Getting Real

January 26, 2010 — Steve Waite

With the Super Bowl coming up, I thought it might be fun to use football to illustrate one of the big themes Kris and I are working on at Research 2.0. The theme is the convergence of the real and virtual worlds, something we call RealVR. The convergence of the real and virtual worlds promises to profoundly reshape the global economic and financial landscape. The investment implications of RealVR are significant, particularly when viewed in conjunction with the migration of applications to the Cloud.

We can illustrate the convergence of the real and virtual worlds by looking at the evolution of Electronic Arts’ popular computer game, “Madden NFL.”   The first version of the game – titled “John Madden Football” – appeared in1989 for the Apple II series of computers. In 1991, a version was released for Sega’s Genesis machine. The picture at left is a snapshot from that game. Note the crudeness of the playing field and players. Suffice it to say that Madden NFL in 1991 was not realistic at all.

If we fast forward a decade to 2001 and look at a snapshot from that year, we can see that the graphics of the Madden football game have taken on a more realistic appearance. The team colors and logos are clearly visible (in this case, the Raiders and the Rams). We can see the images of the players are beginning to resemble real football players. The playing field looks more realistic as well.

It is evident from these two snapshots that during the first decade of Madden NFL, there was a significant increase in the realness of the game. We can jump ahead another decade (well, almost) and compare the realness of the 2001 game to today’s Madden NFL. Nearby is a snapshot from this year’s version of the game. Note there has been another large increase in the realness of the game. The players are beginning to resemble themselves (pictured in the snapshot are Arizona Cardinal wide receiver Larry Fitzgerald and Troy Palamalu of the Pittsburg Steelers, participants in last year’s Super Bowl).  The current version of Madden NFL makes the 2001 version look like a joke. There is no comparison.

The evolution of Madden NFL over the past two decades clearly shows the ongoing convergence the real and virtual worlds. Put simply, things are getting real. Given where we are today it is pretty easy to see that things will become even more real and life-like in the coming decade amid exponential growth of computer power.  We are moving into an age where increasingly, it will become difficult to discern real from virtual.

We can imagine in the not-too-distant future a time when our appearance in a virtual world like Second Life or Teleplace will resemble who we are in real life. Several of the companies we have spoken with over the past year are incorporating life-like avatars into their enterprise virtual worlds technology. The avatars are crude today, just as the football players were in the early versions of Madden NFL. But you can bet they will get more realistic in the years ahead.

As RealVR continues to evolve in exponential fashion, there will be many new opportunities for established as well as emerging technology companies. Much of the research Kris and I are doing today involves identifying the biggest potential beneficiaries of RealVR.  It is an important piece of our investment strategy today and ripe with potential. We believe the convergence of the real and virtual worlds will profoundly alter the dynamics of corporate growth and profitability and create some fantastic investment opportunities in coming months and years.

Speaking of RealVR, football, and the Super Bowl, it won’t be too long until Madden NFL will be available in 3D and people will be able to watch the real Super Bowl in 3D – in their living rooms or on their smartphones.

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3D and 4G

December 16, 2009 — Steve Waite

Kris and I published a report on 3D mobile technology today with our friends at GigaOM (subscription required) ahead of the release of James Cameron’s “Avatar,” which opens in theatres on Friday. We are seeing a burst of innovation in the mobile space, led by companies like Apple, Google, Nvidia, Qualcomm and others.  We believe it is in mobile computing where we will see increasing convergence between the real and virtual worlds (what we call “Real VR”). Is it any wonder why Google and Apple are banking large fortunes on mobile technology?

With 3D mobile technology, augmented reality will become totally immersive and spawn new applications and services we haven’t seen before. A host of new software and services  will pop up  as if out of nowhere (how many people knew Twitter existed 18 months ago?). The Cloud will become a pervasive force in mobile computing.  Supercomputing, once the domain of expensive laboratories, will be available in the palm of your hand through the Cloud in the not-too-distant future.  Could the Singularity be too far away?

One of the issues we did not address in our 3D Mobile technology report was the state of mobile bandwidth and its impact on the evolution of 3D mobile technology.  There are over 4 billion wireless subscribers globally, and there has been a significant increase in mobile data usage. Mobile data accounts for over 20% of carrier revenue globally. The increase in the demand for mobile data poses some important strategic questions for the mobile operators who need to figure out a way to deliver mobile data more economically and efficiently.

Third generation (3G) is the predominate technology used by wireless carriers, but we will see a migration to more powerful fourth generation (4G) technologies in the future amid rising demand for wireless data applications and immersive mobile experiences.  The two leading 4G technologies are LTE (Long Term Evolution) and WiMAX (Worldwide Interoperability for Microwave Access). Both 4G technologies help reduce the cost per megabyte, increase efficiency and decrease latency through flat all-IP infrastructure, and provide a rich framework to innovate new applications and services across multiple platforms.

Most major mobile carriers in the United States and several worldwide carriers have announced plans to convert their networks to LTE. The LTE specification provides downlink peak rates of at least 100 Mbps, an uplink of at least 50 Mbps. LTE can deliver the same MB at  less than 25 percent of the cost compared to Wideband CDMA (WCDMA) and at less than 50 percent compared to HSPA (High Speed Packet Access, a 3.5G technology). WiMAX technology lies at the core of mobile pioneer, Craig McCaw’s company, Clearwire. Sprint is an equity owner in Clearwire and is building out a 4G network using WiMAX. Whether WiMAX 4G can pull Sprint out of its tail spin remains to be seen.  We have our doubts.

Many analysts expect LTE to become the dominate 4G wireless technology in the future and that looks like a reasonable bet to us.  Whatever technology prevails, it is clear that there will be growing demand for high speed wireless broadband as 3D mobile technology and applications proliferate.

3D and 4G go hand in hand.  The more bandwidth, the better the immersive mobile experience.  Who are the likely winners in 3D and 4G mobile technology?  What companies should we be investing in today? For answers to those questions, you’ll have to sign up to and become a Research 2.0 client. Membership has its privileges.  :)

(Disclosure: The Research 2.0 Technology Model Portfolio has positions in Apple, Google, Nvidia and Qualcomm; clients have full access to the portfolio and its managers).

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The Perfect ‘RealVR Cloud’ Storm

December 8, 2009 — Steve Waite

I was recalling a time back in the mid-1990s when I was up in Canada giving a talk on investing to a group of financial advisors.  I was speaking about the coming wave of technological change associated with the Internet and World Wide Web that our research had uncovered and recommended taking a position in a little, largely unknown company called Amazon.com. Most of the people in the room had no idea what I was talking about, but there was one guy in the room who came up to me after my talk and said, “That talk was terrific! What was the name of that company you recommended?”  For the most part during my travels, I felt as if I were speaking to the deaf since few had done any research on the internet or web or even heard of the technology.

Fast forward nearly fifteen years. There’s a perfect storm brewing in technology – one that promises to bring about a tidal wave of creative destruction in the months and years ahead.  A wave of economic change that could rival what we observed in the mid-1990s.  That storm is something Kris and I call ‘The RealVR Cloud.’  There are two pieces to this storm: RealVR and the Cloud. Together, they represent the next major opportunity for technology companies, businesses and investors alike.

RealVR captures one of the biggest trends we have ever seen in our careers and may see in our lives – the convergence of the real and virtual worlds. It encompasses the 3D internet, 3D web, augmented reality, and virtual reality. It cuts across every sector of the global economy from consumer, to business and government. Together with advances in cloud computing, which is the catch-all phrase for networked computing which promises to change computing as we know it, Cloud computing is ushering in a host of different computing architectures, mobility and new applications requirements.

All of the established technology companies – Apple, IBM, Hewlett-Packard, Microsoft, Dell, Sony, Google, you name them – are making a massive push into the the Cloud. Together, Real VR and the Cloud promise to unleash a massive wave of technological change – a virtual Cambrian explosion of innovation. You can think of The RealVR Cloud as the next evolution of computing, the internet and web.

Just as during the Cambrian explosion in biology, which wrought millions of new species and incredible biological diversity, there are thousands of emerging companies operating beneath the surface and invisible to many observers. These companies have been slowed down by the financial crisis, but there’s still a heartbeat and they are intent on finding a way to create innovative products and services associated with the RealVR Cloud that will challenge incumbent technologies and established business practices in much the same way Amazon.com, eBay, AOL and Yahoo did in the 1990s. Not all will succeed, of course. But some will, and they will appear as if they came out of nowhere. Such is the nature of exponential change in technology.

The RealVR Cloud is being enabled by extremely powerful, nano and quantum-enabled technologies. We are entering a period of innovation that will usher in new 3D chip architectures, powerful chips, including Graphic Processing Units (GPUs), Multi-core CPUs, 3D Virtual Worlds software platforms and applications for increased collaboration and productivity, sensors and software to enable touch, voice and vision to make technology more human-like.

The RealVR Cloud storm will reshape industries and businesses around the world. There will be new products, services and applications emerging out of the RealVR Cloud for energy, transportation, medicine and health care, consumer products,  and any other industry or sector you can name. Put simply, the RealVR Cloud is nothing less than the next (r)evolution in information and communications technology. As Kris says, there’s no more important space in tech land. The Real Cloud is likely to represent an overwhelming share of technology market growth in the decade.

Amid the perfect RealVR Cloud storm that is brewing, we see a growing inefficiency in equity markets. More and more investors seem intent on chasing daily or monthly returns. Miss the quarter by a penny and issue conservative guidance, and investors dump the stock and run away. This is creating new opportunities for those investors who see value beyond the quarter.  The perfect RealVR Cloud storm that is rolling in is not a quarterly phenomenon. It will evolve over the course of years and well into the next decade and beyond. To try to capture this tidal wave with investment processes intent on targeting daily or monthly returns is foolhardy. We’re fully in agreement with my fellow Morgan Stanley colleague Andy Kessler, who after sizing up the latest trading scandal on Wall Street summed up nicely what Kris and I believe at Research 2.0. Andy said:

“Information now travels at the speed of light. The edge to human traders is mostly gone, arbitraged out by fast computers. Near-term blips in stocks will always be driven by those with industry contacts, legal or illegal. The only way to truly beat the market long term is to use your head, think out long-term trends, figure out where productivity and therefore wealth is being created in the economy, and invest alongside it. This might include investing in wireless commerce, gigabit broadband, personalized prescription drugs, oil shale extraction, or electric smart grids that can better allocate power to where it is needed.

Some investors will make money trading daily and a few will get news that gives them an indication of where to invest before everyone else. But the edge of focusing on the next mountain to be climbed, while fast money chews up the foothills directly in front of us, is the surest way to make money over the long run.”

Kris and I believe the RealVR Cloud is the next mountain to be climbed. Our technology analysis at Research 2.0 is intensely focused it. It is our mission to help businesses and investors understand the perfect storm in technology that is brewing. Those that don’t are likely to up like George Clooney and his crew in the movie. Suffice it to say, we hope that is not you dear reader.

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The Battle Ahead: Deflationary Boom vs. Inflationary Bust

December 3, 2009 — Steve Waite

Earlier this week, I wrote a blog post on the impressive performance of productivity in the U.S. business sector (see “More Like a Deflationary Boom”). I noted that business productivity growth was rising sharply again and this was a recipe for disinflation and outright deflation. Companies have been restructuring aggressively to cope with harsh economic conditions, and the restructuring, amid increasing liquidity in the global economy, is beginning to pay dividends in the form of higher productivity and profitability. Accelerating productivity growth is great news for the economy and for financial markets.

While the private non-farm business sector has been busy restructuring and getting back into shape, the same cannot be said for the U.S. public sector.  From the looks of things today, it appears that the public sector is in dire need of restructuring. Let’s have a look at the numbers, shall we?

Over the next year, the U.S. Treasury will have to refinance $2 trillion in short-term debt and, in addition, raise another $1.5 trillion to finance the government deficit. That’s $3.5 trillion or nearly 25% of U.S. nominal GDP. Some analysts have looked at these numbers and argued that bankruptcy is around the corner.  We believe that is too harsh of an assessment. That said, given the daunting figures, one wonders where the money will come from to finance the multi-trillion dollars of U.S. government debt in the year ahead.

Overseas investors have been large buyers of U.S. government debt. Foreign investors own over 40% of U.S. government debt. As it stands today, the U.S. currently has insufficient reserves (gold, oil, and foreign currency) to cover the $880 billion the U.S. government owes foreign creditors so they may be  reluctant to continue buying large amounts of Treasury securities at current interest rates and exchange rates. That remains to be seen.

Meanwhile, back at home total domestic savings are in the range of $600 billion. They are not sufficient to cover the government shortfall. Warren Buffett, Bill Gates, Larry Ellison and all the other billionaires and multi-millionaires in America don’t have the funds to finance the U.S. government. A major tax hike is also a possible solution to help finance the deficit, but such a move right now risks aborting the economic recovery. In all likelihood, a major tax hike right now would be the equivalent of economic suicide and lead to the demise of the current administration.

If foreigners become increasingly reluctant to finance the debt, and domestic private savers don’t have the wherewithal, where is the money going to come from to finance it? Chances are, it will come from the U.S. Treasury and the Federal Reserve. The Treasury will print cash and the Fed will purchase government debt in the open market. In other words, the old fashioned printing press will be used to help keep the federal government in business. When strapped for cash, simply print more money!

Of course, there is a cost to having the U.S. Treasury printing more money and the Federal Reserve purchasing the debt in the open market. The cost is inflation. The excess liquidity from the printing press first finds its way into financial markets, which boosts the prices of financial assets. Interest rates remain low and equity multiples expand. Over time, the excess liquidity finds its way into wages and the prices of goods and services. As it does, inflationary pressures build. As inflation rises, the relative value of the dollar declines in the currency markets and investors flock to gold and other hard assets viewed as a hedge against future inflation.

Not surprisingly, many Federal Reserve officials have been arguing the need to keep the federal funds rate low for the foreseeable future. Lower short- term interest rates will keep U.S. government borrowing costs down, helping to keep the government’s deficit from rising further. Currently, 3-month Treasury bill rates are at 0.06% – just above zero. Also not surprisingly, the value of the dollar has been declining and the price of gold has risen. This is pretty much what one would expect from resorting to a printing press solution to financing trillions of dollars of government debt.

Whereas performance of the private sector in the U.S. appears to be consistent with a deflationary boom scenario, performance of the public sector is screaming inflationary bust. From our perspective, and I imagine the perspective of foreign and other creditors, the U.S. federal government is in serious need of restructuring – both financially and operationally. It has expanded beyond its financial limits. Privatizing GM, AIG and restructuring the mortgage market, which is on the docket, would be a good start. But much more restructuring is needed.

Absent a serious restructuring of the federal government, the burden of debt will become highly inflationary and act to erode the value of financial assets and offset the efficiency gains in the private sector, perhaps akin to what we experienced back in the 1970s or even worse. Needless to say, such an environment will not be conducive to a bull market in equities.

Whatever conclusions one wishes to draw from the U.S. government debt figures, and I certainly don’t have all the answers, it seems plain to see that now is definitely not the time for the current U.S. administration to consider expanding the size and scope of the federal government. America simply cannot afford it and to think otherwise is sheer delusion.

Come to think of it, I can’t remember a time when there has been such as large a divergence between U.S. private and public sector performance. One can think of it as a battle: Deflationary Boom in the private sector versus Inflationary Bust in the public sector. Who wins the battle will tell us a lot about how financial markets will perform in the future. I’m inclined to bet on the guys running the printing press, but I am pulling for the private sector to prevail. Holding gold and Google might be a good investment strategy as the battle rages on (Note: this is not an investment recommendation, although as a disclosure the writer holds positions in GGN and GOOG currently).

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The Spirit of Creative Destruction

December 1, 2009 — Steve Waite

A friend of mine sent me to a link to a YouTube video titled “Did You Know?”  After viewing it, I thought it captured beautifully the spirit of this blog. I hope you enjoy it as much as I did.

As for what it all means, figuring that out is what keeps Kris and I busy during the days and evenings.

 

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More Like a Deflationary Boom

November 30, 2009 — Steve Waite

Our friends at GaveKal published a great report on trends in U.S. productivity growth recently, and I thought I would share some of the highlights.  I’ve been anticipating a sharp acceleration in U.S. productivity growth this year and it appears to be coming through according to the most recent statistics.

Before delving into the highlights of GaveKal’s report, you might wonder what the relationship is between Schumpeter’s creative destruction process and productivity growth.  To put it simply, creative destruction is the process that fuels productivity growth, and in turn, increased profitability and living standards.  There is a direct link between creative destruction, productivity growth, profitability and living standards. Those in the middle class today live better than the queens and kings of centuries gone by because of creative destruction.  It’s an economic fact and a hallmark of capitalism.

Creative destruction is the dynamic force that elevates profitability and living standards over time.  Old models and ways of doing business are, through the creative destruction process, replaced with more efficient models and ways.  The birth of new and more productive models and ways leads to the demise of the old. As Schumpeter noted, this dynamism is the heart of a capitalist economic system.

I should add that that technological innovation is a key driver of the creative destruction process. Suffice it to say, we see a great deal of tech innovation in the pipeline (e.g., Cloud computing architectures, 3-D virtual worlds software, smart grids, smart phones, smart books, nanotech-enabled energy technologies).

Ok, let’s turn to the excellent GaveKal report on U.S. productivity trends. GaveKal notes that this has been a “smashing” year for labor productivity in the United States. Labor productivity jumped at an annualized rate of 9.5% in the third quarter. The sharp increase in productivity growth was led by advances in the manufacturing sector. Manufacturing sector productivity rose at a blistering 13.5% rate in Q3. GaveKal calls these numbers “breathtaking,” and indeed they are impressive.

You might ask: What are the short run implications of a sharp increase in labor productivity growth?  The answer is a concomitant rise in corporate profits and cash flows. The most important cyclical variable of corporate profitability is labor productivity. Rising productivity growth pushes unit labor costs down, ceteris paribus.  As marginal productions costs fall, profits increase. Operating cash flows as a percentage of GDP are today at record highs in spite of the severe financial crisis. It is not surprising to see large amounts of cash on corporate balance sheets. Efficiency gains are a key driver of operating cash flows.

GaveKal observes that many investors seem to believe that the U.S. stock market has run ahead of the economy, but the productivity and profitability data suggest the opposite. Indeed, productivity has risen 330% from the lows versus 60-70% increases in broad U.S. equity market indexes from their lows. Meanwhile, corporate profits jumped to $1.35 trillion in the third quarter, up 10.6% from $1.22 trillion in the previous quarter. GaveKal also notes that U.S. productivity growth over the past year has outstripped growth in Europe and Japan.

Accelerating productivity growth is a recipe for sustainable, non-inflationary economic growth, rising corporate profitability and vibrant stock markets.  I expect labor productivity growth in the U.S. to continue to grow briskly in the quarters ahead which will ultimately foster growth in employment. Rising productivity growth will continue to be a positive catalyst for U.S. equity markets as it will fuel growth in corporate profits.

At a time when many investors are fretting about inflation, the productivity and labor cost data are screaming disinflation and outright deflation. After all, sharply rising productivity growth is a recipe for disinflation and deflation. It’s the best protection we have against inflation – far better than gold or real estate.  We aren’t looking at an inflationary bust scenario as many investors believe, says GaveKal. Rather, what we are witnessing is more akin to a deflationary boom.  That sounds about right to us.

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Comcast’s Delusion

October 22, 2009 — Steve Waite

I came across some comments recently made by Comcast CEO, Brian Roberts, that struck me as delusional and worthy of a short blog post.  Mr. Roberts was invited to kick off the Web 2.0 Summit this week in Silicon Valley. Conference organizer John Battelle got things rolling by noting that Comcast was a “dead duck,” to which Roberts responded “We are not a dead duck.” Nothing like starting the summit off with a bang!

After reviewing Comcast’s history and discussing some upcoming product launches (eg., new features for the company’s video hub “Fancast”), Mr. Roberts noted that the company’s investments in broadband technology are helping to fuel the explosion in web innovation in the U.S.  Battelle obviously wasn’t having any of this discussion. It was then that he asked Mr. Roberts point blank why America is lagging behind the rest of the world in broadband technology advancements.  It was Robert’s reply that baffled me. He said: “I think that that’s just not true.”

Say what? Are you kidding us? How a CEO of a U.S. broadband technology provider could utter such a reply in front of a learned audience in Silicon Valley is just baffling.  Anybody that has done the research can tell you that the U.S. is currently far behind in broadband technology.  The folks at Speedtest.net have data freely available on their website.  Speedtest conducts twenty million tests every month and provides download and upload speeds by country.

Speedtest’s data shows that the U.S. currently ranks 28th among all countries in download speeds and 31st in upload speeds. Yes, that’s correct – 28th and 31st in the world.  The download speed in the U.S. is current 6.96 Mb/s and the upload speed is 1.57 Mb/s.  The fastest download speed is 21.84 Mb/s and the Republic of Korea claims top position in that slot. The fastest upload speed is found in Lithuania coming in at 8.97 Mp/s. Japan ranks 2nd in both categories with a download speed of 16.08Mb/s and upload speed of 7.20Mb/s.

PDHeadInSand

We’re not sure where Mr. Roberts is coming from. It’s very clear from all the data we have seen, including Speedtest’s, that the U.S. is lagging far behind in broadband technology. To say that it does not is false.

If Comcast stays on its present course, clinging to outmoded technology and data that is false, we have no doubt that it will indeed become a dead duck, as Mr. Battelle says.  As economic history shows, the creative destruction process has a way of weeding out those technology executives who bury their heads in the sand.

Oh, and one more note to Mr. Roberts while we are on the subject of Comcast. Your company’s customer service, like your cable network, is in dire need of a serious upgrade.  We suggest spending time with Marc Benioff at Saleforce.com to learn how to do customer service the right way.  And please don’t tell us Comcast ranks high in customer service. We’ve experienced your customer service first hand. It’s far from good and not even close to being great.

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The Future in 3D

October 9, 2009 — Steve Waite

Kris and I published a couple of reports this week with GigaOM. The first report is a 16- page survey of virtual worlds applications for enterprise, and the second is a 72-page report on 3D computing technology.  The latter covers a broad range of technologies including display, computing, and software.  It also delves into end-markets like cinema, home entertainment, medial, education and the military. For those interested in these reports, you can check them out here:

http://pro.gigaom.com/2009/10/report-virtual-worlds-for-the-enterprise-market/

http://pro.gigaom.com/2009/10/report-3-d-computing-from-digital-cinema-to-gpus/?utm_source=gigaom_pro_headlines_block

Kris and I also wrote a blog post for the GigaOM website today, and it is reprinted below. Bon appetit!

Is Augmented Reality Just the Beginning of the 3-D Revolution?

Augmented reality — a group of technologies that marry the virtual with the real world — has been around for decades, but in the past it required the use of expensive and specialized equipment. What’s different today is the proliferation of smartphones that have cameras, displays, and even GPS and other sensors on them. That’s enabled a whole host of new mobile applications — Soundwalk, Wikitude and Layar, for example — that provide examples of how online digital information and offline physical worlds could be combined. With such tools, the real and the virtual worlds have moved one step closer.

But we are set to move much further. Augmented reality will rapidly move into “mixed reality” and enable immersive applications and shared experiences that will change how computers are positioned in our lives. The latest GigaOM Pro report, “3-D Computing: From Digital Cinema to GPUs,” (subscription required) outlines some of the coming changes in:

  • Display Technologies. From movie theaters and home monitors to computer displays and even mobile Internet devices, the ability to see and experience content in real 3-D — with and without glasses— will become a common feature. We predict that more than 1 million 3-D digital signs (try not to think of Minority Report) will ship by 2014.
  • Interfaces. Keyboards and mice will no longer be primary modes of input. Instead, cameras will go beyond simple image or video capture and become a virtual eye, through which gestures and other physical information will be transmitted. Combined with voice understanding and scanners, acquisition and navigation in real 3-D space will become easy.
  • Computing Technology. New computing demands will be placed on our systems that call for a greater emphasis in visual computing, high-speed networks and software. IBM, Apple, Google and even Microsoft are beginning to embed the frameworks required to enable real 3-D computing interfaces and applications on their platforms.
  • Business Process. Online collaboration is moving from web conferencing to video and there are many successful pilots underway with enterprise virtual worlds. Vertical industries like the military, education and even health care are poised to take advantage of these technology advances to use virtual 3-D worlds to bridge time and space obstacles in their operations.

In sum, the evolution of augmented reality, and 3-D technology in general, is fostering a convergence of the real and virtual worlds unlike anything we have seen in history. We believe this convergence represents the opportunity of a lifetime for those who embrace it and find ways to harness its power and bring new, innovative products and services to the marketplace.

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The Nature of Technology

September 29, 2009 — Steve Waite

I finished reading W. Brian Arthur’s new book, “The Nature of Technology” and wanted to share a few observations he makes in his book. For those who aren’t familiar with Arthur, he is a first-rate economist and one of the pioneers of complexity theory. I met Brian in the early 1990s in Silicon Valley and then followed him to the Santa Fe Institute (SFI).  He is currently visiting professor at SFI and a visiting researcher at PARC (Palo Alto Research Center). Brian’s work is a breath of fresh air. He is an intelligent voice in economics, particularly with respect to understanding the role of technology in the complex system we know as “the economy.”

Brian’s book is rather technical, and I would not recommend it to the general public. That said, I believe the book is an important contribution to the subject of technology and it should be seriously studied by those interested in technology and its evolution. Rather than write a review of the entire book, I wanted to focus on a few observations he makes that have relevance to today’s investing landscape.

Arthur observes that the representative technology today is no longer a machine with fixed architecture carrying out a fixed function. It is, rather, a system, a network of functionalities – a metabolism of things-executing-things-that can sense its environment and reconfigure its actions to execute appropriately. We are moving toward “smart” systems. He states that the arrival of genomics and nanotechnology will enhance this. In fact, he notes, not only will these systems in the future be self-configuring, self-optimizing, and cognitive, they will be self-assembling, self-healing, and self-protecting.

Brian points out words such as self-configuring, self-healing, and cognitive are not ones we would have associated with technology in the past. They are biological words. And they are telling us that as technology become more sophisticated, it is becoming more biological. Technology, he notes, has long shifted away from the Victorian era’s dominance of bulk material processing, and now it is shifting again: from single-purpose fixed processes or machines into raw functionalities that can be programmed to different purposes in different combinations.

Reflecting this, the economy – the high-tech part of it, at least – is more about the putting together of things than about the refining of fixed operations.  The economy, in a word, is becoming generative, says Arthur. Its focus is shifting from optimizing fixed operations into creating new combinations, new configurable offerings. Entrepreneurship in advanced technology is not merely a matter of decision making. It is a matter of imposing a cognitive order on situations that are repeatedly ill-defined. As John Seely Brown says, “management has shifted from making product to making sense.”

In the generative economy, management derives its competitive advantage not from its stock of resources and its ability to transform these into finished goods, but from its ability to translate its stock of deep expertise into ever new strategic combinations. Reflecting this, national wealth derives not so much from the ownership of resources as from the ownership of specialized scientific and technical expertise. Companies, too, draw their competitive advantage from their ownership of technical expertise.

And so, says Arthur, the nature of modern technology is bringing a new set of shifts: In the management of business, from optimizing production processes to creating new combinations – new products, new functionalities. From rationality to sense-making; from commodity-based companies to skill-based companies; from the purchase of components to the formation of alliances; from steady-state operations to constant adaptation.

In sum, we are shifting from the machine-like economy of the 20th century with its factory nodes and input-output linkages to an organic, interrelated economy of the 21st century. Where the old economy was a machine, the new one is a chemistry, always creating itself in new combinations, always discovering, always in process, says Arthur.

After finishing Brian’s book, I thought to myself: “Hmmm… sounds like a recipe for a lot more creative destruction in the future.”

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Pursuing Opportunities

September 21, 2009 — Steve Waite

The great economist and management guru, Peter Drucker, was fond of urging entrepreneurs not to solve problems but rather pursue opportunities. It is in this spirit that I wanted to highlight some particularly large opportunities associated with technology. The opportunities mentioned below are discussed in George Gilder’s new book, “The Israel Test.” If you are an entrepreneur or investor looking to pursue opportunities that would appear to have sizable upside in the years ahead, here are four to consider from Gilder’s book and two more that are near and dear to my heart:

Opportunity 1:

Insufficient bandwidth is the plague of networks. The promise of a global network seamlessly providing near-infinite bandwidth indifferent to application is the promise, like almost every major economic advance for the past 200 years, to render geography relatively trivial.

Pursue technologies and companies that the supply increasing bandwidth to the marketplace

(Note: We have been engaged in this opportunity for over a decade).

Opportunity 2:

The next major challenge in home electronics is “the mat” – that is, the tangle of connections behind the TV and workstation and the high-definition home theater and the set-top box and the network node and the game player and the residential gateway and the cell phone and the video teleconferencing center and the teleputer and the DVD machine and the intercom and the digital camera and the audio player and the fire and burglar alarms and the camcorder and the speakers and the microphones. This is, as Gilder says, “an incredible morass.”

Pursue technologies and companies that can eliminate the mat.

(Note: We are analyzing this space as there are many companies currently pursuing this opportunity).

Opportunity 3:

Use advances in molecular biology to generate new, powerful biopharmaceuticals to spec on computers rather than discover them empirically.

Pursue technologies and companies that are harnessing advances in molecular biology and computing to generate innovative drugs.

(Note: We launched a biotech mutual fund in the late 1990s that invested in companies pursuing this opportunity).

Opportunity 4:

Develop nano-computers that can flow through the bloodstream, calculate imbalances in the body, and emit the appropriate medicines.

Pursue technologies and companies that are using nanotechnology to create powerful new drugs.

Not mentioned in Gilder’s book, but something I’ve been thinking about for a long time, is this opportunity:

Significantly reduce or eliminate the waiting time associated with phone and cable repair.

This is big hassle. According to a new survey conducted by Harris Interactive, almost half  (49%) of American consumers waited for a cable technician or some other service professional in their homes in the first half of 2009 — and 32% took a vacation day or sick day to do so.  The hassle seems unnecessary in a world teeming with GPS navigation, wireless communications, and mobile computing. Does anybody in phone and cable land care about their customers and the use of their time? I often wonder.

Obviously, there are many more opportunities associated with advanced technology than those mentioned in this blog post. Kris and I believe that the convergence of the real world and virtual worlds – what we dub, “Real VR” – is a tremendous opportunity in the marketplace today. Hundreds of billions of dollars of new wealth will be created as Real VR gathers momentum in the global economy. Cloud computing represents another large opportunity, as does clean energy technology.

And while there are dozens of sizable opportunities associated with technology in the market currently, we believe it is critical for investors to reorient their focus from monthly and/or quarterly returns and begin to think beyond the quarter.  The increasingly narrow time horizon of an ever-larger share of investors over the past decade has created a major inefficiency in financial markets. It is one we intend to exploit in a big way in the future.

A note to our blog readers: If you have identified some major investing opportunities associated with technology, feel free to post a comment on this blog. We would love to hear them!

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