say that the figure of 500 million overstates the figure we are looking for by 90%. This leaves 250 million (assuming many websites are defunct, etc.). It appears safe to say that this represents the usage that blogging must achieve. Thus, the “best achievable” number of blogs is, at the very least, 250 million. The current number of around 80 million thus suggests that blogging has covered about a third of the distance to its “best achievable” usage.

Of course, we will be shortchanging blogging if we end this analysis without considering time frames. While telephones have taken 20+ years to reach their current usage (counting only from the time mobile phones were invented), email has taken 15+ years, and the web 10+ years, blogging has been around only 6 years or so.

To dwell a bit on how technologies evolve over time, let us look at an elegant concept, the 'S' curve. What this says, very simply, is that every technology has an initial period during which it grows very slowly. As it improves and gains usage, it crosses an 'inflexion point', beyond which growth takes off rapidly***. Further down, the technology reaches a maturity stage where growth once again slackens. Metcalfe's Law, which holds that the usefulness of something goes up exponentially with the number of its users, applies during the high growth section.

Thus, in S- curve terms, blogging can be thought of as having crossed the inflexion point, and being about 30% of the way to the peak. In other words, 70% of its potential is yet to be achieved.
* If that sounds high, the Czech are reputed to drink 167 liters per capita per year!

** As is clear from the context, we use ‘best’ not as an indicator of quality but to mean ‘the one that has achieved the greatest or most widespread use’.

*** Not all technologies, of course, actually cross the inflexion point - many (indeed, most) die out well before they reach that point.

Monday, August 08, 2005

Excitement in the Ether
An intriguing suggestion (dismissed as a rumor by Nokia) has appeared over the weekend - that Cisco is eyeing an acquisition of Nokia, evidently driven by a desire to strengthen its wireless infrastructure business. At a superficial level, this sounds plausible - companies worldwide have amassed unprecedented cash hoards (see, for example, The Economist and Business Week), due in part to central bankers' generosity in keeping real interest rates at historic lows, and we can well expect to see a rash of acquisitions in the near future. Also, Cisco certainly is one of the cash-rich giants around, and has amply proven its acquistion credentials.
However, we must pause and ask, how much business sense does this make? As Marek Pawlowski points out, Nokia's business is in making handsets more than wireless networking equipment, and Cisco will be hard put to rationalize buying all of Nokia just to get its wireless infrastructure manufacturing business.
Neither does such a deal appear to make a lot of sense for Nokia, which does not strike me as an overly enthusiastic acquisition target - at 34% of the world market, its handsets outsell those of the nearest competitor (Motorola/Samsung) by 2 to 1. And that is hardly a market that is shrinking - worldwide handset shipments are likely to double over the next 5 years to 1.2 billion.
The backdrop is not very promising either - recent megamergers in the tech space have hardly been stellar. HP / Compaq and AOL / Time Warner come to mind.
And given the size of the deal, even a veteran with Cisco's admittedly high 'Acquisition Quotient' is likely to be overreaching with this buy.

Friday, August 05, 2005

Blogging's Future: Up, Up and Away?

Beyond a doubt, blogging has a bright future. It's tempting to get carried away by all the exuberance being generated.

Bill Gates says blogging "will fundamentally change how we document our lives". Technorati's CEO David Sifry says that there are 11 blog posts being made every second!

While this may well be true, we must resist the temptation to get carried away. Let's analyze blogging's prospects as a 'personal technology', or a technology that individuals use to improve their effectiveness or productivity, or simply to have fun.

All successful personal technologies that gain widespread use (be it the humble pen, the telephone or the iPod), bear certain hallmarks: they are easy to use, fulfil a basic need, and provide a new way to express an existing behavior or habit. Technologies that make the cut on these three respects tend to 'take-off', with their use surging steeply*.

Blogging certainly fulfils a basic need, the need for self-expression and social interaction. It is also more powerful in many respects than other technologies that meet similar needs - the telephone, email or online chatting - in that it is more 'permanent', and allows visibility to anyone who can access the Web. It also provides a new way to exercise our natural propensity to form groups with like-minded folks, by allowing us to form 'virtual communities' on the Web. It also allows people to 'discover' others with similar tastes, wherever they may be in the world.

Well, that leaves ease of use. I am afraid blogging is somewhat less stellar in this respect - while it is simpler than creating personal Web pages, it still lags far behind the telephone and email in ease of use. So, ease of use is the first thing that needs to improve about blogs (I hope the blog tool-makers are listening).

If one is tempted to argue that blogging is already very successful, one only needs to pause to consider the numbers: by most estimates there are around 80 million blogs in the world as of today, while the number of telephones world-wide (fixed-line and mobile) is around 2 billion. This is not to take anything away from the success of blogging, but only to establish (an admittedly somewhat crude) benchmark!

However, we've looked at only half the picture so far - becoming successful. Success brings its own problems, and sure enough, blogging too will need to overcome a couple of challenges that success brings with it:

Better ways to manage 'blog clutter'.
Even with the current number of blogs out there, it is becoming difficult for people to navigate the blogosphere. Telephones or email don't need to solve this problem as they are 'push' technologies, which means that you *want* to restrict who can contact you using these technologies. However, if blogs are to truly live up to their promise of allowing the 'discovery' of like-minded folks, then blog search engines should (and will) get smarter.
Search is of course not the only way to manage clutter - for example, Business Week's Heather Green talks about creating 'influential blogger' lists.

Blogging needs to find ways to enable diverse communication needs
Blogging tools already do a half-decent job of allowing the sharing of digital content. However, as camera phones proliferate, sharing pictures and movies will increasingly become mainstream. Also blogging from heterogenous devices (phones and home appliances come to mind) is likely to need support.

Of course, this piece only addresses blogging as a 'personal technology'. Analysis of its prospects in business - which are fledgling at the moment - is the subject of a different discussion altogether!

*This is driven by Metcalfe's Law, which holds that the usefulness of something increases exponentially as the number of users goes up.

Tuesday, August 02, 2005

The End of Corporate Computing and other Fables

Nicholas Carr is back and at his contrarian best with The End of Corporate Computing in this Spring's MIT Sloan Review*. He posits that Information Technology (IT) is in transition: from an asset owned and hosted by corporations for their own use, to a utility that is supplied centrally by specialized companies. His argument takes the concept of utility computing to its logical extreme, and holds that the corporate data center will go the way of the dodo.

Nick is wonderfully eloquent, and his argumentative skills are admirable. His case would have been very persuasive, had it been based more solidly in reality. As with his earlier article IT Doesn't Matter, he overstates his case here too. Business software often automates complex and firm-specific business processes, and does not easily lend itself to centralization with a utility supplier. It is difficult to imagine a car factory carrying out its manufacturing planning or control thru a subscribed utility, or an investment bank performing securities analysis on a vendor's computer sitting hundreds of miles away. The author's vision may, however be seen as providing a general direction in which computing will evolve.
Summing up, the horse sense view is: It appears far-fetched to state that utility computing will render the conventional model of each firm hosting its own IT applications extinct, or even that it will become the dominant mode of IT use in corporations. Utility computing may gain traction over the next few years for applications that are not highly firm-specific, where business-criticality and security requirements are moderate / low, and where speed of response is not highly material.
* Francis Fukuyama's epochal The End of History seems to have caught everybody's imagination so much that it has spawned an entire genre that is going strong even 15 years on! I remember lapping it up the article as a young, gawky research scholar, and the furore that followed it's publication!