A tale of two Wall Streets

As many TNL.net readers know, I’ve been walking across two different worlds for most of the last decade: on the one hand, I’ve been working on trying to get people in the financial world to act more like startups, and on the other I’ve been helping startups understand some of the difference between wall street and the financial world.

However, it wasn’t until the 2008 crisis that I fully understood where I was wrong about my message: people outside of the financial world look at it as a single industry but there are a lot of different components to it and I would group them into two wide categories: speculative Wall Street and plumbing Wall Street.

The speculative Wall Street is the one everyone is currently mad at. Their job is to build tools that mostly make more money out of existing money and the world they live in is seldom overlapping with main street. It is a world of derivatives, stocks, and mergers and acquisition. It is a world where fortunes can be made in a very short time and value can be destroyed almost as instantly; a world where appearances and proper marketing are an important part of a product’s success.

Plumbing Wall Street, on the other hand, is touching everyone’s life several times a day. It’s a world no one really thinks of or hears about and its main goal is to ensure that money and credit still roll around properly. Plumbing Wall Street is who people face out to when they take money out of an ATM, pay with a credit card, write a check, or received their paycheck via direct deposit. Plumbing Wall Street is a world where the focus is on stability and reliability. It’s not a very glamorous world as no one really believes in the value of a strong infrastructure until it breaks.

A tale of two development worlds

The funny thing is that the speculative Wall Street vs. plumbing Wall Street divide also exists in other areas. In the development world, the frictions that exist between developers and system administrators are very similar to the frictions that exist between the two wall streets.

On one hand, you have a group that is trying to push the envelope, stretching their product to its limit and sometimes breaking things along the way. On the other, you have a group of people who see change as the enemy as it increases instability, making their jobs that much more complex.

The developers push new ideas (or work as idea marketers in that concept) and the system administrators push back while they try to figure out how to lower the risk those new ideas can pose to the stability of the existing systems.

A tale of two marketers

The amusing thing in the relationship developers have with system administrators is not dissimilar to the relationship social media marketers have with developers. In the case of social media people, they try to push the edge and are often pushed back by developers, who in this case, put on the hat of makers as they are the ones implementing whatever product or solution is pushed by the marketers. The developer as marketer of software ideas is displaced, in those cases, by the marketer of product ideas, or ways to make money that may break the software.

In those cases, one can see some of the conflicts that can arise as marketers may push for ways to make money that are incompatible with the social norms of the times. The makers generally work as a buffer in those cases, pushing for something closer to the normative models (eg. the fight within google over use of tracking cookies; or the fight within facebook over privacy; or the current fight over net neutrality).

A tale of two governments

In a similar way, there are two governments in most democracies: on the one hand, you have the marketers of ideas, who try to sell their view of how the country ought to be run to the electorate. We know those people as politicians but their role is mainly to be chief marketers of ideas, properly packaging the messages around how the country is running or should be run. And with every election, citizens get to choose which set of ideas makes more sense to them.

The marketers, in this case, set the agenda, and provide a direction for the rest of the government to follow.

Meanwhile, the bureaucrats are a group of people who generally are in working in government no matter which party is running the country. Their job is to keep the country running as efficiently as possible, no matter who’s in charge. They make laws and policies that are then sold by the politicians. Once again, we’re dealing here with the makers who keep things running, no matter what the political winds are. (on a side note, the relationship between bureaucrats and politicians was made into a very funny BBC series called “Yes, Minister”, that I would encourage anyone to watch).

A tale of two businesses

Time and time again, you see the same kind of push/pull. What happens in those case is that the makers are protecting the commons while the marketers are trying to push for business models that can protect the shareholders. This type of friction exists in every industry and the net result is that progress is made as a result of the friction, with each camp cooperating to give some ground and move things forward.

Marketers push the edge, and force us to reconsider our previous assumption. Makers build great things and ensure that it doesn’t have a negative impact. Both are equally essential to progress but, for the most part, we tend to ignore the makers.

Appreciating the makers

Our society is very focused on praising the marketers. As a result, little room is made to allow some level of appreciation to the makers. For example, as you’re reading this, consider the software program you’re reading it in. Then consider how this post went from the server on which it is located to you. It’s a jaw dropping achievement when you put your mind to it. Hundreds, if not thousands, of people have worked to build out the internet, software, and hardware infrastructures that got this simple note to you. Do you know the name of any of time?

So if you know someone who makes something, instead of just marketing it, why don’t you go thank them today for their contribution.

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

A few months ago, I started getting the feeling that we are in the process of moving into a post-boomer era, and highlighted some of my thoughts on the subject. This was a surprising change of pace to my readers, who are generally more used to my studying things with technology as my focus lense but it was the beginning of an evolution in my thinking.

As the first rumbles of the economic crisis started appearing a couple of years ago (HSBC, my employer at the time, was one of the first companies to aggressively write off bad loans), I started wondering whether the crisis in the mortgage space was only the beginning and thinking that the credit card crisis was probably going to dwarf the mortgage crisis if it ever happened.

At the time, however, I had been so focused on looking at the world with a technology focus that I was failing to find the words to really describe what I was witnessing. My gut was telling me that this was a big turn but I neither had the audience nor the vocabulary to express my thoughts in a clear fashion.

Furthermore, not being a citizen yet, I felt that it might be presumptuous of me to point to the ills of a country that was hosting me as a guest, a country that had offered me so much opportunity. So I kept quiet.

But I now believe that it’s time to attempt to highlight a few things that do not appear to be part of the debate surrounding how to deal with the current crisis. And since I have the luck of dealing with readers who generally are much smarter than I am (and many of them much more powerful than most people), I thought that maybe, just maybe, I could get some of the basic discussion started here, spreading a meme around the concept of a culture crash.

In this particular case, I think the issue is around the destructive culture of credit America has been cultivating with the rise of the post-WW2 generations. I am not saying baby boomers because they are only part of the problem, as my own generation ( Generation X) and the following one, are also involved in the same destructive addiction to credit.

At issue is the concept that over-extending oneself is a good idea. It may be because I am coming from a foreign country, or it may be for other entirely different reasons but I have always had an aversion to credit. When I took my first mortgage, I worked hard to try to repay more of the principal than was requested by the bank. My concept was simple: I thought that if I could repay my loans early, I’d give away less as interest and could then use that interest to pay myself. It turned out to be a smart move but I have no idea as to how I came around to that conclusion. The funny thing is that I had discovered the concept of, to put it in terms that are now being used by every pundit, “liquidity is king.”

Whether it is credit cards, mortgages, or other forms of loans (student loans, car loans, etc…), I’ve always been suspicious of the idea that one could spend more than they had. I was aware of the concept of assets but ultimately, I felt that assets should be, for the most part, tangible. And a bank account with cash in it is about as tangible as things get.

Living in the USA, however, I have always been surprised by how much of a credit culture the country has. When asking for a mortgage, I had to fight my bank to get a “lower” mortgage amount because they felt I was asking for too little. The idea of lowering the risk (both mine and the bank’s) of financial default seemed to go counter to many in the go-go run-up of stock prices in the dotcom era, following by the go-go run up of real estabe prices in the recent housing bubble. Sure, I didn’t spend a lot of time jetting around the world on a lot of vacations as I toiled to ensure that my mortgage was paid off (and it took me a few years to do so)  but I discovered that many of the people who had run up their bills based on the promise of paper fortunes represented by their dotcom options were the same people who were financially wiped out when those paper gains evaporated.

The same phenomenon seems to have repeated itself with the housing crisis, as people refinanced their houses to take cash out and traded those houses as investment vehicles up until the point where the virtual gains they had made in the run-up on prices evaporated.

The similarities between the dotcom crash and the housing crash are a little eerie and, with the benefit of having gone through one of those crisis, I am now starting to gain perspective on the other one.

Meanwhile, the risk of dangerous investment securities (the so-called structured investment vehicles) seem to have been balanced by taking a few bad loans and mixing them with good ones. The problem was that these mixes got increasingly complex and, as I was talking to a friend of mine involved in developing some of those products, my gut feel got stronger. The thing in my discussion with said person (who shall remain anonymous in order to protect the guilty parties) was that “no one really understands many of those investment products anymore.” It felt a bit like a house of cards to me but once again, I figured that I didn’t really know enough to talk smartly about it.

Until this current crisis.

Students of history are familiar with the concept of a run on the bank. As I was reading up on such issues as part of my preparation for a speech, I started thinking about how brittle our economic system really is. Ultimately, most of the financial markets are based on people’s perception of value and, if that perception changes, the whole thing can unravel pretty quickly.

I think we are now at the tipping point of a major shift in the perception of what a good financial decision is. Wall Street may be the most impacted by this for now but I suspect that it will spread relatively quickly (my gut tells me the perception will be generalized globally within the next 3–12 months). The change is coming from the fact that growth may no longer be considered as valuable as tangible assets.

During the dotcom days, I received a couple of crash courses in perception management. The first one was going from VC to VC with a plan trying to raise around a million US dollars for a start-up. The company was slated to be profitable within 2 years and would grow at 15–20 percent afterward, per our projections. To say that our financing efforts were not going well was an understatement. The moment of realization came when, in another disastrous meeting, a VC told us “you’re asking for a million dollars, and will only give us 15–20 growth after the initial couple of years. Your plan lacks ambition.” The whole time, we had been basing our plan on realistic achievable numbers and I failed to understand why we were considered to not be ambitious. Things got worse and, in a fit of desperation, my business partners over-rode my decision of conservative growth based on solid revenue and created a projection set based on year on year tripling of the business, starting with an initial investment valuing the company in the 15–20 million dollar range. I thought were were going to be laughed out of the room by the first VC we presented this but something truly scary happened: not only did the VCs like it, but some of the people who had previously given us a soft no were now banging on our door, trying to get into the round. Of course, we took a first round, and a few more afterward, and enjoyed a nice liquidity event that achieved a nice profit for the initial investors. The company continued on air until the dotcom crash, which it didn’t survive as a going concern.

The lesson here is that VC investment, IPOs, the housing bubble, etc… all have one thing in common: they are based on the idea of future payout, due to year on year growth that is often based on numbers that are wishful thinking in the best of cases ( and outright fraud in the worst cases, as we have learned from Enron and Worldcom)

I think this concept is now hitting the wall. The problem is that it has yet to be replaced by something else as we are moving through the irrational stage that generally marks the end of every great cultural movement. So the operative word is “sell, sell, sell” and confidence has shaken some of the mightiest institutions on Wall street as it will shake up other institutions soon.

On Wall street, they are now well aware of that reality and some of the cooler heads are realizing there may be some ways to profit from the stampede by acquiring assets at fire sale prices.

However, I’d venture that both the panic and the cool reaction are relatively contained right now. Contained to people in the financial industry, the media (who have never seen a crisis they can’t hype), and the reacting investors.

A few days ago, I was at a party in the tech community, and the happy atmosphere reminded me of the euphoria I had experience in the late 1990s, only a few months before the dotcom bubble went crashing down. As I travel in the murky waters between Wall Street and the technology world, I was shocked by the contrast between the panic I was witnessing in the financial space, and the relentless optimism I encountered in the tech space. The assumption that the crisis is contained to Wall Street was well engrained (and may yet change as more people see their 401k go down) but I started wondering about the disconnect. When presented with the issue, one person pointed out that a lot of people would go to grad school, as had happened after the last dotcom bubble and the only thing I could think of, upon that remark was “and where will they get their student loans from?”

Once again, I was getting stuck in the credit mindset and it made me uneasy but it came from the realization that credit is a core basis for the current US economy.

What I suspect is now going to happen, after the credit culture crash, is a move to core value, with people working hard to save up in order to buy things in cash. Actually, I hope that that is the case because any other option only seems to provide a short term band-aid to a major problem. If we fail to take the opportunity to move beyond the credit mindset, the next crisis will make this one look as easy to deal with as the dotcom crash currently looks to us: a big deal for a few people but ultimately something we can get past.

And I’m afraid that we will continue to spiral down the road of an ever increasing amount of debt until such time as there is no other thing to do but crash the culture in order to reset it.

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

Before I go any further in this, I want to have a huge disclaimer: I’m a pretty big fan of some Google products. One can see Google ads running on this site (I’m an AdSense user) and a portion of my traffic gets here thanks to Google’s search engine. i’m also a big user of the search engine, I have a Gmail account (although it is not my primary email system) and I use Google Maps and Google News often. I’ve played with the search API in the past and, for the most part, I’ve been happy with my overall Google experience. However, I worry that the company is heading in the wrong direction and I want to ensure they remain a viable player as they have re-ignited investments in the search space, which has benefited all users on the Internet. However, I fear that, if they are not careful, they could suffer a fate similar to that of Netscape, which popularized web browsing and ended up being gobbled up by AOL, where it is now a shadow of its former self.

That said, let’s look at some of the disturbing similarities.

Market Shares are no guarantee

In the early days of the commercial Internet (let’s say 1996), Netscape was a very successful company. It had beaten every Wall Street expectation and completed a stock offering that had captured the imagination of the general public. The Netscape management graced the covers of most magazines in America and the little browser that could (then in version 2.0) had captured an impressive 75+ percent of the market. Netscape had also introduced its own line of web servers, with a proprietary language called LiveWire, which allowed to create more dynamic applications. The company was also offering a web page development tool, and struck partnerships with many companies to integrate their audio and video components with the browser.

Microsoft had come out with Windows 95, which included a browser (Internet Explorer) which they had licensed from an outside source (NCSA, the place where Marc Andreesen had worked prior to Netscape and the browser was Mosaic, an early web browser Marc had been involved with). The world had mostly laughed at the pitiful version 1.0 offering from Redmond. It was simply a bad product, which did not get much redemption with version 2.0.

Microsoft on the Offensive

The folks at Netscape were feeling pretty smug. After all, they dominated the browser market, had managed to get a way to sell server products and comments about the upcoming irrelevance of Microsoft started making the rounds. But the giant was awake and the clouds over Redmond only covered a flurry of activity. By the time IE 3.0 was released, most people had written Microsoft off. If they couldn’t get as simple a piece of code as a browser to catch up, how could they have a chance to survive.

Netscape had come out with version 3.0 and it was good, if a little bloated from the everything but the kitchen sink approach they were taking. Netscape was now offering an Internet suite that included a browser, a mail client, a newsreader client, an IRC client, some groupware capabilities, etc, etc… There was no way Microsoft could catch up.

Netscape Navigator 4 came out and it was good. It was running Java applets, it could do DHTML, etc.. Basically people liked it and didn’t see a reason to switch…

But Microsoft released IE 4.0 and it was better than people expected. it matched the Netscape browser feature for feature and threw in a few things. One of the people in charge of that development was a guy by the name of Yusuf Medhi, who now happens to be the head of MSN.

While Microsoft had fired a major shot with that new browser, everyone expected that all that would change again when Netscape 5 would come out.

Netscape 5 never came out. In fact, Microsoft release IE 5.0 and started gaining market shares (stealing them from Netscape). Netscape seemed to be trapped in its own legacy and had problem getting a new product out. Microsoft release IE 5.5 and Netscape was working on a new rewrite of their product.

Finally, Netscape 6 came out, conveniently skipping a version. Was it the answer to Microsoft that all had hoped? Not quite and by that point it was too late.

Netscape never recovered and now lives as a shadow of its former self. Microsoft put out a 6.0 version of their browser, cleaning up some of the last parts of the markets they wanted and then went to sleep, in terms of browser, until the recent competitive threat of Firefox reared its head, eating up some of their hard earned market shares.

So what went wrong? The answer is complex but I believe that a mix of Hubris (we can beat Microsoft, we have a huge market share) combined with some sloppy releases, the development of a bit of a monoculture (we set the agenda, the industry will follow), an unwillingness to deal with massive competitive threats, a loss of focus on core assets, and a media world that loves to take down the companies they’ve built up all added up.

How does this apply to Google?

For starters, it is clear that massive market shares are no guarantee of success. Google currently holds around 60 percent of the search market, which is good but is also a reason for concern as it is more likely that this share will go down than it is that it will go up.

More worrisome, however, is the development of the Google monoculture. Much of what is going on at Google is happening with little involvement and input from the community. This is where Microsoft generally starts striking. Say what you want about the Redmond giant, they know how to listen and how to take brutal feedback and turn it into decent product. Microsoft is not known for great products but it is known for decent ones. Last week, Microsoft organized Search Champs, gathering a bunch of smart people from the industry in a room and having them talk to them. I was there and was surprised by how focused they are on winning this one. It is the kind of focus I have not seen come from them since the browser wars.

If it wants to survive, Google needs to do something similar. Throwing a product out to the world with the world beta on it is not a feedback loop. Sitting down with users, developers, thought leaders is. The feedback is not always good but it helps improve the product, which is how one wins this war. Furthermore, the goodwill generated by getting people invested in its products and their success allows a company to develop a strong following from a small group of dedicated users, who then serves as advocates in the marketplace. They can have an impact in changing opinion and not involving them can be dangerous.

Of those people, developers tend to be the more finicky. Alas, the success of many platforms on the Internet depends on developers. As developers go, so tend the marketplace because developers tend to be early adopters. Developers were the first people to switch from Yahoo to Altavista. They were the first group to switch from Altavista to Google. Where will they go next? Is it guaranteed that they will stay with Google (however, here is an interesting case, as developers tend to have a bias against Microsoft. The corollary of this is that Microsoft has to offer something that is radically better in order to make gains in the developer world). A good way for Google to mend some of the rift with the development community would be to support RSS along with ATOM as a syndication format. At the current time, Google is the only major search engine without native RSS support.

Another area to watch out for is the loss of focus. Could someone at Google please explain to me how the Google pack, Google WiFi, Google IM or the Google web accelerator fit Google’s mission (to organize the world’s information). How does owning a radio advertising business (something they acquired recently) fit in that model? It seems that Google is trying to do a lot of things in a lot of areas. I’m sure they’re all interesting things but what does that do to the core search assets on which the business was build (or is it that search is just a side business and Google’s mission is really about advertising?) There has been much discussion in the search world about the relevancy of results in the Google search engine suffering from some level of degradation. As always, expectations are high and any decrease (or lack of improvement) in the quality of the search index will be seen as a loss of focus.

Following the Netscape sloppy release, Google also has to worry about better testing before putting products out. Its recent stumbles with the release of Google NewsReader and Google Analytics showed the world products that were not fully ready for market release. The market acceptance for the word beta goes only so far and Google may suffer some reputational damage if it continues along a curve or release first and fix it later (this, however, is not necessarily a standalone cause for failure, as we’ve learned from the release of many Microsoft products that needed their own round of stabilization)

Last but not least is the burning glare of the media world and of Wall Street. As can be seen now that lofty (and, one could add, unrealistic) expectations could not be met, punishment (in the form of a declining stock price) is coming. Similarly, the press is getting more critical. This is part of a normal cycle: a company is hyped up and then taken down. These are just fads (ask your friends at Yahoo!, who have managed to go through the whole cycle and are starting to go back through a build-up phase now).

And, as a postcript, take the advice of pundits like myself with a grain of salt. There are lessons to be learned but I can’t guarantee that these are the right ones to learn. However, what is certain is that Google needs to remain a viable player in search if for no other reason than to keep companies like Microsoft honest. As we’ve seen in the browser wars, once a company wins, it tends to slow down on the innovation front and search is still so young a field that it needs major progress on the innovation front.

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