Wednesday, October 31, 2007

Turtles All the Way Down

I had a dream last night about the protocol stack. Now, don't get me wrong, I love the idea of the protocol stack, but it wasn't that sort of dream.

Did you ever read George Polya's How to Solve It? I read this book when I was young and it introduced me to the idea of a heuristic--a generalized problem-solving approach. Polya's book has descriptions of a long list of heuristics, it's pretty amazing. You and I spend a lot of our time trying to make sense of complicated situations. Heuristics can help order the problem and suggest a solution approach. The idea of the protocol stack is one of my favorite heuristics.

Why was I dreaming about the protocol stack, aside from the usual warnings from my unconscious to get a life? The protocol stack clearly shows that each platform is an application, and vice-versa. For instance, a web site is an application on a platform: the web browser. The browser is an application on the HTTP platform. HTTP is an application on the TCP platform, etc., all the way down the stack. (And, to those who say there must be some bottom layer that is pure platform and not application, I say "very clever, but it's turtles all the way down.")

When I was at Prodigy, some twelve years ago, we were in the middle of the switch from closed network to open network. Prodigy as an application was forced to become Prodigy as a platform. Prodigy had to reinvent itself as an ISP.

This change slightly preceded the change from web browsers being "closed" to "open" (they were never quite as closed as the walled gardens of Prodigy, AOL and Compuserve, but there major players certainly tried their hardest to make HTML proprietary and otherwise embed their version of the browser as the standard.) It seems the each layer of the stack starts closed and becomes open.

So, the dream was about openness climbing the stack, starting way down and working its way up. The physical/data link layer (telecom) was closed and became open, then the network/transport layer, then the session/presentation layer. Since then openness has been climbing the application layers (the OSI model, since it's a network model, doesn't bother to subdivide the application layer.)

What happens when a layer opens? First there is a huge amount of activity and attention. Then it becomes commoditized and disappears from sight. Fifteen years ago I followed the gyrations of the data link layer with great fascination: wondering when SS7 would be rolled out, would ATM or packet switching win? Huge investments by the telecoms were at stake. Then decisions were made, a path was chosen and I couldn't tell you now who runs the backbones and how. I don't need to know.

So, here we are, several tiers into the application layer, talking about social networking opening up. The New York Times reports a rumor that Google is trying to organize an alliance of Everyone But Facebook to create standards for application developers. This illustrates a general principal: once application openness becomes a virtue, there is a race to be the most open, resulting in a commoditized landscape of open platforms. There must be people at Google smiling at the collosal joke they just played on Microsoft: gaming them into valuing Facebook at $15 billion and then turning around and showing it up as AOL circa 2000.

The opportunity now moves from the commoditized platform up one tier, to the applications that ride on the platform. In this case, the widgets.

Tuesday, October 30, 2007

Better than Precious Ointment, Indeed

I was talking to an acquaintance recently who harbors serious doubts about capitalism. So much doubt that she can't imagine any positive human characteristic that can survive contact with the corrupting touch of big business. I said to her that the scaffolding of capitalism is trust. She scoffed.

No one understands the limits of capitalism better than a long-time capitalist, and maybe someday we'll be smart enough to create a better way to allocate capital than the invisible hand. Until then, I think that our basic human impulse to be true to our word is what makes our economy possible.

Most contracts in the business world are for a much lower dollar amount than the legal cost would be to enforce them. If you do business with someone who's not trustworthy, you'll eventually get stiffed. When you do, there's not a financially rational response other than to grin and bear it. And not do business with that person again.

Given this, it gives me faith in human nature to observe how infrequently people renege on contracts. The only explanation, imho, is that most people are basically trustworthy. The few that aren't, that consider their financial gain more important than their good name, should be avoided , no matter what they promise you.

Monday, October 29, 2007

Just Don't Look Down the Barrel When the Fuse is Still Smoldering

I've been remiss in writing, I know. What can I say? Income before pleasure.

I've bought into widget mania. I'm a little late. I recently realized that one of my persistent professional problems is that I like to work on things that should happen, rather than things that are about to happen. The bets with the steeper odds pay better, on average, because in business the vig is on the side of the gambler, not the house. Steep odds have more vigorish, percentage-wise (this is true, isn't it, always? I'm sure there's some sound financial reason for it that every actuary knows and I don't.) The flip-side is that my ideas have sometimes taken longer to play out than I expected.

But sometimes things that are on the verge of happening hang fire and then I'm tempted to get involved. Widgets have been with us forever, not just since Facebook opened up their platform. Actually, I'd like to appreciate Richard MacManus over at Read/WriteWeb for his post "Widgets are the new Black." A quote:

Over time I expect the big media companies will enable this kind of functionality [the ability to embed widgets] in their platforms too... That kind of mini-app within an app is where all this is headed, from a product perspective. The bigger picture is that it opens up more opportunities for developers to leverage others platforms, and users to get more and varied sources of content.
Note that this was in June 2006, almost a full year before Facebook figured it out and did exactly as he predicted.

Wednesday, October 3, 2007

I Like Being a Contrarian

So it's a little disappointing to me that so many people agree with me.

Here's Paul Kedrosky on why Google's stock is trading up as investors anticipate a downturn in ad spending.

I'll have to find something else to obsess over.

I don't agree that Google is going to $2000 (or $1000) anytime soon, as Blodget predicted. (But I think most people who were outraged by his post didn't really read it very well.) The problem is, for Google to get to $2000 per share (at least in real terms), it would have to have a majority of the advertising spend in the world flow through its system (assuming they continue to be mediocre in every other line of business except search and being an ad rep.) I don't believe that will happen, because there's just too much money at stake for someone else not to figure out a way to take at least part of that market. No one gets to completely dominate a lucrative market without some sort of rationale for monopoly.

What's the Google monopoly rationale? Brand? Spending a few tens of billion will build you any brand you want, and if the result is a several hundred billion dollar market cap, it would be worth it. (Hint, hint, IAC.)

Technology? Google's technology is good, but it's not magic. Some 23 year old will think of something much, much better within the next five years. That's almost a truism.

Consumer data? Well, maybe. But if that's the case, I predict government intervention sooner rather than later.

Lock-in? Placing an ad through a Google competitor is just not that big an increase in work. And, frankly, the last thing the ad agencies (who still place most media dollars) want is a single provider: it makes them superfluous.

Network effects? I don't see any, but maybe I'm being blind.

Falling long-run marginal cost through the output range? No. eBay has that, but not Google. Or, if it does, it's de minimis compared to the price.

I don't think Google has the characteristics of a monopoly. I think that no one has come up with a better product yet. That will happen soon, if history is any guide.

So, my prediction for the maximum rational Google stock price? No more than $1000 per share. (Note that I put "rational" in there to cover myself.) Of course I sold my just prior to Blodget calling for Amazon to go to $400 in 1998, based on similar logic. So, my recommendation: when Google gets over $1000 per share, move all your money into TIPS, the bubble has become unsustainable.

On a different note: I completely agree with Blodget that if you are putting your money into individual stocks (and you're not a professional stock analyst) then you are an idiot. Or sadly divorced from reality, whichever. I recommend Vanguard's and Fidelity's low management fee, broad-based index funds. The fact is, the people you are buying your Google stock from invariably know more about it than you do and they have decided to sell.