On a day after the stock market suffered through one of its classic fits of pique at the news du jour, it's hard to find any bright side to a 382-point loss. But something's happening here and--apologies to the immortal Buffalo Springfield--what's taking place is becoming increasingly clear.
The conventional wisdom is that these are (among) the worst of times, with the tech economy hostage to the vagaries of the larger global economy. I suppose that it's reasonable to expect things to get a lot worse before they get any better. But how about some historical perspective?
As bad as things seem--and they ain't good--this still would not be the first time that Silicon Valley and the larger technology sector stumbled through a slowdown.
And keep in mind that the big innovations hatched during the times of trouble only became visible in history's rear-view mirror: 20-20 hindsight is never in short supply. That was true in each of the past three decades, and there's no reason not to believe it won't be equally true this time around.
But here's where the storyline needs an edit.
Ever since Wall Street's fall meltdown, the mantra has been that the reduced access to capital threatens to choke off technology innovation and force a lot of start-ups out of business and, oh, wouldn't that all be horrid for the "community."
I'm not so sure about that. And besides, not all innovation is grinding to a stop.
On the surface, there's no doubt that a number of start-ups will get wiped out by what Marc Andreessen once glibly referred to as the coming "nuclear winter" (Andreessen had no idea how prescient he would turn out to be.) But isn't that the way capitalism is supposed to work? And frankly, the world is not going to miss yet another widget maker or a social network for left-handed gimps.
Some perspective helps. For instance, the more interesting Web 2.0 companies aren't in dire straits. Andreessen's own Ning pocketed $44 million in July 2007 and another $60 million last April. Meanwhile, Facebook received $240 million from Microsoft in October 2007, giving Mark Zuckerberg more freedom to build the service brick by cyber brick.
The fact is that Web 2.0 has played out. The VCs who invest in this sort of thing continue to argue otherwise, but I've tuned them out. Nobody's offered a convincing explanation as to why Web 2.0's 15 minutes of fame aren't about up.
At the other end of the spectrum, this horrid economy is creating a paradox: the strongest technology companies are actually doubling down to extend their advantage.
Just this week, Intel disclosed its plans to spend $7 billion over the next couple of years. The investment will go to upgrade Intel's manufacturing technology here in the U.S. (stimulus bill or no stimulus bill) with an eye toward the introduction of 32-nanometer technology. That is quite a sum, but consider that Intel had about $12 billion in cash and investments on its balance sheet at the end of its last quarter. In other words, there's a lot more where that came from.
Elsewhere, pay attention to what's taking place at Cisco Systems. Talking with analysts earlier this month, CEO John Chambers didn't seem overly concerned as he warned sales might decline by as much as 20 percent in the current quarter. In fact, he predicted that a stronger Cisco will ultimately emerge, ready for the recovery.
Maybe he was telegraphing what was in store. On Monday, Cisco announced that it was selling $4 billion worth of bonds in what's the probably prelude to another Chambers shopping expedition. A company representative says that $500 million will go to pay down existing debt. That still leaves $3.5 billion in Monopoly money with which to go on a spree.
And it will. This is a company that thinks big and, more important, thinks strategically. Cisco bought for $500 million in 2003 A couple of years later, it paid $6.9 billion for . And in 2007, Cisco spent $3.2 billion for WebEx.
Chambers learned the hard way how to survive a rapid downturn. He was at Wang when it fell apart, and he had to make the tough choices on layoffs at Cisco when the dot-com boom ended. Ultimately, his quick decision-making allowed Cisco to emerge from the bust faster than many other tech companies. It wouldn't be a shock to see that same savvy management this time as well.
And like his counterparts at Intel, Chambers has money in the bank while so many others are struggling to hang on. You know that old cliche about cash being king? These days, it's more like the Holy Roman Emperor.
With the elections behind us, Wall Street's bears returned to form by dumping stocks in a big way on Wednesday and Thursday. Out in San Francisco, another tech conference devoted to all things Web 2.0-ish got under way amid dread about the future. And Cisco's John Chambers cast a further pall when he warned that a sales slowdown has spread from the U.S. to Europe, Asia, and the emerging markets.
On the surface, none of this is encouraging news for the near-term prospects of start-ups, which are the lifeblood of the tech business. So it was that last month Ron Conway of Sequoia Capital counseled start-ups to hunker down and cut their burn rates until this squall lifts.
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CNET News)
Given current events, that's sensible advice. But risk-taking is the sine qua non for innovation in the technology industry and this sort of thing suggests a lousy environment for innovation. In her recent book, start-up veteran Judy Estrin offers a parallel worry: the impact of reduced research spending on U.S. innovation. (The Organization for Economic Cooperation and Development ranked the United States 22nd in the percentage of GDP that nations spend on non-defense research.)
So you've got private sources of capital drying up just as the U.S. enters its deepest financial crisis since the Great Depression. I don't pretend to have a crystal ball into how long any of this will last. But with a new administration taking power in January, now's the time to get creative about figuring out possible answers.
In the mid-1980s, the U.S. semiconductor business was in such a parlous state there were concerns the industry would not survive the competition with Japan. So it was that a public-private partnership formed. Some 14 U.S. chip companies and the U.S. government created a consortium called Sematech (SEmiconductor MAnufacturing TECHnology), in 1987.
The idea was to jointly leverage resources and share risks in a bid to resolve common manufacturing problems. Seven years later, U.S. firms were again enjoying market share leads and by 1996 there was no longer any need for government matching funds.
And this was during the Reagan administration, hardly a proponent of free-spending, federal involvement in the private sector. But the leadership of the day acted in its enlightened self-interest and made an exception with Sematech. Obviously, the current conditions are not completely analogous.
• The size of the budget deficit is huge and sure to grow.
• With the auto industry on the verge of collapse, there's pressure to come up with another multibillion dollar bailout.
• And if there was agreement on some kind of tech start-up super-fund, how would you draw up the rules governing who receives funding and how much?
• What should the revenue split be?
• How long before a company would need to stand on its own? Etc.
OK, it would be complicated but let's not get lost in the weeds. The details are less important than the need to find a way to keep the funding spigot open. Maybe the private sector can't do it by itself and maybe Uncle Sam's not ready to go solo either. But don't tell me that the best and the brightest from both sectors can't figure out a way to figure out how to meet midway.
Time to get out ahead of this crisis before the stuff really hits the fan. Don't you think?
George Carlin said that when you live in the United States, you're guaranteed a front row seat to the freak show. Events of the last few weeks only reconfirm how right he was.
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But first, think back a few years.
The deflating of the Internet bubble, which began in 2000, wasn't a one-day blowup. Instead, the pain was spread over months and only ended after dozens of one-time high-flying technology companies got obliterated.
Out of the rubble emerged a new generation of start-ups that went on to operate under the Web 2.0 rubric. And since 2002, the innovation in consumer and social-network services has been the more interesting story in tech.
But this latest market upset takes place at a very inconvenient time. (When is it not inconvenient?) It's hard to know exactly, but most of these start-ups aren't swimming in cash. Before it's over, this may become a particularly hard transition for companies that depend on Internet advertising to pay the bills. Especially companies that operate according to the "freemium" model.
What's "freemium"? Fred Wilson of Union Square Ventures nicely defines how the model is supposed to work.
Give your service away for free, possibly ad-supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium-priced, value-added services or an enhanced version of your service to your customer base.
The idea is predicated on the assumption that you'll be around long enough to collect. In normal times, that might work. Does anyone believe we're living in normal times? Even if Bush convinces congressional renegades in his party who opposed the Wall Street bailout, this economy's getting worse by the week.
If past is prologue, the technology business may emerge changed, and ready for the next big challenge. But that's the longer-term perspective. In the meantime, there's that matter of meeting payroll. "Freemium" was a grand experiment but its practitioners don't have the luxury of time any more.
And so it starts.
Marc Andreessen
(Credit: Seth Rosenblatt/CNET Networks)Earlier Friday, analysts lowered estimates on Amazon.com and Yahoo, setting off renewed worries about the earnings outlook for Internet companies. The Nasdaq finished Friday in the red, even as the Dow Jones climbed back from an early morning sell-off with a triple-digit gain, ostensibly, on hopes that Congress would come up with a financial bailout plan.
What to make of all this? Up until lately, most of the people involved in Internet companies (and particularly, Web 2.0 types) shrugged off the gyrations in the financial markets as Wall Street's problem. The standard refrain was that the Internet economy "is a lot different."
Well, not really. Go back a few years and you'll find that was pretty much the same line of jive peddled by the folks pumping Internet stocks. That lesson got learned the hard way. Fact is that the economy is intertwined and the ripples--both for good and ill--touch every sector. So it was that more than a few of today's current class of born-again pumpers snorted derisively when Marc Andreessen last year quipped that Ning's decision to raise $60 million in private equity would prove handy during the coming nuclear winter. They're going to eat their words before long.
Talking about his August channel checks at Amazon, Lazard Capital analyst Colin Sebastian reports that online spending trends "remain challenging" and may have deteriorated since then. Citing a customer survey by Billme, an Internet payment services provider, Sebastian notes that almost half of the consumers polled said economic uncertainty had convinced them to delay purchases, with 42 percent saying they intend to cut back on credit cards. What's more, Sebastian expects competitive holiday promotions to hit even earlier than usual.
Was there any good news out there? Well, sort of. "We continue to believe that e-commerce growth should outpace brick-and-mortar retail as consumers seek better values online and are now more accustomed to shopping online for the holidays," he wrote.
Meanwhile, Collins Stewart analyst Sandeep Aggarwal's dismal note on Yahoo easily could apply to any number of advertising-dependent Internet companies:
We believe that the fundamentals at YHOO are deteriorating. On the one hand economic headwinds and turmoil in the financial markets are causing weaker display ad revenues. On the other hand changes with the minimum bid with search and a possible GOOG/YHOO deal are causing an outcry among many advertisers. To further complicate the situation is an ongoing loss of talent which might accelerate with the renewed restructuring efforts. We don't see any near-term upside in the shares of YHOO on fundamental basis. However, we would not rule out a possible MSFT/YHOO deal in the future.
The evidence is piling up every day. During the just-concluded Advertising Week conference in New York, Wenda Millard, the co-CEO of Martha Stewart Living Omnimedia, said during a panel that the financial crisis is going to reverberate through the economy with "pretty severe implications for medium-sized and smaller businesses and consumers."
The venture capitalists who've invested in sundry Internet start-ups (most with unpronounceable names) are spinning this as a passing event. Once Congress and the president agree on the $700 billion bailout (or rescue, if you prefer), we'll return to normalcy. Suuure.
I can't put it any better than did AllThingsD's Kara Swisher's recent post, where she wrote that "the economic crisis is likely to become a whirlpool that will be hard for any ad business to avoid, even the often recession-proof digital sector."
Translation: It's only a matter of time before the stuff hits the fan in a big, big way.
Who would have thought look and feel would ever become important to the enterprise? But the decades-long push--maybe we can trace it back to the Macintosh--to make it easier for regular human beings to work with technology has infiltrated the thinking of the high priests of IT. Up to a point, of course. After all, we are talking about the enterprise :).
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Still, there's a move underway to make enterprise apps, if not more friendly, then at least more useful. So it is that recent announcements out of Oracle with Social CRM Beehive play up the concept of integrating different enterprise features into integrated packages designed to make things easier on the regular user. Cisco is also doing something similar with the collaboration tools in its latest release of Unified Communications.
I thought it was instructive that Oracle co-president Charles Phillips went out of his way to note that Beehive was "Web 2.0-enabled." Personally, I'd prefer we banish what's essentially a vapid marketing term from the tech lexicon. But we're stuck with it so we'll make do with it for a while longer--at least until the inevitable shakeout that everyone expects but nobody can pinpoint.
Last week at the Web 2.0 conference, IBM attracted attention with its plans to open a center for "social software." As my colleague Jim Kerstetter noted, several companies holding court at New York's Jacob Javits Center at that show were as far from "social media" start-ups as you can imagine.
"Instead, they're trying to sell software, hosting, and consulting services to social media companies and to traditional technology buyers like auto makers that are trying to add communities and other "social" tools to their Web sites.
Earlier today, I had a conversation about this trend with ZDNet's Editor in Chief, Larry Dignan, who was in town to cover the Oracle World conference.
Maybe it's a throwback to my childhood recollections of "duck and cover" school drills, but this nuclear winter Andreessen thing is still rattling around in my head.
First, the gloomy view: The economy is slowing down and so what's up with the increasingly pointless me-too social-networking apps getting link love these days on Techmeme? They're cute, but outside of the echo chamber regulars, who really cares? Let's be frank: The world does not need another social news aggregator or online scheduling assistant.
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Now, the slightly more optimistic view: This isn't the first time that caution is the byword, and it won't be the last. Silicon Valley survived the Internet bubble, so why should anyone believe that it won't get through another recession?
What's more, the tech business is doing well. And the recent run of earnings announcements from the likes of Intel, Apple, IBM, Google--and even Yahoo--suggests that while folks may not be buying lots of houses, they continue to buy lots of computers.
Still, there's no getting around the fact that advertising will be hit hard in any recession, and that would be bad news for the prototypical Web 2.0 start-up. Here's where it starts to get really interesting. The definition of your prototypical Web 2.0 company is undergoing a change from what it connoted in 2005. Browse through the roster of companies exhibiting at this week's Web 2.0 conference and you'll find enterprise-heavy names like IBM, Microsoft, Oracle, and Cisco-WebEx, among others.
We've seen this movie before. The history of the computer industry is chockablock with examples of smaller, innovative entrepreneurs shaking up the status quo to the point where the mainstream companies either figure out how to coexist in the new world order or pass the baton.
I don't know where we are in the transition, but there's no getting around the fact that the constellation of forces in software is shifting. Companies like Twitter still draw more comment in the blogosphere, but look what's happening with Web 2.0. We're now in a phase where bigger hardware and software companies with deep pockets are starting to predominate. (In many cases, because they buy up innovative start-ups to get into the game such as AOL-Beebo. Other times because they come up with new technology models like Microsoft's cloud platform push with Live Services and Live Mesh.) Lots of reasons behind the enterprise companies' interest but maybe it boils down to something as simple as companies just trying to stay relevant. Fact is that as more young people graduate into the work place, the new generations will import online habits they learned growing up into their work routines.
In a recession, they'll fare better in any storm than companies which don't have an apparent exit strategy, according to Barry Schuler, a former CEO of America Online and now a private investor.
"With social media, no one's figured out how to monetize things yet," Schuler said. "In a certain sense, it looks a lot like 1997. The hiccup will be if there is a recession. The least proven stuff, the companies that haven't decoded a business model, will be the stuff that gets dropped. If there's one thing we learned through the Internet bubble, you can say this is a new economy, but in the end, P&L does matter."
We're fast approaching a point where it's time to find a more fitting sobriquet. Better yet, maybe we should just dump an awkward marketing umbrella term entirely. It just gets in the way of clear thinking.
SAN FRANCISCO--So there was Marc Andreessen, scaring the bejeesuz out of the crowd at the Web 2.0 Expo here with talk of a "nuclear winter" descending upon techdom. Maybe it was the Lex Luthor resemblance that made it seem extra sinister.
Marc Andreessen: Watch out or...kaboom!
(Credit: Seth Rosenblatt/CNET Networks)For the record, this line is becoming old hat for Andreesen--in a blog post he wrote after Ning raised $60 million net in a private round of funding, Andreesen said the money would "enable us to keep scaling given our accelerating growth (more than 230,000 networks on Ning now, growing at over 1,000 per day) and to make sure we have plenty of firepower to survive the oncoming nuclear winter. At current growth rates, we don't need it to get to cash-flow positive, but having lived through the last crunch, it's good to be conservative with these things."
Nothing controversial about being conservative in uncertain times. Still, a nuclear winter? Author and Oxford professor Jonathan Zittrain followed Andreessen onstage--via a recorded transmission --by pondering grim Internet scenarios lurking just over the horizon. The odd thing is that I've heard similar hedge-your-bet comments all week. This is a crew that survived the last bubble and they know from firsthand experience that a lucky rabbit's foot won't be enough to get by in case lightning strikes twice.
The knock against Web 2.0 is that it's chockablock with me-two, doodad makers, companies fated to blow away like prairie grass at the first sign of a storm. Some of that is true. But when you walk the floor at Web 2.0, you see that this year's conference is dominated by serious companies with serious products: Disney, IBM, Intuit, Microsoft, Cisco-Webex, Oracle, Juniper, Google, EMC--well, you get the idea. (You can find the full list in the program guide.)
Barring a real nuclear winter, I expect they'll still be around for quite some time.
So why the lingering insecurity?
"I think it depends on your perspective--that is, where in the market you are in terms of the growth curve and users," said Kaku Srivastava, general manager at Flickr. "From where we're sitting, we're bullish."
That's true. It's also true that many of the smaller companies are ready to grab the first good offer that comes their way.
"You look at CPMs for a lot of the social-media platforms we work with and you wonder about the CPMs," said an executive who asked to remain unidentified. This guy was one of the smart ones: he took the money last year and decided to hang around the mother ship--at least for the foreseeable future--and run the division. "Unless they run a very small shop, it's going to be really hard for them to make serious money. But that's the dream that drives everybody so, why not?"
Why not, indeed? After all, it worked for Andreessen.
SAN FRANCISCO--Jonathan Zittrain recently published a terrific book with the suggestive title The Future of the Internet--And How to Stop It. But as I settled into my seat to report on his talk at the Web 2.0 Expo here Thursday, the Internet stopped me.
Jonathan Zittrain
Dead in my tracks.
It was a confluence of events. In a switcheroo, what we witnessed was actually "virtual Zittrain." The good professor--he teaches Internet governance and regulation at Oxford University and is the co-founder of Harvard Law School's Berkman Center for Internet & Society--appeared on the big screen in a brief pre-recorded disquisition about the state of Internet computing.
The show organizers did arrange with Zittrain to follow up with the audience on a Meebo chat room. (You can follow the archived chat conversation). Unfortunately, the wireless connectivity here at Moscone Center has been flaky all morning, and I spent half of the duration of his presentation trying to get a live connection. So was my welcome to Web-minus-2.0.)
Zittrain covered familiar ground from his book, starting off by noting that his writings may make many of the people in the audience "dyspeptic." (I'm sure that word sent half the people here scrambling for online dictionaries.)
He painted a troubling picture of the direction in which technology is heading. Zittrain's main concern is that consumers may inadvertently be making surveillance of individuals easier for companies and government agencies.
In his writings, Zittrain has raised a red flag over the hidden price paid by consumers who willingly adopted so-called closed devices in return for a promise of stability. Also, he has concerns about the trade-offs involved when smaller applications developers agree to terms set by big platform makers.
Zittrain suggested that we're at "a constitutional moment" akin to the founding of the United States. "The original plan--U.S. 1.0--was: everyone's really nice, and if not, we'll just move west. The framers of the U.S. Constitution--U.S. 2.0--saw that not everyone could get along, and needed a system of checks and balances."
He raised an interesting analogy by pointing out the separation-of-powers doctrine famously articulated by James Madison (and I should add Alexander Hamilton and John Jay in the Federalist Papers), which articulated reasons to avoid investing in any single institution with too much power.
Zittrain finished up with a call for ad hoc "bottom-up" citizen community-based models to take the lead. Otherwise, he cautioned, we deserve the future that's otherwise heading our way.
SAN FRANCISCO--One of the biggest booths at the Web 2.0 Expo here belongs to a very un-Web 2.0-ish kind of guy.
Remember Steve Perlman? He's one of those tech wunderkinds who piled up a laundry list of achievements over the last couple of decades--to the point where their predictions about technology carry more weight than most mere mortals. In his case, the highlights include leading the Apple development team whose technology led to QuickTime and later co-founding WebTV (later sold to Microsoft for a half billion or so.)
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Perlman has been working at Rearden, an incubation firm he founded in 2000 that has some cool companies in its network, including Mova and Moxi Digital. Perlman was at Web 2.0 to show the corporate flag and sign up new talent. Though neither he nor his team would say what was on deck, they were playing it up as quite a big deal.
"At least two of the technologies we have are getting ripe on the vine," he said. The big tease. (By the way, Tom Paquin, who ran engineering at Netscape, does the same at Reardon.)
Interestingly, Perlman isn't very impressed by most of what falls under the rubric of "Web 2.0." Coming from someone with his technical pedigree, I was intrigued when he added: "Most of what you see here will be obsolete in three or four years."
Unfortunately, I was already running late when he offered those bons mots at the end of my interview and didn't have enough time to get into that. Hopefully, I can reconnect at the company's party this evening.
******
I did manage to catch up with Perlman. Here's what he had to say (over the din of a pounding electric-muzak like attack on our eardrums.)
"What we've been seeing is a huge change in the way people manage their data and the way applications handle data. We've been working on the assumption that the gold standard for communications was a 1.5 megabit T-1 line. Like, you had it made! Well, today, that just sucks. Most people can get 3 to 6 megabits. So you're seeing richer flash animations on pages and that's beginning to change the way people think about stuff."
Such as?
"They're adding new things as the Web becomes richer. But a lot of the sites you see out there tend to be very static. You go from one static page to another static page. They may call themselves Web 2.0 but it's Web 1.0 in terms of interactivity....I was walking around the floor (at the conference) and asking myself, `Where is the video?' It's not there. And that's going to have repercussions."
Over the years, Microsoft has taken different approaches to offering online support. Some of you may remember Microsoft Bob, a bizarre software desktop replacement whose personal guides were supposed to offer personalized help.
Unfortunately for Microsoft, the product went nowhere and is now better-known as the answer to the trivia question, "What was Melinda French's claim to product fame?" (Of course, Melinda French later went on to fame and fortune as Mrs. Melinda Gates.)
Most computer users are more familiar with the Clippy, the office assistant Microsoft put into Office 97 that offered advice to user queries. The feature was subsequently panned by Smithsonian magazine as "one of the worst software design blunders in the annals of computing."
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But Microsoft is now about to take another stab by rolling out an updated natural language search tool it acquired when it bought Colloquis in 2006. The company this week is giving private demonstrations of Automated Service Agent, or ASA, a hosted online customer service technology, which makes its official debut next month.
Microsoft envisions ASA as a tool companies will deploy to help reduce costs associated with call centers or internal help desks. The way it would work, a user engages in a chat-type session asking questions in conversational English. The system then would tap into a knowledge base to find the most fitting answer.
"We see this as offering a lot of advantages over FAQs or keyword searches," said Clinton Dickey, director of Microsoft's Automated Service Agents. "When you have an FAQ, a customer still has to go through the a long list of possibilities to get the answer--if they get it at all. We see this as driving self-service on the Web where ASA can provide very particular answers. The beauty of ASA is that it can ask questions in natural ways and will link answers from a knowledge base that expands over time."
Among other things, Microsoft asserts that:
• ASA will offer direct answers to even the most technical questions.
• The service will be available 24/7.
• Microsoft's Knowledge Modules will include
terms and phrases germane to different industry niches.
• ASAs can serve as a training tool for new employees or for retraining existing staff.
At this point--and for the foreseeable future--Dickey said Microsoft does not intend to use ASA's technology in a consumer search application. That's likely the smart move. Routine in-house questions that go unanswered waste time and money. Any technology provider that can reduce costs at call centers or other internal support centers will find no shortage of takers among the corporate set.
