Growth midst Recession - Scarcities & Abundance

This past weekend we were in Las Vegas and we went to Cirque du Soleil for their "Beatles Love" program. The Mirage was crowded and the auditorium was packed. Where was the "recession"?

Food is cheap and abundant; yet some people pay $10 for "special" organic lettuce. MIT offers all its courses for free online; yet students attend classes paying annual fees over $36,000 (plus dorm expenses and books).

These paradoxes make sense when we consider how markets work, and redefine what is being bought and sold. Midst the abundance of choices, we buy "scarcities" - the things we really want. In the case of the live show, it was the sense of authentic connection. Before and after the show, people were buying expensive books, DVDs and T-shirts to capture the memories of BEing there. Going to MIT - BEing there - cannot be replaced by any on-line course.

The technology guru George Gilder has long postulated: "Every economic era is based on key abundances and scarcities." Every new abundance brings matching scarcities, and many of our problems are centered on these recurring anomalies. Our current "scarcities" offer opportunities.

Markets create abundance by identifying needs, determining prices and allocating goods. Markets thrive on scarcity, and turn it into abundance. Wealth is generated when something is scarce and can be offered at a high premium over cost.

Markets have given the world an unprecedented amount of information to help make choices. Google is free, yet the company is profitable, growing and making more money each quarter. They have found ways to sell scarcities midst the free choices.

In the midst of a seemingly abundant choice of cellphone, Apple broke into the market to gain a leadership position fairly quickly. They did not offer what was already abundant - lots of cellphones with slightly different features. They offered the real value which people wanted, and were ready to buy at a premium.

Why do consumers still shop at old-fashioned retailers when they can buy cheaper on-line? Because they can touch and feel and compare products. Also, buying on the web is a lone experience; shopping becomes an outing for the family on a Saturday morning. Everyone participates, and you can have lunch together at Target. Or, you can get a cheap hot-dog and a drink at Costco - and cheap gas and a car-wash.

With the abundance of email, what is the true value of Facebook or Twitter? They have attracted all the buzz for creating social networking; it's like hosting a big cocktail party. But making money is their challenge - it's free and nobody shops. They must find scarcities, things that everyone at the party needs which they can sell, without driving away the crowd. They don't yet have a "scarcity" revenue model. That's the challenge - to monetize social networking without ruining the atmosphere.

Searching For Scarcity

The problems of Scarcity & Abundance

Where Social Networking Cashes In

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Software - Apple's Real Value-offering

From this standpoint, Apple is not an iPod (music-player) company, nor a smart phone company (iPhone). It's not even a computer company - MAC hardware is relatively mundane.

In the midst of commodity products and markets, Apple is morphing into a serious software giant. The iPhone OS 3.0 software update released this month for the iPhone and iPod Touch is probably the most important technology event of the past few years.

Sure, the latest iPhones are good phones; but they are like most other phones - capable and easy-to-use multi-tools for the connected age. They not only make phone calls, they check your e-mail, browse the Internet and take a decent picture. And they have games and GPS. Most of the competitors do too. Heck, if all you need is a good phone, buy the new Palm Pre which was designed by an ex-Apple genius.

The real iPhone breakthrough is the software it unlocks for developers of third-party applications. It becomes not just a cell phone, but a computing platform. The AppStore is now packed with more than 50,000 iPhone applications. There are apps for working out, for around the house, for going out, for making money.

For a couple bucks iBeer uses the iPhone's accelerometer to slosh around a beer, brew, drink, shake and burp. Or you can pour beer from your iPhone to another. It's like ridiculous cellphone ring-tones, which still sell in the millions.

Many iPhone applications are "free" downloads - software developers make money by selling subscriptions for add-ons and premium content.

The software is the "scarcity" - no one else has the capability yet. By the time they catch up, Apple will be locked in as "the standard". It remains to be seen how the other cellphone companies will react. Early leaders (Motorola, Eriksson) are falling behind by just offering hardware and proprietary software. Apple's marketing genius comes from offering a complete development environment for third-party developers.

Is your company affected by the recession? Are people simply not buying your products because of a budgetary crunch? This may be because you're selling "commodities" - abundantly available stuff. The secret is to sell "scarcity" - something in demand, which your customers MUST buy.

Apple's most important product this year - software

Your iPhone gets better with every new App

On iBeer

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America's Executive Pay Fiasco

It's a seemingly incurable disease that inflicts our Capitalist economy. In case people mistake my motives as Socialist leanings, let me proclaim that I am indeed an ardent Capitalist.

A century ago, JP Morgan said a 20-1 ratio of CEO earnings to that of average workers was fair. Management guru Peter Drucker also preached that number.

In 1974, the actual ratio in major US corporations was 35 to 1; by 1991 this had increased to 150:1. In 2008, it was about 300:1 for all Fortune 500 companies - and 525:1 for the largest 50. This compares with about 25 in Britain, 20 in Canada and Italy, 12 in Germany and 11 in Japan.

In America, a top-level executive's "compensation" is typically a mix of salary, bonus, stock-options. And there are other perquisites ("perks") which may include the use of corporate jets, company accommodations and sundry re-imbursements.

There's something intrinsically wrong about the way America pays its top executives. The cultural assumption is that if you pay more, you get more; and people may get de-motivated and leave if they are not rewarded sufficiently. Complete nonsense! Who sets the limits?

The answers to this widespread abuse lie in the perverse interaction of CEOs, boards, consultants, and even the government. Most boards are ceremonial puppets, simply collecting attendance fees while the CEO rules the roost. The compensation committee typically has no real ability to cutback on a CEOs demands.

Here's a case in point: In 2008, Dave Cote of Honeywell was listed as one of the highest paid CEOs in America, with total earnings of $28,731,628, including a cash bonus of $17,500,000 and options worth $8,983,000.

Midst regular rounds of layoffs, pay cuts and budget reductions, Honeywell weblogs are replete with complaints about Dave Cote's compensation and his utter lack of sensitivity to the situation.

From a purely logical standpoint, Dave Cote is arguably proud of his accomplishments in keeping Honeywell profitable. But, this came through the implementation of many short-term expedients which, at the very least, exhibit complete lack of empathy and understanding of what's really going on.

When the failures of his short-term decisions eventually become evident, Dave Cote will escape blame by quickly exiting to some other highly paid CEO position, touting his old Honeywell accomplishments to a new, gullible and ineffective board. And the game will continue...

It's interesting to note that Warren Buffet gets an annual salary of only $100,000. And there are other notable exceptions; during this recession, many empathetic key executives have taken significant voluntary pay cuts till growth and performance is re-established.

After accepting his huge bonus and stock options, in 2008, David Cote took a 20% salary cut. His base salary is "only" a couple-million, so that was just eye-wash. There were no whoopees on the weblogs. And there's a common joke going around Honeywell - why not "outsource" the CEO position and save millions of dollars?

Is fast-rising CEO pay a sign of U.S. market failure?

The Present and Future of Executive Compensation Regulation

2008 Executive Compensation: The current state and future direction

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Cloud Computing on the Horizon

1. Cloud computing: Applications and services, Internet delivered.
2. Utility computing: On-demand Internet-based server capacity.

Most IT departments now pay for maximum capacity at all times, with very low utilization. If they haven't planned for enough capacity at the high end, they risk downtime at peak times if their systems get overloaded.

Utility computing wants simply to take over server capacity for private services and applications. They will seamlessly scale up and scale down services so that organizations only have to pay for the bandwidth and server capacity used.

About 5% of enterprises have already implemented some form of cloud-computing, and this will more than double to 9% by 2012. Software-as-a-Service (SaaS), just one segment of Cloud Computing, is itself growing at double-digit rates. According to many experts, the real impact of cloud computing will be much more - "in the cloud" applications are expected to be 25% of the net new growth in IT spending.

Watch for cloud computing to blossom in 2010.

Four reasons why corporate IT will embrace cloud computing

Why Microsoft, Google, and Amazon are racing to run your data center

Cloud computing rises to $9.6 billion in 2009, up 22%

Automation World - SaaS (Software as a Service) Solutions Surge

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eFeedback

"Jim, you brought up an interesting notion: from a purely defensive standpoint, it behooves us to research designs for arcologies: self-contained (aside of perhaps some stored energy resource or energy input from the sun) and self- sufficient towns/cities.

"This would actually solve many environmental problems all at once by forcing these self-sustaining cities to recycle EVERYTHING. However, there is one very crucial element missing. It is something that should keep the liberal arts majors busy for many decades to come: Since the beginning of time, our societies have been built upon the assumption that there are always new resources out there to be exploited somehow.

"When resources are scarce, many (if not most) societies tend to devolve toward some form of monarchy or dictatorship. Can we as humans govern such relatively closed systems wisely without degenerating toward a dictatorship of some sort?

"If that becomes possible, it will truly be a new era of human society."

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David Bell [dbell.greyskies@shaw.ca] on the power-based versus peer-information-based future:

"I suggest the future of newspapers is about the same as the future of TV, radio, movies, books, magazines, schools, etc. These could all be characterized as power-based (asymmetrical) media.

"In 1948 Claude Shannon argued that there's an inverse relationship between power and bandwidth. This applies to organizations and their value (derived from their capacity to process information effectively). This indicates the following:

1. We're in an almost inconceivable informational storm! We've moved from a 100 channel economy to a 100 million channel economy. Adapt or lose. 2007: Netcraft found 108,810,358 websites. Research says we double information on the planet every 9 months - a million times as much as in 1991. Impact: Capacity to process & convey information has become an economic, organizational flashpoint!
2. Power-based models are informationally dysfunctional! Peer-based (or culture-based) models & organizations win daily battles for informational dominance. Power-based organizations are losing credibility. Impact: Power-based organizations & models are being defunded. Peer-based organizations and models are growing like weeds and earning presence.
3. There's global war between power-based & peer-based organizational and institutional models! This shows up in the Middle East, the US election, doctor's offices, newspapers, books & music recordings (earnings-erosion for old models). Successful marketing today is horizontal, cultural, peer-based, networked etc. compared to old (vertical) power-based marketing & decision-making models. Impact: The internet is ground zero for this war."

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Bob James [bobarc6364@sbcglobal.net] provides some insights on the future of War, WMD, and the desire for respect and communication:

"Your article got me thinking about our attitudes on talking/communicating/respecting other governments that do not totally buy into our model of their behavior and philosophy.

"Many in our country blame our opening up a dialog with North Korea as the reason for the recent nuclear tests. The thinking seems to follow a path of hard line - no communications with anyone who is not currently our friend.

"Anyone who has ever harbored teen age children, knows how behavior speaks volumes about being heard, respected, and listened to, etc. Our recent past has been one of ignoring, ridiculing, threatening and attacking the "bad guys" in the world. Let's push them far enough so we can attack them. Is there any hope given this mindset?"

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