Facebook’s Next Business Model

VC Chris Dixon muses in a recent post that Facebook has yet to uncover a business model that will support its IPO valuation and drive future growth in that valuation.  As he puts it:

Facebook relies on an old internet business model: display ads. Display ads generally hurt the user experience, and are also not very efficient at producing revenues. Facebook makes about 1/10th of Google’s revenues even though they have 2x the pageviews. Some estimates put Google’s search revenues per pageviews at 100-200x Facebook’s.

The good news for Facebook is there is a lot of room to target ads more effectively and put ads in more places. The bad news is that, if there is one consistent theme in both online and offline advertising, it’s that ads work dramatically better when consumers have purchasing intent.

I think he’s right about the ad model.  Google has uniquely cornered the market in delivering an ad at precisely the moment the user is searching for something to buy, hence the remarks about purchasing intent.  A banner ad, on the other hand, lurks in hopes that someone with purchasing intent will happen to see it at exactly the right time and place to make a difference.  Given the odds, it’s no wonder the ads make 1/10 the revenue despite 2x the pageviews.  Unless Facebook can engage the timing and content properly to capture purchasing intent, that isn’t likely to change.

So what’s a poor Facebook to do?

Let’s get back to basics: what exactly is Facebook?  If Google, from a monetization standpoint, is the place you go to find something when you want to buy, what is the analogous elevator pitch for Facebook?  It’s pretty simple, really:

Facebook is a platform for chilling with your friends.

Doesn’t that really capture in a nutshell what people do with Facebook?  Put aside what marketers wish they were doing (yeah, we all go there to worship the sugary soft drinks that use those adorable polar bear cartoons as mascots), this is what’s really going on with Facebook.  And guess what, isn’t owning the world’s leading platform for chilling with your friends apt to be extremely valuable?  It’s got to be.  If for no other reason, look at how big a part of the economy entertainment is.  In 2010, Arts, Entertainment, Recreation, Accomodation, and Food Services amounted to 3.6% of the nation’s GDP.  That’s the platform Facebook has available to tap into.  It’s not as good as say the 5.9% that is the retail trade Amazon and Google tap into, but heck, it’s still not bad at all.  It is a sufficient market on which to base a huge business.  Look at what Apple has been able to do with music alone, for example.

The key for Facebook is to get focused with laser-like precision on how to monetize their Chillin’ Platform before the opportunity seeps away.  Eyeballs and leisure time are fickle as those old enough to remember things like pet rocks and CB radios will tell you.  Right now, Facebook is focused on advertising revenue, but they could get a lot more creative and, given all the capital they’re raising and the opportunity available to them, they should be getting very creative and testing everything under the sun.

What are some potential ways to monetize a platform for chillin’?

-  Social games are an obvious first choice.  Facebook has to relentlessly build this platform and creates as many barriers around it as possible.

-  Making Dates:  Dinner anyone?  They should own Open Table.  Movie Times?  Why am I going to Google to figure that out.  Hook me up.  Make it easy for me to plan and coordinate a date.

-  Music:  Gotta be part of any chillin’ for me.  While we’re at it, plug in media of all kinds.  If Google is gonna do hangouts, Facebook needs to up the ante in some chillin’ fool kinda way.

-  Vacation and Travel:  The ultimate chillin’ game and big bucks involved too.

-  Party Time:  Coordination, invitation, planning, decorations, photos (oops!), eats and drinks.

-  Devices:  What devices do we have around when chillin’?  What facilitates communicating the vicarious virtual thrill of chillin’?  Video, phones, cameras, yada, yada.  But what else, and how does Facebook uniquely home in on all that?

Being successful with all of this will require Facebook to think BIG.  I mean Steve Jobs kinda BIG.  They have to seriously simplify and amplify the act of chillin’ in ways that only a platform can accomplish.  If they do that.  If they can reinvent chillin’ the way Apple reinvented music and the phone, they’ll be here for a long time and folks buying in at today’s market caps will stand to make a lot of money going forward.

This is a big time innovation and UX problem: reinventing the art of chillin’ with your peeps.

Hewlett Packard and the Many Curious Paradoxes of Micro-Management

I just finished reading Fortune’s massive write up on the ills at Hewlett Packard. What an amazing story, and as I was going through it, I kept seeing the same thing repeated over and over again: Micro-management trumping Leadership and creating a disaster in its wake.  Instinctively, we all know Micro-management is something bad, but the first paradox for me is that we need this term.  What are the variations of Management that are good?  I prefer to contrast the term “Manager” with “Leader”, and ascribe all the bad things about Micro-management to Management in general.  It’s unfair, I know, and it doesn’t apply to all organizations, but I’m helpless to avoid it because I’m an entrepreneur and not an employee.

What then, is the difference in HP’s case between Management (or Micromanagement as I prefer) and the Leadership that should have been available?

In another post, I characterized Micromanagement as forcing people to do things not because they believed they were the right things to do, but because the manager had sufficient Political Capital to make the employee do what was desired.  This seems to have been the order of the day in the HP article if you read it through the lens of this definition.  There were executives at all levels who acted on enforcing their decisions largely by means of political capital expenditure and without the necessary leadership step of making the hearts and minds who actually had to execute these plans believe.  What made the Political Capital bill much more expensive is that this went on through a succession of leaders.  The descriptions of all the nastiness, snarkiness, hubris, and ego are all symptomatic of individuals who were so certain they were right and so certain they were entitled to make others obey, that they need not do the work of persuasion.

In fairness, perhaps this was coupled with a sense of desperation; that there might not be time for persuasion; and that with that certainty comes the notion that since the plan was going to work out spectacularly well, persuasion would come later.  The results could speak for themselves and would persuade even the harshest critics of the wisdom behind the plan.  Such reasoning is obviously circular and even a bit lazy in retrospect, but we’ve all been guilty of it at one time or another.

Another of the curious paradoxes of Micro-management is it can only work in a very few cases.  The ideal opportunity for Micro-management success involves these ingredients:

-  The situation and group you intend to Micro-manage must be small enough relative to your talent that you can be right personally making every decision of consequence.

-  The individuals have to be willing to be Micro-managed so that the consumption of Political Capital relative to its replenishment can proceed at a net positive.  Perhaps it is an assembly line job where Micro-management is such an established part of the job that it is totally expected.  Perhaps the individuals are in a training mode of some kind and you are a recognized expert who they all look up to and respect.

-  You have to be right often enough to assist in the replenishment of Political Capital.

-  If any of these ingredients are going to be missing, you had better make sure that the application of Micro-management is so brief, with so few people, and affects so little of what’s going on that you don’t use up too much of your Political Capital.  For example, it is often more important to have a decision that is sub-optimal than no decision at all.  An insightful executive will realize when they are faced with no decision and will Micro-manage the sub-optimal substitute as needed.  It will be a rare executive practicing Micro-management who strikes the proper balance and doesn’t overdo it because Micro-management is addictive.

Unless you disagree with that set of ingredients, you can see that Micro-management is a tactic that can only be employed very sparingly.  The type of people who tolerate it are not high in an organization.  The HP story seems to be one where the Team has so little cohesion, that they’re all trying to Micro-manage each other incessantly.  Each new CEO is tasked with immediate transformation, dives in and tries to Micro-manage some momentous decision to fruition, but is thwarted:

-  Because they are new, they have little Political Capital.

-  Because the long timers have seen these tactics fail again and again, they insist on a higher Political Capital price each go round.

-  Ultimately, the Political Capital is insufficient to pay the bill, so the managers become insubordinant, unresponsive, and they flip the bozo bit.  That’s always the cost of an overdrawn Political Capital account, and it leads to worse.  Once you default on Political Capital, it’s much harder to replenish.

Another irony or paradox of Micro-management is the type of people who practice it are often those who should most readily understand its failings.  They’re those who’ve exceled in some way.  They are the brilliant young leaders of new startups.  Or the successful old warhorses of companies like Hewlett Packard or SAP.  These people know they’re good, and it is that knowledge that bolsters their certainty to the point where they’re unwilling to invest in Leading.  They’re too impatient.  Once you know you’re right, you shouldn’t have to persuade others.  It is their deficiency if they can’t understand your plan.  They need to get on board with it because the train is leaving.  This is important stuff and we don’t have time for the laggards.

I believe HP fell into a culture of Micro-management through no fault of their own.  If Micro-managing leaders jerk the organization through manuevers without ensuring true alignment of hearts and minds (not just lip service), it breaks down the bonds of a Team and creates silos in a hurry.  Once you break apart an organization that large, and do so over a long enough period of time, you create problems that cannot be solved quickly.  Even Leaders will be tempted to force change through Micro-management because they know results will be expected before they can deliver true Leadership.  That’s a great pity, because one of the roles of the Leaders at the top has to be to take that kind of pressure until results can be produced.  A little Micro-management of big issues will have to be tolerated, but at the same time, room has to be made for Leadership principles to take root again.

It’ll be interesting to see if Meg Whitman is able to pull that off.  Her predecessors and Board have left her facing an uphill battle.

Big Data = BI + ADD

Big Data is Business Intelligence plus Attention Deficit Disorder?  That’s gotta be linkbait of an order I’ve not used since my NoSQL is a Premature Optimization post.  What’s up with that?

I just got done attending Jeff Kaplan’s excellent Cloud BI Summit at the Computer History Museum.  It was a very enjoyable event and it helped me align a lot of disparate threads that had been circulating in my noggin into some coherent insights.  It also reminded me what an excellent facilitator of panels Jeff can be.

One of those threads is that the problems Big Data is focused on are not necessarily all that hard.  Everyone wants to talk breathlessly about the incredible volumes of data that are flying around these days and how hard it is to deal with that data.  But I just don’t buy it.  We’ve had Big Data for a long time and we’ve been dealing with it for a long time.  Web Scale only affects a relatively few organizations at the very high end–probably not enough organizations to make it the interesting investment thesis that it currently is held out as.  At smaller scales, the volumes are just not all that crazy relative to the tools that are available.  Put another way, its ADD because we simply have that much more data and excuses to obsess over nuts and bolts technology instead of seeking the real actionable insights our organizations need.

Listen, I’ve been doing Big Data for a long time.  You want to talk lots of transactions?  I did a startup called iMiner / PriceRadar that had to process all of eBay’s transactions every day in just a few hours.  This was back in 1999.  There was no Amazon Cloud to leverage.  Nobody was using MySQL, and nobody had really even heard of NoSQL.  eBay itself was still crashing weekly because they hadn’t started using their relational databases in all the adhoc-NoSQL ways (no joins or transactions!) that people would eventually codify and start talking about.  I asked all of my high-powered database expert friends how to do handle the data volumes and they said it would require Oracle and lots of expensive high powered Unix hardware.  We couldn’t afford that so I told them we were going to use SQL Server running on commodity Windows hardware.  They laughed and said that wasn’t even possible.  8 weeks later it was up and running and worked well. Today we’d use MySQL and commodity hardware at Amazon.  This was the whole point of my NoSQL is a Premature Optimization post.  You don’t need column stores and flash memory architectures to get this kind of work done for the majority of companies out there.  Who really has Facebook’s data volumes (and BTW, they used MySQL to handle those)?  Who has Google’s data volumes?  Relatively few organizations.

So then what’s the real problem?

The best part of the conference for me was a panel Ken Rudin participated in.  I’ve interviewed Ken on this blog before twice when he was running LucidEra.  He went on from there to run Analytics at Zynga, and now he is at Facebook running their Analytics.  The rest of the people on the panel were from companies building the tools needed to wrangle Big Data.  Ken pretty much cleared the decks when he said that was all fine and well, but the hard part wasn’t really managing the data.  The hard part isn’t the ETL, the data feeds, the database, nor the dashboards and report generators.  That’s all doable and easier than you’d think up to very large scales.  The hard part, according to Ken, is knowing what questions to ask.  He is so right about that.

There’s not that much new under the sun with Big Data.  When I worked at Callidus, terabyte data stores for our application were common.  We were handling huge transaction volumes around sales commissions for the world’s largest companies.  We got it done largely with off the shelf technologies for the Analytics and a little tuning.  If you don’t think managing the complex comp plans for 250,000 insurance agents for one of the largest insurance companies in the world is Big Data, you just don’t know much about the comp plan business.  For one customer we had to horizontally scale our architecture out to over 200 cpus.

Jane Griffin, from Deloitte amplified on Ken’s thought in some nice ways.  She said what I had been thinking ever since Ken uttered those words during his session:  there is a growing shortage of the sort of person who knows how to ask the questions.  Once again, she was so right about that.

As a person who does know how to ask those questions and get answers, I have seen it over and over again.  I have often wondered in various organizations why I was doing that kind of work.  Wasn’t there someone besides the SVP of Products or Engineering that could formulate these questions and get them answered with Analytics?  Worse, why was it that when I presented the data and the answers there were so often blank faces?  Why didn’t they get it?  Didn’t they think analytically?

The simple fact is that we are moving from a world of intuition and gut feel to a world of data and analytical thinking.  Before we had the data, intuition was all we had to fall back on when making decisions.  It’s better than nothing, but it can result in spectacular failures.  I’m fond of telling the story of a certain expensive marketing program that went very wrong that was based on someone’s gut feel.  It involved spending a lot of money without producing much of a result.  When my friend Marc Randolph, someone who is very analytical in their thinking, was asked why it failed, he said, “I don’t know, but it was tragically knowable.”  He meant the idea should have been tested at much smaller volumes before all that wood was put behind an arrow that was doomed to miss.

In this world, if businesses want to succeed, they have to realize that data is plentiful.  First they have to collect it up.  That’s the easy part.  Then comes the hard part.  Someone in the organization must have both the skills and the empowerment to ask the right questions, get the some answers backed up by hard analytics, and then get changes made to take advantage of this newfound knowledge.  If your competitors have digital strategies driven by hard analytics, and you’re flying by the seat of your pants, you may as well be piloting a biplane and barnstorming because they’re flying a sophisticated jet with radar and gps navigation.  You don’t want to try to win that contest!

Thinking about these kinds of people that can perform that analytics-question-asking task, it’s clear they’re scarce as hen’s teeth in most corporations.  I am reminded of a similar essential skill set that is equally as scarce:  great software developers.  The world went through an interesting evolution largely because of the shortage of great software developers.  At first, when there weren’t that many computers around, IT built all their own software.  Eventually, they couldn’t hire enough great developers, and so packaged software had a chance.  Then, there weren’t enough great developers there either, so the world of professional services was spawned.  Demand outstripped that supply and so we went global, with offshoring and outsourcing.  There is no monopoly on this talent in the US.  Now we have a sort of software development supply chain where software of varying degrees of sophistication can be created and the scarce supply of these developers has to be rationed at these different levels in that chain.

Expect to see the same thing going on with the Data Scientists, Quants, or whatever you want to call these people that know how to ask the Big Data Questions.  They’re going to be the Moneyballers in their organizations and they’ll be worth every expensive penny you wind up having to pay them.  Someday soon you’ll be turning to the Deloittes of the world to hire these people when you can no longer attract them.  Who knows, maybe we’ll see them popping up in India, China, or Vietnam not long after that?

BTW, it’s a great pity the space isn’t called “Big Questions” or maybe “Big Insights” instead of “Big Data.”  It would’ve been much more to the point, or at least more benefit oriented and less feature oriented.

Why I’m Dropping InstantSlideup Like a Hot Potato

This is one of those minor personal rants that come up from time to time.  What good is having a blog if you have to be all serious and to the point all the time?

I recently had tried a little piece of software called “InstantSlideup” (not gonna link to them as I don’t want to help their link authority).  It’s purpose is to offer a slide up message (can be advertising or anything you like) at the bottom of a web page.  It’s unobtrusive in the sense it doesn’t block much of anything, yet it catches the eye a little bit.  That’s my preferred method for these sorts of things.  Popups that totally stop you in your tracks really bother me, although I do understand their efficacy.

In any event, I had it up and running on my CNC Machinist’s blog and all was well.  That site is one I use both for my hobby/passion around machine tools, as well as to run a small microISV business, and just generally to test out various online marketing concepts.  InstantSlideup is in the category of “nice to have”, but not “must have”.  A must have for me would be SEOMoz (see, I gave them a link).  My experience with InstantSlideup is that while it helped a lot more people to “discover” my product home page on the site, most of the new audience weren’t interested enough to convert.  Net net I was ahead on conversions, but by a lot less than the traffic would imply–gotta analyze yer analytics carefully!

Anyway, I liked it okay, a bit expensive for what I was getting, but I decided to hang in there with it.  Until now.

I’ve been pretty successful with this site, digital marketing works and works well given the right strategies.  I’ve put together a very analytics-driven approach (call it Big Data for Small Business, if you like) and have been tuning it up for about 3 years now.  I get circa 1 million uniques a year roughly doubling every year, which is very good compared to my peers in this rather odd niche space.  Unfortunately, this also led to the undoing of InstantSlideup.  The thing is, their SaaS version (and I always prefer the lower hassle of using SaaS to installing it myself), was a one size fits all that only allows 100,000 impressions per month.  Here is the kicker:

When the 100,000 impressions runs out, they don’t just stop running your slideup ad, they start running THEIR slideup ad on YOUR site!

I couldn’t believe it when I saw this was happening.  I guess I should not have been surprised.  We live in a world where most businesses take the liberty and ask forgiveness later.  Even a casual look at all the privacy controversies we’ve seen swirling so far this year should make that clear.  Yet somehow, this just seemed beyond the pale.

There is that certain kind of marketing that’s all spam all the time.  Shoot the prospect into a landing page that has no navigation so they can’t escape.  Don’t give them too much information because Heaven forbid, they might stop to think instead of filling out that contact information.  Get on the phone and machine them into the purchase any way possible.  The darned thing is that it works.  It even works pretty well.

Seth Godin is one of my marketing heroes, and he thinks there is a better way.  Aside from the digital marketing, Seth’s approach of building a Tribe, is more what I’m after.  I think it works as well or better than the all spam all the time crowd, although it is more work.  Yet even Seth acknowledges that the all spam all the time approach often beats us down.  Well I’m feeling feisty this morning, and InstantSlideup took one too many all spam all the time liberties.  So I gave them the boot off the site and off my credit card and I’m letting folks know exactly why that happened here.

Eventually, I will stop and write the little bit of code needed to do a slideup and the site will have slideups again.  Maybe I’ll just open source that little bit of code so others can do likewise.  OTOH, this feisty feeling can only last so long and I have a lot of other things to do first.

For the record, here are some things I would have considered doing instead were I running InstantSlideup:

-  Send a message well in advance, not at midnight when the impressions ran out, reminding the user that based on history they’re within a few days of running out and tell them how to deal with it in just a few clicks.  Perhaps they’d like to just temporarily no show the slideup.

-  Tell the user they’ve exceeded the impressions but that you’re going to comp them another 10,000 impressions on a one-time basis.  Present them with the immediate opportunity to upgrade to 200K impressions for a slight additional charge.  After all, a site exceeding impressions ought to be one of your star customers.  Why not treat them as such and make them feel special?  I’d have not only paid at least 1/2 of another license for the impressions but I would have written here about this kind of treatment instead of doing the blog post I am.

-  Send the message, but just make the slideup go dark until the impressions are reset for the next month.

See how much nicer not being all spam all the time can be?  Isn’t that how you’d rather be treated by a vendor?  Shouldn’t a vendor of marketing tools, of all possible businesses, be more sensitive in these areas?

Cheers!

For Startups, Joel Spolsky’s Management Model is Mostly Wrong

I read with interest Joel Spolsky’s guest post over on A VC.  It’s all about how he sees the hardcore command and control model as the wrong model for startups and that it has been wrongly emphasized by highly autocratic leaders like Steve Jobs.  As an alternative, he advocates inverting the hierarchical pyramid so that leaders are not management, they are a service organization.  Those on the lower rungs who are “smart and get things done” (Spolsky’s trademark phrase) make all the hard decisions.

There are a lot of important and very subtle issues missed by this model, though it does capture at least some of the importance of empowerment and initiative as a means to success.  The best quote in the piece is this one:

Turns out, it’s positively de-motivating to work for a company where your job is just to shut up and take orders. In tech startup land, we all understand instinctively that we have to hire super smart people, but we forget that we then have to organize the workforce so that those people can use their brains 24/7.

Spolsky is absolutely right about that, but his article makes it seem like organizing that workforce to use their brains 24/7 is largely a matter of getting out of their way.  It isn’t!  Apparently most of the readers also disagree, because the comments certainly start out negative there.

He goes on to suggest that he expects “more entrepreneurs model their behavior on Captain Picard from Star Trek than any nonfiction human.”  If that’s true, it’s great because Picard is the right one of the two famous starship captains to copy.  Kirk was notorious for making arbitrary decisions his staff disagreed with based on his gut and with no explanation or attempt to get their hearts and minds to follow.  Why bother, he was the captain and they had to obey.  Picard, by contrast, went about things in a much better way.  He was thoughtful and always careful to enroll the inputs of everyone on his team.  At the same time, he made sure that when it was time to make a decision, a decision got made. Much closer to the leadership ideal any business needs.

Let’s drill down into it a bit and try to tease out some of the key leadership and organizational/cultural characteristics a healthy, vibrant, and growing startup needs.

First, on the subject of leadership, start by asking what the difference is between a leader and a manager?  I would suggest that leaders motivate by charisma and an ability to sell the vision whereas managers motivate by hierarchical position.  Every time a decision maker has to force someone to do something they don’t believe in, they burn political capital.  The farther up the chain you are, the more capital you get, and the faster it is replenished, but even CEO’s eventually run out if they’re too autocratic and the chips turn down.  Leaders need very little political capital.  They sell their vision so that everyone wants to follow it.  The use of political capital is friction in the machine.  Too much friction yields heat.  People sit around steaming about the dumb things their boss is making them do instead of being wholly vested in implementing the awesome vision behind the company.

Being a great leader means knowing how to tweak the plan to fit the players rather than trying to beat the square pegs that are the players into the plan.  The great leaders will know instinctively how to get the essential elements of the plan executed in ways that uniquely maximize the strength of the available players.  It’s part selling the player on what needs to be done and empowering them to figure it out their way, and part knowing when a little change of plan will make it far more palatable to certain players without harming the plan in any great way.  In the end, no matter how perfect the plan is, people still have to execute it and they will do so far better if they actually want to do what it calls for.

What other qualities, besides being able to sell the vision, should a great CEO have?  Eventually, the comments get to some of the classics:

-  They need to have a Vision

-  They need to Hire and Retain the Right People

-  They need to make sure there is Cash in the bank (e.g. fund raising)

For a startup, this is right.  At some stage the vision and cash thing are no longer on that list, but a company can get pretty large before it reaches that point.  I think the second point falls a little bit short.  Just hiring and retaining the right people isn’t enough.  Those people have to be inspired to do the very best work of their lives.  Many of us have been in jobs where we didn’t have that inspiration and can contrast with jobs where we did.  We may have stayed at the less than inspirational jobs far longer than we should have.  Shame on us, but also shame on the CEO for not having made it more inspirational.

Another part of hiring and retaining the right people is not settling for managers.  How far down the ranks can we place true Leaders who can inspire others to be the best that they can be and to love the vision the company is trying to pursue?  Are we able to create an organization where those Leaders not necessarily very near the top can stay excited, productive, and challenged?  Can we provide enough rope, an interesting enough territory, enough funds, or whatever it takes to really empower those people?  Now we’re starting to get at the heart of perhaps what Spolsky is wishing for.

Can everyone in the company be one of those Leaders?  Alas, no, they can’t.  And that’s why assuming the leaves on the tree can run the place is the mistake Spolsky makes.  Sure, they’re smart.  But do they have the experience?  Do they have the vision?  And do they have the Leadership to get it done?  Or, as many commenters suggest and as I have seen all too often, do things just devolve into committees that argue endlessly?  The more smart people you push into a room to make a decision together the less likely you’re going to get that decision.

Clear areas of authority with empowerment for autonomy in those areas is the solution.  Making organizations sing has a lot of parallels with how we geeks modularize our code.  Put too much function in a single module and it becomes unweildy.  Put too little and it is inefficient.  Find the “just right” amount of authority and empowerment to give a particular Leader and the organization will sing.  Being skillful at that constant refactoring of an organization is another thing a great CEO Leader must do.

Let’s turn to some of the less happy and empowered notions of organization that still matter.  Spolsky talks about Charlie Bucket screwing the caps on tubes of toothpaste and how Charlie’s job is well suited to command and control.  It isn’t exactly command and control that suits Charlie’s job.  It is process.

Organizations have two important tools at their disposal to help their people be more productive.  One is empowering people to take the initiative.  The other is establishing a process to optimize some repetitive but well understood task.  There are many functions and tasks in a company that fall into the repetitive and well understood category.  Spending too much time empowering initiative on them is a good way to miss out on the opportunity to optimize those jobs.  Take a Call Center for example.  Most of them thrive on process.  Only a few, such as Zappo’s, are able to thrive on initiative.  Not every company can or should wake up and decide to be Zappo’s.  The trick here is to make sure that the right people are in a position to use their initiative to continuously improve the process.

Companies need to be great at both maximizing the value of personal initiative and of process.  It’s horses for courses.

Last point, and it is an extremely critical one: great leaders have to control the focus.  It’s fine and well to empower initiative and launch new processes, but focus is critical to achieving an organization’s goals.  The smaller the organization, the more focus is needed.  Focus, in my mind, was the critical piece Steve Jobs (also much maligned in Joel’s post) brought to the table.  Clearly he was often unpleasant to work for, but just as clearly he knew how to require focus on what he viewed as his vision and how to empower people like Ives to “make it so” as Captain Picard would say.  His success is no accident as a result of that unique combination and balance.

Apple Blocking Unique Device Identification May Make iOS Less Secure, Not More Secure

Apple’s decision to deprecate access to the Unique Device ID is problematic for a lot of applications besides Advertising and other Privacy-Challenged cases.  It will actually make the devices less secure, not more secure as many imagine.  ”Deprecation” can mean anything from elimination of the capability entirely to making enough changes in the API that it will require a lot of work to deal with the changes and all points in between.  I’m hoping that rather than doing away with the deprecated capability, they will instead embellish it so it can only be used for good.

What is a UDID and why is it a problem for anyone?

The UDID is a threat to privacy because an application can uniquely tell which device it is running on by checking the UDID.  It’s kind of like having the device say, “This is Bob’s iPad, not Mary or Jane’s iPad.”  As such, it can use that information to index the behavior on that device over time and transmit information about how it is being used back to some central service.  In other words, it can keep that service apprised that not only did you look into wedding-related arrangements on one particular day, but you’ve been steadily looking at them more and more over the last week.  Hey, maybe you’re involved in a wedding!  The advertisers would love to target that.

But there are other cases where UDID can be pretty handy.  Consider security.  Seems like revealing too much information is the antithesis of security, but in fact, being able to reliably identify who is using your credit card is pretty valuable.  So much so that it is the essence of credit card security.  Being able to limit that credit card use to devices that have been verified might just save you a lot of pain in the identity theft department.  Perhaps your corporate IT or SaaS software provider would like to be able to identify and track which devices are accessing sensitive corporate data.  They would like to do that so they can limit access to devices that have again been carefully verified (the credit card case), but also so they can audit whenever changes to data are made and know which device made the changes.

This all hinges on the idea that it is harder to physically steal the device than it is to steal your password–a bet I would certainly be willing to make and I suspect you would too.  If you can’t reliably and securely identify the device, you’re left with nothing but the password.  But having both the correct password and knowing it was entered from a valid device is a much more secure proposition.

Apple shouldn’t eliminate this capability, rather they should look at ways of regulating its use so that it is used for good and not evil.  If they don’t provide an alternative and simply eliminate UDID’s, they’re just making identity theft easier.  Which thing would you choose if you’ve only got 2 choices:

1.  Easier Identity Theft

2.  Easier tracking of your online behavior

Here’s the other reality, which works sort of like the argument about gun control.  You know, the one where they say the criminals will always have guns?  In this case, for purposes of doing the kind invasive tracking advertisers need, they don’t have to be perfectly right.  Being nearly right or right most of the time works pretty well for them.  In the worst case they’re just going to show you a couple of ads that aren’t of interest.  But when you’re fighting credit card fraud and identity theft, it’s more important to avoid being “almost right”.  Almost right in those cases means they’re going to choose the flavor of “almost right” that’s conservative to their interests.  They’re going to assume, in other words, that fraud is happening more often than it is, which penalizes you with a credit card being turned down too often.

How’s that happen?

Well, there are lots of ways to go around the UDID to try to get some sort of “signature” going to identify the device.  These boil down to trying to collect some sort of “fingerprint” for the device, or by leaving cookies of one kind or another hanging around.  The cookies get more and more surreptitious as we fight the arms race against those who want to delete tracking cookies.  The fingerprints are more interesting because they’re passive.  Nothing new has to be added to your machine.  Instead, they rely on the idea that you will inevitably personalize your machine and this personalization will add information that can be cataloged to provide the fingerprint.  You can’t avoid it, no matter what you do.  Your machine will have a series of things that are unique about it.  For starters, you will have a unique set of applications and versions of those applications installed.  You may have a unique set of fonts installed.  Your wallpaper may be different.  The photos in your photo folders are different.  If the fingerprint software is clever, it runs a lot of different checks and keeps it very secret what it is looking at.

Suffice it to say the marketing guys will find a way to track you.

Apple can’t stop that, but it can certainly make it hard, and it can continue to allow the UDID API to work, with the requirement that anyone using it has to go through a process to get their app authorized to access it.  That process should involve explaining to Apple exactly why you need to use it and making sure that use is for good and not evil.  And of course, the identity pirates can certainly find ways of spoofing the UDID, but that’s also an area Apple can work on, and it is again one more piece of information they must have (e.g. the actual UDID) before they can do anything.  Just providing an API that makes the UDID look different to every application would be one way to make the fraudster’s job that much harder.

Radical Surgery to Fix Software Patents

I’m from the camp that says we’re way past the point of patents fostering innovation, if they ever did.  It didn’t take me long reading Scoble’s post this morning about the value of WebOS’s patents to HP possibly making the unit a profitable venture to be reminded once again that while patents may be a lot of things, they are not a way to foster innovation.  They’ve lately become a currency to value failed innovations, which seems quite the opposite of fostering innovation.  Scoble’s argument went like this:

Last night I was talking with a VP who works at HP on the former Palm team. He told me they have 2,000 patents for webOS, smart phones, and TouchPad.

Now remember, Google paid $12.5 billion for Motorola Mobile, mostly to get their hands on the 17,000 patents that Motorla held. Now, if you just price HP’s patents at the same price, you come out with $1.48 billion. HP paid $1.7 billion for Palm. So that gets you pretty close to even.

But this VP told me that these patents are almost ALL for modern smartphones, while the Motorola patents included a lot of old stuff that isn’t relevant anymore. So, this patent portfolio could get a premium of, say, 2x what the Motorola patents did. That gets you up close to $3 billion.

Something about all that just strikes me as WRONG, at least in the context of spurring innovation.

The Valley is loving the patent discussion right now.  For every meme, it seems there is a matching “here’s-how-patents-relate-to-that” meme.  Just because a thing is popular doesn’t make it right, and thankfully, most commentators on the patent issue seem to agree that it hurting innovation much more than it’s helping it.  It hurts innovation in many ways, but it’s worth going back over at least some of them here.

The Cost of Patents to Innovation are now Tangible and Large

We’re seeing this measured almost daily.  Scoble is working through the math for WebOS even today when he values the WebOS patents at circa $3 billion for 2000, or $1.5 million apiece.  That doesn’t seem too far afield if we look at patents in a way similar to how VC’s have to look at their portfolios.  In other words, many will be worthless, but a few will be quite valuable indeed and will more than make up for all the rest.  We don’t have to spend very long looking at the billions raised by Nathan Myhrvold’s Intellectual Ventures to realize that many astute financial minds really do look at it that way.   In recent years, it’s been a good bet that financial engineering to produce wealth was really inflating a bubble of one kind or another that would destroy a tremendous amount of wealth for the general public.  Why would we be surprised to learn that patents are just another way to play the same Ponzi scheme?

Patents Favor the Patent Holder in a Dangerously Asymmetrical Way

As I’ve written, it costs much less for the patent holder to sue than it does for the defendant to defend.  Any time there is an asymmetry of that form, it creates a virtuous cycle for water to follow the path of least resistance.

It costs an average of $1M just to get to trial.  That’s before you begin the trial–it’s preparation for the defense.  That assumes you’re just trying to prove your work doesn’t infringe a patent.  If, on the other hand, you’re dealing with one of the overly-broad patents a patent troll typically comes after you with, it will cost you $4M to defend and win!  Is it any wonder the trolls can make a business out of suing and then simply waiting for the defendant to do the math and pay them whatever figure makes sense to avoid the pleasure of our legal system.  Typically that figure is a significant portion of the $1M it would cost just to get to trial.  If the troll wants to play more aggressively and they’re confident, it may be a significant percent of the $4M.  And they get to go after multiple companies for that protection money, not just your own.  The more overly broad the patent may be, the wider the net they cast.

Small wonder that these patent trolls are becoming multi-billion dollar enterprises.  And all those billions that make up their ecosystems are billions that create very few jobs, let alone innovations.  They’re billions we can ill afford, particularly given what the economy is today.

The Pace and Timing of Today’s Patent System Prevents them Being of Value to Software Innovators

In the long run, we are all dead.  But startups and similar innovations generally do not have the luxury of waiting for the long run.  They have a year or two to achieve market fit or pivot and try something else.  If they achieve their fit, they have only a couple more years to generate the kind of mega-traction that makes it clear they will be successful.  Innovation markets live in dog years, these days.  Yet, the USPTO takes an average of 6 years to grant a patent.  No innovator in today’s Social/Mobile/Cloud/Software/High Tech ecosystem can afford to base their planning on a 6 year horizon.  The world changes too much in substantially less time.  By the time the patent is sorted out and granted, its purpose can only be to prevent future innovators from usurping the position of power a newly minted and patent wielding monopolist has achieved.  In other words, the purpose of the patent is not to encourage innovation, but to stop innovation in a particular market so the early winners can enjoy the fruits.

Read back over my article on early adoption and how long it takes a technology wave to crest.  The usual argument for patents encouraging innovation is that they grant a monopoly to ensure businesses have enough time to recoup adequate profit from their innovation.  Forget 17 years, Google IPO’d in the 6 years it would’ve taken for their first patents to be granted.  Their patent won’t be 17 years old for many years.  How much value must a company extract from innovation before it goes beyond serving the public good to grant it a monopoly?  Google didn’t need any help from patents.  Most modern tech businesses don’t.  They have a far more powerful advantage called network effects that takes a lot less than 6 years before it can make a difference.  Patents are fine for some other markets, markets that have no possibility of a network effect, or where the burden of research is so high that it will take more than an IPO to recoup costs.  Perhaps pharmaceuticals qualify for that need, but modern software and web businesses certainly do not.  Instead, they are victims of the anti-momentum that happens when a critical mass of patents descend on a particular market and make further innovation impractical.

How do we fix it?

First thing is to realize we have to fix the patent system.  Congress is at least considering some reforms.  They’re too little, but perhaps they’ll start the ball rolling.  When a guy like Seth Godin starts talking about patent trolls, we can take these as signs that public opinion for the idea we need to fix the patent system has reached critical mass.

Second, we have to realize we won’t fix it through fine tuning.  It’s going to take radical surgery to avoid having to junk it altogether.

There is a collection of voices, best typified by Mike Mace’s “The Case for Software Patents”, and Nilay Patel’s, “The Patent System Isn’t Broken–We Are”, that try to argue the patent system is right, it is just, it is simply misunderstood and needs a little bit of fine tuning.

Mace largely wants to quote a 2006 Paul Graham piece to do his arguing for him.  In it, Graham says startups shouldn’t worry about patents because he doesn’t see them being sued.  Oddly, he starts off quoting Mark Cuban, who is one of many investors who says that startups are indeed being sued constantly and that therefore they do have to worry about patents.  The recent suits against apps in appstores, which involve many startups are just one more example.  Ironically, if things can change so much in the short while since 2006 that startups clearly do have to worry patents, that’s an indictment of them all by itself.  It’s a sign things are going to Hell in a hand basket and we’d better do something about it.

Patel says he is not a lawyer and shouldn’t be held accountable as one, but he is only too happy to tease apart the patent laws in great detail to try to make his point.  He wants to argue about how valuable it is to be able to read the patents and see how people did things.  Because we have patents, there’s less incentive for trade secrets, and hence innovation is served.  It’s going to be so great, he argues, when in 17 years we can actually start to use the page rank algorithm.  Lord knows we will have had plenty of time to understand it.  Just a few minor problems with this argument.  I don’t know any engineers who spend their time reading patents to educate themselves on anything other than what they can’t do and then only in cases where they suspect the market to be litigious.  Patents are not a learning resource and anyone who has had the pleasure of having to try to understand one can see they are more often written to obfuscate and create overly broad protection while revealing as little of real value as possible.  Worse, the insights covered in so many of these patents are not scholarly revelations.  We didn’t need to read Amazon’s 1 click patent to get a clue about UX for e-commerce sites, thank you very much.

And speaking of that obfuscation towards the overly broad, Patel applauds and encourages Graham’s notion that if you are against software patents you must be against ALL patents.  That’s balooney born of a lack of understanding, pure and simple.  It ignores the fact that patents specifically seek to avoid patenting mathematics and algorithms by jumping on the bandwagon that since we use math for virtually everything patentable, therefore all patents must be equivalent.  Here is the money quote:

Every invention is “just math” when it comes right down to it — traditional mechanical inventions are really just the physical embodiments of specific algorithms.

In other words, I may invent a splendidly complex and unique mechanism, but because I can use math to simulate it, the mechanism is therefore math and should not be patentable.  But since we did want to patent it, let’s just let all things math be patented.  This is the kind of fuzzy chase-our-tails thinking that our patent office evidently uses when granting patents it never should have granted in the first place.

As disconcerting as that kind of thinking may be, it goes to the heart of why we can’t fix the patent system’s problems through fine tuning.  The heart of the problem is that the patent examiners are not competent to decide these issues of what is math, algorithm, or otherwise patentable invention.  They’re not competent to decide whether there is prior art.  They’ve proven this lack of competence time and again by granting patents that never should have been.  They’ve proven it by not being able to keep up with their backlogs even under these lax standards.  Worse, the courts have proven they’re neither a cost efficient nor particularly insightful way to remediate the bad decisions of the USPTO’s examiners.  These are the same arguments put forward by Marco Arment, who does not believe the patent system is fixable.

I don’t know that I agree the system is wholly unfixable, but Marco at least is a developer who makes a living by understanding what software really is, unlike a lot of those who are arguing for software patents.  When I say I don’t know if I agree the system is unfixable, let me clarify.

To fix the system will require some combination of:

1.  Radically simplifying the patent examiner’s task in some way so they can do a better job and do it faster.

2.  Radically simplifying the process and expense of remediating bad examiner decisions so patents can be cheaply invalidated.

3.  Changing the scope, penalties, or legal process of patents so that they can do less damage to innovation.

4.  Ruling out patents in areas where no good solutions can be found #1, #2, or #3.

#1 and #2 seem wholly amenable to improvement.  In fact, I am quite hopeful about them.

Let Persons Skilled in the Art Decide Prior Art

This is a perfect application for Gov 2.0.  The USPTO should let persons skilled in the art participate.  In particular, let them argue the case for prior art both before and after the patent is granted.  We see many examples, Quora and StackOverflow to name two, where questions can be crowdsourced very efficiently.  They work well.  The patent examiners should be given such tools and they should use them to solicit the aid of the community in determining prior art.  In cases where the community mounts a credible documented argument that there is prior art, the patent application should be rejected or if already granted, the patent should be revoked.  This will cost the USPTO very little extra, and what better way to tell if a person of ordinary skill in the field can identify prior art?  That particular issue, prior art, is the best one to crowdsource, for as many will argue, once you hear the idea, everyone will claim it was obvious.  It’s much harder to be ambiguous about the prior art, and in any event, the USPTO remains the arbiter that will decide whether the evidence of prior art is compelling.

While focusing on prior art does not improve the case of granting a patent on an obvious idea with no prior art, it is still very helpful.  This approach seems democratic, fair, and potentially also economically efficient.

What better qualities could we ask for from a broken system that many are saying should simply be junked wholesale?

We Should Also Change the Scope, Penalties, and Legal Process

In addition to reducing the likelihood bad patents will be granted, we should work hard to eliminate the unfair asymmetry between the burden of the plaintiff and the defendant.  As it stands, this asymmetry means the plaintiff need only file a case and wait patiently with their hand out to be paid.  Making it easier to remediate bad patents will help tremendously, but this fundamental unfairness in the system makes it too easy to use the system punitively.  What’s needed is to make the system less profitable for those not actually engaged in innovating or at least producing something of value from innovations.

Applying a shorter term to software patents would be one easy way of improving the balance.  17 years is a ridiculously long-term given the pace of innovation for software.  Half that is still generous and would go a long ways towards making the system more equitable.  Call it 8 years instead of 17 for “business process” and software patents.  If you can’t make reasonable value from an invention in 8 years plus however long the invention is in the USPTO’s hands, you’re not fostering innovation, you’re standing in its way.

Limiting damages for those not actively innovating or delivering their innovation to the market is another change that would minimize the ability of the patent trolls to tax innovation.  It would give the innovators who created their patents an incentive to hook up with real companies to bring those innovations to market.  There’s plenty of real value to be captured that way, and if there is less value than before, we have to ask ourselves whether every patent should be worth the average of $1.5 million Scoble’s math suggests?

Having gotten all of this down in a post, I took a moment to reflect back on it.  Admittedly, my confidence is very low that the USPTO will take the practical steps needed to get back to adding value for innovators.  Perhaps it is my basic distrust and lack of experience with government adding value.  That’s fine, we can go back to arguing about junking software patents altogether.  Just so long as we agree that something needs to be done now.

Big Company Customers: Be wary of Big M&A, Big Executive Change, and Big Bad Quarters

It hasn’t even been a year since I suggested things might not go swimmingly for WebOS and now they’re discontinuing it.  Such is the life of products at large organizations when directions are being changed.  Apparently they’re also planning to disgorge the PC business.  Shades of IBM’s moves not so long ago.

For those watching from the outside, and for many watching inside, it all must seem tremendously wasteful when big companies operate this way.  What’s the cause?  How can they prevent these things from happening?

First, Big Companies like to act, well, “Big”.  Some are smart about testing, but for many, they invest a ton in a product and launch it with great fanfare without ever having validated what was going to happen before the money was spent.  Even when they do validate, careers and aspirations ride on these things.  Divisions do not go softly into that good night.  For many, the plan may be to launch it and figure out the problems later.  That’s not a bad idea, BTW.  It’s Agile thinking at its best.  But you should at least try to launch something that is close enough that minor tuning is likely to succeed.  Slow following an Apple Uber Product is not a strategy that has shown a great deal of merit.

Second, Big Companies are all about Big Personalities.  Some executive somewhere made the decision happen.  The skills and qualifications needed to make a Big Organization do your bidding are political.  They don’t necessarily have anything to do with whether the decisions being made are great product decisions.  The market will provide the answers to those questions, and careers may be made or broken, but in the end it’s about the ability of the Executive to get the organization sold on the idea more so than selling it to the market.

Third, any time the CEO changes, particularly with a change like this one, the critical underpinnings and foundations that kept earlier decisions going may either be weakened or eliminated entirely.  For truly huge organizations like HP, even executives in the first level or two below the CEO, or major reorganizations can signal these changes.  Following the change there will be a period of turmoil during which all bets are off.  Whatever bad things that happen will be blamed on the prior regime, making it that much easier to put huge changes through.  And once again, the changes will be more a function of the political prowess and position of those driving the changes than on their market viability.  Shareholders have to hope that whoever is doing the deciding didn’t get there without knowing the market pretty well, but they don’t necessarily have much hard evidence of that.  It’s an act of faith.

The bottom line is we shouldn’t be too surprised about all of this, and certainly not shocked.  Look around.  We’re in a time of Big M&A.  The stars are well aligned.  The Economy puts pressure for change on everyone and Big M&A is the favored tool of large organizations for creating Big Change.  It will be interesting to see what sorts of similar fallout we see from the Motorola-Google merger.  Another corollary is if you are a customer, beware betting on some company’s Big New Idea when times are tough.  There may be a Big Change just around the corner waiting to upset the apple cart.  We’ve seen recently changes were produced by Bad Quarters at Cisco.

Big Company customers have to be wary of Big M&A, Big Executive Change, and Big Bad Quarters.

My 2008 Ideas for LinkedIn Are Still Good: Maybe Google+ Will Do Them.

I got to thinking about LinkedIn this morning largely because I was annoyed with them.

I received a request to link from someone this morning.  The name was vaguely familiar–about the level of friend of a friend sort of familiar.  So I went to their profile to try to figure out who it was and whether I wanted to link.  I don’t just link everyone, I only link people I have some legitimate relationship with.

So, clicking over to the profile, I get to see their current job and that’s about it.  If I would like the privilege of actually trying to understand how this person knows me, whether through shared contacts or prior work history, I’m out of luck.  I have to pay LinkedIn money to do that.  That strikes me as completely ridiculous.  It’s one thing if they want to restrict my access during random searching, but this person identified me to LinkedIn and they forwarded the request to me.  I am adding value to their network effect if I accept the invitation.  Basically, I was minding my own business and these two entities, the inviter and LinkedIn want me to agree to something.  What I can’t fathom is how that is a reasonable time to be reaching into my pocket?

As I remarked over on a Google+ conversation about it with Sameer Patel, when you have a Greater Fool Theory Valuation (as LinkedIn does), you have to get some pretty unreasonable profits before the poker players start looking around the table and realizing they’re the marks.  They haven’t acted on much of it, and the suggestions are still good today.  Whenever a company decides the road to profitability is to start charging for what they used to give away, indeed for what made them great, it always makes me wonder about that company.  It often indicates they were either tragically wrong to start with, but if they kept it free as long as LinkedIn has, you have to drop that theory.  That leads to, “We knew this was not sustainable, but we wanted to suck as many of you in as we could.”  Fellas, that’s not nice.  Karma being what it is, that makes companies vulnerable to disruption because they obviously can’t innovate very quickly (quickly enough to think of new things to charge for so they can leave the old things free) and they’re have a cadre of annoyed users who are starting to feel cheated for having supported the company to where it is today.

Speaking of innovation, I got to wondering about a post I did way back in 2008 where I recommended 10 things they should do to step up their game.  It’s a real pity they didn’t act on the list.  Consider the first two items on it:

1. Build, Buy, or Partner with Xobni and Nail Down the Outlook Connection

For those that don’t know, Xobni is the intersection of email, Social, and LinkedIn-like networking.  The dynamics of what I had in mind are exactly how Google+’s integration with GMail has played out.  I think it is a huge part of their meteoric rise.  Why other strong email companies like Microsoft or Yahoo don’t take more advantage of this stuff is beyond me.

2. Start a Coffeehouse with WebEx to Foster More Interaction between LinkedIn’s Members

Doesn’t a rich media coffeehouse sound like Google+’s Hangout feature?  Now I just wish Hangouts were more like WebEx.  It’d be awesome to be able to do demos in a Hangout and switch back and forth between video conferencing and playing back your screen.

After I saw those two standouts, and finished going over the rest of the suggestions, it dawned on me:  Google+ can easily take over for LinkedIn.  Why not?

-  They’re well on their way to having LinkedIn style profiles that are resume like.

-  They’ve demonstrated they do a great job connecting people.

-  It’s a nice professional counterpoint to Facebook’s fun and family role.

-  They can monetize without all these nickel and dime charges LinkedIn wants to levy.  LinkedIn has to do that, BTW, because their engagement levels are too low to live on advertising alone.  I recently saw an article that says ads only work when you have 100x the traffic you need to make the revenue by charging.  Sorry I didn’t save the link.

-  Most of the conversations in my circles there are more business-like than Facebook tends to see.  Could be the nature of my friends, but then I have similar friends on Facebook and the conversations are just about different things.

Here’s hoping G+ will take on some of this and disrupt LinkedIn.

Come On Silicon Valley, We Can Provide a Better Rx for Jobs!

Fortune magazine has an article running that Techmemed about some advice Barrack Obama is getting about jobs from Silicon Valley Heavyweights like Kleiner VC John Doerr and Facebook COO Sheryl Sandberg.  They’re all about Education and Immigration Visa Reform as the path to creating jobs, along with plugs along the way for their own ventures.  Here are some quotes:

“We have to focus on our education system,” said Facebook’s Sheryl Sandberg. “We’re falling behind in every way possible.” Sandberg talked about what can be done to get more women in particular into high-tech jobs, such as giving girls more time with computers from an early age. “Let your daughters play video games,” she told an audience comprised of educators, entrepreneurs and investors.

and:

Sandberg also talked about the role Facebook’s ecosystem of developers has played in job creation. While Facebook employs about 2,600 employees, she noted that there are 2.5 million developers globally creating applications for the social network. She added that Facebook has also given rise to entire new industries, like social media consulting.

Here’s the problem: this stuff has nothing to do with creating jobs in the kind of timeframe our failing economy needs them in.  We needed to be doing things a year ago that would line us up for massively reduced unemployment for the coming-sooner-than-you-think Christmas 2011 season.  We’ve missed that window, but we dare not let it go on for another 12 months, particularly not if President Obama expects to have a hope of re-election.

I’ve got nothing against letting our daughters play video games (I couldn’t stop mine if I tried, and she’ll be taking a swing at programming too after having helped her brother learn very successfully) nor against education (some personal news on that front before too long I hope!).  The problem is we can’t wait on the time it takes for education to work.  This economy needs help right now.  We need results in less than 12 months.  I want President Obama to keep Education as a major initiative that his Administration stays behind 200%–we absolutely need to do better in this country.  But job creation needs to be even more urgent, especially now that the original bets placed on stimulus have failed to pan out and the new deal needed to raise the debt ceiling is going to reduce the potential for even more stimulus as a tool to get the jobs engine going.

The truth is, the government has been betting on the wrong horses for job creation.  The Dems want Big Government and the Republicans want Big Business to do it (Big Business is largely who wants the immigration reform being talked about, tell me how that’s going to create jobs Right Now in the Good Ole U S of A?).  They’re both entirely wrong.  Neither Big Government nor Big Business has ever done much good by way of job creation.  Big Government fails because we can’t afford to hire everyone without a job and put them on the dole.  The whole point of the debt ceiling compromise is we’re already spending too much on government.  And Big Business has an ongoing record of fail.  During the 2000′s when they had everything just as they like it–the least regulation and taxes ever–they managed to eliminate 2.9 million jobs in the US and move 2.4 million overseas (according to the pro-business WSJ).  If they eliminated a net of 2.9 million jobs when they were booming, imagine what good they can do for us when things are tight?

I’ve been skeptical about the President’s Silicon Advisor group before.  The problem is that only small businesses create jobs in this country, and while many of these advisors may have started with small businesses, their interests have moved on.  That’s no knock on this group of advisors, they’re all smart people, I know many of them, and we are all products of our experiences.  Heck, I’m glad they have the President’s ear, but when I hear their primary advice being education and immigration reform to create jobs, I know the President needs some additional advice from somewhere.  We simply do not have time to educate ourselves out of this morass.

Let’s go over the data, one more time, on where job creation happens.  It’s been well established for a long time that small companies are the engines of job creation in America.  This is not just supposition, and it’s not just a little bit true, it is well-documented and a huge difference.  See for example this data from Jeff Cornwall:

The columns represent net job creation. The big giant spike that’s doing most of the work is for new companies with less than 50 employees.  A little deeper analysis is available here, and goes back all the way to a study published in 1979 before we were so worried about the impact of China on the job market.  The OECD has a particularly in-depth white paper on how public policy impacts the small firms that are the drivers of growth.  There are many other such write ups.

It isn’t all that hard to understand why we have to rely on small companies to create jobs.  After all, many of the things that result in fewer jobs are unique to larger organizations:

-        Small companies don’t outsource overseas.

-        Small companies don’t have huge piles of captive profits overseas that they can’t repatriate for fear of paying taxes on them.

-        Small companies can’t go through round after round of layoffs where the bottom 5-15% is cut.

-        Small companies don’t spend a fortune automating in order to get by with fewer jobs.

-        Small companies don’t have billions in the bank and billions more for shareholders to squabble over.  They spend every penny to keep going and growing.

-        Etc., etc.

Small companies just don’t have the critical mass to cut jobs.  They’re too busy trying to grow and generate the critical mass.  Based on that data, if we want to fix the jobs problem, we have to do everything we can to enable small businesses to get started and to grow as quickly as possible, and we have to do it NOW.  Every dollar we spend, every day that goes by, without focusing on helping small business, is a day and a dollar we have lost as our economy worsens.

Who are these small businesses?  They are the restaurant owners, small retailers, garages, machine shops, little manufacturers, florists, bakers, candlestick makers, and many others.  They’re the people with that scary gleam in their eyes.  You know, the ones that just never fit in at a Large Organization–the geeks and rebels, not the Armani-clad scratch golfers.  They’re the ones who don’t get much respect, like Rodney Dangerfield, but who actually built this country.  For the most part, the Big Ideas come from them.  Ironically, once they get big, they quit having so many Big Ideas and settle down to fine tuning the numbers.  That’s when the Outsourcing, pay cutting, automation, and job elimination cycle begins.  Unfortunately, once they’re big, they represent the kind of concentration of power and influence that politicians crave.  After all, it’s much easier to do dinner with a few Movers and Shakers than it is to talk to 1000 entrepreneurs about what might help them, yet the latter is what will produce the jobs we so sorely need.

The thing is, we now have the power to talk to those people just as easily as sitting down to dinner with the Movers and Shakers.  We didn’t used to, but the Internet has changed all that.

Here’s what I wish the Silicon Valley Digerati advising the POTUS had said instead of focusing on Education and Immigration Reform:

Mr President, in addition to our small advisory group, you should be putting together a Virtual Job Creation Council filled with small business owners.  Our companies, which include Social Networks like Facebook, can help you do that.  In fact, we believe it’s our patriotic duty to do that, we understand the Internet, and we know how to use it to democratically crowdsource all the ideas and initiatives you need to kick-start these small businesses into the job creation engine this country so sorely needs.  

We’ll get you the ideas, and we’ll rely on you to make them real.

Aren’t you curious to know what such a crowdsourcing initiative might turn up?  Don’t we sorely need some new ideas to move forward, get inspired by, and break the gridlock?  Isn’t this the sort of thing Silicon Valley would be proud to be doing for our Country?

How about it guys?