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Archive for October 17th, 2007

There May Be a Bubble, But It Isn’t a Casino Economy

Posted by Bob Warfield on October 17, 2007

I’m stuck chasing Nick Carr around today it seems.  He’s written about some dire predictions by economist Carlota Perez in the NY Times about the effects of companies spending so much money to acquire what are basically small startups.  In Carlota’s view, the normal cycle would see these companies devalued by a bubble burst, and they could be acquired at much more reasonable prices.  The problem is opportunity cost for the big guys.  They have no idea which little companies of today will define the trillion dollar markets of tomorrow.  Which ones are the nascent Googles?  Hence, they entertain things like the recent valuation discussions around a Microsoft investment in Facebook. 

The problem with all this, as Perez sees it, is straightforward:

The more complex explanations have to answer why the excess money and why so much of it has gone into a financial casino and into asset inflation rather than into widespread real investment, innovation and high-quality employment growth.

She’s willing to tolerate pricing bubbles as a way of reallocating capital if that capital results in “real investment, innovation, and high-quality employment growth.”  She puts it well:

Asset price inflation was good in the late 90s when there was a need for overinvestment in telecoms and Internet, even before they could produce profits or dividends. Everybody was willing to put their money into the new high tech companies because they could get short-term capital gains (only a few invested because they wanted to hold on to the shares until they really became major companies paying dividends). That is how the capital was gathered to “fiber-wire” the whole world, to get everybody to learn the new paradigm and to test every imaginable dot.com idea.

Do you see the flaw?  It has to do with testing “every imaginable dot.com idea.”  Perez assumes the new bubble isn’t funding any meaningful new innovation.  What do you think?  Was everything interesting to do with computers and the Internet invented in the 90′s?  I don’t think so. 

Blogging, Social Networking, and a raft of other innovations on the web have seriously changed how individuals interact with each other.  We’re still innovating, but as I mentioned in a comment on a Stowe Boyd article, we are near the end on the current crop of ideas, so the timing is ripe for key players to be picked off by bigger companies.  Business software, likewise, is going through a huge revolution around SaaS, Open Source, and a host of other developments.  Older ideas, such as Business Intelligence, are apparently commoditized enough that the big players are picking off the Hyperions and Business Objects.  Interestingly, the Old School Enterprise world did encounter the downturn Perez likes to see so valuations over there are not as high.

We’re witnessing consolidation and commoditization of computer architectures.  It’s harder and harder to justify Intel-incompatible cpus.  Eventually Sun will give up on SPARC.  We’re seeing massive centralization of data centers, and the shifting of large amounts of processing and data into the cloud.  Digital photography has largely taken over since the 90′s, and we’ve seen an incredible rise in rich media and rich Internet user interfaces.

This seems to me an emminently reasonable set of investments to have made through over-valuation in these areas.  To add insult to injury, Perez is making these statements in the newly opened up NY Times on a blog!  Somehow that’s hugely entertaining to me, but I’m easily amused.

Here’s another factor Perez leaves aside in her analysis.  She identifies bubble pricing by a relative pricing model that sounds reasonable to me, although it has limitations:

How many cars do you need to buy a house? How many laptops to buy a car? How many Starbucks cups of coffee to buy a laptop?

That’s all fine and well, but she leaves out an important relative valuation concept that most elementary real estate buyers and sellers realize.  What’s happening in the market is less important if you’re simply making a lateral move.  You pay more in an up market, but you sell your old house for more too.   The same is true for these acquirers who we’re concerned may be paying too much.  Look at Microsoft.  I calculated their potential $500M investment in Facebook amounted to a little over a week of cash flow for them.  The valuation sounded hugely inflated, but in real terms to Microsoft, the chance an optional on what might be the next Google was almost immaterial.  Take the Yahoo-Zimbra acquisition. 

$350M for a $15M revenue stream?  Preposterous.  Yet, Zimbra is growing much faster than Yahoo, which needs to average its growth up.  Zimbra is highly strategic to Yahoo’s business interests.  It was arguably the best-of-breed for it’s kind.  To compare it to the Microsoft deal, Yahoo paid more dearly, as $350M is about 3 months of Yahoo’s cash flow.  OTOH, Yahoo gets over 2x the valuation per dollar of earnings, so if it can make the Zimbra acquisition profitable, those profit dollars add more to Yahoo’s stock price than they would to Microsoft’s.

Let’s try another comparison.  Think of these different companies as different currencies.  Some currencies are quite undervalued.  It would be very expensive for Ford to buy Facebook.  Their currency just isn’t worth nearly what Microsoft’s is.  Given Ford’s cash flow, it would take them 2 years to pay for a $500M investment in Facebook while Microsoft lays off the bet in a little over a week.

We may have a bubble here, but I can see no ominous scenario of the kind Perez describes.  Quite the opposite.  We’re limiting speculation on these properties to companies in the business who acquire them, and not to private investors betting their retirement money on them the way we did last time.

Posted in saas | 4 Comments »

Google Patents Search Engine Partnerships (and My Idea, Doh!)

Posted by Bob Warfield on October 17, 2007

Google has patented the idea of search add-ons, which is eerily similar to an idea I was touting as a way for Yahoo to catch up.  My thought was to have Yahoo partner with the 1000 or so independent search engines by letting them be “widgets” that were accessible from the Yahoo general search.  Google’s idea is to allow:

third-party content providers could enable specialized searches on general-purpose search sites.

They do this using what they call “One-Boxes.”  These are special boxes that appear in the general search results that show the result of a specialized search.  So far they have a list of recommended add-ons, and you can add them yourself if they’re developed according to plan.  This is the search engine equivalent of Amazon’s all-too-obvious 1-click patent.

The idea that this idea is non-obvious and deserves a patent is troubling.  Software has allowed plug-ins to add functionality in various ways since the beginning of time.  Sticking a plug-in capability into a search engine is useful, but it isn’t rocket science.  The patent system is sold as encouraging innovation, but it seems to me it usually has the opposite effect.  Big companies and patent trolls are almost always the beneficiaries.  The patent system’s asymmetric costs mean that its cheap and easy to get a patent and punitively expense to defend against an infringement suit let alone overturn a bogus patent.

There are certainly cases where it is very expensive to innovate.  Developing a new medical drug is a wonderful example.  But shouldn’t patentability be tied somehow to the difficulty of creating the thing and less to the serendipity of who applies for a patent on a totally obvious and easily implemented idea first?

At the rate Google is filing for patents on stuff like this, I predict we will see Google’s “do no evil” motto get seriously bollixed up in the patent world.

Related Articles:

No sooner did I file this than I read Amazon is losing a lot of their claims from the 1-click patent.  Maybe there’s hope yet.  Maybe folks just have to get organized and more proactive about filing for these re-examinations.  It would be great to think there is a way to mobilize and help the system to police itself more automatically.

Posted in business | Leave a Comment »

SaaS, Mashups, and Web Software: The Rub is Customization

Posted by Bob Warfield on October 17, 2007

I was reminded today of the customization conundrum as I read Dion Hinchcliff’s post on the 10 Top Challenges Facing Enterprise Mashups.  This brings me to a confession I need to make:

I’ve always been uncomfortable with mashups.

Yeah, I know, they are hot, hot, hot right now.  And you can do cool things with them.  But they are largely reductionist and not transformative.  They don’t create much new; rather they are filters on what exists.  It’s like the DJ mixing/dubbing scene:  are DJ’s really creating much new music by remixing other people’s work?  Yes, it’s fun and interesting, but it isn’t quite as satisfying as genuinely new music.

Mashups are a lot like scrapbooking.  It’s way cool to build scrapbooks, and a lot of people love it.  But the real deal is the photography.  That’s creating content and not just framing it.  Even Photoshop has a much more profound effect on photography than scrapbooking because it is tranformative.  These things are missing from the mashup world so far.

Dion points to a lack of business success stories with mashups even though they’ve been around for a long time and there are tools aimed precisely at that world.  In his view business has an even greater need for customization than consumer mashups because most business problems are unique in nature.  There may not be something out there you can simply filter to get your answers.  You may have to do further processing, transformation, and creation to get a useful answer.

Interestingly (to me anyway, given my Quattro Pro background), he points to spreadsheets as tools that fit better for businesses.  Spreadsheets often serve as ad hoc mashup tools for structured data.  I’ve cut and pasted many a record from applications like Salesforce.com and others into a spreadsheet so I could work on the data and transform it into something more useful.  For a particular kind of data, they’re extremely powerful, and they enable mere mortals to do the most amazing things.  At the same time, it’s a very manual exercise.

Dion lists 10 challenges, and a number are related to this customization issue:

1.  No common assembly model.  What’s the metaphor to be?  How do users think of assembling the data?  Are we pouring content into boxes on a web page?  Are we calculating on a grid as spreadsheets do?  Are we filtering lists like a database?  There are a lot of models out there.  Each one is different, and there has been no agreement on the One Best Assembly Model.  Doesn’t this have to be customized into the application?  Maybe there isn’t a One Best Assembly Model because the examples I’ve given are all pretty different.

2.  Widgets over API’s.  Regular users can’t handle API’s, but they can deal with Widgets.  Yet, there is no “Universal Widget API” that let’s us mix, match, and mashup Widgets at will.  This sounds like another customization angle to me.  Dion wants end user customizability with bite-sized Widgets as components so as to avoid API’s.  It’s a graphical user-friendly self-service SOA architecture.  I like it!

3.  Management, Versioning, and Security Issues.  Dion breaks these out as several of his 10, but I see them all as what I call the Business Trust Fabric.  It’s all about being able to put in place and enforce the set of policies that make up a particular organization’s Trust Fabric.  It’s why doing Web 2.0 things to the satisfaction of business is hard.  Most consumer web apps have a very minimal trust fabric that is not customizable.  Businesses are not one size fits all here.  They each have fairly unique policies that the software must implement in these areas.  Once again, it is a customization issue around whether the software can be customized to the particular flavor of Trust Fabric a business wants to implement.

4.  Accessing the Data:  A comment on the post points out a reality: 

most of the “data” in the enterprise is heterogeneous, siloed, complex, and beyond the reach of 99% of the mashup developers. 

Accessing the data is a task that we could enable the so-called mashup developers to tackle.  That’s part of what BI tools do, and some are pretty good at ad hoc queries.  What I find is that this just isn’t enough.  To borrow the old cliche, I want information not data.  Often, I find myself using a spreadsheet to transform data retrieved with BI-style tools into information.  The logic can be complex.  Anyone who has crunched numbers knows the drill.  One number is quarterly, one is monthly, you want average daily, yada, yada.  Lots of customized processing to get the data into a state where it even makes sense to mash it up.

Similar issues plague SaaS for business.  Delivering customization is hard.  If you have to roll in the traditional multi-million dollar Services engagement to get a SaaS product customized, it’s a non-starter.  Delivering self-service customization is also very hard.  Dion touches on some interesting ways to approach the customization issue for non-techies, but I don’t know that I’ve seen a SaaS solution yet that dealt with the problem.  In most cases they either prohibit customization, or allow very little (for example, you can add your own fields and make cosmetic changes, but the overall app is fixed).  This has limited SaaS to domains where minimal customization is acceptible.

SaaS and Web 2.0 software vendors that hope to satisfy business users and solve real business problems need to find a way to address the issue of self-service customization.  They need to find ways of letting these users go beyond canned apps and mashups of data to create and transform.  Mashups are a very limited type of customization.  A lot more mechanisms need to be available before we can see real progress.  I recently chatted with an entrepreneur who is working on a product related to this area, and plan to run an interview soon.

Posted in business, saas, strategy, Web 2.0 | 7 Comments »

Google and Apple to Rule the Universe? (Interesting Theory from Nick Carr)

Posted by Bob Warfield on October 17, 2007

Nick Carr has this interesting theory that Google and Apple can work together to rule the universe.  Google builds the back-end “cloud” piece, which is the cloud supercomputer.  Apple builds the hip click gotta-have-it devices that talk to that cloud supercomputer.  Carr sees many advantages for this model:

1.  It will be cheap.  Carr says $199 for the machine, and all the software and data storage is free, supported by ad revenue.

2.  It will be energy efficient.  Very little power is needed on the PC, and the power of the cloud supercomputer can be efficiently managed through centralization.

3.  It will be low maintenance.  This is the promise of cloud computing reflected in paradigms like SaaS that radically lower maintenance.  Nothing local but a browser.

4.  It will be flexible.  You never have to backup, sync, or copy data again.  It’s all in the cloud.  Backups are automatic.  You see the same data from any machine anywhere.  You can give out links to share the data in place.

Nick says the fireworks from this will start in a matter of months, not years.

It’s a beautiful vision, really.  I’ve had similar thoughts myself, so I found myself daydreaming about sitting at a sidewalk cafe in Paris, smoking a Gauloise, sipping a Vins Nouveau, all while surfing the web and doing all my computer activity on an Uber Cool Apple PowerTechieThingey that was hooked to the Google Cloud Supercomputer and could run for a month on a single charge.  And then the bubble burst and I was back to reality.

Aside from the fact that I don’t smoke, there are a number of problems with the vision.  First, 100% everywhere all the time WiFi connectivity remains problematic.  The hot spots are fragmented, some are free, some charge, and the big municipal projects to equip whole cities with WiFi seem to have stalled.  This is not to say that it isn’t coming.  There is tremendous interest.  One of the most common “off-topic” search terms leading people to this blog is people trying to figure out if they can live with just an iTouch and Skype or whether they really want an iPhone.  But, it takes more than just Google and Apple to finish out that infrastructure, and it is not an especially fast process so far as I can see.  Forget WiFi everywhere you might want to phone, just getting it in every coffee shop (not just Starbucks) is still not a done deal.  The world is working this from both ends.  We’re getting more connectivity daily, and we’re learning to run web apps disconnected, but this all takes time and is far from being resolved in mere months.

Can these two companies collaborate on a vision like this?  As I write this, the GOOG has a market cap of $196 billion.  AAPL is about $149B.  A merger is possible, but do we see a merger of equals in the cards given the personalities involved?  I don’t think so.  So then these two have to somehow collaborate perfectly in a completely arms-length mode.  I guess it’s possible, but neither has a great history of such statesmanship.  Even the best intentioned partnerships are often quite rocky.

The next big issue is the Walled Garden issue.  This is a Walled Garden vision we’re talking about here, where Google and Apple get together and own the world.   Are they wonderful philosopher kings who will do no evil?  Hmmm.  Benevolent dictators.  I say, “Hmmm,” again.  Can we settle for open and highly receptive to customer feedback?  I’m still at, “Hmmm”, when I look at Apple bricking iPhones and being a total control freak about everything.  Is this the world you want to surrender total control to?  Not me.  I’ll buy the products because I have options.  I can run Windows on the Mac if I want, and the World Wide Web is a big ole open prairie.  Start walling me in and I have a problem.

What about Google?  Are these guys really that innovative?  I mean, they’ve been brilliant at search and cornering the online advertising market, but so much of the rest of it seems a careless afterthought.  In many ways they are a lot like Microsoft in terms of innovation.  What have they done for us lately?  When was the last time they punctuated the equilibrium?  Seems to me they’re largely working on a lot of “me-too” stuff they get through acquisition, they’re not real fast at rolling the stuff out, and they don’t really tie it all together nearly as seamlessly as the vision calls for.  I mean, it took quite a while to get blog search inside the blog reader, and I recently read they’re only now able to hide columns in their spreadsheets.  I mean, hello?  We could hide columns in Visicalc.  That’s pretty basic stuff, folks. 

Let’s not forget the ever-present antibodies that suddenly spring up when it seems an infection will overwhelm.  We’re all hardwired to become increasingly suspicious and unsupportive when too much power is concentrated in too few hands.  It’s a normal survival instinct that has evolved to take a firm grasp on all of us.  It’s healthy, and keeps innovators and the little people from getting squashed.  Sometimes power is so great and so sudden that we live with it for a while because it surprised us.  But inevitably, we want to throw that yoke off.

The real answer that so many have been saying, is that the Internet needs to stay open.  Everything will not wind up inside a Google-Apple technology and product mashup.  Everything will not reside inside Facebook.  Every piece of software will not wind up in the clouds.  But, in each case, the owners of the franchises will try mightily to tempt us, and they will make progress towards their visions.  That’s great.  Just remember to draw the line if they try to make things too pat and too closed.

Let’s also remember to understand how centralization works best.  That’s when the entity being centralized has become commoditized.  If there is no further value in differentiation, and if the commodity is sufficiently open as to be entirely fungible (nobody likes having someone corner the market on their commodities!), you get massive centralization driven around economies of scale.  This is happening today in the world of cloud computing.  It makes less and less sense to own a data center.  MIPs and Gigabytes are commodities.  They are fungible as I can run lots of different software on them.  I just want them as cheaply as I can get them. 

Search pretty well went that route.  Google got enough better for long enough to capture a good enough share that nobody since does enough better to unseat them.  It’s entirely open and fungible.  I can buy the ads at reasonable prices and Google is egalitarian about what they search, or at least with respect to how most users like to see it (Spammers are less happy).

The Google-Apple vision assumes we’re ready to commoditize the personal computing experience.  I have a big problem with that.  We’re far from done innovating there.  We’ve barely scratched the surface in fact.  Wait until we see the same thing for 5 years, let alone 10 years, going on with every PC and then you’ll know it’s time to commoditize.

Posted in business, data center, saas, strategy, Web 2.0 | 5 Comments »

To Build Better Software, You Need Fewer People (But Why?)

Posted by Bob Warfield on October 17, 2007

Mark Masterson reminds us that people have been saying for a long long time in places like the Mythical Man Month book that system design integrity is best achieved through the work of a single mind.  The alternative is design by committee, which dooms us to understanding by committee and all the inefficiency and waste that goes along with that approach.  The avoidance of premature optimization almost always improves architectures by making them more comprehensible.  Abstractions properly constrain the performance and functionality bottlenecks of a system to make them more comprehensible.  Yet how often do we really focus on making architectures or code understandable?  In what actionable way is that something you can measure and act on?

So far, the best answer is simply to use fewer people and live with what they can get done.  It will automatically lead to simplifications and abstractions that act as firewalls.  On the other side of the firewalls are initially very simple implementations, but they are placeholders.  Some chief architect decided an abstraction was needed so that there would be a place to stand with a big enough lever to move the software’s world should it be necessary. 

I vividly remember a seminar in grad school at Rice University.  Stu Feldman had come to visit us from Bell Labs.  To this day, he is best known as the creator of make.  When I asked him what made him invent it, he informed me that he was trying to make it possible for more people to work together on software.  In his view, communication between people was the arbiter of how many could work together.  Make, in conjunction with source control systems, simplified one area of communication so that people could work more or less independently on source files and they could all be brought together and made into a coherent whole for testing and delivery.  In Feldman’s mind, before make, only 2 or 3 could productively work together.  After that, he felt the number reached the 7 to 9 that human short term memory dictates as the barrier for efficient inter-personal communication.

Recently, I was talking with Peter Nickolov of 3Tera, and he echoed the sentiment.  They had to build extremely complex software that virtualizes data centers, but they did it with 10 or 12 developers.  After running many development organizations, Peter feels this is the optimal number for “magic” to happen, and that adding more after that will likely reduce productivity and result in a mediocre result.  I quite agree with him.  (BTW, I will be publishing an interview with 3Tera next week, so stay tuned–their technology is a “must-see” if you’re working on SaaS or Web 2.0 software!).

I’ve always kept the communication bottleneck and small team size ideas in mind, and found that groups take a profound dip in productivity when we get too far beyond 10 or so developers.  If a product can’t then be broken up into very independent modules with extremely simple interfaces between the modules, we are stuck.  The logical conclusion for development managers is they should pay inordinate sums for the very best athletes, because they will only get 10 or so working productively on a team.  The other logical conclusion is to invest in improving communication in any form possible. 

I like to consider the following as worthwhile communication investments:

- Wikis and other online sources that are easily searchable.

- Sufficient face time.  Working separately or at home is good for productivity drives, but you have to allow enough communication face time.  I like to create a frequent venue where people tell us what they’re working on, solicit feedback, and give demos.  Short self-contained development milestones facilitate opportunities to communicate and apply mid-course corrections.

- Screening for great communicators at interview time.  I like to run folks through a mock architecture review.  I have them choose some piece of software they’re proud of and present it to the group.  I think this matters a lot more than impromptu brain teasers and the other ilk one sees in some interviews.

- Focusing on team chemistry.  Some managers think their job is to put as many IQ points in the room as possible.  I think it is to assemble a group of people that love the idea they’re working on and love working with the team they’re on.

I’ve put all this into practice for a long time, and gotten excellent results.  James Coplien wrote a paper about the amazing communication patterns that existed on my Quattro Pro team at Borland.  We had 8 developers, and we recorded some of the highest productivity scores that Coplien had ever seen.  As Coplien puts it when he introduces himself:

I’m one of the original Hillside pattern guys.  They brought me on board because of my earlier work on C++ Idioms:  C++ microarchitectures that I collected into one of the early (1991) C++ books. As I was finishing up that C++ stuff I was just starting work on organizations. It started with a study of the Borland Quattro Pro for Windows project. The ensuing DDJ article was a shot heard round the world. It was one of the foundations of SCRUM and became the foundation of the organizational patterns efforts. The organizational patterns work started appearing in 1993 and would become a foundation both of XP and the Agile movement.  

I’m proud to have contributed to the early ideas that led to the more mature methodologies of Scrum, XP, and Agile programming, but it all boils down to a simple observation:  It’s all about getting fewer, more talented people to work really well together as a team.

Related Articles:

Alex Iskold talks about some of these issues, and some of the newer developments like Design Patterns and Refactoring.  In the end, he agrees on the fewer better developers conclusion.

Raganwald asks, “What if powerful languages and idioms only work for small teams?”  Even crappy languages and idioms only produce much for small teams.

Posted in software development, strategy | 18 Comments »

What is SaaS? Can it Exist Without the On-Premises Comparison?

Posted by Bob Warfield on October 17, 2007

I had two different conversations recently where the people I was talking to were reluctant to use the term “SaaS”.  To them it equated to something a non-SaaS ISV was trying to get to, but if you didn’t have that non-SaaS Enterprise ISV background, you thought more in terms of calling it “Web 2.0″ or just “web software.”  Interestingly, they were kind of uncomfortable with the whole “Service” component of SaaS as well.  We’ve all heard the dramatic artifice that says there is no Good without Evil, because Good is only a relative term and it needs an opposite to give it meaning.  These folks seemed to imply SaaS was the same.

On a somewhat related note, a lot of folks who will answer to the name “SaaS” actual prefer “On-demand.”  I can’t quite get to the bottom of why, but the feeling I get is that SaaS is a little too caught up in Marc Benioff and Salesforce.com, or maybe its more a question of which term they grew up with.  Note that the “service” piece is once again missing from On-demand.

After more back and forth, I was able to boil out two issues that relate to this. 

First let’s talk about Service.  While a SaaS (or On-demand or web software) provider wants to deliver to the customer the benefits of service, at the same time they want to relentlessly eliminate the cost of service delivery.  They do this through economies of scale, but more powerfully, they do it by writing software that eliminates the human component of the service.  This is the prime function of multitenancy.  It’s possible to manage a bunch of instances by hand, but it would be very expensive to do so.  The first step is to write a bunch of scripts and perhaps use virtualization to reduce those costs.  That still is not cheap.  The next step is to actually build the necessary automation into the fabric of the application itself.  This dramatically lowers the cost of the service by replacing manual activity with software.

The result is that companies in the SaaS business often do not think of themselves as Service companies.  They’re actively trying to eliminate service by replacing it with software so that they can scale more efficiently and pass the savings along to customers.  These folks want to be known as software companies and not just companies that added service to software.  It’s an interesting nuance.

The second issue is simpler, and has to do with the customer.  Companies selling B2B are much more likely to consider themselves as SaaS, while companies selling to consumers think of themselves as having web software.

This business of putting computing in the cloud has a ways to go before we’re all on the same page about exactly how to talk about it.  The good news is I’ve talked to many companies using the model and they’re nearly all doing quite well without having to spend a fortune on marketing.  There’s a tremendous appetite among potential customers and everyone agrees it’s gotten a lot easier to sell over time.

Posted in enterprise software, Marketing, saas, strategy | 2 Comments »

 
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