Balancing the budget

Balancing the budget, or at least lowering the growth of the current deficit, may be a way to signal a change in our national priorities. Doing so would not only appeal to fiscal conservatives but also work as an example to everyone in the country that the days of financing through debt are over. Sending such a strong signal would ensure larger support for some of the programs that are truly needed in terms of restoring the country’s infrastructure and ensuring that every American has access to education and healthcare resources.

The first item would probably be a repeal of the tax cuts enacted in 2001 and 2003. Such financial leger de main didn’t make sense then and it still doesn’t. Repealing those cuts would put anywhere from US$200 to US$300 billions back into the government coffers, which goes some way towards solving the budget deficit gap.

An order asking for a two percent across the board cut for all 2009 discretionary spendings would add about $240 billion in funds, helping handle the rest of the deficit (except for TARP)  and allowing the country to get closer to a balanced budget. The total budget would still represent an increase from the 2008 budget, just not as large a one. Making the cuts mandatory across the board would ensure that the pain is evenly spread and not based on any ideological directives.

Retiring the debt?

Another big question that could be considered would be around what to do with our national debt. Before TARP, interest on the national debt for 2009 were considered to be around US$260 billion. To put this in context, it’s more than what we spend on Medicaid yearly (US$215 billion); or 63 percent of what we spend on Medicare (US$409 billion); or 40 percent of what we spend on social security (US$644 billion); or a bit over 8 percent of the national budget… and that’s just the interest.

Not only that but today, for every US$100 the US government currently spends, it borrows US$14. That’s pretty scary because that money doesn’t come for free and that means that our interest payments will continue to increase over time.

So one could ask whether retiring some of that debt through accelerated payment might be a way to help create a surplus in the future. Since the debt will be crushing on future generations, why not take the hit now and find ways to use some of today’s entitlements as ways to offset those extra payment. For example, if we were to pull out of Iraq, we probably would end up with US$50 to US$100 billion in spendings that are no longer necessary. Assuming we had balanced the budget by other means, could we look at investing that money into retiring our national debt. The premise is the same as that of repaying a little more on your mortgage every month: if you did that, you might shaves years of interest on the back end. In the case of the country, that could means trillions of dollars that could be reinvesting in the country.

Encouraging Investment

Our current infrastructure is crumbling. Whether it is roads, bridges, railroads, or the electric grid, we are dealing wht a 20th century architecture that is not suited for our 21st century needs. For example, one of the biggest holdups in getting cleaner energy in the country is that the electric grid is not built in a fashion that would allow routing energy from low population areas to heavily populated one. Rebuilding the grid to solve that problem would cost about US$60 billion over several years. But here’s an interesting tidbit: that rebuilding could be done by the private enterprises that currently run the grid. The challenge would be in getting different states to agree to play together on setting common rules for building it out, coupled with some possible tax cuts to offset the initial investment costs. Something similar to the tax abatment on internet retail could be put in place around energy to stimulate, for somewhere around 4–5 years, the investment into new infrastructures through some form of private-public partnership.

Also in the public private partnership side would be the creation of a national service program allowing students to go to college for free in exchange for doing national service. The program would take the form of up to 4 years of college tuition paid for in exchange for up to 6 years of working for the country (The program would be sliced in one year increments, with tuition for one year being paid in exchange for 18 months of service). That service could take the shape of work as a government employee either at the state or federal level. Initially, the program would only be available for education through public universities. Private universities who are match the difference between the cost of a public offering and their own cost would later be added to the program, which might help curtail the rise in the cost of education. Service would be compulsory for anyone who has taken a government grant but there would be an opt-out clause that would allow someone to repay the loan in full, with interest, in their first year out of college, allowing them to join the private sector after that.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Federal Budget 2010. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

It seems every time Apple or Google introduces a new product, the buzz is high. For example, Apple recently introduced a $350 speaker and, while the reaction was more tepid than it has been for other Apple products, no one seem to point that the emperor was looking very very naked. Yet, Microsoft keeps throwing out new products and few people seem to be very interested (no matter how Scoble tries to browbeat us into thinking of Microsoft as cool).

Similarly, today, Google introduced a finance section that mimicked much of what yahoo! finance has been doing for years. It has a couple of nice AJAX-based features but, all and all, it’s not enough of an improvement to be considered like something that could potentially dominate the tech news cycle. And yet, every major tech pub or mainstream publication has covered the release.

why?

Trying to divine the source of coolness

What Google and Apple seem to have understood is that there are ways to make oneself look cool. I’m going to try to lay out some of the things I’ve seen (and I hope that others will chime in in the comments):

Rumor Mill

First, let the rumors float or give the appearance that you don’t want rumors spreading. Google Finance has long been a rumored product (as is Google payment, for example) but no word ever came out of the company about their intentions. In fact, Google is relatively stingy in terms of providing advance information about their products. They have learned to let the rumors run wild, leaving their competitors tearing their hair out trying to divine what Google will do next.

Apple takes a different approach to this. In the past, the company has been relatively ruthless in its attempts to shut leaks down. However, it seems that, when leaks are presenting compelling products and the company doesn’t really have anything to announce, Apple is happy to let the rumor mill run wild. So, before the release of the iSpeaker, uh, iPod Hi-Fi, Apple did not crack down on rumors about a new video iPod.

The two approaches speak to two different traits: one is to be extremely secretive about your action and the other is to let rumors go wild as long as they paint a picture of your company that is far cheerier than its reality.

The one feature

When selling technology, there are two publics to serve: the early adopters, and the general public. The early adopters are a fickle bunch but they can have some influence on the general public. So giving the early adopters one feature that they will like is an important feature of creating good buzz. Similarly, when dealing with the general public, emphasize the one feature that makes your product different. It doesn’t have to be something that is actually innovative (many companies were making MP3 players years before the iPod; many companies have offered services (other than search) which did what Google did in categories like mail, web hosting, classified, news, etc..) but it has to be presented as such. The early adopters may groan but they are eventually drowned out by the masses.

Thus, Apple did not release a featureless MP3 players without a screen, they released the “Shuffle” which allowed people to get a little more randomness out of their music collection. Or Apple didn’t release a $350 speaker, they release a Hi-Fi system that will work with an iPod (iPod sold separately). Similarly, Google did not release a Geocities rethread, they released pages, a cool online web editor and page hosting service. They did not release a me-too version of finance: look at the cool graphs they have.

I may sound a little cynical in that last paragraph but I believe it is this kind of cynicism that infuses the marketing of cool products. They may not be the top technology in the market but they are different. And emphasizing that they are different gives a chance to the users to feel like they, too, are different.

Cool by association

The next item on the list, in terms of generating buzz is to create an appearance of exclusivity from the get-go. Thus Apple does not complain too much when the police report rise in theft of iPod, due to the high visibility of the white headphones (see, our product is so popular, people steal it). Similarly, Google did not offer a free web-mail service for all, you had to receive an invitation.

By creating a certain level of exclusivity or belonging to a certain tribe, Apple and Google have managed to go beyond the product. They’ve created an aura of cool in being associated with them. When a new product comes out, you have to check it out or you will be out of the loop. The trend folds on itself, ensuring that future product launches benefit from the buzz of previous product launches. Over times, the duds are forgotten, and the companies are seen as innovative.

Look! Feel!

One of the other things to consider, when creating some level of buzz is the fizz and whiz of look and feel. Apple is known for designing beautiful computers (in the mainstream PC world, only Sony puts as much thought into how their computers look). The energy they put into the design allows them to bypass some of the technology issues that other vendors would encounter.

Similarly, Google has become an expert at using AJAx for their interfaces. As a result, new products generally look more polished than the competition. In the case of Finance application, it was interesting to see comments by people in the financial space on the performance of the product in terms of delays giving stock quote prices, etc.. However, few users would drill in and discover that stock prices were about 20–25 behind, or that

What value does buzz have?

At the end of the day, though, much remains to be seen about the value of such buzz. While Apple generates a lot of buzz about its computers, it still only retains between 5 and 10 percent of the market. Similarly, while Google has generated much buzz for all its new products, its bread and butter is still revenue from advertising on the search engine. So the question that still needs to be considered is whether buzz has value beyond the introduction of a new product and what that value translates to in terms of real dollars.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Building Buzz. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

5. Little attention to infrastructure problems

During a bubble, attention to boring details like capacity planning, infrastructure management, security, etc… sometimes take a back seat to new feature introduction. Those, however, are a substantial portion of what makes a company survive. One can try to sell a product to hundreds of people but what happens when thousands show up? At that point, much energy must be devoted to rethinking and rebuilding the platform while it is running, generally at a higher cost than would have been required if planning had been done properly.

When features take precedence over infrastructure, you’re dealing with a clear sign of failure down the road. This may not kill a company outright but, when the bubble burst, the ones who have not paid enough attention to such things are generally among the first to go as they find themselves in the difficult position of needing capital outlay when money becomes more scarce.

Signs of such failures can show up early and should be monitored by management: they generally include things like slow response times, users getting restless, and outages that generally can be seen as too long.

4. Poster child can do no wrong

At the bottom of the list is the belief that the poster child for a particular bubble can do no wrong. This is generally a feeling that starts within a company, as it starts believing its own slogans and press. As the bubble starts to inflate, the poster child traditionally starts receiving more coverage from the mainstream media and being presented as a new type of company that can do no wrong. Through telling perks (Aeron chairs in the 90s, Free food and time for personal project in Web 2.0, concierge service in the housing bubble), the mainstream media start showing an image of the ideal in that new bubble world.

Things generally start taking a turn for the worst when a portion of the public starts looking at that poster child and questioning some of its practices (“Can you build a business around selling pet supplies?”, “Does this search company have access to too much personal information?”, etc…)

3. Features and me-too solutions

During a bubble, some features are often sold as the whole package (“This apartment has sub-zero appliances”, “We’re building a business around the concept of giving everything for free. When we have lots of people, we’ll monetize our audience”) The problem with such approach is that it builds packages (companies or other portion of a bubble) which are essentially one trick ponies. If that one trick starts failing (tastes change, a competitor starts offering a better version of it, or the underlying fundamentals are wrong), the business is in danger.

In technology bubbles in particular, companies are built to flip (although, looking at some of the new apartment construction in New York city, one might say that the same is true in real estate). This works as long as the founders and initial investors can sell out quickly enough. Most of the people who make money during a bubble phase are the people who manage to flip things quickly enough or try to go the other, less travelled and much longer, route of trying to build a business around strong fundamentals.

However, another element of a bubble is when second generation built-to-flip companies enter the market. Those are not even presenting new models, they are just reproducing the model of a company that manage to sell out in the initial phase of the bubble. Generally, you’ll hear them say things like “we’re the [insert first generation built-to-flip company that was sold at a huge premium] of [insert whatever area the second generation built to flip company is going after].” Those companies are generally the most endangered ones as their proposition is based purely on the fact that the model they’re copying worked once as a potential sale.

2. Money, money, money

Valuations, revenue models and metrics fall in this category.

Valuations of companies out of line with their earnings can represent one of two potential trends: either the companies are too young to evaluate and the initial start-up cost were high, requiring a higher valuation to enter a marketplace; or the company is grossly overvalued and we’re in a bubble. In the first case, the investors are smart and realize that the business will generate solid revenues in the future that justify the initial investment. This is generally based on more conservative projections that show returns in the mid to long term. In the latter case, the issue often arises as a result of investment money being so readily available with so few deals to chase that investors are willing to pay a premium to get in on a company. This is a very dangerous thing as it leads potential investors to drop money in a company that may not have solid fundamentals.

Among some of those fundamentals are things like what the revenue model of a company is. Words like “Let’s build it and we’ll figure out how to generate revenue from it down the line” are dangerous. An unclear business model rarely gets clearer as time goes on and, if the company does not offer a solution that can be easily monetized, its chances for success are slim. Running a company is generally a difficult endeavor and running a start-up is even more difficult as smaller companies can easily be trampled by giants. Having no revenue goal in mind at the onset is generally a pretty bad proposition. If you look at companies that have weathered a bubble and burst cycle, it is generally because they were focused on meeting some revenue targets. Companies that did not generally disappear when the bubble bursts.

A dangerous item in this area is the concept of using things other than revenues to calculate the value of a company. I was surprised recently when my analysis of the cost of a link (which was supposed to be more of a humor piece) became the talk of the blogosphere, with many people looking at it as the new metric for valuing blog (next time, I’ll post a big fat disclaimer at the top of the article instead of burying it in the conclusion). When items like links, traffic, eyeballs (square footage, river views, number of trees, etc.. in real estate) or something else become more important than revenue, a company may be in trouble and an industry may be experiencing a bubble.

1. “The rules are different now”

And for my number one is the simple belief that the rules are different now. I’ve been guilty of saying it in the 90s and it makes me cringe when I hear people say it about the real estate market. The rules may be different but the fundamentals of the business world seldom change.

Delivering a product/service to your customers at a fair price does not change. Making a profit on what you’re selling does not change.
Having to pay suppliers and employees does not change.
Having to deal with competitors does not change.

Add to this last one that larger players also generally have an advantage in that they already have revenue sources to fund their own effort ( and words like “The larger players are dead” do not change it. To the contrary, it helps them notice that they need to change something or deal with an issue).

Conclusions

So there you have it, my top 5 signs you’re in a bubble. I may be off here and there but at this time, having thought about it, it’s what I think one should consider when evaluating a bubble. Some of those signs may be showing up in the industry (still need to work out the mapping) and some may be way off.

What are other signs that should be considered? Post them in the discussion thread and let’s see if we can set up a way to evaluate bubbles before they burst and help them ease into softer landings.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Signs of a Bubble. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

I will now go into each of these concepts, providing examples for each of them but it is necessary to give a quick overview of the concepts before looking into how they apply to the approach and why you should consider adopting them.

Standards

When I first unveiled the modular by design concept, I didn’t think of this critical component. The idea was brought forth to me in one of the many discussions that ensued but it does make sense. A modular by design model should really be based on a common standard. The reason for this is that the basic precept of an aggregated model is lock-in through proprietary standards. The antidote to that is adoption of open standards.

Focus

Because modular units are small, they are generally much more focused than larger aggregated ones. However, because they are small, they must conserve energy and focus on the critical mission they want to accomplish. This forces them to get rid of any other distraction and focus on their core competency. Doing so is the only way they can truly survive.

Independence

Because they are relatively small, modular units are generally more independent. However, that independence only goes as far as the basic issue they are focused on. Much like any other organic structure, modular units have inter-dependency on other members of a complex system to fully accomplish their task.

Flexibility

It’s been said that “there are no monuments to great committees.” Large aggregated models generally have less flexibility in the decision-making process because they have to get the buy from all the parts they are aggregated to. Because modular units are generally focus on solving a single problem and work as part of a wider network but are given independence within the network, they tend to be much more flexible in terms of adapting to changing market conditions.

Speed

The success of modular units can often be attributed to their velocity. In a modular world, only the strongest unit survives. As a result, a modular unit is always running at full-bore, trying to take advantage of the limited lead it has over competing concepts, models, or product. This can be considered as the live fast or die model.

Communication

Because they are forced into high velocity, and because they are generally focused on a single issue, modular unit need to be in constant communication with other modular units in order to create and destroy aggregated models. For example, a modular by design company could be relying on a number of other companies to help it bring its product to market, and could even be working with its competitors in order to push forward a new idea, standard, or product line. At the same time, a modular unit needs to stay on top of what the rest of the world is doing in order to stay ahead.

Stealth

While it does communicate heavily, a modular by design unit is generally hidden from the mainstream. This is largely because its concept is generally not mainstream during the initial phase, and then keeps moving and morphing over time. As a result, a modular unit is generally relatively hard to pin down. Amorphous by nature, the modular by design approach means that a module has already moved on by the time someone has enough information to pin it down.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Modular by Design — How it works. You can follow him on twitter here or receive his weekly newsletter by subscribing here.