Ross Mayfield's Weblog

Nick Carr's New Paradox

Nick Carr's new book, The Big Switch, takes on IT from a different angle and rests upon a metaphor -- that IT will not matter because it will move to grid computing in the same way electricity moved to the grid.  From the first chapter:

If the electric dynamo was the machine that fashioned twentieth century society - that made us who we are - the information dynamo is the machine that will fashion the new society of the twenty-first century.

And a Network World interview:

Carr explains that factory owners originally operated their own power plants. But as electric utilities became more reliable and offered better economies of scale, companies stopped running their own electric generators and instead outsourced that critical function to electric utilities...

"Some of the old-line companies will succeed in making the switch to the new model of computing; others will fail," Carr writes. "But all of them would be wise to study the examples of General Electric and Westinghouse. A hundred years ago, both these companies were making a lot of money selling electricity-production components and systems to individual companies. That business disappeared as big utilities took over electricity supply. But GE and Westinghouse were able to reinvent themselves."

Now I'm quick to liken computing to a commodity.  And Carr is right about the general trend line.  But with a bit of experience in commodity bandwidth, as a provider of SaaS and Managed Service Appliances, I can say there is something very different at play when it comes to enterprise computing and energy.  The difference is that bandwidth carries something of subjective value to sender and receiver.

From the buy side, enterprises will believe in firewalls at the edge of their networks and centrally managed infrastructure for a long time.  Perhaps its just easier to not outsiders, if not their own employees, to create their own firewalls around them.   It will take a long time for this perception, and the vested interests to vest, for this to change. And for every economic benefit argument of shifting to the grid

From the sell side, let me share something I learned from sharing a very personal namespace.  There happens to be another Ross Mayfield, so I reached out to him over the net out of obvious interest.  The former Pepperdine professor and security expert had come up with Mayfield's Paradox:

The cost of security is the greatest for the many or few in this well curve.  Sellers of grid computing will have the greatest cost of ensuring its security. 

Now, I don't believe that this cost will be prohibitive for providing grid computing as a utility to third parties.  But I do believe the cost of providing utility service plus utility service will be greater than the cost of providing behind the firewall virtualized datacenter service and security.  Or at least, the perception of it.

With Socialtext, we take the position of offering both options for topological deployment, while retaining the benefits of SaaS connectedness to our customers.  See Phil Wainwright's article.  The only vendor I don't think will end up there is Salesforce.com, because its their brand.

Carr is right about where we are heading, but it will take time.  But in the meantime, it makes for a fun argument for years to come.

Buy Side Publishing, An Open Model

Allow me to further simplify the Buy Side Publishing model. The most efficient part of the content business isn't in how or what they produce, nor how they distributed it, but how they make money.  Today the embraced commoditization is in advertising, with standardized metrics such as CPM.  But this makes money through directed attention, not directly from content.  To that, with the balance between freedom and profit motive required in a modern business model, you simply:

1. Apply CPM, and other standardized metrics developed for advertising, to content
2. Build upon the Creative Commons framework to ensure reuse without DRM under such commercial terms

This fills in the grey area between Commercial and Non-Commercial, or rather, let's you define Commercial use along with terms.  Maybe this is an over simplification, but picture this content universe...

1. But picture this post with a discoverable watermark that bakes in these two terms, with a CPM of $10 communicated to the clearinghouse each time the invisible .gif is impressed.  Say you read it and like it, fair reader and writer, and decide to republish it on your site. 
2. Someone else grabs it from my blogs and remixes it into a commercially minded remix.
3. Now picture someone finds it on your site, and thinks it would be a perfect complement to a Sell Side Advertising ad that is starting to take hold as a meme. 
4. Suddenly, as a publisher, I make money from all three transactions without the one-off transaction costs that plauge old notions of syndication.

I happen to think this is a model that not only unlocks value, but discovers it.

Jeff Jarvis comments:

But Ross, you assume that anyone would pay for content when they can link to it. Not sure that's a valid assumption. What am I missing?

Commercially viable remix use cases.

For example, search and aggregation are limited to fair use cases today.  Google scrapes and indexes an entire page, but only presents a link and summary on their own site.  What business models could they come up with going beyond fair use?  Or take more traditional media and their reliance on newswires as fodder.  What if they could efficiently syndicate diverse content sourced online into print?  Or from the initial publisher perspective, is there content you want to offer openly for non-commercial reuse, but also not restrict commercial use so long as you get paid?

Is the Whole World Going Open Source?

Notes from a panel at AO on Is the Whole World Going Open Source.  Here is the video and chat archive of the session.

Ray Lane
Industry being democratized.  Interesting developments from other parts of the world.  Business models changing, the focus of Software CEOs, they know they need to change to something different from a salesperson pitching software for perpetual use.  Top 15 companies represent 84% of revenue.  Hundreds of companies without profit or value.  MSFT, ORCL, SAP = 75% of Profit pool.  <5% are really innovative.

Rahul Kapoor
Business rationale: open source is more stable and secure.  Diversity in open and closed source products and licenses.  We are still at the infancy of the open source, but what is mature is more stable.  Linux or Apache.

Jonathan Schwartz
Open source cures cancer.  CFO reaction to open source was grumpy, but explained that Linux didn't get in the data center because of their decisions.  Not anti-Microsoft, it's anti-expensive software.

Rod Smith
Businesses are recognizing risks and how to address them.  Microsoft used to put stuff out that helped you be productive in a matter of hours, now people go to open source for productivity.

Kim Polese
IT is now in the driver seat.  Every industry at some point figured out the need to standardize so they can focus on architecting the solutions. Open source solutions and mixed stacks will increasingly be what we see in the enterprise.  It's about an industry maturing.

Jonathan Schwartz
Three costs:

1. Cost of acquisition
2. Costs of operation
3. Cost of exit

In your average ERP app, significant cost and lockin.  With OSS 1 & 3 are nominal.

Marten Mickos
Open source was always the better way, even in the 50s or 60s.  Companies had a temptation of closing things for profit.  Today it's the same companies that have problems with open source.  Google and others do not have this issue.  More lines of code will be written on MySQL than Oracle.  Enterprise software is not just ERP, you have email, collaboration and others built on top of it.

Rod Smith
Businesses think they are in the drivers seat.  They always know their problem is a bit different and need to tap communities to commoditize.  Open source communities are a way to mitigate risk.

Rahul
On open source motivators...If you are a business, price has to be a factor.  China moving because they don't want to be dependent.  If it is open source, I know what it is I am using.  Cost of operations includes the legal/IP aspect.

Jonathan
Customers frustrated because they are locked in.

Ray
Customers want to buy open, but implement closed.

Jonathan
If SAP was open, would it matter? (Ray argues that there would be better economics)  Where it matters is in replaceable applications.

Rod
Setting up with new suppliers quickly as an example motivation. 

On new business models... 
Rahul: need for service, integration, mechanism to help open source packages work together. 
Kim: the value of the business is shifting from bits to services.  Testing, information, integration wanted by CIOs.  Moving from the basic LAMP out to the long tail, applications to really run their businesses.
Marten: millions of net-connected developers that can innovate themselves, even as users with open source.

Rod
If you look at the skill level of people doing innovation, it's people with a little scripting skills, but deep domain expertise -- not PhDs.

Jonathan
slams Redhat distro.  Single biggest impact of OSS is it drops the cost of getting a product down to zero.  The fact that they can add and enhance to it is a little less important.  (Ray: I get better responses for bug fixes with open source) Jonathan with MySQL there are 500k people ready to help.

Rod
They are actually very process driven, they have wikis to coordinate.

Kim
Interoperability has not just been an open source issue.  Testing is rising in prominence.  DrKW CIO: testing and certification is how open source comes together, refactoring the biggest shift.

Marten
LAMP is not just four letters, you have lots around it like SugarCRM.  In just a few years it has grown to be a similar alternative to .Net and J2EE.

Kim
SugarCRM is a new breed of enterprise apps, gaining traction.  But when they use it they have to make it work with other parts.  We created an integrated installer that gets it up and running with the LAMP stack in minutes.  People also like extending SugarCRM.

Marten
Very few people buy cars and open the engine, but the assurance that you can get at the engine is necessary.

Jonathan
This is a replacement for source code escrow.

Rod
Open source doesn't address everything, standards are important.

Kim
Now that I am going beyond the LAMP stack, I want one source of support.

Jonathan
It's about changing the barriers to adopting your product in the short run.  Open standards matter more than open source in the long run.  Firefox is being adopted because it is a better browser than alternatives.

Ray
Similarly, it's either a good business or not for VCs, not whether it is open or closed.

Marten
Open source says we can't predict all your needs, so we leave it open for you to innovate.

Rod
Hybrid models coming out.  You want the innovation, but also want to get to the customer to make sure you are delivering value.

Had to go to the ready room before my panel, so couldn't take notes on the Q&A.

Relationships Over Transactions, A Learning from the Bubble

This post is part of Om Malik's bubble-a-thon.

Five years ago, I was the President and co-founder of a B2B Exchange with a $1B market cap. Seems right on the 5th anniversary of the bubble to revisit the rational insanity and fess up to your part in it.

A few years before, Sean Whelan and I were above a garage in the Mission district with a website brokering bandwidth.  RateXchange was a relatively simple business.  The telecom industry was full of the fattest cats imaginable, arbitrage opportunities abound and the margins were insane.  Sean knew the industry and had a simple concept of bringing some price transparency through a website.  For a year and a half we worked with hardly any salary, publishing rates and having conversations with phone brokers, buyers and sellers.  We pitched every VC and they still didn't get it.  I look back on this period fondly.  We were exploring new territory, creating a market and learning from people who worked profitable magic with only a phone, fax and a rolodex.

Then, Boom.  Suddenly what were doing all along was called B2B.  We raised $35M and $10M in debt overnight.  A dearth of B2B equity offerings drove us to go public with sixty thousand in revenue.  We went on a roadshow to meet people that had already participated in our oversubscribed offering.  Our business model was a fat butterfly, and we had to get fatter. 

Flush with capital, we embarked on an elaborate plan to foster a commodity market for bandwidth.  Not because the bandwidth market was growing like gangbusters, but because the market was grossly inefficient.  This was before there was B2B transaction software.  A year before, Chemdex spent $32M building such a system, cost us about a buck to develop our own in partnership with Trading Dynamics (later Ariba), a year later you could get one for $60k.  Beyond transaction efficiency, delivery was a mess of tangled wires, and contracted to deploy 14 pooling points in colo facilities to trade and deliver 91 routes in near real time across three continents.  We sought to create a spot and forward market to help carriers manager risk. 

For a damn good reason, the value of their assets was declining at 1000% per year for major routes and there was no mechanism to manage volatility.  Yet they kept building and buying.  After all, bandwidth was like a vacumm, and convergence promised smart layering of new services with elastic demand.  The more you build, the greater the demand, blah blah blah.  But for some reason, the sellers largely didn't ask to play in markets they couldn't control.  Around this time the Gorilla came in, Enron and its market making magic, offering their own market mechanisms.  Energy companies were ripe to play, but they still had little to sell.  Eventually we figured it out and liquidity was fostered, but it was too late for the equity markets and companies that were supposed to cumble, did.  Most of the rest is history.

Me, I would get up at the crack of dawn with my wife, logon at the desk I am sitting at now and look at how our paper value increased by a buck or two.  We would laugh in disbelief.  Private Client bankers called us before eight in the morning with schemes to turn paper into cash flow.  I hopped on the train to the city trying to figure out how to get the industry on board before it was too late for all of us.  Surely the market would flock to automated efficiency, to frictionless transactions, wouldn't it?

Around this time I picked up a copy of the Cluetrain Manifesto.  Markets are conversations.  This drum cut my ear, blew my mind, as it did many. 

Somewhere around the peak of the boom we forgot something.  That lowly phone broker who knew how to make money in the market.  Not because he could process transactions straight through to the bank. Near the bubble's pop, we were partnering with energy brokers, as they knew the people at energy-cum-telcos that wanted to play.  They didn't talk about efficient systems.  They talked about talk, they guy they knew they could extend credit or cut a deal because they knew they would get it back when they needed it.  Just like the phone brokers from a couple of years before, they knew markets were relationships.  Markets are social. 

But it was too late and the industry collapsed.  I moved on, and it wasn't easy.

Five years later I find myself with another startup, emulating the lesson learned as much as I can.  Now I am in the business of fostering social capital, of helping people connect through conversation.  Helping groups be more productive by tearing down false walls.  A revolution in simplicity, beyond aspirations of complex efficiency.  Going for sustainable growth, but also making choices based on relationships over transactions.  My customers are my business.  I work with some of the best people I could hope for, something I couldn't have said back then.  Even some of the Cluetrain authors, for which I am not worthy.  My network extends with people that value people.  My company produces social goods.  Even if Socialtext doesn't pan out as we hope (hey, it's possible), we have fostered a social software industry that will change the world.  Which is why I made the move from non-profit to public sector to private sector in the first place.

RateXchange lives on as an investment bank, MCF, thanks to the people that followed me, and one of its competitors went public three months ago.  It all happened so fast I never had a chance to vest or cash out.  Some investors made a thousand-fold return, which is more than fine by me.  I'm not sure I have regrets because I learned what I learned.  Markets are markets and somehow I maintained my own ethical integrity through boom and bust.  I still believe the network is the market, that bandwidth trading could have saved the industry and that similar businesses will thrive. 

I have learned two things from the bubble and have one theory that remains to be proven out.  One, relationships are the only thing you cannot commoditize, which makes them so valuable.  Two, by consequence, it matters who you work with.  Three, if you pursue what you believe to be the right thing, learn from failure, and innovate at the margin -- your rewards will be greater than what you could speculate.

This post is part of Om Malik's bubble-a-thon.

• Andy Kessler: Nazdog & The MOMOs
• Om Malik: The Beholden Years
• Ross Mayfield:  Relationships Over Transactions, A Learning from the Bubble
• Paul Kedrosky: The Bubble and Me

Adword Arbitrage

Seems appropriate on the eve of the boom's anniversary to revisit arbitrage and bubbles. Jeff Nolan points to a definition of arbitrage (risk free profit), but in the context of a poor analysis. Jupiter analyst Niki Scevak takes issue with an article by Bambi Francisco on how keyword arbitrage is leading to a bubble in Google Adsense valuations. Unfortunately, the article is behind a costwall, but Niki's post summarizes:

Bambi cites Nextag as an example of a 'search arbitrageur' because they bid up the term 'dvd players'. Yet Nextag does not buy the keyword and simultaneously sell it for a riskless profit. I can't say enough that this assertation is categorically, absolutely and unconditionally wrong (again to put it mildly). Nextag takes a generic keyword, filters that user through the decision of what make and model, and often what price range the consumer is willing to pay for their dvd player, and then sells that more qualified lead to merchants. It furthers the consumer through the purchase funnel. Extra value is added. Ask any merchant bidding upon the term 'dvd player' and they will tell you it performs poorly, in terms of direct conversion. But the term 'dvd player' is more valuable to vertical search engines like Nextag than it is to merchants and so Nextag can afford to pay a higher price than can merchants.

I won't pick on Niki's analysis or assertion that Bambi's article is horribly misleading information, but instead explain how the Nextag example is arbitrage at work.

Say the keyword 'dvd player' costs $1 on Google's auction market. On Nextag's market it costs $2. Nextag does add value, by decreasing search costs for vertical merchants, say by $0.50 (lets not drift into a discussion of how they are extending the Long Tail, but this is about Fat Tails). Nextag also does have its own transaction costs, say $0.50. Overall, Nextag pockets a profit of $0.50 for their 'value add' -- but if you assume the transaction was straight through processed and there were no credit or operational risks, this is risk free profit.

In this simple example, they are buying from one market where there is a low price and selling in another where the price is higher. How did they do this? By having superior information than other market makers or buyers.

Now assume that there was a delay from when they purchased from Google and when they sold to another party. That would be risk, the price could go up. Common in storable commodities such as natural gas. But on the other hand, it would create the ability to retain inventory as a hedge against price volatility.

So is there an AdWord bubble? Not by the Nextag example. As arbitrageurs, they are doing the opposite, and others will follow, gradually bringing the prices in both markets towards equilibrium. Who knows if the market is in contango (trending up) or backwardation (trending down), there are many other forces at play. As we are figuring out the economics of the long tail, I fall back on Says Law, where the market flocks to both scarcity or abundance to bring it back into equilibrium

Foreward: Five years ago I created RateXlabs with the good folks at Oncept tand published some whitepapers on bandwidth arbitrage conditions applicable to today's computing commodity market. Finally I have a use for all that information, to share it and hopefully not mislead.

There is no Supply Side

This one is for Doc.  What happens when the demand side supplies itself?  You have a commodity market.

What Doc usually means switching choice and the ability to build upon.  But consider Sun's creation of a Computing Commodity Market.  Buyers can sell excess capacity.  This option, provided contracts allow (this is where the details matter), reduces the risk of buying too much in the spot market, and can increase liquidity.  If Sun overprices the spot market, the buy side can sell instead of use.  Volume will bring leverage in this market, but even the smallest buyers benefit from this option, even more than selling their extra servers on eBay. 

Many will value different options and not take the risk of volatility -- but there is a risk management product that will be available for them -- the next opportunity.

Sun Opens the Computing Commodity Market

The ability to deal with people is as purchasable a commodity as sugar or coffee and I will pay more for that ability than for any other under the sun. -- John D. Rockefeller

A banker is a fellow who lends his umbrella when the sun is shining and wants it back the minute it begins to rain. -- Mark Twain

Sun's move is more than openly asking $1/cpu-hr. -- they are forcing the commoditization of computing by making a market.

A friend of mine from the RateXchange days (B2B Bandwidth Commodity Exchange) forwarded a press release about a MIPS Exchange fostered by Sun foray into Grid Computing, pointing out the similarity to our old business plan.   The Over-The-Counter exchange is hosted by Archipelago, giving it level of neutral positioning and real trading infrastructure. Some short term impact:

• Price transparency begets more transparency
• Price setting shifts negotiation to service level, credit and settlement terms
• Setting a standing offer to sell at a given price is half of the role of a market maker, expect them to offer a price they will buy at as well
• Fostering a Secondary market for your own product pools some customer risk and should increase initial sales
• The creation of a Forward market is where it really gets interesting

IBM is offering cycles at half the price of Sun and HP has a grid barter plan called Tycoon.  Jonathan Schwartz challenges IBM for not having a standard offering.  When market debate shifts to standards, commoditization is settling in.  Analyst Michael Dortch puts it well:

"The ability to acquire compute cycles economically as they are needed is incredibly compelling. However, questions about how requests for those cycles will be prioritized, and whether or not priorities will be governed by service agreements, auctions or other mechanisms are just the beginning for interested IT decision-makers," he added. "The fact that these questions are being raised is good for all concerned, but actual, specific business benefits will have to wait until at least some of these questions are asked -- and answered -- by Sun, its partners and at least some of its competitors."

Jonathan offers this table as a commodity definition:

Elements	Sun's Grid	IBM's Grid
Industry Standard Server	V20Z Opteron (2.4 GHz), V210 SPARC	?
RAM per CPU	4 Gig	?
Cache storage per CPU	20 Gig	?
Operating System	Solaris 10	?
Is OS open source?	Yes	?
Is OS Protected by ALL* corporate patents?	Yes	?
Minimum Commitment	4 hrs.	?
Price per hour	$1 US	?

While this is an admirable stack, and is significant progress in a consistent redefinition of Sun's strategy, it has little to do with the commoditization of computing.  How the commodity is produced is irrelevant except as a temporary source of advantage for one actor.  What matters is defining price, quantity, quality and delivery mechanisms.  What Sun has defined is price and quantity, and now its time to hire some lawyers into the marketing department.

It is in Sun, IBM and HP's interest to come to a common table and pool risk.  This will not happen anytime soon, and first there will be alternative definitions and markets.  Sun's initial asking price is a ceiling, not a floor or a table.  Expect for them to trade in and out of the market leveraging information arbitrage (the real reason you want to be a first mover in commoditization).  Watch for when a second seller enters (Google?), an agreement is standardized by early movers, volatility ensues and liquidity explodes.

Gold like the sun, which melts wax, but hardens clay, expands great souls. -- Antoine Rivarol