The Social Networking Panel

Red Herring hosts this discussion of social software featuring Ben Smith, CEO of Spoke, Reid Hoffman, CEO of LinkedIn, Allen Morgan of Mayfield, and Ross Mayfield, CEO of Socialtext. Mark Mowry of Red Herring moderates. [Disclosure: I am on Socialtext’s board of advisors.]

Mowry: We called this “(Anti-) Social Networking” to make sure everyone showed up.

Spoke is an enterprise business tool for discovering relationships. They have 10 million relationships in their network and will make money selling an enterprise application.

LinkedIn provides a tool for doing the kind of networking we do to hire employees, make connections and so forth. No clear business model yet.

Mayfield’s Morgan is representing Tribe, which he just invested in. Tribe is using social networking to build a network of local online classified ads business. A superset of Craig’s List combined with Yahoo Groups.

Socialtext isn’t doing social networking, but enterprise social software to provide enterprise collaboration and publishing tools. He talks about how we learn about one another’s communication habits to develop our business relationships.

Mowry: Between the companies on the panel and Friendster, this group has raised about $40 million.

Smith: I don’t want to sign up for creating a trend.

Morgan: There is a lot less going on here than meets the eye. Part of the “trend” is that the news hit during a slow week and it didn’t all happen at once. The new part is the tracking of connections and making those visible in a privacy-protected way. Tribe isn’t in the social software business, we are in the classified ads business.

The sense is there is no “industry.

Mayfield: Friendster users spend an average of two hours per visit which makes it a good ad business. What Reid is doing is like joining a business association and what we do is a lightweight collaboration software.

Smith: The social software stuff is a phenomenon, whether you are talking about Friendster or Match or Tickle. People are connecting in a new way. Knowing who knows who is an incredibly valuable bit of information when people want to meet.

Mowry: How did Spoke’s software come about?

Smith: A number of people were thinking about the idea independently and I just acted as a catalyst when USVP asked me to do it. The issue was how to access the power of networks they had access to. It needed to be a Web application. It needed to deal with the privacy issue aggressively. It needed to discover and analyze relationships. We got a couple customers who helped us design the product — spent $200,000 to get the first version; eight releases later it is getting better.

Hoffman: Actually connecting people is one of the most interesting things you can do with the Web. How do you do that to facilitate dating or manage your career. Business networking is the hardest area, because they come to the relationship very differently than people who are dating. Business people have a lot of information and resources already, but they don’t have convenient due diligence tools. In professional networking we are used to relationships being intermediated.

Mowry: What about privacy? I don’t want to upload my contacts and have that get out there.

Hoffman: The only way someone sees your contact data and relationship with that person is through an explicit acceptance of an invitation. They become visible as a relationship up to four degrees away from you.

Smith: Our users decide about their privacy preferences. Some have only company name discovery but not individual’s names. Today, you can set very limited access. It will be more automated in future versions. (Having talked with Ben for a couple days, I am very intrigued by the Spoke functionality, which combines Outlook integration with spidering and relationship analysis.) Who knows who is never discoverable in the system.

Mayfield: We create workspaces where people can interact with one another. We tell people about links to other spaces, but social networking isn’t what we do. People were taking blogs and wikis into the enterprise from the bottom up, just like other great disruptive technologies. So, we built toward the requirements of the enterprise combining blogs, wikis and email to help people connect and collaborate in the enterprise. By encouraging linking within your workspace, you can analyze what ideas are catching on and generating the most effort.

Morgan: All these companies take people do in real life and put them in software. In 1999, we thought the Internet was a market. It turns out the Internet is a good way to talk to people (email) and put stuff up for people to see (Web pages). The thing that is different is that we are all used to online reputational systems, like on eBay and Amazon reviews, where feedback describes one’s reputation. Now with software you can track interactions and draw a map. It’s all just putting into software activities we all do in real life and with the Internet you can do it over a broader geographic scope than in the physical world. The catch-all description “social networking” is misleading.

Mayfield: People are using wikis internally, so we compete with open source in the convenience we provide. The best way to compete is through network effects, by building useful tools and having them proliferate.

Morgan: The way to distinguish these companies is enterprise-focused and individually focused. The main competition for these companies in not in the room, it is the large enterprise and consumer software companies everyone competes against. These enterprise side, they will need a strong salesforce. On the consumer side, the bases of competition will be who builds critical mass. When Microsoft wakes up, the challenge will be how to compete against the large groups of people it has access to. All the startups are using members to invite new members — we used to call that viral growth — without some measure of how the users bring more users, the company is lost at sea.

Hoffman: I think if the application has value it will succeed. The “six degrees” problem is more difficult because it is so diffuse, and a focused service can differentiate.

Mayfield: There is a new social software service popping up every week because people are trying to draft off an area that they perceive is hot with VCs. There is a logical limit to how many me-too companies can come into the market. I think a big untapped area is in ethnic networking.

Question from audience: How do you make social networking tools a high priority for enterprise customers?

Smith: You don’t call it social software, that’s is the easiest way to get kicked out of someone’s office. We focus on making deals work faster. Getting money is different than getting people excited. Early adopters make emotional decisions and we need to reach them, then we have to get to the business reason of the specific customer. He targets companies where individuals are using Spoke, making the sale easier. We have to get a little scrappy in a market where a lot of Siebel sales guys are not making book.

Morgan: If you look back at the history of how spreadsheets and word processing were adopted. It’s adoption from the ground up. Socialtext’s and Spoke’s models can tap that.

Mayfield: Our ASP model that allows people to create workspaces gets Socialtext inside many companies. We step in and talk with the top of an organization only after it has emerged from the bottom with a certain mass of support. You can’t sell enterprise software from the top down anymore.

Irwin Jacobs, Chairman and CEO of Qualcomm

Jacobs begins by describing 3G as it stands today, though he qualifies this by saying things will be changing quickly for at least a decade.

“Just about everyone has focused in on CDMA” in the 3G debate. Yes, true, but Qualcomm is really facing a challenge of being more than the licensor of a networking protocol. Its BREW platform, for example, has failed to gain a significant ISV following, which means that it has to roll out more technologies to grow from current projected revenues

There are 62 million 3G CDMA subscribers as of September 2003. Qualcomm projects a global total wireless user base of 750 million–on both 2 and 3G–by 2008. It will take a decade to get people transitioned to 3G (which raises the question of what the next round of 3G spectrum auctions will cost, since that is the timeframe where profitable 3G seems possible for carriers).

He brings up 802.11, suggesting that 3G will replace it someday by the sheer speed with which he talked about how much people like WiFi.

Describes 3G applications, such as cardiac monitoring, video phone, etc., which he expects to grow. Again, all this is good for Qualcomm’s core CDMA licensing business, but they haven’t succeeded in being a platform for development of these services that would add per-device licensing revenue for Qualcomm.

Jacobs focuses on Korea, where wireless connectivity is the densest and fastest in the world. Movie trailers, sports, news and “other unmentionables” are driving the market. Qualcomm is supporting multicast broadcasting to reduce data loads for carriers. Sharing of voice and video among groups is becoming an important feature: “Push to talk” and “Push to Multimedia.”

The next generation of Qualcomm chips integrate QoS features to prioritize audio and video packets. Interesting, QoS as a feature at the edge of the network.

He also talks about multi-mode phones, but does not get into integration of WiFi into handheld chipsets. One assumes that with VoIP phones the WiFi connectivity would be required.

Jacobs talks about how Qualcomm can collapse competitive and complementary functionality into the chip — this requires a development platform, an area where they have not established leadership. Location-based services (GPS), video streaming, Gameboy-like gaming, etc. can be built into the Qualcomm chip.

Finally, he gets to the development platform, talking about BREW. Says Nokia is offering a BREW applications layer, too. But there is no market data here — as I say, this isn’t a great story for Qualcomm. He says the phones support Java, too — indeed, they must. Jacobs then goes on to describe various third-party plug-ins that are shaving off parts of the BREW functionality set. Essentially, Qualcomm has to compete with itself to sustain its market leadership in the network protocols business, at the expense of BREW.

Eight of 10 CDMA operators have launched BREW. It is on 21 devices.

Moving along to the use of spectrum. The old analog bands at 450 MHz, can provide 3G service now with a very low number of base stations.

The U.S. market is largely a replacement market, according to the slides. The rest of the world is where new customers are coming from. Hot spots: India; China; Japan; Korea; etc.

Qualcomm’s recent quarter: 32 percent year over year growth. Introduced stock repurchasing program; mostly relies on internally driven growth and not acquisitions.

Alex Vieux asks about China and its potential impact on Qualcomm.

Jacobs: China is going CDMA, it’s going to happen, it’s really a question of time. Qualcomm is working with Chinese manufacturers, which are planning to sell internationally, too.

Vieux drills down on BREW, pointing out that other interface tools are dominant in China.

Jacobs: BREW is growing very well. Newer phones have BREW, they are rolling out GPS features.

China requires a lot of patience. It takes long time to work out deals that are good for both sides. He hints about IP concerns (“They usually say ‘We’ll give you the market, you give us the technology.'”) He goes on to describe the kaleidoscopic changes in Chinese bureaucracy and international relations that can slow down building a business in the country.

He deflects IP questions, saying there is a difference between “open standards” and licensing without dealing with the question of how Qualcomm would deal with a Chinese knock-off of CDMA. Just because the standard has been adopted, it doesn’t mean it is “open” to innovation without incurring licensing fees. The fact that China is basing a lot of its economic future on being a good member of the World Trade Organization bodes well, but it will be a bumpy road.

Vieux asks about margin growth because CDMA limits Qualcomm’s options for growth.

Jacobs talks about the CDMA licensing business and the growth in that market. Demand suddenly began to come at us from all sides, so we came out with increased guidance. But he doesn’t deal with the question of how, beyond selling more CDMA phones, the company can grow per-user revenues.

Lawrence Calcano, Managing Director, Goldman Sachs

Calcano is co-head of the technology practice at Goldman….

Powerpoint failure. There is a debate going on about skipping the presentation. Hey, there it is.

Calcano starts with an apocryphal story about a Snapple cap that informed him the average person swallows 12 spiders while sleeping during their lifetime. He wonders who thought to measure that. I wonder if he believes everything he reads.

Based on the fund flows into the markets, the current rally seems sustainable to Calcano. NASDAQ up 53 percent since March. Goldman’s Tech Index is up 58 percent. There are more deals brewing and more business creation (I suspect they only pay attention to business creation that requires $10 million or more — in other words, aberrant behavior).

What held the market down in 2002 was a “nuclear winter” caused by the bubble’s burst, the real appearance of economic weakness, scandals galore and research analyst conflicts, the weak dollar and so on. It was a “perfect storm” (the allusions are flying) and now CEO confidence is rising, GDP is growing, etc. As a result, valuations are starting to increase and we have to wonder how much further the valuations of tech leaders can go.

Equity issues are at their lowest point since 1993, and only 16 percent is coming through IPOs. Calcano says that the IPO market will be more robust in 2004. “Investors are ready to buy IPOs, the market is open. One of the issues is the maturity of the companies” — an IPO company has to be profitable. So, what does it take to go public? A proven business model, real and large markets, long customer lists and proven experience, profitability, defensible technology and barriers to competition, expanding gross margins and operating margins and a solid management team.

The IT business has been able to tap the high yield market recently, which is new. The companies able to do so are mostly hardware firms with real assets.

The new research rules are just firming up — banking and research is completely separated. This contradicts Tom Weisel’s comments yesterday, reflecting the lack of clarity about this in the financial service industry. This makes it difficult for companies contemplating an IPO — they can’t meet with research and ibankers at the same time and research is–supposedly–totally independent. There’s a very mixed message here, a little plaintive.

Calcano expects the M&A market to revive in 2004, but the valuations are more down to Earth and reflect a new acceptance of reality. The typical revenue multiple is 1.6 times revenue and 36 times profitability. In 2003, mergers have accounted for about four percent of market capitalization of the total market, compared to between 12 and 15 percent in the late 90s.

The volatility of the NASDAQ has fallen dramatically — from 44 days in the previous quarter where values moved by two percent to 14 in the current quarter.

He finishes the presentation with a cautionary note about the unexpected. We need to be “flexible and balanced.” In other words, it’s still a very tentative recovery.

Alex Vieux and Mark Mowry of Red Herring come on to question Calcano.

Mowry: People have been taking potshots at ibanks — how are you going to change that cynicism?

Calcano: We drive investment banking based on the notion of “long term greedy” so that we have no deals that depend on just the next quarter. It is really easy to throw potshots, but I view my job to be a trusted advisor to the client.

Mowry: What sectors are you looking at?

Calcano: There are a lot of middle-sized software companies that need to get larger. Merging software companies is hard. Telecom equipment is another interesting area. We’re seeing a lot of companies with solid business models coming out of the downturn.

It takes strategic decisions to be in the right place at the right time. In the 90s we had many people focused very narrowly — a person dedicated to eCRM, for example. Now, Goldman has to be focused on larger companies — they did the HP-Compaq deal, for example. That strategy has paid dividends, and now we need to change again, because the IPO market is coming back.

While the IPO market is open, there will only be a small number of IPOs in 2004. More than this year, but it’s not going to be 400 or 300 IPOs. The companies are not there yet. Companies should not rush to go public. Being public is hard. It’s really expensive to be public. Sarbanes-Oxley makes it a real challenge.

Mowry: How do you make up for the lack of influence because of the reduced analyst coverage?

Calcano: The criteria companies use to select bankers are changing. Research is still a factor, but we’ve been asked in recent months to work on deals for companies we don’t even cover. In the future, research will be much more focused on secondary investing than investment banking.

Vieux: Is Goldman focusing on the U.S. or will Goldman redeploy to address Europe and Asia.

Calcano: We cover the big cap companies around the world and I’ll put our coverage up against anyone’s. He’s saying, essentially, that they are ignoring the startup world outside the U.S. and even in the U.S. they pay attention only to companies with very large capital needs. This is good news for the boutiques out there, though they shouldn’t hope to be acquired by Goldman at the old valuations — big banks will not make that mistake, overpaying, again.

He goes on to say they helped to cofound Shingwa University in China, an entrepreneurial training center. But, he says that China will take a very long time, point to the old bugaboo, piracy, to discount the China market a bit. He’s really saying that Goldman will deal with big companies.

Guy Gecht, CEO of EFI

EFI (Electronics for Imaging) is big, but relatively hidden because it is an OEM supplier.

EFI is one of the key suppliers for the printing business. Gecht says the printing industry has a well established pay-as-you-go business model. He points out that a bottle of Dom Perignon is $147, Chanel No. 5 sells for $1,471 a liter and $3,500 a liter for ink — a tank of ink sells for about $145,000. Printing is the fourth largest industry in the U.S. at $320 billion or three percent of GDP. It is just behind semiconductors and well behind the petroleum and auto industries.

There is a lot of evidence that demand is picking up, based on EFI’s business experience, Gecht says. Total page volume is still rising today, despite all this digital stuff. Digital technology has increased local printing. We no longer ask for brochures by mail, but download and print them ourselves. “Paper is the On and Off Ramp of the Information Superhighway.”

EFI sees printing opportunities in security, wireless and the “information lifecycle.” Reducing or controlling printing costs is the key to EFI’s business.

The security opportunity is in access control. Routing and printing permissions.

Wireless output, from handset to the enterprise.

Information Lifecycle — the integration of copier functionality and archival access.

Gecht says he is hearing that end-user customers want to work more directly with the provider of print infrastructure systems, indicating they need to spend more on branding and support in coming years.

Like Veritas, we looked at the downturn as an opportunity to differentiate ourselves from the competition. They did not lay off as many people as they might, lowering current margins, in order to be more prepared for growth. He says that as the company grows, it will grow profit more rapidly than revenue.

The company has $750 million in cash, is not looking for a large acquisition and is buying back $15 million in stock. The company compensates top performers with more stock and Gecht feels obligated to offset the dilution for shareholders.

Gary Bloom, Veritas

Another day the Red Herring conference begins….

Notes come with a warning: These are not verbatim in any sense.

So, he’s just come from the Laguna Seca racing school and that has him thinking about the recent changes in speed in the IT business. Racing analogies promise to proliferate.

He says Veritas is on track to exceed its $1.5 billion in revenue last year by a long shot.

I’m not a believer that there will be a dramatic recovery, it will be very measured. The problem with predictions is that IT surveys look at budgeting, which doesn’t reflect actual spending. Right now, we’re looking at better budgets but that won’t necessarily result in actual spending. We’ve been through tight budgets and a lot of scrutiny for spending. He isn’t saying it, but the sales don’t seem to be coming.

Veritas used the downturn to grow geographically and in specific technology markets. Veritas has added 2,000 employees, to reach 6,800, since the end of 2000. Bloom says the companies that cut back will not be prepared for growth.

The last quarter: Sales were up 23 percent over the previous quarter. Veritas is the fourth largest software company by market cap as of the end of November.

He talks about a European telecom customer…. The company reduced IT headcount by 47 percent by introducing Veritas (not the most compelling argument for IT guys to support this stuff, but hey, we’re all pawns in this game).

9/11 changed the concept of disaster recovery, he says, because the worst disaster most companies were used to was a failed drive. Veritas had more than 100 customers with data loss that day — the same occurred with the New York and London blackouts, when many companies were affected and lost data because they hadn’t put enough backup power in place.

The next trend that fueled data integrity was the corporate scandals, which increased regulations and disclosure practices. Even private companies that hope to go public have to be concerned with compliance issues going forward. As compliance considerations became front and center in management concerns, the data storage and integrity industry got a huge boost.

I agree — this is only the beginning. We’re moving toward increased transparency in corporations, just as we went through eras of growing transparency in government. This is not only about storage of, and access to, data, it is about reporting and making information useful for critical examination of the state of a business.

Bloom is a firm believer that there will be massive consolidation in the computer industry, starting this coming year, but lasting a very long time. Companies that try to consolidate others will face great challenges as they try to integrate competitors into their business after acquisitions; Bloom is clearly saying that Veritas will take this slow and steady rather than racing into a round of acquisitions.

His strategy slide describes Veritas as a universal integration layer in the heterogeneous computing environment. He says utility computing will be real, but that it will be an archipelago of individual enterprise utilities rather than a world where everyone plugs into services from single vendors.

At this point, Bloom is joined by two Herring interviewers….

The question of EMC’s position in the market comes first. Bloom says EMC bought Legato and got only a seven percent market share, which doesn’t position them to become a leader. He says they have a robust “Legato replacement” business and that EMC is not ready for the open hardware environment that is developing in the corporate backup market. Veritas has grown while EMC has declined in revenues, Bloom points out.

Lee Bruno asks if Veritas will make aggressive moves in M&A this year. Bloom says they have 1,800 engineers building technology that are complemented by an acquisition strategy — this can be a challenge, because you can go too far to the not-invented-here approach that closes out external innovation or you can try to buy everything and face an insurmountable integration challenge. “We define our strategy through the eyes of the CIO, who is our customer.”

In core storage and disaster recovery, Bloom says Veritas already has the market leading products to which they will add features, and that they will work to automate more of those processes through strategic acquisitions.

Alex Vieux asks about recurring revenues and the utility computing market. Bloom says a company should always be a transition in terms of sales and pricing models. Companies that haven’t changed very much suffer from resistance to new pricing models. He says the whole executive team at Veritas has turned over (odd thing to brag about) and this is a strength. He hasn’t made the cast that Veritas is really changing its pricing strategy to a utility model — what he is describing is a pricing model for monolithic IT infrastructures within individual enterprises, rather than being a plug-and-play option for companies, like Computer Associates has tried, which Bloom said “horribly hurt” CA’s business.

When talking about how quickly Veritas will become the number three software company, we get to the racing analogy — ultimately, Bloom says one of the leaders will have to have an engine failure for Veritas to move up in the rankings.

Alex Vieux then asks about the revelations that Veritas’ former CFO, Ken Lonchar, had no MBA from Stanford, which the guy claimed he had. Bloom says, essentially, mistakes happen. The CFO was there when he arrived in 2000, so he didn’t check his credentials. “You trust that people are telling you the truth until they do otherwise. You’re looking for a personal fault, but there is none.” Apparently, Stanford contacted Veritas about this after seeing the CFO’s claims on the Veritas Web site. Bloom said the main concern was not his degree, but his accounting credentials, which the CFO did have — he was let go because he lied in a position of trust.

Lee Bruno asks about threats to Veritas from open source and to margins.

“I see open source more as an opportunity than a threat,” Bloom says. Linux is going to be in many systems. Software costs have been outpacing hardware costs, but the biggest cost is always labor. So, as long as Veritas can help customers lower labor costs it can remain competitive. “I believe Linux will take a long time to [be recognized as a viable enterprise system],” which is a remarkably skeptical statement in the face of statistics.

China’s Promise

The conference now turns to one of my pet topics, the future of China’s role in the economy.

Alex Vieux: We are underestimating what will happen to us [the United States], because China will hit us like a truck.

The panel begins by saying that China is still somewhat behind in the technology market. Ken Xie, CEO of Fortinet, says China’s technology industries will take 20 to 30 years to catch up to the U.S. and Europe. This is true, I think, in the area of innovation, but in manufacturing it will be a tremendous and growing influence on cost structures around the world.

Brewer Stone, managing director of East Peak Advisors, confirms that China’s technology is behind the U.S. The manufacturing growth, from a dead start to 15 percent of the semiconductor industry output globally, is significant, but the design of high-end chips will not migrate to China.

If I had to guess, I’d say the Chinese will learn to innovate in semiconductor design in about 10 years — for the time being, they are learning from the systems made there today. It is just like Silicon Valley, where several generations of corporate and technical development were required to bring innovation to the forefront.

When Alex Vieux asks about how hard it is to do business as an outsider in China, Soo Boon Koh, managing partner of iGlobe Partners, points out that there are many different Chinese — that it isn’t a monolithic society.

Everyone agrees it is hard to do business in China. Manufacturing there is tricky, because intellectual property can be hijacked. If you want to build a market in China, it is a huge opportunity, but will take years.

Brewer Stone, the only caucasian on the panel says being an outsider can be helpful. He speaks Chinese, and believes that he is in a better position vis-a-vis the Chinese government than many Chinese.

Ken Xie widens the discussion to doing business anywhere in Asia, saying that relationship building is critical throughout the region — he says that the market is more willing to adopt risky technology than the U.S. and Europe.

Vieux: There is still a lot of stealing of software — is that a trend or are we going to see China respecting intellectual property rights?

My answer: I am told that Chinese business and government leaders want to start pressing their own IP claims globally, which will force them to enforce those rules at home, too.

Ken Xie suggests being a service provider is safer than building technology there, because service is not easily replicated.

Brewer Stone says there are a lot of laws but the problem is enforcement. They don’t have the resources and understanding of the issues to put these laws to work. Pointing to India, he says Chinese business is starting to adopt IP rules and that business, not government, will drive that movement.

Understanding how to manage the Chinese is critical, too, says Soo Boon Koh. Lower labor costs are only useful if you have an insight into how to make use of that labor profitably (this is critical, for instance, in managing quality). The human costs are definitely lower in China, but management overhead is higher. Fortinet has 300 employees in China, half of which are engineers, but the organization doesn’t operate as efficiently as a U.S. operation, Xie says.

An interesting digression comes up: We talk about the Chinese economy being 1.4 billion people, but, in fact, the reality is that only 400 million people participate in the economy.

Vieux: How much uncertainty is the result of lack of transparency in the Chinese government?

Tsang says he’s very hopeful. He says that content companies cannot be owned by outsiders, but actually these U.S. traded firms only control through management contracts. The new government is very pro-growth, he says.

As I’ve written before, the government has to deliver growth to keep its control over society. The give and take between the people and government is predicated entirely on the Communist Party’s ability to deliver growth — no growth and you’ll have revolution (though likely a velvety one, at this point).

Stone says the track record of the government has been very good. He points to UT Starcom, which is doing wireless services when it isn’t licensed to do so. The government decided to let it continue to do business and it thrived — left unsaid is that the company may be held hostage by this in the future.

Vieux: Is it true that nothing negative will happen — coming from the government — until after the Beijing Olympics?

Everyone agrees. Stone says the government wants to use the Olympics as its “coming out party” in the global economy. Stone says it’s about the “face” of the nation.

Another interesting turn: The panel believes this peaceful trend is founded in China’s new wealthy class. This suggests that wealth and liberalism are closely aligned, but does nothing to actually improve the democratic quality of Chinese society — they are describing an oligarchy.

Vieux: Is the enthusiasm a sign of a Chinese bubble.

Everyone thinks real estate and technology may be over-inflated today. At the Hina Group, Ken Tsang says, they are focusing on more traditional industries currently controlled by the government. Stone says the over-heating is the result of over-investment.

Vieux: How can a country proceed at two different speeds, for one group that participates in the economy and another that does not?

This is a real problem, says Soo Boon Kuh, because the rural population is beginning to sense its economic isolation. The government has responded by building new cities where people can migrate — this is a kind of delaying tactic, not a solution.

She also talks about how some people who have come to the city to work have found they can’t afford to live there on worker’s wages and gone home.

Stone says there have been a lot of explosions — hundreds of riots — but the reality is that the press and government keep this quiet. He says the rural Chinese don’t have a choice — people say they can’t do anything about this and focus on their own interests (which, I’d note, means the society is becoming secondary to personal wealth in stark conflict with traditional Chinese society — the nation needs to tax and spend on the rural areas to make up for the unequal investment). Tsang says the socialist structure is still a beneficial system in this case.

Vieus: Is China going to welcome companies that want to sell to the Chinese or is China only for the Chinese?

Stone says China is trying to create proprietary infrastructure for industries, but people are also passionate about new technology that bodes well for foreign companies. Tsang says the $57 billion in foreign direct investment each year is evidence that the market is worth entering.

There comes a point where, having let capital in, the Chinese cannot back away without destroying its global economic position.

Kevin Ryan, DoubleClick

Closing the day with Kevin Ryan, CEO of DoubleClick.

Alex Vieux: How come people’s perception of DoubleClick is focused on what you used to do, rather than what you do today?

Ryan: The first three years of our company, we were focused on Internet advertising, and since 1999 we have focused on marketing technology. People still think of as in advertising, which is still 40 percent of what we do.

Vieux: Why can’t your marketing make a difference for DoubleClick?

Ryan: We’re focused on whether we are doing the marketing we need to do in order to sell to our customers. DoubleClick is not marketing to the Street. The company is buying back stock now.

Ryan goes on to address the concerns raised about marketing tools becoming intrusive in consumer privacy, saying they do link online and offline databases, but do not use matching for the targeting of ads. This sort of skirts the privacy issue, but the question is “why the hell not?” If it is a mandate for the company to improve targeting, why aren’t they using database mining to target ads? Answer: People are still touchy about it and will revolt against DoubleClick — the marketplace (the people that make up the market) won’t stand for it.

The company is currently undervalued, because investors don’t understand everything it does. The stock used to follow Yahoo!, because people focused on the advertising business. We’ve already guided that GAAP earnings will be 2.5 times what they were this year.

Vieux: What is the level of correlation between ecommerce growth and the growth of DoubleClick?

Ryan: It’s very significant, but there is a lag. Internet advertising and email follow commerce — they Net guys get support after the holidays, when their growth is most visible to senior management.

Vieux: What is the reasonable margin to expect in DoubleClick’s business?

Ryan: Core products run close to 40 percent, though that is brought down by investments in new technology and markets, such as analytics and Japan. We sold off the ad sales group, which lowered our revenues. You’re seeing growth now, and the result is the faster growth you see today. He feels he is done with the triage.

We don’t have an enemy in the market. We have a series of small competitors in different areas of business. By combining different functionality, we aggregate the revenues those smaller competitors can pick off today. (Heavily paraphrased).

Vieux: Where are the areas of growth?

Ryan: The big segments are ad management, marketing automation and data management. Marketing automation is going to grow the fastest, but it will be the least profitable for a couple years. The other two areas are extremely profitable, but they will only grow about 10 percent a year. The factors that drive costs continue to come down, which compresses revenue growth.

Why did Kevin Conner move up to chairman. He likes to create product; even when he was CEO everyone reported to me. He continues to contribute at the strategic level.

Vieux: What are the trends for the industry in the next year?

Ryan: The Internet application as a component is going to continue to grow. The amount of data you can analyze in a multi-channel world is exploding, so that companies can tell what the relationships between different channels are and adjust spending accordingly. It feels like there is optimism that we hope will continue to pick up.

Online advertising is already taking a significant chunk out of print advertising. If you looked at the valuation of the tech publications in 1999 it was about $8 to $10 billion; today that is a fraction of the cost, so you can see how in the core market for Net advertising online has taken a huge bite out of ad spending.

No one uses information to buy impulse and image purchases (bleach, fast food, etc.) TV still plays a very important role in that market, and once you have more full-motion video advertising, TV is relatively insulated from erosion by Internet advertising.

Asked about DoubleClick being located in New York, Ryan says there is great R&D talent in the Bay Area, but it is easier in most other areas to find talent in New York. even among engineers. It’s also a better stepping off point to Europe. In New York, you are always in one of many industries, which is a valuable perspective.

Vieux: What has been the most damaging mistake you made?

Ryan: Real estate was the biggest mistake — $50 million in write-offs of leases. Privacy concerns were far less impactful for us. I told the sales force that when this shakes out, everything will be fine. I expected a two-month freeze in the market, but people called in unexpectedly high numbers. Bad publicity paid off.

The Next Things, Big & Small

The theme of the Red Herring conference is Top Ten Industry Trends 2004. The short list from the gang at Red Herring sums up next year this way:

Advertising Madison Avenue is waking up the the limitless new opportunities in digital media.

Communications The battle for voice/video/data subscribers get nasty.

Health Obesity becomes a big problem, and a big industry.

Computing Low-cost everything is the order of the day.

Regions Multinationals will have to be quick learners to stake a claim to China’s high-tech bonanza.

Culture DIG: Digital Immediate Gratification — In the move to make things digital, consumer electronics are changing the way we live — and think.

Intellectual Property Hollywood fends for its meal ticket as consumer appetite for digital content grows.

Venture Capital Angel investors are back, funding the small startups that will be tomorrow’s giants.

Security In a dangerously unstable world, security gets smarter and more tightly integrated into the fabric of networks and machines.

Management Outsource backlash. Once popular with cost-conscious IT execs, outsourcing has been shown to be full of security holes.

On the last point, I think outsourcing isn’t full of security holes, rather we haven’t found new business relationships and the mechanisms for arbitration that will make outsourced work a normal part of business. This is simply a lack of maturity, the stumbling that happens when young companies (virtually all companies) actually start operating in the global economy.

Taking it a step further, I was asked by a client of InnovationWORLD for a list of ten technologies that I think are worth watching in 2004. I wrote the following over the weekend….

There’s something arbitrary about this exercise, which comes at the end of every year, since society is always surprised by what has happened already. Here we are at the dawn of the third millennium on the Christian calendar, the 47th century of the Chinese calendar and middle of the 57th century according to the Jewish calendar, which dates back almost to the very beginning of civilization. We’re not very old as a species and, yet, we have cloned animals, understood and cured infectious diseases, visited the moon and can manufacture nano-scale machines. Yet, we always want to know what is next, which is the source of our capacity for innovation.

Here, then, is the list of 10 technical trends for 2004, starting in the computing industry:

64-bit computing. During 2003, the computer industry will consolidate recent technical strides to drive greater usage of network capacity, which is still available in far greater quantity than currently needed. 64-bit computing, based on new 64-bit microprocessors from IBM, AMD and Intel, will produce far richer application functionality—higher definition graphics on the desktop and immensely increased data processing capability. That translates into more data flowing over networks.

The first 64-bit processors made their appearance on the desktop in 2003 and will grow in market share at the high-end of the desktop market, especially in workstations and gaming systems, during 2004. At the same time, software developers will begin to roll out applications that take advantage of the added computing power, which will force 64-bit processors into the midrange market late in the year.

Real Simple Syndication. The underpinning of the blogging phenomenon, which has given rise to approximately four million personal publishing sites in the last two years, is Real Simple Syndication (RSS) (that’s a gratuitous link to Scoble, who is stirring up the dust in the RSS world lately), a convenient way to distribute information because it support subscription services and makes finding content one might be interested in a snap. RSS functionality will begin to find its way into other applications during 2004, as the convenience of information sharing makes itself critical to work.

As network connectivity reaches every corner of the world, RSS is a key technology for bringing people and information together in purposeful ways. Using RSS, a team can be formed across national borders and many time zones to tackle a project, start a company or form a political movement.

Ultra-Wideband Wireless. Ultra-wideband, or “UWB,” is the next and, maybe, ultimate step in making use of the airwaves. UWB is a descendant of the spread-spectrum radio systems that birthed the wireless data industry. Built on a mathematically complex transmission technology that encodes data by spreading it out over a vast swath of radio spectrum, UWB signals sound like noise to other radios—this allows today’s radio infrastructure to co-exist with UWB signals.

Because it uses such a broad range of radio spectrum, UWB can carry far more data that today’s wireless networks. Early versions of the technology can transmit hundreds of megabits of data a second over far greater distances, many times the capacity of today’s fastest 802.11 wireless networks—without the potential for interference that can disrupt today’s wireless data networking. UWB will make its first significant appearance in 2004.

In media, the trends InnovationWORLD will be watching include:

Time-shifting. The broadcast schedule is about to give way to a media environment when the audience will watch or listen when and where they want. Apple’s iPod, one of the hottest-selling products, is an example of the new media based on portable playback. During 2004, inexpensive writable video data storage will become widely available, spurring a revolt against the broadcast schedule. From radio programs to television series, we’ll be taking our mass media with us on the bus, the train, for a jog and to the office, this last to extend the professional learning that has become an essential part of work.

Time-shifting will accelerate the development of a new industry of micro-content delivered via subscription platforms for audio and video, such as and through the aforementioned RSS for non-commercial content. New programming won’t look like today’s network television series, rather it will address very narrow interests and could come at a significant premium—consumers will be able to take classes or collect the performances of artists who sell directly to the public without a media company handling the transaction.

DVD-Recordable goes mainstream. For a number of years computer users have been able to burn DVD discs, but the cost per disc and the inconvenience of the software involved has kept most people from using this storage medium. No one has wanted to burn a $5 disc and have it ruined by shoddy software.

During 2004, DVD-R will find its niche with a proliferation of new devices, such as the tape-to-DVD decks introduced during 2003, feeding the consumer’s habit of recording video, audio and pictures for their friends. Everything in the consumer market, from the immense popularity of digital cameras and the transition to digital video, are militating to drive the adoption of a storage medium that can be handed around. Just as mix tapes and photo albums have been passed from person to person in the past, DVD-R is the logical basis for physical exchange of media.

Moving on to biotechnology, we think this will be a key area of technological transformation in the wake of the decoding of the human genome:

DNA screening. The availability of low-cost DNA screening technology, called micro-arrays, will make genetic testing a far more familiar part of clinical medicine. These devices, which combine biochips and DNA scanners that the chips plug into, can give a comprehensive picture of a part or all of a patient’s genome in a fraction of the time required only two years ago. When confronted with a genetic disorder, patients may find it becomes commonplace during 2004 to have a DNA screening to determine if they are at risk. Once screened, the patient might be proscribed a change in diet or precautionary medication.

Pharmacogenetics. Following in the footsteps of DNA screening is a novel pharmaceutical practice, pharmacogenetics. This field is based on the fact that some medicines can be profoundly powerful in the treatment of people with a particular genotype, a broad class of genetic characteristics shared by families and groups in the population. Unfortunately, these same drugs might be very harmful to people with a different genotype. The pharmaceutical industry is in the midst of a vast reordering of its development processes to address the pharmacogentic challenge.

Where drugs that could harm some people were not approved for use by the U.S. Food and Drug Administration, the clinical trials process is being adjusted to target genotype groups in the population. This transformation will deliver more powerful drugs for people with diseases like cancer, and it will lead to a dramatic localization of the pharmaceutical industry as drugs targeting specific populations are developed and distributed.

Chronic, not terminal, disease. As the pharmaceutical industry changes, the way we think about disease will be transformed, as well. Consider how, in the developed world, Acquired Immune Deficiency Syndrome (AIDS) has become a chronic condition through the application of “drug cocktails” that strengthen what remains of the patient’s immune system and fights specific diseases, like Tuberculosis, that often kill someone afflicted with AIDS. This is just an early example of the change in the way disease is managed that is underway today.

Of course, the challenge is making the drugs available, but this is a profound change in our perception of illness.

Now, here are a couple of unconventional predictions:

Security for security’s sake will wane. The need for computer security technology has been taken as an inviolable truth for the past few years—the security industry and the pronouncements of government have virtually ensured that people approach their computers with fear of virus infection and identity theft. However, the fact remains that as much security is put in place the weak link in the security chain is the individual user or corporate policies that compromise good sense. The ideas that Bruce Schneier has promulgated at Counterpane are the enlightened approach to security that I think will be ascendant in the coming year.

Security has become the silver bullet for all sorts of problems that need to be addressed through changes in the way business is done. In the music business, digital rights management technology—a form of security applied to music—has created more barriers to the survival of the music industry than it has to renewed success. Only when Apple introduced its iTunes 99 cent download service for popular music did the potential for digital distribution of music come back into focus. Business models, as much as security regimes, need to change.

After the security spending spree, IT professionals are coming to the realization that users will often route around the technology meant to protect them. This happens because the technology isn’t designed right as often as it does because people are careless. In either case, the avalanche of security technology will give way to a new awareness that teaching people to be thoughtful about their own and their company’s privacy is at least, if not more, important than technology. This will lead to a leveling off of security spending relative to other application software in 2004.

Linux wildcard. Linux and open source software have made tremendous strides in recent years. Microsoft is several years from the release of its next generation Windows operating system, opening a new window of opportunity in the enterprise applications market for Linux and open source applications. The wildcard in this picture is the development of a business model for open source that accelerates the adoption of software and services.

Linux and open source software are uniquely positioned to create local software industries around the world. Where a copy of Windows can cost as much as a year’s wages in many countries, Linux and open source can be introduced for next to nothing and, since the applications will create service revenues, create a built-in software consulting industry in a developing economy. At InnovationWORLD, we believe a key indicator to watch in the development of the global economy will be the adoption of Linux and open source, which should race ahead of Windows in markets where personal computing hasn’t taken hold.