Silicon Valley Watcher - at the intersection of technology and media

I don't pay much attention to games. I used to play games as a kid, and I used to play Halo as an adult. But that was years ago.

Today there are games everywhere, Farmville on Facebook, games at fast food places, games based on watching TV shows. I've managed to avoid all those too.

But I'm probably in the minority. Because games have become one of the most lucrative commercial endeavors, which means lots of people are playing. And game culture is having an effect on our broader culture -- especially the game culture of earning points.

Kevin Kelly points to a fascinating talk by Jesse Schell, a games designer. In "Design outside the box" Mr Schell starts by explaining out how much money is made by very simple games, such as Farmville and Club Penguin.

But its the latter part of his talk that is even more interesting, when he predicts how games will be embedded into our reality. With the use of wireless sensors, a lot of real world game play is possible.

For example:

- people will be rewarded with points by their insurance companies for walking.

- kids will get points for doing well at their music lessons.

- people will use public transport to earn points that are redeemable through tax credits; and so on...

Kevin Kelly notes:

On second viewing I realized that Schell had also outlined a version of an attention economy -- where points are distributed for paying attention -- to ads, or other activities, or other people. Some aspect of his vision seems pretty inevitable.

Foremski's Take: I agree with Kevin Kelly and Jesse Schell that the intrusion of games into our society is inevitable. But It's a scary future.

I can imagine people doing all sorts of weird things because some advertiser pays them points, for say, shouting out their name at noon: "JACK IN THE BOX!" and monitors it via a cell phone, and its GPS location, for extra points in an urban area. And there will be even weirder, crazier stuff going on, as games becoming ever more embedded into our reality.

Foursquare already gives us a tiny glimpse of a world where games are embedded into reality -- its a form of what could be called a 'reverse virtual reality.'

And 'points' are a perfect example of a reverse virtual reality (RVR), they are a virtual currency with real benefits.

The opportunities for abuse, in constructing points based RVR game play, are huge. Yes, people will be encouraged into healthier behaviors but they will also be taken advantage of by their willingness to do things for points.

We won't need to fear subtle mind control by governments, or a Big Brother, people will do and say all manner of things, not because they love their Dear Leader, but because they earn points.

- Monitoring of behavior, and the scoring of points, will be carried out by cheap sensors networked together through the ever spreading wireless communications layer that will soon be ubiquitous, even in remote rural areas.

- Collation and redemption of points will be in online worlds where even more points can be earned, by taking part in immersive experiences that strengthen brand association and loyalty. Scary, very scary.

- And of course, the tax man will take his share. How, I'm not sure, but there will be a way. And since government will benefit, it benefits the government to regulate it and encourage it.

But what if you don't want to participate in the brave new RVR world?

Of course, you won't have to, there's nothing that says that you must, no laws can compel you, in fact, there will be laws that protect you from discrimination through having to have RVR points, in housing, employment, and education.

However, we are social animals, we are very social animals. Monkey see, monkey do. Peer pressure will compel us into RVR game play to an enormous degree. Decrees against RVR game play will find few takers.

And as the real world becomes ever more tied to the virtual world, outcasts from this RVR society, like outcasts have always done, will once again form communes in the woods and remote areas of the world. Will you be one of them?

I'd like to think I'll be one of them, but then I'd have to walk away from all those points I've accumulated over so many years...

Take a look at the video - it's really worth it.

DICE 2010: "Design Outside the Box" Presentation Videos - G4tv.com

"I'm not sure if we think about society, or that society thinks us," that's what I heard Malcolm Muggeridge say, when I was about 10 years old.

Malcolm Muggeridge was a British journalist and philosopher and I often saw him on British TV when I was growing up, talking about serious subjects.

That quote has stuck with me because it says something about us, it says that we are part of a society, and that we are a part of its messages. And society's messages and its thinking is done through media.

Today, we have more media, in more forms, at anytime of the day -- than at anytime in our history. Wow. What's that going to do to us?

These are extraordinary times and I'm thankful for being here right now because we won't see changes on such a scale ever again in our lifetimes.

(BTW I'm counting social media as Media - it's all about publishing.)

Two-way media

Our media helps us to make decisions about important things: presidents, global warming, health, ecology, morality, and washing powder.

We live in societies because we are social by nature. We respond to each other and we influence each other.

Today we can influence each other more easily than ever before because our media is digital, it can reach anything that has a screen. And nearly anything with a screen can also be published from -- we have a two way media.

Media is influential

Do you sometimes wonder about the "echo chamber" aspect of Techmeme, where it seems everyone is obsessed with the same stories, the same thinking? Well, that's because they all read the same things and they all take part in the same media.

Media influences people, and people use media to influence other people.

The more exposed you are to the media the more likely you are to be influenced by it. That was the great insight of Noam Chomsky, professor of linguistics at MIT. He said that intellectuals were more prone to propaganda because they read more, they were exposed to more media than others.

Now that we have more media than ever before, the likelihood is that we will all be prone to being more influenced than ever before.

And who is interested in doing the influencing? Antonio Gramsci, the Italian philosopher said it was the government. He coined the term cultural hegemony to describe the activities of state governments in the 1920s and 1930s.

You can see this most easily during political campaigns, where choosing the right word, the right phrase, is done with great care because it can make or break campaigns. But it goes on all the time -- governments seek to exercise their influence at all times.

Today the concept of cultural hegemony includes corporations, many of whom have greater power than state governments.

Fragmenting the echo-chamber

With the fragmentation of media we might find an escape from the echo-chambers and the influence of society's special interest groups. It could lead to a new flowering of culture, original thinking, unique ideas, and philosophies.

That's what seems to happen when you have a revolution, when the cultural hegemony is overthrown. You see it in the English revolution, which led to an explosion of new thinking and beliefs, with the Diggers, the Shakers, the Puritans, etc. You had new communities, some believed in free-love, some in castration, some in communal sharing of resources.

You see the flowering of the arts after the Russian Revolution, the Spanish Revolution, and Hungarian Revolution... It sometimes seems that the fragmentation of media could be revolutionary and smash the cultural hegemony of our times.

Or it might not. Fragmentation of media is no protection if the messages are all the same, which is what they seem to be. The new media world might lead to closer control and tighter influence on our thinking. It might lead to narrow thinking and expression simply because everything digital can be tracked, measured, and logged.

The best way to stop being influenced by media is to cut yourself off from all media.

But that's very difficult. In today's always-on world we are obliged keep checking into the media every few minutes: emails, Twitter, SMS, headlines, Facebook, etc. These are all avenues of influence.

There's probably no escape.

Which means that we either get our thinking right, and we prosper, and enter a new golden age of humanity, thanks to our media.

Or we don't, and we end up with one massive echo chamber of crap and a tightly controlled society, thanks to our media.

We seem to be heading into challenging times.

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Please see other Saturday Posts:

WeekendWatcher: The Sheer Number Of Things Will Devalue Them

Saturday Post: If You Are In The Path Of A Disruptive Technology You Are Toast - Goodbye Newspaper Companies

A Saturday Post: The Internet Devalues Everything It Touches, Anything That Can Be Digitized

A Saturday Post: Social Media Is Not Free - And The Disruption Of The PR Business Model

Saturday Post: Choking On The Long Tail - The Unbearable Burden - SVW

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Rave reviews find out why! - Order the The Amazon Kindle Electronic Book Reader!

You need video services! Creation, Distribution, Attention. Contact Aron Pruiett at SF Media Collective- 415 533 4487 - Here is a demo reel.

Silicon Valley Watcher Consulting services - call Tom at 415 336 7547

Last week my Saturday Post was about how Internet based technologies have been used to create applications and services that devalue existing business models. It's a hugely disruptive process. [The Internet Devalues Everything It Touches, Anything That Can Be Digitized]

This trend is occurring because it can occur -- because if you have the ability to significantly improve a service at a dramatically lower cost, then there will be startups that will attempt to disrupt the business models of existing companies.

One of the best examples of how the Internet can devalue business models is Craigslist and its effect on the classified ads business.

[Here are some ideas I've been thinking about over the past few years, I welcome your feedback and contributions.]

Ever since I first heard about the Internet and then saw its incredible development and application across industries, I've been on the look out for the economic effects of this powerful platform technology. The specific economic influence I've been looking for is a strong deflationary trend. That's when we will know when the Internet has truly begun to reach its potential.

Let me explain why.

Can you charge for news? Can you charge for social media? Two questions that show how the economics of the online world are affecting media and PR.

I've long said that the same media technologies transforming the business model for journalism are transforming the business model for PR. Yet this relationship wasn't as evident in PR for several years because the old business model was still working. The difference between the two industries has been in the timing of the disruptive trends affecting them.

Last year I spoke with Todd Defren, owner of Shift Communications. He said that social media was the tip of the spear in terms of winning new business. However, he said that it takes a lot of work and that clients often aren't willing to pay for the extra work.

I come across lots of people joining Facebook for the first time, or joining Twitter. Some, should have joined a while ago because their profession needs to know about such things. And you can only know by doing, not by reading. But at least they eventually join.

I know many people, young and old, that are passionately determined never to join any social network. They are often adamant. I admire their stance but I don't understand it.

This is a chance to take part in a social experiment that is totally unique. Facebook, Twitter, MySpace, Friendfeed, etc, are part of a unique global experiment that involves tens of millions of people in ways that we have never experienced each other. Tell me that's not interesting, or fascinating. Tell me that's not a reason to get out of bed. It's all fresh footprints in the snow.

Things are very interesting in media and PR communications these days. Things are changing so fast and we are all learning so fast. The changes happening in our industries are unprecedented, we have no frame of reference except our old ways.

For much of my 25 years in Silicon Valley I've been reporting on innovation and what people have been doing in software, IT systems, chips, etc. These days, the innovation isn't so much in technology, but in media communications.

These days I spend a lot of time talking with reporters about the changes in media and PR. There is a tremendous amount of innovation happening in media communications: Twitter, Friendfeed, Facebook, etc, represent just a tip of an iceberg, a tip that barely existed a year ago, what will be there next year?

And that's what's great about all of this innovation in media communications, that we are in the midst of it, and that we get to help create the future. We get to make the mistakes, and we get to discover and create things that no one has ever done before. It's like making fresh footprints in the snow. It's not often that we get to do that.

It seems as if it doesn't matter how old you are, kids or grownups and beyond, everyone is complaining they are having trouble focusing on tasks, and that they are constantly distracted.

I remember when MTV launched in 1981. The music videos were a big hit at the time, they were imaginative and innovative -- it was very compelling content. But there were concerns that the fast edits, combined with the seductive imagery of the music world, would shorten the attention span of viewers, especially kids. There was talk of an "MTV attention span" syndrome.

However, today I know people that would kill to have the breadth of an MTV attention span. In this world where worlds of compelling content are just a click away, it's like being in a garden of Eden and feasting on every type of fruit, a cornucopia of amazing content and knowledge. And it is all available in any format you want, at anytime, and in anyplace.

The death rattle of the newspaper industry makes it seem as if media is dying, yet there is more media being created today than at any other time in human history.

Plus, there is more compelling content today than at any other time. And it has never been easier to find because our social networks constantly tip us off on Twitter, Facebook, Friendfeed, email, sms, blogs, phone, and when we get together to talk. We are all sharing (and creating) massive amounts of compelling content, all the time.

The problem with compelling content is that it's compelling. That's why we now all seem to have the attention span of a gnat.

I've been thinking about this question for a while: In a world of compelling content what do you do? How do you deal with the distraction of its easy reach and abundance?

I have a suggestion. I'd love to hear yours, please send to tom(at)foremski.com or leave a comment.

CES in Las Vegas was made more tolerable because of the good company of fellow journalist blogger Paul Mooney. One late night we were discussing the media industry, an occasional favorite topic of mine.

We were discussing how the economic situation was going to accelerate the broad disruptive trend within the media industry.

Less advertising would lead to a faster rate of job losses, and lower revenues for most, if not all media companies, and that also includes many newer media companies, Gawker Media for example. Simply put, it's not a good time to be in media--mainstream or newstream.

More recently, the Wall Street Journal cut 25 newsroom jobs.

Here is part of a memo to staff from Robert Thomson, Managing Editor of the Wall Street Journal:

It is obvious to you all that we are in the midst of an unprecedented economic downturn. We are also in the midst of an unprecedented increase in our readership, in print and online, but a precipitous decline in print advertising revenue has forced a close examination of our structures and of our costs.

It points to a curious anomaly within news organizations, that readership is often rising but revenues are falling.

And the reason is that advertising is less expensive online but news creation costs remain the same. The cost of being in the news business isn't being covered by online advertising revenues.

Media companies such as Google and Yahoo can sell online advertising at low rates and cover their costs but Wall Street Journal and other news organizations cannot survive without shrinking their productive resources, which can create a downward spiral of less content, and less revenue.

When journalists lose their jobs it's tough because they also lose their publishing platform. They lose their byline, they disappear from public view, and that makes it more difficult finding a job. And even when better economic times return, the majority of journalism jobs won't ever return.

In Las Vegas, Paul Mooney and I were thinking that we are in a better position than many of our colleagues in the media because we don't have far to fall. As long as we can keep the lights on, and maintain an Internet connection, we can still keep publishing during bad times, and worsening times. If you lose your job at a news organization you lose your public persona--a journalist that isn't publishing isn't.

We joked that we represent a new type of media: cockroach media. Paul is from New York where cockroaches can be formidable in their ability to survive the harshest environments. He says, "I've given cockroaches some of my best hits and they still manage to crawl away."

Cockroach media will survive this economic downturn a lot better than old and new media companies. And cockroach media should do well once the inevitable upturn comes around.

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Cockroach media:

Paul Mooney Living, Linking and Learning

I don't like chain letters but I like the tone of this chain: Writing 25 random things about yourself and then "tagging" 25 others to invite them to do the same. I got tagged this morning . . .

(If you read this consider yourself tagged :-) send me a link and I'll add the first 25 to the bottom of this post, I'd love to find out more about my readers. Don't be shy.)

1: I was born in Salzburg, Austria, left after 6 months.

2: My parents are Polish.

3: My parents wanted to emigrate to Canada but couldn't because I was under 2 years old.

4: I had whooping cough as a baby. There is a saying that to cure it you have to cross over a body of water, in this case the English Channel seemed to do the trick.

5: I really miss not living with my kids.

6: I like Hugo Boss suits.

7: I think of myself as semi-literate.

8: I like to notice irony and believe "ironic design" proves the hand of the supreme being more than "intelligent design." Because there is someone/something paying attention, moment to moment, and trying to mess with us. Intelligent design is more about "set it and forget it."

9: I'm an atheist.

10: I'd like reason and logic to make a comeback, I'd like to see a new enlightenment.

11: I try not to think too much, instead, allow myself the space to think.

12: I keep a pen and a slim moleskine notebook always on hand - it's my hipster PDA - it's instant on, high definition, stylus input, sharable, and 100% recyclable.

13: I prefer offline to online.

14: I've never had a wine cooler and want to keep it that way.

15: I don't know how to small talk.

16: I am afraid of karaoke. I can't carry a tune even if it were super-glued to me.

17: I like thinking on my toes.

18: I like "and" rather than "or." The world is not black or white it is black and white and more.

19: I like to have my cake and eat it.

20: The more I write the more authentic I become.

21: I like Manhattans.

22: I like Manhattan.

23: I like road trips.

24: I'm intensely interested in the future of media.

25: I prefer conversation more than going to the movies.

The global economic crisis doesn't seem to be showing any rays of light, which is quite worrying. But at least there is some good green news from the economic slowdown:

- Factories around the world have scaled back production and are not polluting air and groundwater as much as before.

- We have fewer trucks and ships polluting the atmosphere.

- We have a much smaller carbon footprint worldwide because there is far less use of fossil fuels in manufacture and transportation.

- We are buying fewer replacements for goods we own and making them last longer, lightening the load on landfills.

- We are using less of the earth's limited resources in manufacturing goods and providing various services.

- Fewer of us are traveling to jobs which reduces carbon footprint and pollution.

- Less pollution improves people's health and saves lives.

- More importantly: We are more likely to develop and adopt technologies that are more cost efficient, which means saving resources and energy. And this is where Silicon Valley's companies have a key role, developing disruptive technologies that replace the more wasteful processes that are currently used in many industries. It will lead to the creation of new rules enterprises--businesses that are greener and more profitable.

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Please see: As the economy slumps, so does trash - Los Angeles Times

I couldn't agree more with the following essay on the current economic crisis from David Roche, submitted to the ACTA Open dialogue: Using public debt to fund private debt delays the inevitable and could extend the economic recession.

There is too much comparison of the current situation with the period of the Great Depression and the Japanese economic problems of the 1990s. Mr Roche states that "We have created our own very serious, but quite unique, mess."

Using public debt to prevent deflation of assets will extend the current crisis. A better approach:

. . .forcing the banks to write down their assets to market and take the hit to shareholder capital before recapitalization begins. Without this, there is no way of knowing how much capital is needed and no telling which institutions are solvent or distinguishing between good and bad banks.

In the US, about 90 per cent of all the measures to deal with the credit crisis aim to prevent asset prices falling to market levels, at which they would clear. The balance sheets of borrowers and creditors will remain encumbered by dud assets and liabilities, slowing the resumption of credit expansion and risking stagnation of the process of intermediation between saving and investment.

It is a hard pill to swallow but it must be swallowed if we are to reset our economy.

Also, I continue to be amazed at all the economic experts that come up with bailout packages of one kind or another. It seems clear to me that none of them, including our chief regulator, Alan Greenspan, have a good grasp of how the economy functions\. Mr Greenspan's recent visit to Washington was astounding, he admitted that there was a serious flaw in his understanding of financial markets! For forty years he and his staff "regulated" the US economy based on faulty assumptions!

YouTube - I Was Wrong! Alan Greenspan

Since no one really knows how things work the best thing to do is to let the economy correct itself without interference.

That means we write down the inflated assets, and take the bitter pills, and let the economy unwind its huge leverage, and then we can clearly see where the economic stimulus packages can be applied. Trying to fix things based on assumptions can only make things worse, imho.

Here is the full essay Thrift is the Future: Interventions will only Prolong the Credit Crisis by David Roche:

DK Matai, chairman of the ATCA Open has written a terrific essay about how global shipping has come to a halt because of the lack of letters of credit.

Just five months ago it cost about $234,000 to rent a 170,000 tonne Capesize bulk carrier. That priced has collapsed 98 per cent to less than $5,000!

That means that globalization has come to a screeching halt. Read more:

The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?

By DK Matai

Freight shipping prices for transporting dry raw materials have collapsed in November 2008. The Great Unwind is like a Tsunami that is engulfing and halting the shipping world at an accelerating rate. The Baltic Dry Index sounds like a weather report, but what it really does is track the price of shipping bulk cargo -- such as coal, iron ore, cotton and grain. Recently, the Baltic Dry Index has fallen through the floor. It has slumped by nearly 95% over the past five months. In real dollar terms, at the peak of the market in June, a 170,000-tonne Capesize bulk carrier cost USD 233,988 to rent. Recently, it was available for USD 4,793 - that is a crash of 98% and is below the cost of paying for crew, insurance, maintenance and lubricants. Why?

1. Of the USD 13.6 trillion of goods and materials traded worldwide per annum, 90% rely on letters of credit or related forms of financing and guarantees such as trade credit insurance. International shipping works on "letters of credit." These financial guarantees are issued to buyers of bulk cargo by their banks. This system has greased the wheels of global trade for the last 400 years by transferring payments internationally from buyer to seller once shipments have been delivered. With the collapse of the credit market - and banks now sitting on their hands, refusing to lend - the fast-moving wheels of global shipping have come close to halt.

2. There is a collapsing demand for credit driven expensive product purchases like cars and as a consequence, the transport of associated raw materials and sub-assemblies. Auto sales are falling in double digit percentages across most of the G7, ie, the US, Japan, Germany, UK, France, Italy and Canada. The pace of car sales growth is slowing down across most of the remaining G20 nations as well, including China and India.

This is a massive disruption in the freight market with asymmetric consequences for world trade, which poses systemic risk for many nation states. Liquidity has to return because if there is insufficient money to provide standard finance, world trade is being sharply cut back and economic growth is not only stalling but likely to implode. If cargo trade stops, a whole lot of supply chain disruptions start. For example, if the iron ore does not go to the refinery, there is no plate steel. If the plate steel does not get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers cannot buy. If the consumers cannot buy, there can be no sales!

On a more sobering note, if bulk shippers cannot buy cargoes, then a lot of US and world grain could end up rotting in warehouses while big portions of the world go hungry. For example, the Saudis are the biggest importers of food in the Middle East. They probably have the money to pay cash for their food shipments and may not therefore need letters of credit. But for the approximately 2.7 billion people in the world who spend 80% of their income on food, a disruption in the global shipping trade could mean the difference between quiet poverty and going hungry day-in, day-out. That will not last for long before there is social disorder on a massive scale.

The Baltic Exchange based in London is the world's leading maritime marketplace. Their dry index, a measure of shipping costs across different ship sizes, hit a record high of 11,793 points in May but has since fallen by 93% to 815 points last week. The UN Conference on Trade and Development (UNCTAD) has said that the financial crisis had begun to affect international trade, noting sharp falls to key shipping indices. Much lower shipping costs mean national markets are more contestable by foreigners, which should limit the ability of domestic firms to raise prices and therefore this should reduce the possibility of inflation. We can safely conclude that the majority of The Great Unwind's forces moving through the markets now seem to be deflationary, and not inflationary.

The ravaged worldwide demand for cargo ships is due to the chronic global financial crisis affecting credit availability, an unprecedented synchronised economic downturn across most of the major national economies in the world caused by massive demand destruction, and the resultant collapse in commodity prices. At the same time, container rates in the Asia-Europe routes have plummeted by around 75% this year and a price war between companies seems to be driving rates lower and lower, destroying the profitability of container shipping and placing huge stresses on companies struggling to meet their commitments. A significant component of the dramatic decline in shipping indices has been due to the difficulty in arranging trade finance during the credit crunch. Demand has been slashed because the global credit squeeze has made it very difficult for buyers to attract funding. At the same time, perceived counter-party risk in the physical markets has slowed trading to a trickle, exacerbating the freight slide. Many big players involved in the shipping of dry commodities and goods cargo are unwilling to trade with some parties fearful of their financial footing. There are big chains of owners of the chartered ships in the supply chain, so if someone goes bankrupt half way through the chain, it has a knock-on domino effect for everybody else. Another problem is that there are quite a significant number of players walking away from cargoes at present. So anyone who has taken cargoes to hedge the vessels they have chartered is now finding themselves with the ship without the cargo to carry.

ArcelorMittal, the world's biggest steelmaker, on November 5th said its global output will decline by more than 30 percent. Cia Vale do Rio Doce, the world's biggest iron-ore producer, said last month that it will cut production.The fall in demand for many raw materials, which began at the beginning of June, first squeezed the profit margins of producers since they faced fixed high raw material costs and falling prices for their finished products. This was followed shortly by a squeeze of freight costs as they tried to pass the pressure from the profit margins to the freight market. One could be forgiven for not noticing what the world has experienced in recent years by way of an unprecedented growth in shipping and shipbuilding, fuelled by cheap imports from Asia and the seemingly unstoppable rise of economies such as China and India with their insatiable demand for raw materials. For some time charter rates went through the roof and reached a zenith in May/June this year and demand for new ships out-stripped supply. A different picture is now emerging. Companies are starting to struggle with too many ships chasing ever decreasing rates.

This slump not only means a fall in revenues but also less revenues to service debts. In turn, the current 'credit crunch' means extreme difficulties for struggling shipping companies seeking to raise capital. UNCTAD revealed in its annual maritime transport review that the world's merchant fleet had expanded to a record 1.12 billion deadweight tons, with the order book for new vessels reaching a peak of 10,053 ships in 2008. However, from mid-2008, companies were cancelling new ships on order, even when they were losing their 10% deposit in tens of millions of dollars. Mitsui OSK Lines (MOL), Japan's largest bulk shipping company is said to be considering laying-up and even scrapping vessels as revenues collapse. MOL may mothball some of its largest vessels. The company is considering scrapping seven of its Capesize dry bulk ships from its fleet of a 100 vessels. This suggests that MOL may be getting ready for a protracted down turn lasting several years. Reports are already filtering through of companies seeking sheltered waters to lay up their giant vessels to weather the financial storm. Just as in the days following the oil crisis in 1973, we could see the same happening with the great lumbering bulkers and container vessels, which now seem less and less attractive as they ply the waters with their great bellies less than full. In the space of less than half a year we have seen the shipping world ride the crest of a massive globalisation expansionary wave and then plunge into a financial storm that could sweep most vessels off our oceans, and with them, companies who cannot weather the crisis caused by The Great Unwind.

We welcome your thoughts, observations and views. To reflect further on this, please respond within Facebook's ATCA Open discussion board.

Best wishes

DK Matai

Chairman, ATCA Open

DK Matai, chairman of the ATCA Open writes an interesting essay on how this financial crisis will play out in the following article titled: The Four Scenarios: Debt Deflation, Hyperinflation, Quadrillion Play and Muddle Through.

The "Four Scenarios" brings to mind the "Four Horsemen" as a metaphor for describing these extraordinary times.

It's an interesting essay. I love the imagery of scenario #3 and that is my pick because governments think they have control but they do not and thus will continually put markets out of balance. And the road to hell is paved with good intentions.

IMHO, the thing to do is to let it all play itself out, since no one can understand the complexity of today's global markets.

[BTW, the third horseman rides a black horse and represents famine and carries a scale. Scarcity and judgement?!]

The Four Scenarios: Debt Deflation, Hyperinflation, Quadrillion Play and Muddle Through.

By DK Matai

From the vantage point of November 15th, 2008, whilst the Washington, DC, summit is underway amongst the leaders of the G20 nations, it would appear that there are four distinct global economic scenarios that may unfold towards the tail end of this year, 2009 and 2010:

Scenario 1: Debt Deflation

Most product, service and asset prices keep falling and the vicious circle of deleveraging causes many businesses, factories and support sectors to shut down. This in turn causes rising and out of control unemployment and falling living standards quarter-in, quarter-out with a severe and ongoing headache for some governments to provide stimulus in the face of declining revenues. This is a similar scenario to the US in the 1930s post the 1929 Wall Street crash.

Scenario 2: Hyperinflation

Some governments print money to try to stave off a recession / depression and end up stoking large scale inflation in a similar way to the Weimar Republic in Germany around 1923 post the first world war's conclusion in 1919. Hyperinflation is the flip side of currency collapse, which then leads to multiple domestic and trans-national black swans.

Scenario 3: Quadrillion Play

The invisible one Quadrillion dollar derivatives equation underpinning the hundred trillion dollar plus debt pyramid manifest as "Eight Bubbles" (Ref: ATCA briefings) continues to experience trillion dollar black holes in which capital on the balance sheet vaporises without warning, month-in month-out. Governments via central banks try to hyper inflate and levitate the system by pumping trillions of dollars of liquidity into the system. The net impact is manifest via two opposite north and south directional vectors -- hyperinflation and deflation. The two vectors collide continuously to create several vortices as the markets change direction nearly every day exhibiting high volatility. The consequence of being caught up in the resultant eddy currents of those vortices is that some asset classes levitate and give the impression of rising, albeit temporarily, and other asset classes fall or simply cease to exist as their underlying asset-base vaporises within the gravitational pull of the nascent financial black holes.

Scenario 4: Muddle Through

Given that fiscal stimulus is one component of GDP over which there is direct policy control, the muddle through is another possible scenario. However, government spending is always far too slow and occurs at some point in the future so we can expect a lunge towards cutting taxes or offering tax holidays, which is the high velocity component. The massive public sector borrowing requirement may have an adverse impact by way of currency devaluation. There is some probability that the governments' massive stimulus packages and central banks' interventions, after a while of uncertainty in the minds of people, act as a partial, deferred offset to the ongoing global financial system deleverage. Then markets may revive, although some of the eight bubbles are only partially deflated. Life goes on in a new muddled way as new and larger bubbles are created. Politicians stop panicking and get re-elected and a new bigger set of bubbles prepare themselves for collapse a few years later, say, 2015 or 2020. This is similar to the scenario post the dotcom and 9/11 crashes in 2000-2001 and the muddle through which occurred until 2007 on the back of extremely low interest rates, credit card, car and housing loans and the other eight bubbles. There is, however, one caveat. Countries without reserve currencies -- of which there are really only two -- and in particular those with with large financial sectors given the base of their GDP, can practically prime the pump only in a very limited way and in doing so risk moving from a banking crisis via a currency crisis on to sovereign default. That would mean expectations from fiscal stimulus are far too high, and not all countries would be able to muddle through.

Conclusions

Take a look at this study. OK, it is a small sample size, but ask yourself: do you search the Internet based on brand? Do you believe that GOOG has the best search results?

It seems that some people do...and maybe it is more than some.

I believe that GOOG has the best results, that's why I use it. But I don't know for sure. GOOG doesn't publish its algorithm so I don't know if it is making the best choices for me, I trust in the brand.

Study: Good Brand Can Make Search Seem More Relevant

The study showed that when a searcher was given an identical result set across Google, Yahoo, Windows Live Search and an in house search engine, Google and Yahoo came out as more relevant. Why? Because of the brand of the search engine. Despite the results pages being identical in content and presentation, participants indicated that Yahoo! and Google outperformed MSN Live Search and the in-house search engine.

If this is the case, that we are influenced by brand more than we are willing to admit, then the search market is wide open to some of the biggest brands in the mediasphere: Apple, Virgin, Coca-Cola, Gucci etc. Why not?

I remember that it used to be quite common to switch to the newest, hottest search engine. Infoseek, Excite, Hotbot, AltaVista, etc. Loyalty was easily compromised, new search was always just a click away.

GOOG has done very well in brand management. But, I have no way of telling that Google is better. There is no objective way to measure search engine performance. There are only subjective studies out there.

Search has become a commodity. There is no right answer to any single search query, multiple answers can be produced. Why not a Hugo Boss slant or an Apple slant to my search results?

So, how will GOOG stay ahead?

I have an answer...

- - -

Please see: Part 1: Is Apple About To Launch Apple Search?

The business of the Long Tail is the concept that there is money to be made in services and products with a potential market of just a few people.

We can see Internet companies exploiting such micro-markets everywhere, well before the concept was popularized by Chris Anderson, editor of Wired magazine in October 2004.

We see it in Amazon and Ebay, they host the many millions of small markets that are interested in obscure books or collectabilia.

We see it in Google, which monetizes interest in the most obscure parts of its index. We see it in MySpace and Facebook, which seek to monetize markets that can consist of many thousands of "friends" but are mostly groups of just a few dozen people.

The trick to success is to have as many Long Tail markets as possible. Each micro-market generates micro-profits therefore the more the better.

Selling free content...

If you can get that Long Tail content for free, that's the best kind because producing content is expensive. For example, Flickr, a Yahoo company, hosts people's photos for free. In exchange for free hosting it sells advertising around the photos.

Users come back to visit their photos, and they also share them with friends, and sometimes complete strangers are attracted to the photos too. That's a lot of free traffic and you can make money from traffic.

YouTube hosts people's videos for free and in exchange it sells advertising around that content. Again, as in the Flickr example, users created the content, and brought traffic to that content, and YouTube monetized that traffic.

Not a bad business model and one copied many times over: user generated content comes with its own viral marketing, which equals free monetizable traffic. And user generated content can sometimes catch much larger viral traffic, such as LonelyGirl15, or a skateboarding dog.

Facebook viral marketing tools built-in...

MySpace and Facebook are examples of trying to grab even larger amounts of user generated content. On Facebook I can upload my videos, photos, blog posts, movie tastes, etc.

It also provides me with viral marketing tools through my news feed which automatically informs my friends of what I've done, "Tom uploaded photos, Tom wrote a blog post," etc.) I didn't have to email, or text, or twitter anyone at all, Facebook did it all automatically.

Again, it is the same type of business model: user generated content of all types, aided by automatic viral marketing tools, creates more monetizable traffic.

This is the business of the Long Tail, making money from tiny markets. And this has been the business of the Internet in one form or another, for two decades.

How much can be made from the traffic to my YouTube videos? Not much. How much money can be made from traffic to my Flickr photos? Not much. But aggregate many millions of such tiny long tail markets and you can make billions in revenues and hundreds of millions in profits.

Profits from free content...

It's not a bad business: you get the content created for free, and you get the traffic for free. It is like having a shop with many customers buying products you obtained for free. Your cost is the store rent and cashiers to take the money.

Another cost is the warehouse space. In the online world the warehouse is your data storage systems, which is far, far cheaper than physical warehouse space. Hosting digital content such as photos, blog posts, video, digital books, etc is extremely inexpensive. That is why Google, Amazon, MySpace, etc, are profitable - their costs of doing business are less than their revenues.

As long as user generated content keeps flooding in, it brings its own traffic, and that fuels the business.

-As long as people keep creating new online content, Google will index it (and store a copy) and make money from the traffic that seeks that content.

-As long as people create content for free, and upload videos to YouTube, or photos to Flickr, the same business dynamics apply. As user generated content increases, it leads to more traffic, which leads to more profits.

The burden of free...

What would happen if user generated content decreased? Clearly, it would lead to less traffic and lower profits.

What could lead to a decrease in the amount of user generated content?

Consider this scenario:

The cost of hosting the massive amount of long tail content, all the photos, video, etc is very small. As the amount of this content increases, the hosting costs rise.

As long as traffic also rises, the costs of business remain in balance with the rise in revenue.

But traffic growth is limited. There is a limited number of people in the world, there is a limited number of hours in a day. There are fundamental limits to the rate of growth of traffic.

But the amount of content collected by Google, Flickr, or YouTube, for example, grows much faster, and there is ever more of it that has to be stored and hosted. There is a legacy mountain of content and it's becoming a mountain range.

That means expanding your data storage systems, that means more power needed to drive those systems, it means administering the storage systems, which is people intensive, the data has to be made secure, the data has to be backed up. These are the exponential rising business costs of Long Tail economics.

As the number of long tail micro-markets increases, the less profitable each one becomes. This is because each long tail micro-market competes with an increasing number of other long tail micro markets.

More of any product or service means less revenue for that product or service. A current example: more housing on the market means a lower price for housing. Same thing applies in any market.

There is no way that increases in Internet traffic can keep pace with the growing number of long tail micro-markets.

The costs of hosting long tail micro-markets will continue to increase until they exceed the profits that can be made from them.

I was recently speaking with David Scott, CEO of 3PAR data storage systems, and he pointed out why 3PAR stays away from certain markets.

I might view a photo of my grandma, and that might be once a year or less. Yet that data still has to be hosted, secured, managed, and backed up. What is the business case for that photo? The cost of keeping that photo and others like it, will continually force companies to cut their storage costs and that will lead to them to storing the data themselves on cheap disk drives.

High traffic from skateboarding puppies, or Brittany Spears photos can subsidize hosting Mr Scott's grandma photos but that is only true for now.

At some point, businesses will be chocking on the costs of supporting the Long Tail of data that makes up their micro-markets. The costs of the Long Tail will twist tighter around the neck of profitability. What happens then?

Dump the grandma photos...

Companies have a fiduciary duty to their shareholders to maximize profits. They will have to dump the data, dump the grandma photos.

That means dumping the many links that users created to their content. The idea of permalinks, links that will remain rooted forever in the concrete of the Internet will become a fallacy.

Even though the online companies make no guarantee in their terms of service that users' content will be always available there is an implicit guarantee that user content will be always be there. When that implicit contract is broken users will be less willing to spend all that time uploading and tagging their content.

They'll be less willing to tell their friends about it, to post links to it, etc, because there is no guarantee it will be there next year or beyond.

That's the scenario that will dry up the flood of user generated content to online firms. And that is the great flaw in the business of the Long Tail.

Businesses making money from the economics of the Long Tail will be dragged under by mounting costs of maintaining Long Tail micro-markets.

Maybe this should be the title of my upcoming book: "The Unbearable Burden of the Long Tail - How Internet Commerce Will have to hack-off the Long Tail to Survive."

[Saturday Post is the name of a series of essays. This is the first in that series.]

Please also see:

Long Tail Economics - Bonanza or Bogus

Have we misinterpreted the business value of the long tail?