*michael parekh on IT*

ON CAPEX SPEND GOOGLE VS. MICROSOFT

SOW, AND YOU SHALL REAP?

On the heels of my posts on the growing need for infrastructure spending by consumer web companies (see here and here), comes this timely comparative data in John Battelle's post today (John of course, is the author of best-selling Google book, "Search"):

"Amount spent on capex (capital expenditure), 05 (estimate): $800 million
Amount MSFT is estimated to spend: $810 million"

This is notable considering Google has 2000 employees vs. Microsoft's 60,000 (and growing competition here), revenues last fiscal year of $3.2 billion vs. Microsoft's $37 billion, and operating profits of $640 million vs. $9 billion respectively. 

Not to mention a current market cap of around $95 billion vs. Microsoft's $265 billion.

As the song goes, "It's only just begun..."

ON ALLEVIATING WEB 2.0 INFRASTRUCTURE CHALLENGE WITH P2P CONTRIBUTION

COME TOGETHER...RIGHT NOW

Writing yesterday's post on the coming infrastructure challenges and investments needs for the consumer web services being driven by Web 2.0 trends, reminded me of one of the topics discussed at the Union Square Ventures sessions a couple of days ago.

Specifically, the agenda on the Peer Production discussion asked:

"Are the peers always producers or can they contribute other resources like disk space or bandwidth?"

One way the consumer online portals like Google, Yahoo!, MSN et al will likely be able to alleviate the infrastructure demands of the dozens of storage and processing intensive web services coming up, is by employing variations on today's P2P (peer-to-peer) technologies.

Technologies like BitTorrent are alleviating the massive bandwidth requirements in downloading videos over the internet by employing P2P architectures.  Using similar technologies and approaches, we can likely address SOME of the challenges ahead by leveraging the tens and hundreds of millions of hard drives and CPUs of users using some of these services.

Another popular service that also leverages P2P architecture is Skype, soon to be part of eBay.  Whenever a consumer downloads the Skype internet telephony application, and rapidly clicks on the "I agree" button the its terms of service, he/she is also agreeing, knowingly or not, to make available the PC in question to facilitate the routing of Skype calls by other Skype users TO other Skype users.

P2P approaches as a result, will have a big impact on the infrastructure solutions going forward.

What's also interesting is that EVEN WITH the use of P2P architectures, some industry observers note that at times almost HALF the traffic on the internet backbones is comprised of Bittorrent traffic.  Imagine what it would be WITHOUT the use of P2P technologies.

P2P applications altogether are estimated to have accounted for 60% of all internet traffic last year, as this piece in IT Week explains.

Web 2.0 is not just about people working together, but their PCs working together as well.  The machine to machine traffic is likely to be as important as the people to people traffic we measure today in terms of email, IMs (instant messages) and the like.

It's truly going to be an "All for one, One for All" kind of world out there.

ON NEW YORK TIMES' TIMESSELECT HELL CONTINUED

UNTIL HELL FREEZES OVER?

VC Fred Wilson's heartfelt post titled "Walls of Mass Destruction" is worth checking out.  It's nice to have company on an issue that made me vent in a post back last month in a post titled "On the New York Times' TimesSelect Hell". 

It gives some more reasons for readers to dislike the New York Times' decision to put their columnists behind a subscription firewall and spin it as a new "feature" called TimesSelect.  Although he's a subscriber to the paper version, like myself, he says:

"Although we can easily afford the cost of Times Select, I refuse to pay it."

Fred in particular is expressing his frustration that he can't blog an interesting columnist from the paper:

"I want to blog it, as Jeff did today.

But I need to get to the piece in order to blog it.

And I can't get there unless I pay more money.

This is nonsense."

It's a valid point, and I agree with it.  I haven't done a single post quoting my favorite NYTimes columnist Thomas Friedman since they implemented the new "feature".

My additional beef with TimesSelect is how difficult the paper makes it to activate TimesSelect for paying subscribers who are already entitled to get it.

In my post last month, I explained how I made several efforts to activate my TimesSelect subscription as a paying customer to the paper version, with no success due to ongoing problems with the Times' Customer Service processes.

Again, I realize that the company is undergoing tougher financial times given the cyclical and secular trends facing the industry.  I also understand they're trying to protect the circulation business in terms of trying to differentiate the value add to their traditional advertisers.

But I do feel that they are eroding the personal brands of their columnists and reporters, in a world where their work should be exposed to as wide an audience globally as possible, not to mention eternally searchable via the crawlers and indexes of the world's search engines.

Again, as I said in my earlier post:

"It'd almost be interesting to start a pool here...how long before TimesSelect is deselected by the company?  A few weeks, months or years?  I mean if the once-mighty AOL has to bring down its walled content gardens, how is the New York Times going to be able to hold out?"

Any takers?

ON THE INFRASTRUCTURE AND "ENERGY CRISIS" AROUND CONSUMER ONLINE SERVICES IN WEB 2.0

FASTEN YOUR SEAT-BELTS

Back in August, I concluded a post titled "On the merits of online storage", with a framework borrowing from Wired Magazine:

"TIRED:  Storing all Your Stuff on Individual PCs/laptops/PDAs/Phones and syncing 'em.
WIRED: Storing all you Stuff online with infinite storage, access, security, and share-ability...for free or near free.

P.S.  There are economic and bandwidth limitation issues to unlimited storage and uploading/downloading that we do need to be mindful of, but they are manageable both technically and from a business model perspective over time...for more more on that, see my April post titled "ON TODAY'S BROADBAND LIMITATIONS"."

It's all very easy for armchair blogging strategists to say that Google, Yahoo! et al will unseat Microsoft for desktop applications because they'll provide all these applications and more to hundreds of millions of consumers, right off the network.  And for free, because after all, it'll be supported by booming online ads.

The devil as they say, is in the details, and the details here have to do with economic and bandwidth issues, just to start.

As tech columnist Robert X. Cringely also points out, it also has to do with heat and power requirements.  He has a great article outlining some of the numbers, highly recommended to be read in its entirety.  An excerpted summary, for reader convenience:

"Every one of these service providers, if they really do intend to be there when we need them with all our pictures, videos, love letters, and construction blueprints, are going to have to keep all that data available online 24/7, which is an unprecedented storage challenge, and one that the storage industry has NOT been working on."
...

"In the U.S. alone, according to Nielsen/Netratings, we have approximately 202 million Internet users, each of whom is eligible for a free Gmail account with two gigabytes of storage. Since my mother uses less than two gigs and I use more, let's do our rule-of-thumb estimate with that number, making the potential Gmail storage obligation 404 million gigabytes or about 400 petabytes. That's 400 times the current capacity of the Internet Archive, but it is also probably a tenth or less the total capacity of our PC and DVR hard drives today, so I think it is a very fair number to play with.

Of course, all that storage won't be required just for Gmail, unless Microsoft decides to create phantom users and take down its competitors through overwork. (Would that be legal? Maybe.) Rather, the 400 gigs will be shared among many competitors. But for this exercise it doesn't really matter because the issue is TOTAL cost, not who is bearing that cost.

Probably 80 percent of this capacity will be borne by the major players, with each of those taking a roughly equal share. That's MSN, Yahoo and Google, assuming that AOL will be somehow distributed between them, with each having about 100 petabytes of storage.

How much storage IS that, really? Well, the biggest enterprise hard drives available today hold 400 gigabytes each, which means each of these companies is going to need AT LEAST 250,000 drives, making Seagate, Hitachi, Maxtor, and Western Digital all very happy. Though with volume discounts that's really only about $25 million in disk drives -- far less than Microsoft's legal bills.

Now let's build a data center using those 250,000 drives. A disk array can hold about 32 drives in a 3U space. In a typical cabinet you can store about 12 arrays or a total of 384 drives. That cabinet sits on a 2' x 2' floor tile, plus some aisle space, or about 10 square feet of floor space for planning purposes. 250,000/384=651 cabinets or about 6,500 square feet. Heck, that's nothing when you read about all the hosting companies, with their 20,000 square foot data centers containing 20,000 servers each.

But just how many of those 20,000 square foot data centers are there, really? Do a little investigating and you'll find many hosting companies share the same building and claim the same 20,000 square feet.

The problem comes when you start to think about power consumption. It's not that disk drives consume so much power or that they haven't come down in consumption over the years, but each of those cabinets will require using modern drives about 3,300 watts to run while the full 100 petabytes will require 2.148 MEGAwatts. And all that heat has to go somewhere, so the building will typically use three to four times as much power for air conditioning as it does to run the drives, taking our total power consumption up to just under 10 megawatts, which at typical U.S. industrial power rates will cost about $5 million per year.

NOW we know why Google bought those 30 acres on the Columbia River in Oregon right next to a generating station from the Bonneville Power Administration. It's a source of cheap, uninterruptible power.

Of course nobody would build such a data center today because it would require 330 watts per square foot, and even the most modern facilities are provisioned only with 200 watts per square foot. Most are designed for 100 watts. So chances are any of these companies would spread their storage over two to three facilities.

This is the kind of planning and provisioning required to support FREE services. Add pictures and especially video and the total data storage requirements go up by another two orders of magnitude, much of that supposedly still supported by ads.

That's a heck of a lot of ads."

Robert goes on to add:

"My point here is that we're entering another period of Internet exuberance. Yes, a lot has changed since 1999, but it's amazing how many of the ideas being pushed are the SAME ideas, just empowered now by dark fiber, cheap broadband, and six years of Moore's Law. And this time I think it will actually work and the Internet will change even more than it has the ways we live and work. But it isn't going to come easy and it isn't going to come cheap."

What's truly different since 1999 is that we don't have a whole horizontal layer of infrastructure companies this time around, funded by the same VC and investor exuberance ready and waiting to provide the storage and ISP (Internet Service Provider) infrastructure to the consumer online services companies. 

And we're just barely moving from text to pictures, with video, network-based productivity computing, internet telephony, wireless services and several other exciting things still around the corner.

In Web 1.0, we had an array of companies that helped make possible the early layers of infrastructure that made it possible for companies like AOL to go from the number four to number consumer online service company in the US in less than five years (1994 to 1999).  Companies like UUNET, PSI, et al were there to build out huge networks of dial-up modem points of presence across the country, linked into nationwide networks that then made possible consumer ISPs like AOL, MSN, Earthlink et al.

Those ISPs in turn made it possible for companies like Yahoo! to gain global web portal status, along with folks like Netscape, Excite, Lycos and many others WITHOUT having to spend a dime on the underlying infrastructure spend, essentially a "free ride".  They had high and growing margins that set investor's hearts thumping, matched later by their stock prices.

Later in Web 1.0, there were an array of hosting companies that emerged lead by companies like Exodus that made it possible again for consumer companies to offer the early versions of consumer online services around content, community and commerce.

Of course, behind all of them was the parallel boom in telecom where billions were being invested in dark fiber around the globe that ultimately went unused for the most part in that cycle.  It's coming in handy in this second cycle.

But the point is that the infrastructure layer CONTINUES to need massive investment in money, people, research and development, and there is NOT as robust a horizontal layer of third party companies (funded by "exuberant" VCs and public investors) that consumer services like Google, Microsoft, Yahoo! and AOL can turn to this time around.  And of course, no telecom and/or wireless infrastructure boom.  In fact most of those companies are consolidating, merging and shrinking.

Which means that the consumer Internet companies are going to have to get their hands dirty this time.  The effort, R&D, and the expense of the infrastructure build this time around will have to be borne on the financial models and statements of the consumer companies themselves, with or without the concurrent understanding, support and enthusiasm of their public shareholders.  And these companies will need to do this globally given the much greater maturity of international markets in Web 2.0 vs. Web 1.0.

Which means that today's public investors in Internet companies need to brace themselves for rising infrastructure spend by the consumer online companies, and compressed margins, even though the ad-based revenues and profits are going through the roof (see my post from yesterday).

And this time, the "free ride" will be had by the hundreds of third-party web 2.0 companies that are emerging that'll be able to put out new services as "proofs of concept", whether it's in photo sharing services, podcasting and video blogging companies and dozens of other categories.

And then the lucky ones will either be acquired by the big internet and/or big media incumbent companies for the heavy-duty infrastructure spend for the REAL roll-out.  A handful may even make the exits with successful IPOs.

So fasten your seat-belts, there's some turbulent infrastructure spend just around the corner.  But the destination is still exciting, at least for users and consumers.

(DISCLOSURE:  I was the lead research analyst on a number of the above-mentioned infrastructure company IPOs and secondaries including UUNET and Exodus, along with the consumer companies like Yahoo!, eBay and AOL in the 1990s.)

ON PAYMENT FOR PEER PRODUCTION

PAYMENT IN KIND

UPDATED BELOW*

A subject discussed at the Union Square Ventures' event (see earlier post) was the issue of who gets paid what and how for "peer production" in a web 2.0 world.  It's a subject worth some exploration.

Most of the discussion to date focuses on how the web services themselves can make money from peer production. 

But the broader question for me is how users are eventually compensated for their "peer production" today and over time.

Payment for our peer participation and production to date on services like Wikipedia, Flickr, blogs and the like are primarily in non-cash terms.

Specifically they can be classified in the following categories:

1. Convenient functionality for all (e.g., Flickr, Del.icio.us, Wikipedia and  of course, Google).
2. Reputation as in the case of bloggers, reviewers and commentators on the web (aka vanity).
3. Generosity, as highlighted by Tom Evslin in the discussion at the USV session.  Good example here are the mostly anonymous contributions by countless folks to entries in Wikipedia.
4. Monetary compensation direct and indirect, as in the case of eBay sellers who get direct cash from sales and Google advertisers, who presumably get transactions from the leads they pay for through Adsense and Adwords on the service and affiliates.

In most cases, we get convenient functionality as the top form of compensation in web 2.0 services, by being able to share in the efforts of many around a subject of interest to one. 

As pointed out aptly by Tim O'Reilly in the session, this is particularly true in the case of Google, where every user's search fuels the efficacy of the search for all. 

Google's shareholders of course benefit here, particularly when the company reports a seven-fold increase in profits for the third quarter of over $380 million on revenues of a little over a billion dollars. 

Not bad for a seven year old company monetizing very well the 5% of time and attention that users worldwide spend on search on the Internet.

In a world where the "peers" in peer production are paid mostly in convenience or reputation (aka vanity) in the case of blogs, user comments and the like, one wonders how far we are from a time when a search engine and other web 2.0 businesses offer a piece of the cash to users for their attention and loyalty in any form.

It's been tried before of course in Web 1.0 days...the notion of paying money to search users.  iWon.com is the poster child here, which continues to pay users in cash prizes to this day (over $64 million to date according to their website).

Of course back in the web 1.0 days, the prize money was a customer acquisition expense.  Today in the world of paid-search, there is real revenue that can be split with users.

Alternatively, search engines could offer a loyalty program a la the airlines that offers specific awards and benefits for sustained usage and loyalty.

In a trillion dollar plus world of global advertising, direct marketing and promotion, it's not unreasonable for peers to collectively ask for a piece of the pie.  Especially when there's SO MUCH of it to go around.

Whatever form it takes, at some point in the evolution of the web, consumers and users may ask for and get more tangible compensation beyond functionality, reputation and feelgood generosity, in exchange for their attention to all things on the web.

Why, we may even call it web 3.0.

After all it is VERY personal and it is BIG business.

The next Google wannabes of course will keep this in mind.

UPDATES:

*David Gibbons of Poductivity has an interesting comment below applying some of Umair Haque's thinking on microchunking to the eBay-Skype acquistion, that happens to be relevant to the paying for peer production thesis above.  For reader convenience, here are the live links to the slide and his original post.  My own post on the eBay-Skype acquisition can be found here.

ON HOW FLOCK FLOPS FOR ME SO FAR

NON-STARTER

The debut of current startup darling Flock's "social browser" was as eagerly anticipated by me as by many early adopters.  Well, it's only version 0.4.8, so everything I say in this post will hopefully be addressed and corrected in future versions...but my bottom-line after a half hour of trying the software is that Flock underwhelms.

It starts with the installation process, where Flock like Firefox before it (and from where some of the founders came), offers to import your bookmarks from Internet Explorer.  Which is all very well and good, but like most folks likely to try Flock, I've long since left IE for Firefox and all of my current bookmarks are in Firefox, not IE...so please, if you're going to automatically and conveniently import my bookmarks, do so from Firefox, not just IE.

The browser does have a cool look once installed, with a basic blue default theme.

Being a "social browser", the software offers the ability to easily integrate your favorite blogging service, Flickr account for photos and Delicious for tags.

On the first item, after typing in my blog address when asked, Flock failed "to connect" with the blogging service (Typepad), and asked me to do so manually, but offered no help on how to do so.  I tried some other blogs that I maintain, but no luck.  Flock wasn't able to connect with any of them automatically.  So no points on number one.

The Flickr integration worked fine, with photos from your Flickr account loading up on a toolbar above the browsing window.  The feature that is supposed to be most helpful here is the ability to drag and drop photos from the Flickr account to your blogging editor.  I haven't had a chance to try that yet given point number one above.  Also, I'm not sure I want to give up over an inch of horizontal screen space for Flickr integration.
This is a browser after all, and that's the primary function.

Finally, the integration with delicious went well, but too well as other reviewers have described...Flock puts links to its services into your delicious account with asking your permission.  Irksome.

Other nit:  left-clicking on a bookmark in the bookmark toolbar doesn't give you the editing options you normally get in Firefox, forcing you to actually open the bookmark manager to edit your links.  Also, in this early version, there seems to be no easy way to add folders to the bookmark toolbar.

So overall, I agree with VC Paul Kedrosky's pithy assessment.  Out of the box in this early version, there isn't a feature yet that I find useful enough to launch Flock instead of Firefox.  But will continue to check future versions as the software evolves.  Some other reviews of this version can be found here and here.

ON UNION SQUARE VENTURES' "PEER PRODUCTION" CONFAB

A GREAT START

UPDATED WITH PICTURE BY SCOTT HEIFERMAN

Some interesting discussions today around an agenda centered Peer Production at Union Square Ventures hosted "Sessions" event, hosted by VCs Fred Wilson and Brad Burnham and attended by a few dozen folks. 

In these early days of user produced web content and services, aided by Web 2.0 doodads like Ajax, RSS, tags, and the like, it's clear that the future is wide open (again), and there is a lot of work to do...by developers, entrepreneurs, investors, the media and users, before we have some fully baked services and business models. 

A great start to an on-going, long discussion to follow.  Thanks to Fred, Brad, Charlie, Kerri et al at USV for putting it together and keeping the discussions on track.

A memorable anecdote from Scott Heiferman of Meetup seeing a guy in the subway on the way to the event with a T-shirt that said: "F**k you, I have enough friends!".

Seemed to aptly sum up this whole Web 2.0 world and its promise so well... we all need to find our own levels of trust and comfort with how much of ourselves we want to share online, and what we should expect in return for it.

The full details of the day will up on the event Wiki soon, along with photos, along with delicious links to blog posts on the subject.  To be continued...

ON NEW BREAKTHROUGH SONY MEDIA CENTER PC

OUT OF THE BOX

Looks like I may be replacing my Media Center PC.  Sony is introducing a Media Center PC that seems to have some out of the box thinking in its design.  They've fused existing technologies like CD and DVD changers with a Media Center PC to provide the kind of functionality today's home network increasingly needs. 

PC Magazine has a good review of the system, called the Sony Vaio XL1.  It describes the practical advantages of the system.  Here are some excerpts:

"Designed to be the true Media Center in your home theater, the XL1 can replace your TiVo, CD changer, DVD player/changer, DVD recorder, and any older Media Center PC you have put in your rec room."
...

"The XL1 Digital Living System consists of two halves: the VGX-XL1A main unit and the VGP-XL1B 200-disc CD/DVD changer. The XL1B is the muscle of the system. You can load 200 CDs into the changer, call up the MCE interface, select the "manage discs" menu item, and rip all 200 CDs onto the VGX-XL1A's 200GB hard drive.

This is a much better way to copy your music than what the typical MCE PC allows you to do, which is come back every few minutes to swap discs. The saving in time and convenience would be significant for the person with several hundred (or a few thousand) CDs.

In our testing, the XL1 still took 3 to 4 minutes to rip a CD, but it does all 200 consecutively; so once you load them in the changer, you can leave the system alone, say overnight, and in the morning it'll be done. Loading and unloading the slot-loading changer was a snap; loading or ejecting each disc took only a few seconds."

...

"After you've ripped your CDs, you can keep as many as 200 DVDs in the changer. The XL1 system keeps track of them, so they can be called up and played at a moment's notice."

...

"The XL1B can also burn content to DVDs. Let's say you've just recorded the entire Seinfeld saga from your local affiliate onto your hard drive. To free up disk space, you can insert as many as 200 blank DVDs, and the XL1 will burn your programs to DVDs that can be used in any consumer DVD player.

The XL1's Click-to-DVD burning utility is well integrated into the MCE interface, and it only takes a few clicks to burn your shows. It will even let you know how many blank DVDs you have in the changer, and if you need to add more to complete your project. You'll find that keeping four or five DVD blanks in your changer is a convenience you never realized you needed."

The product is so new it's not yet available on Sony's website. It points to an interesting direction that consumer media home networking needs to go.  While it doesn't have the pizzazz and the buzz of an Apple iPod Nano and/or Video, it's a pragmatic answer to the issues that consumers increasingly face in optimally using their CD/DVDs and digitally stored media in a seamless, interoperable way.
 

ON CHINA REAL ESTATE BOOM

UP, UP AND AWAY...

Great article in the New York Times (registration required) on the real estate boom in China...it starts with this gangbuster opening:

"China Builds Its Dreams, and Some Fear a Bubble

 

By DAVID BARBOZA

   

SHANGHAI, Oct. 16 - Move over, New York. This year alone, Shanghai will complete towers with more space for living and working than there is in all the office buildings in New York City.

That is in a city that already has 4,000 skyscrapers, almost double the number in New York. And there are designs to build 1,000 more by the end of this decade.

China's real estate market is so hot that miniature cities are being created with artificial lakes, and the country's nouveau riche suddenly seem eager to put down as much as $5.3 million for a luxury apartment in skyscrapers with names like the Skyline Mansion."

Another eye-opener midway through the article:

"It is not surprising that in a country where 170 metropolitan areas have more than a million people, according to government figures, everyone seems to want to be a developer.

State-owned oil and steel giants, automobile companies, shipbuilders and even Communist Party newspapers are creating real estate subsidiaries."

The economic circumstances and pricing are different, but some of these anecdotes are reminiscent of the property boom in Japan in the eighties, when land in Tokyo was valued higher than all of the property in the US.

China no doubt has great economic and investment potential over the next few decades, but it's important to keep reminding ourselves that it'll be a really bumpy road.

 

ON TECHNOLOGY AND INFLATION

TECH DAMPENERS

Economist Stephen Roach of Morgan Stanley has an interesting article on the something he calls "New Inflation".  I last posted on his work back in September highlighting his piece on the US trade deficit in the context of the global economy. 

This time, he examines how inflation has evolved over the last 35 years, and how it currently should be viewed, in a Thomas Friedman "Flat World" context.  Specifically,

"As I see it, three powerful forces emerge from this saga -- globalization, technology, and monetary policy. The first two are holding down inflation and, barring an outbreak of protectionism, are likely to do so for the foreseeable future.  The third force -- monetary policy -- has the potential to be an important swing factor."

The inclusion of technology as one of the three forces makes sense at a time when tech investment has become the single largest piece of US corporate spending at almost 40% of the total, according to a recent Goldman Sachs study.

Mr. Roach goes on to add,

"However, it is not clear what type of inflation -- CPI or asset-based -- will arise from excess monetary accommodation.  Here, as well, context, is key. It may well be that liquidity injections are not powerful enough to outweigh the secular disinflationary forces of globalization and IT-enabled technological change.  In a low nominal interest rate climate, that could well mean that the transmission of monetary stimulus gets directed more at asset markets than at goods and services."

The current spike in energy prices is a short-term concern.  But as Stephen Roach observes,

"For the US, there can be no mistaking the inflationary impacts of the energy shock of 2005 -- a 35% increase in energy prices over the past year boosted overall CPI headline inflation to a 14-year high of 4.7% in September 2005.  At the same time, there are literally no signs of inflationary pressures elsewhere in the economy. The notorious “core” CPI -- which can be helpful in understanding the spillovers from energy and food prices to other segments of the pricing structure -- actually ticked down to 2.0% in the 12 months ending September 2005 and is off 0.3 percentage point from this year’s peak rate of 2.4% hit in February."

He concludes the point with,

"In terms of the broad gauges of US prices, inflationary pressures remain narrow and generally well contained."

The whole piece is worth reading for an alternative perspective at a time when the mainstream media continues to focus on the price of gas at the pump, and the record prices for natural gas going into the winter.  It's important to see all this in the larger, longer-term, global context.