The Low-Down

When a Bridge Falls in America: Lessons and Lip Service

2013-05-24T14:58:00.001-04:00

On the one hand we have The Leader of the Free World discussing how we might redeploy our whizz bang drone technology in ways that will optimize its impact from space while reducing the possibility of collateral damage.

On the other, we have an actual bridge fall down. Not a hypothetical like in that nursery rhyme set in London, but an actual structure - supporting the pride of the national transportation system, no less - an interstate highway.

This is not about war, peace or intentions, good, bad and indifferent. It is about priorities and pragmatism. The US is a socio-economic entity built on trade and commerce. It relies on the free flow of products, services, people and ideas. Infrastructure is the boring, frequently overlooked back-bone that keeps the system upright. Fail to maintain it and, just like in those spurious kitchen-table, household budget parables so many politicians enjoy sharing, it will fall down and cost more to repair in the long run. It will also reduce competitive advantage in the short run by increasing the degree of 'friction' experienced in the economic sense that it takes to get people and their stuff to market.

So the decision to ignore infrastructure is both short-sighted and counter-productive, to say nothing of dangerous and kind of embarrassing for a nation that it professes itself to be an avatar of exceptionalism. JL

Derek Thompson reports in The Atlantic:

When a bridge falls in America -- like the one near Seattle on Thursday night -- infrastructure spending has a way of transforming from a fringey bugaboo to A1 national obsession.

Fortunately, falling bridges in America are still a rarity. Unfortunately, infrastructure spending is being unnecessarily squeezed by sequestration and the incredible shrinking discretionary budget at the very moment that infrastructure spending is a historic bargain for the federal government.
Public construction spending has been declining since the middle of the recession in outright terms ...

... and as a share of the economy, it's at a 20-year low (the lowest on record with St Louis Fed data).

Our construction budget has been the victim of deficit fears, but it's the infrastructure deficit that's truly absurd.
Our expensive transportation and utility challenges absolutely aren't going away, but our window of opportunity to cheaply fix them absolutely will. Roads, rail, airports, broadband, electrical grids ... repairing or building out these systems is a matter of inevitability and U.S. interest rates and labor costs will only go up as the economy recovers.
The average age of America's 607,380 bridges is about 42 years old. The Federal Highway Administrations claims we'll need to spend about $20.5 billion annually for the next 16 years to properly update them -- about 60 percent more than we're spending every year today. Meanwhile, the Highway Trust Fund has been slammed by a decrease in miles driven nationally, states and cities have been slammed by the weak economy, and private builders face a jumbled knot of "municipalities, investors, and federal overseers."
For a rich country like the U.S., the beauty of the federal government borrowing in its own currency is that you can finance huge deficits when the economy stinks and use that money to fill the gap left by the private sector and state and local governments. Infrastructure improvements -- the shared responsibility of all levels of government and the private sector -- are the perfect recession-time gift from Washington. States and local governments are pulling back because they have to. Washington is pulling back because it chose to.
There are scolds who accurately point out that infrastructure rhetoric is somewhat famously hyperbolic. There are real-keepers who accurately point out that our share of bridges that are either "functionally obsolete" or "structurally deficient" has actually been declining over the last ten years. There are fiscal conservatives who accurately point out that we don't spend much less on infrastructure than the rest of the developed world, including Europe.
My response is two-fold: (a) they're all right; and (b) so is the argument that Washington should be spending more on infrastructure. America's rebuilding needs aren't going away. The basement-bargain price of rebuilding America is. Unfortunately, we might have to wait for a bridge collapse to inconvenience a member of Congress before infrastructure spending is rescued from austerity. Then, perhaps, we'll finally take advantage of the best deal on the market.

Look Ma, No Driver! Are We Ready for Computerized Cars?

2013-05-24T08:34:00.001-04:00

We have ceded many other facets of human domination to devices, why not driving?

Even the most highly skilled among us have conceded: fighter pilots have given way to drones, surgeons employ programmed lasers. But can the human psyche stand to hand over control of an one activity so closely identified with competence, wealth and accomplishment?

We will probably be learning the answer to that question sooner than we imagined possible.

Electronics already account for a major portion of the typical auto's value. Tinkering under the hood now usually requires a computer rather than a wrench. 'Smart' technology on roads with built-in censors manage access to many highways. So the transition to even greater technological oversight is a matter of gradation rather than revolution. In addition, urbanization is making commutes longer and more harrowing. Climbing insurance rates and gas prices are causing some to give up cars entirely and others to search for ways to better manager the expense. All of which suggests that computerized driving may become an affordable solution to current transportation needs, especially if the option to drive is preserved for less crowded streets and times of day or week.

The greatest obstacle may be overcoming the perceived loss of control in a world already replete with such reminders. JL

Julia Pyper reports in ClimateWire via Scientific American:

Humans have been at the helm of the vehicle for the past 120 years. But now cars are starting to think for themselves and talk to smartphones, intersections and each other through what are broadly called intelligent transportation systems, or ITS.
Americans will soon be able to surf the Internet, hold a video call and connect with friends on social media all via the dashboard of their car while sitting in the driver's seat. Further down the road, no one may need to be in the driver's seat at all.
Cars are connecting through a combination of Wi-Fi, GPS, cameras, radar and sensors. And as technology improves, vehicles will take increasing control of their own mobility.
Advances in in-vehicle technology could save lives or create a whole new set of distractions. Photo courtesy of the Transportation Department.
"It's happening faster than you think," said Peter Sweatman, director of the University of Michigan Transportation Research Institute, during an interview at the Intelligent Transportation Society of America's annual meeting and exposition last month in Nashville, Tenn.
Big-name automakers, including Audi AG, Volkswagen AG, Mercedes-Benz, Volvo and Ford Motor Co., have already developed technologies that allow vehicles to park, operate in traffic and brake without any input from the driver.
General Motors Co. announced last month it would start "real world" testing of its semiautomatic "Super Cruise" system capable of hands-free lane following, braking and speed control. The feature could be commercially available on Cadillac models before the end of the decade.
Meanwhile, Google Inc. has developed a fleet of self-driving cars that are shuttling the company's employees to work on California highways. They are also legal to operate in Nevada and Florida. Google says its cars could reduce traffic accidents, wasted commuting time and energy, and the number of cars on the road by 90 percent. According to moderate estimates, these driverless vehicles could go on sale to consumers as soon as 2020.
To keep up with the fast pace of technological development, the Senate Commerce, Science and Transportation Committee will hold a hearing tomorrow on the potential risks and safety benefits of autonomous and wirelessly connected vehicles. Today, Transportation Secretary Ray LaHood will also take up the issue at a three-day global symposium on connected vehicles hosted by the Transportation Research Institute.
"When we see this convergence of connected and automated vehicles, it's going to be a revolution," Sweatman said. "We're going to be in a situation where we don't just get a small percentage improvement in things like safety, fuel efficiency, emissions, traffic flow and so on, we're going to see order of magnitude changes."
Reducing fuel use, emissions and 'havoc'
A Department of Transportation pilot project underway in Ann Arbor, Mich., has already collected 7 billion safety messages exchanged among 3,000 cars, trucks and transit buses equipped with vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) technology. By alerting drivers to potential collisions, DOT believes, connected vehicle systems could eliminate 80 percent of crashes among nonimpaired drivers and greatly improve roadway efficiency.
"Having vehicles connected to each other and connected to the infrastructure, we believe, is going to make a dramatic improvement on safety," Federal Highway Administrator Victor Mendez said in an interview.
"I think you also have to take into account that it's going to improve air quality," he added.
In connection with V2V and V2I research, DOT is gathering data on vehicle emissions through the five-year Applications for the Environment: Real-Time Information Synthesis (AERIS) program. Transportation produces about 27 percent of all U.S. greenhouse gas emissions. Measuring how and where emissions occur can support carbon-cutting initiatives like eco-lanes that prioritize alternative fuel vehicles and eco-driving practices, or encourage system operators to optimize traffic signals for greater throughput and less fuel consumption.

"ITS and transportation systems management and operations -- by improving traffic flow, reducing the starts and stops, [and] acceleration and deceleration -- really reduces greenhouse gases," said Louis Neudorff, ITS expert at CH2M Hill.
According to research by the Information Technology and Innovation Foundation, applying real-time signal optimization systems to the U.S. traffic network can reduce stopping by as much as 40 percent, reduce travel time by as much as 25 percent, cut gasoline consumption by 10 percent and reduce emissions by 22 percent.
In terms of climate change adaptation, adjusting traffic signals and signs can also alert drivers to road closures or direct them to evacuation sites during severe weather events like Superstorm Sandy, Neudorff said. "[ITS] is not going to prevent the havoc, but it can help minimize the havoc," he added.
Alternative to building more freeways
Companies like Siemens AG, Xerox Corp. and Schneider Electric SA have already built adaptive traffic management systems in cities across the United States. These systems do not use Wi-Fi-based V2I communications systems, which are still in their infancy. Instead, they rely on sensors and imaging to determine a vehicle's location and speed in order to reduce congestion.
"Many cities want to become more green, and this is an ideal way to do it. The traffic congestion in a city is probably one of your biggest pollutants," said Patrick McGowan, president of Schneider Electric's North America transportation division.
In addition to optimizing car travel, ITS technologies can also support alternative modes of transportation.
Iteris Inc., for instance, offers a technology that can detect when a bicycle enters an intersection and lengthen the traffic signal time so the cyclist can leave the area safely. One of Siemens' systems in San Antonio is designed to know whether a bus is off schedule and adjust the street lights so it gets back on track without interrupting the regular flow of traffic.
These types of tailored traffic systems can make low-carbon forms of transportation more appealing and allow for overall greater road capacity.
"You could build a new freeway, which is very, very expensive, or you could build a new technology ... and move the traffic at a pretty good speed from one end [of a city] to the other end," said Stephen Mathew, head of product marketing at Siemens' road and city mobility division.
More brains, fewer bricks and -- hopefully -- deaths
The idea of squeezing more capacity out of existing roadways is appealing to governments that are trying to meet the demand for mobility that comes from rising populations and a growing economy, while also coping with tight budgets.
"Our field has traditionally had a very engineering-centric focus to it," said Polly Trottenberg, DOT undersecretary, speaking at the Intelligent Transportation Society of America summit. "Nowadays, I think ... a lot of our transportation challenges are going to call for operational and technological solutions in addition to bricks and mortar."
By 2014, the gas-tax-funded Highway Trust Fund will be nearly bankrupt, according to Trottenberg. Technological solutions like electronic tolling could squeeze more revenue out of roads and other infrastructure, while other ITS solutions add more capacity to them. Tolls and other user fees could help supplement the gas tax, particularly as consumers switch to more fuel-efficient vehicles (ClimateWire, April 16).
But policymakers aren't just interested in budgets; they're also focused on safety. More than 32,000 people died on U.S. highways in 2011, and while the overall number of traffic deaths has declined in recent years, the number of distracted-driving traffic deaths has slightly increased, according to David Strickland, head of the National Highway Traffic Safety Administration (NHTSA).

In theory, synchronizing cellphone applications with a vehicle's infotainment system will reduce the amount of time drivers spend looking at their phones instead of the road. Over the next year, the software provider Airbiquity Inc. is working with three automakers to launch a technology in 32 languages and 53 countries that would connect smartphones directly to a vehicle's dashboard. Drivers would be able to pair up their phone, start driving and use certain cellphone apps like Facebook and Twitter through verbal commands or steering wheel controls.
"Some people are going to like it, some will not," said David Jumpa, chief revenue officer at Airbiquity. "The next generation can't live without it."
To the extent that people can't get what they need from their car, they'll turn to their phone. But as this type of technology becomes more sophisticated, there's a concern it could end up being just as distracting as a cellphone or perhaps even more so.
DOT has yet to issue a mandate for in-vehicle electronics systems. Last month, however, the department released voluntary guidelines calling for stakeholders to disable video calling, social media and Web browsing features unless the vehicle is in park and to limit the time drivers must take their eyes off the road to 2 seconds at a time and 12 seconds total per task.
Look, Ma, no driver!
Driverless cars, while they take away the issue of distracted driving, present a whole new set of concerns. What if the automated system fails? How will control transfer between the computer and the driver? What if the driver is drunk? And how will other drivers react to this new technology?
"What do you do when you're driving a vehicle and you look next to you and you see a person reading the newspaper while driving, how does that make you feel?" asked Mike Schagrin, program manager of the Connected Vehicle Safety & Automation Office of DOT's Research and Innovative Technology Administration.
"Technically, we are really far along; it's all these nontechnical issues that really are the hurdles," he added.
NHTSA is studying the different levels of vehicle automation and plans to release a decision by the end of the year on whether it will regulate automatic braking, in which a vehicle stops by itself to avoid an impending collision. The administration also plans to decide whether V2V and V2I communications systems should be mandated, be incentivized or undergo more research and development.
"It is virtually an impossible task to keep apace with the technological evolution that we're seeing right now," NHTSA's Strickland said. "The best thing that we can do as department and as an agency is be able to create the right framework and make sure that whatever technology innovation happens always happens in that zone of safety that's bounded by good engineering, good science and good data."

Meet the New Boss, Same as the Old Boss: P&G Goes Back to the Future in Replacing CEO

2013-05-24T08:00:00.002-04:00

However distinguished and successful a former executive has been, it never inspires confidence when a leading global corporation decides that the best person to embrace the company future is...someone who retired from running that company five years earlier.

Aside from what it says about the CEO selection process then and, more to the point, what it says about managerial development within the company now, the move by iconic consumer goods behemoth Procter and Gamble (P&G) to replace its embattled current CEO with his predecessor speaks volumes about the challenges the company faces - and probably hints at the reasons why the very recently departed CEO never had a chance.

It is always difficult to replace a beloved and respected leader after a period of great success. The 'big shoes to fill' banalities often mask a genuine unease within any organization about the process of change. A long serving boss has generally created a lot of opportunity for underlings. Their success was tied to him or her. When that person leaves, everyone in the enterprise feels threatened. And especially when the new boss attempts to make changes in what has been perceived to be a smooth-running, optimally functional machines like P&G, the resistance is going to be that much tougher.

As if a significant leadership change weren't wrenching to begin with, Bob McDonald took over the company just prior to the financial crisis and recession. Establishing one's leadership is hard enough in a large, proud, successful institution. Doing so while trying to stave off financial and operational disaster imposed is that much more difficult. In addition, P&G 'enjoys' the support of a large cadre of managers and retirees, many of whom own significant quantities of the company's stock. They saw their retirement nest eggs diminished during the crisis and then only slowly make headway during the subsequent aftershocks. As if that weren't enough, global competition combined with a lessening of consumers' ability willingness to pay a premium for name brands made the recovery that much harder. Retirees and the company's other shareholders expect relentless growth yesterday, today and forever. They are not the least bit interested in excuses.

Mr. McDonald also took over P&G at a time when American corporations were being particularly introverted in their strategic and innovative positioning. Which is a polite way of saying they have become risk averse. They dont like to invest unless the return is guaranteed. Which, as a general rule in business, is not a common occurrence. The result was that attempts to introduce new products ran into resistance from consumers whose incomes and wealth were evaporating at the same time the company's overlords were questioning every investment that might have diminished their stake.

This is not to say that Mr. McDonald was perfect and simply the victim of bad luck. He made mistakes. AG Lafley will have some running room based on goodwill earned in his prior engagement. But the fact that P&G could find its future leader only by looking backwards says a lot about the company's culture and expectations. And it doesnt inspire confidence. JL

Barney Jopson and Gary Silverman report in the Financial Times:

P&G’s sales growth and profitability began to flag, prompting dissatisfaction among some investors, analysts and current and former employees.

Procter & Gamble’s embattled chief executive Bob McDonald is stepping down and will be replaced by predecessor A.G. Lafley after a period of weak performance that disappointed investors.
P&G, the world’s biggest consumer goods maker by sales, announced late on Thursday that Mr McDonald would “retire” at the end of June after nearly four years in the role.
The return of Mr Lafley, 65, who was chief executive from 2000 to 2009, caught Wall Street by surprise. It came less than a year after activist investor Bill Ackman took a stake in P&G and began agitating for change.
Mr Lafley took over P&G at a time of crisis and helped spearhead a turnround marked by its $57bn acquisition of Gillette in 2005 and an increased focus on emerging markets. Jim McNerney, P&G’s lead director and head of Boeing, said in a statement: “AG’s record and his depth of experience at P&G make him uniquely qualified to lead the company forward at this important time.”

Mr Lafley, who has carved out a reputation as a management guru in retirement, was known at P&G for his focus on consumers – embodied in its often repeated mantra “the consumer is boss”.
The company has been beset by problems in its beauty business. Mr Lafley had led P&G’s expansion into the sector through the acquisition of Gillette as well as Wella, the shampoo maker, in 2003.

McDonald bows out after investor criticism
In the year or so that Bob McDonald was under intense pressure from critics, he never entirely accepted the premise of their complaints about Procter & Gamble’s listless performance.
P&G would not comment on what prompted its chief executive’s “personal decision” to retire on Thursday, and it continued to insist that the company was making “steady progress” in improving sales and profitability.
Dissenters, however, say the world’s largest consumer goods maker by sales has lost its way .

Jim Stengel, P&G’s global marketing officer under Mr Lafley, said: “AG has always been a champion of innovation, of marketing, of building brands consumers love.”
Javier Escalante, an analyst at Consumer Edge Research, said morale at P&G was as low today as it was when Mr Lafley took over from Durk Jager in 2000. “So he knows how to appeal to the culture and the better part of Procter’s pride and drive,” he said.
P&G shares edged up 0.4 per cent to $78.98 in after-hours trading following the news.
The share price was stagnant in 2010, 2011 and the first half of 2012, but a recent rally means it is about 50 per cent above its level when Mr McDonald became chief executive.
Mr McNerney said: “The board expects AG to further improve results, implement the current productivity plan, and facilitate an ongoing succession process.”
Critics of Mr McDonald said that under his leadership P&G had been too slow to adjust to the growth of the middle classes in emerging markets and the post-crisis penny-pinching of Americans and Europeans.
Mr Ackman said this month: “We think this is one of the great businesses of the world, underearning relative to its intrinsic earning power.”

Now That's What You Call a Search: Google and NASA Announce Partnership

2013-05-23T14:58:00.003-04:00

Had they announced that Google was acquiring NASA, many people would probably have shrugged and gone on about their business. What with budget cuts and stock prices increases causing the fortunes of public and private to pass each other on different trajectories, that would not have been surprising.

To learn that NASA and Google are actually partnering is, in many ways, just as interesting. It says a lot about the focus of 'search,' or exploration, as it used to be called in the intergalactic context, and about the importance of the internet and enhanced knowledge management to its prospects for success.

The purpose of this alliance is to bring the considerable skills of these two organizations to bear on one mutual interest: quantum computing. For Google and its brethren in the tech community, success in this endeavor could extend Moore's Law indefinitely, or at least beyond what are perceived to be its current limitations. For NASA, long a beneficiary of and pioneer in the application of advanced computing, this could both extend its mission by generating new applications for space travel as well as modernize it by synching the half-century old agency with contemporary tech.

Quantum computing is thought to be able to overcome the physical limitations of its current manifestations. NASA has long enabled the belief that humanity's physical limitations could be overcome as well. Whether the meshing of these two objectives through the efforts of two esteemed but not obviously allied enterprises is feasible, let alone attainable, could be an interesting experiment. JL

Greg Satell comments in Forbes:

Paradigm shifts come in strange guises, with little or no tangible effect on immediate life and often take decades to make an impact.
It’s easy to become jaded about announcements in the tech world. Slick, media savvy CEO’s announce “revolutionary” new products with metronomic regularity. Version 1.0 becomes 1.1 and eventually 2.0 and on and on. It all seems like a blur.

Meanwhile, the truly groundbreaking stuff often goes unnoticed (neither the transistor nor the microchip were instant hits).

Nevertheless, we should take notice at the recent news of the Google-NASA quantum computing partnership which marks the beginning of a new digital paradigm. Although we must account for that which is beyond our present understanding, even the projects currently underway promise a future that seems almost more like science fiction than science fact.

Spooky Action At A Distance
The story begins not last week, or even last year, but in 1911 when a young scientist named Albert Einstein arrived at the Solvay Conference to discuss his discovery of light quanta with the elite physicists of the age. It was somewhat of a coming out for the young man who, although not yet a professor, had overturned much of classical physics.

Niels Bohr and Albert Einstein. (Photo credit: Wikipedia)

However, his own idea got away from him and he returned to the 1927 conference as an opponent of the new quantum theory. It was there that he had his famous debates with Niels Bohr and was reported to have insisted that “God does not play dice with the universe.”
“Einstein, stop telling God what to do,” Bohr retorted.
Beyond the issue of whether matter is deterministic or the mere product of probability, what really got under Einstein’s skin was what he called “spooky action at a distance,” the strange phenomenon that we now know as quantum entanglement. He proposed an ingenious experiment that he believed would disprove quantum theory.
It is a measure of the man that his failures have often proved more fruitful than most people’s successes. Einstein’s experiment was carried out at IBM Labs in 1993 and resulted in the first quantum teleportation of matter. The event would finally resolve the 1927 debates in Bohr’s favor and eventually give rise to the project announced last week.

Computing For A Nuclear Age
In the early 1940’s, another promising young scientist named Richard Feynman would find himself included in an altogether different conglomeration of brilliant scientists at Los Alamos, New Mexico. The aim of this gathering, however, was not intellectual debate, but the explosion of an atomic device (put in motion, incidentally, by a letter from Einstein).

Move up http://i.forbesimg.com t Move down

Among Feynman’s tasks was managing the unprecedented amount of calculations needed to estimate the potential of an atomic explosion. To do so, he arranged his computers (which, at the time, were humans equipped with mechanical calculators) to each work on part of the problem, a technique now known as parallel computing.

After the war was over it became clear that an infinitely more powerful bomb, based on hydrogen, was theoretically possible. However, the calculations required were thousands of times larger and even Feynman’s method would prove useless. An electronic computer, based on digital technology, was needed to make thermonuclear bombs a reality.
The brilliant mathematician John von Neumann, a friend to both Einstein and Feynman, was assigned the job and he organized a team at Princeton’s Institute for Advanced Study (which, perhaps not surprisingly, was the academic home of Einstein as well) and it was there that the computer architecture was developed that survives to this day.

The End Of Computing As We Know It
Since the 1950’s, the internal technology that powered von Neumann’s architecture has steadily improved, from vacuum tubes to transistors to integrated circuits.. The result has been a doubling of computing power roughly every 18 months, which has enabled all of those slick launches of fancy new gadgets.
However, for some time we have been aware that this advancement would stall, due to physical limitations, sometime around 2020, unless a completely new architecture could be developed. Many believed that the solution would be quantum computing, a new method based on the same “spooky action at a distance” that Bohr and Einstein hotly debated.
So Google and NASA’s recent announcement, along with a separate announcement that the government has been running a quantum internet for several years, marks a new era in which quantum computing is not only theoretically possible, but thoroughly vetted and technically feasible. Moore’s law will stay intact for the foreseeable future.
In other words, the party will not end, but is indeed just getting started and we can expect the power of our devices to multiply thousands of times over the next generation. Perhaps not surprisingly, we will not use these super-fast, super-secure new computers to do the same things faster, but to do completely different things entirely.

What The Shift Will Mean
In many ways, the Google-NASA partnership represents a new Manhattan Project, but instead of the aim being a nuclear explosion, the goal is to simulate the human brain, a feat that Google’s Director of Engineering, Ray Kurzweil, believes will be completed before the end of the next decade.
Following Kurzweil’s line of reasoning, the vast increase of computing power enabled by quantum computers will result in a technological singularity by the mid 2030’s, where machines will self-replicate, power similar trends of accelerating returns in fields such as nanotechnology, genomics and energy and, eventually, merge with humans.
In the more immediate future, we can expect our computing technology to get a whole lot smarter. Services that far surpass the capabilities of even today’s most powerful supercomputers will be made available to our mobile devices through the cloud and using them will be almost indistinguishable from dealing with a human.
Google now leads in this area, but Microsoft, IBM and others (but strangely enough, not Apple) are making impressive gains as well. The price tag for a quantum computer is around $15 million, so certainly not prohibitive and we can expect more organizations to adopt them in the coming months and years.
Two decades from now, if present trends hold, quantum devices will be available for about $1000 and it’s even possible (if certain technical conditions are overcome) that we will have the opportunity to hold in our hands the power of an intelligence that even Einstein himself thought too bold to even imagine.

New Startups Are Prime Targets for Cyberattack

2013-05-23T09:17:00.001-04:00

Rather than assuming that they are too small or unprofitable or unimportant to be of much interest to hackers and cyberattack, reports suggest that start-ups are becoming particularly juicy targets. And the reasons are, in classic martial arts fashion, exactly those that entrepreneurs believe shield them from such attention.

Because they are focusing their energy and budget on getting their business launched, start-up founders and investors tend to invest less in security. In addition, their need for market testing and validation often means they are anxious to share their interim efforts with colleagues and potential alliance partners. Facilitating that sort of interaction requires ease of access, since the start-up is competing for others' time and consideration. This vulnerability makes them attractive 'masks' for those who may want to use them to get to others, perhaps even more so than those who see value in hacking whatever new features the startup has to offer.

In a complex and interconnected economy, conduits can be as valuable as end targets. Whatever the reason, no enterprise is too small to attract the interest of those who generate value from the efforts of others. JL

Parija Kavilanz reports in CNN/Money:

Cyberattackers can sniff out new businesses to target as quickly as two months after they come into existence, according to cybersecurity firm Symantec. By the time a startup is five months old, it has already been targeted by hundreds of spam messages and malware.

Once a new business sets up a website and its first emails and instant messages are exchanged, cyberattacks are triggered almost immediately, the report said.
The frequency of cyberattacks rapidly increases after a startup's launch. As employees inadvertently click on malicious content in emails, malware will start spreading to other accounts throughout the company. Within 10 months, most startups will have been infected with malware.

"Startups are incredibly vulnerable to cyberattacks in their first 18 months," said Brian Burch, vice president with Symantec. "If a business thinks that it's too small to matter to cybercriminals, then it's fooling itself with a false sense of security."
The report showed that malware attacks typically peak in either the fifth or 10th month for a new business, while spam messages typically spike in either the fourth or 14th month.

Cybercriminals are intently focused on preying on new small businesses for several reasons. Early stage businesses are easier to infiltrate than established companies that have spent the time and the money to fortify themselves against cyberattacks. And as the economy improves, there's been a jump in new business creation.
Every small business, regardless of size, has some information that cybercriminals want, whether it's bank details, client information or intellectual property. And there's money to be made on the black market from selling that information to unethical buyers.
"Wherever money collects, it attracts the bad guys," said Burch. "Small business have to realize that they are not invisible."

A Nation Is Not a Household; And Other Reasons Why Economic Advice Is So Often Wrong

2013-05-23T08:41:00.003-04:00

We live in an age of unprecedented information access. Educational levels are higher for more people than they have been historically. And inexpensive high speed communications makes the dissemination of knowledge quicker, easier and broader than ever.

And yet. We hew to ideological impulses as current as those that motivated the Salem Witch Trials 400 years ago.

Among a host of misguided nostrums being flogged to the unsuspecting, perhaps the most erroneous is the notion that household budgeting has anything whatsoever to tell us about national budgets and global finance. As the following article explains, households may well save in times of crisis in order to preserve what little they have for the future, but nations require investment, preferably productive investment. Investment is what creates wealth, not savings.

Which is why austerity has failed in Europe, especially in the UK. And it's diluted extract in the US is headed in the same direction. Austerity's proponents believe - or at least profess to do so - that by cutting budgets, they will free 'space' in the capital markets for private investment and that by dint of their fiscal virtue said markets will reward them with previously unallocated funds.

The problem with that spurious and often specious argument is that the markets reward investment, not virtue. So when businesses are too weak, frightened or selfish - or all three as often appears to be the case these days - the markets respond best to other sources stimulus, even if it is from the government, as they have in the US due to the Federal Reserve's actions.

Unlike households, markets focus on the future and what is being done to generate wealth from it. So as we watch Europe stagnate and the US fail to generate new jobs even as its markets climb higher we would do well to remember that. Decisions reached sitting around the kitchen table are unlikely to approximate those that generated the income to pay for that cozy symbol of domestic bliss. JL

Michael Pettis comments in his blog via Naked Capitalism:

One of the reasons that it is been so hard for a lot of analysts, even trained economists, to understand the imbalances that were at the root of the current crisis is that we too easily confuse national savings with household savings.

By coincidence there was recently a very interesting debate on the subject involving several economists, and it is pretty clear from the debate that even accounting identities can lead to confusion.

The difference between household and national savings matters because of the impact of national savings on a country’s current account, as I discuss in a recent piece in Foreign Policy. In it I argue that we often and mistakenly think of nations as if they were simply very large households. Because we know that the more a household saves out of current income, the better prepared it is for the future and the more likely to get rich, we assume the same must be true for a country. Or as Mr. Micawber famously insisted:

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

But countries are not households. What a country needs to get wealthier is not more savings but rather more productive investment. Domestic savings matter, of course, but only because they are one of the ways, and probably the safest, to fund domestic investment (although perhaps because they are the safest, investment funded by domestic savings can also be misallocated for much longer periods of time than investment funded by external financing).

Saving in itself, however, does not create wealth. It is productive investment that creates wealth. Domestic savings simply represent a postponement of consumption.

In a closed economy, total savings is equal to total investment or, to put it differently, whatever we don’t consume we invest (if we produce something that we neither consume nor invest, we effectively write its value down to zero, so the balance remains). In an open economy, if a country saves more than it invests it must export the excess savings. It must also export the excess production.

Notice that by definition if a country saves more than it invests, total consumption plus total savings must be greater than total consumption plus total investment. The former is the sum of the goods and services it creates, whereas the latter is the sum of goods and services it absorbs. That country, in other words, supplies more goods and services than it absorbs, and so it must export the excess.

What is more, by exporting excess savings, the country is providing the funding to foreigners to purchase its excess production. This is why the current account and the capital account for any country must always add up to zero.

In the late 19^th Century, as I discuss in my most recent book, economists like John Hobson in the UK and Charles Arthur Conant in the US noticed that the rich countries of the west were exporting large amounts of savings abroad – mostly to what were later called by the dependencia theorists of the 1960s the peripheral nations. Hobson and Conant argued that the reason for this excess savings had to do with income inequality. As more and more wealth is concentrated into the hands of fewer people, consumption rises more slowly than production, largely because the wealthier a person gets, the smaller the share he consumes out of his income. Notice that because savings is simply total production of goods and services minus total consumption, this forces up the national savings rate.

This was a very important insight. Excess savings, they pointed out, was not a result of old-fashioned thrift but rather a consequence of structural distortions in the economy. The consequence of this “thrift”, furthermore, was not greater wealth but rather structural imbalances in the global economy.

In a closed economy there are four ways of resolving the imbalances caused by an increase in the savings rate. First, and most obviously, investment can rise by the same amount.

The private sector, however, may be reluctant to increase investment if it believes the consumption share is declining over the long term, in which case the government can sponsor the increase in investment, for example in infrastructure, so that savings and investment balance at a higher rate. This is sustainable only as long as there are productive investments that can be made, but as consumption declines, the reason for investing should decline too. The purpose of investment today after all is to create consumption tomorrow.

The second way to resolve the imbalance is if the government or the labor unions take steps to redistribute income downwards. As middle class and poor households retain a greater share of total GDP, consumption will automatically rise relative to production (the savings rate declines), even if middle class and poor households save a greater share of their higher income. The savings rate declines to the point at which savings and investment are once again balanced domestically and everything a country makes it consumes or invests.

The third way to resolve this in a closed economy – albeit only temporarily – is to fund a consumption boom among the not-so-rich. How would this work? One way might be, as Conant discusses extensively, that as savings grow faster than opportunities for productive investment in infrastructure and production capacity, more and more of the savings of the wealthy go into speculative investments that drive up asset prices – homes, stocks and bonds. As asset prices rise, households feel richer and they begin to take advantage of the abundance of savings to borrow for consumption, and borrowing is just negative savings.

As home prices or the value of investment portfolios rise there is likely to be not just an increase in consumption but also an increase in investment in new housing. As both of these happen, the reduction in consumption caused by rising income inequality is matched by the increase in consumption caused by credit-fueled purchasing and an increase in housing investment, and once again savings and investment can balance domestically. We saw this happen in the US and in the peripheral countries of Europe in the run-up to the 2007-09 crisis.

The fourth way to resolve the savings imbalance in a closed economy is to force up unemployment (this is what Karl Marx said would eventually happen). As income inequality grows, and so consumption grows more slowly than production, companies are forced to cut production and fire workers. Fired workers of course produce nothing, but they still consume, either out of savings, welfare payments, or handouts from friends and families. This causes total savings to drop so that once again it balances investment, but of course in an economy with rising unemployment, profits are likely to drop, and with lower profits comes reduced investment, so more workers need to be fired and the process can become self-reinforcing.

Open economies have another option

In a closed economy there really aren’t many other ways to balance savings and investment if structural factors force up the savings rate. But we do not live in closed economies. Most of us live in open economies (although the world itself is a closed economy), so there is actually a fifth way to resolve domestic savings imbalances, and this is what Hobson and Conant described as the root source of late 19^th Century imperialism.

If domestic savings rates are so high that the country cannot invest it all profitably, it can export those savings, which means automatically that it imports foreign demand for its excess production. Its net export of savings (less net returns on earlier investment) is exactly equal to its net export of goods and services.

In an open economy, in other words, a country’s total savings matters because to the extent that it exceeds investment, it must be exported, and it must result in a current account surplus. Here is where the confusion so many analysts, including economists, have about the difference between national and household savings. Household savings represent the amount out of household income that a household chooses not to consume, and so can be affected by cultural or demographic factors, the existence and credibility of a social safety net, the sophistication of consumer finance, and so on.

The national savings rate, on the other hand, includes not just household savings but also the savings of governments and businesses. It is defined simply as a country’s GDP less its total consumption. While the household savings rate may be determined primarily by the cultural and demographic preferences of ordinary households, the national savings rate is not. Indeed in some cases the household share of all the goods and services a country produces, which is primarily a function of policies and economic institutions, is the main factor affecting the national savings rate.

National savings, in other words, may have very little to do with household preferences and a lot to do with policy distortions. In China, which has by far the highest savings rate in the world, part of the reason for the high national savings rate of course is that Chinese households save a relatively high proportion of their income.

But while China’s savings rate is extraordinarily high, the Chinese household savings rate is merely in line with those of similar countries in the region, and in fact lower than some. Chinese households are not nearly as thrifty as their national savings rate implies. Why, then, is China’s savings rate so extraordinarily high?

The main reason, as I have discussed many times and which now has pretty much become accepted as the consensus among China specialists, is not so much income inequality (although this is certainly a problem in China) but rather the very low household income share of GDP. At roughly 50% of GDP, Chinese households retain a lower share of all the goods and services the country produces than households in any other country in the world.

This is a consequence of policies Beijing put into place many years ago that goose GDP growth by constraining the growth in household income. As a result of these policies, the household share of China’s total production of goods and services has been falling for thirty years, and fell especially sharply in the past decade. It isn’t surprising, consequently, that as households earn a declining share of what China produces, they also consume a declining share. Because savings is simply GDP less total consumption, and most consumption is household consumption, the fall in the household income share of GDP is the obverse of the rise in China’s extraordinarily high savings rate.

Many factors explain this very low household income share in China, including most importantly financial repression, whose characteristics typically include artificially low deposit rates, which, by reducing the amount of money that a saver should earn on his bank deposit, transfers part of his income to borrowers, who are able to borrow very cheaply. In China, this implicit transfer is extremely high, perhaps 5 percent of China’s GDP or more.

Of course the more money that is transferred in this way, the less disposable income the household depositor has, and so he is forced to reduce both his nominal savings and his nominal consumption. We cannot easily predict how this reduced interest rate will affect the household savings rate, but it is pretty easy to figure out how it will affect the national savings rate. If the transfer is substantial, it will reduce the share of GDP retained by households. Unless households reduce their savings rate by more than the reduction in the household share of GDP, it must automatically force up the national savings rate.

Confusing thrift with inequality

China’s extraordinarily high national savings rate, in short, is a function primarily of the extraordinarily low household share of GDP. Even economists who really should know better manage to make some fairly impressive mistakes when they discuss Chinese and other savings imbalances, mostly because their understanding of savings can be hopelessly confused. For a typical example, consider a piece Raman Ahmed and Helen Mees, published last year called, “Why do Chinese households save so much?”

In the article the authors try to address the causes of China’s high savings rate, but they do so by thoroughly confusing national savings with household savings. For example they set out trying to prove that financial repression has no impact on China’s savings rate, but because they fail to understand that financial repression does this by reducing the household share of income, and not necessarily by reducing the household savings rate, they find:

China’s monumental savings rate is a popular topic of for policy discussion. It has been blamed for the global financial crisis, currency wars, and the ensuing Great Recession. But what explains the high savings rate?

…Although the savings rate varies significantly per income group, with the lowest income group’s savings rate in urban areas in the single digits and the highest income group’s savings rate at almost 40% of disposable income, we do not find evidence that income inequality as such is a motive for households to save a larger portion of their income, as Jin et al. (2010) have suggested. It would have been the Chinese version of ‘keeping up with the Joneses’, albeit that ‘keeping up with the Wangs’ would not have involved conspicuous consumption but rather conspicuous saving. This would have instigated higher savings rates across the board of deciles of savings rates, with the strongest effect on low-income households. However, using urban data on household savings rates and income inequality from 1985-2009, we do not find this effect present.

There is no evidence that the household savings rate in China is high because of low deposit rates, as Michael Pettis (2012) has asserted time and again, which would indicate that the income effect of lower deposit rates trumps the substitution effect of lower deposit rates. The coefficient of the deposit rate has alternating signs, but is insignificant in every single estimate.

The article purports to discuss what they refer to as China’s “monumental savings rate”, which, according to the authors, has been blamed for the global financial crisis, currency wars, and the ensuing Great Recession, but it focuses on the wrong savings rate. Chinese household savings are not by any definition “monumental”, and they most certainly did not cause the global financial crisis, nor does anyone seriously claim that they did. Chinese household savings rates are high, but not exceptionally high, and because household income is such a low share of GDP, Chinese household savings as a share of GDP, which is what really matters, are even lower than the household savings rate would imply. Chinese household savings are not the problem.

It is China’s national savings rate which is “monumental” and which drives China’s current and capital account imbalances, and the national savings rate is monumentally high because the national consumption rate (which consists mostly of the household consumption rate) is extraordinarily low. The authors have either confused national and household savings rates or they have failed to see that what matters is not the household savings rate but rather total savings. Aside from the fact that there is indeed evidence that Chinese savings are negatively correlated with interest rates, for example a 2011 study done by the IMF, the relationship is one of pure logic.

The important lesson from this article, aside from suggesting just how confused many economists are when it comes to understanding the source of global imbalances, is that national savings represent a lot more than the thriftiness of local households, and as such it has a lot less to do with household or cultural preferences than we think. In fact many factors affect the savings rate of a country, including demographics, the extent of wealth inequality, and the sophistication of consumer credit networks, but when a country has an abnormally high savings rate it is usually because of policies or institutions that restrain the household share of GDP.

This has happened not just in China but also in Germany. In the 1990s Germany could be described as saving too little. It often ran current account deficits during the decade, which means that the country imported capital to fund domestic investment. A country’s current account deficit is simply the difference between how much it invests and how much it saves, and Germans in the 1990s did not always save enough to fund local investment.

But this changed in the first years of the last decade. An agreement among labor unions, businesses and the government to restrain wage growth in Germany (which dropped from 3.2 percent in the decade before 2000 to 1.1 percent in the decade after) caused the household income share of GDP to drop and, with it, the household consumption share. Because the relative decline in German household consumption powered a relative decline in overall German consumption, German saving rates automatically rose.

Notice that German savings rate did not rise because German households decided that they should prepare for a difficult future in the eurozone by saving more. German household preferences had almost nothing to do with it. The German savings rate rose because policies aimed at restraining wage growth and generating employment at home reduced household consumption as a share of GDP.

As national saving soared, the German economy shifted from not having enough savings to cover domestic investment needs to having, after 2001, such high savings that not only could it finance all of its domestic investment needs but it had to invest abroad by exporting large and growing amounts of savings. As it did so its current account surplus soared, to 7.5 percent of GDP in 2007. Martin Wolf, in an excellent Financial Times article on Wednesday on the subject, points out that

between 2000 and 2007, Germany’s current account balance moved from a deficit of 1.7 per cent of gross domestic product to a surplus of 7.5 per cent. Meanwhile, offsetting deficits emerged elsewhere in the eurozone. By 2007, the current account deficit was 15 per cent of GDP in Greece, 10 per cent in Portugal and Spain, and 5 per cent in Ireland.

Employment policies and the savings rate

It is tempting to interpret Germany’s actions as the kind of far-sighted and prudent actions that every country should have followed in order to keep growth rates high and workers employed, but it turns out that these policies did not solve unemployment pressures in Europe, and this is implied in the second sentence of Martin Wolf’s piece. Germany merely shifted unemployment from Germany to elsewhere. How? Because Germany’s export of surplus savings was simply the flip side of policies that forced the country into running a current account surplus.

To explain, let us pretend that Europe consists of only two countries, Spain and Germany. As we have already shown, forcing down the growth rate of German wages relative to GDP caused the household income share of GDP to drop. Unless this was matched by a decision among German households to become much less thrifty, or a decision by Berlin to increase government consumption sharply, the inevitable consequence had to be a reduction in the overall consumption share of GDP, which is just another way of saying that the German national savings rate had to rise. During this period, by the way, and perhaps as a consequence of restraining wages, Germany’s Gini coefficient seems to have risen quite markedly, and the resulting increase in income inequality also affected savings adversely.

As German savings rose, eventually exceeding German investment by a wide margin, Germany had to export the difference, which its banks did largely by making loans into the rest of Europe, and especially those countries that were financially “shallower”. Declining consumption left Germany producing more goods and services than it could absorb domestically, and it exported excess production as the automatic corollary to its export of savings.

Of course the rest of the world had to absorb excess German savings and run the current account deficits that corresponded to Germany’s surpluses. This was always likely to be those eurozone countries that joined the monetary union with a history of higher inflation and currency depreciation than Germany – countries which we are here calling “Spain”. As monetary policy across Europe was made to fit German needs, which was looser than that required by Spain, and as German savings were intermediated by German banks into Spain, the result was likely to be higher wage growth, higher inflation, and soaring asset prices in Spain.

In fact this is exactly what happened. Spain and the other peripheral European countries all saw their trade deficits expand dramatically or their surpluses (many were running large surpluses in the 1990s) turn into large deficits shortly after the creation of the single currency as their savings rates shifted to accommodate German exports of its excess savings.

The way in which the German exports of savings were absorbed by Spain is at the heart of the subsequent crisis. As long as Spain could not use interest rates, trade intervention, or currency depreciation to block German exports, it had no choice but to balance the excess of German savings over investment. This meant that either its investment would have to rise or its savings would have to fall (or both).

Both occurred. Spain increased investment in infrastructure and in real estate (and less so in manufacturing, probably because German growth occurred at the expense of the manufacturing sectors in the rest of Europe), but it seems to have done both to excess, perhaps because of the sheer amount of capital inflows. After nearly a decade of inflows larger than any it had ever absorbed before, Spain, like nearly every country in history under similar circumstances, ended up with massive amounts of misallocated investment.

But this was not all. If the savings that Germany exported into Spain could not be fully absorbed by the increase in Spanish investment, the only other way to balance was with a sharp fall in Spanish savings. There are two ways Spanish savings could have fallen. First, as the Spanish tradable goods sector lost out to German competition, Spanish unemployment could rise and so force down the Spanish savings rate (unemployed workers still must consume).

Second, Spain could have reduced household savings voluntarily by increasing consumption relative to income. Higher Spanish consumption would cause enough employment growth in the services and real estate sectors to make up for declining employment in the tradable goods sector.

Raising consumption

Not surprisingly, given the enormous optimism that accompanied the creation of the euro, the latter happened. As German money poured into Spain, helping ignite a stock and real estate boom, ordinary Spaniards began to feel wealthier than they ever had before, especially those who owned their own homes. Thanks to this apparent increase in wealth, they reduced the amount they saved out of current income, as households around the world always do when they feel wealthier. Together the reduction in Spanish savings and the increase in Spanish investment (in infrastructure and real estate) was enough to absorb the full extent of Germany’s export of excess savings.

But at what cost? The imbalance created within Europe by German policies to constrain consumption forced Spain into increasing consumption and boosting investment, much of the latter in wasted real estate projects (as happened in every one of the deficit countries that faced massive capital inflows). There are of course no shortage of moralizers who insist that greed was the driving factor and that Spain wasn’t forced into a consumption boom. “No one put a gun to their heads and forced them to buy flat-screen TVs”, they will say,

But this completely misses the point. Because Germany had to export its excess savings, Spain had no choice except to increase investment or to allow its savings to collapse, with the latter either in the form of a consumption boom or a surge in unemployment. No other option was possible.

To insist that the Spanish crisis is the consequence of venality, stupidity, greed, moral obtuseness and/or political short-sightedness, which has become the preferred explanation of moralizers across Europe begs the question as to why these unflattering qualities only manifested themselves after Spain joined the euro. Were the Spanish people notably more virtuous in the 20^th century than in the 21^st? It also begs the question as to why vice suddenly trumped virtue in every one of the countries that entered the euro with a history of relatively higher inflation, while those eastern European countries with a history of relatively higher inflation that did not join the euro managed to remain virtuous.

The European crisis, in other words, had almost nothing to do with thrifty Germans and spendthrift Spaniards. It had to do with policies aimed at boosting German employment, the secondary impact of which was to force up German national savings rates excessively. These excess savings had to be absorbed within Europe, and the subsequent imbalances were so large (because German’s savings imbalance was so large) that they led almost inevitably to the circumstances in which we are today.

For this reason the European crisis cannot be resolved except by forcing down the German savings rate. And not only must German savings rates drop, they must drop substantially, enough to give Germany a large current account deficit. This is the only way the rest of Europe can unwind the imbalances forced upon the region in a way that is least damaging to Europe as a whole. Only in this way can countries like Spain stay within the euro while bringing down unemployment.

But lower German savings don’t mean that German families should become less thrifty, only that the average German household should be allowed to retain a much larger share of what Germany produces. If Berlin were to cut consumption taxes, or cut income taxes for the lower and middle classes, or force up wages, total German consumption would rise relative to GDP and so national savings would fall – without requiring any change in the prudent behavior of German households.

To ask Spanish households to be more “German” by saving more is not only impractical in an economy with 25 percent unemployment (it is hard for unemployed workers to increase their savings), it is counterproductive. Lower Spanish consumption can only cause even higher Spanish unemployment, until eventually Spain will be forced to abandon the euro and so regain control of its ability to absorb or reject German imbalances. This abandonment of the euro will be driven by the political process, as those in the leadership (of both main parties) who refuse to countenance talk of leaving the euro lose voters to more radical parties until they, too, come around:

The latest opinion polls show the PP has lost 10 percentage points of support since Rajoy’s election in November 2011. Support for the main opposition group, the Socialists remains unchanged, while backing has been growing for smaller, more radical, parties. More than 68 per cent of Spaniards say the government is doing a bad or very bad job, while the latest official forecast shows that a quarter of the workforce will still be out of work three years from now.

An article in this week’s Economist suggests that Spain is indeed becoming more “German” and so that this is reason for hope:

Is Spain the next Germany? It may not feel like that to the 26% of Spaniards who are unemployed. GDP shrank by 0.8% in the fourth quarter of 2012. Yet in some ways, Spain resembles the Germany of a decade ago, when Gerhard Schröder brought in reforms to turn the sick man of Europe into its strongest economy. The efforts by Mariano Rajoy’s government to loosen labour laws and cut public spending are aimed at a German-style miracle.

…Joachim Fels, chief economist at Morgan Stanley, is one of several backers of the Germany theory. “Spain is doing a lot of the things Germany did ten years ago, but in a much shorter time span and tougher global conditions,” he says, pointing to falling labour costs, rising exports and booming Spanish car factories. But, he adds, “Spain becoming Germany is really a two- to four-year story.”

The global constraints

The problem with this argument may be, however, that the global conditions that allowed Germany to grow by exporting savings to Spain cannot be replicated. If Spain were to make its workers more competitive by reducing wage growth relative to GDP growth, it would implicitly be forcing up its savings rate to generate employment. To whom would Spain export those savings? The world is awash in excess savings, and unlike in pre-crisis days, there are no countries with booming stock and real estate markets willing to fund another consumption binge. This means that Spain and Europe are expecting to recover by exporting unemployment, but to whom?

In fact this is the great worry that Martin Wolf expresses n the conclusion to his article:

A big adverse shock risks turning low inflation into deflation. That would aggravate the pressure on countries in crisis. Even if deflation is avoided, the hope that they will grow their way out of their difficulties, via eurozone demand and internal rebalancing, is a fantasy, in the current macroeconomic context.

That leaves external adjustment. According to the IMF, France will be the only large eurozone member country to run a current account deficit this year. It forecasts that, by 2018, every current eurozone member, except Finland, will be a net capital exporter. The eurozone as a whole is forecast to run a current account surplus of 2.5 per cent of GDP. Such reliance on balancing via external demand is what one would expect of a Germanic eurozone.

If one wants to understand how far the folly goes, one must study the European Commission’s work on macroeconomic imbalances. Its features are revealing. Thus, it takes a current account deficit of 4 per cent of GDP as a sign of imbalance. Yet, for surpluses, the criterion is 6 per cent. Is it an accident that this happens to be Germany’s? Above all, no account is taken of a country’s size in assessing its contribution to imbalances. In this way, Germany’s role is brushed out. Yet its surplus savings create huge difficulties when interest rates are close to zero. Its omission makes this analysis of “imbalances” close to indefensible.

The implications of the attempt to force the eurozone to mimic the path to adjustment taken by Germany in the 2000s are profound. For the eurozone it makes prolonged stagnation, particularly in the crisis-hit countries, highly likely. Moreover, if it starts to work, the euro is likely to move upwards, so increasing risks of deflation. Not least, the shift of the eurozone into surplus is a contractionary shock for the world economy. Who will be both able and willing to offset it?

The eurozone is not a small and open economy, but the second-largest in the world. It is too big and the external competitiveness of its weaker countries too frail to make big shifts in the external accounts a workable post-crisis strategy for economic adjustment and growth. The eurozone cannot hope to build a solid recovery on this, as Germany did in the buoyant 2000s. Once this is understood, the internal political pressures for a change in approach will surely become overwhelming.

As long as it is part of the euro Spain has no choice but to respond to changes in German savings rates. There is nothing mysterious about this process. It is simply the way the balance of payments works, and thrift has nothing to do with it. If Germany does not take steps to force down its savings rate by increasing the household share of GDP, then either all of Europe becomes like Germany, in which case growth slows to a crawl and some other country – maybe the US? – will be forced to resolve Europe’s demand deficiency either through higher unemployment or through higher debt, or Europe must break apart to free Spain and the other peripheral countries from German savings imbalances.

I don’t imagine the rest of the world can absorb demand deficiency from a Germanic Europe, and if Europe tries to force it the result will almost certainly be an eventual collapse in trade relations, so either Germany rebalances or Europe breaks apart. It is hard for me to see many other options

Cognitive Computing: IBM Concentrates on Customer and Context

2013-05-22T14:53:00.002-04:00

IBM's Watson computer gained notoriety by winning at the game of Jeopardy. Which was cute but not necessarily a productive way to generate a return on investment.

The company has now determined that customer service may be the best locus for its potential commercial appeal. Which makes sense from a number of perspectives.

In an economy dependent on consumer spending for 40 to 70 percent of GDP, that is where the big bucks are. But the interaction with happy customers also offers the greatest opportunity for additional public relations attention. And it may well provide the optimal outcome for the system's talents because of its ability to offer context to queries and complaints that might otherwise generate frustratingly obtuse answers from computerized response mechanisms. The corporate penchant for cutting down on relatively expensive human customer support. Current digital systems rely on FAQs (frequently asked questions) which may or may not address the customer's query, let alone answer it.

It is both fascinating and gratifying that IBM has identified this heretofore overlooked and musty corner of the business workspace. It suggests both that enterprises are sensing growing dissatisfaction fueled by ability of mobile computing to take action rather than suffer in silence. It also suggests it perceives an financial and operational opportunity, which may be good news for IBM as well as for long-suffering customers. JL

Clay Dillow reports in Popular Science:

This new offering of Watson, known as IBM Watson Engagement Advisor, will give customer service transactions a layer of cognitive computing help, leveraging Watson’s unique skills to make those transaction go more smoothly. Those unique skills include Watson’s ability to understand context and to learn as it goes, giving it far deeper insight and the ability to return far more meaningful answers than a simple Web search can.

IBM’s Watson computing platform made a name for itself on Jeopardy, but its incremental roll-out into the real world has been no less impressive. It has worked in finance at Citi helping to assess risk and at Memorial Sloan-Kettering Cancer Center sifting through medical cases and data to help oncologists make the right diagnoses. Now the supercomputer is rolling out to the masses as a computerized customer service agent designed specifically to help customers connect with the information they want at a variety of firms in a variety of businesses, including Australian finance house ANZ, at media ratings maker Nielsen, and at Royal Bank of Canada.
The reason Watson can do this is because it is more or less designed like a human brain. That is, where a Web search is great for finding certain blocks of text out there on the Internet or sifting through structured data sets, Watson works well with unstructured data, or data that hasn’t been organized into a database. Web search can find you a snippet of text within a sea of words as directed by the terms of your search. Watson can understand both the nuance of your question and the context of the text surrounding your potential answer, wherever it lives out there on the Web. As such, Watson’s answers tend to be more meaningful.
On top of that, Watson can learn as it goes. So imagine Watson working alongside your financial planner. Your planner asks you questions, you answer, Watson remembers your answers. Watson is also sifting through an Internet’s worth of financial data as well as your specific financial data, looking at your transactions and the economy in your city and state and the global economy and several anecdotal, unstructured stories and opinion on the municipal bond market, in which you have invested a meaningful portion of your savings. You can ask your advisor a specific question about your portfolio and its prospects for the near term, and he or she might have to get back to you with the answer. Watson can put a good answer in front of the both of you instantly.
And it doesn’t stop there. Beyond being a client-relations assistant, IBM is also bringing Watson directly to the masses via an “Ask Watson” feature that offers help to customers via various channels, including email, text, and chat. Considering nearly half of the 270 billion customer-service-related calls go unresolved every year, Watson’s cognitive ability could go a long way toward alleviating load stress on call centers and in resolving customer service issues (imagine calling the help desk only to find you can’t get a live person on the phone and you still get to walk away satisfied).
IBM Watson Engagement Advisor will roll out with a handful of companies (including those listed above over the next few months, during which it will be evaluated for a variety of tasks (ANZ will use it to evaluate insurance portfolios to help customers determine where they are over-insured and where they are exposed, while Nielsen will roll it into the software tools that help its clients in media planning figure out where to buy their ad space) before being released into the larger ecosystem.
Keep an eye on it, as it will likely grow into something larger, and quickly (IBM says the first Watson-powered consumer apps will emerge later this year). Imagine a voice-activated Watson assistant that understands your linguistic nuance and learns from your past queries what to expect in the future. In other words, imagine a Siri that really works.

The Future of Decision-Making: Less Intuition, More Evidence

2013-05-22T09:37:00.003-04:00

We pride ourselves on trusting our instincts: going with our gut, our sixth sense, our feel, our gift. We even talk about the impact of training, education and muscle memory on our inclinations.

We believe this to be evidence of our superior skill, experience and insight. But the reality is that we are an increasingly data-centric society. We prefer evidence and we have invested vast sums to identify, collect and interpret the information we need to succeed in an intensely competitive economic world.

Data, particularly data that has been culled, evaluated and reduced to its interpretive essence drives decision-making in organizational settings. 'Do the math' has become the latter-day catch-phrase for signifying the incontrovertible evidence of a suggestion's or statement's or strategy's correctness. This does not suggest that as a species humans have become less intelligent (the data are not yet in on that) but that we have so much more information at our disposal, as well as the means to access and analyze it, that we would be remiss - in fact, quite possibly extinct - if we did not use that power to our advantage.

The result is that we will continue to rely on instincts and intuition, but they will be better-informed and based on a broader, deeper more complete well of knowledge. Knowledge that through the effective application of assessment, we may actually turn into wisdom. JL

Andrew McAfee comments in Harvard Business Review:

Overall, we get inferior decisions and outcomes in crucial situations when we rely on human judgment and intuition instead of on hard, cold, boring data and math.
Human intuition can be astonishingly good, especially after it's improved by experience. Savvy poker players are so good at reading their opponents' cards and bluffs that they seem to have x-ray vision. Firefighters can, under extreme duress, anticipate how flames will spread through a building. And nurses in neonatal ICUs can tell if a baby has a dangerous infection even before blood test results come back from the lab.
The lexicon to describe this phenomenon is mostly mystical in nature. Poker players have a sixth sense; firefighters feel the blaze's intentions; Nurses just know what seems like an infection. They can't even tell us what data and cues they use to make their excellent judgments; their intuition springs from a deep place that can't be easily examined. . Examples like these give many people the impression that human intuition is generally reliable, and that we should rely more on the decisions and predictions that come to us in the blink of an eye.
This is deeply misguided advice. We should rely less, not more, on intuition.
A huge body of research has clarified much about how intuition works, and how it doesn't. Here's some of what we've learned:

It takes a long time to build good intuition. Chess players, for example, need 10 years of dedicated study and competition to assemble a sufficient mental repertoire of board patterns.

Intuition only works well in specific environments, ones that provide a person with good cues and rapid feedback . Cues are accurate indications about what's going to happen next. They exist in poker and firefighting, but not in, say, stock markets. Despite what chartists think, it's impossible to build good intuition about future market moves because no publicly available information provides good cues about later stock movements. Feedback from the environment is information about what worked and what didn't. It exists in neonatal ICUs because babies stay there for a while. It's hard, though, to build medical intuition about conditions that change after the patient has left the care environment, since there's no feedback loop.

We apply intuition inconsistently. Even experts are inconsistent. One study determined what criteria clinical psychologists used to diagnose their patients, and then created simple models based on these criteria. Then, the researchers presented the doctors with new patients to diagnose and also diagnosed those new patients with their models. The models did a better job diagnosing the new cases than did the humans whose knowledge was used to build them. The best explanation for this is that people applied what they knew inconsistently — their intuition varied. Models, though, don't have intuition.

It's easy to make bad judgments quickly. We have a many biases that lead us astray when making assessments. Here's just one example. If I ask a group of people "Is the average price of German cars more or less than $100,000?" and then ask them to estimate the average price of German cars, they'll "anchor" around BMWs and other high-end makes when estimating. If I ask a parallel group the same two questions but say "more or less than $30,000" instead, they'll anchor around VWs and give a much lower estimate. How much lower? About $35,000 on average, or half the difference in the two anchor prices. How information is presented affects what we think.

We can't know tell where our ideas come from. There's no way for even an experienced person to know if a spontaneous idea is the result of legitimate expert intuition or of a pernicious bias. In other words, we have lousy intuition about our intuition.

My conclusion from all of this research and much more I've looked at is that intuition is similar to what I think of Tom Cruise's acting ability: real, but vastly overrated and deployed far too often.
So can we do better? Do we have an alternative to relying on human intuition, especially in complicated situations where there are a lot of factors at play? Sure. We have a large toolkit of statistical techniques designed to find patterns in masses of data (even big masses of messy data), and to deliver best guesses about cause-and-effect relationships. No responsible statistician would say that these techniques are perfect or guaranteed to work, but they're pretty good.
The arsenal of statistical techniques can be applied to almost any setting, including wine evaluation. Princeton economist Orley Ashenfleter predicts Bordeaux wine quality (and hence eventual price) using a model he developed that takes into account winter and harvest rainfall and growing season temperature. Massively influential wine critic Robert Parker has called Ashenfleter an "absolute total sham" and his approach "so absurd as to be laughable." But as Ian Ayres recounts in his great book Supercrunchers, Ashenfelter was right and Parker wrong about the '86 vintage, and the way-out-on-a-limb predictions Ashenfelter made about the sublime quality of the '89 and '90 wines turned out to be spot on.
Those of us who aren't wine snobs or speculators probably don't care too much about the prices of first-growth Bordeaux, but most of us would benefit from accurate predictions about such things as academic performance in college; diagnoses of throat infections and gastrointestinal disorders; occupational choice; and whether or not someone is going to stay in a job, become a juvenile delinquent, or commit suicide.
I chose those seemingly random topics because they're ones where statistically-based algorithms have demonstrated at least a 17 percent advantage over the judgments of human experts.
But aren't there at least as many areas where the humans beat the algorithms? Apparently not. A 2000 paper surveyed 136 studies in which human judgment was compared to algorithmic prediction. Sixty-five of the studies found no real difference between the two, and 63 found that the equation performed significantly better than the person. Only eight of the studies found that people were significantly better predictors of the task at hand. If you're keeping score, that's just under a 6% win rate for the people and their intuition, and a 46% rate of clear losses.
So why do we continue to place so much stock in intuition and expert judgment? I ask this question in all seriousness.
So do we just dispense with the human experts altogether, or take away all their discretion and tell them to do whatever the computer says? In a few situations, this is exactly what's been done. For most of us, our credit scores are an excellent predictor of whether we'll pay back a loan, and banks have long relied on them to make automated yes/no decisions about offering credit. (The sub-prime mortgage meltdown stemmed in part from the fact that lenders started ignoring or downplaying credit scores in their desire to keep the money flowing. This wasn't intuition as much as rank greed, but it shows another important aspect of relying on algorithms: They're not greedy, either).
In most cases, though, it's not feasible or smart to take people out of the decision-making loop entirely. When this is the case, a wise move is to follow the trail being blazed by practitioners of evidence-based medicine , and to place human decision makers in the middle of a computer-mediated process that presents an initial answer or decision generated from the best available data and knowledge. In many cases, this answer will be computer generated and statistically based. It gives the expert involved the opportunity to override the default decision. It monitors how often overrides occur, and why. it feeds back data on override frequency to both the experts and their bosses. It monitors outcomes/results of the decision (if possible) so that both algorithms and intuition can be improved.
Over time, we'll get more data, more powerful computers, and better predictive algorithms. We'll also do better at helping group-level (as opposed to individual) decision making, since many organizations require consensus for important decisions. This means that the 'market share' of computer automated or mediated decisions should go up, and intuition's market share should go down. We can feel sorry for the human experts whose roles will be diminished as this happens. I'm more inclined, however, to feel sorry for the people on the receiving end of today's intuitive decisions and judgments.

Death and Taxes: Apple, Responsibility and Reputation

2013-05-22T08:43:00.002-04:00

The perception in Washington is that Apple CEO Tim Cook handled himself pretty well in front of the Senate panel investigating the company's highly inventive and profitable tax avoidance strategy.

But the company's challenge is that the issue is more of a global marketing and reputation problem than a US political flap.

Cook trotted out the usual applause lines about Apple's contributions to job creation and the many ways in which the US tax code makes American companies uncompetitive. All without providing a shred of hard evidence. It played well to some in the media who routinely parrot those points of view. What it did to how people feel about owning an Apple product may be another matter entirely.

The big issue is that the revelation about the tax avoidance strategy casts Apple - again - as the bad guy. Even given universal aversion to paying taxes and quiet approval for those who get away with it, the numbers reported about Apple are breath-taking. For a company that made its reputation by casting itself as the cool, creative outsider in ads featuring a young woman throwing a sledge hammer through the screen of a corporate overlord, the latter-day Apple has now cast itself firmly as one of those suits.

On top of the Foxconn employee abuse scandals and the high cost of Apple products relative to the competition, it has been a while since Apple generated any news even hinting that it shares its customers' interests. The dearth of praise-worthy new products contributes further to the notion that this is a company that has lost its edge. That it is reduced to maintaining its share by using dodgy schemes invented by slick lawyers and boring accountants rather than cool products invented by brilliant designers.

The risk is that Apple is losing that reputation for being the iconic revolutionary, smarter, more inventive and way hipper than the big Asian and American tech behemoths. Instead, the perception may be that it is just another corporate grifter, grabbing what it can before someone overtakes it. On top of that, with future growth dependent on global sales outside the US, Apple has served notice to the Chinese and others that there is a huge pot of cash out there. No one is going to be shy about demanding a piece of it in return for market access. Even the Irish, who have obligingly provided cover till now, will have to demand a bit more, if only to avoid appearing like they are humbly tugging their forelocks to Apple as they once did to the English.

Ultimately this will raise further questions in the minds of investors about whether than 'most valuable company on earth' moniker is the result of hard-won market success or whether it is based on tax and accounting trickery. Given its recent stock price disappointment, those are questions Apple would have preferred to avoid.

Tim Cook may have talked his way through the day, but it is the years and decades Apple needs to worry about. JL

Tony Romm reports in Politico:

“Just like millions around the world, I carry an iPhone in my pocket. The company’s engineers and designers have a well-earned reputation for creativity. What may not be so well-known is that Apple also has a highly developed tax avoidance system — a system through which it has amassed more than $100 billion in offshore cash in a tax haven,”

Apple CEO Tim Cook on Tuesday vigorously defended his company on Capitol Hill against charges that the tech company stashes billions of dollars overseas to lower its U.S. tax bill.
In his first appearance before Congress, Cook told a Senate investigative committee that the company is a leading U.S. taxpayer that’s generated thousands of new jobs. And he countered that the U.S. Tax Code itself is faulty because it hamstrings “American corporations in relations to our foreign competitors.”
“We are proud to be an American company and equally proud of our contributions to the American economy,” Cook added.
Still, the Apple chief, flanked by fellow company executives, seemed unlikely to win over the panel’s most skeptical leaders: Democratic Chairman Carl Levin and ranking Republican John McCain. Even before Cook began his testimony, lawmakers released a report that found Apple had established overseas entities to help it bypass some taxes while exploiting U.S. loopholes that shielded about $44 billion from U.S. levies.

The committee leaders, however, stopped short of calling any of Apple’s conduct illegal. One committee member, Sen. Rand Paul (R-Ky.), even went as far as to defend the company Tuesday while urging the subcommittee to “apologize” for “bullying” executives.
“If anyone should be on trial here, it should be Congress,” Paul stressed in pointing out serious problems with the U.S. Tax Code.
Still, Apple has drawn Washington scrutiny because the company maintains more than $100 billion in cash overseas. That money, if ever returned to the United States, would be subject to a 35 percent U.S. corporate tax — a big bill that’s deterred the broader tech industry from repatriating its foreign earnings.

Apple isn’t the only company with a complex international tax scheme seemingly designed to lower its multibillion dollar tax dues. Two other tech leaders — Microsoft and Hewlett-Packard — were the subjects of the same committee’s 2012 tax probe. Levin suggested earlier this week that additional similar investigations are forthcoming, but he declined to specify who might be in the cross hairs.

With Apple, though, Levin said its “tax avoidance” strategies and “gimmicks” are especially unprecedented.
Apple’s long-established entities in Ireland handle the tech company’s sales and operations outside the Americas. But some of those entities, including one called Apple Operations International, aren’t legally tax residents of the European country, according to Senate investigators. In the case of AOI, it means the holding company hasn’t even filed an income tax return for the past five years, even as it reported income of roughly $30 billion over that period, lawmakers’ probe found.
Senate investigators further charged in their report that Apple had avoided paying taxes on $44 billion of income by transferring the economic rights to its intellectual property abroad and exploiting a series of U.S. tax loopholes. Top U.S. tax officials are slated to testify about Apple’s tactics later in Tuesday’s hearing.
For his part, Cook said in testimony that Apple already paid more than $6 billion to the federal treasury last year and expects to pay more this year.
Alongside Cook, Apple’s chief financial officer, Peter Oppenheimer, argued Apple follows international laws. And Oppenheimer added Apple’s international structure isn’t meant to reduce its taxes in the United States, as those earnings already are taxed in their local jurisdiction.
Oppenheimer, however, acknowledged later to Levin that Apple Operations International did not file an income tax return over the past five years. “That income is not subject to U.S. tax, both by statute and regulation,” the executive said.
Even before Apple executives testified, though, members of the subcommittee divided sharply over the nature of the probe itself.
“There is a direct relationship between this rapidly accelerating shift of corporate profits offshore, on the one hand, and on the other, a worrisome federal deficit fed in part by a decline in the contributions corporate taxes make to federal revenue,” said Levin, coupling Apple’s “tax avoidance” tactics with the country’s current budget debate.
Levin’s comments drew a stinging rebuke from tea-party darling Paul. At one point, the Kentucky senator derided the entire hearing as a “show trial.”
That didn’t sit well with the chairman. After Paul suggested the subcommittee “apologize” to Apple, Levin retorted that Paul is “free to apologize if you wish.”
“No company, no company, should be able to determine how much it’s going to pay in taxes,” Levin said.
McCain, for his part, later came to the chairman’s defense, describing Paul’s comments as offensive. “Apple’s corporate tax strategy reflects a flawed corporate tax system — and it’s a system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions,” McCain added.

As Good As It Gets? Yahoo, Tumblr and the Question of Who May Be Screwing Up What

2013-05-21T13:34:00.002-04:00

When an acquisition is announced it is common for the price of the acquiring company to decline. This often seems counterintuitive. After all, the dominant company 'won' by buying out the other one and the winner's management have made a bold statement about their strategy and their confidence in the future. How come the markets don't get it?

Because the reality is that 65 percent or more of mergers and acquisitions fail to achieve their stated financial and operational targets. All too often, the highly touted bridge to the future becomes a boulevard of broken dreams. That's why.

When Yahoo's purchase of Tumblr and its 175 employees for $1.1 billion was announced, it was Marissa Mayer, CEO of Yahoo and the reigning Queen of Tech who promised not to screw it up. That seems to have played well to the digerati.

But it belies some of the very real problems the acquired company already faced, even before it had to begin dealing with the melding of cultures, natural resentment of the acquired for the acquiring (and vice versa), the mixing of often incompatible systems, the imposition of new accounting, marketing and human resource policies and the host of other PMI (post-merger integration) issues that every commercial combination must worth through. In this case, those new management challenges are being larded on top of existing marketing and profitability issues that may have prompted the willingness to sell in the first place.

Given the hurdles that such complicated financial, managerial and interpersonal initiatives usually entail, the promise to not screw it up may not be the ringing call to arms and lofty embrace of the future that everyone from employees to customers to investors may want to hear, but it may be as good as it gets. JL

Peter Cohan reports in Forbes:

Karp has done well for a seller in trouble. According to the Times, Tumblr burned through $25 million in 2012 and Facebook, Microsoft and Google, all turned down Karp’s offer to sell after he had trouble adding to Tumblr’s $125 million in cumulative venture capital.
Yahoo will buy New York City-based blogging service, Tumblr, for $1.1 billion. This is bad news for Yahoo shareholders because the deal fails the four tests of a successful acquisition.
Tumblr — founded by high school dropout, David Karp, in 2007 and now employing 175 – claims 108 million blogs that Quantcast reports reach 44 million U.S. citizens and 134 million people globally, according to the New York Times.
Tumblr’s efforts to generate revenue through “interactive campaigns, rather than standard clickable ads” fell way short of expectations. Tumblr generated only $13 million in 2012 revenues and $13 million in the first quarter of 2013 — with a goal for this year of $100 million.
But the deal will enrich Tumblr’s biggest shareholders. Karp owns nearly 25% of the company and will get about $250 million from the deal, according to the Times. Meanwhile, Boston-based, Spark Capital, whose founder, Todd Dagres I interviewed a few weeks ago, participated in five Tumblr financing rounds and Spark ”is expected to make tens of millions of dollars from the deal.”
Will Yahoo shareholders make money from this deal? My research on acquisitions suggests that most of them fail because they do not pass four tests of a successful acquisition. Here’s why Yahoo flunks each of those four tests.
1. Tumblr’s industry is not attractive
The first test of a successful acquisition is that the industry in which it competes is profitable — ideally more profitable than the industry in which the acquiring company participates.
Tumblr’s industry of interactive advertising is less profitable than Yahoo’s display advertising industry. For example, Yahoo’s return on equity over the last five years averaged 11.9%. Tumblr lost about $2 for every dollar of revenue it earned last year, so it is clearly losing money.
Whether its brand of interactive advertising could potentially become profitable is subject to speculation but based on Tumblr’s inability to come to terms with Facebook, Microsoft and Google my guess is that they do not see an attractive industry here.
2. Combined companies are worse off
The second test of a successful acquisition is that the combined companies will be better off after the deal. This can be measured by whether the combined market share of the companies is higher and whether the combination strengthens the capabilities needed to prevail in the industry.
While the deal will boost Yahoo’s market share fractionally, it is unclear whether the combined companies will have stronger capabilities. Yahoo has 700 million users and 8.4% of the digital advertising market — down from 15.5% in 2009, according to eMarketer. Tumblr’s $13 million in revenues are a dust smidgen compared to Yahoo’s roughly $5 billion in revenue.
To be sure, Tumblr would boost Yahoo’s mobile rank. App Annie ranks Tumblr 63rd among iPhone apps in the U.S. — ahead of all Yahoo apps. And on Android smartphones, App Annie ranks Tumblr 85th — Yahoo has one app, Yahoo Mail, that’s higher on Android.
But the bigger problem for the combination is that when it comes to winning in the online advertising business, neither Yahoo nor Tumblr has figured out how gain market share. Yahoo has lost a huge share of the online advertising market to Google in the last three years.
So combining with Tumblr — even less capable of monetizing users — will do nothing to make Yahoo able to compete with Google. To regain its lost market share, Yahoo must be better than Google at attracting users and selling them advertising that generates a return on investment for the companies trying to reach those users.
Even achieving Tumblr’s modest revenue goals requires skills that both companies lack. One reason for this is that bloggers own their Tumblr pages which means that to advertise on them, Yahoo will need to get the bloggers permission, place an advertisement there, share the revenue with the blogger, and persuade an advertiser that this advertisement will be worth buying, according to Fortune’s John Saroff.
3. Yahoo is over-paying
The third test of a successful acquisition is that the buyer pays less than the present value of the target’s future cash flows.
Yahoo appears to have failed that test because it is hard to see why a service that burned through $25 million in cash last year can generate enough positive cash flow to justify paying $1.1 billion of Yahoo’s cash.
One analyst who came up with a possible justification for the price is Saroff who estimated that Tumblr could generate $108 million in annual revenue. He sees a conservative scenario in which revenues would pay for the deal in under 10 years. As he wrote, “If we assume no growth and no international, [Tumblr's 60 billion in annual pages views] will spin off $108 million per year if a net $1.79 revenue per thousand pageviews is achieved.”
I doubt whether that is achievable and will yield sufficient cash flow to repay Yahoo shareholders. After all, Tumblr has only succeeded in generating about a tenth of that $108 million — this may be due to two factors: it hosts plenty of content that is not suitable for advertising and advertising could cost Tumblr many of its users.
4. Yahoo will struggle to integrate Tumblr
The final test of a successful acquisition is whether the acquirer can integrate the target company. This means making sure that the roles and responsibilities of the target’s people are defined clearly and that they are so well tied into the acquirer’s systems and culture that the acquisition is seamless to the target’s customers.
There are a few problems that Yahoo will face when it come to integrating Tumblr. For example, Karp has resisted display advertising on Tumblr, reports Fortune. This suggests a potential conflict if Yahoo keeps Karp in charge and requires him to push display advertising onto Tumblr’s customers.
Customers may bolt as well. According to Time, TechCrunch’s co-editor, Alexia Tsotsis, told a colleague that Tumblr is part of her identity and “for whatever reason, I don’t want to identify with Yahoo.”
When Yahoo’s board hired first-time CEO, Marissa Mayer, it probably thought she would go through a learning curve. But the $1.1 billion Tumblr deal is Yahoo shareholders’ most expensive tuition payment yet.

American Idle: The Young Without Jobs

2013-05-21T07:06:00.003-04:00

In the course of a decade, the US has gone from having the highest global percentage in young adults who are employed to having one of the lowest.

For all the Panglossian optimists out there, this is not a competitive advantage.

Corporate reluctance to hire new workers and their associated costs (which in previous eras were once actually thought of as investments in the future) has played a role. So have counterproductive public policies focused more on the morally uplifting but economically destructive austerity programs that deny the benefit of any government stimulus, however well-designed and historically proven.

It is curious that the usually pragmatic American people have so enthusiastically embraced an ideological precept with little practical evidence to support it. The question is whether they will be sufficiently aroused by its failure to take on those who are more concerned about the short term tax impact of this approach than the long term economic implications.

The issue is that the skills and experience one usually picks up in a first or second job and which form the basis for future accomplishments are being denied to a significant proportion of an entire generation. It is not clear that this deficit can be made up or whether it will haunt those who have suffered from it for all or most of their working lives. The implication may be that such deficiencies may burden both the individuals and the society in which they live. The decreasing support for public education, both elementary and higher, merely exacerbates this trend by extending the degree to which potential workers are ill equipped to satisfy demands for an effectively trained global workforce.

There does not yet appear to be much of a protest groundswell to change this state of affairs. We may continue to abide these conditions - or perhaps it will take yet another crisis to finally bestir the beast. JL

David Leonhardt reports in the New York Times:

For all of Europe’s troubles — a left-right combination of sclerotic labor markets and austerity — the United States has quietly surpassed much of Europe in the percentage of young adults without jobs.

THE idle young European, stranded without work by the Continent’s dysfunction, is one of the global economy’s stock characters. Yet it might be time to add another, even more common protagonist: the idle young American.

Over the last 12 years, the United States has gone from having the highest share of employed 25- to 34-year-olds among large, wealthy economies to having among the lowest.

The grim shift — “a historic turnaround,” says Robert A. Moffitt, a Johns Hopkins University economist — stems from two underappreciated aspects of our long economic slump. First, it has exacted the harshest toll on the young — even harsher than on people in their 50s and 60s, who have also suffered. And while the American economy has come back more robustly than some of its global rivals in terms of overall production, the recovery has been strangely light on new jobs, even after better-than-expected unemployment report. American companies are doing more with less.

“This still is a very big puzzle,” said Lawrence F. Katz, a Harvard professor who was chief economist at the Labor Department during the Clinton administration. He called the severe downturn in jobs “the million-dollar question” for the economy.

Employers are particularly reluctant to add new workers — and have been for much of the last 12 years. Layoffs have been subdued, with the exception of the worst months of the financial crisis, but so has the creation of jobs, and no one depends on new jobs as much as younger workers do. For them, the Great Recession grinds on.

For many people with jobs and nest eggs, the economy is finally moving in the right direction, albeit a long way from booming. Average wages are no longer trailing inflation. Stocks have soared since their 2009 nadir, and home prices are increasing again. But little of that helps younger adults trying to get a foothold in the economy. Many of them are on the outside of the recovery looking in.

The net worth of households headed by people 44 and younger has dropped more over the past decade than the net worth of middle-aged and elderly households, according to the Federal Reserve. According to the Labor Department, workers 25 to 34 years old are the only age group with lower average wages in early 2013 than in 2000.

The problems start with a lack of jobs. In 2011, the most recent year for which international comparisons exist, 26.2 percent of Americans between ages 25 and 34 were not working. That includes those for whom unemployment is a choice (those in graduate school, for example, or taking care of children) and those for whom it is not (the officially unemployed or those who are out of work and no longer looking). The share was 20.2 percent in Canada, 20.5 percent in Germany, 21 percent in Japan, 21.6 percent in Britain and 22 percent in France.

The European economy has deteriorated over the last two years, and the American economy has strengthened modestly. But the job growth here has been fast enough merely to keep pace with population growth, which suggests that this country still lags in the employment of young adults. In 2000, by contrast, the United States led Germany, Britain, France, Canada and Japan — as well as Australia, Russia and Sweden — in such employment rates. The nation now trails them all. Older American workers have also lost relative ground, but not as much.

As Mr. Katz, Mr. Moffitt and others note, an explanation of the root causes remains elusive. But there are obvious suspects, and each probably plays a role.

The United States, for example, has lost its once-large lead in producing college graduates, and education remains the most successful jobs strategy in a globalized, technology-heavy economy. It is no accident that the most educated places in the country, like Boston, Minneapolis, Washington and Austin, Tex., have high employment rates while the least educated, including many in the South and inland California, have low ones. The official unemployment rate for 25- to 34-year-old college graduates remains just 3.3 percent.

Beyond education, the nation has also been less aggressive than some others in using counseling and retraining to help the jobless find work. To take one small example, a recent study in France by the renowned M.I.T. economist Esther Duflo and four colleagues found that placement programs for unemployed workers helped not only the workers but the economy too. The counseled workers were more likely to find work, and they did not simply take jobs from other candidates. Overall employment rose more quickly in the regions with job counseling.

Other research notes that the United States has expanded parental leave and part-time work less than other countries — and, perhaps relatedly, employment rates among women here have slipped.

Whatever role these trends are playing, they do not appear to fully explain the employment decline. It is too big and too widespread. Existing companies are not adding jobs at the same rate they once did, and new companies are not forming as quickly.

What might help? Easing the parts of the regulatory thicket without societal benefits. Providing public financing for the sorts of early-stage scientific research and physical infrastructure that the private sector often finds unprofitable. Long term, nothing is likely to matter more than improving educational attainment, from preschool through college (which may have started already).

Many business executives and economists also point to immigration policy. Done right, an overhaul could make a difference, many say, by allowing more highly skilled immigrants to enter the country and by making life easier for those immigrants already here. Historically, immigrants have started more than their share of new companies.

Perhaps the most remarkable aspect of the jobs slump is that the Americans in their 20s and 30s who have been most affected by it remain decidedly upbeat. They are much more hopeful than older generations, polls show, that the country’s future will be better than its past.

Based on what younger adults have been through, that resilience is impressive. It’s probably necessary, too. The jobs slump will not end without a large dose of optimism.

Who Owns Your Thoughts and Genes? Hint: It Probably Isn't You

2013-05-21T06:35:00.003-04:00

In a service economy the value of weight declines. Intangibles like ideas, concepts, laws and processes can be bought and sold for much more than supposedly 'hard' assets like machine tools, locomotives and factories.

Ownership of said intangibles is the province of intellectual property law, in which the rights, obligations and opportunities are argued, decided and attributed. The problem, as Nobel Prize winning economist Joseph Stiglitz explains below, is that the system for identifying and adjudicating these rights appears to have become corrupted by the value now ascribed to this previously unknown and undervalued class of property. The result is that the rules originally established to protect those who came up with brilliant - or simply useful - innovations are now being employed for purposes that in some cases directly contradict the original intent of the laws' creators.

As a practical matter, the question is whether the battling over intellectual property rights encourages or stifles the innovation necessary for the advancement and benefit of the economy and society. The concern is that the answer is, increasingly, no. That IP rights are, like so many of the financial innovations that led to the Great Financial Crisis and Recession, an entity unto themselves, divorced in intent and practice from the underlying civilization they were once thought to have been designed to serve.

Where this leads is a matter of some debate. The US courts are increasingly frowning upon what their rulings suggest they believe to be the usurpation and overreaching of the more aggressive IP practitioners. But as in all things financial, those with the greatest incentive to profit tend to be better funded and more determined than their opponents. The ultimate clash will be between those who want to use the ideas to create additional products or services and those who simply want to benefit from the trade in IP rights. Given the values involved (Apple's $7 billion judgment against Samsung being indicative) that battle will be epic. JL

Joseph Stiglitz comments in Project Syndicate via Slate:

There is increasing recognition that the patent system, as currently designed, not only imposes untold social costs, but also fails to maximize innovation.

The Supreme Court recently began deliberations in a case that highlights a deeply problematic issue concerning intellectual property rights: Can human genes—your genes—be patented? Put another way, should someone essentially be permitted to own the right, say, to test whether you have a set of genes that imply a higher than 50 percent probability of developing breast cancer?

To those outside the arcane world of intellectual property rights, the answer seems obvious: No. You own your genes. A company might own, at most, the intellectual property underlying its genetic test; and, because the research and development needed to develop the test may have cost a considerable amount, the firm might rightly charge for administering it.

But a Utah-based company, Myriad Genetics, claims more than that. It claims to own the rights to any test for the presence of the two critical genes associated with breast cancer, and it has ruthlessly enforced that right, though their test is inferior to one that Yale University was willing to provide at much lower cost. The consequences have been tragic: Thorough, affordable testing that identifies high-risk patients saves lives. Blocking such testing costs lives. Myriad is a true example of an American corporation for which profit trumps all other values, including the value of human life itself.

This a particularly poignant case. Normally, economists talk about trade-offs: weaker intellectual property rights, it is argued, would undermine incentives to innovate. The irony here is that Myriad’s discovery would have been made in any case, owing to a publicly funded, international effort to decode the entire human genome that was a singular achievement of modern science. The social benefits of Myriad’s slightly earlier discovery have been dwarfed by the costs that its callous pursuit of profit has imposed.

After all, Myriad did not invent the technologies used to analyze the genes. If these technologies had been patented, Myriad might not have made its discoveries. And its tight control of the use of its patents has inhibited the development by others of better and more accurate tests for the presence of the gene. The point is a simple one: All research is based on prior research. A poorly designed patent system—like the one we have now—can inhibit follow-on research.

That is why we do not allow patents for basic insights in mathematics. And it is why research shows that patenting genes actually reduces the production of new knowledge about genes: The most important input in the production of new knowledge is prior knowledge, to which patents inhibit access.

Fortunately, what motivates most significant advances in knowledge is not profit, but the pursuit of knowledge itself. This has been true of all of the transformative discoveries and innovations—DNA, transistors, lasers, the Internet, and so on.

A separate legal case has underscored one of the main dangers of patent-driven monopoly power: corruption. With prices far in excess of the cost of production, there are, for example, huge profits to be gained by persuading pharmacies, hospitals, or doctors to shift sales to your products.

The U.S. attorney for the Southern District of New York recently accused the Swiss pharmaceutical giant Novartis of doing exactly this by providing illegal kickbacks, honoraria, and other benefits to doctors—exactly what it promised not to do when it settled a similar case three years earlier. Indeed, Public Citizen, a consumer advocacy group, has calculated that, in the United States alone, the pharmaceutical industry has paid out billions of dollars as a result of court judgments and financial settlements between pharmaceutical manufacturers and federal and state governments.

Sadly, the U.S. and other advanced countries have been pressing for stronger intellectual-property regimes around the world. Such regimes would limit poor countries’ access to the knowledge that they need for their development—and would deny life-saving generic drugs to the hundreds of millions of people who cannot afford the drug companies’ monopoly prices.

The issue is coming to a head in ongoing World Trade Organization negotiations. The WTO’s intellectual-property agreement, called TRIPS, originally foresaw the extension of “flexibilities” to the 48 least-developed countries, where average annual per capita income is below $800. The original agreement seems remarkably clear: The WTO shall extend these “flexibilities” upon the request of the least-developed countries. While these countries have now made such a request, the U.S. and Europe appear hesitant to oblige.

Intellectual property rights are rules that we create and that are supposed to improve social well-being. But unbalanced intellectual-property regimes result in inefficiencies—including monopoly profits and a failure to maximize the use of knowledge—that impede the pace of innovation. And, as the Myriad case shows, they can even result in unnecessary loss of life.

America’s intellectual property regime—and the regime that the US has helped to foist upon the rest of the world through the TRIPS agreement—is unbalanced. We should all hope that, with its decision in the Myriad case, the Supreme Court will contribute to the creation of a more sensible and humane framework.

What Isn't Digital? How to Proceed When A Word Has Lost All Meaning

2013-05-20T14:55:00.003-04:00

Whenever new technology goes viral it takes a while for the economy and society it is impacting to adjust.

Cars, phones, electricity, television, computers. All were specialized until, suddenly, they were so integral to human existence that their ubiquity had utterly eliminated their novelty.

And so we find ourselves contemplating the meaning of the word digital. It has subsumed so many of the functions that used to be just, well, whatever they were, that its usage in those contexts has become inseparable from however we might have previously conceived of them.

Virtually all of the creative pursuits and many business activities are now almost completely digital. But our insecurity about what it means leaves us stuck in some interim nether world. We continue to reflexively add digital as a prefix or suffix as a means of saying we 'get it.' We are hip, of the moment - and, due to the nature of this economy - determined to assure all and sundry that our skills have not atrophied, our awareness not become hopelessly outdated.

That there continues to be a perceived need to differentiate, which is either an antiquated response mechanism to the power of the Old Ways - or a curious but useless reflection of some genetic holdover akin to a human's vestigial tail. At some point it should simply disappear. Everyone will get that the word digital is superfluous. But perhaps there is a lingering belief that digital itself is simply a transitional phase, to be followed and overcome by something even more powerful and all-encompassing.

Whatever the motivation, digital is more descriptive than nominative. It illustrates and articulates, inferring knowledge, prescience, modernity, even futurism, more than any particular expertise. We will continue to use it until we conclude it is no longer necessary. By which time we will be chewing over some utterly new word or phrase to communicate the equally ephemeral and indistinct essence of credibility. JL

Tony Quin comments in Advertising Age:

What isn't digital these days? TV is digital, you can't even get the old kind anymore, whatever that was. Photography is digital. The old days of film are so gone, but do you see Canon trumpeting their digital cameras? Digital vs. what? So here we are, professional marketers, and we are using a word to describe what we do that has no real meaning anymore.
I am the CEO of a digital agency. I also chair the board of an association of digital agencies. My problem is I don't know how to tell people what I do.
It's not that I don't know what I do. I just don't know how to describe it in terms that people will understand. The problem is that the word "digital" has become obsolete. Every time I hear it or use it I cringe.
The association I am involved with is called SoDA and its letters originally stood for the Society of Digital Agencies. But our great acronym is already in trouble. Some of our members say that "digital" is an irrelevant word because everything is now digital, and so it's a distinction without a difference.
Of course, there was a time when being a digital agency was a clear differentiator, a opposed to being a non-digital, or dare I say it, traditional agency. Those were the days when digital agencies like mine used to run digital rings around the traditional agency behemoths. But then the big guys woke up and before long were digital agencies, too. Now every agency has to be digital if it wants to stay in business. Digital in all its forms has changed so much of our business, that the old Mad Men concepts of advertising seem quaint; and I don't know many agencies that want to be considered quaint.
Take my own dilemma. I call my agency a digital-advertising agency. I thought about dropping the word digital but I just can't let it go, because without it we are just, God forbid, an ad agency. I was tempted to use "next generation" for a while, but it was too pompous even for an ad guy. I toyed with "an advertising agency for the digital age" or "an ad agency with digital at its core", but they felt at best clumsy and at worst buzz-word noise. One agency I know just gave up and called itself "an experience company", which is so vague it could be an escort service.
The bottom line is that we need to find a new word or words to describe what we do. It's almost as if we're a new industry and we need a new name.
Side-note: For a humorous take of the sometimes absurd world of buzz words in our industry, you might also want to take a look at "The SoDA Buzz Word Launcher" that debuted in the first 2013 edition of SoDA's biannual trend publication, The SoDA Report.

We're Number 3! Microsoft Surpasses Blackberry in Mobile Phone Sales

2013-05-20T08:49:00.000-04:00

Alright, go ahead and scoff, all you smug iPhone and Android users. Be happy in your choice.

But if the projections about mobile smartphone sales are correct, that number three position you so disdain could be worth a cool $4.5 billion annually. By next year.

Given the revenues of the average start-up or app creator, that looks like a pretty serious chunk of change. In fact, that probably looks juicy to any business on earth. But the larger strategic question is what it will cost to sustain that position. And that's where the calculations get tricky.

With Android and Apple secure in their 92.3 percent leadership positions (Android with @74 percent and Apple iOS with 17+), there will be a battle for every decimal point of market share. But at the lower end of the range every added customer is more expensive to get than it is for the big guys, who can spread their development costs over a much broader customer base. At some point this kind of advantage become self-fulfilling. Which is not to say that miracles dont happen, especially in tech. Just ask Microsoft or Apple or Amazon about changes of fortune. It does suggest, however, that questions about Microsoft's commitment to reaping the benefits of what could become a permanent non-leadership position as well as Blackberry's independence will continue to be raised. JL

Matt Vella reports in Fortune:

By 2014, the global smartphone market is expected to be worth some $150 billion, according to researcher MarkestandMarkets.
There's a new number three.
Microsoft's (MSFT) Windows Phone operating system has overtaken BlackBerry (BBRY) for the first time, according to researcher IDC. The firm released its quarterly report on the smartphone market, showing that during the first quarter of 2013, Windows devices made up 3.2% of all smartphones shipped. BlackBerry devices accounted for 2.9% of the market. That is almost a perfect flip of the results in the quarter previous: Microsoft's OS then accounted for 2.6% of all shipments, and BlackBerry 3.2%.
Good news for Microsoft? Certainly. But one quarter change does not cement a definitive third-place operating mobile operating system. Both companies were once dominant in smartphones. Microsoft's earliest version of Windows for phones powered once-hot Palm devices. And just two years ago, Blackberry's keyboard-sporting devices enjoyed a 34% market share. Before Apple's iPhone came along in 2007, it owned 50% of the market. (What's more, RIM was once Fortune's Fastest Growing Company.)
Both have desperately tried to gain momentum and lock themselves in as the third player, behind Google (GOOG) and Apple (AAPL). Combined, Android and iOS make up 92.3% of the market. Google's OS leads with some 75% of all smartphones shipped in Q1. On Wednesday, at is annual I/O developer conference, the search giant revealed that, in all, it had activated 900 million Android-powered phones, up from the 500 million announced last fall. Apple, which had its best first quarter ever with 37.4 million iPhones shipped, saw market share for its iOS dip to 17.3%.
To move beyond single-digit market share, Microsoft and Blackberry are going to need devices that can erode Google and Apple's enormous lead. Microsoft announced a strategic partnership with Nokia (NOK) in early 2011, which is bearing fruit, including the Lumia line of smartphones. (The two share development and marketing resources; Nokia abandoned its own proprietary system in favor of Redmond's.) Meanwhile, Blackberry -- which changed its name earlier this year -- has tried launching a new OS, Blackberry 10, alongside new devices. This week the company showed off additional hardware and said its BBM messaging service would come to rival platforms.
In a research report, Baird Equity Research praised both sets of moves but noted they were likely to have only modest consequences. "Our U.S.-based checks continue to suggest tepid demand for the Blackberry Z10 and Nokia Lumia devices," the report concluded. One thing is for certain, it's going to be a long fight to hold on to number three.

CEOs Say Investing In Innovation Is Not Paying Off

2013-05-20T08:00:00.003-04:00

'Moving the needle' is one of those omnipresent business cliches that are used so frequently we tend to tune them out.

In the work context it means making an investment or taking an action that changes an enterprises' fortunes. By which, those who use it usually mean raising the stock price, improving earnings, creating strategic advantage and, just in case we weren't clear about most executives' priorities these days, raising the stock price.

So when a consulting firm like Accenture - which makes its quite substantial living from pleasing the CEOs of many large corporations - reports that said CEOs are concerned about the low impact of innovation investments, we should pay attention. We should also ask a lot of questions.

The first question is what they mean by 'not paying off.' CEOs and the companies they manage are evaluated on a range of metrics. Some of them fairly reflect the KPIs - key performance indicators - that it takes to really run that business. But some of them, again, to be fair, are designed to assure that senior executives are compensated in the manner to which they have become accustomed.

What this means is that investments in anything - an acquisition, opening a foreign market, new product development - are evaluated with an eye to the long term prospects, but more importantly, whether they will 'move the needle' in the short term. And we do mean short. So if said investment, as in innovation, is not producing returns consistent with hurdle rates meant to emphasize near over far, or bonus calculations tied to this year's payout versus that in five years, it is appropriate to wonder whether the measures being used are reasonable or whether they reflect a bias designed to support a certain outcome.

Now one might also ask why, if all those smart, well-compensated people are investing in innovations that aren't paying off, what assumptions did they make that led them to make the choices they did. And what, by the way, do they mean by innovation? Is it shiny new devices that cause the business press to ooh and ahh. Or is it the less glamorous but potentially more profitable investments in processes, procedures and systems?

When my colleagues and I did a survey of attitudes about corporate innovation, our results showed that most CEOs thought that innovation was one of the terms that defined their enterprise in the eyes of customers and investors. But a concurrent survey of said customers and investors reported that innovation often didnt make it onto their priority list of considerations for purchasing from that company. If it did, it sometimes ranked lower than attributes like 'low cost producer,' or 'convenient.'

The point is that innovation has become so popular a concept that everyone thinks they have to be 'innovative' even when the market does not reward that activity with any sort of premium. Because the market often takes innovation for granted. So when CEOs say they are disappointed in the returns on innovation investment, it may well be because they are investing in the wrong innovation at the wrong time and for the wrong reasons. JL

Bernhard Warner reports in BusinessWeek:

Fewer than one in five chief executives believes his strategic investments in innovation are paying off, and that this poor track record is starting to discourage companies from taking risks.
By now it is almost gospel that investing in innovative new products and services helps a company’s long-term success. That doesn’t mean it’s easy.

For the study “Why ‘Low Risk’ Innovation Is Costly,” , Accenture (ACN) surveyed 519 companies across more than 12 industry sectors in France, Britain, and the U.S. Half (51 percent) of survey respondents reported they had recently increased funding for innovation at their companies. Almost all (93 percent) said the long-term success of their organization’s business strategy depends on their ability to innovate.
Despite the importance they assign to this innovate-or-die business rationale, just 18 percent of CEOs say they’re seeing their investments in innovation pay off. At the same time, 46 percent of the executives surveyed said their company had become more risk averse when considering new breakthrough ideas, the study found.
There may be a classic negative feedback loop at work here. If frustrated CEOs are not seeing their more risky R&D investments produce needle-moving results fast enough, they may turn to incremental improvements rather than big killer ideas. To wit, nearly two out of three of respondents said they were investing in product-line extensions. And 33 percent said that when it comes to innovation, “their primary goal was the expansion of the product suites that support their basic offerings.” That’s fine, but it’s the kind of innovation that begets the donut burger, not the risk-taking that can really change a company’s future.

Where Robots Fail: Education Will Not Become All Digital

2013-05-19T12:01:00.002-04:00

Our anxieties sometimes cause us to wish for magical solutions to seemingly intractable problems. We infer superhuman powers on machines, devices and processes because we know that mere humans don't have them.

But our needs, fears and desires do encourage us to conflate the truly astonishing with the also truly impossible.

A recent and much-heralded example of this comes in the field of education. The importance of the subject to personal, professional and societal advancement freights it with an importance that is at once appropriate and, perhaps, unrealistic. We have pinned many of our hopes on a more economically and socially benevolent future on the attainments we believe education can provide.

We are, at the same time, stuck with the problems we have created in the present. Budget deficits and concern about a financially viable future cause us to defund public education at the very same time we are loudly proclaiming its critical importance. Thus, the introduction of MOOCs (massive open online courses) allows us to believe we have found an answer. 'Free' courses from prominent educators, delivered by technology without the need for all that expensive infrastructure (like classrooms, football teams and the like).

The problem of course, is that when an answer appears to easy - whether on an algebra test or in real life - it probably is. As the following article explains, machines can do many wondrous things, but teaching continues to lie at the heart of a good education. And without that human interaction, whether in small classrooms or large, we may find that we are investing in our wishes rather than in our far more complicated and uncertain welfare. JL

Aaron Harris comments in VentureBeat:

The real test of edtech is still to come. Companies will have to prove that they are able to actually teach students, not just put lessons in front of them.

Thanks to technology, we’re watching a revolution happen in education right now.
From the explosion in popularity of language learning apps like Mindsnacks to the media furor about the rise of massive open online courses (MOOCs), companies are being built around the idea that technology can radically reshape our relationship with education.

Educating the well-educated
MOOCs have attracted more attention than any other edtech category, and with good reason. Imagine being able to take a physics class with Stephen Hawking without having to enroll at Cambridge, or learn poetry with Helen Vendler, and explore the solar system with Neil deGrasse Tyson.
The possibilities are seemingly endless — especially for the hyper-literate, hyper-educated communities of bloggers and journalists who typically write about this technology. These platforms started as experiments in distributing high quality education for single classes, and blossomed into fully-fledged companies on the strength of early, massive enrollments.
There’s an amazing amount of potential embedded in the idea of MOOCs, but for now, they are only struggling experiments aimed at the outer edge of enthusiasts of esoteric learning.
Enrollment figures point squarely at largely unfulfilled promises. Katy Jordan, an educational researcher, pulled together published stats, largely from Coursera, and plotted enrollment and completion rates for various popular MOOCs.
Harvard’s computer science class CS50x on edX had an amazing 150,349 enrolled students, of which 0.9 percent completed the course. Attrition rates on that level would instantly doom a college. While MOOC proponents argue that these completion rates are irrelevant because of varied interest levels of participating students at the outset, they’ve set the stage for their own measurement by using enrollment factors as their topline metric in interview after interview.

Education for the rest of us
But let’s say you ignore the massive discrepancy between enrollment and completion. Let’s say you focus, instead, on the stated mission of these companies. Each company states that its mission is access to education. So who is getting that access? Certainly not the millions of elementary and high school students struggling with a crumbling K-12 system in the U.S. Even if these kids have access to computers and broadband at home (which is a big “if”), they don’t necessarily have the skills to teach themselves the material with little or no human interaction.
Educating these kids in the subjects, and with the methods that they need to learn are not directly tied to jobs or expensive credentialing systems — the emerging business models of the biggest players in edtech. These kids are in the thick of the learning bell curve, not the autodidactic wunderkinds taking symbolic systems courses at the age of 12.
Many of the students that we work with at my company Tutorspree fall into this category. They are kids who are still learning to learn. Some are hugely advanced for their age, some need extra help — all want something more than the purely digital options being pushed by media and many government agencies.
These kids and their parents tell us every day that they need a real person to teach them, to learn with them, to react in real time to errors and successes, and to provide the kind of personal warmth and encouragement that computers cannot provide.

The power of people
We’re not the only ones noticing the importance of having real people interact with one another to make education work better. The MOOCs are beginning to hire teaching assistants and tutors to create emotional buy-in and attachment with students.
Sal Khan isn’t pushing for his videos to be the final say in teaching. They are meant as a gateway to unlock significantly higher rates of one-to-one teacher student interaction in the flipped classroom. Codecademy may use a carefully structured system to help people start learning to code, but they also encourage meetups and high school groups to get together to support one another through the really hard stuff.
The media likes to talk about how technology is creating radical shifts in education. Journalists talk about increases in access, tracking, and new mediums for delivery. But none of that is enough.

We need teachers if we want a system that is effective for the students who really need help, and want real progress.

Read more at http://venturebeat.com/2013/05/17/where-robots-fail-why-education-cant-just-be-digital/#EmYIhEhjqpydeVmz.99

Rethinking What It Means To Be Middle Class

2013-05-19T10:11:00.003-04:00

Maybe it's not 'them,' it's us.

'Them' are the shadowy forces that we accuse of having stolen the dream of middle class plenitude. Could be the banks, or the liberals, or the conservatives, or organized labor, or the corporations or whoever else we might think to blame.

But it is just possible that the big houses outside Dublin or Chicago or Sydney and the sybaritic vacations in Marbella or Cancun or Bali were historical anomalies. The three car garages and the flat screen TVs and the new iPhone every year may just be unsustainable appurtenances to an already doomed way of life. Not that it would be so bad without them: with plenty to eat, entertainment, education, cars and computers, Maslow's hierarchy of needs seems like something from a different universe, which, in a way, it was.

But it could well be that a fully functional and competitive global economy, driven by succeeding waves of technological change, is simply a place in which accumulated surpluses are going to be a rarity, at least for the foreseeable future. Which is not to say that the internet, or China or anyone else is to blame, but that as in so many other phases of human history changes take time to work their way through the economy and they extant societies they both support and reflect. Those changes affect our expectations as well as our realities - and not always positively.

It may well be that the rise of developing economies, a situation which now ranks China as a relatively expensive labor market, means that even Africa, yes Africa! is now considered a potentially desirable locale for both export and import. This all may imply that the largess to which we have become accustomed will be harder won in the future, and not as broadly distributed. That may be good or bad but it will be different and if we are looking for reasons, we need search no further than our own closets, garages and larders. JL

Paul Wallbank comments in Unconventional Economics:

Maybe we also have to change the definition of what is middle class and accept the late 20th Century idea of a plasma TV in every room of a six bedroom, dual car garage house in the suburbs was an historical aberration.
Just like the loom weavers of the 18th Century, it could well be the middle class incomes of the post World War II west were a passing phase.
Technologist Jaron Lanier says the internet has destroyed the middle classes.
He’s probably right, a similar process that put a class of mill workers out of a job in the Eighteenth Century is at work across many industries today.
Those loom workers in 18th Century Nottingham were the middle class of the day – wages were good and work was plentiful. Then technology took their jobs.
Modern technology has taken the global economy through three waves of structural change over the past thirty years, the first wave was manufacturing moving from the first world to emerging economies as global logistic chains became more efficient.
The second wave, which we’re midway through at the moment, is moving service industry jobs and middleman roles onto the net which destroys the basis of many local businesses.
Many local service businesses thrived because they were the only print shop, secretarial service or lawyer in their town or suburb. The net has destroyed that model of scarcity.
The creative classes – people like writers, photographers and musicians – are suffering from the samee changed economics of scarcity.
Until now, occupations like manual trades such a builders, truckdrivers and plumbers were thought to be immune from the changes that are affecting many service industries.
The third wave of change lead by robotics and automation will hurt many of those fields that were assumed to be immune to technological forces.
One good example are Australia’s legendary $200,000 mining truck drivers. Almost all their jobs will be automated by the end of the decade. The days of of relatively unskilled workers making huge sums in the mines has almost certainly come to an end.
So where will the jobs come from to replace those occupations we are losing? Finance writer John Mauldin believes the jobs will come, we just can’t see them right now.
He’s almost certainly right – to the displaced loom worker or stagecoach driver it would have been difficult to see where the next wave of jobs would come from, but they did.
Businesses and politicians who cater to the whims and the prejudices of the late Twentieth Century middle classes will find they have to change their message.

Why Can't McDonalds Serve Breakfast All Day?

2013-05-19T08:52:00.002-04:00

Your local diner does it, why can't Mickey Ds?

The trade-off between marketing demand and operational efficiency is one that many businesses face daily. An important demographic segment wants something but the cost and effort of providing it don't quite add up, even when the loss of customers is factored in.

And we can think of that in terms of new mobile phone features or shoes or, probably, certain types of ten thousand ton locomotives. But we rarely think about it in terms of breakfast.

Fortunately, for those who really care - and it turns out there are a lot of you - McDonalds has given this some deep thought. We wish the answers were profound or philosophical or even health-related. But, to get ahead of ourselves, they're not. They are operational and financial, which is where most businesses live.

Turns out McDonald's dominates - as in, owns - the fast food breakfast category. But the problem is that providing all those yummy egg, cheese and meat products on a bun is not as profitable as your garden variety (or should we say feed-lot variety?) hamburger and fries. And, as if that weren't disincentive enough, it actually takes some skill and attention to turn those breakfast items out. So the problem is that lots of people want breakfast at 11:22 am or at 3:15pm or, most likely, between 10pm and 4am after they've had a few adult beverages and are seeking the return of intestinal equilibrium. Unfortunately that would reduce profits both by encouraging the purchase of items with lower margins and because the additional costs of providing the service cut further into the company's retained value.

So learn to appreciate what you've got as you eat in your car or as you walk or sit on the bus every morning, as well as the thought, care and analysis that went into making this opportunity available to you. JL

Susan Barfield and Leslie Patton report in Bloomberg:

Breakfast accounts for only one-quarter of McDonald’s U.S. sales, but it dominates the market. A 2012 study by Scarborough found that among the adults who said they’d eaten a fast-food breakfast in the prior month, 48 percent had visited a McD’s
In the 1993 film Falling Down, Michael Douglas enters a fast-food restaurant and orders breakfast. The worker behind the counter informs Douglas he’s a few minutes too late, and suddenly Douglas becomes totally unhinged. Twenty years later breakfast still ends too early for many people—10:30 on weekdays and 11 on weekends—at most McDonald’s (MCD) restaurants. So when Don Thompson, the company’s president and chief executive officer, said on CNBC in late April that he was considering serving breakfast all day, a lot of Americans thought it was about time.
Not so fast. Back in 2006, then-CEO Jim Skinner announced that the chain was considering operational improvements that would make it possible to offer breakfast 24 hours a day. “It’s a concept for now—no specifics yet,” Heidi Barker Sa Shekhem, vice president for global communications, writes in an e-mail in response to a request for an update. (A few breakfast items are offered all day in select countries.)
But all-day breakfast? “It’s been tried and failed repeatedly. It just makes the operation too complicated,” says Richard Adams, a restaurant-franchisee consultant in San Diego and former McDonald’s restaurant owner. He says the chain has conducted test runs in a few stores over the years. (There are about 14,100 McDonald’s stores in the U.S.)
One of the biggest obstacles to a McDonald’s breakfast 24/7 is logistical. There may not be enough “grill capacity” to cook both eggs and burgers, says Don Boodel, who owns two McDonald’s restaurants in the Denver area. And burgers, like other meat, need to be cooked at a higher temperature than eggs. At breakfast, the crew cooks the bacon and sausage ahead of time. That solution might not be possible during a busy lunch shift. Then there’s the scrambled egg. “It’s something you’ve got to dedicate yourself to, stirring the eggs,” Adams says. “You’ve got to keep them moving; you can’t just let them sit there.” During peak times, McDonald’s already struggles to quickly serve drive-in customers, says Darren Tristano, executive vice president at research firm Technomic. About 65 percent of McDonald’s U.S. business comes from customers in their cars.
Another problem with all-day breakfast is that the morning fare costs less than lunch or dinner meals, so some customers might trade down. Still, “there’s nothing better on the menu than breakfast,” says Barry Klein, a former franchisee who is now a marketing consultant in Chicago. “The value is sensational. And there’s a slightly healthier halo to what they serve then.” (The Sausage, Egg & Cheese McGriddle excepted: It has 550 calories and 31 grams of fat.)
Klein and other interested observers suggest that restaurants could offer only the breakfast sandwiches all day; they’re easier to make and sell better than pancakes and scrambled eggs anyway. Or they could experiment with serving breakfast until noon, suggests Tristano of Technomic. Until then, he says, there’s always the (once) secret Mc10:35. Customers arriving minutes late for breakfast can often prevail on McDonald’s crew to put leftover eggs from the Egg McMuffins on their burgers.

Living In the Programmable World

2013-05-18T14:08:00.003-04:00

We're in Stage 1 now, synching all of our devices to make our cars, TVs, phones, microwaves, laptops, jacuzzis and refrigerators coordinate.

But it's the next stage where things are supposed to get really interesting. That's when those devices are - we are told - going to start communicating and then learning from each other.

This will make life more convenient (!), which our behavior suggests is the goal we whose attainment to which are most committed. Not that the lives of most people in developed countries are models of slavish toil. But life can always be better, so here comes the future, ready or not.

There is a wondrous element to all this. We are like the conductors of a virtuoso technological symphony, weaving the disparate elements of our lives together with software, will power and imagination. Our ability is staggering and constrained more by the limits of our imagination than by any actual barriers.

But there is, as always, a price. And it comes in the form of both intrusion and transparency. In return for the freedom and power, we must give up an unprecedented amount of personal privacy. Most people appear to believe that the trade-offs are worth it. However, most have only experienced the beneficial aspects of that trade so far. It's hard to say how they will react when the piper has to be paid. It may be more discomforting than many imagine and we can not really pretend to understand where it ends.

In the interim, however, we are learning important skills - and wisdom - about the interface of technology and humanity. Which may serve us well in the future. JL

Bill Wasik reports in Wired:

In our houses, cars, and factories, we’re surrounded by tiny, intelligent devices that capture data about how we live and what we do. Now they are beginning to talk to one another. Soon we’ll be able to choreograph them to respond to our needs, solve our problems, even save our lives.

In a 5-acre plot in Great Falls, Virginia, less than a mile’s stroll through exurban scrub from the wide Potomac River, Alex Hawkinson has breathed life into a lifeless object. He has given his house, a sprawling six-bedroom Tudor, what you might describe as a nervous system: a network linking together the home’s very sinews, its walls and ceilings and windows and doors. He has made these parts move, let them coalesce as a bodily whole, by giving them a way to talk among themselves. Open a telnet session in the house’s digital hub and you can actually spy on his chattering stuff, hear what it says when no one’s listening:

LIBRARY MOTION SENSOR: Device 0x9E07 zone status 0×0031

CAR DOOR: Temperature: +13.0C; Battery: 2.4V

CAR GLOVE COMPARTMENT: [87AC] checkin

FAMILY ROOM LIGHT: 2001-

KITCHEN COUNTER LIGHT: 2001-

THERMOSTAT: 4301-

FOYER LIGHT: 2001-

COFFEEPOT: 2001-

LIVING ROOM MOTION SENSOR: Device 0xB247 zone status 0×0031

This is the language of the future: tiny, intelligent things all around us, coordinating their activities. Coffeepots that talk to alarm clocks. Thermostats that talk to motion sensors. Factory machines that talk to the power grid and to boxes of raw material. A decade after Wi-Fi put all our computers on a wireless network—and half a decade after the smartphone revolution put a series of pocket-size devices on that network—we are seeing the dawn of an era when the most mundane items in our lives can talk wirelessly among themselves, performing tasks on command, giving us data we’ve never had before.
Imagine a factory where every machine, every room, feeds back information to solve problems on the production line. Imagine a hotel room (like the ones at the Aria in Las Vegas) where the lights, the stereo, and the window shade are not just controlled from a central station but adjust to your preferences before you even walk in. Think of a gym where the machines know your workout as soon as you arrive, or a medical device that can point toward the closest defibrillator when you have a heart attack. Consider a hybrid car—like the new Ford Fusion—that can maximize energy efficiency by drawing down the battery as it nears a charging station.
There are few more appropriate guides to this impending future than Hawkinson, whose DC-based startup, SmartThings, has built what’s arguably the most advanced hub to tie connected objects together. At his house, more than 200 objects, from the garage door to the coffeemaker to his daughter’s trampoline, are all connected to his SmartThings system. His office can automatically text his wife when he leaves and tell his home A/C system to start powering up.
In this future, the intelligence once locked in our devices now flows into the universe of physical objects. Technologists have struggled to name this emerging phenomenon. Some have called it the Internet of Things or the Internet of Everything or the Industrial Internet—despite the fact that most of these devices aren’t actually on the Internet directly but instead communicate through simple wireless protocols. Other observers, paying homage to the stripped-down tech embedded in so many smart devices, are calling it the Sensor Revolution.
But here’s a better way to think about what we’re building: It’s the Programmable World. After all, what’s remarkable about this future isn’t the sensors, nor is it that all our sensors and objects and devices are linked together. It’s the fact that once we get enough of these objects onto our networks, they’re no longer one-off novelties or data sources but instead become a coherent system, a vast ensemble that can be choreographed, a body that can dance. Really, it’s the opposite of an “Internet,” a term that even today—in the era of the cloud and the app and the walled garden—connotes a peer-to-peer system in which each node is equally empowered. By contrast, these connected objects will act more like a swarm of drones, a distributed legion of bots, far-flung and sometimes even hidden from view but nevertheless coordinated as if they were a single giant machine.
For the Programmable World to reach its full potential, we need to pass through three stages. The first is simply the act of getting more devices onto the network—more sensors, more processors in everyday objects, more wireless hookups to extract data from the processors that already exist. The second is to make those devices rely on one another, coordinating their actions to carry out simple tasks without any human intervention. The third and final stage, once connected things become ubiquitous, is to understand them as a system to be programmed, a bona fide platform that can run software in much the same manner that a computer or smartphone can. Once we get there, that system will transform the world of everyday objects into a designable environment, a playground for coders and engineers. It will change the whole way we think about the division between the virtual and the physical. This might sound like a scary encroachment of technology, but the Programmable World could actually let us put more of our gadgets away, automating activities we normally do by hand and putting intelligence from the cloud into everything we touch.

The first stage of this transformation—the simple act of putting objects on the network—is well under way, spurred by a few different economic forces. For makers of consumer devices, one way to escape the trap of commodification is to put a device (alarm clock! refrigerator! fitness tracker!) on the network and call it “smart.” No doubt that’s a big reason why more than half of the gadgets displayed at this year’s International Consumer Electronics Show boasted some sort of wireless hookup. But an even bigger reason is that the rise of the smartphone has supplied us with a natural way to communicate with those smart objects. Nearly 700 million new smartphones shipped last year, most of which can communicate with nearby sensors via multiple wireless languages. At the same time, the staggering scale of the smartphone market has spurred sensor manufacturers to miniaturize and innovate, driving the cost of all the wireless chipsets (both sensors and receivers) down to a pittance. This has created a built-in market for these first-stage products—formerly unnetworked items that now deliver simple information to your phone, and from there to the cloud—at a relatively minimal manufacturing cost.
Already, scores of products have emerged to take advantage of Bluetooth Smart, one low-energy radio protocol that hit the market in October 2011. They include watches, heart rate monitors, and even some new Nike shoes (which use four built-in pressure sensors to send workout data back to your phone). One project, called Asthmapolis, uses a sensor that attaches to an asthma inhaler; it maps usage to generate insights into where attacks are likely to occur. Another rising technology is NFC, short for near-field communication; Visa just announced that it plans to let Samsung smartphone users make payments to merchants wirelessly over NFC instead of swiping a card, and some billboards are using the protocol to beam content to passersby who ask for it.
In the industrial realm, there’s a similar dynamic at work but with even higher stakes. Massive US companies like IBM (through its Smarter Planet initiatives), Qualcomm, and Cisco all see ubiquitous connectivity as a way to sell more products and services—particularly Big Data–style analysis—to their large corporate customers. Chinese manufacturers have much the same idea, and the Chinese government is pumping hundreds of millions of dollars every year into so-called Internet of Things–based manufacturing. (This project kicked off a few years ago when China’s then premier Wen Jiabao put forward the following equation in a speech: “Internet + Internet of Things = Wisdom of the Earth.”) Global analysts look at all these developments and project that by 2025 there will be 1 trillion networked devices worldwide in the consumer and industrial sectors combined.
Take one case in point: General Electric, which has been trying to apply the sensor revolution (what it calls the Industrial Internet) to 50 different projects across scores of businesses, from wind turbines to railroad locomotives to a pilot program with Mount Sinai Medical Center in New York that predicts, based on sensors in beds, when rooms will become available. But perhaps GE’s most remarkable application of this program has been to its own manufacturing process at the Durathon battery factory, completed last year in Schenectady, New York. Its biggest manufacturing challenge is the high tech ceramics that separate the electrodes inside the battery: Tiny variations in the mixing and firing process can lead to huge swings in quality and consistency of these ceramics. So the solution, GE’s team decided, was to engineer their way to consistency through data.
Step by step, they developed and refined their process using feedback from the machines. One crucial step was near the beginning, in mixing the powder that would eventually be pressed to form the ceramics. The team didn’t know the optimal mixing time needed to give that powder a perfectly even consistency that wouldn’t vary from batch to batch. And since the raw materials would themselves vary slightly—in density, for example, or moisture content—the mixing time would need to vary too. So, says Randy Rausch, a manager of manufacturing engineering at the plant, “we put a sensor on everything,” from the outside of the factory to the inside of the room to the inside of the vat to the innards of the machines. Eventually the team realized that the powder was ideally mixed when it reached a certain viscosity. The key sensor, it turned out, was inside the mixing apparatus itself: When it needed to draw more than a certain amount of power, indicating that the powder was at just the right thickness, the process was done.
In many ways, this is the most extreme possible example of a first-stage usage. GE estimates that this single factory generates some 10,000 data points every second, and using that data has allowed GE to eliminate the high defect rates that typically plague high tech ceramics. Yet it has done it through pure data analysis, not through the actual coordination of these low-level sensors and devices. Like the consumer-hardware makers linking up their products to distinguish them from ordinary toasters and refrigerators, GE is connecting its industrial components to solve a near-term business problem. But in the process, the company and its industrial brethren are laying the groundwork for a far deeper transformation.

The rise of the smartphone has given us a natural way to communicate with all of our smart objects.

The second stage—the yoking together of two or more smart objects—is the trickiest, because it represents the vertiginous shift from analysis, the mere harvesting of helpful data, to real automation. This is a leap that tries our nerves: No matter how thoroughly we might use data to fine-tune our lives and businesses, it’s scary to take any of those decisions out of human hands. But it’s also a challenge to our imagination. In a non-programmable world, when few objects are connected, it can be tough to grasp how even pairs of things might naturally fit together. Alex Hawkinson of SmartThings likes to draw an analogy to Facebook, which has famously described the underlying data it owns as the social graph—the knowledge of who is connected to whom and how. Hawkinson wants us to think of a “physical graph” where all the objects in our lives take on similar underlying connections, based on how we might want the state of one object to depend on the state or behavior of another. But until you actually have the intelligence baked into your objects—until you have, say, a network-connected sprinkler system on one hand and an in-ground moisture sensor on the other—it can be hard to imagine the automation you might someday want, or even need, in your daily life.
Think about where you spend most of your waking hours: your office, perhaps, or your living room or car. There are all sorts of adjustments you make over the course of any given day that are reducible to simple if-then relationships. If the sun hits your computer screen, then you lower a shade. If someone walks in the door, then you turn down your music. If there’s too much noise outside, then you close your window. If you have a Word document open but haven’t finished writing a sentence in 10 minutes, then you brew another pot of coffee. Would you want to automate all of these relationships? Not necessarily. But you might find that automating some of them would make your life easier, more streamlined.
Perhaps the clearest two-sensor example is where one of the sensors is on us. “Presence” tags—low-energy radio IDs that sit on our keychains or belt loops and announce our location, verify our identity—are what let the SmartThings system text your wife or fire up your A/C when you leave the office. It’s also the principle behind Square Wallet and a number of other nascent payment systems, including ones from PayPal and Google. (When you walk into a participating store today, Square can let the cashier know you’re there; you pay simply by giving your name.) For the four-legged set, Qualcomm has created a product called Tagg, a tracking tool that monitors your pet’s movements while you’re gone, estimating its activity levels and alerting you if it strays too far from home.
With GPS we can reliably know our location within 100 feet, give or take, and that knowledge has transformed our lives immeasurably: turn-by-turn driving directions, local restaurant recommendations, location-based dating apps, and so on. But with presence technology, we have the potential to know our location absolutely, down to a foot or even a few inches. That means knowing not merely which bar your friend is at but which couch she’s sitting on if you walk through the door. It means receiving a coupon for a grocery item on the endcap at the moment you walk by. It means walking through an art museum and having your phone interpret the paintings as you pause in front of them. This simple link—between a tag on us and a tag in the world—stands to become the culmination of the location revolution, delivering on all the promises it hasn’t quite fulfilled yet.
Dennis Crowley, CEO of Foursquare, the location-based social app, thinks of location as a giant X on Earth that grows smaller as our technology improves. “We want to get down to the point where the X is this big,” he says, holding out his hands. “X marks the spot: It’s pirate’s treasure.” Already that X is shrinking: On Google Maps, you can now navigate inside certain airports and stores, with Wi-Fi triangulation helping out your GPS. (The Wi-Fi is especially important to distinguish among levels of a multistory building, which GPS is poorly equipped to handle.) But presence tags can simplify that math, replacing it with a concrete assurance of where we are. And the treasure that digs up could be considerable. This is obviously true for retailers: According to a mobile couponing firm called Koupon Media, some 80 percent of customers who buy gas at one major convenience-store chain never walk inside the store, so presence-based coupons could make a huge impact on the bottom line. But it’s also true for our everyday lives. Have you ever lost an object in your house and dreamed that you could just type a search for it, as you would for a wayward document on your hard drive? With location stickers, that seemingly impossible desire has become a reality: A startup called StickNFind Technologies already sells these quarter-sized devices for $25 apiece.

Your office will text your wife
when you leave and tell your home
A/C system to start powering up.

A simple link—between a tag on
us and a tag in the world—will complete the location revolution.

The third and final stage is to build applications on top of these connected objects. This means not just tying together the behavior of two or more objects—like the sprinkler and the moisture sensor—but creating complex interrelationships that also tie in outside data sources and analytics. Think about how much more intelligent your sprinklers could be if they responded to the weather report as well as to historical patterns of soil moisture and rainfall. Plugged into that information, your system wouldn’t just know how much water is in the soil; it could predict how much there will be, based on whether it’s going to rain or the sun will be baking hot that day. Think about a home medical monitoring system that didn’t just feed back data from diabetic patients but adjusted the treatment regimen as the data demanded. Think about a liquor cabinet that auto-populated your shopping list based on the levels in the bottles—but also locked automatically if your stock portfolio dropped more than 3 percent.
With his 200-plus sensors and objects installed, Hawkinson is using his house as a laboratory to dream up just these sorts of elaborate interconnections. A blond, hulking, bespectacled entrepreneur in his forties, he lays out some of the basic objects on the coffee table in his airy living room. There is a motion sensor, a moisture sensor. There is the “multi sensor,” whose two pieces can be mounted opposite each other on a door and its frame, registering movement and also ambient temperature. There is a power outlet that listens for commands as it sits plugged between the wall and any AC-powered device. And there is the presence tag, worn on a keychain or belt loop, which announces to the house that its bearer is home. Finally, there is the sandwich-sized device that binds them together: the SmartThings Hub.
Right now there are multiple efforts under way to standardize how connected objects talk to one another. Two different projects, led by big companies—AllJoyn, spearheaded by Qualcomm, and MQTT, pushed by Cisco and others—are trying to create something like an HTTP for smart objects, giving them a shared language to coordinate their actions. Hawkinson’s strategy, by contrast, is to make his hub a universal translator, deciphering the different types of chatter over multiple wireless protocols and processing it all in the cloud. The SmartThings Hub includes Wi-Fi, Bluetooth Smart, and two mesh technologies called ZigBee and Z-Wave that allow each device to extend the network. He estimates there are already more than a thousand compatible off-the-shelf devices, but he says that if some popular new wireless chipset (or HTTP-style protocol) comes along, “we’ll just throw that in too.”
The true genius of SmartThings, though, isn’t in the sensors or the hub but in the system that Hawkinson and his users are building on top of it. Open the SmartThings mobile app and one finds its own array of apps inside, a pleasingly designed grid of bubbles that show the status of the people and places and things on your system and the various programs that connect them. Through the SmartThings Store, users and developers can share their simple if-then apps and, in the case of more complex relationships, make money off of apps, just like in the mobile marketplaces.
For example, Hawkinson’s users are already hacking smart thermostats, which draw on sensors and historical usage patterns to help save energy. Essentially these are open source competitors to Nest, the most successful connected home appliance on the market right now. Designed by former Apple engineers, Nest is a proprietary system where all the intelligence is embedded in the thermostat itself. But on the SmartThings platform, a thermostat app can pull in readings from any other device on that platform—motion sensors that might say which room you’re in, presence tags that identify individual family members (with different temperature preferences)—as well as outside data sources like weather or variable power prices.
An even more natural category for apps is security. While Hawkinson is away from his house, he receives texts when any door opens, when any motion is detected. When the last person leaves the SmartThings office, it locks itself up, shuts down the lights and thermostat, and activates an alarm system complete with siren, flashing lights, and auto-notifications, all coordinated through the SmartThings system. With so much intelligence built into the structure, why would you ever pay ADT—or one of the other myriad firms that makes up that $20 billion market—just to duplicate that effort? For those rare situations when someone needs to come out to the premises, Hawkinson imagines a low-cost security service that will wed his simple sensors and notifications with an on-call platoon of off-duty cops—“an Uber for home protection,” as he puts it.
This, finally, is the Programmable World, the point at which the full power of developers, entrepreneurs, and venture capitalists are brought to bear on the realm of physical objects—improving it, customizing it, and groping toward new business plans for it that we haven’t dreamed of yet. Indeed, it will marshal all the forces that made the Internet so transformational and put them to work on virtually everything around us.

It’s a future where the intelligence
once locked in our devices
can now flow into the universe
of physical objects.

There are obviously some pitfalls lurking in this future of connected objects. Our fears about malicious hackers preying on our email and bank accounts via the cloud might pale in comparison to how we’ll feel about those same miscreants pwning our garage doors and bathroom light fixtures. The mysterious Stuxnet and Flame exploits have raised the issue of industrial security in the era of connected devices. Vanity Fair recently detailed nightmare scenarios in which hackers could hit connected objects, from our high tech cars (university researchers have figured out how to exploit an OnStar-type system to cause havoc in a vehicle) to our utility “smart meters” (which collect patterns of energy use that can reveal a great deal about our activities at home) to even our pacemakers.
Hawkinson, for his part, sees security as a concern but hardly an existential threat. The traffic between the cloud and the SmartThings Hub is encrypted, making it very difficult for hackers to intercept, let alone to modify for malevolent ends. It might actually be the case that automation, even mediated through the cloud, will make our lives more rather than less secure. As Wired senior writer Mat Honan has documented, our recent hacking epidemic has largely exploited the human interface—the password. We’re always the weak link in online security, and in the Programmable World, our objects will carry out their business without needing us to get involved at all.
A bigger concern, perhaps, is simple privacy. Just because we’ve finally warmed up to oversharing in the virtual world doesn’t mean we’ll be comfortable doing the same in the physical world, as all our interactions with objects capture more and more data about where we are and what we’re doing. Certainly the gradual acceptance of smart toll tags for cars (e.g., E-ZPass) shows that such qualms can be overcome, so long as there’s a demonstrated benefit and a fair assurance of security. In that regard, personalized billboards are arguably a step in the wrong direction, but wireless payments will make users happy; so too will the coffee shop that knows your order and lets you skip the line, or the rental-car seat that adjusts to your preferences before you sit in it. Just as with social networking, the privacy concerns of a sensor-connected world will be fast outweighed by the strange pleasures of residing in it.
No, the main existential threat to the Programmable World is the considerably more mundane issue of power. Every sensor still needs a power source, which in most cases right now means a battery; low-energy protocols allow those batteries to last a long time, even a few years, but eventually they’ll need to be replaced. In a hyperconnected home like Hawkinson’s, that will eventually mean changing scores of batteries every year, and the numbers in a large office complex on the SmartThings system would be even higher. Hawkinson hopes that within a few years we will see the commercial rollout of wireless power, which uses a technology called resonant magnetic coupling to beam power to devices as far as several meters away from a charging station. (MIT recently spun out a company called WiTricity to bring such a system to market; its founders are hopeful that even electric cars could charge up using its technology.)
The idea of animating the inanimate, of compelling the physical world to do our bidding, has been a staple of science fiction for half a century or more. Often we’ve imagined the resulting objects to be perverse in their lack of intelligence, like those remorselessly multiplying brooms conjured up by Mickey Mouse in Fantasia. At other times we’ve feared the perversity that results when our things get too smart, like HAL refusing to open those damn pod-bay doors. In reality, though, just as in our programmable computers, the “intelligence” in our programmable world will never be more or less than the intelligence we can instill into its far-flung moving parts. It’s vanishingly unlikely that we’ll ever have a car like KITT or a house like Tony Stark’s Jarvis, chatting us up in urbane British accents about our built-in weapons systems. But someday soon we’ll have a house that can warn us about a flood or keep an eye on our kids or turn off that stove when we forget—acts of genuine intelligence that will enrich our lives far more than any missile launcher ever could.

We're All Addicts Now

2013-05-18T06:28:00.001-04:00

Have we become a civilization of addictive personalities? How else to explain our lurching progress from one obsession to another.

Mobile phones, cupcakes, pharmaceuticals for every condition, mood and hour, fashion, celebrity and convenience.

Scientists attempt to understand our inability to function without constant texting and talking after eons of relative quiescence. Some believe that it is the nexus desire and ability that has created this situation: technology has given us the ability to see things we want and affluence has provided us with the means to believe we can have it - or them. Lots of them.

Our chemical reflexes have responded in Pavlovian fashion to stimuli exactly as their designers intended. We appear helpless in the face of unrestrained demand for our attention.

It would be comforting to assume that this is a phase and that we will grow out of it. But with the world's largest generation already well into grandparenthood, one wonders how much time is left for that deliverance to reveal itself. JL

Damian Thompson reports in Salon:

Even cupcakes and iPhones control us -- social and technological advances stimulate desires and foster addiction

The 21st century cupcake is a thing of wonder: a modest base of sponge groaning under an indulgently thick layer of frosted sugar or buttercream. It’s made to look like a miniature children’s birthday cake – and, indeed, birthdays are the perfect excuse to scurry down to the local boutique bakery for a big box of them. The retro charm of cupcakes helps suppress any anxieties you might have about sugar and fat. Your mother made them! Or so the advertising suggests. Perhaps your own mother didn’t actually bake cupcakes, but the cutesy pastel-colored icing implies that one bite will take you back to your childhood. This can’t possibly be junk food, can it?

Now let’s consider another ubiquitous presence in modern life: The iPhone, which started out as a self-conscious statement of coolness but which, thanks to Apple’s marketing genius, has now become as commonplace as a set of car keys. Millions of people own iPhones, making use of hundreds of thousands of apps, whose functions range from GPS-assisted mapping to compulsively time-wasting computer games. Your iPhone does everything you could require of a mobile phone and more, so you really don’t need the upgraded model that Apple has just released … do you?
A cupcake and a smartphone. These objects are so innocent-looking that you could leave them on your desk at work and no one would comment (though the cake might disappear). You can easily consume them simultaneously: checking your text messages and picking at that yummy frosted topping.
On the other hand, each of these mundane items can get us into trouble. They are objects of desire that can reinforce addictive behavior – the sort that creeps up on you when your defenses are down. That’s my subject: a social environment in which more and more of us are being pulled towards some form of addiction, even though we may be unaware of the fact and never become full-blown addicts.
It’s not obvious to us now, but the most far-reaching social development of the early 21st century is our increasingly insistent habit of rewarding ourselves whenever we feel the need to lift our moods.
When our hand creeps out towards yet another square of organic chocolate, or when we play just one more game of Angry Birds before setting off for work, or when we check a secretly bookmarked porn site for new arrivals, we’re behaving like addicts. The activity in question can be innocent or shameful. Either way, it reinforces the addictive streak in human nature.

That streak is there because our brains have evolved to seek out immediate, short-term rewards. Our ancestors needed to stuff themselves with energy-rich berries and to respond quickly to sexual stimulation; we wouldn’t be here if they hadn’t.
Our problem is that we’ve built an environment that bombards us with rewards that our bodies don’t need and that do nothing to ensure our survival as a species. Yet, because they are rewards – that is, because they provoke specific feelings of anticipation and pleasure in the brain – we grab them anyway.
To put it another way, we reach out for a fix.
That’s a word we associate with helpless addicts. They talk about their “fix” because it feels as if they’ve temporarily fixed themselves when they take their drug of choice. There’s no mystery about this. As a result of heavy exposure to the drug, they have become dependent on frequent chemical rewards. Their brains are in a state of hyper-vigilance, waiting for the blessed relief of a chemical that, once tolerance develops, merely allows the addict to feel normal, as opposed to anxious and ill.
That much is not in dispute. Many addiction specialists go further, however. They say that the brains of addicts are fundamentally different from those of non-addicts. They are forced to chase these rewards because they have “the disease of addiction.”
I’d challenge that theory: If you keep eating chocolate biscuits until you feel sick, you’re indulging in a milder version of the addictive behavior that leads heroin addicts to overdose. I’m not equating the two situations, of course. I’m suggesting that they lie at different points on a spectrum of addictive behavior on which everyone can be located.
Also, and more importantly, many of us are being pulled toward the dangerous end of the spectrum, thanks to technological and social changes that stimulate the most fundamental of all our instincts – desire.
Never before have we had access to so many desirable things and experiences that we hope will change our moods. I know “things and experiences” sounds vague, but that’s really the point. Addiction has never been confined to substance abuse, and with each passing week technology unveils a new object, process or relationship we can obsess over.
For example, these days our fixes are often delivered to us through social networking tools such as Facebook or Twitter that enable us to manipulate our circle of friends. Installing and deleting people as if they were iPhone apps offers a quick and dirty method of changing our feelings (though, needless to say, we are furious when someone deletes us). It’s a consumer experience.
In any discussion of addiction, whether of the trivial or life-threatening variety, the concept of desire is just as important as that of pleasure. Usually, it’s more important. That’s because the anticipation of the fix is more powerful than the moment of consumption, which often fails to live up to expectations. Sometimes we throw internal tantrums when this happens. The fix infantilises us so that, like children, we are constantly and annoyingly hungry for more.
Believe me, I speak from experience.
*
I spent many years as an addict. I was pathetically addicted to alcohol between the ages of 18 and 32. It took me a long time to acknowledge the fact, though — to realise that the act of getting drunk delighted and obsessed me to a degree that set me apart from most of my friends and colleagues. My doctor tells me I’m still an addict. I’m not exactly happy to wear that label after spending such a long time avoiding so much as a sip of alcohol, but the evidence is compelling. Since giving up drinking, my addictive desires have attached themselves to one thing, person or experience after another. I can’t swallow a Nurofen Plus for a headache without hoping that I’ll enjoy a little codeine buzz. I can obsess for 10 minutes in front of a display of confectionery in a newsagent’s. And my CD-buying habit has nearly bankrupted me. Trivial stuff compared with my drinking, but my over-reactions to these stimulations don’t feel normal, exactly.
Perhaps the crucial feature of addiction is the progressive replacement of people by things. That deceptively simple statement is a brilliant insight, though I can’t claim credit for it. It comes from Craig Nakken, author of a bestselling book called “The Addictive Personality,” who argues that addicts form primary relationships with objects and events, not with people.
He writes: “Normally, we manipulate objects for our own pleasure, to make life easier. Addicts slowly transfer this style of relating to objects to their interactions with people, treating them as one-dimensional objects to manipulate as well.”
What begins as an attempt to find emotional fulfilment ends up turning in on itself. Why? Because the addict comes to judge other people simply in terms of how useful they are in delivering a fix. And, at some stage, everybody lets you down. Therefore the addict concludes that objects are more dependable than people. Objects have no wants or needs. “In a relationship with an object the addict can always come first,” says Nakken.
I felt a shiver of recognition when I first read those words. But it wasn’t just my own behavior that came to mind, or that of people whom society can conveniently label “addicts.” This may come across as a presumptuous thing to say, but over the last decade I’ve been struck by the way friends and colleagues, most of them psychologically far healthier than me, have begun to display aspects of the process Nakken describes. Lifestyle accessories exert an ever greater power over them, disrupting relationships, nurturing obsessions and — as I’ve noticed in the office — dominating conversation.
Does that mean that the people around me are turning into addicts? That’s never an easy question to answer, because “addict” is such a loaded term. It’s a good word to describe people whose problems are obviously out of control, as mine were, but it has to be used carefully. Not only does it carry misleading overtones of disease, but it also implies that there’s a clear dividing line between “addicts” and “non-addicts.” That’s not true. In my experience, addiction is something that people do — to themselves and other people — rather than something that just happens to them; it’s not like developing cancer.
Addiction is easier to understand as a concept if we focus on clearly observable behavior — that is, the search for a fix and its consequences. Almost anyone can indulge in addictive behavior, but some of us are more prone to it than others, for reasons that scientists don’t fully understand.
In fact, let’s get this point out of the way. In the past couple of decades, countless scientific studies have attempted to pinpoint what it is about either the brains or the upbringings of addicts that leads them to adopt self-destructive lifestyles. They have failed to do so.
No one is immune from developing addictive behavior. If there’s a history of addiction in your family, you’re more at risk. Likewise, if you have an impulsive personality — that is, score highly for “impulsivity” in psychological tests — you’re more likely to do something impulsive, such as try a new drug or drink that fatal last glass of whisky before jumping into your car. Indeed, a fashionable term for various addictions is “impulse control disorders.”
For me these findings fall into the “No shit, Sherlock” category of scientific discoveries. They tell us nothing very surprising. The consensus at the moment is that addiction seems to be the product of genetic inheritance and environment. In other words, the nature versus nurture question is no closer to being settled in this area of human biology than it is in any other. To repeat: We’re all at risk. That’s why this applies to everyone, not just coke-snorting hedge fund managers, bulimic receptionists and absent fathers glued to World of Warcraft.
Psychologists talk about addictive behaviors in the plural, recognizing the many different impulses that tempt people. What these behaviors tend to have in common is the replacement of people by things and events. We all develop these habits to a certain degree; the people we call addicts are those people who can’t or won’t give them up even when they cause harm to themselves and others. Again, that’s a loose definition, fuzzy at the edges. Never mind; addiction isn’t an easy phenomenon to pin down.
This isn’t to deny that addictive behavior has important consequences for the brain. It does. Indeed, it can partly be explained by the overstimulation of the brain’s fearsomely complex reward circuitry.
Different parts of the human brain govern what some scientists call the Stop and Go impulses. More primitive sections of the brain — parts that we share with other animals — tell us to consume as much as possible in order to increase our chances of survival. They say: Go. More highly developed parts of the brain, capable of reasoning and not found in other animals, hold up a Stop sign when we’re consuming too much of something for our own good. Classic addicts keep ignoring the Stop instruction, despite the high cost to themselves and others. They require instant gratification, whatever the consequences. Indeed, they’ll often seize any opportunity to indulge in addictive behavior even when there’s no real gratification to be extracted from it. We’ll discuss this puzzling paradox later.
The Stop and Go imagery helps us understand the growing appeal of the fix. As technologies develop and converge, the speed of delivery increases. So does the speed of our expectations. We now live in a world filled with life-enhancing objects and substances that promise ever faster and more effective gratification. It’s as if everything that tumbles off a production line is stamped with the word Go.
Temptation peeks out at us from the strangest places. Who would have guessed, 40 years ago, that a piece of electronic office equipment — the personal computer — would morph into something so desirable that people would sacrifice huge chunks of their spare time (and income) in order to play with it? Or that modifications to a telephone would generate global excitement?
Changes to our appetites don’t come about by accident. The manager of your local Starbucks didn’t wake up one morning and think: “I know what would brighten up my customers’ afternoons — an ice-blended cappuccino!” The Frappuccino was invented when Starbucks employed food technology to solve a specific business challenge. As a result, hundreds of thousands of their customers (including me) developed a near-obsessive relationship with something they had previously lived happily without.
The pace of technological change means we need to revise our concept of addiction. Our cultural history provides us with images of stereotypical addicts, some of them dating back centuries: the grinning harridan dropping her baby down a staircase in Hogarth’s Gin Lane; the American Indians crazed with “firewater”; the hollow-eyed Chinese sailor propped against the wall of an opium den; the junkie shivering in an alleyway surrounded by needles. Also, anyone who lives in a city is used to the sight of spectacular drunks and morbidly obese people whose addictions are so grotesquely out of control that we avert our eyes.
These are powerful images, but if we pay too much attention to them then we can end up with a dangerous sense of immunity. We overlook our own eagerness to self-administer fixes, those sensory experiences that temporarily lift the mood while subtly detaching us from traditional human relationships. The fix can take any number of forms. Some toy very obviously with the chemistry of the brain.
Anyone with a rolled banknote up their nose knows that — so long as their dealer hasn’t ripped them off — they’re about to experience the effects of a mind-altering substance. The same goes for the guy swigging from a whisky bottle. In contrast, the tubby young man who demolishes a packet of chocolate digestives while watching the football doesn’t suspect that his eating habits have left his brain unusually sensitive to stimulation by sugar; he just knows that, once the packet’s opened, the biscuits disappear. His habit of stuffing his face with refined sugar and vegetable fat doesn’t place him very far along the addictive spectrum — but, then again, it may be enough to put him in intensive care when he has a heart attack at 50.
The most puzzling addictions are those that don’t involve the consumption of any substance. Gambling is the obvious example — we’ve known for hundreds of years that it can tear apart families as ruthlessly as hard liquor. In academic circles, these non-substance addictions are known as “process addictions.” It’s now clear that things you don’t eat, drink, smoke or inject can nevertheless disturb your brain in much the same way as drugs. And, in an age when so much digital entertainment — notably video games and online pornography — is designed to be as addictive as possible, their potential to do this is accelerating rapidly.
The global marketplace offers a bewildering selection of consumer experiences, simultaneously delightful and dangerous. It’s constantly modifying products and experiences that were never previously considered to be addictive — or simply didn’t exist until recently.
Also, as we’ll see, corporations have learned how to supercharge old-established intoxicants by popularising new patterns of consuming them. One vivid example is the phenomenon of recreational binge drinking, particularly by women. People have always got drunk, and a minority have always enjoyed going on binges with their friends. What no one predicted was the emergence of the binge as everyday behavior. Ordinary drinkers, with no history of a problem with alcohol, now plan evenings to end in a messy and helpless surrender to the drug. And this is seen as normal.
It would be silly to pretend that everyone is equally threatened by this changing style of consumption. But the prospect of whole populations learning new ways of tampering with the flow of pleasure-giving chemicals in their brains is one that should make us feel very uneasy.
With that in mind, let’s take another look at the cake and the phone.
*
In 1996 a tiny corner shop called the Magnolia Bakery opened in Manhattan’s West Village. Its old-fashioned cakes and pies quickly became the objects of guilty fantasy for women who liked to pretend that nothing more fattening than tuna carpaccio ever passed their lips. Then, in 2000, the bakery featured in an episode of “Sex and the City.” This was the moment America’s cupcake craze began in earnest.
In the episode, Carrie and Miranda were filmed sitting outside the Magnolia. Carrie, played by Sarah Jessica Parker, told her friend that there was a new obsession in her life. This turned out to be a new boyfriend called Aidan — but viewers could have been forgiven for thinking it was icing sugar, judging by the way Parker was pushing the rose-colored cupcake into her face. Viewed in slow motion, it’s a faintly disgusting spectacle. The truth is, there’s no elegant way to eat a Magnolia cupcake, which is why customers adopt self-mocking smiles as the fluorescent globules of frosting tumble down their chins.
“When Carrie took her first bite, she left teeth marks in my neighborhood,” wrote Emma Forrest, a journalist living opposite the bakery. “Not long after the episode was broadcast, the tourists started to arrive and the bakery started charging them if they wanted to take photographs of Carrie and co’s favourite haunt. With the influx of tourists came the rats, as half-eaten cupcakes were dumped into overflowing bins outside my apartment … Riding on this extraordinary upturn in its fortunes, Magnolia changed its hours, and stayed open to midnight throughout the summer. I was kept awake each night by the hoots and hollers coming from the queue that now snakes all the way around the block.”
In 2006 and 2007 I spent quite a lot of time in the West Village visiting my friend Harry Mount, then New York correspondent of the Daily Telegraph. By this time, “Sex and the City” was off the air and the cupcake craze had gone mainstream: Magnolia-style bakeries were opening all over America. Yet, on chilly autumn evenings, there was still a queue outside the original store, and it didn’t seem to consist of tourists. “Our local stick-thin fashion victims can’t get enough of the things,” explained Harry. In which case, how come they were stick-thin? Was there a parking lot at the back where they threw them up?
That was a bad-taste private joke between Harry and me, but when I recently did a word search on “cupcakes” and “bulimia” I discovered a blog by a bulimic mother of two entitled “Eating Cupcakes in the Parking Lot.” Its posts appear to have been deleted, but cupcakes feature prominently in many other blogs devoted to eating disorders. After a row with her boyfriend, one bulimic girl baked cupcakes decorated with the words “I am sorry.” She added mournfully: “And now where are those cupcakes? Floating along a sewage pipe.”
This sort of incident isn’t unusual. Abigail Natenshon, a psychotherapist who treats eating disorders, tells another horror story involving cupcakes: “One young woman with bulimia found herself, at a time of great stress, compelled to drive into a 7–Eleven convenience store where she purchased three cupcakes; she then proceeded to stuff them down her throat whole in an emotional frenzy in the dark and deserted alley behind the store. As far as she was concerned, her binge had begun at the moment when she drove her car up to the front door and did not finish until she had purged the cupcakes.”
The disturbing subculture of “pro-ana” (pro-anorexia) websites actually encourages girls to starve themselves, or “b/p” (binge and purge). A recurring question on these sites is: Are cupcakes easy to throw up? Answer: not as easy as ice cream, but eating them with diet soda can help.
“It doesn’t surprise me that cupcakes are favourites with bulimics,” the food writer Xanthe Clay told me.

They’re the ultimate eye-candy, primped and styled like a teen pop star, the food incarnation of many girls’ fantasies. In the gossip magazine world, where shopping is the only serious rival to celebrity in terms of aspiration, cupcakes are consumer-desirable in a way a Victoria sponge isn’t.
If having an eating disorder is about a desperate attempt to take control, then eating these artificial, too-perfect creations may be particularly satisfying. More likely, the huge sugar rush will feed the craving, and provide a quivering kick of hypoglycaemia. The texture – smooth, aerated, oily – may, like ice cream, be especially suitable for regurgitation.
And – just my prejudice this – but perhaps the ultimate emptiness of cupcakes, those empty calories, the way they never deliver on flavour what they promise in looks, is a metaphor for the hopelessness of the woman, or man, with bulimia.
Although a high proportion of bulimics have “issues” with cupcakes, clearly the overwhelming majority of people who eat them don’t throw them up. They do, however, seem obsessed with them. A chain called Crumbs sells 1.5 million cupcakes every month in 35 U.S. stores; in June 2011, it started trading on the Nasdaq, with an opening valuation of $59 million. And market analysts predict robust growth if Crumbs moves into emerging markets such as China.
The Facebook group for Sprinkles Cupcakes had, at the time of writing, been “liked” by 325,000 people and was spreading the cupcake gospel with near-hysterical enthusiasm. For Valentine’s Day: “It’s back! The first 50 people to whisper ‘love at first bite’ at each Sprinkles receive a free raspberry chocolate chip!” For Superbowl Sunday: “Whether you’re rooting for the New York Giants or New England Patriots or just tuning in for the commercials, Sprinkles Super Sunday boxes will score a touchdown at any viewing party. Each box contains 6 Red Velvet and 6 Vanilla cupcakes, adorned with football sugar decorations and your favourite team’s name. Just don’t get tackled reaching for the last one!” There were even signs that cupcakes were trying to infiltrate the military-industrial complex: “Sprinkles is excited to bring freshly baked cupcakes to the Pentagon! Pentagon employees can find us in the Main Concourse …”
This is a resilient craze, as Dana Cowin, Food & Wine magazine’s editor-in-chief told Reuters in 2011. “I have predicted the demise of the cupcake so many times that I’m actually going to go to the dark side now and say the cupcake trend is not going to abate,” she said. When an earthquake struck Washington D.C., in August 2011, someone tweeted that you could tell it had happened because there was suddenly no line outside Georgetown Cupcakes.
Could the “emptiness” of the cupcakes to which Xanthe Clay refers be part of their appeal? Their overwhelming sugar hit fills the consumer with what nutritionists call “empty calories,” because they have no nutritional value. But that’s not to say they have no mood-altering value. Sugar triggers production of the brain’s natural opioids, according to Princeton neuroscientist Bart Hobel, who led a study into sugar dependence. He found that rats which binged on sugar went into withdrawal when the supply was cut off. “We think that is a key to the addiction process,” he said. “The brain is getting addicted to its own opioids as it would to morphine or heroin. Drugs give a bigger effect, but it is essentially the same process.”
Opioids are also implicated in bulimia, irrespective of whether sugar is involved. Have you ever experienced that feeling of glorious relief after you’ve just thrown up a dodgy curry? It’s not just getting rid of the food that makes you feel good; it’s a natural elation produced by chemicals in the brain. Bulimics get off on it, to put it crudely.
As Abigail Natenshon explains: “The bulimic cycle releases endorphins, [opioid] brain chemicals that infuse a person with a sense of numbness or euphoria. Ironically, the relief passes in short order, only to be replaced by anxiety and guilt for the bulimic behaviors.” Again, we need to state the obvious fact that most people don’t throw up their food. But the sort of food associated with purging is also the sort of food that many of us have difficulty resisting, because its heavy concentrations of sugar, fat or salt can magnify euphoria and neediness.
It’s easy for urban sophisticates to mock American rednecks or British “chavs” who stuff themselves with fast food, and easy to recognize that they’re in the grip of some sort of addiction. Just look at their waistlines. But the marketing executive who orders a cranberry muffin to go with her morning cup of coffee really ought to ask herself: Why am I eating cake for breakfast?
•
So what about the iPhone? Isn’t it a bit much to call our love affair with this shiny gadget an “addiction”? Researchers at Stanford University aren’t so sure: In a survey of 200 Stanford students in 2010, 44 percent of respondents said they were either very or completely addicted to their smartphones. Nine per cent admitted to “patting” their iPhone. Eight percent recalled thinking that their iPods were “jealous” of their iPhones. These are strange things for students at one of America’s top universities to say about their phones, even in jest. They also reveal something about how completely the iPhone has become part of these students’ identities and social frameworks. They’re not just tools that allow us to connect instantaneously and prolifically with others; they’re also being afforded identities of their own – “patted,” protected and cherished.
Perhaps it has something to do with how these devices are engineered. They practically force you to perform repetitive rituals of the sort associated with obsessive-compulsive behavior: from the initial activation of the iPhone to the weekly “syncing” and nightly charging, your relationship to the phone is structured for you. And because the iPhone’s battery life isn’t quite enough to last a full day’s use – and certainly not long enough to withstand hours of constant fiddling and gaming – “pit stop” charges become a regular feature of the day. iPhone users can often be seen checking for power sockets in coffee shops so that, while they get their own fix of caffeine, their phones can get juiced up as well.
“iPhone owners live in a constant state of anxiety about their battery levels,” says Milo Yiannopoulos, editor of The Kernel, an online culture magazine. “To some extent, the phone ends up structuring their day. For example, they tend not to plan to be out of the office for more than six hours at a time, in case they run out of battery and have to start knocking on doors, USB cable in hand, begging for a few minutes’ worth of charge to get them through the afternoon.”
Talk about the replacement of people by things. The 4S version of the iPhone, released in October 2011, includes a virtual assistant called Siri that responds to spoken instructions and speaks back to the user. This infant technology is already so complex that you can have entire conversations with Siri. She will then execute commands, in some cases fetching very specific data from the Internet. “Intelligent personalized assistant software is going mainstream,” says Yiannopoulos. “Never in the history of mass-market consumer electronics has the line between man and machine been so blurred.”
It’s significant that a quarter of respondents in the survey above said they found iPhones “dangerously alluring.” They are supposed to be. Absolutely nothing is left to chance in the design of these devices. If Apple customers have an embarrassing tendency to anthropomorphise their gadgets, that is because Apple has explored the possibilities of the human mind and body more thoroughly than any of its competitors.
For example, one of the most appealing features of the MacBook laptop line has been the status light, which pulsates gently when the computer is sleeping. Early reviewers cooed over the calming effect of the light, but couldn’t put their finger on why it felt so good to watch. Later, it was revealed that Apple had filed for a patent for a sleep-mode indicator that “mimics the rhythm of breathing” and was therefore “psychologically appealing.” As the tech blogger Jesse Young noted, while Apple’s sleep light matched the pace of breathing while we sleep, Dell’s was closer to breathing during strenuous exercise. “It’s interesting how a lot of companies try to copy Apple but never seem to get it right. This is yet another example of Apple’s obsessive attention to detail,” he wrote.
Former Apple executives – who frequently brief American technology blogs off the record about the internal culture at Apple’s headquarters in Cupertino, California – describe the lengths the organization goes to in order to create coveted products. There’s a design-dominated power structure that results in hushed reverence when Jonathan Ive, senior vice president of industrial design, walks into the boardroom. “Marketing and design have been fused into a single discipline at Apple,” says Yiannopoulos. “Everything, from product strategy to research and development, is subordinate to making the products as beautiful and compulsive – that is, as addictive – as possible.”
It works. To quote an extreme example, in 2010 a schoolboy in Taiwan was diagnosed with IAD – iPhone Addiction Disorder. According to Dr Tsung-tsai Yang of the Cardinal Tien Hospital, his eyes were glued to his phone screen all day and all night. Eventually, “the boy had to be hospitalised in a mental ward after his daily life was thrown into complete disarray by his iPhone addiction.”
Two days after it opened in 2010, I visited the Apple Store in Covent Garden – a magnificently restored Palladian building dominated by a glass-covered courtyard. The heady aroma of addiction was unmistakable. The misery in the queue for the Genius Bar, where broken computers are diagnosed, was painful to behold. Legs were crossed and uncrossed and eyebrows twitched every time a Genius read out a name. I couldn’t help thinking that these customers looked like addicts waiting for their daily dose of methadone.
I wanted to ask a Genius what it was like dealing with people who weren’t just asking what was wrong with their laptops but pleading for (literal) fixes. But finding someone who would talk was easier said than done.
First I went down the route of asking an Apple Store manager – a friend of a friend – whether he could chat off the record about the way the company seemed to encourage addiction to its products, or put me in touch with someone who would. His first response was encouraging, but then he changed his mind. He would be in big trouble if his bosses suspected he’d put me in touch with an indiscreet ex-employee, and he’d be fired on the spot if he got caught blabbing himself.
So I tried a different route. A start-up CEO friend of mine put out a message to one of his networks. Shortly afterwards, a young man called Ben Jackson, a social media entrepreneur, emailed to say he could meet me for coffee in Soho, London, a few streets from the Apple Store where he had spent two years as a Genius.
Ben, like many former Apple employees, inhabited the cooler end of the geek spectrum, with glasses offset by a gym-honed body. He didn’t need any prompting to talk about addiction to technology: The experience of seeing the addiction every day – deliberately stimulated by the company – was one of the reasons he left the store.

I saw a whole range of addictive behaviors. It’s one of the things that made the Apple Store such a surreal place to work. At one end of the scale you have the total Apple obsessives who exhibit a sort of religious fanaticism that the company does nothing to discourage – it encourages it, in fact. They’re the people who will book the same tutorial again and again, being shown how to do stuff they already know.
When a new product is launched, it’s the same faces at the front of the line every time. They treat the staff almost like celebrities, trying to ingratiate themselves. At the Genius Bar, they’ll show you Apple products from years ago, and you’ll have to pretend you haven’t seen them before, because they need their egos massaged. It’s kind of sad. Well, it is sad.
But it’s not only the true obsessives who are touched by addiction, according to Ben.

There’s a general perception that Apple is awesome in a way that other companies aren’t – a perception that’s quite at odds with the way it operates behind the scenes. Even the products are considered awesome, which is why otherwise normal people would get quite disproportionately angry and upset if anything went wrong with them. And it’s also why there’s such unease if people think they’ve fallen behind, that their stuff is out of date. But the point is that you can’t keep up to date without spending a lot of money on things you don’t need, because the products are just coming out too fast.
I’ve seen people burst into tears because a credit check wouldn’t allow them to stretch to the latest upgrade. That’s when I started thinking: I need to get the hell out of here.
Admittedly, many psychiatrists don’t believe in “Internet addiction” as a medical condition, let alone addiction to a specific model of smartphone. They argue that obsessive users aren’t addicted to the Internet so much as to the experiences it provides, such as digital porn and computer games. But few experts would deny that gadgets such as iPhones can produce behavior that bears the hallmarks of addiction. And it’s becoming increasingly clear that the ability of manufacturers to stimulate this behavior is racing far ahead of our ability to cope with the psychological and social problems that are created as a result.
The science of pleasure is playing a greater role in the marketing strategies of all sorts of companies: the people who waft the smell of freshly baked doughnuts at you in the shopping mall have fine-tuned their recipes in the laboratory, not the kitchen. But Apple is in a class of its own. No other company has managed to mix such a finely balanced cocktail of desire, in which the crude flavour of compulsion is disguised by a deliciously minimalist aesthetic.
“More than any other product, the iPhone has encouraged the tech industry to concentrate on getting people hooked on things,” says Yiannopoulos. “Apple’s marketing genius, and the incredible attention to detail paid to the design of their devices, filters down into the iPhone developer ecosystem.”
He cites the example of Angry Birds, a simple computer game app that, by May 2011, had been downloaded 200 million times. The premise of Angry Birds is simple: Players launch birds across the screen with a slingshot, judging the trajectory of flight and altering the force and initial direction accordingly. It sounds harmless enough. But type “Angry Birds addiction” into Google and you’re presented with 3.24 million results. So many people complain about being addicted to the game that it has spawned self-help pages all over the Internet. Some of these pages ask whether Angry Birds addictions are changing people’s brains. Self-described addicts say they don’t know why they can’t put the game down, and talk about compulsively tracing their fingers on tables as they subconsciously recall the catapult action of the game. These sound suspiciously like the little rituals associated with alcoholism and drug abuse.
Again, perhaps a degree of scepticism is called for: It can only be a matter of time before some opportunistic researcher diagnoses ABAD – Angry Birds Addiction Disorder (which would presumably be a particular strain of IAD, since the game is played mostly on iPhones). No doubt the Angry Birds craze will fade, as these crazes always do. But it may well leave behind a residue, in the form of the compulsive instinct to perform repetitive actions.
It’s not a conspiracy theory to suggest that the primary task of iPhone game developers is learning how to manipulate our brains’ reward circuits. They cheerfully admit as much. At the 2010 Virtual Goods Summit in London, Peter Vesterbacka, lead developer for Rovio, the company behind Angry Birds, described how they make the game so addictive. “We use simple A/B testing to work out what keeps people coming back,” he said. “We don’t have to guess any more. With so many users, we can just run the numbers.”
We can just run the numbers. Remember those words. Where previously advertising and marketing were more creative disciplines that involved a huge element of risk, a new generation of manufacturers doesn’t need to guess what will keep us coming back for our fix: they already know

Facebook's IPO: One Year Later

2013-05-18T06:13:00.002-04:00

What a difference a year makes. Or not.

The controversy lingers over Facebook's much anticipated IPO which was launched a year ago today, but investors, not being long on nostalgia, have moved on to more substantial criticisms. Like, what have you done for me lately?

Welcome to the joys of becoming a public company.

Having suffered monumental embarrassment borne of its own hubris and the mobs' unrealistic expectations (and having successfully foisted some of the blame on the Nasdaq market which also appears to have slavishly embraced the hype, but been inadequately prepared for the boring details of making it all work), the company has striven mightily to put that unpleasantness behind it. A focus on mobile, on its raising revenues and margins, all while not gratuitously alienating the lesser beings known in other businesses by the name 'customers,' has begun to improve performance and even change perceptions.

The result, however, is still a sluggish stock price and questions about the future. To use a medical analogy, one might observe that Facebook has stanched the bleeding but not yet gotten the patient back on its feet. That is progress, however. One senses a still nascent humility and a genuine desire to prove that the widespread - particularly searing - charge of incompetence, was misplaced. The company's management has largely avoided further embarrassment, but has yet to really convince anyone they are as special as they once thought they were. JL

Sam Gustin reports in Time:

On the morning of May 18, after months, even years, of anticipation, Facebook founder and CEO Mark Zuckerberg rang NASDAQ’s opening bell by remote from Facebook’s campus in Menlo Park, California. And then all hell broke loose.

One year ago tomorrow, social networking phenomenon Facebook went public in one of the most highly anticipated initial public offerings of the last decade.
Leading up to the IPO, which valued the company at a whopping $104 billion — or 100 times earnings — the hype was intense. Facebook, market prognosticators predicted, would soar in the first day of trading, generating easy gains for the investors who rushed for a piece of the action. Indeed, investor demand was so intense that Facebook boosted by 25% the amount of shares it planned to sell to the public.

Technical glitches on the NASDAQ exchange delayed the first trades for 30 hair-raising, white-knuckled minutes. After the NASDAQ commenced trading, Facebook shares jumped 13% to hit $43, only to retreat quickly to the initial offering price of $38. At that point, Facebook’s IPO underwriters, including the largest banks on Wall Street led by Morgan Stanley, stepped in and waged a furious buying battle to support the offering level. Thanks to their efforts, Facebook closed a frenetic first day of trading at $38.23, essentially flat.

Although Facebook shares slowly climbed back above $30 by January of this year, momentum stalled and Facebook shares are currently bouncing around $26 per share, down more than 30% since the IPO. For Facebook, the IPO was a major success because it raised over $10 billion for the company. But for investors, Facebook’s IPO is widely considered to be one of the most disappointing public stock offerings in U.S. history.
One year ago, TIME published an article examining the kind of revenue opportunities Facebook might seize upon to justify its sky-high valuation. Looking back at the list, many of those opportunities remain untapped. The company has only scratched the surface, for example, when it comes to leveraging the vast hoard of user data it is accumulating. A true Facebook phone hasn’t materialized, nor has a credit card-based E-commerce “passport.” And though Facebook recently announced a “semantic” search engine, it shows no signs of threatening Web search titan Google’s dominance.
But there have also been some notable successes. Facebook’s mobile efforts, in particular, are starting to achieve impressive results. Last quarter, 30% of Facebook’s ad revenue came from mobile devices, up from 23% during the previous quarter and 14% the quarter before that. In the first quarter of 2012, Facebook’s mobile revenue constituted 0% of its total revenue. Perhaps most important, Facebook’s share of mobile time spent online is soaring, offsetting desktop declines. Facebook’s share of mobile minutes has doubled from 11% to 22% over the last year, according to JP Morgan. The company has also begun packing more ads into the News Feed.
A year ago, we also asked if Facebook could possibly maintain its “cool factor” in the long term. The answer is that it might not matter: Although there are signs that younger users are increasingly flocking to other social services, Facebook remains far and away the top social network on the web. Overall, in fact, Facebook seems to be maturing into a reliably profitable public company, even if its share price remains more than 30% below the IPO level.

The ill-effects of that IPO, however, still represent a lingering cloud hanging over the company. In the immediate aftermath of the offering, recriminations flew fast and furious. NASDAQ CEO Robert Greifeld told a conference of corporate directors at Stanford University’s Law School that “arrogance” and “overconfidence” among NASDAQ officials were partly to blame for the technical breakdowns that plagued the offering. Simply put, the NASDAQ’s systems, which had been repeatedly tested before the offering, couldn’t handle the massive volume of trading. NASDAQ’s breakdown may have spooked investors, causing many to sell, driving the stock price down, as Facebook suggested in a legal filing last year.
Irate investors filed dozens of lawsuits against Facebook, its underwriters, and the NASDAQ. One set of suits alleged that Facebook’s IPO documents “were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects.” Specifically, the lawsuits charged that Facebook hid the financial impact of challenges to its mobile advertising business — challenges that would have been material information for prospective Facebook investors.
Another set of Facebook lawsuits charged that company executives gave the underwriters more detail about the financial impact of challenges to its mobile advertising business than they did to the investing public. The underwriters, in turn, lowered their financial forecasts, which they then “selectively disclosed” to big, favored clients like hedge funds and institutional investors, but not the public, according to the lawsuits.
Predictably, Facebook maintained that it acted appropriately, by updating its IPO documents with the SEC before the offering to reflect that the number of daily users was increasing faster than the number of ads the company was serving, a change it attributed to its fast-growing mobile user base. (Facebook’s SEC update was delivered in dense, financial legalese, but may in fact have satisfied the disclosure requirements.)

Thirty-one of the lawsuits have now been consolidated into one umbrella case before a judge in the Southern District of New York. Earlier this month, Facebook asked a judge to throw out the umbrella lawsuit, arguing that it had no obligation to disclose internal data on how increased mobile usage might affect the company’s financial performance. But Facebook’s legal headaches continue. Less than two weeks ago, the company was hit by a new IPO-related lawsuit seeking to hold Zuckerberg and other executives responsible for the botched offering.
Given the immense financial windfall the IPO delivered to Facebook insiders, it’s not hard to understand why ordinary investors were upset. Zuckerberg cashed out to the tune of $1.14 billion. Early investors Accel Partners, DST Global, Mail.ru Group and Tiger Global generated $2.1 billion, $1.7 billion, $745 million, and $722 million, respectively. Tech mogul Peter Thiel sold $638 million worth of shares. And Wall Street titan Goldman Sachs cashed out to the tune of $923 million.
Of course, venture capitalists and early employees took big risks, and deserve to be rewarded. But the contrasting fortunes of company insiders, who made billions, and ordinary shareholders, who saw their Facebook investments fall off a cliff, raised basic questions about the fairness of the IPO process. Facebook’s IPO reinforced the stereotype that the IPO process gives deep-pocketed investors and well-connected insiders an advantage over everyday investors.
Facebook is making good progress on several fronts, especially mobile, but the company needs to boost earnings growth significantly if it wants to see its stock price return to its IPO level. Right now, the market just doesn’t see that happening. “Facebook’s share price is telling you that investors are more skeptical about the company’s prospects than a year ago,” Wedbush analyst Michael Pachter told MarketWatch. Another thing investors are likely skeptical about? The IPO process itself. As the old adage goes: “Fool me once, shame on you. Fool me twice, shame on me.”

OTT vs SMS: Online Services Are Disrupting Mobile Phone Carriers' Messaging Binge

2013-05-17T12:25:00.001-04:00

The initials don't matter but the monetary impact does.

Messaging drives the mobile business model - and it is hugely profitable. Revenues of approximately $140 billion with profits to match.

For phone carriers this is the key to current survival and future opportunity. They are rolling in revenue from SMS messaging which has softened the impact of declining land line sales and actual phone conversations.

But there is now a disruptive innovation on the market and it could be a killer. The new messaging services are called OTT, which stands for over-the-top. And are they ever.

The OTTs provide instant messaging over the net that does not require wireless cell networks. Some provide the service for free and charge advertisers to send messages. Some prohibit adverting messages but offer phone carriers promotional opportunities. Some carriers are fighting but some think the best approach is to acquire the new services. Whatever the final outcome, the emergence of the OTTs reminds us that no one in any business dependent on technology and communications can afford to become complacent. JL

Business Insider reports:

A new batch of companies are providing over-the-top (OTT) messaging services — services that send instant messages over the Internet and don't depend on wireless cell networks.

Messaging, led by SMS texts, has grown to become a huge global industry and a revenue windfall for the world's mobile carriers: $140 billion annually over the next three years.

The OTT services are already causing big changes in the mobile industry. From Facebook's Messenger service to Santa Clara, Calif.-based startup WhatsApp — which boasts 200 million monthly active users, more than than Twitter, and Korea's LINE, these players are some of the biggest crowd-draws in mobile. It's not just carriers that are threatened, but legacy social media too.
Here's an overview of the monetization opportunity:

The size of the opportunity is massive: OTT instant messaging apps are enjoying phenomenal audience growth and message volume. Some back-of-the-envelope estimates have pegged WhatsApp revenues at $63 million. There's a rush of developers and publishers scrambling to find their place in this market. MessageMe, a new aspirant to the field of OTT messaging heavyweights, launched earlier this year and attracted a million users in less than two weeks.

Advertising: Asian OTT messaging players KakaoTalk and WeChat charge brands to send messages, including photos and videos, to users who opt in. KakaoTalk calls this program "Plus Friends," and encourages its users to add brands and show business acts as plus friends, with real and virtual prizes. But, other OTT apps like Viber and WhatsApp have so far said no to advertising.

Carrier partnerships: These are nascent but could work in certain markets. WhatsApp boasts 15 carrier deals, including Asian, Middle Eastern, and African operators. Viber and Bubbly have explored or struck deals with carriers in Asia. The carriers promote the messaging apps and pre-load them on phones. In exchange, the apps might feature carrier-managed services like enhanced voice calls or data plan top-ups. In China, wireless carrier Unicom has reportedly advocated working with the super-popular WeChat, rather than attacking it.

Acquisition: Messaging apps might be looking to be acquired by the very mobile players they threaten: social media and carriers. The rumor late last year that Facebook was close to acquiring WhatsApp spotlighted just how dominant WhatsApp has become. In fact, in many months its download volume exceeded that of Facebook's Messenger app, although WhatsApp is a paid download and Facebook Messenger is free.

The Post- Normal Age of Work

2013-05-17T08:09:00.003-04:00

What's normal these days?

Maybe that's exactly the point. Nothing much is. Foosball, trading desks, skunk works, alliances, hierarchies, open plan, executive floors. We've gone from one size fits all to mix and match.

So post-normal could, at first blush, seem even more chaotic, even anarchic. But, as the following article explains, it is more a reflection of the reality we have created - or accepted - than some bold new vision of the future designed to take us where man has never ventured before. In fact, we're already there, we just aren't always sure what to do with what we've got.

The basic structure has become more decentralized. Contractors often outnumber employees. We manage to the project not the five year plan. Relationships are looser, if no less financially significant, but the formal bindings have usually stripped away. This means a work environment that is, by turns, more distant, but of necessity more collaborative and cooperative. We work together because we have to, but also because we want to. And if we dont, either side can move on, whether the other likes it or not.

This requires a more subtle approach to interaction if value is to be obtained. The lack of formal and familiar organizational landmarks is what makes it post-normal. We have to make them up as we go along, remembering, we hope, to keep the ones that work. Rather than 'knowing our place,' we have to accept responsibility for finding, building and nurturing it, at whatever level. This is challenging because few of us have been trained to do so, but also liberating because it gives us the freedom to experiment and figure out what's best. It wont always work - and it will always be messy - but it is the reality and if we want to prevail, we have to make it real for those around us and for ourselves. JL

Stowe Boyd reports in GigaOm:

It’s a now-prevalent notion that companies can advance by simply adding a social layer on top of existing business processes, integrating social tools with existing functional tools such as ERP, CRM, and HR solutions. The idea goes that this will make companies more social and therefore more productive. That idea isn't going to work.
Why? In a nutshell, social network-based communication is primarily organized around the concept of a “pull” medium — that is, a medium where individuals subscribe to whichever information sources they prefer and find useful. Traditional business processes, on the other hand, use “push” communications, where whoever created the information gets to decide whom it’s most important to. Simply put, the two parties don’t gibe.
Perhaps more importantly, the nature of work in our era has changed. Most people now have jobs based on non-routine work, where the predefined and fixed roles of business process do not reach.
I recently wrote a report as part of my activities in GigaOM Research, entitled “Social networks will displace business processes, not socialize them” (subscription required). In the report, I argue that we are drifting away from a business-process defined culture and towards a social network-shaped, cooperative one.

We see the variance between process-oriented organizational cultures and network-oriented ones. I consider this part of the transition from post-modern (1970-2005) to what I’ll call post-normal (2005-present and beyond) economic eras. These cultures also differ in the nature of social affiliation, with a loosening of the bonds that tie people together in cooperative cultures contrasted with collaborative ones. People in cooperative organizations will have a higher number on connections, but the proportion of those that are strong ties decreases relative to collaborative cultures.

Some corporate cultures are stuck even farther back in time because they are based on competition. I don’t mean competing with others in the marketplace, like Toyota competing with BMW. I am talking about a corporate culture based on zero-sum competition among workers, where one person’s advancement is someone else’s demotion. These are cultures strongly based on authority-based decision-making, and really are a holdover from the late modern era: the late industrial era.
In the report, I discuss the “fit” of different psychological profiles, or archetypes, in these cultures. For example, the Entrepreneur archetype (see above) fits well in collaborative and competitive cultures, and fits the entrepreneurial culture perfectly. But Entrepreneurs won’t like working in a purely traditional, “cooperative” culture, because they like to lead collectives that are managed through consensus. A cooperative organization is too loose for them: It’s a connective, and is based on laissez-faire decision making.

This is the debut of the 3C model — competitive, collaborative, and cooperative. It’s a psychosocial model of organizational culture, and I hope it helps address some key issues in organizational dynamics in organizations today as social technologies and practices are being adopted. Marshal McLuhan said, “we make our tools, and they shape us.” Keeping that in mind, we see the change that social network-based communication is causing.
Businesses are not making these changes on a whim or because individuals are made happier by cooperative work relationships. The fast-and-loose business is most in sync with the digital realities of today’s world, although most companies are still operating principally in a more traditional mode, and may even have a healthy dose of the “frozen-and-immobile” at the core. Nonetheless, businesses must move towards a more cooperative work environment because in doing so they will successfully compete in today’s fast-paced, digitally focused world. Older cultures that cling to traditional business processes will not.

Wanted: More Corporate Boards of Directors With Digital Savvy

2013-05-17T07:32:00.001-04:00

Now, now, it isn't going to be that hard.

Given the importance, one might even suggest, the essential, nature of technology to business survival, let alone success these days, adding directors to corporate boards who have substantial experience with the digital economy would seem as important as having lawyers, accountants, fellow CEOs and crisis managers.

But despite that seemingly obvious need and advantage, such directors are underrepresented on many Global 500 corporate boards. The reasons for this are cultural, social and experiential.

Corporate boards tend to be stocked with 'PLUs' - people like us. In other words, other corporate guys (and a few, um, 'gals') who came up through finance and marketing. Many have MBAs or engineering degrees. They also tend to be people who have already established a record of achievement over many years and, increasingly, many international assignments. They play golf, they went to many of same schools - or other schools pretty much just like them - and they share a certain outlook about business, politics, the right place to vacation and the advantages of bordeaux versus cabernet sauvignon. This is not to say that they are dumb, or superficial. That may occasionally be true, but the odds are against it: there is too much money at stake.

There may be, however, a certain insularity in the selection process. People want to serve with those who make them comfortable and CEOs want supporters, not critics, even if they are from outside the company and do not officially report to him or her.

By their very nature, tech executives, though no slouches when it comes to business and finance (or even golf and cabernet), do tend to be younger thanks to the age of their industry, have somewhat different educational and/or professional backgrounds and may not share the same world outlook. All of which should be an advantage to any pragmatic, ambitious corporation looking to capture the future. As the following article explains, that does appear to be dawning, however slowly. Overcoming social barriers if often harder than breaching professional ones. But necessity and financial opportunity - or threat - do tend to concentrate the mind, enabling the heart, in this case, to follow. JL

Joann Lublin reports in the Wall Street Journal:

Nearly every facet of corporate life has gone digital. But many public-company boards remain stuck in analog mode.
That has started to change. Boards worried about their scant digital expertise are scrambling to recruit newcomers who can advise management on strategies for mobile devices, social media and data analytics.

Mark Vadon chairs online-retailers Blue Nile and Zulily. As a Home Depot director he has urged executives to tailor ad pitches for mobile devices.

"The avalanche of digital activity is making directors conclude they are increasingly ill-equipped in the boardroom," observes Tuck Rickards, a managing director of recruiters Russell Reynolds Associates Inc.
Digital directors, who are sometimes decades younger than many of their colleagues, weigh in on marketing strategy, business alliances and even recruitment, several company leaders say.

The shift has made digital experts like Jeffrey F. Rayport hot commodities in U.S. boardrooms. Dr. Rayport, an operating partner of private-equity firm Castanea Partners, taught the first digital-strategy course at Harvard Business School in the 1990s and later ran the digital-strategy arm of consultants Monitor Group. He says he now fields more than a dozen feelers a year.
"It's a little overwhelming," says Dr. Rayport, who already holds directorships at Monster Worldwide Inc. MWW -3.06%and ValueClick Inc. VCLK -2.10%
"I have never seen such an acceleration of demand for specific board expertise," says Clarke Murphy, the chief executive of Russell Reynolds. The search firm handled 10 U.S. hunts for digitally savvy directors last year. Its first such assignment resulted in Facebook Inc. FB -1.77%executive Sheryl Sandberg joining Walt Disney Co.'s DIS -1.81%board in 2010.
Because boards at public companies want members with C-suite experience, the pool of digital candidates is small and usually doesn't include entrepreneurial startup veterans, recruiters say.
As a result, finding a digital director can take six to 12 months, which is twice as long as a typical board search, says Norbert Gottenberg, a solo high-tech recruiter. "Both sides are picky," he adds. Boards vet digital prospects more carefully than they do traditional ones, while qualified candidates "want to be on the right board."
Dr. Rayport, for example, is weighing three other directorship offers at publicly held businesses but says he wants to make sure that he's "not playing the role of window dressing."
Thirty-seven of the 100 biggest U.S. companies lack directors with digital expertise, and only 16 have at least three such members comprising 20% of the board, a Russell Reynolds analysis concludes. "Highly digital" boards include Cisco Systems Inc., CSCO +11.21%Coca-Cola Co. KO +0.40%and Allstate Corp. ALL -0.99%
Mark Vadon received his first public-company board invitation in 2006 but waited years before accepting one. The co-founder, chairman and former CEO of Blue Nile Inc., NILE -0.75%an online retailer of jewelry that went public in 2004, also co-launched and chairs Zulily Inc. The flash-sale site derives almost 40% of its revenue from smartphones and tablets.
For years, Mr. Vadon spurned feelers because they only came from Internet-related businesses. "It wasn't very different from what I was already doing," he says.
Then Home Depot Inc., HD -1.45%a home-improvement chain eager to expand online sales, approached Mr. Vadon in 2012 as part of a push to bolster its board's digital expertise. CEO Frank Blake even flew to Seattle to woo him.
Appointed last September, the 43-year-old entrepreneur is younger and wears his hair longer than the others who sit on Home Depot's board. "Whatever his appearance, he was an incredible addition," says Bonnie Hill, the independent lead director.
Among other things, Mr. Vadon says he has urged executives to tailor ad pitches for mobile devices and enlarge the ranks of mobile developers by training current staffers. A Home Depot spokeswoman agrees that "mobile is a priority" but declined to discuss specific strategies.
At Starbucks Corp., SBUX -0.82%digital director Clara Shih played a pivotal role in a mobile-payments deal forged with startup Square Inc. last August. Ms. Shih, named to the coffee chain's board at age 29 in December 2011, runs Hearsay Social, which helps companies use social media.
Though startup leaders are often less wedded to hierarchy and formal structure, Ms. Shih says she felt the Starbucks directorship offered an "extraordinary opportunity" to learn how big businesses operate.
Square will eventually process credit and debit transactions at about 7,000 U.S. Starbucks stores through Square's smartphone app. Starbucks invested $25 million in Square, and CEO Howard Schultz joined its board.
Craig Weatherup, another Starbucks director, says he supported the alliance partly because Ms. Shih knew Square co-founder Jack Dorsey and had expertise on its users and technology. And Ms. Shih and board colleague Kevin Johnson, a technologist who leads Juniper Networks Inc., JNPR +4.16%"were both at my side throughout all of this" negotiation, Mr. Schultz adds.
Some digital experts, such as Lorraine Twohill, demonstrate their chops in different ways. The head of global marketing for Google Inc. GOOG -1.33%became a Williams-Sonoma Inc. WSM -1.50%director in 2012. During a board meeting in March, she recalls proposing that the retailer's website "make a bigger deal" of the debut of 700 items for its furniture line. As a result, the site currently contains multiple pitches for the enlarged Home Collection. "There has been increased Web activity and sales," says Pat Connolly, the chief marketing officer.
Other digital directors screen executive candidates, a duty that risks blurring their roles as outside overseers. Ellen Siminoff, president of online-education firm Shmoop University Inc. and an early Yahoo Inc. YHOO -2.86%executive, says she avoids the problem by interviewing prospects solely at management's request.
Kevin Thompson, CEO of SolarWinds Inc., SWI +0.22%says fellow director Ms. Siminoff joined the interview team for the information-technology-management software company at least four times in the past two years when the firm needed executives with digital-marketing backgrounds like hers.
Ms. Siminoff will soon screen less, however. She is relinquishing two board seats by July. She'll remain a director of SolarWinds and social-gaming company Zynga Inc. ZNGA -3.16%"I do have a lot going on in my life," the executive says.

The Blame Game: Endorsements and Their Often Errant Effect

2013-05-16T12:12:00.001-04:00

The very edge that gives some endorsers their value is what invariably creates the embarrassment for corporate sponsors.

Endorsements from rappers like L'il Wayne are not solicited because of their adherence of social norms and proprieties. So it should come as no surprise to the corporations that importune them when behavior goes awry, threatening the loyalty of one demographic segment with the style beloved of another.

Rap and hip-hop come in for more than their fair share of the blame with all of the attendant racial and class overtones. But these issues have been cropping up for centuries (Papal alliances with murderous despots etc) and with greater frequency in the modern advertising era which began in the 1920s. The question is not whether companies are surprised, but why they have not done a better job of preparing for the almost inevitable disappointments or embarrassments.

Edginess sells, but too much of it can offend. The challenge is when mainstream brands attempt to capture some of the dangerous allure that consumers find exciting. It is in that cross-over where the translation sometimes fails. Advertisers seek images consistent with what they perceive their core customer appeal to be. But they are always attempting to push the boundary a bit further so as not to appear to staid, boring or predictable. Hence the appeal of glamor, elegance and danger. So whether it is a rapper offending moral sensibilities or a movie star betraying too great a fondness for stimulants, the risk is omnipresent. Can't have the appeal without the jeopardy, whose impact is exacerbated by the social media megaphone.

Rather than hoping that nothing it will happen, it may well be more efficient and productive to assume it will, and figure out how to turn it into a lesson further confirming the company's prescience and appeal. Smart sells. JL

Jon Caramanica reports in the New York Times:

Companies already spend millions on endorsements and millions on social causes. In difficult situations, it would be more progressive to use that financial muscle to align the interests of the company, the artist and the public to raise awareness of the issues brought up.

In hip-hop, as in all things, you get what you pay for, even if you don’t read the fine print.
Three times in recent weeks large companies have learned this the hard way, severing ties with rappers they had previously happily paid to endorse their products: Reebok dropped Rick Ross over objectionable lyrics, and PepsiCo’s Mountain Dew did the same to Lil Wayne, just days after it had cut short an ad campaign it had worked on with Tyler, the Creator.
This is a neon-bright sign of corporate retrenchment in the face of protest, bad press and flashes of moral rectitude. Mr. Ross’s casual lyrics about rape incited a petition and a protest outside a New York Reebok store. Lil Wayne’s lyrics spurred an outcry from relatives of Emmett Till, the black teenager murdered during the civil rights era whom the rapper had mentioned in a vulgar context. Tyler, the Creator was jettisoned after a black scholar called his soda commercials racist.
But these reactions are also a signal of how expendable hip-hop culture — and, by extension, black culture and youth culture — is to mainstream, predominantly white-owned corporations. These companies have been happy to associate with hip-hop while turning a blind eye to some of the genre’s rougher edges, but at the same time they have remained at arm’s length, all the better to dispose of hip-hop artists once their liabilities outweighed their assets.
This is a familiar story with roots way back in the culture wars of the 1980s and ’90s, during the days of 2 Live Crew’s obscenity trial and Tipper Gore’s Parents’ Music Resource Center, which coincided with hip-hop’s rise as a cultural force, one both alluring and a potential scourge. Hip-hop’s commercial power and success, penetrating even the least forgiving corners of the mainstream, seemed to ensure that the old stigma and disapproval had all but vanished. (The same goes for the old accusation that hip-hop artists sold out by partnering with big corporations that held purportedly opposing values — hip-hop took those contradictions and made them into art.) In this environment rappers looked like safer bets than ever for corporate endorsements: widely known and admired, with a frisson of counterculture still stuck to them. They are outsiders recognizable to insiders, and far better celebrities than the generally faceless titans of dance music or the declining stars of rock.
And yet those old debates have returned with a vengeance in recent weeks, re-energized by the frictionless way social media can speed up conversations. In each instance it was only days between the identification of the offense and the end of the business relationship. In the case of Mr. Ross and Lil Wayne the intense criticism was justified. Mr. Ross alluded to nonconsensual sex with a woman, using slang for Ecstasy, in his verse on Rocko’s “U.O.E.N.O.”: “Put molly all in her Champagne, she ain’t even know it/I took her home and I enjoyed that/she ain’t even know it.” Lil Wayne, on his verse in the remix of Future’s “Karate Chop,” invoked Till as part of an explicit sexual simile. (In each situation the offending verse was part of another artist’s song and therefore might have been policed less vigilantly than if it had been on Mr. Ross’s or Lil Wayne’s own album.)
Mr. Ross’s lyric is reprehensible; Lil Wayne’s is regrettable and tacky. (Lil Wayne is by no means the only rapper to mention Emmett Till in song, but his use is easily the messiest.) Both men issued tepid nonapologies. Mr. Ross eventually progressed to a full apology, but only after prodding.In each case justice was swift, as companies said, rightly, that their values didn’t jibe with the sentiments of those lyrics — and, by extension, those artists.
Except when they do, that is. A cursory glance at any rapper’s catalog, from Jay-Z on down, will be likely to turn up a lyric that’s offensive, in poor taste or eyebrow-raising. By that metric, almost every rapper of note would be ineligible for corporate partnerships.
But hip-hop’s place at the table is secure, and has been for years. No category of celebrity celebrates consumption more than rappers; they’re natural endorsers, and probably will continue to be. That’s why, instead of scorched earth, a better policy would be to turn disruptions like these into opportunities for genuine action.

It would be a model of creative corporate citizenship, and almost certainly a pipe dream, though maybe less so as corporations have been increasingly inviting rappers into their executive suites. (Swizz Beatz, for example, has a longstanding formal relationship with Reebok, although he’s remained conspicuously quiet throughout the recent ordeal.) Mere endorsements signal a midlevel relationship at best. What’s attractive now is ownership, as in the case of 50 Cent’s initial arrangement with VitaminWater as an investor, a more meaningful deal that goes beyond an artist’s fame.
PepsiCo found a way to use Tyler, the Creator in unexpected ways, contracting with him to direct a series of short ads for Mountain Dew. His clips depict a tetchy goat that craves the soft drink and attacks a waitress to get it. In the third ad in the series, the injured waitress, who is white, scrutinizes an all-black (except the goat) police lineup. This led Boyce Watkins, a scholar in residence at Syracuse University, to deem it hopelessly racist. (Dr. Watkins later recanted that charge.)
Tyler, the Creator had more leash to play with, since his arrangement was a step beyond typical endorsement deals. His ad was no more offensive than some of his skits on “Loiter Squad,” the Odd Future sketch show on the Adult Swim cable network, and its characters were no odder than the recurring ones who run through his music. If he is guilty of anything, it’s of being unfunny or merely silly. Nevertheless, the ad was quickly pulled.
If the long pas de deux with corporations has taught rappers anything, it’s the importance of having your own business. Like many other rappers, Lil Wayne and Tyler, the Creator have started their own clothing lines; while it’s lucrative to endorse someone else’s product, it’s maybe more important to have something of your own to sell, especially in times like this. Why waste energy pitching for someone else when you’ve got your own vision to flog? Then, for better or worse, you’re answerable only to yourself.