Food for Worms
King. Now, Hamlet, where's Polonius?
Ham. At supper.
King. At supper? Where?
Ham. Not where he eats, but where he is eaten. A certain convocation of politic worms are e'en at him. Your worm is your only emperor for diet. We fat all creatures else to fat us, and we fat ourselves for maggots. Your fat king and your lean beggar is but variable service- two dishes, but to one table. That's the end.
King. Alas, alas!
Ham. A man may fish with the worm that hath eat of a king, and eat of the fish that hath fed of that worm.
King. What dost thou mean by this?
Ham. Nothing but to show you how a king may go a progress through the guts of a beggar.
(Shakespeare, Hamlet, Act IV, Scene 3)
Following his murder of Polonius, Hamlet starts talking about worms. As a subject, worms are disgusting and it is easy to simply brush his comments aside as the incoherent ramblings of an antic disposition. But there is something that gripped me as I have been re-reading this. What does Hamlet mean by “variable service” and is it really “progress” if a beggar is simply remixed as a King?
Another month has gone by as I have been collecting my thoughts for this final section of Media Futures. As you know, I have been looking for the light at the end of the tunnel of Internet Arbitrage. If automata is a form of artificial life, then it is the function of arbitrage to extinguish such life through the systematic liquidation of all vital spreads. Arbitrage is a key lubricant for any emerging market economy. The conventional meaning of therapy is overdetermined by the specter of Freud and the practice of talking about your childhood to a shrink on the Upper West Side. But this is only one context, and I would like to remove the practice of therapy from psychology per se and introduce it into our conversation about Media Futures.
Let us understand therapy to be the practice of working with decay: decay in the sense of something that has happened and needs to be worked through in order for one to move forward, grow, prosper, profit, progress, develop. Therapy can happen in a variety of ways so long as it is a dynamic process. Talking, writing, reading, shopping, running are all potentially therapeutic processes in so far as they act on prior conversations, states and conditions. In describing how we use language to create a meaningful social environment, Wittgenstein says that "in the practice of the use of language one party calls out the words, the other acts on them" (PI, #7).
What the Internet has enabled is an “acting-upon-ness” of singular historical scope and scale. I was recently at an exhibit at the ZKM in Karlsruhe called “Making Things Public: Atmospheres of Democracy” curated by French Anthropologist Bruno Latour and New Media Philosopher Peter Weibel. The core assumption is that we have always used communications and computing instruments to participation in the architecture of social meaning. The Internet has simply normalized our feedback to the point where our interests are indistinguishable from the history of our click streams.
Not that this is an avant garde European theory, just look at the recent cover of Business Week:
The poster for the ZKM exhibit was a giant quote from Tom Watson of IBM stating “There will be a need for no more than 5 computers in the world.” The intended comment I believe was to show how far off he was on the downside. For me, the error was on the upside, for there really is only one computer and it is called the Internet. Yes, there are billions of CPUs out there each of which is technically a computer but in so far as an increasing majority of them are connected or connectable via TCP/IP, then they collectively form the I/O extensions of a single social computing machine.
And so now we can go back to thinking about our 5 A’s of Media Futures: Automata, Algorithm, API, Alchemy and Arbitrage in the context of this computer that we are all acting upon. Our actions, expressed as Attention, establish networks that connect us, our family, our friends, our colleagues and our affinities.
As we spend time online we are actually impressing ourselves upon certain links within these social networks and choosing not to impress ourselves upon other links. Our most popular email recipients and instant message buddies, our bookmarks, our cookie trails are residues of where we have decided to pay attention. The net currently has a schizophrenic but unique way of remembering bits and pieces of these attention streams: Not all data is captured; the consumer has no central attention management tool; and most companies don’t want you moving your history between their networks anyway.
Despite these points of friction, more and more applications are being built upon our attention streams. Every new web application or mash-up from HousingMaps to Backpack to Del.icio.us is simply a better enabler of some existing user behavior. People were using Google to find Craigs Listings, people were using wikis and blogs to manage their projects and to-do lists, people were storing and sharing their favorite links for themselves and their friends.
It is the promise of Internet media to know everything about you so that it can engage you in an intimate conversation with advertisers around specific products you are looking to buy. But we are still many years away from a truly personalized advertising experience. In the meantime, architects of participation are channeling specific community zeitgeists into hyper functional media products. The consumer is invisible in the moment, leaving only traces of her clickstream behind her as a trail of evidence. Innovations in internet media are like handfuls of white flour dropped over the invisible outlines of consumer intention. At times, user behavior drives media construction directly, but at other times the original user behavior evolves beyond the ability of the media to engage it. These hollow shells of former behavior are being swept up constantly by domain, banner, click-thru and lead brokers who recycle the detritus into more usable (aka monetizable) impressions.
Remediation is the removal of pollution or contaminants from land (including sediments in waterways) for the general protection of the environment. Remediation in terms of new media, is the representation of one medium in another. (from wikipedia)
The process of remediation has become the status quo of Internet media consumption. What we consume online is likely the residues of other people’s behaviors. Innovation occurs through the subtle differences between my behavior and that of everybody else who has formed the sediment that I now surf upon. In so far as my strange behavior becomes reinforced by that of others, then I am creating the foundation for new forms of media. These are typically the alchemical moments when the mad scientist designs a feature that becomes a product that becomes a company. Josh Schachter transformed del.icio.us from a link storage feature for him, to a link sharing product for the community to a link sharing company for investors.
If we are comfortable describing the process of Internet innovation as a form of remediation, then we might as well put Hamlet’s worms back on the table. Worms are like arbitrageurs: nobody likes them very much but then again nobody questions the role they play in making markets more liquid. The covalence of arbs and worms should not come as a great surprise, since I am sure many of the greatest financial arbitrageurs have been referred to as “maggots” as some point in their careers. This may however be the first time a maggot has been called an arbitrageur.
The technical term for using worms as a form a medicine is Biotherapy. Shakespeare’s cure for Polonius was hundreds of years ahead of its time. In February 2003, the BBC ran a story about a novel approach to treating wounds:
Maggots heal hospital wounds
A hospital in Northern Ireland has been using an unorthodox treatment involving maggots to treat wounds where modern medicine has failed to cope. Known as larval therapy, the maggots eat dead tissue, but leave healthy tissue alone. Although staff at Daisy Hill hospital in Newry were initially skeptical, clinical specialist in tissue viability Jenny Mullan said the treatment produced "unbelievable" results. Hospital maggots are specially bred for wound treatment. They are sterile and are usually of the green blowfly variety as this species only ingests dead tissue. The therapy was first used at the hospital on a diabetic patient, who had recently had a limb amputated and developed a pressure sore on his other heel. The patient reported that the pain had been reduced, said Ms Mullan. Even so, maggot therapy may have a bright future. According to Handler, they're cheap, they don't become ineffective over time like some antibiotics, and they work. "Especially as doctors are getting stretched thinner and thinner," he said, "it will be helpful for them to conserve their resources and use maggots." (emphasis mine)
I like the irony of doctors “stretched thinner and thinner” using maggots as an enriching way to “conserve their resources.” This expands the conventional meaning of worms as consumers to embrace worms as creators. The very fact that these worms are recycling, remediating and remnating diseased tissue is in itself a creative activity, not unlike many of the Web 2.0 mashups that synthesize a vital new experience from two or more existing web services. All of these examples underscore the core thesis of Internet media therapy, namely the ability for quantitative reorganizations to produce qualitative change. This is perhaps best exemplified online by the Web API which routes multiples streams of data input into (the potential for) a qualitatively different stream out.
The relationships between worms in the organic and Internet worlds is a rich vein of interpretation. In both contexts they provide an infrastructure for processing decaying materials. At the end of his life, Darwin became obsessed with worms and his penultimate book of 1883 was in fact entitled The Formation Of Vegetable Mould Through The Action Of Worms With Observations Of Their Habits; in it, he writes:
Worms have played a more important part in the history of the world than most persons would at first suppose. In almost all humid countries they are extraordinarily numerous, and for their size possess great muscular power. In many parts of England a weight of more than ten tons (10,516 kilogrammes) of dry earth annually passes through their bodies and is brought to the surface on each acre of land; so that the whole superficial bed of vegetable mould passes through their bodies in the course of every few years. From the collapsing of the old burrows the mould is in constant though slow movement, and the particles composing it are thus rubbed together. By these means fresh surfaces are continually exposed to the action of the carbonic acid in the soil, and of the humus-acids which appear to be still more efficient in the decomposition of rocks… When we behold a wide, turf-covered expanse, we should remember that its smoothness, on which so much of its beauty depends, is mainly due to all the inequalities having been slowly levelled by worms. It is a marvellous reflection that the whole of the superficial mould over any such expanse has passed, and will again pass, every few years through the bodies of worms. The plough is one of the most ancient and most valuable of man's inventions; but long before he existed the land was in fact regularly ploughed, and still continues to be thus ploughed by earth-worms. It may be doubted whether there are many other animals which have played so important a part in the history of the world, as have these lowly organized creatures.
Darwin establishes here two core principles that we have been working through in a variety of contexts:
At his now-famous graduation speech to Stanford University students, Steve Jobs, the preeminent creative entrepreneur of our time, shared a story of his near-death experience with pancreatic cancer. His suggested that "Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new." Jobs ended his speech with the Whole Earth Catalog refrain "Stay Hungry" which puts worm logic in a beautifully constructive, creative and curious context.
There is, of course, a techno-literal meaning for worms (and viruses) as they relate to Internet media and communications. Bruce Schneier, the Internet’s best critic of cryptography and security, forecast the following worm reality for 2005:
In 2005, we expect to see ever-more-complex worms and viruses in the wild, incorporating complex behavior: polymorphic worms, metamorphic worms, and worms that make use of entry-point obscuration. For example, SpyBot.KEG is a sophisticated vulnerability assessment worm that reports discovered vulnerabilities back to the author via IRC channels. We expect to see more blended threats: exploit code that combines malicious code with vulnerabilities in order to launch an attack. We expect Microsoft's IIS (Internet Information Services) Web server to continue to be an attractive target. As more and more companies migrate to Windows 2003 and IIS 6, however, we expect attacks against IIS to decrease. We also expect to see peer-to-peer networking as a vector to launch viruses.
Targeted worms are another trend we're starting to see. Recently there have been worms that use third-party information-gathering techniques, such as Google, for advanced reconnaissance. This leads to a more intelligent propagation methodology; instead of propagating scattershot, these worms are focusing on specific targets. By identifying targets through third-party information gathering, the worms reduce the noise they would normally make when randomly selecting targets, thus increasing the window of opportunity between release and first detection.
Even though Schneier is referring specifically computer security, his comments are useful for our conversation about Media Futures. The “window of opportunity” that he identifies "between release and first detection" applies equally well to the creation of new media applications and the attention management tools that they enable. Once new applications have been “discovered,” just like that of any wide spread, they are likely already in the process of deteriorating.
Over the past month, I have been reading my boys Norton Juster’s classic, The Phantom Tollbooth. In a chapter entitled “The Word Market,” Juster sets the ambiance of a bazaar of fresh fruit and exotic delicacies, but where instead of food there are words. Suddenly, a merchant cries out: “Juicy, tempting words for sale.” My six year-old loves this part; he appreciates words' unique ability to convey different shades of meaning. Every new word he learns is another tool he can use to establish control over his environment. He wants to take each new word and wield it like a light saber of intention.
This weekend maybe I will sit down with him outside, on the grass, dig into the soil with my hand and pick up a worm. “Do you remember that scene from Phantom Tollbooth, where they are selling words? Well, when the words go stale and nobody wants them, do you know what happens to them?” I am not sure how he will respond. But I will take the worm, put it in his hand, and say "The worms eat the words.” And he will probably look at me like I am joking and being the smartie that he is, will ask “And what do the worms do with them?” And I’ll tell him frankly “Why, the worms feed the words to Google.” And he will laugh, and I will laugh.
But I wont be kidding
Want an iPod? Get one free at freeiPods.com
I hate sounding like a crass web promoter but FREE remains the best single response mechanism on the Internet. We are happy to provide our full attention in exchange for free stuff: iPods, Razrs, Flatscreens, PSP, and more. And it really works, as people actually do end up with iPods which are free in terms of money but expensive in terms of attention.
It is easy to dismiss the random college student who has nothing better to do with his time than click away on offers he isn't really interested and sell out his five other college friends as potential online education and auto loan applicants. It's similarly easy to dismiss the stretched dad who eagerly clicks on low cost mortgage ads even though he has already borrowed 200% of his income on credit credit cards and usually pays 100% annualized interest on cash advance services to service his debt. It is scary when you consider how much the Internet advertising economy depends on juicing up consumer credit; as JK suggests at his excellent blog, more than 20% of Google and Yahoo search ad revenue may be dependant on mortgages. Our research at Majestic suggests that the top paying keywords on paid search have consistently been Home Equity Loan and Refinance purchased by Countrywide and ELoan for over $20 per click.
An enterprising consumer could fabricate her identity and that of her referrals in order to try qualifying for products without ever being contacted again. But that’s not what happens. The great majority of America does not subscribe to RSS feeds or use Firefox. These Americans think a tag sale is a great way to spend a Saturday afternoon, not the next revolution in Internet advertising.
We are an American populus of lazy attention providers who opt in to elaborate network marketing schemes that resell us multiple times over and append increasing data about our demographics and purchase intentions. We would rather not bother with multiple email identities with unique passwords; life is too short.
Spitzer may indeed go after freeipod.com once he is done with Intermix. Consumers who have filled in a lot of data and have yet to see their free iPods arrive in the mail will cry foul. In the same way that some retail investors cried foul to the Attorney General after losing their 401k money on Internet Capital Group or Infospace. Mayor Bloomberg was right when he said that people make their own investment decisions and should be held responsible for any losses they incur.
I wonder if he will say the same thing when consumers begin the witch hunt against any Internet advertising company that sells their attention to advertisers without their explicit permission each step of the way. The individual’s decision to save time and money in exchange for their passive attention represents our collective failure to imagine a more active Internet lifestyle. This should come as no surprise in the context of our dependencies on credit, oil, porn, sugar, and gambling. These industries are not in danger of collapsing anytime soon.
It is ironic how personal technology and the Internet continues to be represented culturally as a source of control; we are everywhere reminded that our browser gives us the ability to establish order on a world of constantly changing information. When we search for something, we are driving the process of personalized information retrieval
But on the other side of the mirror, we are being watched. Our queries are being mapped legitimately by companies looking to contact us. If you are not careful, an errant click will be answered with a telephone call from a sales representative. And so as we succumb to these performance-based networks, our future purchases, our future media consumption, our lifetime economic value across hundreds of categories and thousands of companies, are all being calculated in real-time. Not by a single agent, but by multiple agents each trying to evaluate our momentary state of purchase intent in the context of the many monetization levers these advertisers have at their disposal.
As the Internet medium continues to evolve into a sales channel, the price of advertising is becoming mapped algorithmically to probable outcomes. Very little is being left to chance, as even the most ephemeral of creative decisions (color of the car in the banner, the choice of text in the link) are immediately evaluated in terms of click-thru rate and ultimate conversion. As Josh Kopelman, who used the prototypical arbitrage concept of “half” to create a $300m exit for his company half.com to EBay, puts it, “online advertising is just math."
An Algorithm is a set of instructions or procedures for solving a problem.
In the same way that computer scientists 50 years ago focused on the single problem of designing a general purpose computer, there is a similar focus in 2005 among leading Internet service architects: creating a social media computer that leverages user generated content to automate the production of commercial content. In so far as this represents the important problem that the best and brightest of us are looking to solve, then to an extent it is a race for the best algorithm.
From PageRank to PeopleRank
Hovering over this endeavor is the shadow of the last great algorithm, namely Google search engine. At its core, Google is PageRank (which nominally cites both one of its founders Larry Page and its subject of operation, Web pages):
"PageRank relies on the uniquely democratic nature of the web by using its vast link structure as an indicator of an individual page's value. In essence, Google interprets a link from page A to page B as a vote, by page A, for page B. But, Google looks at more than the sheer volume of votes, or links a page receives; it also analyzes the page that casts the vote. Votes cast by pages that are themselves "important" weigh more heavily and help to make other pages "important.”"
In this case, (1) the input for the algorithm is the population of web pages, (2) the instructions rank them in value based on their link structure, and (3) the output is the list of links that you see when you search for something.
Now transpose people for web pages, and you see how the race for the next great search algorithm has less to do with organizing static HTML content than with coordinating the constantly changing expressions of millions of distributed people. For an interesting perspective, see my fellow entrepreneur Mark Pincus's riff on the PeopleWeb. Many Internet businesses have tried to direct user behavior into certain architectures of participation. Services such as Friendster, Orkut, and even Pincus's own Tribe, presume to address all of a person's social communication needs in one place. All of these services, however, are now rapidly trying to reinvent themselves to stay relevant to a community that refuses to be intermediated by somebody else's system.
The services that seem to do the best job at enabling users to communicate on their own terms are those that manage to find a middle ground between the DIY (do-it-yourself) ethos that is beginning to pervade the web and the need for structure to guide constructive interactions (ie the reason by Wikipedia succeeds and most other Wikis fail). LinkedIn, with its two million profiles of professional affiliations, provides the tools for interesting social media production, even if the site itself limits one's imagination (open up the API please). The reason behind the annoying digerati blogfest on folksonomies (myself included) stems from the simple but mildly heretical notion that users, given decent primary (meta)data, might actually be able to create their own systems that scale. Clay Shirky (lighting designer for the Wooster Group, CTO of SiteSpecific, advisor to Flickr, current leading pundit for the digerati at shirky.com) captures the anxiety perfectly in his title to last week's panel at ETech: "Folksonomy, or How I Learned to Stop Worrying and Love the Mess". The question is, then, whether a PeopleRank algorithm that uses community driven tags as its input, could do to About.com, Gawker Media, and Weblogs what Google did to Alta Vista, namely deliver a superior end-user experience that requires only incremental server bandwidth to scale.
About three years ago, in March 2001, after living through the incredibly sudden collapse of the first .com bubble, I was in a lot of pain and quite bitter about the whole modern digital capitalist enterprise. Rather than consider continuing to work as an investor, or start another company, I decided to channel all my energies into a great modern masterpiece- a high tech cyber thriller screenplay! It was called Datacost and it was about an evil hacker who was taking over people's genetic privacy in a systematic, fascist fashion, and his nemesis, a talented young cryptographer who had invented the first biological sexually transmitted virus to scramble one's DNA.
Suffice it to say that I never managed to get even half-way through the script. The more I thought about the logical implications of the future costs of data, the more I tweaked the plot beyond anything vaguely coherent. A few months later, the terrorists destroyed the World Trade Center and my spiffy conspiracy theory about foreign cyber terror no longer seemed so urgent.
A few weeks ago as I was reviewing the latest financial model for Majestic Research, I noticed that one of our key line items was Data Costs, which included all of the licensing fees and software development costs related to our acquisition of proprietary data for our research products. Seeing the words made me think back to the premise of Datacost.
I looked through my old files and came across the most recent draft. It starts with a description of the world as of 2007.
2007. At the end of another failed U.S. administration. W. lasted 4 years, characterized by escalating U.S.-Foreign antagonism around the globe, and increasingly desperate economic policies. In attempting to bolster the private sector, W. and his administration continually cut Federal interest rates and removed as much oversight as possible from the commercial technology sector. Starting in late 2003, trying anything to prop up his ailing economy for a successful reelection, W. stopped the government and the states from persecuting antitrust cases. Working with his Treasury Secretary, he also removed all restrictions on the financial services sector, extending the repeal of the Glass-Steagel act far further than anybody would have imagined possible. Suddenly, banks, brokerage houses, insurance companies, pension funds, hedge funds, all start cooperating to market riskier and riskier securities to the American public. Consumers borrow more to pay for these sweepstakes, racking up more debt in the process.
U.S. companies outsource programming to foreign communities—China, Russia, Cuba—willing to work at a fraction of the domestic cost.
Companies begin regularly exporting advanced security software overseas to foreign governments with questionable motives.
The economy tries but cannot recover from its millennial crash. Oil prices skyrocket. Layoffs abound. Peace erodes in the Mideast. China begins exerting its popular power. India starts siphoning off tech value from the US. Taliban factions strike random physical terror among foreign US targets. Former U.S.S.R. succumbs to mafia control: ecstasy manufacturing, data hijacking, copyright violation. Republics of Estonia, Rumania and Yugoslavia find common ground in advanced network warfare technology.
After reading it just now, my first reaction was: "duh, if I only I had put on those trades on in mid 2001 I would have made a fortune!" My second reaction is more nuanced. More to the effect of, "What really is the value of private information for commercial use in this day and age?" Among his many dubious accomplishments, Bush has fostered a vital debate on the value of private information:
* Poindexter got it hard from the public before getting pulled backstage.
* The administration uses the classification and declassification of official documents as one of their primary levers of power.
* The intelligence about WMD in Iraq and Al Qaeda threats pre-9/11 have become central to the debate on whether Bush should get reelected.
In this context, how can we evaluate data costs, and the market value of personal and aggregate sets of human identity and behavior? Compared to a libertarian administration (remember how Gore invented the Internet?) or one religiously aligned with the consumer (take Germany), ours has seriously deflated the value of individual privacy. It doesnt take very much to buy a consumer's willingness to opt in to share vital personal information. The silly low interest rates is giving us so many occassions to type in our personal information and credit history so that we may qualify for ever increasing flavors of cheap money. Yes, we are saving a lot of cash flow pressures by putting off full purchasing to a later and later date, but the costs of constant electronic legislation (application forms, bills, payments, etc) take the form of increased payments of personal information. Financial services firms and insurance firms want to "get to know you" to better service you, which also means that you are required to open up more and more of your unique individual behavior to their electronic systems. The web has been able to grow so incredibly functional, for free, because it leverages personal information to create more effective advertising mechanisms for marketers.
To the extent to which this blog is concerned with a central theme, it is the intersection of data, research, investments, and executions. As you probably know, I am really interested in the ways in which these elements are becoming bundled together as traditional Wall Street Research is giving way to new forms of Independent Research. Full disclosure: I am 100% biased towards the relative value of Independent Research compared with traditional sell-side research. I recognize that Independent Research is as much an approach to investment research as any explicit set of firms. Nevertheless, despite the best intentions of the incumbent Wall Street franchises, I really cannot see how they will be able to continue to add value to Investors in a world where Regulation Fair Disclosure has eliminated any competitive advantage of name-brand analysts and where the economics of proprietary trading desks and hedge funds continue to suck the premium talent away from sell side research departments.
Of course I have a vested interest in the success of Majestic Research to recognize and address these challenges before the competition does. And while I am tempted here to lay out all of the strategies we are employing to apply our unique research development process against more and more stocks and sectors, it would probably come at a cost.
More thinking soon about how the sales trading cash register can be used to compensate for the personal disclosure of historical behavior.