Continual disruption - still happening in TV and content

One of my favorite things to read about is innovation. For those of you that know me, that's not really a surprise. However, I think that there's a lot of misunderstanding out there about what "disruptive" innovation is. Most people think that apps that modify the way you do something is disruptive. For example, people have said that companies like Kayak and Hipmunk are both disruptors of booking travel. However, the true disruption came from travelocity or orbitz, whichever came first. These sites really did change the way the game was played for booking travel because they essentially cut out both the middleman (travel agents) and the airlines involvement in book flights. Anything beyond that has simply been sustaining innovations. These are innovations that are quickly co-opted by the existing incumbents as it's possible for them to do that. A more disruptive technology for travel would view the process holistically from the moment you booked the trip to the time to returned home from your completed vacation. The site would need to account for getting you to your destination without any sort of delays. In James Womack's book Lean Thinking, they point out the "value add" activity of a flight was only 3 hours, while the total waiting time was over 12 and they didn't include the effort it took to book the trip back in 1995. All inclusive it's likely to be much worse now. Especially the way that airlines measure "on time departure" (leaving the gate on time) which is different than our "on time departure" (taking off on time).

In a true disruptive situation you'll typically see the incumbents resorting to changing laws to keep their supremacy of the markets, we don't see this in travel at all. Where we do see this is in telecom and cable. The image below from Mashable pretty well explains why this is happening.

There's likely overlap between users of Netflix, Prime, and Hulu, but if I was cable TV I'd be running scared. I also would love to see this graphic if you add Twitch.tv and specifically ESPN. I think eventually twitch will be disrupting ESPN and the traditional sports networks out there.

How are the cable companies using legal and technical mechanism to limit access to content on Netflix, Amazon, Hulu, and Twitch? First, the movie industries have absurd agreements with cable companies (providers) giving their services, like Xfinity from Comcast first access to content. In many cases this will translate into something earlier on the subsidiaries of those in terms of networks. Second, cable providers use their control over the network to throttle the internet speeds of these internet services. This is leading them to try to change the laws around net neutrality so that the cable providers don't just become "dumb pipes" that content is passed through but the users don't interact with.

I believe this also indicates that both cable networks and internet providers are being disrupted in a way that they don't understand. They are using every tool they have at their disposal to fight against the adoption of these services, but they don't understand what's happening. Consumers have hired comcast, verizon, and others to provide them a solid consistent connection to whatever content the user wants. Internet providers are trying to force themselves into a middleman role that the users don't want. When opportunities arise that will allow the user to experience content on their own terms. It's clear that cable TV is losing the fight and this will only accelerate as people purchase more tablets and devices like that. Chromecast (which allows people to display things from a laptop/tablet on their TV) is another disruption that Google is providing, Amazon has something similar for their Tablets (which will increase Prime usage by the way). The TV companies are losing and need to figure out new business models to stay afloat. This is where disruption is happening. Not in other spaces.

Amazon's potential army of Drones - what's the point?

Amazon wants to deliver packages to you in 30 minutes via drone. While the convenience might be pretty awesome. I'm not sure how good of an idea this is going to be. I also think that this points to a broader push for Amazon. In the past Amazon has mentioned how they had plans to sell groceries locally and deliver rapidly. This is currently in beta test with only two cities involved, LA and Seattle. Depending on the size of these drones this will make delivery of groceries much easier and reduce the risk for goods to thaw while waiting for the resident to come home and get the groceries. Furthermore, if these drones are really good, Amazon could time the delivery of the groceries based on when the customer wanted them to arrive at their home. Let's say you place the order in the morning, but know you won't get home until around 6:30, you could ask Amazon to deliver the goods around 6:30 so you could just bring them in the house and start cooking.

A few years ago there were some rumors that Amazon was planning on going to brick and mortar stores while everyone else is going more web, web, web. These drones that are in the video do not look like they have the farthest range in the world, which means for a place like my home town about an hour north of Pittsburgh by car and if there was a distribution center in Pittsburgh (there's not, but there is one in Allentown), the drone would need to fly close to 120 miles per hour. That doesn't seem likely for these things. They don't look like they have the speed, they are clearly designed for shorter ranges than that. Additionally, implementing these drones would require significantly more distribution centers throughout the US. Distribution centers work best when there is a need for high volume, high speed, and high variety at least in many distribution models. However, if Amazon were to use retail stores as part of their distribution network and looked to use the stores as the location where the drones would send goods from, this makes a lot more sense. Retail stores aren't really there to be retail stores, but micro distribution centers.

This would impact the types of items that would be a candidate for Air Prime in many locations, for instance cities with Stores only would have a much smaller list of applicable items. Cities with distribution centers near by would likely have any item up for Air Prime that would fit on the drone.

This is still 4-5 years out from being deployed, so why is Amazon showing this off now? Well, bad press recently. There have been several articles that came out this past month about how horrible the distribution centers are in the US.

All said though, I think these drones point to continued interest in providing different approaches to brick and mortar stores as well as grocery stores. I think it will start out small and grow from there. Amazon will likely build out some stores first with a similar function to Best buy where you can pick up in the store. In later store deployments they will have options for Air Prime and pick up in store for certain items. It will certainly change things for Amazon workers and will change the way the distribution centers are managed. They may simply become hubs with a lot more being pushed out closer to the end customer.

Looming battle: Content providers vs. service providers

In my last post about the PS4, I discussed how the PS4 is a long term play and that over time the product will move away from playing directly on the PS4 towards utilizing servers to stream the game to the user. This was an argument to counter many PC gamer's disdain for the specs for the system. Sure, the specs aren't great, but they are a huge advancement over the PS3, which is still able to play, rather well, new games.

Most of the feedback I got on the article basically went "well that's great and all, but the infrastructure isn't there for this in the US." This is extremely valid feedback. AOL still records $500 Million in revenue from dial up connections. The US rates among the worst in developed world for internet speeds and penetration. Of course there's the argument that our country is so much larger, well, the EU as a whole tops us, it's not uniform across the EU, but that still makes it a valid comparison. The other thing to remember, the console won't just come out in the US. Many of these features will work better in Korea and Japan than in the US. Typically Sony has released different features by region and will likely experiment with the sharing features in Japan before rolling it out to the US, where Sony knows it will have infrastructure difficulties.

This discussion raises additional concerns though, infrastructure isn't just about the lines in the ground, but also the structure of the service providers that allow access. In the case of the US, not only does quality and speed of the connection vary wildly but we also have more restrictions on the amount of data we can download than other countries. For a typical family you end up buying the internet 2 or 3 times at the minimum (smart phone access per family member and then the main house connection). Each of these connections likely has a different maximum for downloading or uploading with fees for going over this.

This creates a lot of difficulties as we don't always know how much bits a specific file will use as we access it. In many cases, it likely drives consistent under utilization of the service do to excessive fees and user dissatisfaction for those hitting the cap. Americans are starting to cut the cord in record numbers, my wife and I don't have TV, just cable internet; I have a lot of options without Cable. This is going to start increasing the rate of frustration users have with caps. I typically watch live streaming video in 720p while my wife surfs the net and watches a show on Hulu.

I have absolutely no idea how much bandwidth is being consumed on a typical night. There is no easy way for me to measure this or plan for getting close to a cap. Furthermore, both my wife and I use our phones to access the internet, listen to music, watch videos, and play games on our phones. Again, all of these use bandwidth and likely push us against our cellular plan. Sure there's meters for these, but they are notoriously inaccurate.

This issue with be further exacerbated by the proliferation of cloud services like Drop Box, video sharing on YouTube, streaming new services all the time, and the eventual goal of offloading computing power to the cloud. The measurement of these services will be extremely difficult and planning for how much data these services will require will be absurdly difficult at best for the average user. It is likely that these services will push users over the usage caps on a monthly bases.

I think that we need to start looking for another solution. I think that Google Fiber is a start, it would make sense for Netflix, Amazon, Dishnetwork, Microsoft, Intel, and other content providers to join a consortium that will introduce a new service provider to attack the incumbents. I have heard that Dish is currently working on creating their own system with Google or some other company, I think that this could potentially shake up the industry and allow users more options. There are going to be a wealth of new services that require more and more bandwidth and higher speeds. If these content providers want users to be able to access and enjoy their services they need to challenge the status quo to enable their customers.

Tracking the right metric

Last week I wrote about the Facebook IPO and how I felt that for the company the shift to stock price metric tracking was a big deal. I said that there has been a shift from what Facebook was and could be to the broader public to how all of its actions impact the stock price for the company. Today, in an article on Forbes they published an article about the impact of what you measure and how it impacts later choices. One of the things they didn't mention was how frequently this measure or metric is reported. These all matter.

Looking at Facebook, I think it's rather clear why Zuckerberg has publicly stated that he doesn't care about the stock price of the company. Stock price is continually reported and when major milestones are passed, either in the positive or negative, everyone is talking about it. Apparently, Facebook dipped below $30/share today. Is this the end of the world? No, but it does mean that a lot of people have lost a lot of money.

Let's look at stocks. Do they truly reflect the value of a company? I, personally, don't think so. There are so many factors that shift the price of a given stock in a week, that it's impossible for the value of the company to fluctuate in such a manner. However, the price of a stock does impact what a business is able to do. Companies are able to leverage their stock values for loans and interest rates, which means that a company can suddenly gain or lose market capital if the stock market swings for something completely unrelated to them and investors sell of their stock.

Despite the fact that, at best, there's a loose correlation between the actual value of a company and the price of its stock, CEOs are held accountable to this metric by investors. Now, maybe some CEOs do ignore the value like Zuckerberg plans on doing (I've heard Jeff Bezos from Amazon does), however, when it's continually reported and discussed it likely will change some behavior even if the CEO does their best to ignore the stock price. Even if the CEO does ignore it, in many cases the board or the investors will not. They may take serious action if the CEO does not work to ensure that their metric, stock value, continues to increase.

However, this may drive the wrong behavior. Tracking the wrong metric may be answering the wrong question. What increases our stock price may not be the same answer to what keeps our company competitive. A company that reduces work force to cut expenses for the end of the year, may seriously be hampering their ability to compete over the next few years. The change will likely bolster the performance of the stock in the near term but will likely lead to greater drops in the medium or long term.

Company management should not solely be measured on stock price alone and neither should a company. As much as I dislike Facebook and Mark Zuckerberg, Facebook is a company that actually has more value than simply its bottom line. It is able to create new networks and new places for activists to work. Now is this likely to continue? I don't know. Could another company come along and beat them at it? Definitely. That's why Facebook bought Instagram and will likely buy other companies that could threaten their market space.

Free-market, Small Government and Regulations

The free-market has been used to argue against regulations and for small government for years. However, I believe that the major supporters of using the free-market argument are disingenuous in their application of the argument. In addition, the free-market is a flawed theory which needs to be revisited by neoclassical scholars and adjusted.

The free-market theory comes from the idea that there is an invisible hand that guides the market towards equilibrium between supply and demand. This assumes that once the equilibrium is hit it will stay at that point until there is some shock to the system which would find a new equilibrium. Each time that there is a shock, the invisible hand would push the market into a new equilibrium. This idea came as a side comment in the Wealth of Nations. This idea has become enshrined in the minds of neoclassical economics in a manner that Newtonian Physics was presumed to be accurate. In both cases the theory is incorrect. Relativistic Physics has replaced Newtonian, but in Economics the free-market is still the prevailing mechanism for policy creation. There has been no evidence for an invisible hand at all. In fact Metcalf created the theory of a networked economy which argues that the value of a good becomes more valuable as more people use it. I've mentioned this in the past. Essentially, this will prevent any equilibrium from every being found as the price can increase and people will still adopt the networked item because it's becoming more valuable to the user. Or the price can remain constant even when it should drop for other factors such as a reduction in cost of production. A perfect example is the iPhone. According to research Apple has a whopping 72% margins on the iPhone, even if production was moved to the US Apple would still make 42% margin on the iPhone. There also is an over production of the iPhone and strong competition, which would indicate that the iPhone should drop prices as they are capable with that large of a margin. This market has a great deal of competition and has a large number of companies producing, which indicates that it Apple should be under pressure to drop prices. However this isn't happening because of the networked value of the iPhone. There are a huge number of apps for the phone, the apps are high quality and the product works well with other iPhones. The market has had no impact on the cost of the iPhone.

However, free-market champions would look at any effort to change the labor practices of Apple as wrong headed and regulation that isn't required. The Market isn't demanding any change to labor practices because the market can bear the current prices and the demand indicates that people don't care about labor practices. However, it's well known that there are no alternatives to Apple's iPhone that are produced in an ethical manner. So voting with your money wouldn't actually work here. The problem arises because there is something of a monopoly in the manufacturing of the smart phones in FoxConn. In this case there is a market failure. Which is something that neoclassical theorists argue cannot occur. The market cannot send a signal to firms because there is no mechanism in which the market could send a signal. This is can be understood if you view this industry as a networked economy. Where you see the ties between manufacturers and handset companies, which would show a massive connection to FoxConn.

Efforts to regulate the manufacturing of devices have been argued as the reason for moving the manufacturing to other countries. However, this is not the case in the case of Apple, as they would still have huge margins. It's because the company is attempting to maximize profits, not reduce costs to be profitable. The same arguments have been used to argue for smaller government. Saying that since there are no market failures the government should not intervene in the industry.

The unfortunate thing is that these arguments immediately disappear when it comes to protecting the profits of record industries. The same free-market advocates then move to argue that intellectual property must be protected. Essentially, creating protection for a specific product through IP causes a market failure and prevents the market from operating at its most efficient because there are not other competitors in the market. Creating IP requires a huge regulatory framework from the mechanisms of registering, logging complaints and prosecuting actors that infringe on the IP.

This type of industrial policy is typically derided by the small government fans, as it is a type of regulation that selects a "winner" (IP owners) over "losers" (non IP owners). Which may be fine. However, whenever this selection pushes our government to select a winner (Music) over the fastest growing, possibly only growing, part of our economy (internet based companies) there is a serious risk to the future. As I've mentioned before these laws represent huge risks for innovation.

These laws are SOPA and PIPA, which I've discussed extensively. However, the next round of internet regulations come in the form of CISPA. This bill, which requires allows companies to share extensively with government agencies. This type of sharing of user data and information about the activities going on at the company would not go over very well from the the free-market advocates if this was a request for data about customer data for car dealerships or steel mills. Essentially, this is going to increase the cost of doing business in the US. This may prevent companies from working in the US and prevent innovation. If I was to create a company that dealt with social data I would not want to do so after the passing of this bill. It would be likely that I would be blackmailed into giving the government data about my users that I had no desire to give them.

The internet is the perfect example of a networked economy. Facebook's value comes from the fact that it has a huge user base. This is true for Google, Amazon and Instagram (List of companies that support CISPA). Without the users the services is literally worthless. With the users a company without any revenues can be worth $1 Billion (Instagram). The difference between this bill and other bills like SOPA and PIPA is that the agreement is bidirectional. The government will likely help Facebook and Google fight Chinese attacks and give information to each other about the activities of online hacktivist groups like Anonymous. It is likely that 4chan will end up giving over IP data and other information related to anonymous and Anonymous users.

This is regulation that the internet doesn't need and will stifle innovation. The government already has these powers, which maybe why the Obama administration is opposed to CISPA. It is also ironic that Obama plans on sanctioning countries that use Tech to abuse human rights specifically committing genocide. A whistle blower has recently announced that the NSA has intercepted 20 TRILLION emails and likely has copies of all of these stored somewhere. The passing of CISPA and any other law of similar persuasion  would likely protect companies like AT&T from future lawsuits for being complicit with these activities.

For devotes of the Free-Market these laws create market distortions and will cause serious harm to innovation on the internet. For people that understand networked economies, this will greatly undermine the value of these networks as users will likely change their behavior to mitigate the amount of information the Government can compile on them. CISPA and its sister laws SOPA and PIPA represent big government actions attempting to control and regulate industries that do not need to be regulated. In this case there is no market failure that needs to be addressed. Privacy is something that the users have been pushing for and Facebook and Google have steadily improved on those accounts. Surprisingly industry is doing a decent job at regulating itself. Finally, regulations being pushed by advocates of small government and free-market smack of hypocrisy and a lack of understanding. These laws require a deep understanding of the internet and how the market of the internet works. Without this understanding terrible laws will be passed that will damage our privacy and freedoms. For the issues that this law would protect from there are other methods that could be employed to gain the desired results without passing laws.

Contact your congressional members to fight against this bill.

Ubiquitous free high speed wireless: Computing

In my last two blogs, Government and Business, I've discussed some of the impacts on our society of ubiquitous high speed wireless internet. In this post I'll look at the future of the computing industry. I think that this industry will go one of two ways, or perhaps both at the same time. The first route is obvious and is already happening, the second route will probably begin as a backlash to the first route.

The obvious route is cloud computing. As I've said we're already going down this route. The best example of the speed of this transformation is the Amazon Kindle Fire (all three different links). Basically, we will be using less powerful, but still growing in abilities, equipment and pushing the more processor intensive applications out onto a server in the cloud. This will most likely be owned by some private organization. Amazon's Fire is a great example of this because it provides the ability to browse websites at a much faster rate than what's allowed under current network speeds. Even with high speed internet this may continue because it'll fit the website to your screen and make it even faster than over the high speed network.

However, many people are skeptical of cloud computing. There is a sense of a loss of ownership. You become locked in to a specific firm to provide the required services. End User license agreements change frequently and your true ownership of the data and information you place on their servers can change unexpectedly and in ways that aren't in the favor of the users. Additionally, it's been acknowledged by both Google and Microsoft that all data in their cloud servers are subject to the US Patriot Act. This raises privacy concerns for the EU and firms using cloud services.

I think that these concerns will drive another type of cloud computing. I think it'll be something like a personal cloud. It will be similar to working with both a desktop and a laptop at the same time and remoting into the desktop from the laptop, but it will be done seamlessly and transparently. The ownership of the data will be clearly yours and the power will effectively take a phone or low power table and turn it into a fully powered desktop computer. This way the cloud won't be out there and will be easily controlled by the end user. You don't have to worry about the Patriot Act or a company going under, changing rates and other issues like that.

Both of these changes will create disruptive changes within the computing industry. The Kindle Fire is on the cutting edge of this. I fully expect Amazon to create additional applications that will run on the Amazon cloud system. There's no reason not to expect this. It will shift how apps are developed. It will also change who is in the game of creating computers. Dell, for example, will continue to have a major hold over both servers and personal computers, however as we move away from laptops to tablets and phones over time Dell is going to fail in this market. They have been unsuccessful at every attempt to enter these markets. There will be a shift in the players in the market.

These systems will only work with ubiquitous internet connection. They will become more effective as the network speed and capacity increases. Users will become more willing to use the systems as the reliability of the systems increase.

In my opinion these changes will fundamentally change the way that we look at computers. The way we interact with computers and how we feel about the usage of computers. Today they are everywhere, but in the next few years I expect them to become more prevalent as we are able to offload high power demanding applications off of our phones and onto powerful servers.

In my next blog I'll discuss some overall societal changes.

Amazon's Silk

Interesting read on Tech Dirt on Amazon.com's Silk browser. They note that it's a copyright infringement suit waiting to happen. If you're too lazy to read the article, basically Silk will copy whatever website you go to onto it's servers so it can send you a compressed version of it. For instance if a website that you're on has a 3mb picture they'll send you a 50kb picture instead. This does a few things. First, it will help relieve congestion on cell networks because smaller pieces of information are being sent. Second, it will save you data if you don't have an unlimited data package. Finally, it could violate copyright. Why? Because it's copying everything from a website and then sending you the information from a different source. Not only that, but it is effectively altering the picture they are sending you. I'm not sure if there have been any copyright cases based on compressing the quality of a picture, but for all intents and purposes it's altering the picture. It probably should fall under fair use, but you never know some one will probably try to sue over that.

There are some other issues to consider too. The browser has predictive capabilities based off of aggregate users actions. This is actually fairly similar to what Facebook is doing, but there are no implications for ads with Amazon (at this point we don't know if they store individual user statistics). The example they give on the website, is if you go to NYTimes.com and a high percentage of users then click on the business section Amazon will pre-load this information into their severs. This could have an impact on big websites' server loads as well. They could potentially be hit twice for a lot of visits to their site. If Amazon predicts incorrectly, then it will hit the server at least twice.

Another interesting consideration is related to ad revenue. Let's say users of some website like, I don't know KBMOD.com, always visit a YouTube account after reading the front page, let's go with InfiniteSadd, which would then auto play the video that's on top. This of course have the ad pop up on the bottom. Now the question I have is in these situations would this count as a click, or would the ads start to filter out views and click throughs from Silk? The situation, I presented is unlikely as there's no direct link from KBMOD to InfiniteSadd's user profile. But's easy to image that it could work that way.

I'd really like to know more about the user statistics that Silk will be collecting. Since the browser is going to be on their Fire device (who knows could also be an update for older Kindles as well), Amazon will know who is browsing what you are browsing and may actually keep that information in your account to predict your behavior better. I don't see any reason why they couldn't collect that data. I would imagine that it's very technologically feasible to use a larger aggregate dataset for websites you don't frequent, but for your most commonly visited websites for Amazon to have enough usage to figure out where you're going to go next.

I think the browser is a great idea. However, I can also see this turn into another way for Amazon to better target your recommendations. If you are on your Fire and they see where you go, then they will also know what other products you might be interested in that you haven't bought through Amazon before. If they know what interests you then they can put those into your "Silk based recommendations." Now there hasn't been any talk of that yet, but since they are selling the product at a loss they need you to buy a decent amount of product to get a return on their investment. I've seen two values, $50 and $10 losses.

Keep your eyes open for news on this, it could be a copyright and privacy issue before long.

Innovation and Software Patents

Whenever a new type of product is released there are a lot of difficulties with intellectual property. This is being played out in biotechnology and software. As recently as last year it was possible to patent human genes in the US. See this link for the recent verdict against it. The ACLU also had a write up from 2009 when this case was still ongoing about the history of genetic patenting. Software is another case of this. Many people argue that since software is an algorithm or series of statements that leads to a result it should not be patentable. This makes sense as mathematical proofs are unable to be patented. The argument is that for proofs these are discoveries and more natural processes than creating technology.

In the EU it is not possible to obtain a software patent at all. They claim that with software there are multiple different methods to obtain the same output. Software patenting is a very recent trend. The most famous example is the Amazon.com one-click to buy button. Which, if you don't know what it is, basically allows you to store an address and a credit card and automatically buy whatever product you're looking at. Fairly simple right? Well there was a lawsuit against a major competitor, Barnes and Noble about this in '99. Some how this patent managed to survive the re-review, even though it's a fairly obvious idea and could be implemented in about a billion different ways. On the billions, I'm not even exaggerating. There would be so many different interactions that could make the actual implementation totally different. These range from database types, information request, how the data is actually stored in the data base. There could be nothing similar between the implementation at all, yet Amazon ones all the methods to do this. In terms of patents this is effectively an amazing patent.

Let's put this more simply. If software patents had been allowable in the 70's when software first started to take off we would be living in a different world. BIOS have been owned by IBM until 1990 or so, which would have made manufacturing computers a two horse race between Apple and IBM. Microsoft or Apple could have patented the Operating system, and then the graphic user interface. IT innovation would have been non-existent. Think of this, some one could have patented data sorting. There are a many different ways to sort data in the CS world and all of them would have been covered by a single patent. Then some one could have decided to patented sorting on a multi-core computer (by then sorting as a patent would have expired).

Software is more like a mathematical proof than it's like inventing the computer.

Innovation in the software world has been amazing because it has been something of a free for all. However, there are drawbacks to this lack of IP protection. In the most recent version of iOS, iOS5, Apple has been accused of lifting many of it's new "innovations" from apps that have been rejected from the app store, or that have been selling in the jailbroke iPhone app store. Here's the link for the article. How do we deal with cases like this, either Goliath stealing from David or David stealing from Goliath? There needs to be some sort of protection.

Potentially copyright should cover this, or a registered design. Perhaps in the case of the app stores a non-compete agreement should be signed if the app is rejected by Apple. Meaning Apple won't steal it. However, there is no easy solution. Software design thefts are going to be very difficult to manage and deal with.