by Dana Blankenhorn
  Volume VI, No. XXXIX

This Week's Clue: The Sound of Recession

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This Week's Clue: The Sound of Recession
SSP (Shameless Self Promotion)
SP (Shameless Promotion)
But What Will You Do About It?
The Search for Fee
The Best Policies for Rich People
Clued-in, Clueless
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For the Week of September 30, 2002

The sound of a recession is silence.

The phone doesn't ring. The fax doesn't chirp. The bills arrive quietly. When the weekend comes, you don't go out. Couples huddle around piles of figures, trying to find what else they might cut from their budgets. Little things - clothes for the kids, magazine subscriptions - suddenly loom large.

Economists can argue about the U.S. economy, but about the tech economy there is no doubt. This isn't a recession. It's a depression. Its shape and future looks a lot like the "oil depression" that hit friends of mine in Texas during the 1980s. As now it began with a boom, and it ended with a whimper. By 1984 billboards once-filled with real estate offerings had ads for mega-churches. Aging cars wheezed along the roads, and a generation of MBAs and petroleum engineers took work where they could get it. (It's not surprising that powerful Houston Rep. Tom DeLay is a pest control guy - his was one of the few businesses that hired through the bust.)

One thing is different this time around. This medium is the difference. We e-mail one another, in sadness and despair. We create great new business plans, new ideas, and (in my case) books. We blog. But you can't get blood from a stone. When there's no money, there's no money. The sound that comes back is silence. Hit the "send and receive" button as much as you like all that's coming in is spam.

Spam booms in a recession, as does crime generally. It's cruel, but when you're desperate the other fellow's sorrows don't mean anything. Scruples become a luxury. At the same time, of course, the demand for scapegoats grows. We cheer the "perp walks" and imagine CEOs in chains, in deep dark holes, suffering. Never mind that morality may come cloaked in hypocrisy - it's a growth industry in a recession.

The saddest parts of a recession are the false hopes, the false starts. "The bottoming-out process," "we've reached the bottom," and "we expect growth to resume" in the second half, maybe next spring. Each time it's a mirage. There's another leg down. "Here's the bottom at last," and then another leg down.

What finally ends the recession? Someone with deep pockets comes in and picks up bargains. Demand comes from elsewhere, some unexpected quarter. The Houston oil recession didn't end until after Texas banks had all been bought by outsiders, and demand picked up from the coasts, the New York LBO boom and (yes) from Silicon Valley.

But who will pick up Silicon Valley? That's the key question. Some thought that demands from defense might do it. Others thought demands for security might do it. Some even thought it might be the oil industry - and technology has really revolutionized the oil patch, increasing field yields and cutting the percentage of dry holes to a fraction of what they were.

The truth is no one knows. Even the guys who "buy low" don't know when the turnaround will come. Those may look like bargains, but they're still risks. The truth will be known only in retrospect, and by then it will be obvious to all.

Meanwhile, we wait. (Why doesn't the phone ring? It's usually ringing off the hook at this time of year. Am I doing something wrong? Have I lost my touch? How am I going to afford the kids' tuition if this keeps up? C'mon phone, ring!)

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SSP (Shameless Self-Promotion)

Corante has launched my "Moore's Lore" blog . Drop by and watch it grow.

I'm still trying to arrange a "book promotion" tour for February or March in Australia, promoting my new book "Moore's Lore." Drop me a note if you can help.

My other books include "Boom, Bust & Beyond: The Best of Dana Blankenhorn," , "The Time Mirror," and "Living on the Internet" . I still write for Boardwatch , Boardroom and BtoB . I still produce I-Strategy for Adventive

I'd like more readers, so tell your friends, clients, partners, and Congressperson about a-clue.com. You have my permission to forward this newsletter widely. And if you have trouble subscribing let me know.

Remember: it's journalism that keeps the Clues coming...

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Shameless Promotion

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If you're serious about Internet Commerce, you need Whitehat Interactive . Get it today.

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Takes on the News

But What Will You Do About It?

It's nice that the Commerce Department understands why broadband take-up is low, but unless policies change the knowledge is useless.

As I've said many times, broadband won't grow so long as broadband content remains illegal. The fact is nearly every U.S. household is now within reach of some form of broadband, but only 10% of homes actually buy it. Even Canada's penetration is higher.

Yet what is on offer from the U.S. government to change this? Subsidies for the Bells, monopolies for the cable guys, and an attitude from FCC chairman Michael Powell that two choices are plenty. (He confuses the Everly Brothers with the Mormon Tabernacle Choir.) The proposed solutions, in other words, are irrelevant to the perceived problem.

The solution to the broadband mess is an end to the copyright wars. Buyers must have the same rights to use and enjoy content in the digital world they had in the analog world, and right now they don't. So content sales go down, and broadband sales don't go up.

Instead of attacking Kazaa, lay the blame where it belongs, on the desk of Hilary Rosen . The recording industry must reach an agreement with the marketplace on digital music, and offer products at prices people will want to buy, under conditions people will want to accept.

War is unhealthy for economies and other living things. This is as true for war within industries as it is for wars between countries. Until the content industries give peace a chance they hold the U.S. economy hostage. And until the government pushes the content industries for a settlement at least as hard as it claims to be pushing Ariel Sharon no economic progress is possible.

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The Search for Fee

Olivier Travers is Clued-in. His latest effort, Endoffree (he also has TheEndoffree ) is deliberately provocative, and low-cost. (He's just using Blogger - no cost there.)

Travers is chronicling the move by existing publishers to "fee-based business models" (at "the end of free") and the clash of business models between free and fee. I think I have the answers, but Travers is looking for hard evidence and that may be more important.

While A-Clue.Com is a living room where I'll buy you coffee and tell you stories you can consider while munching biscotti, Travers' sites are crowded, noisy bullpens (note the long list of contributors (http://www.theendoffree.com/)) that remind me of the original Jupiter offices in New York, back in 1995. He's trying to serve his own interests, mainly, not yours, and given the fact his sites are free I have to admire his honesty.

Right now his business model is geared around easy money, re-selling research reports from people like Anne Holland . But my guess is you'll soon see him offering his own products, perhaps a directory to fee-based sites, and a paid newsletter for fee-site managers. But they won't come until he can see money coming out the other side.

And that's the problem for all of us. We don't want to launch new investments unless we can see a guaranteed return - we don't want to take a risk. But growth only starts with risk-taking. Putting a price tag on a formerly free item is a loser's game. Real business starts with identifying your target, delivering on its needs, and reaching that target with the right pitch. When you see Travers (or someone else) take a disciplined step in that direction, you'll know things are truly looking up.

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The Best Policies for Rich People

In my role as a history major (if not an historian) I'm constantly surprised at how people don't want what's best for them. Instead they want what they think is easier for them.

Union members are a classic example. What they usually want, in the words of the great union leader Samuel Gompers , is "more." As a result, unions are the most conservative institutions in society. They fear change like the plague. They don't want new machines that would replace their members. They just want more money, and more benefits, for doing the same thing.

This doesn't work in the real economy. Real wage gains come from productivity, and competition. Nothing can be guaranteed. Stupid companies must go to the wall, union contracts or no. In a world of Moore's Law the speed of this cycle only increases. As a result there's a whole generation of us who find unions irrelevant.

Rich people are the same way. I'm not a rich person, although I'd like to be. But when it comes to politics rich people, it seems, have no more sense than do union members.

Rich people, I assume, want most to be richer. So they support policies that put money in their pockets. But that's not how rich people get richer. It's how poor people get richer. Rich people get richer by having their money work for them, and gaining a return on their investments.

When the amount of capital goes up too fast, returns go down. Thus, in the late 1990s, when the U.S. was awash in capital, there was too much money chasing too few deals and a bunch of that money went to money heaven. Most of it didn't go to the pockets of alleged crooks like Bernie Ebbers of Worldcom - it just disappeared.

What if we had taxed some of those returns a few years ago, even given it away? That would have increased demand for goods and services. Companies owned by rich people would have sold those goods and services, earning a fat return. The rich would have gotten richer, instead of growing poorer, as they have.

This theory doesn't always work. In very poor places, where there's very little capital, seems to me that it would make a lot of sense to give money to rich people. Redistribution of wealth is stupid when there's no wealth to redistribute. Only after local capital grows (when some people get rich), and that capital is invested in producing goods and services and earns a profit, do the poor really gain. The urban poor then become human capital, and everyone wants to invest in them.

What does this have to do with Moore's Law, the Internet, or e-commerce? They're all part of the real economy. As we've seen in the last few years their growth is tied to what happens in the real economy. When people are poorer, they stop buying computers or books from Amazon.

It has always struck me as curious that stock markets rise faster under Democrats than under Republicans. Yet rich people keep voting for Republicans in the expectation they'll pass money to them. This theory seems to work - Republicans do tend to give lots of money to rich people. But all they seem to wind up with are bigger hunks of a shrinking pie. Shouldn't rich people want not bigger slices of pie, but more pie -- especially if they own all the bakeries? But how many Wall Street pundits, reporters, or analysts are liberal Democrats? Not enough, it seems, for their own good.

Or look at the history of the Internet. In 1994, when returns from Internet investments didn't exist, those who bought or built new companies made fortunes. In 1998, when capital for Internet investments flowed like water, returns went into the dumper . To me, it seems 2002 is a great time to invest in technology. You'll get more equity, and a bigger return, than even in 1994. Why? Because there's less investment capital floating around, and a huge skepticism that tech investments will pay off.

I don't believe in the perfectibility of man, or markets. I'm a feng shui kind of guy. In government my philosophy is to like balances that can be adjusted, a maximum of flexibility, and enough strength to take a pounding. I think that's what Moore's Law (with its constant, wrenching change) demands of us. And it's the one thing I don't see in any ideology, from the left, right or center.

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Clued-in, Clueless

Clued-in is the new Pew study of college students' use of the Internet . I would just add that whatever today's college students say about their use of the resource, that is doubled and re-doubled among younger students, like those in my own house. Around here "the Internet is down" is a bigger problem than "the cable is out."

Clueless is Microsoft's refusal to fix bugs in Word 97 . If you thought the Justice Department was tough, Bill, just wait until you face the plaintiff's bar.

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