Deep Freeze on Ice

I’m leaving for a month-long overseas trip, most of it with dial-up Internet access at best. I’ll use this as an excuse for taking a break from posting.

It’s entirely coincidental, entirely, that this coincides with a fallow period; you may have noticed, Dear Reader, that posts have become fewer and further between.

I’m often reminded of my father’s maxim: Have something to say; say it; stop. The first step has always been my greatest obstacle, and it looms large at the moment.

The peasants don't know they're revolting

“Anonymous” raises a good point in his comment: the peasants may grumble, but they hardly ever revolt. (The reference is to a Power Lab management simulation we attended.)

The majority of Americans distrust commerce in general, and big companies in particular. Their jaundiced view is no doubt shaped by the statistical necessity that most people are down in the grubbier reaches of the corporate pecking order. Does this mean that they’re going to overthrow capitalism? Surely not. Even the French have only crippled it… [1]

However, the fact that people don’t revolt doesn’t mean that they don’t act. While they may not act against their own company, they may well act against the interests of company owners. I suspect that many salary slaves in the media business are turning out pro-quality home-made videos in the hope of a YouTube hit – which will undermine the business models that pay their salary. Likewise, at least some Open Source developers are coding for money during the day – and it remains to be seen whether the eventual new equilibrium in the software business will have enough well-paying jobs to fund such moonlighting. (I believe it will, since many companies generate Open Source code for non-revenue commercial reasons.)

The Power Lab models just a single hierarchy. Real life consists of many interlocking networks, only some of them hierarchical. A nonentity in one network (the workplace, say) may be very influential in another (the residents’ association, or an online activist group). Someone who feels they’re making a difference in their “true life” network may not feel the need to overturn their “work life” network. (This accounts for at least some of the attraction of synthetic worlds.) When these networks collide – as when, say, an online movement discredits a corporate special interest – a corporate peon-by-day may not even be aware that they’re in a fight with their own CEO.

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[1] The Economist has a very good report on France’s Troubles in the April 1, 2006 issue. It cites an undated GlobeScan survey in which people are asked whether they agree or disagree with the following statement: “The free-enterprise system and free-market economy is the best system on which to base the future of the world.” The Chinese are the biggest fans of capitalism (74/20 agree/disagree), ahead of the US (71/24). France is the most hostile of the 20 countries polled; fully 50% disagree that the free-enterprise system is the best, and only 36% agree. Globescan finds “a striking global consensus that the free market economic system is best, but that governments should also do more to regulate large companies.”

The Lilliputians’ new ropes

There’s a dirty old joke about an ant and an elephant (#6, and another version), in which the ant grossly overestimates the elephant’s awareness of his, um, efforts. Until recently that’s been a pretty good model for the relationship between activists and large corporations. Big companies have been feared and loathed since the beginning, but the web is giving more heft to the rancor.

Big Business is Bad

I’m getting a first-hand sense of the antipathy towards large companies now that I’m outside the corporate cocoon. It’s very noticeable at universities, particularly in Humanities departments. (Engineering departments have a shot at raising money from corporations, so they’re more polite.) It’s a given that Big Business is Bad. Academics see themselves as fighting the good fight against behemoths that are immoral by nature, and amoral at best. Companies are heartless, ruthless, exploitative, and hostile to individual values and freedom. The ideological underpinnings for this animosity range from paternalism, to progressive/populist activism, to neo-Marxist suspicion of capitalism as such.

This is a broader phenomenon, of course. NPR fund raisers argue that the public should support their radio stations because they’re “not beholden to corporate interests”. Hostility towards Wal-Mart, Microsoft and now Google is a staple of the chatterati.

The population at large is ambivalent, and attitudes seem to be swinging against corporations. Take this conclusion from an October 2005 Pew Research Center study:

“Public opinion about business corporations has taken a nosedive, and favorable ratings for corporations are 20 points lower than they were in March 2001. The decline is seen across most groups in the population, with favorable views falling about as much among conservatives as among liberals. Indeed, in the current poll, just half (50%) of conservatives say they have a favorable view of business corporations.”

In 1985, favorable/unfavorable opinions about business corporations were divided about 60/30; in 2005 it was evenly split at 45/45.

A Pew study of the 2004 political landscape reports:

“There has been a small rise in the percentage of Americans who believe corporations make too much profit (62% vs. 58% in 2002). A declining number now say corporations strike a fair balance between making profits and serving the public interest (38% say that now, compared with 45% in 1999). And while there has long been overwhelming agreement that too much power is concentrated in the hands of big companies, a growing percentage completely agree with that statement (40%, compared with 33% in 2002 and 31% in 1999).”

From ambivalence to abolitionism

The ambivalence arises because most Americans work for corporations, but don’t enjoy the experience. It’s hard to run one’s own business; fewer than 10% are self-employed. Given an alternative universe, though, people prefer to work for themselves. Edward Castronova points out that there are few if any corporations in massively multi-player online games:

The economy consists of thousands of one-person firms, each with its own stock of capital and one laborer. It doesn’t have to be this way – one could very easily have explicit firms where one person or a group of shareholders hires groups of avatars to do work for them. But it seems that one of the attractions of the synthetic economy is that it can be designed so that everyone can be independent, can be their own boss. There is most likely a strong latent desire to do this. Certainly, Earth’s economy is not very strong on that point; there are too many risks to being an entrepreneur, and so most people work for others. Synthetic economies don’t need to operate that way and, in practice, such an arrangement has not been a popular design choice. [Synthetic Worlds : The Business and Culture of Online Games (2005) p. 186]

The antipathy might come from the work environment, but the animus comes from a legal construction. The notion of a company as a legal person is a 19^th Century innovation. And yet as a matter of fact, it’s a group of people, not a person… I often find myself switching between referring to a company as “they” and “it” in a single paragraph. The ambiguity is rooted in the very words we use; sometimes we talk about “a company” (literally, a group of people), and sometimes “a corporation” (from the Latin corpus, a body).

This makes it easy to criticize companies as immoral, heartless etc., and easy for executives to dismiss such claims. We feel that since a company claims some of the benefits of personhood, it should bear similar ethical burdens, whereas executives can argue that personhood is simply a legal fiction. (An extreme response to this tension is the movement to revoke corporate personhood.)

The elephant’s view

Most companies see the world in terms of suppliers, customers, and competitors. Those in retail see the public as actual or potential customers; others don’t see them at all. Companies usually don’t think of the public as antagonists. When companies do get into conflict with civil society, they denigrate their opponents as naïve, immature, unrealistic, idealistic, and irrelevant – a set of epithets no fairer than describing companies as heartless, ruthless, exploitative, and hostile to individual values.

While patronizing civil society may have been a viable strategy in earlier decades, it’s a dangerous stance these days. The Internet has given the public better information, and more ways to organize. It is undermining power structures, as when people out car shopping have already researched their purchase on the web, and know the dealer invoice price before they walk onto the lot. At the other end of the spectrum, SMS has helped topple governments, and global broadband enabled the Open Source movement which is reconfiguring the computer industry.

The contest

Political blogs, Napster, bittorrent, Craigslist and Linux represent some successful forays by “the edge” against “the center”. One can see the tussle as tension between two world-views that can be approximated by a variety of contrasts (thanks to Jon Pincus for these ideas):

• Structured vs. ad hoc
• Elitist vs. inclusive
• Commercial vs. non-market (or $$-market vs. new-market)
• Control vs. freedom

So in the end it’s not about an ant and an elephant – it’s Gulliver in Lilliput. And the Lilliputians have some strong new ropes: the web.

Eli Noam and Network Integrity

When I ran my Network Integrity idea past Chuck Cosson, he mentioned a remarkably prescient article by Eli Noam written back in 1994. Prof. Noam wrote:

“This article argues that the institution of common carriage, historically the foundation of the way telecommunications are delivered, will not survive. To clarify: "common carriers" (the misnomer often used to refer to telephone companies) will continue to exist, but the status under which they operate -- offering service on a non-discriminatory basis, neutral as to use and user -- will not.”

Noam came to this conclusion by considering the rise of private networks cobbled together out of common carriage components – exactly what we’re seeing cable doing.

I’ve argued that network integrity is the key Internet attribute that can and should be protected as regulation evolves. I proposed that the lack of effective competition in wireline Internet access justifies the imposition of three requirements on providers: no blocking of access to 3^rd party sites, inter-connection with other networks, and transparency in disclosing terms and conditions of service.

Noam’s policy recommendation of a dozen years ago is remarkably close to my proposal. He concluded that the negative consequences of the demise of common carriage on information diversity and flow could be addressed as follows:

“A carrier can elect to be private by running its own self-contained infrastructure, and having full control over its content, use and access. But if it interconnects into other networks and accepts transmission traffic from them, it cannot pick some bits over other bits. This means that while a private carrier can be selective in its direct customers, whether they are end-users or content providers, it cannot be selective in what it accepts from another interconnected carrier.”

In other words, Noam applied the non-blocking requirement to inter-connection with other networks. He didn’t consider prioritization (ie networks delivering some streams faster than others if their source pay extra), as far as I could see. It might not have been so pertinent at that time, since deep packet inspection and traffic shaping wasn’t as cheap as it is now. I wonder how he would’ve responded... My (reluctant) conclusion has been that prioritization is OK, since it’s a continuum – bad behavior can’t be defined a priori. As long as the packets make it across the net, fast and slow lanes are a matter for the market.

The 15% Rule

Internet Explorer is now has about 85% market share, according to hitslink.com. This is an important inflection point: a firm, or firms in the case of a duopoly, loses strict dominance when it loses 15% of the market.

According to an economist friend, there is no theoretical basis for the 15% Rule. It should be wrong, but it turns out to be a good rule of thumb. IBM started to cut prices when it lost 15% of the mainframe market. Prices are higher on routes where United and American Airlines have over 85% of the landing rights. The same applied in the steel industry and the long distance telephony market.

Since web browsers are given away, one can’t test dominance through pricing power. However, one can see the effect in Redmond through Microsoft’s renewed interest in upgrading IE, and in its efforts to win hearts and minds. I’d expect that Microsoft will pay more attention to standards-compliance, eg CSS. Feature trade-offs will change; the company will pay more attention to the needs of consumer users compared to those of the enterprise customers who have dictated functionality to date.

As for the share numbers: momentum is running against IE, and its share will get worse before it gets better. Getting to feature parity with Firefox may slow down the defections, but the situation won’t turn around until IE can beat it on features. Once users get used to a product, they’re loath to change; and once they’ve changed, a lot of work is needed to get them back. The power of incumbency worked in IE’s favor for years; the tables are turning.

Carlota Perez on recurring technology surges

John Seely Brown alerted me to Carlota Perez’ theory of technology revolutions. It’s a must-read for those interested in the intersection of history, technology, and business. It will appeal most to those who believe that history is cyclical, and most annoy those who think it’s linear.

Perez argues that technological revolutions occur every 40-60 years. After a cluster of new technologies bursts on the scene, there’s first a 20-30 year ‘installation’ period, during which a frenzy of investment leads to a bubble, and a crash. This is only the first half of the story, though. After the turning-point there follows a 20-30 year ‘deployment’ phase during which the technology spreads to all parts of the economy, and becomes the new paradigm. At the end of the second phase, the surge peters out – leaving investors with under-performing hungry capital that’s ready to drive the next revolution.

She describes four and a half of these technological surges during the history of capitalism, beginning with the Industrial Revolution that began around 1771 when Arkwright’s mill opened in Cromford. We’re right in the middle of the fifth, which began around 1971 when the Intel microprocessor made its debut.

Perez’ model nicely explains two sentiments which always seemed paradoxical to me: that the glory days of the computing revolution are over, and that the impacts have barely started to be felt. The glory days were the installation period leading up to the dot-com bust. In that phase, financial capital drives build-up of the new infrastructure and the new technologies. At the end, its potential is clear but not yet realized; full deployment will happen in the second phase. We’re at the beginning of the second phase. Is it a coincidence that Perez’ second phase will end just about when Kurzweil’s singularity is supposed to hit? Probably not, since each paradigm creates a common sense world view beyond which it’s very hard to see, just as it’s impossible to see through a singularity.

The theory is documented in her 2002 book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. It’s well-written and crammed with examples, though occasionally a little repetitive. A video of a talk Perez gave in Estonia is a very good 45 minute introduction to the topic.