Update: Sony withdraws its DRM

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Following on the previous story on Sony digital rights management, Sony has announced it will stop making CDs using this DRM technology, after the first virus that uses Sony’s copy-protection software to hide had been discovered. At a public event yesterday, Stewart Baker, the assistant secretary for policy at the Department for Homeland Security made pointed comments evidently aimed at Sony: “”It’s very important to remember that it’s your intellectual property — it’s not your computer,” as he discussed the implications for the security of technology infrastructure. Given the Bush administration’s tendency up until now to support sometimes even the heavier tactics of the entertainment industry , this is encouraging.

In 1421 the government of Florence gave the first patent to Filippo Brunelleschi for inventing a way of bring goods up the unnavigable river Arno to the city. He asked for and was given the right for three years to burn any competitor’s ship that used his innovation. I think we’re finally realizing that potentially destroying the computers of your customers is not valid, even less than burning ships of competitors. This event has been an important turning point in perception of how digital rights management is used and intellectual property enforced.

The Sony DRM debacle shows you can’t hide

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The big story this week has been how Sony BMG has way overstepped the mark by how they have used digital rights management (DRM) technology to prevent copying of its music CDs. This could shift the course of the debate and public perception of DRM. For those who haven’t read about this yet, Mark Russinovich, a specialist in the deep innards of PCs, stumbled across a “rootkit” installed in his computer. A rootkit is software that installs itself at the heart of the PC operating system and reconfigures files to hide its presence. Not surprisingly, this technology is usually only ever found in “malware” that is designed with nefarious intent. In this case, it turned out to have been installed when Mark had played a Sony CD on his PC. There are a couple of interesting implications of the installation of the rootkit. Anyone who tries to delete this uninvited presence on their PC risks irremediably damaging their computer. In addition, the presence of the rootkit makes it far easier for people less benevolent than Sony to hack into the PC and hide their activities, including from anti-virus software. This is potentially a massive security risk. While Sony states on the CD packaging that it has used copy protection software, it doesn’t indicate in any way what this software does. While consumers can ask Sony to uninstall the rootkit, they need to apply, provide personal details, and are then given another piece of software to uninstall it.

There is no question that Sony has gone too far here, certainly ethically, and potentially legally. While the protection software was extremely carefully hidden, it was naïve at best to imagine it would not be uncovered, and for this to become a public issue. Increased transparency is one of the most powerful trends today. The reality of transparency is not only that things get found out, but that if people are interested, word will spread very rapidly. While all the mainstream media reported this story after the case, this was first reported on a blog, and news spread through blogs. The very measure of people’s distaste for Sony BMG’s activities is how quickly this became a major story. In trying to hide what they are doing in their customers’ PCs, Sony BMG has created security risks for their customers, and created a major problem for itself. Openness is and will be rewarded in the market. Sony BMG doesn’t understand this, and undoubtedly will be punished in the market. Digital rights management has a role, but precisely how it works must be visible. Otherwise the backlash will be far bigger than the entertainment and content companies seem to comprehend.

Investor relations and blogging

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Investor relations is the art of managing relationships with your investors. It used to be easy: tell them whatever you felt like telling them. Shareholder activism, new regulations such as Sarbanes-Oxley, and the internet have dramatically changed the landscape, giving far more power to investors. A great example was the Save Disney campaign. Roy Disney was fighting to limit the powers of Michael Eisner, while the rest of the board was stonewalling. The SaveDisney.com website (now defunct) marshalled support and public opinion, while the Disney board and investor relations group ignored the issue and declined even to present their case. In this situation, pressure was significantly applied by individual investors to the managers of the mutual funds in which they had invested. Mutual funds can no longer ignore governance issues if they want to keep their customers on-side. So now companies are increasingly using the internet to present their side of the story. Chevron, which has been under attack from Amnesty International, among others, has set up a website called willyoujoinus.com, which gets people involved in thinking about the future of energy and environmental issues.

The next phase is blogging by corporate boards. IRWebReport, a company specializing in online investor relations issues, has written a couple of great pieces on Why Corporate Boards Should Blog and 10 Excuses for Boards NOT to Blog. Governance is all about transparency. Blogging is a fabulous tool for giving greater visibility to the governance process, and providing investors with a chance to provide their input and perspectives. Certainly the traditional annual meeting is completely ineffective as a system for getting investor participation and involvement. One of the initial objections you often get on implementing blogging on investor relations issues concerns regulations on corporate disclosure, such as Regulation FD (meaning Fair Disclosure. Regulation FD was established largely to stop large investors getting preferential access to information). Given that RSS feeds allow everyone to get immediate notification of anything released on a blog, blogging in fact provides far more egalitarian information flows than other forms of release. Significant disclosures can be tagged for concurrent release to stock exchanges. IBM is getting on board, offering investor relations information through RSS feeds and podcasting (also available on Odeo). General Motors vice-chairman Bob Lutz has his own blog, as does Carole Brown, chair of Chicago Transit Authority, and over 100 CEOs of primarily technology companies. I believe that in just the next twelve months, blogging for investor relations purposes will become commonplace. The difference between those boards that really do believe in communicating with their investors, and those that prefer to avoid any interference by pesky shareholders, will swiftly become evident.

Sell-side banks become consultants

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One of the issues I’ve spent much time on over the last decade is how financial markets buy-side/ sell-side relationships (usually those between investment banks and fund managers) are changing, and what the implications are for investment banking sales and research. My case has largely been that financial markets salespeople need to build “knowledge-based” relationships with their clients, which requires salespeople to add explicit value to the decision-making processes of the fund managers they deal with. Particularly now that so much trade execution and research distribution is automated, there is simply no reason for clients to pick up the phone when salespeople call, unless they can do something more than peddle the latest trade idea. An example of this in practice is CSFB’s Locus product, which enables fixed income derivatives salespeople to create sophisticated analyses of complex trades. The interesting part is that they can show these analyses to their clients online, and both the salesperson and the fund manager can change the assumptions or characteristics of the trade, and see the implications, real-time while they speak on the phone. This enables the salesperson to go far beyond sending pdf research documents to their clients, and to actively engage with clients in exploring possible trades, variations on these, and how these fit with their clients portfolios.

Now one of the most important trends in financial markets is that of algorithmic trading. In order to execute large orders, equity fund managers increasingly use automated systems that break up trades into smaller blocks, and execute these at different times and on different marekts. This allows anonymity and minimizes market impact. However implementing these algorithms effectively is an extremely complex task that fund managers do not have experience with. As such, an increasing part of the value that can be offered by salespeople is in consulting to clients on implementing effective trade execution strategies. Wall Street & Technology magazine recently had two very interesting articles on how sell-side salespeople are becoming consultants, and how this is contributing to fund managers reassessing their broker relationships. As such, the emerging domain of algorithmic trading – which largely automates trade execution – is in fact providing new ways for investment banks to create high-value relationships with the clients. However even greater value can be created by adding explicit value to clients’ decision-making processes. One example of this is how Morgan Stanley uses long-term scenario planning as a tool to help clients think through extremely broad issues such as the future of China or possible directions for government bond market structure. Another key issue is in changing the roles of sales and research so salespeople are more able to actively discuss the portfolio implications of trade ideas with their clients. Buy-side/ sell-side relationships have come a long way in just the last five years, and the pace of change certainly isn’t slowing.

Your printer is telling on you

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The Electronic Frontier Foundation (EFF), the most active and powerful organization aiming to protect civil liberties in the digital world, has just announced that it has cracked the secret codes printed by the Xerox DocuColor color laser printer, as a first step to bring color printer secret codes into the open. The U.S. Secret Service has made agreements with Xerox, Canon, Brother, Dell, Epson, HP and other printer manufacturers so that their color laser printers print almost-invisible codes on every page they produce, marking the date, time, and serial number of the printer. This is ostensibly to track down printers used to produce counterfeit money, however the information could be used by government in any way. Now the code has been cracked, it is a far broader privacy issue, as now anyone can discover by which printer a document was produced. However this had to be understood as a possibility when the initiative was created. What can be created and used (or abused) by government can equally be abused by others, and the only resort is to make it completely open. As the EFF note, if we find the US government is making behind-the-scenes deals with private corporations to compromise our privacy through our printers, who’s to know what other of our personal technology is being compromised in this way? The potential for abuse comes not just from government, but from anyone else that has access to or uncovers this information. That’s one of the reasons why I have problems with the “people who have nothing to hide shouldn’t be worried” argument about privacy loss.

Australia in the global network economy

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Last week The Bulletin, Australia’s premier newsweekly magazine, ran an interesting article on the role of technology in the future of Australia, drawing heavily on an interview with me. The broad topic of how Australia – and all other countries – can be successful in the swiftly evolving global economy is taking much of my attention, and I anticipate spending increasing time on this theme. In an intensely connected and interdependent world, it is impossible to stand alone. The idea of creating products, services, and ideas at home and then taking them to a global market is increasingly dated. All aspects of the innovation and commercialization process need to access global best-of-breed talent from the outset. Australia certainly doesn’t suffer from a lack of talent. Australians are well ensconsed in the most sophisticated business, technology, and academic circles around the planet. An interesting statistic is that 6% of open source coders hail from Australia, making it the most heavily-represented country in this domain relative to its population. However, with some notable exceptions, Australian technology innovation isn’t positioned to capture global markets. Part of the issue lies in the size of the economy. With 20 million people – not to mention the reality of geographical isolation – there is a mentality of economic self-sufficiency. Countries such as Singapore, with 3 million people, and Finland, with 5 million people, have no illusion of self-sufficiency and so seek more actively to integrate themselves into the global economy. A key theme that is brought out from my quotes in the article is that of specialization. As scientific and technological progress drives deeper specialization, we must as individuals, organizations, and indeed countries, very carefully select the domains in which we specialize, where we can have a reasonable possibility of being world leaders, and then who we will collaborate with to create value from our expertise. Very likely those collaborators will not be in the same country as us. We must form ties with whoever in the world provides the best complement to our skills. Building and leveraging the supporting networks is a critical skill that Australians – and others – must develop. We live in an increasingly location-independent economy. If you have deep specialist expertise, and connect and collaborate well, you can create massive value, wherever you reside.

Online advertising is a viable business

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The head of Goldman Sachs‘ high-tech group has said that the IPO market is back for the right Internet companies. However the barriers are far higher, and we’re not likely to return to unprofitable or no-revenue companies getting piles of investors. Now that advertising is a viable business model, with further strong gains in online advertising dollars likely, many more online businesses can flourish, or at least fight for the advertising dollars available. On a related note, a group of prominent bloggers have united to create a blog aggregation site, which will compete with mainstream media and live on advertising revenue. They may not make a fortune, but just around now this has become a viable business model.

Internet everywhere

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I am currently flying on Lufthansa between Frankfurt and Hong Kong. Lufthansa is one of the first airlines to use Boeing’s Connexion service, which allows in-flight internet access. This post is going live while I am approximately 30,000 feet above Kazakhstan or thereabouts. So, airplanes no longer provide that personal space where you are far from responsibility, and can’t access email on what’s going wrong in the office, or find out the latest news. The other side of this story is the fact that we have to exert choice. If we are always accessible on our mobile devices, we are the only ones who can press the off switch. Many people tell me how they can’t resist checking their Blackberry’s, even at home or during the night when messages come in. So far we’ve been able to get out of mobile range or away from email. No longer. Strong will and managing others’ expectations are essential in choosing and creating pockets that are entirely your own, unbeholden to others. Are you up to it, or will you be always connected?

Why do we have no time?

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An issue which almost everyone finds personally relevant is why we seem to be getting busier and busier, and having less time. Last week BusinessWeek’s cover story addressed this issue squarely with the title The Real Reasons You’re Working So Hard… and what you can do about it.

Very interestingly, the angle they took was that business is increasingly based on collaborative networks, a theme dear to my heart. That we are connected to many people (which is why our email inboxes are so full) and must collaborate with others in our work (which requires meetings, building trust, and ongoing interaction) is both the source of the challenge, and at the heart of the potential solution. The answer is not in becoming disconnected, which is a dead-end path, but in plugging effectively into the networks so that we can play just the roles we choose and where we can create the most value. With the right strategy, it is indeed possible to transcend the downward spiral of busy-ness. In the article they referred to Rob Cross, author of The Hidden Power of Social Networks, and founder of the Network Roundtable, which I am research leader for on client connectivity. Many of the members of the Network Roundtable were also referenced on their work on collaborative networks in organizations. Yes, a world of pervasive information and knowledge networks is challenging, but if we understand how to deal with it effectively, we can create far more with far less… including the most precious commodity of all, time.

The rise of modular process networks

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John Hagel and I gave the two keynotes at the Silicon Valley KM Cluster last week. Hagel is a true thought leader in the intersection of technology and business strategy, with landmark books including Net Worth, that in 1999 described the currently still-emerging phenomenon of “infomediaries”, and Out of the Box, on how web services are transforming business. His new book, The Only Sustainable Edge, co-written with John Seely Brown, describes how value creation and innovation are increasingly happening at the edges of organizations, economies, and markets. At the event Hagel talked about “modular process networks”, in which business processes and activities become increasingly modular, and are brought together dynamically from throughout the network. In an excellent overview article (and in the book) the authors describe how the motorcycle industry in Chongqing, China, can now make a quality motorcycle for less than $200 by implementing standardized, modular design across an ecosystem of manufacturers and suppliers. China currently produces around 50% of motorcycles worldwide. While John and I use different language and frameworks, the messages in my book Living Networks and that I am currently preaching on modularization, integration, and global innovation networks are based on very similar premises. Executives should pay careful attention to Hagel’s vision of the future of business.