Unexpected use cases, what a Service Provider never sees coming…
Service Providers launch offerings with a particular use case or set of use cases in mind. Flickr launched a photo/video sharing site, Joyent offers Accelerators to host websites, and Google/Yahoo/Hotmail/etc. offer free e-mail. All of these services have other ways they could and probably are being used….ways the product teams never expected.
Plenty of on-line backup services exist, Jungle Disk (disclosure, they’re owned by my employer), Carbonite, Mozy, AT&T Remote Vault, and more. These services are all priced around $50+/year after you have a resonable amount of data. This is where Flickr enters the picture in our unexpected use cases…by using steganography I can have 50GB of free backup and after that it only costs me $24.95/year for unlimited.
Why are free e-mail services interesting? They offer free storage and bandwidth again expecting you to use it for e-mail. Many of their terms of service don’t prohibit account sharing. If you are a software company looking for a low cost way to distribute your newest release get company@<freemail>.com and upload it there. Setup the auto-updater in your software to check for a new version in the e-mail and if it is there download and update.
For general web hosting providers offer different package offerings with CPU/Disk/Bandwidth under the expectation you’ll host your entire site with them. To differentiate some offer extreme amounts in one of the categories to attract customers. One example of this is Joyent Accelerators with 10TB of transfer for $45/month (or $199/year prepaid). They figure you can’t use 10TB of transfer with 5GB of storage. I can host all of my images for an advertising campaign at Joyent and store the DB and rest of the site elsewhere. Off AWS 10TB of download transfer would cost you $1,700/month but CPU/Disk are much less expensive than they are from Joyent (my employer is Rackspace where our cloud offerings are priced much more like AWS).
This extends beyond just technical services as well. The best example of this is the “all you can eat buffet”. They pick a price based on average consumption and charge everyone the same. This works better in the buffet world than it does in the information services world as people generally eat in groups of friends or family. Information services however we can consume individually thus allowing use case versus price arbitrage much more efficiently.
Service cost arbitrage exists all over, the reason we have it, and the reason more people don’t take advantage of it is many of them aren’t efficient to utilize. If I release a steganographic Flickr backup client they’d change their terms of service. If all software companies started using free e-mail services for distribution, they’d change the terms of service. Even the “all you can eat buffet” would change the terms of service. When I used to wrestle in high school our team of 40+ would go to buffets after our tournaments and we’d frequently see a near-realtime change in the terms of service — i.e. we’d get thrown out of the buffet after we ran them out of food.
When developing a service offering the best way to meet the expectations of all of your customers is to price each component in a fair manner. Consider running promotions or specials with limited terms if you’re trying ways to attract new customers rather than setting artificially low prices in a particular category believing people will use the expected use case.
“Big Government” isn’t the problem, lack of accountability for corruption is.
If “Big Government” is more wasteful, less efficient, and generally just not a good idea why is “Big Business” more efficient, more profitable, and generally able to succeed without groundbreaking nimble new inventions?
So what do the failed “Big Businesses” have in common with the inefficient “Big Government”? We have the “all in” style risk based bonus systems in the financial sector — this falls in both the accountability and corruption buckets. Outside the financial sector we have many of the major corporations of the post-war era that have had to file bankrupcy due to lack of accountability over their workers because of the union shield.
Both of those paradigms exist in the federal government. Elected representatives “know” if they take care of people they’ll get rewarded when they leave office. This is similar to the financial sector problem as the represenatitive spends/takes risks with other people’s money and if it goes well stands to gain huge personal benefit.
On the other side of the coin the federal government is more unionized than any other industry. Even non-union employees in government aren’t going to be eligible for performance related bonus plans. Nobody is held accountable to perform above a baseline minimum, nobody is asked to do their best.
So how do we fix this? The same way we fix other places where we have a lack of accountability and corruption. Use existing laws or put better ones in place to enforce transparency and honesty. Pushing the spending from federal down to state just spreads out the corruption, localizes it, and makes government less efficient overall for the same reasons small business is less efficient than big business.
Term limits don’t fix the “all in” mentality, they may perhaps make it worse as representatives know they have a short time to push through their “payday” legislation. People that pass legislation need to be ineligible to recieve financial benefit from it. This make may it very difficult to go from Congress back to the private sector but I’d rather pay them a congressional salary pension for life than encourage them to spend $100B of our money so they can get a $20M paycheck after they’re out of office.
The union issue is more complicated. In a utopian society people would do their best each day regardless of an “incentive pay for performance” plan. We sadly don’t live in utopia so people with no incentive often do the minimum required. The best way to fix this is any job with a measured baseline of performance needs to be automated. If it is too complicated to automate then people deserve some sort of performance incentive. We don’t have to fix this overnight, let the current generation of workers finish out their careers and phase them out moving foward.
If we don’t address both accountability and corruption we will end up bankrupting our country. In some states now people are paying > 50% of their income in “income tax” (NY and CA), start adding on property tax, sales tax, gas tax, and all of the other taxes and up to 2/3rds of some people’s earnings are going to taxes. We also have some of the highest corporate tax rates in the world incenting businesses to evaluate opportunities to move to other nations. Raising taxes isn’t the answer, we’re running out of room to do it — futher increases run the risk of decreasing federal revenues as income earners will look for opportunities elsewhere.
Google’s “Office” is YouTube
Right now Google is a “one trick pony” and eventually like Microsoft did with DOS and then Windows you saturate that market and can only grow at the pace of the industry. The only way to have huge growth again is to find a new line of business. For Microsoft it was and still is the Office suite (Word, Excel, PowerPoint, Access). For Google it is going to be YouTube…
This isn’t going to happen over night but it isn’t much more than 5 years out. Early adopters are already consuming Netflix through their Xbox360. TV manufacturers are starting to include network adapters and PC manufactuers are shipping home theater studio PCs with remotes. The next generation of home game systems will all be TV/Movie capable; Microsoft can already run the AT& U-Verse software on an Xbox360 (Microsoft is partnered with AT&T with the video delivery software).
So how does all of this help Google and YouTube? Right now for TV+Broadband the consumer spends $80-200/month with the broadband component costing $20-80 leaving $60-120 for the TV content portion. Broadband $/Mbit will continue to become more efficient allowing more and higher quality video to be delivered over it.
Time Warner Cable already sees this coming and they put new bandwidth caps on their broadband (5GB, 10GB, and max 40GB tiers) that limit their users to ~9 hours of HD quality video per month. AT&T only offers their highest speed broadband bundled with TV service (you can get 6Mbps DSL for $35/month which is enough to deliver 1 HD stream). Verizon offers their FiOS service with or without TV and for $69.99/month you get enough bandwidth to have 3 HD streams going at once.
So as long as the carriers providing the bandwidth don’t lock Google out they’ll be in the game for the TV portion of the revenue. Right now all cable providers are limited to providing commercials based on service area — Google and YouTube can deliver commercials to each subscriber. Google can cross reference your search information and base the commercials you see on that. Because of this they can generate more $/commercial. Imagine this — you searched earlier in the day for ‘new car’ and went to Ford, Audi, and BMW websites — now you’re watching the newest episode of “Super Show” on YouTube and Google can show you car commercials.
The TWC, Cox, Comcast group will fight this as hard as they can because they don’t have a carrier backbone so if you’re a traditional cable customer expect to see further limits like the one TWC has in testing in a few service areas now. AT&T and Verizon are better off as they don’t need to pay transit fees for traffic from their subscribers across the Internet.
With mobile devices starting to become video capable Google is in the drivers seat here as well. YouTube already works perfectly on my BlackBerry Bold and as mobile carriers move from 3G to 4G and battery technology makes huge strides (thanks to the investment coming from the automobile industry) many of us will be watching TV in the future on our phones.
What about Hulu? What about other video startups? Just like Microsoft having the OS it was much easier for them to create a synergy and add the Office suite. All of the pure video plays lack the dominance in search that give them the ability to better place relevant advertisement.
The TV advertising market in the US is between $50-60B annually. Google can double their revenue by getting half the market share in TV advertising that they have in Internet search. Android, cloud computing, business e-mail and office applications, and the rest of their current projects don’t have the potential that TV does. They can be good profitable business units but Google’s route to the next major growth will or won’t happen based on their ability to execute with TV.
Cloud Computing forces IT “Evolve or Perish”
When I started this blog I thought I’d be talking about technology on a regular basis and so far I haven’t. This is still somewhat business related but it is also very tech heavy. The tech focused pieces I intend to explain at a level that an average “nerd” gets but the average adult can read.
Earlier today I spent an hour watching one of the Rackspace founders deliver a training video intended for new hires in 1999. In the video they go through the complexity of ensuring hardware works properly together, that the OS is installed properly, and that DNS is configured properly. Now just 10 years later much of this is significantly simplified. When is the last time you spent time dealing with an “IRQ conflict” or “checking jumper settings” (hardware related troubleshooting that is automagic today)?
Now as we move to cloud computing with pre-defined virtual machine images the “OS is installed properly” piece is going away. Projects like TurnKey Linux will lead to one-click application stacks on top of an OS. For much of the IT community their career has been performing these tasks. Now instead of an application developer needing a system administrator to “build the server” they go to a web based control panel, pick the system type they want and click “create” and the server is spawned.
It isn’t that the system administrator career is being completely eliminated; rather instead of every company needing their own system administrators in the future the computing providers will need them and general business will only need to have an IT staff that works on their specific business applications. Business won’t need to have many other “building block” level IT roles either: networking, desktop support, and storage/backup administrators.
Many in the IT industry think I’m taking things a bit far when we have this discussion. I don’t believe it’ll happen over night but during the next 10-20 years it will. Looking back in the past nobody has a “typing pool” to type up hand written notes, a “courier” to deliver a message across town in a hurry, or a “research” department to go look up basic information we all have access to now through a search engine in a matter of seconds.
This is where the “evolve or perish” comes in. If you’re within 10 years of retirement and focused on the building blocks you may want to consider a job at an infrastructure company or risk the business you work for now eliminating your position in a transition to cloud computing. If you’re at the start of your career and focused on those building blocks you need to be the best and brightest in your field so you can obtain one of the service provider jobs in a much smaller market going foward. Your other option is to evolve and move further up the application stack. This could mean learning how to properly architect an application to make the most cost effective use of the utility priced OS clouds or it could mean going all the way up the stack to interface design.
This isn’t all doom and gloom. Evolution and automation like this increase productivity allowing us to focus on moving forward more rapidly. If you enjoy your IT industry job start asking your employer what you can learn above and beyond the building blocks to help out. While you may not need to today it is much better to be ahead of the game rather than waiting around for a layoff to start learning in panic mode.
Church of Washington, DC
Our government is run by a jealous and power hungry group of individuals. They want to be worshiped for taking care of everyone. They put their faces on money, they build temples and monuments in their honor. They don’t like the fact that when people are in need they turn to something other than them. For many in America, they turn to God, and God warns them:
“You shall have no other gods before me. You shall not make for yourself a graven image, or any likeness of anything that is in heaven above, or that is in the earth beneath, or that is in the water under the earth; you shall not bow down to them or serve them; for I the Lord your God am a jealous God, visiting the iniquity of the fathers upon the children to the third and the fourth generation of those who hate me, but showing steadfast love to thousands of those who love me and keep my commandments.” (RSV Exodus 20:3-6)
Does this mean if you believe in God you can’t look to our elected leaders to help? As long as they’re helping out of duty and service, receive the help. If they’re helping out of a desire to be worshiped then you may be punished along with them for taking their false gifts.
“1For I do not want you to be ignorant of the fact, brothers, that our forefathers were all under the cloud and that they all passed through the sea. 2They were all baptized into Moses in the cloud and in the sea. 3They all ate the same spiritual food 4and drank the same spiritual drink; for they drank from the spiritual rock that accompanied them, and that rock was Christ. 5Nevertheless, God was not pleased with most of them; their bodies were scattered over the desert. 6Now these things occurred as examples to keep us from setting our hearts on evil things as they did. 7Do not be idolaters, as some of them were; as it is written: “The people sat down to eat and drink and got up to indulge in pagan revelry.” 8We should not commit sexual immorality, as some of them did—and in one day twenty-three thousand of them died. 9We should not test the Lord, as some of them did—and were killed by snakes. 10And do not grumble, as some of them did—and were killed by the destroying angel. 11These things happened to them as examples and were written down as warnings for us, on whom the fulfillment of the ages has come. 12So, if you think you are standing firm, be careful that you don’t fall! 13No temptation has seized you except what is common to man. And God is faithful; he will not let you be tempted beyond what you can bear. But when you are tempted, he will also provide a way out so that you can stand up under it. 14Therefore, my dear friends, flee from idolatry. 15I speak to sensible people; judge for yourselves what I say” (1 Corinthians 10:1-16)
When our country was founded giving 10% to the church was very easy. We had few taxes to pay to the government and in times of need people looked to their family, their neighbors, their community, their church for assistance. This didn’t give the elected officials the power and worship they desired so over time they’ve collected more and more taxes to solve more and more problems. People are then be thankful for the government and the officials that take care of them.
Now here we are 200+ years later with over half of our income going to the government. Giving 10% to the Lord is now much more difficult as you’ve already had so much taken from you. And why should you give to the Lord now? If you need something you don’t have to ask God or your church community for it. The government is there to take care of you with “public assistance”.
The difference between being helped by your neighbor or your community and a government entity is if your neighbor helps you, you’re inclined to try and return the favor. If you get help from a non-descript government entity there is nobody to return the favor to.
The government doesn’t make money on its own. The help you recieve from it is really from your neighbor or somebody else’s neighbor and we need to treat that assistance with the same respect and gratitude. Don’t take more than you need, greed is one of the seven deadly sins; and repay what you are given when you can.
Government should focus its energy on matters of the state — our national defense, our military, and laws to maintain order among society. The social and entitlement programs that make up much of our debt should be sold to the private sector and they will run more efficently and take better care of the people looking for assistance.
A quick first step could be changing the charitable donation tax laws. Instead of it being a deduction after 2% of your gross income it should be a tax credit up to 10% of your gross income starting from the first dollar you make. Capital will find its way quickly into the hands of organizations looking to help their fellow man and they’ll spend it right away. It won’t go into an entitlement trust fund to sit not contributing to the economy.
Safety net could eliminate the middle class…
The idea of a social safety net is great, nobody wants to see others homeless, hungry, and in need. The drawback is it eliminates the need for people to really give it their all. If you could go to work and take an entry level job, if it pays you the same as the safety net – why do it?
This does have an upside. True entrepreneurs can risk everything without fear of being left with nothing. If they go bust, wait a few years again building up another nest egg and try again. Just like buying a lottery ticket, you keep swinging for the fences until you get it and if not the safety net isn’t a bad place to be until then.
For tech related Web 2.0 style startups with access to utility style computing they may not even have to wait between attempts. As long as the safety net gives them enough money for Internet access, food, and shelter they can keep trying idea after idea without the need to wait between ventures. Eventually one of those ventures pays off and they skip right over the middle class.
It is horrible for marginal entrepreneurs because they won’t commit everything to success as they know they have a safety net to catch them. This may cause businesses on the edge to fail as the thoughts of 100 hour weeks trying to save your business sounds worse than relaxing on the safety net. This is where the safety net robs people of success, if given no other option for support they would have overcome.
When the safety net put you in a shelter or a public housing development most people were willing to work as hard as they needed to improve their quality of life. If the safety net moves up to saving the $800k home of a bus driver most people will be perfectly happy relaxing on the safety net not trying to improve their life or if they do try for improvement they’ll swing for the fences.
Through this the middle class workforce will slowly be eliminated and in order to attract people to the jobs that really keep everything running we’ll have to start paying significantly more. While on the surface this sounds good dramatic shifts in the average wage will cause hyper-inflation.
Inflation isn’t just the government printing money increasing the money supply. A significant increase in the velocity of money is how we’ll end up in hyper-inflation, not through the printing of money alone. If the M3-M2 money only fractionally changes hands each year it doesn’t have a lot of purchasing power; it doesn’t drive the prices of goods and services. If those large pools of investment dollars now have to be paid out to workers in salarys to attract personnel capable of performing the job M1 and M2 will increase as the average worker doesn’t save — they spend what they make.
So if you are in control of those M3 dollars do you spend them on higher salaries to attract workers, knowing it will lead to hyper-inflation, causing your fortune to diminish in purchasing power? Or instead, do you instead let the economy fail causing deflation as unemployment increases and the M2 supply decreases which in turn increases the power of your fortune?
The time to invest again is coming…
We have a number of financial statistics quickly heading to 0. The top linked pair of statistics I’m tracking are per capita income and population. As long as both of those numbers aren’t declining then we’ll eventually burn through the excess inventory in the “bubble” markets. I’ll define “bubble” as where the rate of supply is increased faster than the long term rate of demand.
Housing starts, existing home sales are both at the lowest levels since WWII and at the current rate of decline they’ll be effectively 0 before summer. For perspective we’re at an annualized rate of 466,000 new homes each year down from 1.7 million in 2005. The US adds around 2.5 million people each year with the average family size of 2.6 meaning we need somewhere in the ballpark of 900,000 new homes. I can’t find the number of homes destroyed on an annual basis due to fire, flood, redevelopment, etc. We can agree that number if always somewhere at or above 0 so it’s also eating into the inventory.
Auto sales are down to less than 10 million annual units and still declining. For some perspective approximately 13 million autos are scrapped each year. This means around 1 in 50 households have 1 less car each year we keep this up. I’m not sure on the sustainability of the reduction of the number of cars. Do we have less need as more people move to alternative transport, as our population ages and the retirees don’t need a commuter car each plus the weekend fun car?
For equity markets 0 isn’t really 0. You’ll hit an effective 0 somewhere above the actual 0 when the price = real book value. I use the term “real book value” because a number of balance sheets even with mark to market have many arbitrarily valued assets at a book value above what you could sell them for in a liquidation. Hopefully we don’t go that low, rather we stop at somewhere above “real book value” based on cash flow that can be obtained from operating + RBV.
So when is the time to invest? When you believe things are cheap enough and cash becomes risky. Cash is the next “bubble” (a lot of people are talking about this as a T-Bill “bubble”, short term T-Bills are effectively cash). While the relative value of the dollar may get stronger globally when we inflate our way out of the debt we’re creating the value of an individual dollar is going to decline. As long as the governments of the world are in debt and can print money we’ll have inflation.
I thought we’d see a bottom in the equity markets in February. That has been wiped out by the threat of common stock equity destruction through intervention. Once the intervention ceases and the future value of an equity investment can be modeled we’ll see a broad market increase. 1 out of 4 S&P500 stocks is up over the November 21st, 2008 bottom as they aren’t likely candidates for interventionist destruction.
With the way current policy is going now our market bottom could drag out to Q3, anything beyond that isn’t possible as long as the population and per capita incomes keep going up. If they start going down 0 really can become 0 for everything (-89.6% from the GD is pretty darn close to 0).
Affording children, the real cost is time, not money
Coming from the Bay Area 5 years ago I left behind what seemed to me as a crazy culture. People would be together and married for 10-20 years before having children “because they couldn’t afford them.” From the 1990-92 Consumer Expenditures Survey indexed forward based on the CPI we spend between 7-15k per year per child. This means if you’re an affluent couple and you eat out 10 times a week and switch from a soda to water, you go to Starbucks 3 times less a week, and you no longer get a massage once a week you can afford a child. Those activities add up to ~$6,250 per person annually. Around a third of the child expense is housing costs and most already have a guest bedroom that is a shrine to Ethan Allen used twice a year when each of your parents visit. What it amounts to is are children a priority for you or is that double chai latte?
“But if I don’t have X, Y, and Z, my kids won’t be happy, or well adjusted, or ….!” Those statements are all just excuses to continue living what is comfortable and easy. Change is never easy and bringing a child into your family is certainly a significant change. I’m not a child development expert; I’m just a parent half way through raising two kids but the only way I’ve ever been able to make them really happy is by giving them love and stability. Love comes in a form of letting them know you find them interesting, that you care about their activities, and that no matter what you’re there for them. Love doesn’t come in the form of ensuring they have the fall collection from Baby Gap or that you already have enough money in your savings to send them to college. Love also doesn’t mean not setting boundries or never saying ‘no’. Boundries provide stability as well as saying ‘no’ because it is the adults responsibility to know what is in the best interest of a child.
So the real cost in affording children isn’t money, it is time. I’ve given some of it over the past 10 years but looking back I don’t ever regret not having enough money for them. I do regret not having enough time. So unless your “waiting to have kids” includes saving up a piggy bank full of time to spend with them you’re saving for a false goal.
10+ years of trouble coming for equities
Many people complained about Jim Cramer’s call to take five years of money out of the market this past fall because it put additional selling pressure on equities. Equity prices are much more fickle than the average investor understands. The “current price” is based on the price of the last trade, not the price of any sort of moving volume average. This is why when companies make an acquisiton offer they often offer a 30% or more premium on the current price.
The same upward distribution you run into when trying to acquire a company occurs in the other direction when trying to liquidate large positions. Over the past 40 years the first broad generational equity investing began with the baby boomers and the pension funds created by the post-WWII jobs. Now those boomers are all hitting retirement age and they want to buy a motorhome, they want to golf, they want to lay on the beach. Their pensions and 401k/IRAs have to be able to cover the distributions. In order to do these things they need to sell equities they hold.
Some equities will hold up well, those that pay a large and safe dividend in an industry the pensions and boomers believe will continue to produce results into their retirement years. The days of tons of people fighting to pay for a 30:1 PE on a growth stock with no dividend in sight are coming to an end. If money is flowing out, rather than in, equity valuations will come down to other asset classes (i.e. you wouldn’t pay 30x earnings to buy your favorite local bar).
The recent market crash has many of the gen-X and gen-Y folks looking back to see a nearly flat or even down performance on their equity portfolios over the past 10 years. Even with the real estate “crisis” we’re having now if they would have purchased more real estate in 1999 they would have made a better return in almost every market.
Now with instant access to charts, graphs, and an Internet full of education this generation of investor is going to compare asset classes. The current bankruptcy filings are teaching people owning common, while it might have a higher upside, is last in line to get anything back. For the boomers, the corporate bond market was a black box that only their pension touched. Now anyone can invest in them through a number of bond funds.
While you may never see a 30% growth year on a bond fund, if you owned LEH bonds you got paid something, if you owned common you recieved a nice letter in the mail saying something such as, “if you are a major shareholder over 5.5% please submit this form to get in line after the bond holders are paid off.” For every common holder outside of the major mutual funds and pensions you aren’t getting anything.
Enough rambling for my first real blog entry… when investing look at more than just equities as an asset class or you may find out that a piggy bank would have served you better as a retirement account.
Why another blog?
I’ve started using Twitter this year to share random thoughts with people that seem to be interested. Some of those thoughts are really difficult to pack into 140 characters and I refuse to be the tweet spamming type that send 15 messages to share a larger thought. That led me to this…a blog…topics you’ll end up seeing here in no particular order…
Investing
Personal Finance
Real Estate
Technology
Politics
Religion
This isn’t intended as a news feed, the blog posts will be opinion pieces. The opinion pieces will be G rated and I expect the comments to follow that.
