Occam's Razor

Managing Intangible Assets

The new report on " l'economie de l'immateriel" from Levy (Publicis) & Jouyet (Inspection des Finances)  is now online (but in French...) : Téléchargement rapportlevyjouyet1.pdf

OSS reading for reboot8

Preparing for reboot8, I’m Browsing the speaker list, I ended up on JP Rangaswami blog and a link to an Inspiration reading from Making a New World (Doc Searl).  This is a must-read for anybody with is trying to understand how to shape business strategy for a software-centric business today.

Linux and open source are demand-side developments. They are all what the demand side does to supply itself. Nearly all of these tools and building materials were created by the demand side of the marketplace, to solve practical problems, and to provide useful infrastructural support for similar activities. The free and open way they contribute to the world is good for business.

In World of Ends, David Weinberger and I initialized three principles as NEA. (Nobody owns, Everybody can use, and Anybody can improve).

The architecture of this world was first described in 1983 by J.H. Saltzer, D.P. Reed and D.D. Clark in End-to-End Arguments in System Design. Fourteen years later, The Rise of the Stupid Network, by David Isenberg, delivered a death sentence to the conceits of network centralizers. The Stupid Network was an end-to-end argument against AT&T's cherished belief in The Intelligent Network. David wrote, "A powerful leading indicator of the Stupid Network will arrive when entrepreneurs who have no vested interest in maintaining telephone company assumptions begin to offer profitable, affordable, widely available data services." A prophesy now fulfilled. Craig Burton combines both ideas — end-to-end and stupid — by describing the Internet as a hollow sphere, comprised entirely of ends.

In fact, it was an interest in supporting business that caused the open source movement to break off of the free software movement. That break took place on February 8, 1998, when Eric Raymond wrote Goodbye, "free software"; hello, "open source". And grow it has. The selection of commodity open source building materials is now so complete that most businesses no choice but to use those components — or, in many cases, to recognize that IT personnel in their enterprises have been building their own open source "solutions" for some time.

Several years ago, when I showed this diagram to Rob Glaser, founder and CEO of RealNetworks, he made a remarkable observation: that the Internet revolution rocked the business world because for the first time in history Infrastructure changed faster than Commerce. "It was like the rug got pulled out from under everybody."

The similarities between software and construction are so close in some ways that we can't help making sense of the former in terms of the latter. As cognitive science puts it, construction is a conceptual metaphor for software development and use. (Lately George Lakoff, the father of cognitive linguistics, has also done some borrowing from the same source. Rather than talk about "conceptual metaphors", he now talks about "frames" and "framing".) In Patterns of Software (Oxford Paperbacks, 1996) Richard Gabriel says "Habitability is the characteristic of source code that enables programmers coming to the code later in its life to understand its construction and intentions and to change it comfortably and confidently."

Before the Net, and before a sufficient abundance of open source building materials appeared, there was often no choice. For some activities inside large enterprises, there still isn't much choice. If you're doing big-time Enterprise Resource Planning (ERP) or Business Process Management (BPM), there are no open source solutions out there. Still, the same used to be true of Customer Resource Management (CRM) and office Private Branch Exchanges (PBXs) — to name two among many categories — but now that's changing with SugarCRM and Asterisk.

Smart software vendors who want to maintain their silos will still have to base them on free and open source infrastructure. That's what IBM is doing with Linux, which supports the company's proprietary DB2, Tivoli and Websphere products. I'ts what Apple did when it moved its whole silo from the decrepit MacOS to Darwin, which is Appleized FreeBSD. It would be a mistake, however, to dismiss Apple as a "proprietary" company. They are, but they also are not. Apple has an open source strategy. So do IBM, HP, Oracle, RealNetworks, Novell, Sun, SAP and other large vendors who use open source strategies to support their proprietary offerings.

All their strategies are different; but they are all based on an acceptance of open source as foundational infrastructure, on participation in open source development projects, and pm an appreciation for what open source provides to the world.

As long as we insist on treating open source and proprietary as polar opposites, we won't understand how complementary they can often be. Nor — if we are a company trying to succeed in a business world supported by open source — will we be able to come up with a useful understanding of how open source supports business, much less a strategy for putting that support to use. There are issues with the notion that open source and proprietary are opposites. "The opposite of open is not proprietary, but closed. The opposite of proprietary is not open, but public domain." If you "uncollapse" those distinctions, and lay them out orthogonally, you get The Burton Matrix (proprietary – public domain vs. Open – closed), with the moral belief that open/Public Domain is good and Proprietary – Closed is bad. if we remove morality as an issue, and spread out the two other distinctions that are collapsed, you have a good strategic framework for businesses to work with." To really take advantage of open source, he explained, you need to value ubiquity in your marketplace at least as much as you value scarcity in your product portfolio. In fact, your smartest move may be to take some of the products you're selling, and make them ubiquitous by moving them from proprietary/closed to open/public domain — literally, from scarcity to ubiquity. This is, literally, a form of commoditization.

It's not the only one, of course. Most open source commodities are created from the start with the intention of putting them in the upper right quadrant. But for businesses that want to create infrastructure, and grow markets, this is one useful open source strategy. It's one of several a company can practice at the same time. In IBM's case, the company adopted Linux (helping make it more ubiquitous), while also open-sourcing Eclipse, moving it into the upper right quadrant. In Apple's case, the company open-sourced nothing of its own, but used one of several other strategies: creation of a new standard (FireWire), adoption of an existing standard for the purpose of ubiquitizing it (USB, Wi-Fi, ZeroConf/Rendezvous, MP3) and appropriation of an already-developed code base to save itself a lot of R&D work (FreeBSD, KHTML). Meanwhile, they have kept QuickTime and their growing portfolio of "i" applications on the proprietary side, even while opening them to free usage, essentially putting those in the upper left quadrant. When the Burton Matrix was show to Rob Glaser and Brian Behlendorf (Apache Foundation leader and founder/CTO of Collabnet), they helped draw up this diagram to explain how they were working together to open and ubiquitize many of the company's proprietary offering (while also creating a development community) . Real's strategy, was to move as much as possible from the lower to the upper left, and from the upper left to the upper right.

Getting ready for reboot8

I'm getting ready for the reboot8 conference that will start on Wednesday evening in Copenhagen. Let me know if you plan to attend so we can meet there.

I'm also very interested in any feedback/question/idea to prepare for a workshop that's hosting on Building profitable OSS business. 

I plan to review and organise a discussion on how Profitable Businesses have been build on scalable OSS operation (MySQL, JBoss, RedHat etc...) . How do we move up the stack and build profitable un-scalable OSS businesses. The workshop will reflect on what happen as we move up into application areas (SugarCRM and up the food chain) and if/how/what can be done to build profitable un-scalable vertical OSS businesses.

Update 1: good pre-reboot8 post from Dannie Jost:

1. who we are: reboot is a gathering of 400 or so people all with a vested interest to some degree or another in internet technology, software, social software, technology itself, society. the kinds of people whom we are so fond of calling geeks. that is, those rare souls that dare to break a few old worn out patterns and to explore new territory.
2. the world that we live in: whatever it is that we want to call our age - information, digital, knowledge, techno-freaked-muddled, post-industrial, web 2.0 - it is an age where resources are plenty and easily sourced. logistics and knowledge do play

a major

role. part of the logistics is the communication, and that is where most information technology finds itself.
3. my observation/assertion: there is a paradigm shift currently taking place in what concerns creating a thriving business.a thriving business is a business that is sustainable. to me a business is sustainable when it makes its community prosper (read, happy, fulfilled, satisfied, peaceful). note that for a community to prosper, maintaining the status quo is not a requirement. all to say that business is about people.business is not  about goods or money, but about people making their world - this world now - work for them and allowing all to live in dignity.
4. my inference: in a world where resources are abundant and that is dependent on both logistics and communication, the key resource is intelligence. if

the crown

jewels of our age are intellectual assets, how are we going to deal with intellectual property rights?

Forget technology, focus on attention attractors.

My ScienceBusiness article no 2, can be found here or below:

I had an interesting meeting with a senior executive in charge of strategy and business development at one of the major European media group last Friday.

My friend is one of the smartest and most articulate media executive. I spend one hour telling her about the interesting infrastructure and technology play I was looking at, and she spend one hour telling me that she count not care less for super-encryption technology, or smart-delivery video infrstructure, but how she was looking for low-tech, mass-market services that would drive customer attention in the key customer segments market where her group was active.

Yesterday, Umair Haque in one of his well articulated post made exactly the same point:

The investment thesis behind infrastructure plays is simple - and too simplistic. It is often simply that demand is racing ahead of supply - and so it pays to invest along in those segments of the value chain which make production technically and marginally more efficient. Of course, the key hidden assumption is that dominant design of the value chain (the sum of business models, the way value is created and captured) is still valid; still in sync with industry economics.

Now, this is an investment thesis that has doomed most VCs to watch a disproportionate number of their highest-geek-quotient investments continue to go sideways - while puzzling over the accelerating success of of largely anti-technological plays like flickr, delicious, Skype, Habbo Hotel and MySpace.

Fox's acquisition (Scout media, Newroo, Ksolo, WhatIfSport, MySpace) thesis is a bit more complicated - but predicated on a much deeper understanding of the new media value chain. Fox invests in domains which are hypersocial (discontinuous shifts in social connectivity) or hypercultural (discontinuous shifts in cultural specificity): sports, karaoke, music. Further, Fox invests at the edge of the new value chain: at the interface with consumers. Further, Fox invests in the three roughly distinct models which live there : markets, networks, and communities.Why? Because Fox understands the deep economics of new media. Value capture in the new media value chain is a function of market power. And market power is a function of attention. And attention is allocated most efficiently by markets, networks and communities. Consider MySpace. MySpace's success is driven by it's proprietary music and now video player - the deepest social widget in the new media world. It is what lets fans connect to bands they might love - it is what allocates their attention hyperefficiently (more efficiently than Top 40 charts, corporatized radio robo-DJs, or even next-gen corporobots, like Pitchfork Media).

Infrastructure driven investments are nearly flawlessly discovering the wrong future. It's the future where infrastructure lays the pipes for scores of generic markets, networks, and communities. Of course, this is the future that already happened, which consumers thought sucked, and so they stopped using the www

What's different about today is that visionaries like Fox (surprisingly enough) understand that what drives attention allocation is the hypersocial and hypercultural; and what drives the hypersocial and the hypercultural in, for example, music and sports, is marginally, but deeply, different.

…If recent history teaches us anything strategic, it's that the Cambrian Explosion in media is about radically redefining the economic essence of media; redefining media production and consumption for an attention and interaction economy; redefining how media shapes the social and the cultural to allocate attention, exploding value creation and value capture.

3 Companies to watch that illustrated this :

• VPod.TV (who just announce a 4M€ A round last Friday)
• Zilio
• Wikio

Mapping technologies

Interesting mapping technologies can be found here . Smart waysto map complex data-sets into geographic representations illustrated in the following two examples:

• future global polution in 2300:

By 2300 the United Nations forecasts that the global population will be just under 9 billion. World population is expected to rise, peak and then decline slightly between 2050 and 2300. The highest long term population growth is predicted for Africa. Africa is currently underpopulated and has the lowest life expectancies. Other regions' populations are predicted to stay level or decline. Between 2050 and 2300 the areas currently known as India, China, the United States and Pakistan maintain their ranked order as having the world's highest populations. The numbers shown here are estimates - based on predicted future behaviours.

• current royalites and licence fee export :

Only 18 (out of 200) territories are net exporters of license fees and royalties. This means that a few people living in less than a tenth of the territories in the world between them receive the US$30 billion of net export earnings for these services.

The International Monetary Fund explained that royalties and license fees include "international payments and receipts for the authorised use of intangible, non-produced, non-financial assets and proprietary rights ... and with the use, through licensing agreements, of produced originals or prototypes ...". Thus these export earnings are payments for past ideas.

[Source B Giussani]

Euro consolidation

Interesting new European-centric consolidation player around MySQL

MySQL AB, a Sweden-based developer of an open-source database, has acquired Netfrastructure Inc., a Manchester, Mass.–based provider of server software for building Web-based applications. No financial terms were disclosed.

MySQL has raised significant VC funding from  Institutional Venture Partners, Intel Capital, SAP Ventures, Presidio STX, Benchmark Capital and Index Ventures.

Measure it, Manage it!

Great post on how and management by metrics, with some smart comments by Ed Sim on the same topic:

When you can accurately predict your results in each operating unit, it means less risk and a greater opportunity to scale your company without blowing your capital (missed quarters get more and more expensive as you grow!). Being able to make accurate predictions also means that:

• You have an operating model (not just a collection of people), which allows you to scale better,
• You understand the key drivers of output in your operating model,
• You are consistently managing the unit to your operating model,
• You have a set of early warning signs (your key drivers) that you can focus more attention on when they get below certain thresholds (i.e., it helps you to know where to spend your time),
• You have a set of measures that you can benchmark against other companies to understand where you have opportunities to move to best practices, and
• You know when you need to add staff or other resources well before you get caught short.

Finally, the understanding of the above gives you a solid platform for experimenting with new approaches and accurately evaluating the effectiveness of the new approaches (thereby allowing you to kill the approaches that don’t work and expanding the approaches that do work).

Most technology driven businesses tend to be under-managed, with board meetings organized as social gathering and public reading  of  very thick board pack that lack the simple data about the top 5 metrics and trends from one quarter to the other (furthermore, one interesting metric seems to be that the more confused a project is, the larger the board-pack is (NB of pages = function  of square of (confusion))).

More public market views on the software industry

Following on yesterday's view on the macro view off the software industry, a great post from Bill Burnham on how the software industry has been shrinking in 2005 (providing low public market returns, but interesting M&A exits for innovative software SME's).

It's an important perspective as investing is all about managing the risk/return ratio, and anchoring the return from a public market perspective define some horizon on what type of exits are reasonable.

Despite this explosion of new software, the software industry itself is shrinking.  In 2005, the aggregate market capitalization of the software sector shank by almost 10% despite the broader NASDAQ market being up 1.4%.  Even if one adjusts that number to account for privatizations, M&A and IPOs, the software market still shrank by 9%. This shrinkage is also apparent when looks at the raw number of public software companies.  There were 236 public software companies at the start of 2005, but only 213 at the end of the year, a decline of 10%. Put another way, for every new software company that went public in 2005, almost 7 were acquired or went out of business.  Not exactly an encouraging picture.

What then is responsible for the software sector’s precipitous market cap decline?  Like most complex systems, there is no one single factor driving this trend, but a combination of factors including:

1. Software is moving from “growth” to “value”.  value managers simply aren’t willing to pay 35X next year’s EPS for anything, which is leading to major multiple contractions in many of the top names in the industry.

2. Open Source and SaaS.  The modern software market was built on the backs of large one-time perpetual license sales.  Unfortunately two major trends are conspiring to make it increasingly difficult to grow revenues quickly: Open Source and SaaS.  Open Source basically flips the revenue model: it gives away the source code up-front and tries to make money on the back-end by charging for support.  SaaS (Software as a Service) allows companies to purchase software “on demand” over the web.  As a result, SaaS requires little or no up front investment from a customer and is often purchased on a short term subscription plan.  The lack of large up-front payments makes it very difficult to grow SaaS revenues quickly and reduces margins because the company actually provides a real service as opposed to just shipping a disk.  Thus, as Open Source and SaaS gain prominence it’s becoming increasingly clear to investors that the good old days of 200% revenue growth/year at 95%+ gross margins are gone for good and stock multiples are responding by heading south.

3. No big platform transition.

4. Networking companies are encroaching on software company turf. If you pry open the hood of your average router, you won’t find a disk drive or a keyboard but you will find a ton of software sitting inside flash memory or embedded in chips.  In fact, many network company executives will insist to anyone that listens that their company is more of a software company than it is a hardware company. 

5. Being public ain’t so great.  Being public in these post Sarbanes-Oxley days is not easy, especially if you were a software company that lavished options on its employees and played it a little loose with revenue recognition from time to time.

Public market perspective on software industry

Interesting public market perspective on the software industry, and on Software's New Economic Drivers By Rick Sherlund (Goldman Sachs).

• The macroeconomic influence on tech is greater than ever as tech has grown to
  become the single largest component of corporate capital spending - now almost 40% of the total.
• IT spending was able to well outpace economic growth as it grew as a proportion of GDP from 1.5% in 1970 to almost 5% in 2000. Since settling in at less than 4% in recent years, tech is likely to resume growing as a percentage of the economy, but not nearly at the rate of decades past.
• Not surprisingly then, the correlation of IT with the broader economy has jumped from less than 0.1 in the 1970s to over 0.9 in recent years as the industry has matured.

Also several interesting trend analysis:

(1) Of all tech trends, wireless's impact will be broadest
(2) China and India are altering both supply and demand formulae
(3) The low-end unit epidemic is distorting revenue realities
(4) With drivers escalating, security is at an earlier stage than the consensus view
(5) Even at this stage, spending is still consolidating around fewer, larger vendors
(6) Internet treasure chest now being unlocked
(7) Open source opening Pandora's box on pricing throughout the IT stack
(8) The true digital home will be longer in coming than expected
(9) SOAs shake up the software industry

The rise of intangible assets

My position paper on "10 years of internet" is today live on les echos web site. feedback/comments welcome here or on les echos online blog.

10 years of Internet, certainly 10 years of technology change and new businesses models, but more than that 10 years for a paradigm shift on how corporate assets are identified, valued, and monetized:  10 years during which the importance of intangible assets, their mode of valorization by the markets and their mode of appropriation by the entrepreneurs and owners of these companies became our true obsession....