Mac Making Inroads in Corporate Computing? People are Waking Up.

I've long believed that one needs to expect the "impossible," and if events in the financial markets over the past several months teach us anything is that the impossible is not only possible, it is inevitable. Consider corporate use of the Mac. This idea has been pooh-poohed at every turn, and such dismissive, pedestrian analysis by "analysts" has simply blown my mind. In fact, I wrote a post about six months ago titled Apple and the Enterprise: In 20 Years, "Who Would Have Thought...?", where I challenged conventional thinking about Apple's prospects in the enterprise and assessed the threat to PC-based platforms over time as being increasingly acute:

I know from my own experience in my company how this transformation takes place. We started out being a Dell/Intel/Windows XP Professional-based shop. Then our developers needed better machines, several of whom had Macs at home, and requested hi-test Mac machines for development. They loved them. Told everyone. Then anybody doing graphics/visualization wanted a Mac. Then anybody in a client-facing role who did presentations, online demos, etc. wanted one. Now pretty much everybody has one. It has become "the" supported platform in my company. And it happened in a stealthy, inside-out way, where a core of passionate Mac users got the ball rolling, showed others how awesome it was after which people were beating a path to my desk asking for one.

So change can happen quickly within SMEs. Yeah, we're not talking about Deutsche Bank going Mac tomorrow, but as the PC user experience degrades and/or requires new hardware, and as more and more grass-roots Mac users begin speaking up, some change - material change -  will invariably take place. First in small, semi-autonomous groups. Then in larger groups. And then it becomes viral. I saw this movie with the Blackberry phone. Early adopters were supported by IT in a one-off, kluge way, told others how awesome the device was, a wall of demand was created, and finally the Wall Street firms caved and properly supported the device on an enterprise-wide basis. The same thing can happen with the Mac. And don't tell me that change can't happen and that Apple is out of the enterprise game. Because it can. And because it's not. Really.   

My analysis was based upon viral consumer use bleeding into the enterprise, chipping away at existing platforms and demanding new types of support until it becomes a full-fledged, fully-supported alternative. 

Fast forward to today: Computerworld ran a story titled Macs on the network: Time to panic?, which approaches the threat to PC supremacy from a similar vantage point as my March 2007 post:

Yet as the consumer market begins to meld with the corporate world even more, and employees expect to use their preferred gadget (and operating system) for work and home life, the Mac could make inroads at large corporations.

The facts reveal a coming resurgence. Apple sold 36% more Macs in the second quarter than the same quarter last year. The company has sold more than 1 million iPhones and 110 million iPods to date. There also just seems to be "something in the air" -- or at least the blogosphere -- suggesting a Mac resurgence. Blogs such as Engadget.com post about Apple constantly, and even IT analyst firms that have usually downplayed the Mac as "niche" are talking about the platform in the corporate world again.

"We expect that much of today's IT infrastructure is going to be turned upside down by the invasion of consumer technologies," said Andrew Jaquith, an analyst at Yankee Group Research Inc. in Boston. "Consumerization is going to make IT's job harder, and platforms like the Mac are going to become increasingly common, in many cases in spite of the wishes of management."

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If Jaquith and others are right, it's the consumer who will bring the platform into the corporate world and, it seems, force network managers to support the operating system.

Consumers driving change in the corporate world. Not really surprising, since corporations are made up of - what? - consumers. And if those consumers have more fulfilling experiences using different types of hardware and software at home than at work, they will push for change at every opportunity. And corporations can only fight against this rising tide for so long, especially when a change might involve extreme short-term pain but bring a host of long-term benefits like better usability, better integration across programs and enhanced stability. I've said it before and I'll say it again - listen to the people. They know how best to do their jobs and complete their tasks. And the computer of choice for an increasing number of these people is the Mac. And corporate adoption is simply the next logical step of Apple's growth. How long it takes I don't know, but this previously impossible thought is nothing if not inevitable.

Gaming Consoles are for Playing Games; All the Rest is Flash

Well, well, well. "Window to the living room.""If we build it they will come." These phrases and others like them are the stock in trade of my friends over at Microsoft and Sony. Build a big, powerful, muscle-bound machine with a billion features and people will be willing to pay a premium price for all this added functionality beyond gaming. No, I said. People who buy gaming consoles want to play games. I've been writing about this for 10 months. Sure, online games are great. But HD-DVD, Blu-ray, etc., etc., etc., for $500, $600 bucks? I said "You're limiting your market and strictly catering to the hard-core gamer. No, Microsoft and Sony said. You don't get it. This is a long-term strategy. Our customers will get it.The problem is, according to a recent NPD survey, that they're not getting it. Not at all. This from today's ARS Technica:

The Xbox 360 and PlayStation 3 consoles are marvels of technology. The PlayStation 3 features a Blu-ray player, the ability to stream video and music from your PC, and it's a very impressive upscaling DVD player. The 360 has a robust selection of movies and television shows you can purchase and rent through the Xbox Live service, and with VGA or HDMI connections it will also upscale your DVDs. For some gamers, these functions go a long way towards justifying the high price of these systems, but a new study from the NPD Group suggests that not only are people not using these functions, they're not even aware of them.

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It's apparent from the study's results that one thing interests the majority of consumers: games. The dueling next-generation HD disc formats, the ability to download content, and even high-definition graphics don't seem to matter to the majority of the game-buying public; if these figures are reflective of the wider market, all those features are being roundly ignored by most gamers.

When you take another look at the three next-generation systems through this filter, it becomes obvious why the Wii is in such a dominant position. It's the least expensive system, and all the added features that make the extra cost of the 360 and PS3 good values to the plugged-in aren't swaying the mainstream buying public. With constantly shifting hardware configurations, falling prices, and the HD DVD/Blu-ray fight still going strong, Microsoft and Sony may be sending the message that they're too complicated for the average gamer, while Nintendo's game-first attitude and strikingly lower price point may be exactly what the majority of console buyers want.

Doh! Not exactly what the pooh-bahs at Sony and Microsoft want to hear. Gamers want to play, what, games? Not to be an I-told-you-so guy, but here is what I wrote four months ago on this exact topic, building on my earlier thinking from last fall:

Fast forward to today. Both Microsoft and Sony are offering super-premium versions of their products, more firmly cementing their bets in the multimedia space. Hard-core gamers seem willing to pay for the high-end graphics and extra functionality, but what about the casual gamer? They seem to be much more in tune with the features, functionality, usability - and price - of the Wii. Nintendo has clearly struck a chord with the everyman, someone who just wants to step to the plate, bowl a game, smash that serve or share with their friends. Nintendo is about accessibility, ease of use, value and fun. Theirs is not a holy war against a competitor, but a quest for understanding and acceptance from their market. THE market. The market where you can sell 100 million consoles. The market that provides you with the foundation to layer on additional features as technology costs continue to drop and even more games are developed for the platform. Microsoft and Sony are battling it out in the trenches. Nintendo isn't playing their game. Interestingly enough, they are clearly winning. Just look at the stock price.

Sheesh. Kind of the way it has played out, huh? Now I know that the mucky-mucks at Sony and Microsoft will pooh-pooh this survey as they do most other forms of market feedback, but that's ok. We know the truth. The market has spoken. The only question is, who is really listening? In one word: Nintendo.

Do Community Models Mirror Search Models?

When I think of "search" I think of two models: general and vertical. General search is Google; vertical search is Kayak.com. Google is good for surveying the universe; Kayak.com is good for targeted, accurate, up-to-date travel deals and information. A research tool for helping you decide to go to Mars instead of Neptune? Google. An application for helping find the best times and fares for hopping a ride on the next intra-solar system probe? Kayak.com. So you get the picture.

Communities, however, raise some deeper issues. Communities are not just about fact-finding and getting something tangible; they address a far greater range of issues. While one might consider Facebook a broad-based community a la Google in search, as it is populated by students, entrepreneurs, professionals, professors and many others types of users, there are countless more narrowly-focused communities based upon specific areas of interest, i.e., pets, technology, bereavement, tattoos, whatever. But my question is: Google is great for general search, and vertical search engines work well for more targeted inquiries. But do we want more from our communities? Do we want communities that are effectively the intersection of broad-based and specialized, where those with whom you interact on a more general basis are also able to connect with you on more specific issues as they arise, be they business-related or personal in nature?

It seems to me that, in the off-line world, communities are great when people need help or are in crisis, but are less effective when things are ok. I've heard from some clergy about this issue, where they feel good about how their communities can rally around a member when they've sustained a loss, but feel less effective and connected to their membership on a day in, day out basis. Something seems inherently lacking in this model. It is great that communities come through when the chips are down, but don't people benefit from community even in the absence of crisis? Or does one need to say either "I'm in crisis" or "I love my pug" in order to the power of community to kick in? On a personal level, I felt tremendously supported by my blog and Facebook communities in the wake of the loss of my friend, about whom I wrote two weeks ago. And I can't tell you how much this meant to me. But after that outpouring of support, then what? Should there be a then what? Or is that simply an unfair and unrealistic expectation to have of the community? I don't know.

People have a need for affiliation, no doubt. And I think this is part of the reason why people join communities in the first place, regardless of whether the motivation is ostensibly personal or business. One of the most amazing things I heard during my friend's funeral is how her different communities came together as one during her crisis, and that she hoped one of her legacies would be the melding of these communities into a whole. And not just because of her illness, as this was simply a catalyst, but because her friends were all good people with lots in common that could help each other get through the pain of her death but to also move forward in life together. A beautiful, simple goal. But is it realistic and is it what members of this newly-formed community really want? I'm not sure.

I find myself unusually inarticulate around this issue. I just feel that something is lacking in the way we are currently defining "community." Is there something more? Or do I just want something more? I've got to figure this out.

From the Mailbag: Why Is Vertical Integration Working Today?

One of my readers recently asked a very provocative and interesting question concerning the recent success of certain vertically integrated business models.

The razor/blade post really got me thinking back to something that's been discussed at great length in the media but for which I still have not found an explanation that resonates with me. Apple and Nintendo are both soaring high by tightly integrating hardware, software and services. I understand that this makes for a better user experience, etc., but why is this strategy prevailing so mightily against the 3rd party, modularized strategy that worked so well for MSFT for 2 decades?

I am both a Mac and Wii owner, so clearly I see the advantages of both platforms, but I have a hard time explaining why these strategies work so well on a macro level. Why was the fully integrated strategy such a failure in the 80's and 90's but so dominant today?

Wow, this is a great question. However, I think that my insightful reader is actually raising two separate issues, one relating to vertical integration and one relating to the specific issues facing Microsoft. I do, however, put Apple and Nintendo firmly in the vertical integration camp while Sony and Microsoft are more in-line with a distributed, third-party model. I will spend more time on my theory concerning business models but will comment on the Microsoft-specific question at the end of the post.

For purposes of clarity, Wikipedia describes vertical integration as follows:

In microeconomics and managing management, the term vertical integration describes a style of ownership and control. The degree to which a firm owns its upstream suppliers and its downstream buyers determines how vertically integrated it is. Vertically integrated companies are united through a hierarchy and share a common owner. Usually each member of the hierarchy produces a different product or service, and the products combine to satisfy a common need...

One of the earliest, largest and most famous examples of vertical integration was the Carnegie Steel company. The company controlled not only the mills where the steel was manufactured, but also the mines where the iron ore was extracted, the coal mines that supplied the coal, the ships that transported the iron ore and the railroads that transported the coal to the factory, the coke ovens where the coal was coked, etc.

So, in addition to Carnegie, consider two of the most famous vertical business models of yesteryear: Ford Motor and U.S. Steel. Vertical integration grew up as a vehicle for controlling every layer of the value stack, when certain of these layers were absolutely vital to completing the finished product and where the ability to dynamically hedge supply inputs simply didn't exist. The best hedge was a perfect hedge, i.e., owning coal mines, iron ore mines, barges and smelters if you needed steel for either girders to sell or cars to manufacture, and anything less was viewed as unacceptable. And this model was clearly right for the times, where the implicit costs of insurance (controlling the entire value stack) were less than the risks and volatility associated with supply chain uncertainty.

However, as expertise became more distributed, the implicit cost of insurance began to rise relative to the risks of a third-party input-sourcing model. Specialists in each layer of the value stack - mining, shipping and steel making - became increasingly efficient, so much so that the cost and quality disadvantage of vertical integration began to  weigh so heavily on the business model that it began to crumble. Further, as it became easier to hedge against supply risk, the reasons for remaining vertically integrated deteriorated even more. And as companies that didn't have the same natural resource advantages as the global market leaders emerged in these industries, i.e., Toyota and Nippon Steel, they were ruthlessly focused on costs, efficiency in the raw-materials-to-finished-goods transformation process and building third-party stability in their supply chains. The result: they were built to win out of necessity, and subsequently kicked the crap out of their fat, lazy and "luckier" competitors. We know how this story played out.

So what of Apple and Nintendo? Why, as my commenter mentioned, do these models succeed when other vertically integrated business models fail? My hypothesis is as follows:

Vertical integration succeeds today because the integration is around IP, not raw materials. The integration of IP "wraps" the value stack, serving as the glue that seamlessly links one process to the next - hardware design, software design, user interface, and the user experience, which is an amalgam of the three. These are not three serial processes but a single integrated unit made up of three components, more akin to a single project than three discrete and independent processes.

If Apple and Nintendo opened their own fabs to control their chip supply, this would be silly. So the vertical integration metaphor is a little different in their case. Sure, they may build their boxes, design their operating system, publish their own software and polish their user experience, but this is different type of vertical model than had previously existed. The value is around starting from the user experience and working backwards, instead of starting with an engineered piece of hardware and then designing software and a user experience to make it work. This is the Sony model. This isn't working so well if the goal is to sell a product with broad market acceptance.

Unless you are close to the market and know what it wants and needs, how can you come up with the right design? It seems that you just can't get the pieces stitched together right in a manner that broadly resonates with the marketplace unless you have tight linkages up and down the value stack, which cries for the type of vertical integration practiced by Nintendo and Apple. I don't think this is a fad; I think it is reflective of a world that is increasingly consumer-driven, as opposed to the world we used to live in where the mantra went kind of like "What GM builds people buy." This mind-set is certain failure in today's marketplace, and one only need look at the road-kill that are companies founded in eras past that got the joke just a little too late. I'm not sure if I have sufficiently answered the business model question but hopefully I've gotten my reader part of the way there.

Concerning Microsoft, I think its model could be successful if it could transition its culture from one that is painfully desktop-centric to one that is user-centric. Desktop applications are simply not going to be the engines of the future. It doesn't mean that Microsoft won't spin off billions of cash for a long time. But so do productive oil wells. But these are decaying assets, ones for which significant future growth is an impossibility but high present-day cash flows are a certainty. Does this describe Microsoft? Unless it figures out how to transform itself, yes. So don't confuse its cash balance for growth. Real growth, sustainable growth will be a function of leveraging its prodigious IP into more online, user-friendly applications. It could be business. It could be consumer. But it has to be lighter and friendlier, it has to  be open and it has to work. Just my two cents.

Business model is key, no question. And in the case of Apple and Nintendo, a blast from the past - vertical integration - is just the ticket to rapid growth and happy customers.

From the Mailbag: How to Stay Current in a Fast Changing World

Believe it or not, some people actually read this blog. And to stretch the imagination even further, I actually receive a fairly steady stream of email from readers who ask me questions. Questions about switching jobs, corporate finance issues, Wall Street culture issues, entrepreneurship, derivatives matters and beyond. Not surprisingly, the questions I receive tend to be clustered in a handful of areas. Given these interesting and relevant queries from readers, I thought I'd start an occasional post cycle specifically addressing these questions. Some of you will find this interesting; others may find this off-topic and annoying. Anyway, I like it. Attempting to keep it fresh, trying to keep it real. You know - cool like.

So today's question is from an MBA student:

...I have a background in software development and am interested in pursuing a career as a financial analyst/strategist in the technology sector. My problem, however, is that I always seem to be playing catch-up with the pace of change in the industry. It seems to me that unless I am driving (entrepreneur) these changes, it is going to be difficult to be in sync.

For instance, it seems to me that a lot of the developments that have happened in the gaming industry may have a big impact on enterprise software. Of course making that statement is the easy part, however, proving that assertion using a systematic technique which results in a course of action is difficult. I was just curious on how you approached these issues and how you manage to be on top?...

Now that is a really good question. It is, in fact, a question I ask myself almost every day. I perpetually feel behind notwithstanding the fact that I am in the middle of the explosion of new technologies and approaches in a range of pretty complicated fields: data harvesting, entity extraction, NLP, taxonomies, ontologies, spam, categorization, sentiment, clustering, visualization, etc. It is a full-time job just to feel behind, much less being "on top" as my reader both kindly and inaccurately portrayed me. That said, I have gone from 0-60 pretty quickly and have stayed at a pretty good speed, especially considering that I entered the technology realm not much more than two years ago after nearly 20 years in a completely different domain. How did this happen and how do I stay in touch with the leading-edge issues of the day? I didn't know until I was asked this question and had to think about it, but my answer is as follows:

1. Build and maintain networks

One of the best ways I've gotten educated about and stay on top of a broad array of issues is to leverage my personal networks. We've all got friends in different fields with different interests involving different technologies facing different issues. Leverage them. In general, people love to talk about what they do, and enjoy hearing that people are interested in what they have to say. And this doesn't only apply to friends. Reaching out to someone who has specialized knowledge you covet, if approached in the right way, can be incredibly receptive and give you a font of information you couldn't have imagined you'd be able to access. I can't over-emphasize this point enough. The building of networks clearly applies to all aspects of one's life, but staying on top of issues in a rapidly-shifting technology landscape not only benefits from leveraging one's networks, but requires it.

2. Divide and conquer

Let's face it, with the exception of a handful of polymath freaks (which I most assuredly am not) being wise about a wide range of topical issues requires help. And while networks are key, another way to manage "information overload" and to tackle the signal/noise problem is to work with people whom you respect and trust to track a range of relevant issues and domains. I have some friends who are NLP freaks and know the latest and greatest (to the extent that the latest and greatest is even knowable) in this field, others who are visualization junkies who are hip to cool ways to display data, and yet more who geek out on issues of reputation and sentiment. I know, it's scary that people like this exist but thankfully for me they do, because I'd have an impossible task knowing much about any of these arenas without a little help from my friends. And when they need to know about financial engineering, raising money, structuring a financing round, which VCs to call, how to structure a pitch book, who do they call? Me. This is what makes the world go around. Enlightened self-interest is a beautiful thing.

3. Load up that feed reader

To be honest, I'm not sure how I functioned before the world of RSS. The insights and perspectives I get on a daily basis on a stupidly wide range of issues is truly incomprehensible. The resources are out there for the taking, if only one invests the time to dig around, identify those words and themes that best describe a domain and then to focus in on the best sources of information in those areas. It takes a while to get the hang of it but when you do, the ability to stay current on truly bleeding-edge topics without picking up the phone or spending a dime is mind-boggling. Further, once the feed reader is loaded with good stuff you can actually build relationships with top experts in the domains of your choice and get further insights. See 1 above; people fundamentally like to talk and write about stuff they like and to feel important. I know I do. I answer almost every email I get and try to help people wherever possible. Because I get something from it? Sure I do. It makes me feel good. And most of the time that is good enough. I have found most excellent bloggers to be very generous with their advice. And I'm sure you will, too.

4. Attend key domain-specific events

Depending on what your gig is, there is a conference of every stripe at every time of year. I go to a select group of conferences each year that are high-impact and relevant to my areas of interest, and I get a tremendous amount of mileage out of them. This is a good place to hear new stuff, exchange business cards and further build my networks. The cost of a really good conference is returned many times over. You just need to be clear on what you are looking for in order to spend your time and money wisely. Because at the end of the day time is truly your most valuable resource. Be frugal with it.

5. Start something

Until a few years ago I had no idea what this entailed, but now I do. When you start something, it is amazing how fear, desperation and possession drives you to ask more, learn more, read more and research more than you ever thought possible. How did I go from a Wall Street guy to a VC/tech/entrepreneur guy in such a short period of time? Because I chucked myself in the deep end and didn't want to drown. And so what is the metaphorical life preserver of which I speak? Knowledge. There is nothing to focus the mind like starting a business from scratch. You want to talk about building networks? Start a company. You HAVE to build them. Leverage people you know? You HAVE to do it. Stay on top of cutting edge issues on the Internet? You HAVE to. Going to key conferences to see, be seen and learn? You HAVE to do it. So if you really want to cut to the chase, forget about 1-4 above and jump straight to 5. Because in the process you will, by necessity, check 1-4 off the list. This is a fact.

I could go on but I think these are the punch lines. Hopefully this has been helpful. Please tell me if you think this "mailbag" concept is good or stupid. You can tell me. I can take it.

Text Analysis for Trading: Moving the Ball Forward

Text analysis for trading and investing: this is area where I've spent a lot of calories over the past few years.  A significant amount of progress has been made in this area, and it is receiving increasing attention as the markets become ever-more competitive, "information overload" gets worse every day and technologies for performing entity extraction and sentiment measurement get better and better. These are hard technical problems to solve and require money, experience with the data and domain expertise, three attributes that are not often found in the same firm.

So after hearing rumblings over the past few months, it was just announced the Reuters is acquiring the Israeli text analysis company ClearForest for $30 million. Each has moved the ball forward in their own way and now they will try to advance it even further as a team. It is very validating that a company like Reuters would see the value in a firm like ClearForest; clearly this small band of technical experts has something to contribute to helping Reuters manage and display its content. I look forward to watching their progress over the ensuing months and years.

Congratulations to Tom Glocer and Barak Pridor on this union of two smart teams and interesting companies.

A Vertical Web 2.0 Success Story: TheStreet.com Acquires Stockpickr

Since becoming a blogger, running a vertical Web 2.0 company and making investments in the digital media space, I have come to learn a decent amount about the intersection of technology, domain expertise and social networking. One such example is Stockpickr, the site founded by my friend and fellow Internet denizen-cum-writer James Altucher. Now James isn't your ordinary tech-geek: he has been a technology entrepreneur; a hedge fund manager; a widely-published author; and is currently doing all of these things at the same time. And in a stunningly short period of time, built Stockpickr into arguably the premier site at the intersection of blogging, technology, investment management, and social networking around these three pillars. And today it was announced that TheStreet.com, Stockpickr's 49.9% owner, is buying the remaining 50.1% in order to fully leverage its impressive traffic into sticky eyeballs and advertising dollars. Congratulations, James. You have built an asset of real value in record speed, and it is to Tom Clarke and TheStreet.com's credit that they had the vision to take you out right now. This is a true win-win; this is how vertical Web 2.0 deals should be done. Strategic buyer, informed and value-added seller.

I have been quite critical of social networking sites for stock-picking. In fact, I penned a scathing post in the wake of socialPick's write-up in TechCrunch way back in August last year. If you want a granular explanation for why I think social networking for stock picking, in a vacuum, is both stupid and potentially dangerous, please check out the post. This is not what Stockpickr is about, to be sure, and I made this distinction clear in an interview I did on Wallstrip back in January. Stockpickr provides the portfolio data of some of the top investors of all-time and today, offers a wide variety of investment resources, and supports a vehicle for social networking as an overlay. This is a model that combines domain experts (legendary investors, their portfolios and investment philosophies), data and social networking to enable investors to make good, informed decisions. This is a much more robust, scalable and less variable model than one based upon "wisdom of crowds" or short-term tracking of an individual's trades which may or may not work out over time. While I personally don't invest in single stocks many, many do, and if you are going to do so on your own better to understand the principles of highly successful investors with long-term track records than a group of people who may or may not generate attractive and sustainable investment returns. If this doesn't resonate with you, I'm sorry. Good luck and good bye.

I think we've just scratched the surface of vertical Web 2.0 applications, and believe we are in the early stages as these applications relate to finance and investing. I see interesting and compelling business plans all the time that are targeting investors using zippy, Ajax-fueled Internet technologies, and the question is less about getting eyeballs than it is the monetization of these eyeballs. Especially where video is concerned. I've seen the explosive traction of vertically-oriented online content first-hand through my Board seat at Wallstrip, and the creative use of different methods of advertising that are palatable to consumers and effective for advertisers without disturbing the presentation of the content. This is a painfully hard balance to strike, but one where we are closer to cracking the code every day. Further, strategic acquirors of these Web 2.0 assets can turbocharge these scalable business models by leveraging existing content together with a massive book of legacy advertisers (not to mention squadrons of highly effective ad sales professionals). As I said above, this is a win-win.

All that remains is for smart, insightful, dedicated entrepreneurs to develop new, relevant vertical apps and for the large strategic acquirors to get with the program and get busy extracting maximum value from the Internet. They can use the help. Keep your eyes open for some new and interesting deals in the next 12 months. The best is yet to come, my friends.

A Foundation for Innovation

Robert Litan had a short, hard-hitting, pragmatic editorial in yesterday's WSJ titled "Innovators Matter Most." There is a lot of high-level talk about what fosters innovation in a society, but Mr. Litan does a particularly good job laying out the issues in plain english that should make us wake up and take notice. As someone who has built and run high-performance teams on Wall Street and in start-up environments, I can really appreciate the points made in the editorial and know the prescriptives mentioned to be right and true.

While many elements of Litan's piece specifically relate to the issues raised by Thomas Friedman in his book The World is Flat, one is able to get much of Friedman's essence in a 500-world editorial. Is it certainly worth a quick read. The editorial's issues and recommendations are pulled from a survey co-sponsored by the Kauffman Foundation and Inc. Magazine:

Recently, the Kauffman Foundation, with the assistance of Inc. magazine, asked some of the nation's most successful entrepreneurs what they needed to grow. They cited four challenges, and academic research has helped to pinpoint the policies that best respond to each of them.

Ensuring a skilled work force. Entrepreneurs say that the biggest constraint on growth is finding "talent" -- highly skilled, entrepreneurial workers. Thus we will need major improvements in K-12 education, which are unlikely to come about without more charter schools: parents and students being able to choose their schools, and principals and teachers with more freedom, and accountability.

We also can use as many skilled immigrants as are willing to come here. Recent surveys indicate that immigrants have been essential in forming a quarter of our rapidly growing high-tech companies. We ought to be encouraging, not limiting, the entry of such people. How about giving permanent residency to any foreign student who obtains a math or science degree at one of our universities -- since these skills are key to the formation and growth of high-growth companies of the future?

Reforming health care. Escalating health-care costs rank high on entrepreneurs' lists of concerns. They're not alone. Workers are anxious about losing their own health insurance, especially if they take the risk to leave their stable jobs to form their own businesses.

The obvious answer to both challenges: Phase out current tax linking employment with health care, using the revenue to subsidize the purchase of health insurance by those of limited means. President Bush has offered one approach, surely there are others. Whatever is done, prohibit insurers from discriminating or refusing to insure based on an individual's pre-existing health conditions (as we do for genetic conditions).

Promoting innovation. We already do a great job innovating and commercializing. But we can do better, by enhancing government funding of research in basic science and engineering; reforming patent law so that protections are not so overly broad that they inhibit the creation of innovative, new firms; improving ways for university-developed ideas to be commercialized; and funding efforts to identify and take advantage of innovations developed abroad, just as foreign companies have been doing with U.S.-based innovations for decades.

Limiting costly regulation and liability litigation. Because of their small size, entrepreneurial firms are especially vulnerable to excessive regulation and liability litigation. Accordingly, entrepreneurs have the most to gain from sensible reforms requiring all major federal (and state) regulations to be implemented only if estimated benefits exceed costs, and by adopting further liability law reforms (without reducing incentives for all companies to make safe products). Two reforms would help curb frivolous litigation: adopting the "English rule" -- loser pays -- on attorneys' fees for litigation with commercial parties on both sides; and limiting the award of punitive damages where defendants have complied with prevailing regulatory standards.

Amen. While the issue of creating the optimal environment for innovation is multi-faceted and complex, I think the four issues raised here address at least 90% of the problem. Ane while I was not specifically surveyed on these issues, I think I may well have answered exactly the same way. Mr. Litan finishes his piece with the following thought:

These proposals are quite different from the ones policy makers in Washington and elsewhere traditionally discuss when trying to promote entrepreneurship -- such as increasing the budget of the Small Business Administration, or reserving a certain percentage of federal contracts for small business. Entrepreneurship Week USA begins this weekend. What better time to begin a serious debate on these larger issues so vital to our economic future?

What better time, indeed. Given the increasingly global market for talent, well-heeled and upwardly mobile competitors like China and India, rising standards of living across much of the world and relative complacency among Western nations, these are issues that require attention from every branch of U.S. Government - now. Time is a wasting. Hopefully we won't be by ignoring a problem when in possession of solutions for a new, brighter and increasingly innovative future.

A Little Cameo on TheStreet TV

Today I had the pleasure of being interviewed by Gregg Greenberg of TheStreet.com, following from last week's fun discussion with Lindsay Campbell over at Wallstrip. The topic was Monitor110, examples of how our Institutional Investor clients use the system to make money and how we leverage domain expertise and real-time search technology to provide our clients with a more targeted, more relevant search experience. Gregg pushed me and it was good, coming at the issue of identifying tradeable information from a somewhat different perspective than most of our clients. But that was cool. I really like talking about what we do. Or maybe I just like talking.

Microsoft: Dazed and Confused

Overview

Microsoft. This was a name that inspired fear and loathing among those in both technology and corporate purchasing circles, certainly until the end of the 1990s. Given their dominance in operating systems and control of the desktop, how could they be stopped? A rapidly rising stock price, a market cap approaching $600 billion, the ability to buy top talent from any company, any place, around the globe, a vaunted R&D capability, the propensity to spend vast sums staking out (seemingly) related but non-core domains (i.e., Nextel, Comcast, AT&T). How could they ever hit the wall?

Well, they did. Hard. Massive crumpling. Fast forward to today, a mere six years later. Slow. Bloated. Stagnant stock price. Hemorraging top talent. Anti-trust problems. The perception as being yesterday's news, being left in the dust by smaller, more flexible, more nimble competitors like Google. Even their founder has shifted his emphasis from value creation to value distribution. You can feel time passing them by. And it is this perception that was reinforced by a very candid article in yesterday's New York Times. It simply reinforced many of the things I have been feeling about Microsoft, and which I will write about in greater detail in subsequent posts:

Microsoft is an amalgam of businesses they'd like to believe are related, but they're not. And it is this lack of insight and self-awareness that will prevent that growth-stock luster from returning. Ever. In the absence of the ruthless focus required to compete in each of its key businesses, which are inherently different, they will die a long, slow death. And maybe Carlyle or Blackstone will help them out of this value trap.

A pretty dire prediction for a company generating the billions in free cash flow that it does. But what is it doing with all that cash? Is it really going to drive high-PE growth opportunities? Frankly, I'm cynical.

Steve Berkowitz - Driving Strategy and Software or a Supertanker?

Steve has a lot of work to do, leveraging its search and portal strategy for the benefit of its Windows and Office Live products. Huh? How to do this in the face of a big, bureaucratic, fossilized Microsoft organizational structure? According to Steve:

There is a lot about the way Microsoft has run its Internet business that Steve Berkowitz wants to change. But he is finding that redirecting such a behemoth is slow going.

“I’m used to being in companies where I am in a rowboat and I stick an oar in the water to change direction,” said Mr. Berkowitz, who ran the Ask Jeeves search engine until Microsoft hired him away in April to run its online services unit. “Now I’m in a cruise ship and I have to call down, ‘Hello, engine room!’ ” he adds with an echo in his voice. “Sometimes the connections to the engine room aren’t there.”

Steve isn't an online executive, he is a supertanker pilot. I do not envy Steve.

Microsoft - Technology company or Customer-solutions Company?

It doesn't take a genius to see how today's most successful technology companies (and, in fact, any customer-facing company, for that matter) are ruthlessly focused on the customer experience. They ask questions like: What do my customers really want? How can we make our value as easy as possible for our customers to access? If there is a problem, how can I best address my customer's problems? How can my customers know that I am thinking about them all the time, making our products and customer experience ever better? Does this sound like Microsoft? Uh, well, no. Even Steve recognizes this attitude gap:

Microsoft lost its way, Mr. Berkowitz says, because it became too enamored with software wizardry, like its new three-dimensional map service, and failed to make a search engine people liked to use.

“A lot of decisions were driven by technology; they were not driven by the consumer,” he said. “It isn’t always the best technology that wins. It is the best experience.”

It is no small task to run an Internet operation that can move as fast, be as popular and make as much money as Google. (That explains why Yahoo announced this week that its chief operating officer was leaving, and why the chief executive of AOL was fired last month.)

No doubt Microsoft has some wicked-cool technology. I saw this on display at Web 2.0 when they unveiled their Photosynth tool. But this isn't enough to compete against the likes of Google. Lots of whiz-bang, but how are you changing my life? I'm not feeling the magic. And it ain't coming from MSN. Is it really going to come from Vista?

Hedging Bets due to Lack of Strategic Direction?

Is it just me or is it pretty obvious that whenever a company in a super-competitive, dog-eat-dog field gets unfocused, it gets crushed (i.e., like Yahoo! with its Lloyd Braun-fueled content creation strategy)? Sticking to one's knitting and branching out only in truly related areas when you are pushed there by your customers, that seems to be a durable and successful strategy. So what is Microsoft up to with its online strategy?

So for now, Mr. Berkowitz has decreed that Microsoft will promote at least two Internet services. MSN, in Mr. Berkowitz’s conception, is a conventional portal with links to programming on various topics that competes with Yahoo and AOL. Windows Live, which uses the Live.com site, is meant to look much like Google, a spare-looking page that can be customized with modules from various services and news feeds.

Reflecting the many conflicting strategies, Microsoft’s Internet unit has been slowed by the same sort of organizational drag that caused the latest upgrade of Windows to fall years behind schedule. And of course, the competitive pace of the Internet is far faster than that of operating systems.

I'm confused, I really am. It's not Steve's fault, it's the hand he's been dealt, I think. But is this really a time for hedging bets or for establishing a unified, coherent online strategy leveraging Microsoft's competitive strengths, acknowledging past errors and moving on? Draconian action is called for here, folks. Yahoo! is feeling the heat, knows they've screwed up and gotten slow and bloated and is working like hell to try and change it. Massive headcount cuts, senior level shake-up, real attempts at effecting change. Whether or not it will be successful only time will tell, but at least they're trying. They're giving themselves a chance to succeed. And Microsoft? Nada. But hey, Vista's coming out. Woo hoo! Not.

This is reminscent to me of Microsoft's gigantic investments in companies such as AT&T, Comcast and Nextel. Over $7 billion, if memory serves me well. Were they listening to Paul Allen's vision of a "Wired World?" (We know how that movie has played out - not well). No. It was due to a lack of clarity of vision and strategic direction. While it was, at first, stunning to think that Microsoft could gain a toe-hold in such industry stalwarts simply by writing a check (which it could due to its mind-boggling success in prior years), it was not all it was cracked up to be. Did they ever get strategic mileage out of this or was it simply a distraction? My vote based upon what I know - a distraction. That money and management focus could have been spent on much better things like, say, a better search algorithm?

Messed up Corporate Culture = Brain Drain + Inability to Plug the Holes

Rallying the troops is great if the strategy is sound and senior management has set people up to succeed. Unfortunately, this does not appear to be what happened. First, legacy bureauracy remained. Second, stock price fell, weakening existing employees' resolve and making it hard to attract outsiders to the team. Third, Google continued its relentless push to preserve a small-company culture in an ever-expanding search-cum-advertising titan, making it THE place to work if you are an engineer with a desire to push the limits of one's gray matter:

Even as the company’s leaders tried to rally a charge against Google, the staff was hampered by conflicting priorities and overlapping organizations, employees said. Moreover, last summer, when Microsoft’s stock fell after it disclosed a sharp increase in research spending, directions changed again.

“They had a lot of new initiatives, and people ran fast out of the gate,” said Niall Kennedy, an expert on Internet publishing who joined Microsoft last spring but quickly became disillusioned and quit in August. After the stock fell, he said, “I wasn’t able to hire anybody for my group.”

Mr. Kennedy says this culture is inhospitable for talented engineers.

“Microsoft is no longer the primary place for technical talent,” he said. “If there is a superstar, Google will be on their minds.” (Indeed, Google has set up shop in Kirkland, Wash., six miles from Microsoft’s headquarters in Redmond, specifically to welcome Microsoft refugees.)

This is pretty brutal stuff. Think about how hard its been for Yahoo! to wake up to the competitive imperative, making difficult, public changes when it has only been around for about 10 years. What about Microsoft, which just turned 30? It may not be GM, but it certainly isn't the nimble spring chicken Bill, Paul et al founded in the mid-1980s. I don't know what it is going to take for them to initiate a radical organizational re-design. But it has to happen. And fast.

Conclusion

Microsoft was a great company, and, in many ways, still is. It still makes gobs of cash off the software business. It still has great R&D and a cadre of brilliant engineers. But it probably could be 5 excellent companies instead of one stalled company. Can you imagine a business that housed the cash-cow software operation, that paid a gigantic dividend and was ruthlessly focused on squeezing every bit of cash out of this franchise? How about a unified MSN/Live.com business that competed in search and advertising without worrying about all the other stuff? You could even spin a venture capital firm out of the Microsoft Bus. Dev. team, with all the connections they've got and all the deal flow they see. I'm sure there's lots of other stuff as well. I don't know much, but I do know that corporate bureaucracy can kill creativity, kill spirit, kill fun. Which kills recruiting, retention and, ultimately, stock price. And this just isn't going to cut it against the Googles of the world who are rocking the house and the Yahoo!s that are willing to incur massive short-term pain for long-term gain. Sorry, Bill. Sorry, Steve. You've built a great company. But it isn't as great any more. Set it free. Please.