The decentralization of the networks

The recent Supernova Conference in Palo Alto explored the theme of decentralization – of the networks, software, communications, and media. So many of the attendees were bloggers that it’s easy to get a good feel for the conference and content through what they wrote. As attendees reported, the clicking of keyboards throughout conference sessions testified to the live logging of ideas and impressions. The conference set up a group weblog, with another list of conference blogs here. Salon.com also had a good article. In many ways, the theme of decentralization is that of the living networks. Emergent behaviours come from the unstructured combination of many participants. Open source software, distributed innovation, and peer-to-peer content distribution are just some of the examples. One of the key issues discussed at the conference was the postulated emerging “end-to-end” nature of networks. Connectivity – the pipes provided by telcos – will be dumb, and the value-added activities provided at the ends. Web services can be applied not just in application integration, but to making everyone’s touchpoint to the networks encapsulate highly customized functionality.

Creating the transparent corporation

Aaargh! Being on the road means I’m getting stimulated by lots of very interesting stuff, but it’s hard to find a moment free to blog it. I’ll try to get a few things down… Last week I got dragged in at the last moment as a pinch-hitter to speak at the KMWorld (Knowledge Management) conference, the largest in the field in the US, in San Jose. It was in the “ROI and Measuring Value” stream, which is not what I spent most of my time on, so I decided to title my talk “A Financial Markets Perspective on Intellectual Capital”. The KM crowd don’t tend to get exposed to finanial markets thinking much, so it’s worth giving some insight into how investors view non-financial or intangible indicators. The story in a nutshell is that it has become increasingly obvious that non-financial indicators are vital in getting an accurate picture of the value of a company. Employee turnover and changes in customer loyalty are just two examples of a myriad of things that investors would very likely want to know, but don’t get told.

Over the last 10 years many have attempted to build models that take into account these intangible indicators. After spending a lot of time several years ago looking closely at these issues, and talking with the top people in the field, I came to the conclusion that there was no simple answer. The heart of the issue is that investors use different valuation models—that is they assess the value of intangibles differently. That’s what makes a market. Steven Wallman, who was then SEC commissioner and now runs the very interesting customized mutual fund service foliofn, stated it clearly. Currently financial reports aggregate all of the vast amount of information inside a company. What is required is a shift to disaggregation of that information, so it is all available to everyone, who can then choose to aggregate it into the financial models of their choice. We have yet to see whether companies, large investors, or regulators will drive this shift, but 10 years is the sort of timeframe we have to expect for it to happen. What could help accelerate this dramatically is XBRL (eXtensible Business Reporting Language), which is an XML-based standard for financial reporting that I discuss in Living Networks. This makes it very easy for analysts to take financial information into their own models. A recent study showed that analysts accounted for stock options in reports more accurately if they were presented in XBRL format rather than in a PDF. The beauty of XBRL is that it is extensible, so it can easily be used to report on non-financial indicators as well as financial ones. XBRL offers the promise of disaggregating information flows in company reporting. Investors will be far better informed, and be able to make decisions based on what is actually happening in the company. Earlier this week I met the executives at the American Institute of CPAs who are driving XBRL. They believe it will be far harder for the Enrons of this world to get away with what they did in an XBRL world. Companies will be far more transparent. And a little further down the track, we will shift to real-time reporting, when you can see what is happening in a company as it happens rather than two months after the end of the quarter. It’s hard to exaggerate the potential impact on how business is done. I will post my slides from my KMWorld presentation in the next couple of weeks, with a link from this article.

Participate in this blog!

This blog has become participative! You can now add your own comments and thoughts to any article, and rate the comments made by other visitors. There will also be reader polls. The system is based on the open-source software PHP-Nuke, a fine example of users collaborating to create the software they want. Anyone can use and adapt it to their own purposes. One of the features I most wanted on this blog was the ability to rate each other comments. This is a fabulous example of “collaborative filtering”, which is a central theme of the living networks. This is marvellously illustrated by the seminal Slashdot site, where much of the value is being able to sort through and access the comments made and adjudicated by an extremely sophisticated community. I hope and expect that many very smart people will be visiting this blog, so please do contribute your thoughts! Slashdot and its foundational principles are well known to the self-confessed “nerd” community. My intention is to make these ideas more broadly known to the business community and beyond. Please join in the fun! Special thanks to Rodney de Pater for implementing the system – a fine job!

Patent madness

“Watch your step: If you’ve ever exercised your cat by having it chase the reflected spot of a laser pointer, you and kitty may be in violation of a bona fide U.S. patent. Don’t believe it? Take a gander at Patent No. 5,443,036, Method of Exercising a Cat, issued by the U.S. Patent and Trademark Office in 1995.” writes Lauren Weinstein in Wired News. Weinstein, like many others, points out how crazy the patent process is, and how it often dampens innovation. Indeed, the heart of the issue is the quality of the work of the US Patent and Trademark Office and its peers around the world. If they only grant focused and relevant patents, the problem would be minimized. Patent examiners get an average of 20 hours to review a patent, which is now often 30-40 pages long itself, and usually requires reviewing 50 or more articles. For example for complex biotechnology patents–applications for which are growing at 24% per year–this is insufficient.

In Living Networks I describe how when President George W. opened the way for federally funded research into stem cells, it came to light that a quiet biotech firm called Geron held patents that covered almost all embyonic cell lines existing at the time, as well as the methods to produce them. So in principle they own the results of almost any future research in the field. The USPTO’s attitude has been to grant patents easily and let them sort it out in the courts, but this means engaging in the intellectual property field requires substantial funds, and creates a domain in which intellectual property is blocked rather than allowed to flow freely. It’s easy to say patent processes must change. It’s harder to do. One thing that would help is if Congress would give back the $90 million it has taken away from the USPTO’s budget for each of the last three years.

Technology enables personal creativity

Creative people now have far more choices about how to market what they produce. The New York Times yesterday reported about authors who have successfully self-published. One author, for just $99, had her book laid-out in a print-on-demand format, and on the basis of its succes shortly after got a large advance from a publisher. Another established author chose to self-publish a book that subsequently reached #1 on Amazon.com. As the article goes to pains to point out, these are the exceptions. Very few self-published books are more than moderately successful. However these new channels for distributing intellectual property (with parallels in music, art, design etc.) open up possibilities. In the chapter in Living Networks titled “Liberating Individuals” I described the generic model for distributing personal creative content.

In the first stage, people use digital distribution to attract attention and demonstrate to publishers (labels, distributors etc.) that they can generate an audience. They then achieve the peak of their career with major publishers, but subsequently go back to self-publishing in order to take a larger part of the rewards. The authors above are respectively at the early and late stages of this cycle. Many aging rock stars, like David Bowie and Todd Rundgren, are distributing direct to take more of the rewards than music labels would usually give them. One of the most important dynamics of this emerging model is simply how much content becomes available as everyone can market themselves directly. The publishers and labels do play a role of filtering that is useful, but they overplay their importance. Collaborative filtering, which helps us collectively to sort through what is out there and identify the best, will be at the heart of information flow moving forward. More anon

Profiting from peer-to-peer file sharing

Lion’s Gate, an independent film producer, is promoting its forthcoming film Rules of Attraction on the peer-to-peer (P2P) file sharing system KaZaa, as reported in this LA Times article (free registration required) . In Living Networks I noted how Capitol Records – part of EMI – had used the feared and hated P2P system Aimster to promote Radiohead’s Kid A. Content firms will find it very hard to succeed unless they get their wares flowing freely through the networks, as just a few are starting to realize. Other major movie and music companies are suing Kazaa. Interestingly, Microsoft is picking up the tab for the P2P promotion campaign, presumably to help promote Windows Media. In a related article, Wharton professor Peter Fader says “record companies are shooting themselves in the foot” by trying to stamp out peer-to-peer file sharing. A fine balance, or rather integration of protection and promotion is required, but they are definitely pursuing sub-optimal strategies at the moment.

Blogging business models

Blogs are at the heart of the shifting flow of information and ideas. Many people have been trying to find a business model by which they can make money from it. Clay Shirky’s recent article gives a realistic view of the situation. That is, there’s not a lot of money to be made, directly in any case. The very best can pick up some money from advertising or sponsorship, but virtually no-one will be able to charge even micro-payments for people to read their profundities. As we move to even better ways to sift through the best of the blogs each day, it becomes greater competition to mainstream press – however this will always have a role. However blogs definitely have an important role in business. I open Living Network by describing how Macromedia is using blogs to do more than communicate to their developer community, but actually participate in it. This Business 2.0 article, Blogging for Dollars, describes some of the new ways in which blogs are being used commercially. Two of the key domains are blurring the boundaries with your customers, and developing effective knowledge flows in the organization. More on this later

From the land of ”Honk OK Please”

I am at the tail end of 6 days in the land of “Honk OK Please”. That is what is printed in large and jolly letters on the back of most trucks in India (or sometimes simply “Honk Please”), and many are only too glad to oblige. Too much intake to do a quick braindump, but it was particularly fascinating to spend a couple of days with Tata Consultancy Services (TCS), India’s largest technology services firm, including at their global R&D center in Pune. “IT-enabled services” are a massive industry here. I passed through one flourishing area on the outskirts of Mumbai which I was told was not so long ago miserably poor. The transformation was due to a whole series of international call centers being set up in the area, bringing direct and flow-on employment to many.

TCS and its major competitors get most of their revenue in the US and sometimes European markets; TCS eked out gains around 25% even during the downturn. Clearly these firms are competing primarily on price, but they also have to do top-notch work. Their challenge is to demonstrate to their clients that they can work on a par with the more traditional consulting names. TCS’s vision is to be “global top 10 by 2010” in IT services. Tough, but possible. One of the emerging issues is competition from even lower cost centers than India. China is rapidly rising, and in fact TCS has set up software development centers in both China and Hungary. Its positioning is no longer just tapping low-cost high-quality Indian engineers, but running offshore centers, wherever in the world there is competitive advantage. More musings on some of these aspects of the global network economy anon – time to hop on a plane…

New offerings make web services more accessible

The key to web services becoming the dominant underpinning infrastructure in the global networks is making them easily accessible and useable by smaller companies. At the moment they are mainly implemented by larger corporations, but their very nature lends itself to creating them in modules that can be easily taken up. IBM will shortly release software that enables companies to easily charge for their web services. As I write in my book, companies should become both users and suppliers of modular services. This kind of tool makes that easy. By incorporating very flexibly pricing rules, it also leads the way to agent-based online markets – more on that another time. BT has also announced a suite of services that position it as a “trusted broker” – in effect a hub – in helping companies establish web services. John Hagel is one of the prime proponents of this strategy, and he is involved through 12 entrepreneuring in Grand Central, which offers similar services to Flamenco, which BT is teaming up with for this offering.

Microsoft realizes not to guard intellectual property too closely

This article on Salon.com describes how Microsoft and China, after tough negotiations, came to a three-year $750 million “memorandum of understanding”. Despite the 92% software piracy rate in China, the agreement contained nothing about enforcing Microsoft’s intellectual property. In Chapter 8 of Living Networks I used the example of how Disney has become a dominant cultural force in China, only because its intellectual property was freely copied for a couple of decades. In the case of Disney, they can look back in hindsight and be glad they were ineffective at protecting their IP in China. Disney simply wouldn’t have a presence there otherwise. By now Microsoft understands the game. If everyone in China starts using Windows and Office as their platforms, then as China’s economy develops and as IP protection is tightened up – as it will do in time – Microsoft could see their China revenues rival those in the US. Playing this kind of network game requires a long-term approach, but in any case short-term profit maximisation can often have a severe negative impact on the long-term. As I describe in my book, maximizing profit from content requires integrating protection and promotion, and sometimes that means neglecting protection for a while.