Friday, March 25, 2005

NEWS: US public Wi-Fi bubble due to burst

By Peter Judge, Techworld
Falling prices of public Wi-Fi services could spell trouble for operators - and may mean less public Wi-Fi than some optimists have predicted. US mobile operators will lose $12 billion in revenue - because there are too many of them competing too aggressively.


John Bogle: Has Your Fund Manager Betrayed Your Trust?

Keynote Speech byJohn C. Bogle, Founder and Former CEO, The Vanguard GroupBeforeThe American Institute of Certified Public AccountantsPersonal Financial Planning ConferenceLas Vegas, NV, January 5, 2004

Ever since the first of the mutual fund scandals came to light shortly after Labor Day 2003, the circle of fund organizations involved has continued to grow. To date, more than a dozen firms have been implicated in some form of late trading (illegal manager behavior) or international “time-zone” trading (unethical manager behavior), with many of the charges brought by New York Attorney General Eliot Spitzer, Massachusetts Secretary William Galvin, and the Securities and Exchange Commission already settled, resulting in substantial and well-deserved financial penalties imposed on the managers.

Make no mistake about it. Most of the firms involved in the scandals are major industry participants. Their aggregate fund assets of nearly $1.2 trillion represent nearly 20% of the industry’s $7.2 trillion total. As the scandals have unfolded, investor reaction turned from incredulity to revulsion, and then to self-defense, with rising share liquidations at the firms that were affected. Even the firms that have so far received only subpoenas for information seem cautious about declaring their innocence, for it turns out that virtually all 401(k) transactions take place long after each day’s 4 p.m. cut-off time for executing orders. What is more, one of the two prime clearing-houses for these transactions has been forced out of business. And there may be more enforcement actions to come.


Academic Paper: The Diffusion of Electronic Business in the U.S.

For those with the stomach for a fairly academic paper:

We provide a recent account of the difusion of electronic business in the U.S. economy using new data from the U.S. Bureau of the Census. We document the extent of the difusion in three main sectors of the economy: retail, services, and manufacturing. For manufacturing, we also analyze plants' patterns of adoption of several Internet-based processes. We conclude with a look at the future of the Internet's difusion and a prospect for further data collection by the U.S. Census


Dallas Fed: Entrepreneurs are Engine of Capitalism

Some of the simplest questions often asked about economic performance have the most complex answers. Three examples: How can profit exist? What causes economic growth? How does a market economy coordinate resource use? Over the long history of the development
of economic doctrine, many great minds have wrestled with these questions and many have turned to the concept of the entrepreneur.

This term has long been used by economists, albeit with varying emphases at different
times, and recently enjoyed a renaissance in economic and business school pedagogy because of the Internet’s evolution and the smallbusiness explosion it generated. The concept remains relevant as America’s economy enters the new millennium, for how we treat our entrepreneurs has immediate and profound effects on our overall national economic performance and the direction of economic activity.


Innovation is Fast, Transformation is Slow

History shows that new technologies do not move instantly from the inventor's laboratory to everyday usage. It can take a long time for them to increase productivity. The absence of immediate productivity improvement with the advent of new information processing technology was not unlike earlier experiences with general-purpose technologies. Similar delays in the impact of technological progress on aggregate productivity occurred during past industrial revolutions.

Part of the delay, according to Northwestern University economist Joel Mokyr, occurs because, important as they are, fundamental technological breakthroughs often require further inventions to make them broadly applicable: "Such gap-filling inventions are often the result of on-the-job learning or of a development by a firm's engineers realizing ad hoc opportunities to produce a good cheaper or better. Over time, a long sequence of such microinventions may lead to major gains in productivity, impressive advances in quality, fuel and material savings, durability and so on."
For example:
• Although Thomas Newcomen built the first successful steam engine in 1712, it was not until about 1765 that major improvements in the engine by James Watt made it suitable for factory use. Additional improvements, which included the addition of a governor and rotary movement, made the steam engine a huge economic success in the 19th century. Recent estimates suggest that at the height of the British Industrial Revolution (1760 to 1830) output per capita in the United Kingdom grew at less than 0.5 percent per year on average, about the same rate as during the period between 1700 and 1760. By comparison, per capita output increased at an average rate of nearly 2 percent per year from 1830 to 1870. Mokyr argues that despite slow growth during the era of high invention, rapid growth in Britain after 1830 could not have occurred without the technological breakthroughs of the previous 70 years.

• Although Michael Faraday invented the first electric motor in 1821 and the dynamo in 1831, it took nearly a century of additional, substantial breakthroughs to make electricity the dominant source of power in manufacturing. Despite major technological breakthroughs in electricity, chemicals, steel production and other major sectors, American manufacturing productivity slowed in the late 19th century. Whereas output per hour increased at 1.7 percent per year from 1869 to 1889, output per hour increased at just 1.4 percent per year from 1889 to 1909. U.S. manufacturing productivity growth remained modest until after World War I, but grew during the 1920s at an astounding rate of 5.6 percent per year. Productivity growth remained high for another 40 years.
• As with the steam engine and electric motor, the computer chip did not affect productivity in many industries until additional inventions came along to apply the new technology. In banking, for example, microinventions like the ATM, the debit card and credit-scoring software were required to generate the productivity gains promised by the computer.
Stanford University economist Paul David explores the dynamics of technological diffusion by comparing the electric dynamo, a key technological advance of the 19th century, with the modern computer. The dynamo, like the computer and steam engine, is a general-purpose technology, having profound effects on nearly all sectors of the economy. Decades elapsed, however, between the introduction of reliable electric motors and their widespread use in industry. Some of the delay was accounted for by lags in the development of efficient means of electric power generation and by competition between direct and alternating current. Electric power generation was reasonably efficient and commercially viable by 1880, however, and the superiority of alternating current for most applications was clear by 1893. Yet, as the chart to the left illustrates, electricity accounted for just 5 percent of mechanical power in U.S. manufacturing in 1900 and did not exceed 50 percent until 1920.


The Role of Finance in the Investment Bust of 2001

William Poole*President, Federal Reserve Bank of St. Louis
Annual Southwestern Finance Association MeetingAdams Mark HotelSt. LouisMarch 8, 2002

A recurring topic of debate among economists and finance experts is the role of financial markets in cycles of boom and bust in the real economy. This discussion has flared up once again in the wake of the Recession of 2001. The performance of the U.S economy in the 1990s was remarkable, and so was the performance of the stock market. Starting in spring of 2000, both the stock market and real economic activity weakened considerably. In the real economy, we observed a sharp drop-off in private business fixed investment. In the financial sector, we witnessed the stock market delivering disappointing returns for two consecutive years. The number of initial public offerings (IPOs) fell dramatically, and the market for venture capital dried up. In fact, given that the financial indicators turned ahead of real investment, there is a prima facie case that financial stringency contributed to the decline in physical investment spending. Of course, the financial environment does not come out of the blue; weakening prospects of the tech companies had a lot to do with the financial stringency they faced starting in early 2000.


Thursday, March 10, 2005


5 Years ago today, the Internet bubble began to deflate. Interestingly it wasn't a crash like 1987 or 1929. It didn't go out with a bang, but a whimper. For months, many of the most savvy thought it was a temporary correction and the fun would continue on after weeding out some bad apples- just a few bad dot.coms that never should have existed. Many never guessed that the whole thing was a house of cards- there were too many companies for too small a market opportunity and even the best of breed (Cisco, Intel, Yahoo, Amazon) were overvalued.

The Internet bubble was not just a stock market bubble. It was not just about the NASDAQ reaching 5,000 as it did 5 years ago. It affected the entire financial markets, from venture capital, to private equity, to creditors. It affected the guts of the biggest and oldest companies. It affected all of us. It wasn't just an irrational speculative mania- though that obviously played a role. A large company cannot speculate on its investments. It lives with the legacy of its decisions.

It was the frontier of new business opportunities ushered in by a new and powerful technology. What investors (VCs, stock pickers, business managers) got wrong was not that the Internet vision was completely crazy. What they got wrong was how long it would take for that vision to become reality and how to make real profits out of it. The Internet will transform the world as many hoped and expected but it will occur over 20 years of evolution not a 2 year revolution. Profits it turns out are also a lot harder to generate than it seems. When so much new value is created, it is tempting to think profit will follow. But that is not true. Think about email. Perhaps nothing else has had such a Transformative effect as email - altering human communication globally and permanently. And yet it is nearly impossible to make money from email. Its free. Its free because nearly anyone can create an email service. When something is easy to make and copy, it is hard to charge a lot because someone else can pop up and charge less stealing your customers.

These and other more nuanced realities more are key to understanding how to manage waves of innovation in the future.

To help in this process as well as have some fun, we're "celebrating" this birthday with a blogathon. A blog-wide echo chat about the bubble. The participants are growing. Contributing writings so far are: Andy Kessler, Om Malik, serial entrepreneur Ross Mayfield and financial whiz-kid, Paul Kedrosky

Wednesday, March 09, 2005

Learning to Live with Bubbles

They're a fact of market economics, and they can lead to much good -- if managers understand and avoid the pitfalls. At the fifth anniversary of the popping of the Internet bubble, a long shadow remains over businesses and the economy: The cycle of creative destruction is not yet complete. A number of key measures, from the stock market to employment, remain far below levels reached in 2000. More strikingly, individual businesses are still fighting the same underlying strategic battle that confronted them during the bubble -- the disruptive effects of digitized information.

How so? The music industry is being transformed by Apple's iTunes. Television is facing pressures from digital video recorders, online downloads, and now the video-clip searching abilities provided by Google and others. Print media faces a challenge from blogs. Telecommunications continues to be altered by the rollout of voice over Internet protocol (VoIP). Electronic trading exchanges are altering the economics of stock markets. And radio frequency identification tags (RFID) are transforming the management of supply chains.

Emerging from the trough, we realize now that the bubble was not all froth and nonsense. It wasn't like the Dutch tulip mania of 1635, a purely speculative run-up in prices for exotic flowers with no underlying value created along the way. The Internet bubble, like so many business bubbles of the past, continues to create positive changes in business and consumer marketplaces. We have moved out of the hyperactive revolutionary period and into the slower, more significant, evolutionary phase.

BUBBLES AS R&D. The frenzy of business bubbles is like an overexcited learning exercise or a giant research and development effort. All the failures teach the marketplace what works and what doesn't. We learned at an accelerated clip about how the Internet could be deployed as a technology, what new business models might work, how consumer behavior can change and at what speed. What was proven wrong during the crash wasn't the overall vision. No, many of the ideas about how to profit from the vision and how long it would take to become reality were proven wrong. But the vision remains. The dot-com bubble followed historical patterns. Bubbles pop because they're the product of a cascade of bad investment decisions. But bubbles aren't attributable just to irrational exuberance -- although obviously that plays a role.

BUBBLE PATTERNS. In addition to the standard ideas of greed and irrational exuberance, bubbles are fueled by other unexpected forces. They're based on systematic distortion of information, which erodes managers' ability to distinguish the good, the bad, and the ugly. They're based on a competitive marketplace that feeds the frenzy and forces even the wise to jump into the game in order to meet their benchmarked returns. And lastly, they're based on the day-to-day decisions by investors that collectively oversaturate the entire market with capital, leaving a market with too much money chasing too few quality opportunities.

BUBBLES ARE EVERYWHERE AND ACCELERATING. Making sound business decisions is extremely difficult during tumultuous markets. And as we continue to see, the business challenges they introduce last for decades. Business bubbles are the driving force of capitalism, innovation, and change. They're the fuel for the creative destruction that's the engine of explosive change in our economy. Bubbles aren't aberrations to normal economic functioning. They occur all the time -- some big, some tiny. In recent decades alone we've seen business bubbles in biotechnology, PCs, and semiconductors, and in regions such as Southeast Asia. Many more bubbles lay ahead. Since the 1960s, there has hardly been a year where there has not been a bubble somewhere.

In fact, we're likely to see a lot more of them in the future, as the speed and scale of both global investment and innovation accelerate. Several bubbles are already percolating in China, in nanotechnology, VoIP, real estate, private equity, hedge funds, US debt, and perhaps elsewhere so far undetected.

COSTS AND RISKS. For all the benefits bubbles can produce by financing giant shifts in technology and new market opportunities, they do so at great costs and risks. The immediate costs are the obvious and painfull loses that occur when they crash. The risks are far larger and more ominous. Since the 1980s, bubbles have repeatedly brought the US or world economy close to collapse (LDC Debt, S&L Crisis, Asian Miracle turned Asian Economic Crisis, Russian Debt Crisis, Long-Term Capital Management, Argentina, the Internet). Each time we narrowly avoided disaster, frequently thanks to a complex rescue package. Fortunately, so far they worked. We may not be so lucky in the future.

Business managers must improve their ability to navigate these periods of innovation and change by recognizing the patterns and avoiding some basic but common mistakes. Those who plan now for the next big bang can avoid making the major mistakes we saw so often in the last go-round.

For more on what drives bubbles see a book I wrote on the topic called Frenzy. I really like it and other people seem to as well.

Vote for Your Favorites



IF you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:
If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: 'Hold on!'

If you can talk with crowds and keep your virtue,
' Or walk with Kings - nor lose the common touch,
if neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man, my son!

Wednesday, March 02, 2005

Popping Bubble

Measuring Bubbles