by Dana Blankenhorn
  Volume VII, No. XLV

This Week's Clue: Microsoft And The Stifling Of Innovation

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This Week's Clue: Microsoft And The Stifling Of Innovation
SSP (Shameless Self Promotion)
SP (Shameless Promotion)
Why Brits Do It Best
Social Networking
What's Wrong With The Technology Media?
Clued-in, Clueless
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For the Week of November 10, 2003

The promise of Microsoft, when it took command of the computer industry from IBM, was that progress would become less bureaucratic, driven more by user needs than Inside Baseball.

The promise was based on simple size, and the fact that Microsoft's key advantage in the OS2/Windows battle had been its ability to shift strategies quickly, and to keep people up all night when necessary.

But power corrupts and absolute power corrupts absolutely. Microsoft has become just as bureaucratic, and just as stifling of innovation, as IBM ever was.

Some part of the blame falls to government. The anti-trust suit (which failed), the DMCA, the security demands of 9/11, all contributed to a loss of transparency.

Some of the loss was inevitable. As companies grow, more and more employees find their careers directed inward. Just as some of your cells must specialize in being your large intestine or colon, so it is that some employees have to work in human resources. Also, as a company grows so does the impact of each decision, and the care with which it must be made. Bureaucratic processes develop naturally to handle this.

But Microsoft has brought much of this on itself. Bill Gates' career, like that of John D. Rockefeller before him, has always been based on control, not on open competition. Rockefeller's era was ended by the break-up of his Standard Oil, and his last piece of advice, "buy Standard," was prescient - competitive pieces are always worth more than a lethargic whole. But that break-up was forced on Rockefeller, it was not done willingly. So it would be with Microsoft.

Gates' argument against a break-up would go like this. IBM today is worth just over half what Microsoft is, despite the fact that its revenues remain nearly three times greater. The reason is that Microsoft's operating margin is about 35%, while that of IBM is roughly 10%. For every three dollars Microsoft brings in, in other words, one dollar goes toward profit, while IBM must bring in $10 to get that same result. Microsoft remains on a course to pass IBM in sales about eight years from now, assuming IBM can stay level (its sales declined in its last fiscal year).

But this column isn't about Gates, or IBM, or John D. Rockefeller. This is about us.

Microsoft continues its policy of "embrace and extend," swallowing each new industry it creates over the course of time. This process is about to begin in financial reporting, and in the same way it was done with Internet browsing. When someone innovates on your platform you bide your time, introduce your own version, bundle it with other products, and crush the innovator.

Entrepreneurs and financiers now know and anticipate the pattern. Anyone who wants to build on any Microsoft platform knows that their product has a sunset date. When it grows too popular, or profitable, Microsoft will eat it. This limits the money available for developing on the Microsoft platform, and limits the number of entrepreneurs willing to try. It's a slow process of grinding down, barely perceptible on a day-by-day basis, but it has been taking place for a decade now.

This process impacts other platforms, not just Windows. The Palm platform is dying because of growing competition from Windows, but this was anticipated, so developers abandoned Palm long before the end was anywhere near in sight. Internet development can't proceed when Microsoft's decisions can make-or-break any new technology, as they have broken Java. And the fact is that Linux is to Windows as Microsoft was to IBM, in 1981, only without a Bill Gates leading the way.

There are foreign policy implications as well. Slowed innovation in the U.S. lets other nations catch-up. Development is moving overseas because companies know that what they produce will not be stale when it comes out. Thus the advantage of low-cost labor isn't balanced off by longer time-to-market, and the whole U.S. economy is slowly going to hell.

There are enormous opportunities out there. The nature of computing is changing, from one driven by keyboards and TV screens to one dominated by autonomic processes and specialized devices, which use the Internet the way a PC used its motherboard. Wireless, Internet, broadband applications are waiting to be built which will transform society, letting us live longer, safer, more fulfilling lives.

But unless entrepreneurs feel free to pursue these opportunities without interference, as Bill Gates felt free in the 1970s, they won't get the backing they need.

The greatest hope for software, then, lies in the chip sector, where the shake-out of Moore's Second Law (costs increase with complexity), and the greater speed of hardware innovation against software, may drive foundries like Motorola and AMD to throw their doors open to enetrepreneurs. Many Always-On innovations can be handled through fairly simple, easy-to-make, cheap as chips chips, with the innovation carried forward in network software. The migration to third-party foundry status would not only keep these folks in business, but transform the world of silicon from one with enormous barriers to entry to one with Internet-sized barriers.

Until the Microsoft monopoly is broken, in other words, innovation must find a way around it. I have high hopes that innovators will.

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Shameless Self-Promotion

I work as a business analyst with Progressive Strategies, a New York research firm that has the ear of the world's top technology companies.

My last book, "The Blankenhorn Effect" won the Computer/Internet category in the 2003 Independent Publisher (IPPY) awards .

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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Takes on the News

Why Brits Do It Best

We're getting another example of why competition is so vital in journalism, as British sites find new ways to make users pay for content , while Americans sit idly behind registration firewalls.

There are many ways to make it work. You can create services for new devices, like PDAs, or you can create new types of services, like fantasy football. In order to gain any success in charging for content you must continually experiment, you must take lessons from your rivals, and you must never take yourself too seriously.

Back in the day John Audette had a simple way to explain his success. You try things, he said, and if it works you do more of it, if it doesn't you stop doing it. That's still true. But those who take advantage of it best live in a dog-eat-dog world where competition is both intense and never-ending, and where the price of failure is high.

That used to be America. It stopped being that in our media industry long ago. As competition is replaced by monopoly (or the shared monopolies that Teddy Roosevelt called Trusts), we're going to be buried. That's the lesson of the British experience.

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Social Networking

There is a lot of venture capital going into "social networking" sites like Ryze these days, according to The Wall Street Journal.

Friendster , Linkedin , Meetup , Tribe Networks , and Emode have all drawn big bucks lately, leading the Journal to ask, "is it 1999 all over again?"

Well, in many ways, it is. With Internet stocks like Amazon and Yahoo at record levels, with kludges like Barry Diller's Interactive valued at far more than the possible sum of its parts, it's obvious to me that a mini-bubble has formed.

But there can be value here, as there is (some) value in Yahoo and Amazon, as there was value in some of the stocks that were driven up by the first bubble. (Just not as much as investors think.) The value comes when you find a purpose for the linking, some financial or social need that will actually give value to members from all this.

Recently Ryze held an Atlanta meeting, and I had every intention of going. Until I saw what was going on. The "hostess" was, literally, a professional clown. They were going to have a guest speaker, talking about how to network. There was a cover charge. It was going to be a meat market for the desperate. I decided against an evening of being schmoozed by salesmen.

In contrast, Meetup has proven some value, thanks to the Dean (and now the Clark) campaigns. The problem is, how can Meetup extract that value? There's a limit to what it can practically charge the campaigns, and the campaigns will end once real votes are cast.

What we're seeing is an amorphous attempt to replicate what match-making and job placement services have done, in which the motivations are created from the bottom-up.

That won't work for the bottom line. What's needed is a sales staff that can bring organizations with members, who will gain huge value from bringing their members together in new ways, under an umbrella framework. Revenue must then be extracted, up-front, from sponsors, members, and from commerce. That doesn't happen by itself.

And when all is said and done, the value of that networking may not be enough to keep more than one set of salesmen alive. When this group shakes out, the stock market will shudder.

What's Wrong With The Technology Media?

William Powers asks a good question. . What happened to the technology media?

The answer is simple. No one in this business has any credibility.

The rise of Ziff-Davis, IDG and CMP were fueled by vendor dollars and the myth that readers were being served. John Dvorak, Jerry Pournelle, and thousands of others approached technology with a jaundiced eye, wanting to know the truth behind the hype, the reality of the technology, the evidence of financial success. They were, to coin a phrase, unbought and unbossed. They were trusted.

But their publishers sold out. They sold out lock, stock and barrel. They became nothing more than advertising vehicles. They forgot that their job was to stand between the readers and products, not just on the side of the advertisers. And as consumers figured this out, the magazines were abandoned.

The examples Powers cites of "good guys," who come exclusively from the "mainstream press," are essentially a set of big-name reviewers. There's nothing Walter Mossberg does that Roger Ebert doesn't do, and better. If he's the best the American technology press can deliver, then it deserves to be ignored.

Fortunately, as I noted in an item higher on this page, there are the Brits. Rupert Goodwins, whom I was privileged to meet in 1995, has become the face of ZDNet. The Inquirer and The Register deliver sass and attitude, along with a ton of good information. And most of their writers are thoroughly disposable, with Andrew Orlowski playing the part written best by Tom Wolfe in "Bonfires of the Vanities," the dissolute, cynical Englishman whom nobody likes but everybody reads.

Look, I've been available for a role like this for decades, but the problem is with the business. So long as advertisers, not readers, drive the train, so long as no one is watching the credibility account, there's no reason for readers to care. To the extent that major newspapers get that, we have a few people doing good work. Until someone in the U.S. industry gets that (and I once had great hopes for C|Net in this regard) we deserve to be flat on our backs and broke.

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Clued-in, Clueless

Clued-in is Richard Boucher, a Virginia Congressman, who called the U.S. Copyright Office "misguided" in rejecting fair use against the DMCA. I wouldn't have been so diplomatic.

Clueless is anyone who buys Linux from SCO , which has begun offering direct sales based on its claims to own code it gave away years ago.

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