"Billionaire" (or why you're still poor)

Maybe I'm just a sucker for an acoustic guitar and a reggae beat, but I actually enjoy "Billionaire" by Travie McCoy. Its lyrics reminded me of the 15 minutes of MTV I've seen in the past 5 years wherein an Oakland resident complained about being poor...as she pulled out her rhinestone-studded flip phone. Poor thing probably only had basic cable.

I wanna be a billionaire so fuckin' bad.
Buy all of the things I never had.

Give away a few Mercedes like here lady have this

Yeah can’t forget about me stupid
Everywhere I go Imma have my own theme music

I’ll probably take whatevers left and just split it up
So everybody that I love can have a couple bucks

Which brings you back to where you started: paycheck-to-paycheck, windfall-to-windfall.

How the Web 2.0 crowd tore the internet a new one

I hate the term web 2.0, but I didn't realize why until I heard the mid-level corporate drones' (they grouplearn these things together at conferences) formulaic explanation of it: "social." They couldn't be more wrong.

The motivation for seeing it as social is a combination of bubble poster children Facebook, Myspace, and Twitter. What they neglected to look at is the beginning of the trend with Google. Expand that list a little and you'll get Google, YouTube, Flickr, Digg, Last.fm, and Pandora. Yes, some of them have thriving communities, but at the same time, some have downright toxic communities. What they actually have in common isn't "social," it's a focus on user experience and a blatant disregard for profits. That's it. What made Google so great was that it wasn't Yahoo's bloated, traffic-driven portal; it did one thing and it did it well.

The key is that none of the ideas were particularly new: personal home pages, search engines, and streaming media all existed in the late 90s, only now, a combination of dedicated engineers, improved technologies, a focus on usability, and someone else's money made it possible for some flavor of these to enter the public conscious.

So what's an established company to do? The conference you're overpaying for keeps claiming the future is in "social." Unfortunately, I'm answerless, here. A bit like Mp3s, Web 2.0 opened a Pandora's box of consumer expectations. People have come to expect a quality experience with few ads, and this simply isn't something most companies can afford to offer. The good news is that most of the obvious changes are already done and most of the displaced web 1.0 products are already deprecated. That said, this newfound focus on the user is fundamentally a disruptive market force, and while simply slapping a tag cloud or user accounts (with avatars!) on your product will make you more "social," it won't change the nature of the product.

Pastiche of Success

This is the first part of a two part series, but don't think of them so much as sequential, but as loosely related observations, or maybe corollaries.

I don't think I ever said this directly (it seemed so obvious only an executive would appreciate it): build a product people actually want. This is an anonymized snapshot of a company that successfully failed to do just that--though not quite.

It supposedly started out with a focus on its product, though in hindsight, that might just be a generous interpretation of the good old days. It soon found its business model to be less than profitable, and rather than simply folding, it entered survival mode...and never left it. It found profit, but at the expense of becoming aimless and fragmented, pursuing any random, but profitable, quasi-relevant venture it came across, and clearly a market follower without the focus or resources to follow through.

This is really a no-man's land for a small company. One on side, it's competing with large companies and their massive resources, while on the other, its competing with the new ideas and revolutionary spirit of startups. There are really just a few directions for the company to go: down the same path, happy to take a profit in anything too dirty for other companies. It could rally around its core product, though it's probably a futile market. Or it could try to move into something different.

I doubt that the management will do anything particularly interesting; there's more talk of markets, profits, and exits, rather than, as I said before, making a product people actually like. In short, it's essentially a pastiche of success--a corporate wallflower; it shows up--to almost everything--but doesn't bother to actually dance.

Priorities

The Accidental Slumlord

While they have a few -luxuries—Bill has a 33-year-old Chevy camper and a satellite dish that gets 250 channels; Will has a $380 Sony PlayStation 3—there's clearly little slack in their finances.

What the House healthcare bill could mean for you

The America's Affordable Health Choices Act (which thankfully isn't a PATRIOT ACT-style backronym) just made it through the House by a narrow margin. Now the big question: what could it do for you?

Most importantly, not deliver on its name. Consumer Reports took a look at what contributes to healthcare costs in America, and the bill (at least according to the summaries I read) does little to address them. The bulk of the bill seems to focus on regulating insurance companies and insuring the uninsured via a publicly owned insurance company.

The proposed regulations force insurance companies to insure more people and at rates that disregard medical history and other factors. Insurance companies are far from the corporate villains public healthcare advocates paint them as, making a profit margin of only 7% or so, so paying for these changes isn't simply a matter of cutting into profits; insurance companies will likely pass the added expense onto their healthier customers. As a nothing more than a guess, I'd say premiums will go up around 10% for most people, but down for people with various medical conditions.

To get closer to universal healthcare, the bill would create a publicly owned insurer and a regulated marketplace for the uninsured to shop for insurance (because going to Google is too hard). To fund the semi-universal coverage, the income of anyone richer than wealthy would be taxed a few extra percent each year. Ironically, according to the Congressional Budget Office the public option panacea I've been reading about would actually have higher premiums than private insurers. Keeping it in the bill is nothing more than an ideological victory for hyper-liberals.

All is not lost, though. The incidental benefit to insuring some of the uninsured is that it would free emergency rooms from dealing with minor problems better suited to a G.P. Hospitals are notoriously expensive, and a level of triage for the uninsured would cut hospital expenses.

In short, the bill does little to address the largest contributors to high healthcare costs--doctors and hospitals--and instead shuffles some of the costs around in a way that appeases various interests with no concrete goal for the sake of claiming involvement in "healthcare reform."

The problem with progressive taxes

With job security running low, the recently unemployed are going to get struck with an irony. Despite the good intentions of progressive taxation--have the rich help out the poor--it's going to slap the middle class with a painful lesson at the worst possible time.

Basically, progressive taxation only works if people have stable incomes. Take two people, one makes $30,000 per year, one makes $60,000 every other year. At the end of every two years, the two will have the same net income, but former will have been taxed (Federal income tax) $8,165 while the latter was taxed $11,187 because he looked richer than he really is. Ordinarily, this isn't a problem--jobs are fairly stable and my example was contrived--but in a deep recession, people will find themselves with unemployment and juicy severance packages one year, but almost nothing the next, and they'll pay more taxes than they ever have at a time when they can afford it the least.

This isn't the first time wealth redistribution programs have backfired. As cutoffs for the Alternative Minimum Tax crept effectively lower, people not ordinarily considered rich started to be affected. At the end of the dot-com boom of the late '90's, many in the Silicon Valley middle class found themselves rich on paper. Through a few bad trades and a tumbling NASDAQ, some not only saw their money disappear, but a high tax bill because the money they never really had made them technically rich.

None of this happens with a flat tax. Every dollar made is taxed the same, regardless of when it was made or how many dollars came before it.

Pitching a startup

A friend sent me a link with five steps to selling a product Billy Mays style, but they seemed to apply to more than just infomercial wares; they were all great for pitching startups.

1. It must solve a problem.
2. It must have mass appeal.
3. It must be unique.
4. It must offer instant gratification.
5. It must be demonstrable.

When you pitch a startup, you're pitching both an investment and a product. If you can't quickly convince people of its value as both, you're on your own.

Regressive taxes

Progressive taxes have been criticized for punishing success--taking disproportionally more from the successful while providing them less. What if, instead, taxes were regressive--baseline taxes were assessed for government services (health inspections, defense, infrastructure), while the remainder of taxes were based not an ability to pay, but an ability to provide?

If people who made less than some amount were taxed at 100%, but given health care, basic shelter, rationed food and utilities, they'd have incentive to look for work (if not just out of boredom), eventually earning a small paycheck--enough for a TV, computer, or car.

Such a tax system would essentially vary the level of socialism based on ability to provide and not punish people who are successful. What's especially clever is that during a recession, as paychecks shrink, increased taxes force people to cut back, providing a safety net like an insurance company would--based on risk.

A regressive tax might sound unfair, but if it's unethical to tax a couple's second paycheck higher than the first, and it's unethical to let poor people die of starvation, the only compromise is a regressive tax that imposes a command economy on those that refuse to participate in the free one.

Variable paycheck

Companies are clever.  When times get tough, they start cutting pay...except for actual pay.  That's disheartening and sends a sign that times aren't just tough, they're coming to an end.  Instead, they have clever alternatives that employees hardly notice.

Stock options

Stock options are great for employers.  They're great for attracting workers, give the workers an incentive to say (they call them golden handcuffs for a reason), just don't pay that much.  When the bear starts wandering down Wall Street, they get better.  As they drop in value, companies see fewer options exercised for less money.  Thanks to Sarbox, they see a drop in expenses, all while employees blame themselves for not exercising at the peak.

Bonuses

Kiss these goodbye!  Big companies use complex equations with more factors than factorial to set bonuses.  Lucky for them, the factors are easy to manipulate, so despite your perfect performance, a 3% drop in company-wide customer satisfaction drops bonus pay into a lower tier.

Perks

Even the Silicon Valley entitlement of free bottled water can be on the chopping block when it's time to make cuts.  Expect cutbacks in the breakroom, supply cabinet, and cafeterias, and don't be surprised when your subsidized ride to work gets thrown under the bus.

Offsites

Not only do these cost money, they take you away from work.  Team building works best when the bulls are running.  Fear works best in a bear market.

Catering

Not the lavish executive meal catering, but sandwiches or pizza at mandatory lunch meetings.

Parties

Nothing says "Merry Christmas" in a depression like a pot luck sans luck.  December layoffs are practically verboten, anyway, so might as well cut what fat (and oh, what good frosting it was) they can.

Pay cuts vs. layoffs

These days, there's a lot of talk about layoffs at big companies (and small companies), but there's a lot less talk about pay cuts, although notably, HP announced that regular employees will see a 5% cut in their income.  It might seem bad, but the effects are probably better than a 5% layoff, and here's why.

The labor market has been flooded for a while, now.  Even during the good times of the mid-2000s, it was an employer's market.  Qualified applicants had to apply for many positions, maybe got a few interviews, but just one job offer.  College students fought over internships to the point where industries took advantage of the scarcity of internships and made the positions unpaid, claiming the experience was pay enough.  When the economy declined, even more people entered the labor market due to layoffs, fewer openings for recent graduates, etc., but not only did the supply of labor go up, the demand went down.  Given typical supply and demand curves, the price of labor should fall, but it hasn't.

Part of this is due to government protection of workers through support of labor union monopolies and rights favoring workers.  During the Great Depression, a change in the Supreme Court, along with pro-labor policies and laws from congress, led to the rise of unions, in part because the plight of workers was more sympathetic than businesses.  The price floor the unions created limited the number of jobs available, despite a demand for labor the market would otherwise price cheaper.

Not only do liberal (as in free) labor policies lessen unemployment, they lessen recessions.  Given the threat of layoffs, people will prepare for the worst case, not the average case; think of it as employment terrorism.  Purchases of items are put off until they're either needed or the labor market is improving.  Pay cuts distribute the risk--a very socialist goal--through very free-market capitalist mechanisms, supply and demand.  Instead of an entire workforce preparing for the worst, a pay cut obligatorily prepares them for the expected, reducing a hoarding/layoff cascade through economy.

This doesn't work for every sector.  The velocity of money decreases in a recession, and any manufacturer needs to cut back to avoid a large, growing inventory.  Still, while more might not be a good option, better might be, and with cheap labor, a recession is a great time for a company with a solid balance sheet to develop next-generation products at a bargain basement price.

Goodbye Iraq, hello Afghanistan: why Obama can't bring the troops home

In a word: jobs.  President Obama's latest goal of creating or saving 4 million jobs can't stand to lose the jobs created by the Iraq war.  At recent count, there are 144,000 U.S. troops in Iraq and 190,000 independent contractors.   Given that one third of a million people working in Iraq, between reservists, troops in training, troops currently rotated out of Iraq, defense contractors not working abroad, and 44,000 troops in Afghanistan, wars in the Middle East are easily employing 1 million people.

These jobs are essentially off the table.  The administration can't claim to be saving jobs by not eliminating them, itself; the saved and created jobs need to be in the private sector--something it can't directly control--hence the focus on things like clean energy and infrastructure projects.  It's between a rock and a campaign promise.  Essentially, continued spending and shuffling troops is easier than adding 1 million to the already-tall order of 4 million jobs.

The financial crisis of 2008 explained for art students and engineers

Ever since 1995, stocks have been historically expensive. In 1996, Alan Greenspan famously described the market conditions as "irrational exuberance." Since then, the market, even after the dot com bubble, has been propped up by financial engineering. Everything that's happening right now is the result of the last decade being built on a house of financial cards.

Don't think of what's happening as a crash. It's just the hangover from a great party. You were looking at you account's value through beer goggles.

About the chart (for the engineers): the trend line was chosen so that prior to 1995, roughly as much was below it as above it. No reasonable trend line makes even 2002 look like a 20 year bargain. The chart is on a log scale, so consistent, growth, e.g 10% annually, would be a line. This is the least scary chart. Linear and logarithmic charts of the Dow following 1970 are a lot more depressing.

The shaded areas represent the following recessions:

• The Great Depression
• The Recession of 1953
• The Recession of 1957
• 1973 Oil Crisis
• Early 1980s Recession
• Early 1990s Recession
• Early 2000s Recession

Rereading an excerpt from an old post,

"I think there is a big, big play to be made in the mobile arena, [but] ...people have not figured out where it's going to be. Look at the raw number of handsets...As it relates to content, no one has put it together, yet"

Meanwhile, the first "Google Phone," a handset running Google's Android OS, was just released. My initial thought was that Google's an ad company, so this makes no sense, but I realized what Google's after: the mobile ad market. Google's been trying to tap this market for a while, but so far, it's been unsuccessful.

Platform matters. Regular phones are broken at practically every level. Bad hardware, bad provider, and bad software (even within software, the entire stack is broken). In a way, they're practically unusable for anything beyond phone calls and texting, which happen to be where carriers make the most money. Google saw this, and recognized that a new mobile browser wasn't the solution, it had to change the way phones are used.

The plan probably won't work. Google has competition from Apple, and the two carriers with faster networks aren't even involved with the iPhone or Android, so breaking into the market is tough, hence Google's role in the wireless spectrum auction.

Even if Google squeezes its way into the market, I'm still not convinced it can sell a significant number of mobile ads. Squeezing an ad onto 6 square inches just doesn't seem as practical as an ad for printers when I search for "troubleshooting deskjet 810" on a PC.

First to market

Face it; developers today are spoiled. Hardly a minute goes by without them using an IDE, a toolkit, a framework, a platform, an API, or a even a mouse, but that's not to say this is bad. Quality, reliability, and speed have matured in everything from the lowly 7400 series up to the once-perpetually-blue-screed Microsoft Windows. And this is good. It brought computing to the masses, transforming a machine that calculated math tables into a machine that connects us, entertains us, and sometimes inspires us.

But this isn't where the money is. Before Woz worked on the Apple I, he designed functional, but hacked-up CPUs that took half the gates of other designs. For an established company like, cheaper designs were nice, but for a startup like Apple, designs using half the gates of the competition meant a product could have a two-year lead to market.

The best startups develop technology that shouldn't be ready for a few years, and not with architectural pedantics, but with a bag of hacks. When they succeed, they have both a technological edge and an existing user base--barriers--that any entrant to the market would have to overcome. This is what startups are about; not a nifty tool that a Googler could develop in his 20% time, but something that the market hasn't seen, something almost impossible.

Novelty watch: Windows 7 and Surface

Microsoft gave the world a peak at what their next OS, Windows 7, would look like at the All Things D conference. On the heels of Surface and it's multi-touch input, Microsoft decided to bring the technology to consumers sooner by adding it to 7.


Video: Multi-Touch in Windows 7

Never mind how single-touch a la tablets flopped, the applications for dual-touch are even more limited. Most are at best nifty, but one of these novelties is so bad, it reverses years of advancements: the multi-touch photo browser. Not only does the photo browser let users circumvent a selling point of technology and disorganize their photos, it offers only marginal benefits over a stack of photos on a coffee table.

Which brings us back to Surface, which I admit is quite nifty.

Reason #1 startups fail: software underestimates

A friend sent me a link about a programmer who was approached by friends to work on a startup, only to find that they thought his role was so easy, he'd do it for free.

Between budgets, man-hours, and even CPU requirements, underestimating how long software takes to write and test is easy. And it's not only a problem for startups, companies like Microsoft have the same problem--Vista wasn't just late, it was missing features. The good news for startups is that deadlines and requirements are often flexible, but missed deadlines kill morale.

Basically, the only people worse at estimating software schedules than programmers are managers, and the only people worse at dealing with missed deadlines than managers are programmers.

Former Lycos CEO on the startup market

Why is it that CEOs who cashed out of failed companies early end up becomming VCs? No matter. Kara Swisher of All Things D interviewed former Lycos CEO Bob Davis, hoping for a few bits on wisdom.

"I think there is a big, big play to be made in the mobile arena, [but] ...people have not figured out where it's going to be. Look at the raw number of handsets...As it relates to content, no one has put it together, yet"

Platform matters. Remember WebTV? It was (and barely still is) a set top box paired with a keyboard for browsing websites on TVs. Despite the potentially large audience and the built-in market of newcomers to the internet, it never caught on. WebTV was a nifty idea, but Tivo is what brought TV and the web together, taking features from each component, and solving a problem that affected people.

So what's a relatively new VC do, now? Shamelessly promote a startup he funded, Quattro Wireless, that reformats the web for mobile phones and provides ads for web-enabled mobile phones. Their problem is that they're the WebTV of Web 2.0, and while trying to start an ad network--an revenue source--is admirable, if monetizing the web is hard, imagine trying to monetize a platform that isn't used for purchasing, has far less traffic, and far less space for ads. Amazon.com predates Adsense by several years. Maybe people should figure out what people are selling via phones before they start building advertising platforms.

Here's where Davis gets something right: when asked what's overhyped, he responded with the natural "social networking." More interesting was his take on social networking 1.0. He looks back on Lycos acquisitions Tripod and Angelfire as the Facebooks of their day. What's changing isn't the technology--neither the web, Facebook, or Google did anything to add to the internet--it's that the internet is changing from being generalized to being specific. Someone using his 1998 Geocities homepage to post personal information, a résumé, family photos, and a his research on Mark Twain would today use Facebook, LinkedIn, Flickr, and Wikipedia to do the same things. Generalized tools might be powerful, but only specialized tools find an audience.

Monetization is hard

Web 2.0 wasn't proclaimed a bubble for any of the criteria that define a speculative bubble. Valuations aren't particularly crazy (few startups have sold or had an IPO), there isn't any "flipping" or speculation, and there aren't many people outside of the industry involved. People saw what was going on and recognized the South Park gnome business plan that dominated the 90s. Startups were sporting spiffy UIs, large userbases, but now, found a way to make money: ads.

Only it wasn't that easy. Take Facebook. In a Motley Fool piece, one fool had this to say:

Since some of the finest marketing minds in the world have tried and largely failed to monetize social networking already, I see many years of losses and negative cash flows ahead for Facebook.

Google was able to monetize search because of the nature of search. If you're looking for information on digital cameras, there's a decent chance you're in the market for a digital camera, so an appropriate ad is shown. Social networks, on the other hand, despite having detailed information about you, aren't complementing their service with ads, but their service is instead competing with ads.

Or take an anonymous startup that's essentially many niche forums. They know what their users are interested in, but there isn't an advertising platform that has relevant, niche products, and a lot of advertisers are only interested in US pageviews. When they turned to adsense as a last resort, they were making $500 a day, but for 50 million page views.

Simply gathering pageviews, even by the millions, isn't enough to turn a reasonable profit. What's worse, what value these startups have isn't in their technology, but in their use. These startups are more apt to see new competitors than an acquisition--becoming devalued is more likely than growing.

My best startup advice

Strange for this to be such an early post in the blog--you'd think epiphanies like this would come later--but it's certainly useful early on.

Solve a problem that affects you.

Look at open source software; the developers are driven by a common problem, not by money (but perhaps recognition).  Define success as making your life easier and gaining experience.  You'll gain more--in both experience and recognition--through the completion of a profitless startup than by abandoning a potentially profitable one.  Yes, a business model is great, but don't focus too much on it.  A business model doesn't define a good idea; it's just a criterion for a potentially profitable idea.

Platform matters

The Facebook application platform didn't do anything particularly new.  Take Scrabulous, a top 10  Facebook app.  Games associated with friends lists are far from new; AOL, ICQ, and others all tried variants of this idea in Bubble 1.0, but none of them were able to bring IM to be more than just messaging.  Even without integration, sending a friend a link to Yahoo Games wasn't a barrier preventing consumers from playing online games.

Importance of platforms is nothing new.  IM took users from email, mp3 took users from CDs, and so on.  What you're doing matters as much as where you're doing it, and certain platforms do a better job facilitating tasks than others.  This isn't to say Facebook is the alpha-platform.  Facebook may be moving into the IM market, they'll undoubtedly see stiff competition from existing services, as well as web services, and while their entry into the email market didn't go unnoticed, "Messages" hardly displaced email.

Presentation is as important as function.  Not only are numerous startups, e.g. Meebo, based entirely on presentation, but superior presentation can quickly displace even a 5-year lead in time to market.