Changing Gears

Enterprises and government agencies the world over are busy changing gears these days. Large global publicly-owned commercial firms are seeking to get more agile and nimble. Small, often family-owned, private businesses are trying to become more mature to cater for growth whilst remaining responsive. Public sector organisations, to the extent they can, are trying to deliver outcomes for citizens faster. Speed, it seems, has become a number 1 issue for everyone. Cost and quality are definitely the next priorities but going quickly is a huge imperative.

The changes required are profound. The world outside organisations – particularly those using the products and services they provide – want new and improved offerings all the time. The world itself is changing at an unprecedented rate. Just keeping up with the demand for change – in many ways: socially, economically, technologically and practically – is mind boggling. The changes inside most organisations are lagging these external changes. It often requires “changing gears” to get the traction required to meet the challenge. Sometimes these gear-changes require new leadership. More often they need new approaches: updated methods, different skills, outside help and most importantly a fresh perspective.

Big multi-national organisations like international corporations find this very challenging. The successful ones with long track records of growth in many markets and many products or services are employing “rebalancing”. Euphemistically, this often means shifting focus from things that are not growing to newer things with growth potential. Smaller companies who’ve historically done one or two things well often get into other lines of business. Government agencies employ “reforms” – either a different way of doing the same thing or augmenting existing functions with additional responsibilities. The growth of public-private partnerships all over the world is a great example.

Technological change is both a driver and an enabler of changing gears. The relentless shift to providing on-line channels between producers and consumers has ramped up in recent times. You can see it in the high street shops. There are now less bookstores, music shops and video libraries. There are more cafes, restaurants and boutiques. The supermarkets and especially department stores are being replaced by petrol stations with convenience stores and fast-food outlets. Books, music and video content have shifted online the most. Business-to-consumer electronic commerce has been eating away at retailers at an ever-accelerating rate. People sit in cafes with their mobile devices for a few minutes then do their everyday shopping while they pay for fuel. Even paying for things has become more and more technically enabled: PIN & chip cards, tap-and-go cards and in a few cases using your smartphone. At one bank here in Australia, even the ATM allows you to transact with your smartphone app rather than the ATM itself.

All of these things have emerged to save people time. Yet all of these changes in the community involve even greater changes on the organisations serving the public. They revolve around speed-to-market and cost-to-delivery for many. For others, it involves participating in business-to-business electronic commerce, often alongside competitors. Employees increasingly work from home at least some of the time in an increasingly casualised relationship with their employer. People collaborate across borders, timezones and organisations in evermore virtual ways. Manufacturing and agriculture, already impressively automated in the developed world, is moving to new and different geographies supplying a more globalised marketplace. In Kenya, more people and small businesses use virtual banking and finance than real accounts with physical financial institutions. Microfinance is similarly prevalent in the developing world.

Many organisations do not make the change. Some get acquired by larger firms rather than attempting the change. Many go out of business before they can change. Some larger publicly-listed companies become privately-held in order to make the changes necessary which can be a very severe form of changing gears. Traditional media is severely under threat from new and social media. Governments continually shift expenditure priorities from physical services to e-government services. Taxation agencies are particularly noticeable in this space. On the other side of the spectrum, postal agencies are shrinking in response to diminished use of ‘snail-mail’. All of these forms of transformation are accelerating in step with the demand for newer and often more digital offerings. Even large-scale philanthropy – the so-called “philanthrocapitalism” – employs modern and very digital ways and means of supporting their causes.

Yet most of the world’s people remain remarkably untouched by these titanic forces. “Only” a third of the world’s people are connected to the Internet. Half of humanity, mostly in the developing world, do not live in an urban area. Wealth and income have become concentrated among the rich few at a level not seen for a century. Education and employment opportunity still elude many. National, provincial and local tax revenues are being impacted by the sleepless world of transnational money in tax-havens and other arrangements. Capital markets have become “irrationally exuberant” again. But most people, two-thirds of humankind by some estimates, only ever see this on television.

It is true that globalisation and economic rationalism has brought great benefits to the world at large. Over the last thirty years, billions of people have been raised out of poverty because of it. But it’s also true that many have been left behind – and not only in the developing world. In the advanced nations, the middle class and older people have borne the brunt of the wealthiest becoming more wealthy. Corrupt and oligarchical minorities have benefitted at the expense of the majority in emerging countries. The numbers of poor across the world are dropping proportionally but increasing nominally. The global environment has also been impacted enormously.

Perhaps the greatest gear-change required is not so much within organisations, although they are certainly needed. The big gear-change is towards a more holistic perspective and a more inclusive one. Climate-change denial needs to become more akin to Holocaust denial: a criminal offence in some jurisdictions and certainly unacceptable behaviour elsewhere. War and terrorism similarly can’t go on the way it has been for the last few decades. Income and wealth inequality needs to be addressed before it becomes a trigger for unrest again. A new perspective is needed: one that considers the global impacts of an increasingly globalised world. We in the developed world have an historic opportunity to lead here. I hope we find the gear-lever to make the change in time…

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Changes in Philosophy & Doctrine at Microsoft

Last week, Microsoft released Office for iPad. Many, including this writer, thought that long overdue. Few now think the time has passed for this software on that platform – including some who thought it was but have now retracted that view. The product has been well received and is being rapidly adopted. Thank goodness for that. We’re all expecting a similar release on Android sometime soon. I’m sure it will do very well too.

It was inevitable whatever the timing. Tablets are everywhere. Android & iOS are now the dominant platforms for the Post-PC world. Microsoft’s Surface has been, well, a dud (to put it mildly). Windows 8 is a similarly disappointing release but not to the same extent as Surface. Touch-enabled PC form-factors like Ultrabook 2 and other “convertibles” bring out more of the benefits of Windows 8 but the modern (aka Metro) user experience has not been well received at all. The expiration of support for Windows XP has spurred new PC sales after years of flat or declining sales. But all of this has not affected the onward and upward growth of tablets.

This is not surprising. Tablets are not a kind of PC, as Microsoft believed in the last years of Steve Ballmer’s reign as CEO. The attempt to make them so has resoundingly failed. Nor is Office going away anytime soon, as the most vehement anti-Microsoft proponents of the Post-PC world will have you believe. A billion Office users can’t all be wrong. The accumulated volume of Office documents over the last 2 decades is a huge reason to keep using these tools. But now the past, present and likely future of the knowledge worker’s world have come together in Office for iPad.

The changes in doctrine and philosophy at Microsoft are large, profound and (hopefully) permenant. These changes signal a more hopeful future for their place in the unfolding Post-PC world. The apps themselves are, to a point, free from Apple’s iTunes AppStore – full functionality is enabled by a paid subscription to Office365 or an in-house enterprise license. There are supplementary tools – the Enterprise Mobility Suite – that enable large-scale management. Documents are stored in Microsoft’s OneDrive cloud storage facility. And, importantly, any in-app subscriptions to Office365 from Office for iPad are subject to 30% revenue sharing with Apple. The difference between this device+service approach, especially bridging two Cloud ecosystems, and the traditional Microsoft business model is staggering. It would have been unthinkable only five years ago.

It is fitting that this announcement be delivered by Microsoft’s new CEO Satya Nadella in the 52nd day of his tenure. It was foreshadowed by Steve Ballmer last year and I’m sure the product itself has been in development for many years. That Microsoft delivers an edition of Office on an Apple platform is nothing new. They’ve been doing it in one shape or form since the inception of the Macintosh. What’s very different is how they’ve done it. In short, they’ve done it according to someone else’s business model – Apple’s. That’s radically different. They’ve decided to give some software features away for nothing and charge for others on a yearly or months subscription basis. That’s not quite as profoundly different – Microsoft has been adopting that approach very gradually for a long time. The software itself is a curious hybrid between Microsoft and Apple user experience styles. That has also been done for years. But $100 per annum for 5 licences of Office on Office365 on PCs, Macs & iPad is new, particularly the iPad piece.

If Microsoft embraces (the competitive horror of) Android tablets in the same way, there is great hope for the future of their software. The one billion Office users, 200 million iPad users and 500 million Android tablet/phablet users could all become Microsoft office users. The promise of anywhere, any time and on any device – a Microsoft marketing catch cry for almost 15 years – could be much closer to being realised in the modern mobility world. An iPad Air running an A7 processor and iOS7 is certainly capable enough to start the ball rolling. Similarly capable Android tablets are too. Future (presumably Nokia designed and made) tablets would certainly be with a future Windows, perhaps even if they ran the “Metro”-skinned Android. Platform plurality is back with a vengeance and it’s certainly good to see Microsoft making room in their philosophy and doctrine for that fact of life.

Google has iOS apps – and some extremely good ones – on the iOS platform. Apple does not reciprocate on the Google platform (but has shipped iTunes on Windows for a decade) and is never likely to, even though Android hugely outsells iOS. What we’re seeing now are the consequences of competitive forces in the marketplace on very large corporations. Cisco has aspirations to being a meta-Cloud player. Maybe that too will work. But nobody has had an installed base of over a billion users has ever done anything like this before. We are living through a milestone change in the history of technology companies. It just such a shame that it took this long for it to happen…

 

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My Industry Has Changed

Every once in a while, you get to see what you once wished for come true. Less frequently, you get explicit advance notice that it’s going to happen. In the last couple of weeks, both of those things happened – the technology industry changed and I was given a heads up.

Trying to change large iconic corporations from the inside is almost futile until they need to change. In an industry like technology, there’s a mythology about change. The myth is that change is continuous and ever-present; the reality is that things largely remain the same until change in unavoidable and often a matter of survival. I learned this at Microsoft 10-15 years ago and at IBM 5 or so years ago. At Microsoft, I advocated things like smart mobile devices, online content stores and a few other things. At IBM, I advocated for the Cloud, in-car tech and a few other things. Now the time has come for many if not all of these changes.

Yesterday, Microsoft announced its intention to purchase Nokia’s handset & services business units only a week after long-timer Steve Ballmer announced his forthcoming retirement. This adds substance to their announcement last month of becoming a devices and services company, despite many false starts in that direction over a decade or more. The impact and meaning of these announcements are all being widely discussed. One of my old buddies at Microsoft gave me an informal warning only days before any of this happened. One day, we’ll all know and understand what this all means. For the moment, it means huge change.

A few weeks ago, Amazon beat IBM in a public procurement exercise for the CIA’s Private Cloud. Amazon was more expensive by a half, yet they still won. IBM appealed and their case is moving along the process (update: IBM has given up). What astonished me about this case was the CIA’s comment that Clouds “auto-scale” and there was more confidence in Amazon’s offering than IBM’s in this regard. Elastic scalability is an essential characteristic of a Cloud. I expected not only that IBM would know that but that they could do it and demonstrate that to a valued customer. One of my old buddies at IBM discussed this with me and later negotiated his exit from the firm. What that means down the road is still a matter of debate. I never thought I’d see IBM come anywhere near losing a big deal to Amazon. In fact, Amazon is crushing all its competitors in the Cloud.

Amazon competitive Nov 2013

It seems that Apple – 90 days away from bankruptcy in 1997 – and Google (founded in 1998), have risen to redefine an industry. They rose from their much more humble places over the last decade or so to reinvent whole industries. Together with their near-end supply chain partners – Samsung, Foxconn, Pegatron and others – they stand titans of the tech business where IBM, HP, Microsoft and others once stood. In last year’s Fortune magazine’s Global 500, only Apple & Samsung Electronics were in the top-20 rankings. The giants of yesteryear have all fallen into the middle rankings.

That one set of companies replace another as leaders in any industry is nothing new. That this set of now-giant corporations have so quickly and completely relegated the titans of the last quarter-century to saving themselves through reinvention is rare. I was fortunate enough to work with IBM during their transformation in the early 1990s – quite an experience. The scale involved this time is extraordinary – the numbers and dollars in play are extreme: billions of people, hundreds of billions of dollars. I’d say I’ll never see this again in my lifetime.

So, my industry has changed. I’m trying to find my place in this new order. Hopefully, my good fortune will hold up going forward as it has for the last 3 decades or so.

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Changing Fortunes

Last week, if you read the press, Apple’s world changed. ExxonMobil overtook Apple as the world’s most valuable company by market capitalisation, after Apple held that slot for just over a year. Apple today is being compared to Microsoft in its heyday 13 years ago. Some commentators have declared Apple past their peak, both in commercial performance and innovation capability. It must be hard to be Tim Cook at the moment.

Curiously, this coincided with Apple’s quarterly earnings announcement for the holiday season in 2012. By most measures, it was an outstandingly successful time for them: record revenues and very healthy profits. It was the biggest quarter by revenue of any company in history in terms of sales in value. Only Exxon has ever had anything like these profits.

Apple Dec 2012 Quarter in Context

But the numbers disappointed stock market analysts in a some very impactful ways, mostly around profit growth and a few other things. The stock plummeted to its lowest point in over 12 months in a matter of days.

This has happened before to other companies. Exxon, Microsoft, Cisco, GE and others have all had big highs followed by large declines in their stock prices. The shape of this peak in the graph stock price over time exhibits the similarity:

Peak Stock Prices - AAPL MSFT CSCO XOM GE

The Wall Street Journal has dubbed this “The $500 Billon Curse” and declared that Apple is not alone. The parallels with Microsoft go a bit deeper. In the last days of 1999, the world was a-buzz with dot-com fever and worries about Y2K. Microsoft was the darling of growth companies with a stock price more than double what it is today (and twice the average of the last 10 years). A big product release – Windows 2000 – was imminent. The PC business was extremely buoyant and Microsoft’s software ran half the Internet. In January 2000, Bill Gates stepped down as CEO. But there are some key differences too. In early 2000, the “tech wreck” plunged the NASDAQ from its peak to a wasteland of lost capital. In less than 6 months, Microsoft had lost two-thirds of its market capitalisation. Margin-calls on option-based borrowing were rife. Some Microsoft employees declared themselves bankrupt rather than cover their losses. I know. I was there at the time.

The reality of Apple today is that they are an enormous company: over 80,000 direct employees with revenues of over $160 billion per annum. They have over $120 billion in cash. They sold 75 million iOS devices (mostly iPhones & iPads) in 12 weeks. They have over 500 million iTunes customers and 200 million iCloud customers. Their supply chain is similarly huge. They, unlike Microsoft in 2000, lost their founder-CEO Steve Jobs to cancer in 2011. There were recent misteps, around Maps & Siri that lost a lot of trust from a lot of people. But the most important reality today is the twin challenges of competition in a maturing marketplace. That changes the fortunes of almost any company in any industry.

Samsung and Google have teamed up to be the most formidable competition to Apple. Amazon is another very strong competitor. The other significant dynamic affecting Apple is a kind of internal competition. The iPad is cannibalising some Mac sales and the iPhone (and its sibling the iPod Touch) are cannibalising iPod sales. Tim Cook is right to see this as an opportunity rather than a problem but the transition takes time and worries investors. Apple is also doing a lot more things now than it was when the iPhone and iPad were released. That creates competition for internal resources. And then there are all the patent lawsuits that consume enormous amounts of time and effort that are a distraction to direct competition and effective internal management. As Tim Cook said of them, “They’re a pain in the ass”.

Of course, Google and Samsung have had many kinds of relationships with Apple over the years. Eric Schmidt, Google’s Chairman and former CEO, sat on Apple’s Board for years. Andy Rubin, Head of Google’s Android division, is ex-Apple. Samsung has been a major supplier to Apple for many years although Apple is winding that relationship back. Even Google is reported to have counselled Samsung in 2010 that the Galaxy S II smartphone was a bit too much like the iPhone. And of course, there was the landmark finding in a US court last year that confirmed the opinion of many that Samsung had indeed infringed on Apple’s patents. But since then, a few of those patents have been declared invalid. More and more patent cases are being thrown out of court. It seems Apple’s intellectual property is not as legally safe as it was before.

Samsung’s execution, patent infringements notwithstanding, has been superb. Their Galaxy S III series of smartphone and a number of other Android-based devices are selling extremely well. Samsung has a very vertically-integrated business model right down to silicon manufacturing. Their partnership with Google on the Android side seems to work very well indeed. Samsung’s sales and marketing expenditures in the smartphone market segment are 10 times what Apple’s are in recent years. Their relationship with the telecom carriers is excellent and getting better whilst Apple’s was never very good and is getting worse.

But more importantly, two sleeping giants have been awakened by this titanic struggle: Microsoft and Nokia. It’s early days yet but there are signs of momentum emerging from this partnership. Microsoft understands the enterprise software market much better than Apple or Google. Nokia understands the telco handset device business much better than Samsung. Both Microsoft and Nokia need their partnership to work as a matter of future viability, although other handset makers are getting on the Windows Phone 8 bandwagon now. Nokia has some very important cloud assets that Microsoft leverages in their online properties, like maps. Both Microsoft and Nokia know what it’s like to be dominant and lose it. But they’ve both left their run very late in the game and have no appreciable market share in advanced modern smartphones or tablets. It’s a very much do-or-die scenario for them both.

Apple has been down before. They’ve suffered the slings and arrows of intellectual property loss before. They’ve certainly had internal missteps before. What started out as a dream run for Tim Cook after Steve Jobs has turned into one of the most challenging situations in the history of the US technology industry. I have faith in what they’re doing. I hope they can execute at least as well as most of their competition.

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Changing Business Models

The last 60 days has seen some extraordinary activity in the mobile device space. Apple announced at its Worldwide Developers Conference a new high bar in portable computers, its own mapping service and a slew of software features in their upcoming iOS 6. Microsoft announced the Surface tablet and a new mobile phone operating system Windows Phone 8. Today, they bought PPI, the firm that does the large mulit-touch displays used by CNN. At Google I/O, the Nexus 7 tablet and Android 4.1 “Jelly Bean” and other things were unveiled.

Unofficially, the rumours of a smaller iPad have never been louder and there’s new speculation of Amazon refreshing the Kindle Fire and perhaps introducing a smartphone. As one old colleague put it to me, “there’s never been this much excitement! ”

But the real excitement should be reserved for what this all really means. What does it mean that Google Maps won’t be the default mapping app on iOS (and OS X)? What does Microsoft getting into big touch displays & the tablet-PC hardware business mean – particularly for the hardware OEM partners, like HP? What’s the meaning of Google making and directly selling tablets (and phones) on its website? Why is Amazon so intent on making and selling hardware to consume the content in its online store?

The phrase “vertical integration” used to be such an ugly term. It was synonymous with other bad words like “closed” and “proprietary” (as opposed to “open” and “standards-based”). It evoked horrible nightmares of vendor lock-in and walled-garden ecosystems. It was the very thing that customers had pilloried IBM for in their heyday in the 60’s, 70’s and 80’s. It’s what everyone thought killed DEC in the 90s.

Over the last decade, Apple has made a virtue of vertical integration. iMac, iPod, iTunes, iPhone and iPad have all been roaring successes. Even their stores are world beaters. The commercial results have been astounding both in terms of volume and profitability. Their secret sauce is how to continually innovate highly integrated products and run a highly efficient supply chain in tandem. That means getting the hardware, software, communications and services to work brilliantly well together whilst managing the partners who manufacture and assemble the devices. What once was conventional wisdom – for a company to do almost everything itself – has now reemerged in a newer form at Apple. The only thing Apple doesn’t do itself is manufacture and assembly of the hardware (but almost nobody in the US or EU does either).

Update: MIT Sloan has done a study of changing business models. They chart the impact of these changes at Apple.

Apple - Changes in Business Model

It now seems many elements of Apple’s model has some attraction to the like of Google, Microsoft and Amazon. The original idea behind the Google Nexus smartphone (a joint venture with Samsung) was to demonstrate to the hardware ecosystem how to make an Android phone that delivered maximum support for the Android software platform. Microsoft (and Intel) have tried this approach before too. Microsoft’s Signature PC spec and Intel’s Ultrabook reference platform were intended as guides to others on how to build hardware products.

But this, it seems, was not enough. Almost nobody built Signature PCs and the Ultrabook initiative has so-far failed to produce adequate competition for Apple MacBook Air. In fact, the Ultrabook is so much like the “Air” that legal proceedings are almost imminent. Apple vs Android patent cases are everywhere and still Android tablets do not seem to be selling well. Twice as many iPads are sold as all the Android tablets put together.

What is required, if recent announcements are any indication, is for Microsoft to design and directly sell in its own retail shopfront stores the Surface tablet (even if it outsources the manufacture and assembly, as Apple does). It also looks like they’ll be in the touch digital whiteboard game. What Google’s done goes one step further – they design & directly sell a phone, a tablet and a TV set-top box (all made by others) that only work with the Google Play store, a single one-stop online shop rather like iTunes.

The change at Amazon is more subtle but still important. They’ve focussed on extending their store and their single device – the Kindle – to be more like an iPad only much cheaper and significantly smaller. Both Apple and Amazon have the 300 million or so one-click credit card customers in their online store. Apple had the music & video content, Amazon had the e-Book content. Then they both invaded each other’s turf. Apple went into books & magazines and Amazon went into music & video. The Kindle had the advantage of running as software on the Apple platform but Apple had the advantage of disconnecting the Kindle iOS & OS X apps from the Amazon store. Apple is still way behind Amazon on books but Amazon is way behind Apple on music, TV and movies.

These changing business models are nothing short of titanic shifts in the ICT landscape. It is being fought by the giants of the industry – Apple, now the world’s largest company by market cap, towers over a once-mighty Microsoft. Amazon & Google, once dot-com startups, are now very significant global companies. For Apple to become the template that reshapes its own industry would have been unthinkable only a few years ago.

It is as Bill Gates remarked to Steve Jobs just before Steve’s death last year – “you proved your model works too”. I wonder if Gates grasped the deeper meaning of his words. It seems Apple’s business model has become the pattern guiding the changes to Microsoft’s business. Steve must be smiling wherever he is…

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Changing Seasons

Most southern summers, we take a ski trip in Europe or North America. This started years ago as an extension to an annual business trip in January to the Pacific Northwest. It puts seasons into stark contrast. The hot Australian summer is about as different from a snowy mountain as you can get. There have been extremes in the past. One year, we got on a train in Switzerland at -25C and came out of the airport at home to find +40C.

The mid and late winter in the Northern Hemisphere this year has been usually severe. After an extraordinarily warm and dry early winter in North America, the ski fields are full of metres of snow and severe avalanche conditions. There are tornados in the mid West, over 20 metres of snow fell in Hokkaido this winter and a huge cold snap killed hundreds in Eastern and Central Europe. The ski resort in Colorado where we were last month just had a big storm go through leaving the better part of a metre of fresh snowfall (damn!).

Recently, here in Australia, it’s been very wet and warm. People have been flooded out in the river valleys and low-lying farm lands in NSW and Victoria again. The main reservoir in Sydney overflowed yesterday creating even more flood danger. This follows the floods in Queensland last year which put a part of that state bigger than France and Germany underwater for weeks at a time; downtown Brisbane had a river flood that wiped out large sections of the City. Over the last couple of summers, an inland reservoir in NE Victoria has fully recovered from the drought – it overflowed last spring for the first time in over 15 years:

Lake Eildon Levels Jan 2009 - Mar 2012

Our return from the US to Australia this week brought the contrast home to us – up close and personal. The day we left the Rockies, it was -20C and very dry. 30 hours later, it was almost tropical in Melbourne and Sydney: mid-30s and extremely humid. As I write, it’s raining outside for the 5th day straight. From 1995-2010, it hardly ever rained late in the summer in SE Australia. Now, moisture is being dragged all the way across the dry Australian interior from the Indian Ocean.

This is something more than El Nino and La Nina. The basic pattern of weather has exhibited a big departure from historical norms. There have always been floods when droughts break in Australia. The last time there was a drought that lasted a decade was in the 1890s and the rains surely followed – but not for two years and not like this. The last time there were tornados in the mid West in February was… never, at least not on record. The last time the Black Sea froze on the Romanian coast was in the Medieval Ice Ago hundreds of years ago. They’ve never measured 70 feet of accumulated snow on Japan’s northern island since reliable record-keeping began. Last northern summer, a weather event in the Carribean disrupted the jet-stream resulting droughts and fires in Russia and deluges in South Asia and the Arctic sea-ice melted almost completely away.

The nightmarish thoughts of some climate apocalypse aside, all of these change evoke some serious worries. Has the weather become so destabilised that its becoming hazardous? Certainly – people are dying all over the world from storms and floods and droughts. Has the weather changed from the gentle seasons of my childhood? You bet – every year seems to bring some high level of intensity to climate-releated news. Is the ice melting and the sea rising? Certainly – no quantitative doubt about it from any reputable scientist. Are food and water supplies changing because of the weather? It looks that way – the markets are reacting quite strongly to nations withholding export supply to satiate domestic demand.

Medium term, this is likely to spill over into some social, economic, political and even some military activity. With a half of mankind overall in cities (85% down here), the resilience of human society to changing weather has paradoxically become concentrated. Farmers are directly subject to the forces of nature but urban dwellers are subject to a finely tuned just-in-time supply chain of foodstuffs. The agribusiness supply chain managers have seen to it. It’s the economically rational thing to do. But if hungry and thirsty people living crammed into larger and larger cities find empty supermarket shelves because of some weather event, things can get very ugly very quickly.

For me, I’m glad my brother-in-law has a hobby farm on high ground just outside the City. We all know what to do up there and how to do it together. The food and water from that property tastes much better than the stuff in the supermarkets. Hope we never need to use that place as a last line of defence…

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Changes in the Distribution of Income

Lately, the news has been full of the top-1%. The Occupy Wall Street movement and its various spin-off local movements purport to represent the rest of us. The GFC and its aftermath, particularly in the US and Europe, have brought the inequalities in income distribution to the fore. People the world over are suffering and more than a few of them are speaking out.

The shifts in income distribution in the developed world have been especially pronounced in America. The data support the widely held perception that the middle-class is being “hollowed-out”. Technological change, globalisation, immigration, tax reforms, the decline of union membership and several other factors have converged over the last 3 decades to a common effect: the rich getting much richer, the poor poorer and those in the middle going backwards. Perhaps its especially in the US that this has inspired the current debate. There, the middle-class have long been a pillar of their society, their economy and a centrepiece of post-war intergenerational socio-economic upward mobility.

Recently, the White House has come out with some stark and disturbing analysis of the relationship between income inequality and intergeneration upward mobility. None other than the Chairman of the President’s Council of Economic Advisors, Alan Krueger, has weighed into this issue with a definitive speech last week. He correlates the metric of income inequality (the Gini coefficient) with a measure of intergenerational mobility. The relationship between these two numbers is surprisingly good. It means that in today’s very unequal America, one’s parent’s economic situation is a strong predictor of one’s likely future economic situation. More disturbingly, the more recent data suggests that not only is America getting more unequal, but this intergenerational link is getting stronger. Upward mobility in America, it seems, is waning. Krueger styled this phenomenon “The Great Gatsby” curve. Miles Corak explains it well here:

More illuminating was some of the background to this conclusion. It seems the 1% have not done as well as they are today for almost a century. The last time they have had as large a share of the income pie was in the 20s. Since then there’s been almost a U-curve with the bottom of the U in the post-war reconstruction era.

The difference between the US and Australia is strikingly visible for almost the entire Post-War Era. Today, the top 1% in America have almost double the income share as they do down under. The numbers for Sweden, Japan and France are much more similar to the Australian experience than the one in the US. That doesn’t mean that the Swedish, Japanese, French & Australian rich aren’t getting richer at the expense of their compatriot poor; just not to the same degree as the American rich seem to be.

The situation is just as worrying for the top 10%. Although the difference between Australia and the US is only half as much again (rather than double), it’s clear that the richest tenth of Americans have almost half the income:

Top 10 Percent - US v AUS

Even more surprising, during the Clinton presidency, there was a significant revival in the much more equitable distribution of income in the US – something that can’t be said of the Reagan/Bush years or the last decade. Nevertheless, the news is that the hollowing-out of the middle class is not a new thing and it’s been going on for a long time.

A worrying question arises from all this. If greed for the few was followed by depression, war, social transformation and the Cold War last time, what lies ahead? Surely the world in 2012 is so different from the world in the 1920s, they bear no possible comparison. An interesting insight into this come from my new hero Niall Ferguson. His 2010 John Bonython Lecture in Sydney last year examined the popular view of how Empires rise and fall. The basic idea he presented in consummate Ferguson style was that Empires are complex systems that can and do fall very rapidly even as they appear robust and stable. Such was the fate of the British Empire in the 30s and 40s. His prediction is that this is what we’re seeing in the American Empire today. The parallels are deep, impactful and timely. As a financial historian, Ferguson’s data are also about money. The ones he presented in Australia last (southern) summer were macroeconomic – national debt and interest payments specifically. His case is compelling; the debt situation in America (and Europe) is particularly severe.

Has globalisation and the accompanying offshore outsourcing of jobs contributed to this mess? Certainly. Has technological innovation and its relationship with financial capital forever changed work and the distribution of income? Absolutely! Have taxes become less progressive and the social welfare state diminished? You bet. Have the very rich once again become the rulers of economic life? Sure looks like it. Has upward mobility in America become the last remnant of the American Dream? The data supports that.

The question from both Ferguson and his arch rival (self-confessed Liberal) Krugman is what to do about it. Strategic tensions between the US/EU alliance and the rising Chinese power and pan-Islamic powers are on the rise. China and America are locked in a kind of deadly embrace that Ferguson calls “Chimerica”. Krugman wants a return to Keynsian remedies. Ferguson wants debt control. Until very recently, we had 3 Christian armies in Muslim lands. Now we want budget cuts at the Pentagon and increases in military spending in an almost bankrupt Europe. It seems almost as if we are reliving the 30s all over again.

Perhaps this time, the difference will be that technology and globalisation will make the transition from denial to declaration of war to despair more rapid. If the Mayans are right, it’ll all end just before Christmas. Then we can get back to reconstructing the world and everyone can benefit more broadly. Let’s then see if the 99% have what it takes to deserve the bigger piece of the pie they all say they want. What their grandparents went through to get their share was pretty tough.

Update: Income inequality is becoming very important, according to the WEF Global Risk 2014 report…

Income Inequality

Update 2: HBR has an interesting blog post entitled “We Can’t Afford to Leave Inequality to the Economists” from Justin Fox.

Update 3: A visualisation of the Global Risk Matrix for 2014

Global Risk Matrix

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Changing of the Guard at Apple

Steve Jobs’ death last week has been mourned by so many of us. It was especially sad for me. It’s taken me days and days to be able to write this piece. Despite the interminable news of his heath issues for the last several years, it’s still hard to grasp that he’s gone. His life and times were an example to us all. What he stood for was particularly meaningful to me.

Steve was more than Apple. His extraordinary life and the body of work he leaves behind will astonish and fascinate future generations for centuries. His spirit will live on in the creation of much of the modern world. More than a visionary, he brought so many of his visions to fruition. More than an inventor, his inventions were honoured by that highest flattery – imitation. More than a businessman, his innovations transformed whole industries. More than the iconic rebel, he refused to accept anything less than ‘insanely great’.

The Apple that Steve rebuilt in the last 15 years of his life is much more than Steve. It’s unlike any modern enterprise. It’s a corporation without the corporate. It’s a tech firm without the technocracy. It’s a design studio without the studio system. It’s retail chain without the chain retailing. It’s a sense of cool that never leaves you cold. It’s a lifestyle company that let’s you pick your own sense of style. It’s a consumer electronics brand whose products and services make your heart sing. It’s the world’s largest online music store and the biggest seller of music of any kind. Before Steve came back, Apple was none of these things. It was 90 days away from bankruptcy.

Steve leaves behind this very different and inordinately better Apple led by one of the best teams in business- period. It’s not just Tim Cook or Jony Ive. It’s not just Phil Schiller or Craig Federighi. It’s the team. It’s a bunch of guys that have played an A-game together, with and without Steve. It’s a top-flight bench of industry-veterans who know what they’re doing. The world has seen them, on and off, without Steve at the helm. This team have earned the confidence of both Wall Street and Main Street, which is more than most leadership teams in the US have done in the recent past.

There’s a deep pipeline at Apple. Steve saw to that before he left his job there and moved on to the next world. The team knows what to do with it. For the last few years, Apple has been capturing the essence of what Steve brought back to Cupertino so that other may follow in his footsteps. Leading and teaching others by example and continuous education will preserve The Apple Way for years to come. Steve knew that writing a book, like Hewlett and Packard did in “The HP Way”, just wouldn’t be enough. He never wanted to see what John Sculley and his successors did to Apple ever happen again.

Apple is destined to become something more than a great American company. It shares many characteristics with a religion or a cult. It is a living culture, a way of life, a philosophy as well as a global brand and a set of products and services. It comes from their marriage of technology and liberal arts. It comes from function melded with feelings. Several times, this unusual and rare blend of the left- and right-brain resulted in a breakthrough experience for Apple’s customer: iMac, iPod, iTunes, iPhone and iPad. The results are undeniable. Unlike so many others, I judge the art, not the artist.

Steve’s impact on the world wasn’t limited to Apple. Without Pixar, the movie business wouldn’t have been the same. Without NeXT software, there would be no OS/X or iOS. Without Steve’s irrepressible showmanship, there would not be the messianic euphoria at the product launch keynotes. Without his decade outside of Apple, there would be no CEO of the Decade. Steve’s grasp on humanity is best summed up in his 2005 Stanford Commencement address.

Changing the guard at Apple is not the end of an era. Steve made sure of that this time. His brilliance and spirit have been captured. His successors know what to do now and for some years to come. The momentum in society is there. The fan club is only growing, particularly outside the US. Steve resigned as CEO only because his ill health would not let him do the job any longer – he said so in his resignation letter. I hope and pray that those who follow him fulfil their potential and seize the opportunity bequeathed to them by their fallen leader.

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Learning About Change by Learning About Change

Professor Niall Ferguson is my new favourite historian. His recent work “Civilisation” is both a landmark book and a great 6-part TV series. “The Ascent of Money” and “War of the World” were also turned into television series. The last episode of Civilisation aired on BBC Knowledge in Full HD here in Australia last week. It marked the end of an experiment in learning for me and many others in my circle of friends.

The themes of Ferguson’s work make longer-term historical influences relevant to current affairs. “Civilisation” talks about 6 killer apps – Competition, Science, Property Rights, Medicine, The Consumer Society and The Work Ethic – that allowed the West to dominate the rest for half a millennium. “The Ascent of Money” puts the GFC into a broad historical context spanning almost that long. “War of the World” looks at 20th Century warfare a single conflict based on racial discrimination and genocide.

They’ve been fascinating books to read and even more enthralling television to watch. “Civilisation” in particular has been one of the best pieces of documentary TV ever, not only for its content but for its production quality.
I’ve always read history. Before Ferguson, some modern historians like Paul Kennedy and Barbara Tuchman captivated my imagination with their scholarship and style. But none of these academics seemed to be able to harness the new media like Ferguson.

To start with, I read these 3 of Ferguson’s many books electronically, thanks to Amazon’s Kindle technology. I didn’t use the Kindle device – I read them on smartphones and computers from Apple. More importantly, I first read the books as books are meant to be read – sequentially from start to finish. Then, as the TV episodes appeared in my electronic program guides on the TV, computer and smartphone, I re-read the relevant chapter just before watching the corresponding TV episode for the first time. I recorded the TV episode on a hard disc in my set-top box. I re-read the chapters, sometimes out of sequence then watched the recordings again. Sometimes I’d mix and match reading and watching across the 3 books/series, as there are many intersecting themes.

This is a serious change in learning for me – a deeply immersive experience that deals with some very important content in a way that surprised me (and many others amongst my friends). It led me to chasing down supporting literature and television referenced in the electronic record, often with no more effort than a hyperlink-click. It opened up new perspectives and an intensity of inquiry I haven’t felt since my university days.

Economic history is a bit of a fad these days. The GFC brought The Great Depression of the 1930s back into the foreground of public affairs. Before Obama’s inauguration, there was a run on books about the Depression on Amazon that caused a big backlog on orders and long delays in deliveries. It seemed that everyone wanted to know about the ’20s and ’30s again.

My father’s library from his days studying economics in London in the 50s and his graduate-school days in New York in the early sixties has always been there. My own library has many volumes. Margaret Macmillan’s “Paris 1919” is the only standout work that was made into a TV program – a 2-part docu-drama miniseries that regrettably does not do the book justice. I recently gave a DVD copy of it to my Dad for review. His knowledge of this material far exceeds my mine.

My learning of economic history has been partly academic, partly econometric and partly recreational – a hobby rather than any serious historical interest.

  • The academic piece started in high school and ended in undergrad school, mostly to fulfill course requirements in what was otherwise a very practical curriculum around math, science and technology. I had a similar mix of philosophy, literature and debating during my schooling.
  • I learned my econometrics on the job from a brilliant polymath who was a classic Oxford tutor. For years, we were drilled in endless conversations over cups of Earl Grey tea and the whiff of his pipe talking about economic cycles over the centuries. My active role in that time was as a software developer, but he insisted I participate in the interpretation of the models and data as well. I learned, if nothing else, how much there was for me to learn.
  • For the 30 years since then, I’ve tried to narrow that gap. Reading history, especially economic history, has been part of that. Rewriting that software many times in several generations of technology has been part of that. Sourcing more and better data from a plethora of online resources has been part of that. Operating a private consulting organisation for many years dealing partly in that subject has been part of that. Engaging in continuous learning in the ICT profession for a quarter-century has helped. But nothing has approached the revelation about learning that I experienced this year with 3 of Ferguson’s works in print and on TV.

Here’s why:

  1. The wars of last century changed the world. The GFC has rocked our present-day world to its foundations. The titanic battle between the West and the rest looks to dominate the next century of history. These are profound and impactful things.
  2. Ferguson puts them into context and into a stark perspective. His scholarship is world-class. His exposition is amazingly approachable. His TV appearances are both populist and learned. He makes the important understandable.
  3. Reading using Kindle technology on usable hardware and software from Apple enhances the experience. Watching Full HD television intensifies the experience. Doing both in sequence and repeatedly massively reinforces the message by leveraging the media effectively and efficiently. Getting a Kindle book online and reading it on a phone anywhere anytime and switching back to exactly where you were up to on a notebook or a big, hi-definition screen at home is a wonderfully easy thing to do.
  4. Bouncing off to the references at the tap of a finger is convenience itself. The TV content augments my mental imagery all the time, whether or not I’m watching it.
  5. Having first-hand experience of some of the many places in the world where the TV series were filmed enhances that imagery all the more. Strangely, I even have olfactory memories of that tea and the pipe-smoke coming into my head from time to time.
  6. Lastly, the room at home where most of this happened used to be my mentor’s study in the early 1980s.

This combined and repeated appeal to sensory dynamic memory (as the cognitive scientists call it) is a compelling factor in this issue. It takes the subject of dry book-learning and layers it with a rich and personal subtext. Experience augmented by someone else’s superb ability to communicate about something meaningful at the right time through new media.

I’m sure this is a harbinger of things to come – how learning can be changed to make education better and more impactful.

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Generational Change

For a few short days almost 25 years ago, five generations of my family were alive. These were my great-grandfather Pete – a retired doctor from Canada, his son (my father’s uncle) – a college professor from New Jersey, my Dad – a sales & marketing executive, and my sister’s first daughter – a newborn infant. In the weeks before his death at 107 years old, my great-grandfather met my newlywed wife from Australia. Almost nobody else in my circle of friends has had that experience.

As children in America, Pete was the marvel of our family. He was a diminutive man at a mere 5 feet tall. His furniture was antique – not because he bought it that way or because it was handed down to him. It was because it had been with him for so long. He had a routine and rhythm to his daily life that came from another era. He awoke before dawn, played his mandolin and sewed to maintain his manual dexterity. He was what later became to be known as a health-food guy, an was since the 1920s. He walked 3 miles each way to work at a hospital every day, snow/rain or shine. He went to the same beach resort only a few miles away every summer for the same week in July. He loved the horse-races with a passion. He read every edition of Scientific American for almost 80 years and kept each magazine in an organised library. His television set in the 1970s had a round monochrome screen because it had been made in the 1940s. He submitted to family pressure just before his 90th birthday in 1969 and drove a 1940’s car down to the junk yard; Pete never drove again. I watched the Apollo 11 moon-landing with him on that old TV with my parents & grandmother. He was an adult when the Wright Brothers first flew.

Pete studied medicine by kerosene lamplight. He witnessed countless medical advances in the 75+ years he was a working doctor. He survived a stroke at 102 years old as a patient in the same hospital he worked in for over 60 years. For a year or two at the end of his career, the Guinness Book of World Records recognised Pete as the oldest practicing medico on earth. Pete was a practical man, a very hands-on doctor. He could take the spectacles off your face and tell you how much your prescription had changed since the last time he’d done that 5 years beforehand. He was a well-read man. He could talk about scientific and medical technology with the same ease as history, current affairs, economics, social change, religion or politics. During the 20th Century, all these things changed and did so at an accelerating rate.

All my life, Pete has been the benchmark by which I measure the changes one person can see in a single lifetime. He saw so many new things that would have boggled his father’s imagination – particularly in science and technology. He saw the very localised world of steamships, trains & telegraphs change into the globalised world of jet planes, rocketships and The Internet. What used to take days & weeks in the world Pete grew up in took seconds & hours in the world in which he died. His son flew for the US Army Air Force in China during WW II – a man who later became an accountant and a university professor who taught undergraduates how to use personal computers for financial modelling (using Lotus 123 spreadsheets on original IBM PCs). His nephews (my father and uncle) became global businessman in the manufacturing and mining industries on 4 continents. In my generation, we have an air-traffic controller, a psychological councilor, an MBA business-school instructor and an IT guy. In the next generation we have a biologist, a real-estate professional, an information manager and a fashion-industry person. Of those, all but two knew Pete’s son; 6 of us knew Pete. The sense of change in the family is deeply shared.

More importantly, we all seem to understand how Pete & his son adapted to the vast changes in their lives. They told us how they did it – more often face to face and more than once. Pete & his children were story-tellers. They made the message real and relevant for successive generations. They could put things into historical context and offer insight and guidance for the future. They did not preach, even if they wanted us all to go to Church. They did not lecture, even though they knew how. They did not dictate as they had all fought dictators in one way or another. They spoke from the heart as they spoke at the fireside – from a deep personal experience of adapting to changing times throughout their lives.

As children of the jet-age and space-age, my sister and cousins & I experienced more rapid change. Moving countries & houses frequently, we saw many parts of the world when they were very different from each other. Our relatives often visited with us from faraway lands and we visited them. We watched TV from childbirth onward. We never feared war and never wanted for anything, unlike the 2-3 generations before us. A wealth of education & opportunity was always before us. The best food & healthcare was a part of our North American way of life, regardless of where we lived. We all remember watching the moon landing with Pete as part of his extended family because he told us the story of the Wright Brothers right afterwards. We spoke about the Space Station and space-planes that night; most of us have seen that come true.

What Pete and his children would dare not imagine is an African American in The White House. What my grandparents could never understand is climate change. Few of them could have grasped the impact that telecommunications and computer technology would have in the years ahead. Even though everyone except Pete had spent time overseas, almost none of us would understand globalisation as it now exists. The social, healthcare, political and economic future of the world of the next 50 years changed far too much for anyone in that living room in July 1969 to fathom.

As my nieces have become adults, I sometimes wonder what their great-grandchildren will be like. I occasionally ponder what kind of world they will live in and how they will think about generational change. It seems they will live in a world of many more people – perhaps up to 10 times as many – as the world into which Pete was born (5 times more than the world into which I was born). It will be a smaller, more connected world. A world in which more will need to share in less of what we shared and will share in more and different things that I can imagine. I hope it will be a better world. Sometimes, I harbour fears of what kind of world it could become, but I think every generation does that in some shape or form. Mostly, I’m optimistic. The billions of starving Chinese & Indians of Pete’s lifetime seem to be on their way to a better life…

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