Michi Knows

For anybody following economic news, the US dollar is in shambles. Initially, I thought this would bring about a depression in the IT sector and possibly a bubble collapse. Don’t get me wrong: I believe there will be a softening in our industry due to things like the crashing housing market (think of all the Adwords purchases that will evaporate). However, another unintended consequence is that off-shoring (the practice of hiring foreign programmers), which was all the rage 2 years ago, is becoming impractical.

As evidence, check out the exchange rate between the Dollar and Rupee: it’s down 15%, and the vast majority only in the past few months. We can sit here and argue if the drop will continue, but we can probably agree that the dollar isn’t going to rise back up anytime soon.

This sort of exchange rate suicide means off-shoring practices are now 15% more expensive across the board compared to 24 months ago. Any company doing this has more and more reason to boot the practice, especially considering the added cost of managing remote, non-native English speaking employees. Considering things like term contracts and the threat of a further falling dollar, the practice actually becomes quite dangerous. Just think: you sign a $3M two year off-shoring agreement only to have the dollar drop 10% next year — suddenly you owe an extra $300K.

So aside from all the arguments that exist about money flowing from the housing market back into IT in the form of capital investment (rather than through ad purchases), we can also safely assume that in-house IT operations themselves will become more valauble in 2008.

I follow the tech news as closely as ever, it’s just that I think I am at a point where all news feels like “old news” by the time I have the free moment to write… But I digress.

Recently, there’s been horrible turmoil in the financial markets due to the housing bubble’s collapse. It’s really beyond the scope of this blog to discuss this matter, but I believe the turmoil isn’t over for several more months. That said, I’ve wondered how it will impact the Internet 2.0 bubble that currently exists.

Unlike the previous bubble, this bubble is definitely fueled by results. As in, companies that are producing revenue are the ones that are becoming successful. But the big problem with today’s bubble - and why I refer to it as a bubble - is that the success is circular. If you cut any part of the circle, all other parts are adversely affected. It’s just like how in the housing bubble, everybody was making money because all prices were going up; success of one neighbor helped fuel the success of another.

Did you know that 37% of all online advertising dollars are spent on financial services such as mortgage loans? There are thousands of blogs, web services, and web applications out there that exist solely for advertising dollars. You might say, “That’s nice, but my company doesn’t deal with financial service ads!”

You are right. I would venture a guess that far less than 37% of web searches and web sites are financially oriented. However, if advertising dollars dropped, it chills the advertising market as a whole. If financial service advertising dollars dropped 30%, for example, we could be talking about a double digit revenue drop (11%) for companies like Google and Yahoo. But it doesn’t stop there.

Once news of a weakening economy starts to sink in, followed by news that Google and Yahoo fell far below sales projections, venture funding begins to cool. Right now, we are beginning to see the reemergence of dumb investments straight from the bubble 1.0 playbook. These types of investments will be be the first to die off as risky investing will be highlighted by the other crash. Certain breeds of “go until a fool buys us out” startups die. 

All of this relies on the fact that online advertising somehow grows less effective. If online advertising were to become even more effective, a correction would not occur. So then I close the circle with the other secondary effect: consumer spending.

As consumers begin to spend less due to a cooling economy, that definitely effects Internet ads. Internet shopping is the epitome of impulse buying: shopping is as simple as two clicks and typing in your credit card number. But these types of purchases are the first to die off when consumers feel a pinch.

Some of the largest sites in the world are still only small companies when compared to equally ranked brick and mortar businesses. And believe me, their equivalently ranked real-life business counterparts have a much larger profit. And like all bubbles, because the Web 2.0 bubble is circular, any slowing in one sector drags down the rest. That is because the bubble is driven by speculation. There are probably 100 or more funded video startups out there, but most if not all are just running losses.

Everybody is speculating that these will become the next big thing, and thus dumping cash on them. Wait, isn’t that exactly the same thing as what happened with all those homes?

In a speculation driven market, a correction is inevitable. It’s exactly how the housing market got to where it is now.

Facebook has a polling feature they introduced a few weeks back. They allow people to vote on polls that show up on their home page if they match a certain demographic, as set by the poll creator. I just saw a poll titled:

Are you going to get an iPhone?

The results of the poll was 7% said Yes. This is significantly higher than the 1% Apple is supposedly hoping for. This is especially amazing since the vast majority of college students are probably way too broke to be affirming any intentions on buying an iPhone.

At 18% answering Yes in the 35-49 age group, they account for half the people affirming intentions to buy an iPhone. The 18-24 and 25-34 age group each had about 7% yes responses among their age group. Males dominated Yes votes 3:1.

Yes votes jump up another 8% across the board if AT&T loses exclusivity on the iPhone (people really hate AT&T). Interestingly, 63% voted No, regardless.

The poll sampled 1000 users whom were self-selected, and is by no means scientific. Still, an interesting bullet point for future considerations on Apple’s success.

Why doesn’t the iPhone have chat, voice dialing, or MMS?

In a time where chatting is as important as the phone feature itself, why would Apple omit it? Given that Apple has iChat, why not have that installed on the iPhone by default? Why wouldn’t a phone that has no physical dial pad lack voice dialing? Since the iPhone has a camera, why can’t I take a picture and send it via MMS (picture message) when virtually every other camera phone can?

The answer: they ran out of time.

There’s a reason Apple doesn’t talk about their products before shipping, and that is because they can miss their targets and nobody would ever know. From the very beginning, icons have been moving around on that ever-famous iPhone interface. It seems there is now still room for four more icons on the final version coming out tomorrow (June 29, 6pm local time).

So which of these features should we see arrive in the coming months via iTunes sync update? Not chat or MSS. Apple may save those features for version 2 of the iPhone (which would come out late 2008 by my guess). Picture messaging and chat isn’t a big deal. You still have email, which replaces MMS, and chat can be done using text messages or web based chat programs like Meebo.

But I think voice dialing will come out later in a software patch. There are numerous problems with not having voice dialing on a touch screen device, most of all because dialing while driving becomes impossible — or extremely dangerous. At least with a physical keypad, most people can get to the call without looking down, but on an iPhone, it’s impossible to do without looking. This is one of the biggest usability requirements that has not been met on the iPhone, and because it involves the safety of the public at large, I’m pretty sure it will not be a feature they hold until version 2.

As an addendum, I also expect to see games come out perhaps in January. We probably won’t see songs as ringtones soon since that is a “political” issue (as in, carriers will hate the iPhone if it starts chewing up one of their cash cows). And flash support will likely continue to evade the iPhone since it was omitted for power consumption reasons — that is, until Adobe works something out with Apple, which they will.

Google made a strange acquisition today. Google bought GreenBorder, a security application that sand boxes browsers. Basically, it ensures that when you close your browser, you destroy any potentially malicious viruses and trojans along with your session. It is a “sand box” as in stuff that happens in your browser stays in your browser, keeping the rest of your system safe.

This is weird on multiple levels:

• It has nothing to do with their core business
• Computer security is a highly competitive and saturated market, leaving little room for massive unchecked growth
• Browser security is a tiny niche of computer security and leaves other major Internet based attack vectors open, especially through Outlook (ugh, huh?).

One potential use for this application is the ability to keep competing search engines from changing a user’s default home page. This normally might exist to fight off spyware, but one can see the additional competitive edge.

Google’s aim may be to make the Internet experience much safer. But I can’t see this gaining wide adoption unless they give it away. Google Pack currently has Norton and an anti-spyware scanner, and this would make a cozy fit for a browser-centric solution. It would keep the computer clean where the scanners may have failed. Thus, in my eyes, this is all about bolstering the software offering of Google Pack.

Google Pack is a free software suite given away by Google (click on link below to try it out). It is a collection of free tools such as Firefox, Skype, and Picasa.

Google Pack is an important pawn in Google’s strategy. In giving away the software suite, they are also increasing the market shares of:

• Firefox
• Google Desktop
• GTalk
• Google Toolbar

These are all very important components in keeping Microsoft at bay. So my prediction is that we should see this (or a re-branded version of it) in Google Pack within six to eight months.

Update: Techcrunch has their own theory that this purchase is for enhancing Google Desktop.

Microsoft has a monopoly ideology, that emphasizes total proprietary integration before all else. For the past two decades, this was Microsoft’s greatest strength, making it nearly impossible for competitors to gain a foothold. But now, as open source is gaining steam and the Internet makes interoperability a requirement, I think this ideology will be Microsoft’s biggest hurdle in the next decade. Microsoft has a lot of great products: Office, .NET, Visual Studio, MSSQL, IE, IIS, etc. But all of these products share a common theme of trying to stamp out established open standards.

This puts Microsoft at odds with the open source community and many governments. If Microsoft was new to the fire hydrant market, they’d be mass producing fire hydrants that required Microsoft Certified Wrenches to open. It is no wonder governments are weary of the continued reliance on Microsoft’s closed standards.

Microsoft uses closed architectures in order to lock its customers in - this will stop working soon. It’s difficult to stop using Outlook when all of your emails are in it and you can’t figure out how to get them out. It’s impossible to stop using IE when all of your web sites require ActiveX. This sounds like a great win-win for Microsoft, but I am saying it will actually hurt them in the coming years as people start to realize many of the technologies Microsoft offers are becoming a commodity.

Word applications are finally beginning to mature to a point where more new features aren’t worth dishing out more money for an upgrade. Open source database alternatives such as MySQL are finally catching up to the big boys and are used at many places, including Google. Linux is already one of the most popular web server operating systems. And Firefox, a popular open source browser, has gained major usage shares in Europe.

The Proposal

A few years ago, Microsoft was nearly broken up as a result of the infamous anti-trust lawsuit. People believed Microsoft would get split into three divisions: Windows, Office, and Everything-Else. Well, that didn’t happen, but looking at what could have happened as a result, I think we missed a grand opportunity. And so did Microsoft. Microsoft’s blind ambitions toward total user control has caused its products to corner themselves into a “Windows-only” box.

Microsoft should restructure itself for more autonomy between its subdivisions that emphasizes less reliance on other Microsoft technologies. As in, each component of Microsoft should try to sell its services to as wide of a market as possible. Microsoft’s products that stand to gain the most from this are:

• Visual Studio / Windows Server
• Office
• Windows itself

On the flip-side, Microsoft’s product that will be threatened most is IE. But that is assuming IE doesn’t make some predictable improvements that should follow suit if things go as I predict. Allow me to explain.

Visual Studio / Windows Server

What needs to happen is simple: All of Microsoft’s web development frameworks should stop assuming or requiring that the client is using IE. As in, it needs to produce 100% standards complaint HTML and JavaScript, as well as not use any proprietary hooks such as Silverlight or ActiveX. With this simple assumption destroyed, you remove one of the top reason why some companies avoid using the ASP/C# development environment — their website breaks in some clients’ browsers. The other reason, of course, is the need to run it all on Windows machines.

While I don’t like the fact that ASP, .NET, and other server-side technologies require Windows, I am willing to put that aside for a moment. I realize that there are certain operating system hooks that Microsoft is using that makes this pairing very convenient. So while it is in their best long term interest to separate their server-side development environments with Windows, I won’t advocate that here — it’s simply unreasonable to expect them to decouple that for the time being. The time will come, however, when it will be in their best interest to make their server-side technologies work on other systems as well. Because of this coupling, we should see a huge spike in demand for Windows Server as developers become more open to using .NET. A wider acceptance of ASP/.NET also means a greater demand for Visual Studio.

Moreover, since the web involves strangers that may not use Windows technologies, lacking support for non-IE browsers is a major weakness in Microsoft’s offering. Fixing that weakness seems like a logical move to me. 

Office

Office needs to support open-standards. The reasoning for this isn’t a plea by someone hoping for free alternatives; this is all about getting new customers. In some countries, Microsoft has a stranglehold on the market. However, in countries where Microsoft has a small presence, it is increasingly common for people to use cheaper, free alternatives. The problem is that a lack of support for open standards means those governments have a strong reason not to adopt Microsoft Office. They don’t want to edit someone’s file and break all the formatting, or otherwise render the file into a “MS-only” format.

The biggest market for Microsoft isn’t the current market: it’s the upcoming one. Office is still far, far, far ahead of its competitors in terms of integration, stability, and ease of use. The only component missing is the interoperability with open standards. If it gained this feature, I am confident Microsoft would stop bleeding away potential new customers (i.e., governments).

Windows

Windows is insecure, right? Or is it IE? Or is it Outlook? Well, to the average consumer, all three are insecure. But in reality, it’s the integration of these three elements that created one of the worst computer security nightmares in history. Because each trusted the other absolutely, compromising one part meant the other two were infected as well. This is how people would get a viruses by clicking on a link, or how an email would install IE spyware, or how looking at a picture would cause you to become an email-spam bot.

Microsoft has taken recent steps in trying to make these components isolated, but the root problem still remains: IE and Outlook are designed to utilize features in the OS that most applications - short of your virus scanner - do not. But to do this, Microsoft should make sure its applications play by all the same rules everybody else does. As in, its OS shouldn’t give special exceptions to IE or Outlook.

By forcing each component to work completely blind to the other, you increase security. This improves the overall image of each of the components, especially Windows. This is a long term investment.

IE

IE doesn’t necessarily lose on this, but its importance to Microsoft changes. Microsoft shouldn’t care so much about this browser except its tie in to Live Search. It is no longer a vehicle to forcibly increase adoption of Microsoft technologies such as ActiveX. In the new age, it’s becoming clear that IE must support the standards. With the changes I suggest here, this becomes a requirement.

Microsoft had a lot to gain by making IE destroy standards because it helped keep the IE + ASP + Windows Server triad in place. However, since that scheme is now falling apart, IE sticks out like a sore thumb.

Supporting standards has benefits on multiple levels:

1. Developers are just itching for the day when IE dies. IE is currently hated by developers because it makes web-programming take twice as long: once for IE, and once for all other browsers.
2. This reduces the complexity of the code generated by Microsoft server-side technologies. This code would only grow more complex as new types of Microsoft-only versions of technology come out.
3. IE doesn’t break on standards complaint web sites (this actually happens).

In a standards compliant word, IE has little to offer over browsers such as Firefox or Opera. However, Microsoft stands to lose the entire IE market share if they continue to ignore standards since governments may begin to standardize on the established open standards.

IE would become all about promoting Microsoft’s web properties (Live) rather than controlling web standards. 

The Problem

Right now, Microsoft is on cruise control. They’re happy with their position, and they don’t want to sacrifice it.

In the coming years, governments are the most likely to jump off of the Microsoft bandwagon. If governments begin valuing open document formats, just wait until they realize their web sites share the same problems as their documents. All of those government web sites that currently only support IE will begin to switch away from IE entirely. Once this land slide begins, it’s too late for Microsoft. Suddenly, the demand for their web development languages slumps and the entire virtual market they build around their proprietary .NET libraries falls apart.

As Balmer once said, “Developers, developers, developers” are the life line for Microsoft’s success. When the development dries up, Microsoft’s competitors gain an edge since all of the new applications appear there first. More importantly, as the notion of a “IE-only” web site becomes increasingly ridiculous, the tolerance for proprietary code drops. Thus, they must ensure their proprietary solutions always produce open data formats.

They have to act preemptively here. And this is the biggest hurdle Microsoft must over come: sacrificing their short term gains for much larger long term ones.

It has been confirmed that Apple is delaying the release the next version of its operating system so that it can focus more attention to the iPhone. At a time when Vista was just released, it could definitely hurt Apple to delay their OS. What was so important that it needed to delay OS X by four months?

Music sharing.

I am going to make an unusually bold prediction and guess that Apple is going to add media swapping into the iPhone. To support this theory (purely a theory!), I present you some facts I feel are relevant:

• The iPhone has wireless LAN functionality. Music sharing is a pure software upgrade.
• Something is being developed now that wasn’t originally planned for the iPhone. Developers were pulled from OS X, and in enough volume to slow down the project by four months. They are working on something that is closely related to the operating system, such as modifying the Fair Play DRM scheme.
• The announcement to delay OS X came out today, but the cause must be traced back a few weeks. The decision to move resources for such an important project (OS X) could not have taken one day. Thus, the decision may have been made recently, but it must have been in the works for several weeks. Something happened in the last several weeks that directly influenced this delay.
• EMI announced they would opened up their music catalog a few weeks ago. The songs are to be available DRM free starting May 1, one month before the iPhone is released. Apple must have known about this at least a few weeks prior to the announcement date. This places this news item squarely in the middle of the target timeline.
• It has been noted that the decision to remove DRM was entirely EMI’s initiative. This is a key point. If EMI approached Apple, any corresponding decision regarding the iPhone was made in reaction to EMI’s announcement. This would have left Apple scrambling to catch up to the aftermath of the announcement, rather than being fully prepared going into it. The timeline is further validating by taking into consideration the secondary negotiations Apple had to make with EMI related to such a feature, as well as with the other labels.
• Microsoft has indicated they want DRM-free music in the Zune. If the Zune comes out as a DRM-free sharing device, Apple may lose significant market share. Even a reduced DRM version would help the Zune a lot.

I believe this makes sense on many levels:

• It would destroy the entire premise of the Zune, killing Microsoft’s ambitions in the music player market.
• The iPhone distinguishes itself as a sharing device too. This adds a ton of value to the product. It also makes it the only phone on the market with such a feature.
• It requires no changes to the hardware, keeping manufacturing costs exactly the same.
• It would hasten adoption of the product, even at its high price.
• It distinguishes the iPhone from the iPod on another dimension, no longer making it a simple “hybrid.”

Final clarification points:

• I am not saying all sharing would be DRM free — just the stuff that is already DRM free. This on its own is a huge edge over the Zune. It also completely redefines the music player market.
• Sharing Fair Play media would require alterations to the fundamental workings of the technology. This would require developers that work with Fair Play a lot, such as certain OS X developers, which makes sense.
• Changing Fair Play might effect iTunes, iPod firmware, and OS X. A new version of iTunes just came out, and nobody needs a press release about iPod firmware updates being delayed. The reallocated human resources would compound the delay to the OS.
• If this happens, you can expect a new generation of iPods to appear in 2008 that share this functionality.

I know my theory is crazy. Give it some thought and let me know what you think.

Update: Wi-fi iPods are now rumored later this year.

So Firefox is going social. The idea is to integrate data streams from social networks directly in your browser. In concept, it sounds neat, but I doubt it will ever grow out of a tiny niche. In fact, I think the idea is dumb all together. I think these exact features belong on existing chat clients.

While consolidating social networking data is for the best, Firefox is not where we need to see this feature. I see a few problems.

1. Bloat.
2. Firefox is a minority browser. Users who will use this feature will be a minority of that subset, making the social aspect limited in its usefulness.
3. Browsers are often used in work environments where social networking is not exactly encouraged.

Social network integration belongs in social applications such as AIM. It would be far more useful and obvious if a chat service piggy backed on the existing chat based social network with meta data from Myspace, Facebook, Del.icio.us, Flickr, etc. It makes no sense pushing social aspects in an application that is not always used for social purposes, especially at the added cost of bloat.

If anybody wants to move to consolidate social networks, Yahoo, Microsoft, Google, and AOL have their chance now by releasing a client that integrates with all of the top networks. Perhaps they could even build an API. If I had the time or money, I’d certainly invest in a chat client that supported this.

Just imagine if I could set up an away message and it changed my headline on Myspace or updated my status on Facebook. Or if sharing pictures with friends was as easy as telling them to right click on my username and select “See Flicker pictures.” Or what if when I try to send a message to somebody who is offline, it just sends the message through Facebook instead? The point is that the social networking features could be harnessed to do things not supported by regular chat clients.

The possibilities are endless and the field is wide open.

Today’s post is about the PS3. I find the PS3 to be an interesting product because of its relative success despite its pricing and feature set that is contrary to the customer’s desires. In short, it has features most customers don’t want (Blu-Ray) and because of these features, it costs a ton more.

So imagine my surprise when the media started reporting that the PS3 sold out in Europe and, in fact, broke sales records in the UK.

I remember launch day in the US: every PS3 in sight was sold out and the Wiis barely ran out of stock. But then it was only a few weeks before demand revealed itself: everybody bought a PS3 so they could scalp it to the hardcore fans who didn’t have one yet. As a result, the PS3 aftermarket quickly died and the eBay market followed it. Soon, people were selling them for a loss!

And I remember Japan’s launch, when people were paying Chinese immigrants to stand in line and buy PS3s so they could sell them later. In fact, the story goes that the first person to ever buy a PS3 later walked from the store to a nearby parked car and gave it to his “boss.” It seems to me like the PS3 launch hype is largely due to scalpers.

So what about the UK? With all this record breaking nonsense, UK eBay must be booming, right? Here’s what I noticed after looking at 1423 closed PS3 auctions in the UK:

• High prices (30% markup or more) were commanded by auctions that happened prior to March 25th (launch). This makes sense.
• Only 55 closed auctions went or asked for a price above retail (£600).
• Most that sold for a profit went for £650 (8% markup).
• At £599 (retail), there were 95 auctions that went without any bids, three auctions for the PS3 that sold, and five auctions for the PS3 plus 3 games that sold.
• There are countless pages of auctions below retail price going unsold (requires eBay login). £450 for a £599 console that came out less than a week ago? (see image below)
• In contrast, searches for the Wii show approximately half of all auctions (maybe 60%) closed with a sale. Prices ranged a lot due to bundling, but a vanilla Wii was selling for approximately £300 (65% markup). In fact, at the £300 range (requires login), virtually every auction closed with a sale. And at the £250 range (requires login), the auctions had double digit bids.

I am not doing this to be scientific, but it’s a stark difference from the PS3 opening week in the US. Auctions ranged around $900 for the 60GB model, a 50% markup. I urge others to go confirm my observations. eBay is possibly the single best product demand barometer of our time. I know the PS3 broke records in UK, but then why isn’t the UK eBay demand following these figures? Is there low demand, except from scalpers?

If I’m wrong, the PS3 will continue to sell out in Europe and give Sony the boost it needs. But if I’m right, you should start seeing the negative “too much stock” stories in about 2 weeks when the eBay market reality sends thousands of scalpers back to the store to get refunds.

At the very least, someone explain all of these “buy it now” auctions that are set below the retail price.

Finally, a post not directly about Google!

My friend Ji predicted the story I’m going to share today. It first became clear when the story broke that Google bowed out of the answers service and Yahoo slapped them around. While Techcrunch simply referred to this as Yahoo’s “Morale boost,” my friend pointed out that this could be the beginning of Yahoo’s come back in the search engine market.

It all started today when I read an article that talked about how few ads Google has compared to Live and Yahoo. The supposed reasoning is that Google serves less ads per page to reduce noise, which increases click rates in the long term. So on a search where Google only shows two ads, Yahoo shows eight. At first glance, Google is beating the pants off of Yahoo. Not only are their ads clearly less cluttered, but Google has 50% more results and a map with restaurant reviews.

But wait, scroll down to the bottom of Yahoo’s result page and notice this:

I don’t know about you, but if someone types in “San Francisco  Sushi” and got that, I can’t see them ignoring that result.

This is Yahoo’s power play, and they’re doing it in relative stealth mode. Perhaps they don’t even realize just how ground breaking this can be. For example, if I search for “Which game console should I buy?”, on Google, I get a bunch of results from review sites. On Yahoo, I get all those, plus these:

As you can see, the potential is amazing. Yahoo may not have the biggest index or the best search algorithm, but who needs it when you can mine answers to common questions out of an Answers database! Yahoo shouldn’t be sidelining these results near the bottom. They should be right at the top, perhaps even displacing a few ads on the right. After all these years, we have come full circle to a search engine that performs best when it is literally asked a question.

This is “ask Jeeves” all over again. Except this one works.

Yahoo Answers is barely a year old. What happens in another two years when this service has fully matured and becomes far more ubiquitous? This won’t ever replace Google, but it has the potential to get users acquainted with asking questions on Yahoo, which has the residual effect of converting them over the long run. Google should be afraid of this application because it has the potential to steal a large slice of Google’s search engine pie.

Keep on eye on this feature as we should see it become a larger part of Yahoo’s search results this year (if they have half a brain).

Note: this was originally going to also cover Live’s shameless sponsored result for San Francisco Sushi that promoted something completely unrelated. I was also going to discuss how bad the sponsored results were. Since I took the screen shot, I have decided to include it here. The caption is, “Which one doesn’t fit?”

I really hope that maps ad is because I typed in a location and not because they are randomly spamming ads to their other services.