March, 2018

  • March 26, 2018

    • I was a guest on the Gillmor Gang last Friday hosted by Steve Gillmor and available for streaming on Tech Crunch here. If you’ve never had the pleasure, it’s an hour of discussion at the nexus of technology, business, and current events and well worth seeing.

    For the last few weeks we’ve devoted time to how we all should react to the revelations about Russian intelligence services attacking Facebook during the presidential election. The conversation has evolved over that time, in part because there are new revelations every week and as the plot thickens our response has become more nuanced.

    For instance, when we started the discussion we knew that Facebook had been the advertising medium of choice for the Russians but that turned out to be only part of the story. In the intervening weeks we learned about the role of Cambridge Analytica in stealing user profiles. Technically we’d have to say there was no theft and that at the time Facebook was running exactly as it intended. I don’t know anyone who sleeps well knowing this. But it adds layers to our discussion and recommendations.

    Last week I advocated, as I had in some blogs on BeagleResearch.com that we’ve entered a time when we must seriously consider regulating Facebook and all social media and treat it all like a utility. You can read more here.

    But back to the Gillmor Gang. There was a variety of opinion about what to do and to my surprise, regulating was not top of mind for anyone other than me. That’s okay though. The discussion was lively and exercised points that I had not considered. What do you think? Take a look.

     

    Published: 5 years ago


    We should say this clearly but maybe just once: Not everything Donald Trump thinks or says is whacky.

    The exception that might prove the rule is the western approach to trading with China and Trump’s initiative to put upwards of $60 billion in tariffs on goods emanating from the Middle Kingdom. Lest you think $60 billion is a tad rich, read on.

    Last year, Trump also said that more than 60,000 factories (not jobs) had left the US for China since China was admitted to the World Trade Organization (WTO) in 2001, a claim that is right directionally but that fails to account for factories moving to other places such as Mexico and Canada to name two. But when you round up, the total number is solid. It comes from a US Census Bureau report in 2014.

    China’s tactic on global markets has been decidedly mercantilist meaning its method is to accumulate foreign reserves by exporting finished goods while keeping its markets relatively closed to imports. Lots of nations do this, especially when they are emerging onto the world stage. Import tariffs were even an important part of US trade policy throughout the 19th century and into the 20th until the Smoot-Hawley Tariff Act (1930) contributed materially to the Great Depression. Open markets and global trading have been a hallmark of US commerce strategy for over 70 years but Trump wants to change the status quo.

    More importantly, Trump is also focused on a more important aspect of relations with China, intellectual property (IP) theft, which has been going on for a long time.

    The New York Times reported in 2013, that IP theft was a specialty of the People’s Liberation Army (PLA) unit 61398,

    The hackers were behind scores of thefts of intellectual property and government documents over the past five years, according to a report by Mandiant [a security firm], in February that was confirmed by American officials. They have stolen product blueprints, manufacturing plans, clinical trial results, pricing documents, negotiation strategies and other proprietary information from more than 100 of Mandiant’s clients, predominantly in the United States.

    This is in addition to the other requirements western companies face when setting up shop in China including technology transfers and taking on Chinese companies as partners.

    None of this is news. In “The Great Industrial Wall of China,” in The American Prospect, a liberal leaning magazine, Carolyn Bartholomew noted back in 2009 that,

    In order to provide an advantage for Chinese industries and companies, and to attract U.S. companies to locate in its country, the Beijing government manipulates its currency, showers subsidies on favored industries, provides low-interest loans from a state-owned banking system, tolerates and even encourages the theft of intellectual property, and ignores WTO rules.

    So there in a nutshell is Donald Trump’s not-so-crazy case against unfair Chinese competition, but justifying tariffs is an entirely different matter. The time for this approach to fighting back was before China became a powerful global economy by taking the markets for the goods, not the factories, admittedly on other presidential watches. But all presidents have messes to clean up from previous administrations. Most take this in stride.

    Trump’s approach to solving difficult problems or cleaning up messes, has been to simply wish away the problem by rolling the clock back but that’s impossible. His promises to bring back coal are a good example of how this approach fails. Coal is now more expensive than natural gas because advanced techniques like directional drilling and hydraulic fracturing, have produced a glut. It’s also less polluting. So the odds of bringing the coal industry back to its former predominance are nugatory.

    Similarly, China is now in a position in which it makes a great deal of the products consumers need, which were once made locally. The Chinese took markets, not jobs or factories. They now make things at a fraction of the cost of western goods because their labor costs are much lower. There is good reason to think that production jobs that left first world locations will not be coming back for the same reasons that natural gas is ascendant in power generation. Notably, gas will have a brief time in the sun because the alternatives are becoming cheaper and replacing all kinds of fossil fuel power production and because, in the long run, they are far less polluting. That’s the way markets work.

    My take

    Some industrial migration can’t be stopped because it is a natural part of economic evolution—part of how countries climb the economic ladder. But industrial espionage in which a country makes off with blueprints, strategies, research data, and other intellectual property is different. It steals the future as well as the capital and effort that go into creating the IP and in the long run it impoverishes the victim of the theft.

    A tariff might be proper given what’s gone before and $60 billion per year may sound large—and it is in comparison with the $375.2 billion trade gap between the countries and it is certain to grab the attention of the Chinese. But it has to be part of a larger strategy. Tariffing Chinese goods in general doesn’t make sense for goods that carry no IP developed in the last few decades. Such tariffs only make everyday goods more expensive for consumers without changing the equation. They are like the zero-sum moves in a checker game.

    If the goal is to make trade more equitable then the strategy should include much better adherence to the WTO rules of globalization and an agreement that recommits the parties to fair trade. In a less well publicized move Trump has said the US would file a trade case in the WTO against China.

    But also, other countries are feeling the same pressure from the Chinese that the US feels. So it would make sense to form a coalition with allies to confront China with one voice. But Trump continues to alienate allies at the same rate he antagonizes adversaries (except Putin). This is a chess game that plays out over time and Trump has not shown the savvy or the patience to pursue.

    But this is all vitally important because when the trade war gets going, the Chinese aren’t going to retaliate over consumer items, they’re going for the things that will hurt like not buying our airliners (Boeing), heavy equipment (Caterpillar) and just about anything that emanates from Silicon Valley and environs.

    On the other hand, trump’s negotiating strategy includes making a ridiculously high demand followed by downward negotiation when the other party comes to the table. If so the trade war might look a lot like the steel and aluminum tariffs which builds loopholes for almost all other nations.

     

    Published: 5 years ago


    If you study economic cycles you can watch the evolution of a disruptive technology throughout its lifecycle from a specific product, to a competitive industry. The last phase in the evolutionary chain is often the formation of a utility. For example, over a couple of centuries we’ve seen the evolution of electricity from a curiosity, to a business, to a group of public companies. Along the way there are the inevitable mergers and acquisitions to enable a winnowing field of competitors to achieve the scale needed to compete in very large markets.

    It wasn’t just the electric industry that went through this evolution. The telephone, gas, and cable industries did in their own ways. Local or reginal utilities that provide sanitation and water still dot the landscape too. Banking is in a similar position that is manifests differently. In fact, any industry that attracts the term “too big to fail” is showing signs of utility status.

    When your business becomes so big that it affects large segments of society it can’t be allowed to fail lest it crater the economy or cause massive disruption injuring many people. At that point government has a compelling interest in preventing failure and along with that comes regulation of the riskiest corporate behaviors.

    The latest example to hit the radar might be social media which has completed many steps of the lifecycle with blistering speed in just over a decade. This speed notwithstanding, we are now at a point where what happens in social media affects all of us.

    Regulation is a thorny issue wrapped in individual freedom. But it is also a logical way out of an impasse. The recent interference in the US election, which all the American intelligence agencies have confirmed, is a proof point that social media is now a utility and needs some form of regulation.

    In a recent article in Wired, “Bad Actors are Using Social Media Exactly As Designed,” writer Joshua Geltzer makes the point that popular social sites including Facebook, Twitter, and Air BNB, all provide tools that enable users to find and segment groups that are best subjected to targeted messaging. His point is simple, the bad actors didn’t pervert social media or hack its code. They simply used the tools provided to mount a campaign to upend a US election and there’s evidence of similar activity elsewhere.

    By this measure, social media is now too big to fail; it is too essential to a large segment of society and its potential excesses must be managed so that it does not consume the society and the users who depend on it. Geltzer’s article clearly, but inadvertently, makes the case,

    When Russia manipulates elections via Facebook, or ISIS recruits followers on Twitter, or racist landlords deny rentals to blacks and then offer them to whites through Airbnb, commentators and companies describe these activities as “manipulation” or “abuse” of today’s ubiquitous websites and apps. The impulse is to portray this odious behavior as a strange, unpredictable, and peripheral contortion of the platforms.

    But it’s not. It’s simply using those platforms as designed.

    So, what would a social media utility look like and how would it be different from what we see today? First off, social networks should be regulated with as light a touch as possible. Grandmothers sharing baby pictures shouldn’t have to change their use habits, for example. Second, to achieve positive ends, regulation should be implemented at two distinct levels, the source and the periphery.

    At the source, regulation comes down to access for any person or entity with a beneficial and productive need for the utility’s services. In the electricity markets this means stable pricing for all and a commitment to serve as a common carrier. It wouldn’t be much different with social network regulation; the key is beneficial and productive use.

    Common carrier law began in railroads and shipping. In return for its use of public lands and roads, the carrier commits to serve all parties equally. In broadcast industries (radio and TV), slices of electromagnetic spectrum play the role of roads  that the broadcasters use as grants (licenses) from the people. In transport, the waterways are also owned by the people, so are the roads, and railroads have historically received government help because they provide a useful service to society. It goes on, but you can see that source regulation amounts to giving all participants a fair shot at using the public’s assets and insisting on beneficial and productive use.

    Regulation at the periphery takes on a different cast, notably in America where so much of modern utility regulation evolved. A great deal of peripheral regulation occurs through certification and licensure. People interested in careers involving one of the utilities often serve apprenticeships, learning from a master before earning journeyman’s status. They must also pass tests to prove their knowledge and skill.

    Barbers, beauticians, and other personal services professionals go to school and sit for certifying exams. Other professions are similar. Doctors, dentists, lawyers, and many others must take many years of education, pass tests, and serve different forms of internships before practicing on their own.

    The point here is that we already regulate the day to day best practices of many industries. We do it with a light touch and in the interest of the culture and the society functions quite well despite, or more likely because of, this light approach to regulation.

    My take

    Perhaps the time has come to consider lightly regulating parts of the tech industry, something we have never done. But the age of information and telecommunication, a 50-year economic cycle called a K-wave, is reaching its natural endpoint and that’s often when utility status and regulation has come to the forefront in prior cycles.

    Elevating social media use to professional status, seems a logical thing to do. Establishing a certification or licensing process plus capturing a user’s license number when accessing some of social media’s higher functions would give an uncomplicated way of keeping bad actors out of the networks or at least making them traceable. In case you are wondering this is the basic process of getting a building permit.

    This approach need not apply to lower level personal use. But trying to reach millions of people on a social network is functionally like climbing a utility pole and messing with the wires. For this one should need certification.

    Last point, part of certification in any industry is training in the ethical use of the tools and techniques of that industry. As a society we have not engaged in such a dialog for social networks yet, but one is overdue.

     

     

    Published: 5 years ago


    I’ve recently looked at the changes in markets and companies as industries grow and as a disruptive innovation commoditizes. Generally, prices come down because the innovation becomes commonplace and competitors fight for every scrap causing margin erosion. Eventually markets equilibrate and a monopoly or small oligopoly sets in. Typically, as Geoffrey Moore pointed out, mature markets have three competitors, the leader that gets most of the business, a fast-following challenger, and one or more niche players.

    We can see this playing out right now in various industries. Mature industries like databases have an oligopoly set up with Oracle and IBM leading. SAP with Sybase xxx is one of several niche players along with MySQL and SQLServer. Recently new approaches to data storage have come to market such as no SQL databases that offer a different approach. Amazon has developed an in-house product that has been a discussion topic for people thinking of dethroning Oracle but that’s not likely. More likely is that Oracle and IBM will be the database leaders until the planet no longer needs databases. It could happen.

    On the way to oligopoly we see vendors making mistakes that could cost them their leadership positions. Mature market leaders have figured out how to put customers in the forefront and their solutions look more like a broad array of services than products. That’s because they have come to understand the role of whole product and are willing to do whatever makes sense to keep customers happily engaged.

    There’s one practice, though, that flies in the face of whole product and keeping the customer satisfied. It’s the software audit. Essentially a vendor builds into its contracts the right to periodically inspect a customer’s systems to understand use patterns and to ensure that the terms of its licenses are adhered to. Typically, a contract for so many seats, or applications, or gigabytes can remain under a preset limit but should not go over. If there is an overage the customer would owe a higher license fee.

    All of this seems fair in the abstract but in practice customers resent the intrusion of an audit especially when the audit does not turn up a flagrant violation but instead identifies a possibility of one. Vendors have been known to bill on the possibility and that can cause, shall we say, disharmony in the customer base.

    In the future, the software audit will likely be seen as an artifact of the licensed software era. Subscription vendors and their customers don’t have the same issues because it’s clearer when the customer needs more seats and they make a purchase.

    But the software audit is here today and in my mind, it represents a mistaken approach to revenue generation by mature market vendors. It also opens a legitimate seam for the competition to exploit. Recalling that markets trend toward commoditization and that features and functions tend to converge on a market ideal, the cost of attrition, even in a licensed software situation, declines over time. So, the risk of customer attrition over some aspect of the whole product, i.e. policies and procedures, increases.

    You can see this scenario playing out in the document management space as Nitro, a document management company with a focus on whole product does battle with the leaders. Nitro is not a small upstart. They’re well over 10 years old and have a customer base of roughly 650,000. Nitro differentiates itself on a UI that’s very Windows-like and on price. But it doesn’t simply offer a lower cost approach to document management. Its flexible licensing policy avoids the software audit process. This seems to matter to its customers who want to deploy technology to all members of the company freely, without obsessively checking license allocation or fretting about fines each time a new hire comes on board. For them the audit can be a show stopper.

    My two bits

    Regardless of the size of the market or its installed base, a company needs to grow, preferably faster than its organic rate—when customers grow their business they buy more licenses. But in mature markets growth is a zero-sum game. For one company to grow it has to take customers away from competitors; usually, that means taking from the market leader(s) who have a majority of the customers.

    So the software audit, as useful as it might be for generating incremental revenue, has a downside. It is not the face of whole product that a company in a mature market ought to present because it can easily prompt a rush for the exits. That’s why so many vendors avoid such contention and focus on product line extension and new product development. Those activities are harder to pull off than swooping in with auditors but they are ultimately better ways to hold onto customers and grow markets.

    Finally, you might say that cloud computing with its per-seat pricing can avoid all of this but that’s not the point. A vendor that can adopt audits can also find ways to throttle use and charge dearly for increasing use. The real point is developing modern approaches to customers that generate revenue on actual products and services delivered rather than gotcha gimmicks.

    Published: 5 years ago


    In 1906 President Theodore Roosevelt signed the Pure Food and Drug Act into law. It had been a long time coming and corporate interests had done their best to derail and delay reformers who advocated the contents of the act. The meatpacking industry had been a major focus of reform as was the over the counter drug industry, each for different reasons.

    Meat was unwholesome especially in the warm weather. Cattle were driven by cowboys to railheads in Kansas City Missouri and then transported live by rail to Chicago which became a major distribution point after the American Civil War. Meat packers slaughtered cattle in Chicago and shipped to markets in the east. This prompted the need for refrigerated railroad cars or reefers. At first, reefers were cooled by ice and not necessarily very well. People in the east got sick from tainted meat and Upton Sinclair’s novel, The Jungle was a story about abuses in the industry that led to unsafe products.

    Over the counter drugs contained high quantities of alcohol and opioids and their makers over promised what they could do for patients. Newspapers, which relied on advertising revenues from the drug companies, were enjoined from expressing support for legislation regulating the drug industry on pain of losing their ad revenue.

    Muckraking which we might call investigative journalism today, came into its own and crusading journalists like Sinclair and many others published exposés of abuses that led to the Pure Food and Drug Act as well as the Federal Meat Inspection Act which Roosevelt signed into law together.

    A century later, the meat supply still has occasional problems, but no one tries to hide the truth and both producers and regulators work to correct issues when they arise. Also, producers rigorously test over the counter drugs both for safety and efficacy before going to market. Libertarians and conservatives might want to complain about the added costs involved or the rights of participants in free markets in other situations, but they are largely silent here.

    Today

    The social networking industry today is in a similar position to meat packing and pharmaceuticals more than a century ago. Our news is full of stories such as Cambridge Analytica stealing 50 million Facebook profiles while that company did little to protect its users. The US intelligence services all point to Russian active measures in interfering with the 2016 presidential elections by using the tools available with social networks as they were designed.

    All of this is awakening many people to the understanding that social networks are not free because they collect a fee in kind; namely consumer data which they use to model profiles and sell to advertisers. Some have suggested that in the face of these revelations that Facebook might be doomed or that social networking in general may be. But nothing could be further from the truth.

    Social networks are at the same place that meatpackers and drug companies were in 1906. Regulation was and is a way to enable the people to influence markets in such ways as to not interfere with any single company. Regulations apply equally to all those regulated and businesses should, after a period of adjustment continue as they were in the newly regulated markets.

    My two bits

    Regulation can take many forms. I’ve previously advocated for treating the social networks as utilities and that’s certainly one approach. Another is simply to put  forward legislation like the Pure Food and Drug and the Federal Meat Inspection Acts of 1906. The Pure Food and Drug Act ultimately spawned the Food and Drug Administration which regulates industries without treating them as utilities.

    The history of regulation in the US and much of the west has involved setting standards and fines for violation. Government agencies randomly sample many aspects under their direction and in some cases government meat inspectors work at slaughterhouses. But the regulation and enforcement is largely something that individuals take on because they are good for business.

    The point is that regulation can work well with business and it doesn’t necessarily mean the end of an industry or crippling rules. A level playing field is good for all  and often increased the size of markets.

    Social networks, and the Internet more generally, need some regulation right now for the good of the society they serve. There are approaches and models that we can adopt. The current issues we face are not unique in history and we should heed its lessons.

    Further reading

    Time to call it—the social utility has arrived. That has important consequences 

    The Social Utility

     

    Published: 5 years ago