Recently in Trends to Watch Category

Well I started writing a post about the new year back in January, when the year actually was new. It is now March and themes of the year are becoming more clear. 2007 is shaping up to be quite a year.

Some things to watch over the next ten months of 2007:

• The housing market -- Is there a national bubble? What will happen to the subprime (and prime) mortgage markets? Will consumer spending drop as consumer debts catches up?
• Investor's appetite (and evaluation) of risk is likely to change if the economy slows down. The risk premium has all but disappeared for bonds and bank loans but will there be a backlash? Economic theory says there has to be.
• A sea change in Washington, D.C. may not raise all boats -- A Democratic congress comes on a rising tide, President Bush and his Iraq war head for the rocks, and the 2008 Presidential elections is on the horizon.
• iTunes, Zune, and a host of video download services will forge ahead as the giant media companies face the (growing) reality of an Internetworked world.
• Five years in the making, Microsoft Vista will (finally) do something - flop or sizzle - with enormous impact (or pain) for the PC world, not to mention Seattle itself.
• Global warming is increasingly on the minds of citizens and politicians around the globe. Will nature or politicians be the first to make big changes?
• The iPhone may become the first "smart phone" that anyone cares about.
• Will the "big three" become the "big two" in 2007? Even as global warming grows, there is a global oversupply of cars. Will there be a correction and what will it look like?
• Will the PS3 get some games worth playing and build a base or will Sony be the first to die off, leaving the game market to Microsoft and Nintendo or will consumers (and Sony/MSFT) realize that the Wii is just a peripheral?

Yessir, a lot of interesting things going on this year and the picture should be a lot more clear by Xmas 2007.

While I have been sitting around thinking about this idea and ever so slowly writing about it, other folks are writing about the same thing :) Although I think this short article in Technology Review sees the tip of the iceberg, it misses full threat.

Pardon me if I am skeptical of Microsoft's tests of disruptive technologies that threaten its cash cows. It will be a few years but the day when "the computer is the network" will come eventually. Software as a service is inevitable because it is so useful.

For the past few months, I have been thinking about the evolution towards services and service businesses. Instead of writing one huge post (which I have been trying to do), I am going to try to write several smaller ones. The basic idea is that product-businesses from the Industrial Revolution are evolving into service-businesses for the Information Revolution and that software in particular is ready for this transition.

I plan three articles: 1) Products become a service, 2) Software becomes a service, 3) Software is already a service

Economists look at how pieces of the economy are connected to (and influence) each other, such as the idea of supply and demand. If the demand for labor goes up and the supply goes down, then wages for labor will increase. If wages increase then the cost of goods increase (to cover the wages) which means higher prices. Higher prices is another term for inflation.

The general rule is that if an economy is growing too quickly, we get inflation. The cure for inflation is to slow the economy down which the government tries to do by raising interest rates. By making money more expense (by increasing the cost of borrowing money), businesses slow down and the economy slows down and prices fall again.

At least that is the theory. Rules of thumb like this example build up over time. Economists study the great depression and the stock market crash of the 1920's for decades and eventually rules of thumb about how the economic system works appear. Economies are so complex, you cannot really see all the interactions and understand it so you need rules of thumb that explain things well enough but are simple enough to use.

I just wonder if the game is changing so fast and much that our rules of thumb based on the past century of national economies are no longer appropriate.

the new rules

This morning, I heard a news story about inflation which is what got me thinking about all this. The truth is, I am rather puzzled by inflation. The person being interviewed pointed out that the national inflation rate has stayed around 2% for years, but I dont get it.

How is it that prices for goods never seem to go up much? We pay $3 for a gallon of gas (diesel actually) in Seattle. Our heating bill went up by 4x this winter and housing prices have gone through the roof everywhere. The cost of gold and platinum is at an all time high. In fact, everywhere I look (except for computers), prices are way up so how is the national inflation index only 2%...?

Thinking about inflation, I got to thinking about closed-systems. Economies used to be largely closed systems. Raw materials would be brought into the system from other countries, but the bulk of the value was manufactured in our country. Thus the Fed and businesses only had to worry about the factors within the nation. All those supply and demand rules about wages and inflation were refined in the past century, so they are based on the idea of a closed national system.

But we dont have a closed national system anymore.

the global economy

The economy today has expanded beyond national into a global system which turns rules of thumb, like supply and demand, on their heads. Wages in our nation arent as important to inflation anymore because the jobs can just move to a cheaper country. If manufacturing costs get too high in our nation, prices dont go up but rather those jobs move to China.

Another rule of thumb economists use to judge the economy is the unemployment rate. If too many people are employed (a low unemployment rate), there will be competition for jobs and wages will rise, ie overheating the economy. This is why investors (inexplicably to many workers) like to see a healthy (ie high) unemployment rate but this rule of thumb is being changed by the massive influx of cheap labor coming into this country (like 10 million illegal workers). This supply of cheap labor prevents prices (and incomes) from rising because there is always someone willing to work for less money. And since they are illegal, you can forget about Unions or other groups pressuring for a living wage.

Of course, economists do take these inflows into account in their models but I have begun to wonder if the magnitude these inflows are now so large that they change the rules of the game. Not only has inflation stayed low because of importing cheap labor and exporting jobs but we have been importing amazing amounts of foreign capital. China, Japan and Korea continue to buy huge amounts of our Treasury Bonds, which keeps the US Dollar and our government out of bankruptcy despite the fact that we borrow more money every year (the national debt is now over $8 trillion dollars!).

So why has the inflation rate in our nation stayed so low? The answer is that globalization has changed the rules of the game and for the moment, the rules are in our favor. We continue to talk about inflation in the old terms, using our old rules of thumb, but globalism has made the picture a lot more complex.

I imagine this is clear to economists but I suspect it is completely UN-clear to citizens. We continue to make decisions on a personal level about household spending and on a macro level about education and infrastructure as if we are the only game in town. People still seem to see things as a closed-national system and that is a dangerous thing for the welfare of our children.

Do you remember that TV show, Survivor? All these people living on an island with nothing to eat but rice and whatever they could catch. They all lost weight. After 40 days of the all-rice diet, that Richard Hatch guy lost a ton of weight. He went from fat to healthy looking.

Why did those people lose weight? They lost weight because they had no choice; they simply had no food to eat. No pork rinds, ice cream, soda, crackers or candy. The external environment forced them to eat less.

What is harder to do? Lose weight because some external force is keeping you from eating or using willpower to force yourself to eat less? If you look at America's ever expanding waistline, I think we can agree that willpower doesnt work so good.

Today I read this great article about our education system. Why do international kids outperform Americans? Because they work harder.

I HIGHLY recommend reading this article. The author hits the problems right on the head.

For once, blame the student

By Patrick Welsh

Wed Mar 8, 7:08 AM ET

Failure in the classroom is often tied to lack of funding, poor teachers or other ills. Here's a thought: Maybe it's the failed work ethic of todays kids. That's what I'm seeing in my school. Until reformers see this reality, little will change.

As one would expect, the middle-class American kids usually had higher SAT verbal scores than did their immigrant classmates, many of whom had only been speaking English for a few years.

What many of the American kids I taught did not have was the motivation, self-discipline or work ethic of the foreign-born kids.

Politicians and education bureaucrats can talk all they want about reform, but until the work ethic of U.S. students changes, until they are willing to put in the time and effort to master their subjects, little will change.

read it

Unlike the author, I blame the parents not the kids. Kids will do whatever is easiest. It is the parents job to force their children to do what is in their best interest. I think this process used to be called "parenting." Today it seems like every parent wants to be their kids best friend, something that used to happen only with divorced parents.

The education system is just another symptom of a larger problem: our wealth and our lack of willpower is causing us to lose touch with reality. A reality in which the world gets smaller and more competitive every year. I think this trend will continue but not for long. On the bright side, things will right themselves again when competition from Asia forces us to live on that all-rice diet whether we want to or not.

Goodness, the number of technologies in development and in use today is simply overwhelming! What's worse, knowing what this stuff is and how it can be used isnt just for geeks and developers anymore. Business people need to understand this stuff more than ever because it affects business models, products and your company.

Even for someone like myself that enjoys tech, trying to keep up with all these innovations is a full time job. Whenever I start to feel like I have a handle on things, I meet someone who makes me feel like a buggy-whip salesman.

Here is a quick list of topics I have run across in the past 2 months.

PHP
I learned old-school computer languages lik C but applications today are often web-technologies and more and more websites are being built with PHP (not to be confused with PGP, which is a type of encryption). For someone wanting to try their hand at web creation, this is one of the tools to pick up early.

AdSense, AdWords
Does Google do search? Not so much. Google made $4B last year by connecting businesses with customers, ie advertising. While it is not obvious to most consumers, Google is an advertising innovator with programs like AdSense and they continue to push their creative business models into other advertising venues including radio, TV and print..

AJAX
Not quite Web2.0 but this technology promises to make websites more interactive. You can see AJAX in action at Amazon and Netflix who already have AJAX features such as mouse-overs that give you product descriptions. I think Google Maps is another example.

Google Maps
Speaking of Google Maps, would you like a free service to present your own data in a map form? How cool is that! I am a map junkie and this is a terrific tool that Google is literally giving away, presumably for the good of the Internet.

"Mashups"
Imagine taking someone's boring text data, combining it with Google Maps and presenting the whole thing on your own website. If you can picture that creation, you understand a 'mashup'. A friend showed me two sites that combine public data to provide an interactive, real-time map of the bus routes and bus positions here in Seattle. Not necessarily a big money maker but expect to see a lot of these mashups because they are very powerful/useful. Power to the people!

Tags
That computer from Star Trek, the one that answers questions in English, is still the stuff of science fiction not science fact. In human terms, computers are still pretty stupid; they simply cannot read or understand things the way we do. One way to help computers make "sense" of data is to mark or structure that data and one of the ways to do this organization that is getting popular is tags. Take a photo of angel cake and tag it <cake> so that people searching for faeries and angels wont find it while searching. Expect to see more tagging..

podcasts
This technology has been around for a long time but it seems to be taking off, thanks in large part to Apple's iTunes store. A podcast is simply a recording you can download and listen to on a computer or iPod. One interesting note is how podcasts are taking off in China, where the media is highly censored (and podcasts are hard to sensor because computers cannot understand recordings they way they can words).

iTunes (PPV video)
$60+/mo for cable TV or $2/episode for your favorite TV shows? People have been talking about downloadable music and video for some time (and running 'pilot' programs in mass-market hotspots like Idaho) but iTunes is the first successful mass-market product of this type. Whether it is a song, a TV show, movie or podcast, pay-per-view content is only going to get bigger. There are a lot of companies trying to get into this space, including Disney and Google, but iTunes seems to have the lead.