This from TechCrunch on April 1, 2009, Silicon Graphics Declares Bankruptcy and Sells Itself For $25 Million:

SGI's high-performance, highly-proprietary, computing systems fell victim to the spread of cheap Linux boxes hooked up together with massive redundancies.

This from Red Herring, September, 1995 in an Open Letter to Ed McCracken, CEO of Silicon Graphics:

In 1992 you bought MIPS, the microprocessor designer and manufacturer, because you were its last major customer and needed to guarantee that SGI could continue to use MIPS chips. Now you rely completely on that technology. In the meantime, Intel and Motorola/IBM/Apple have each spent a billion dollars on their Pentiums and PowerPCs--Intel will spend $3.5 billion in capital investments and $1.3 billion on research and development for 1995 alone! And this investment will only grow. In 1994, Intel-based systems doubled in price/performance. With volumes in the tens-of-thousands, not in the tens-of-millions, how can SGI compete? And stiff competition is just around the corner: a Windows NT system with multiple P6s on the motherboard will compete with your high-end machines at a fraction of the cost.

This seemed obvious in retrospect, but it wasn't obvious at the time, and I think we were the first magazine to really call attention to this trend. I'm actually quite proud of this article and remember being quite nervous about it. After all, who were we to openly challenge the brilliant minds at one of the Valley's hottest companies? I was 25 at the time and had zero direct experience in the industry that would qualify me to make a sound judgment on SGI's strategy.

But we were confident in one thing: we actually talked, and listened, to some of SGI's best customers (even after almost 15 years I won't reveal the sources!) and what they were saying made sense. Their customers didn't think SGI was listening, so the main goal of our letter was to urge them to do just that:

Don't Alienate Your Customers
Regardless of the strategy you choose (or may have already chosen), we urge you to work closely with your customer base and announce your long-term plans--or the grumbling masses of graphics professionals who depend on SGI will mutiny, and turn to Intel and Microsoft for leadership. We realize that abandoning your MIPS-based systems will threaten short-term sales, but, right now, the greatest thing SGI has going for it is its momentum. Don't spoil that by alienating your loyal customers.

SGI's response to our article was telling. Rather than following our advice, they invited us to their offices, loaded the room with some of the smartest people I'd ever met, and tried to convince us why we were wrong. They had convinced themselves that they COULD in fact compete with the wintel price/performance trend and I guess they thought that if they could convince us that their strategy was sound, we would in turn convince their customers through our writing. But that fundementally misunderstood our role at Red Herring. SGI customers influenced US more than we influenced them -- so SGI didn't get how the patterns of influence worked. You don't change customers minds through PR, you change their minds by listening, engaging, responding, and adjusting.

I think the "earned media" meme is a useful one -- if brands want "coverage" in a world of professional AND consumer-generated media, they will have to earn it, not just pay for it. In the past, earning it was managed through PR -- the pros wrote about you because you deserved it (and you did a good job of convincing them of that fact). Today we realize that great products and great customer service can earn you accolades from the hordes of bloggers, twitters, and facbookers (and the inverse is also true).

Here's Pete Blackshaw...

This is important to internalize because maximizing earned media requires a much more fundamental shift than just "embracing social media." Setting up shop on Facebook is the easy part. Developing the brand business processes that increase odds of advocacy or favorable earned media is quite a different thing, but it's essential. If, in fact, the manner in which employees treat customers does more to drive online love (or venom) than your best advertising campaign, we have a fundamentally bigger challenge (and opportunity) on our hands.

who refers to Fred Wilson...

Earned media is media you don't buy but earn the hard way. PR is an example of earned media. Word of mouth is another. Earned media has been around forever. But it has now gotten a lot easier, thanks to the Internet and social media, to earn media for your brand, product, or self.

who refers to Jerry Solomon:

The first step is to stop the monologue and begin a dialogue. Start listening and responding. Marketers understand TV, radio and print. They remain effective but no longer as dominant. No need to abandon them. However, brands need to become equally adept at mastering the language of social networking, blogging and online content. This begins with investment in new business models. Accept more will fail than succeed. Unfortunately the only method of determining the ones that work is by putting the resources and will behind them. The brands that invest in unlocking the code will develop genuine relationships with their customers, as well they should. They earned it.

I was watching Mutual of Omaha's Wild Kingdom on Animal Planet (takes me back...) while blogging and twittering - and finishing up World of Goo - and a thought occurred: is Twitter a gharial?

For those few readers who may not know, a gharial is a highly specialized crocodile that has evolved into a fishing machine. The gharial survived over the millennia by being heavily optimized for eating small fish. With a long, narrow snout "the reduced weight and water resistance of their lighter skull and very narrow jaw gives gharials the ability to catch rapidly moving fish, using a side-to-side snapping motion." The trade-off is that "gharials have sacrificed the great mechanical strength of the robust skull and jaw that most crocodiles and alligators have, and in consequence cannot prey on large creatures...." They've traded specialization for adaptability.

However, while they were once perfectly adapted to their environment, with changing ecosystems through the ages the gharial are now on the critically endangered list and only survive in the wild in a few areas in India. Wild Kingdom chronicled a heart-breaking episode where an early monsoon wiped out one of the few remaining nesting grounds for gharials, washing away dozens of eggs.

Twitter is having its moment. They are a gharial and the internet is presenting it with an bounty of small fish, many of whom were tired of competing with the bigger blog sharks and searched for easier waters. But Twitter is successful in great part by the discipline of its creators to focus on the simplicity of doing what it does best, while others have undulated and mutated, copied and careened. Twitter is highly specialized.

Yet the environment is changing, and the fish are growing. We are now seeing macro-micro-bloggers, from Britney Spears to Al Gore, and organizations small and large are wading into the waters as well. Meanwhile, other predatory species are waddling in from the riverbank. So the question is: is Twitter adaptable?

We've seen this before. The social media space already has a long line of hit services that grabbed the limelight and then gave way to new golden children: LiveJournal, Blogger, TypePad, WordPress, Friendster, MySpace, and some would argue that Twitter is taking the attention from the current darling, Facebook. And already some luminaries are suggesting that Twitter itself is peaking. All of these services continue on successfully, of course, but the conditions that brought them to prominence changed almost as rapidly as they materialized, and these services will have to adapt along with the environment.

Facebook has made notable, aggressive moves to evolve and, despite a fair amount of criticism for a number of its moves, it clearly possesses the strength and adaptability to make changes, learn from mistakes, and adjust. Twitter has only made the slightest adjustments to its product mix in the last few years - an approach that has served it well... so far. But we know that environments change and we will learn just how adaptable Twitter is, or even wants to be, in the coming months and quarters. Do they meddle with the specialization that has brought them this far? Or do they stay the course and risk others adapting better than they to the web's ever changing ecology?

I think Twitter is a phenomenal service and I admire the founders and management team tremendously. It will be fascinating to see how they approach this dilemma.
 

From Ad Age:

Brands aren't simply brands anymore. They are the center of a maelstrom of social and political dialogue made possible by digital media, said Unilever Chief Marketing Officer Simon Clift, who warned that marketers who do not recognize that -- and adapt their marketing -- are in grave peril.

"No matter how big your advertising spending, small groups of consumers on a tiny budget might hijack the conversation," he said. "So this internet thing is much bigger and more interesting than just finding successors to TV advertising."

Conversations happen. The world where brands can shape their identity merely through one-to-many advertising alone is over. Opinions and ideas on virtually everything (politics, sports, technology) are being shaped, formed, and solidified through social media, and brands are no exception to this.

Clift's 5 new rules for marketing (details at Ad Age):

1. Listening to consumers is more important than talking at them.
2. You can't hide the corporation behind the brand anymore -- or even fully separate the two.
3. PR is a primary concern for every CMO and brand manager.
4. Cause marketing isn't about philanthropy, it's about "enlightened self-interest."
5. Social media is not a strategy. You need to understand it, and you'll need to deploy it as a tactic. But remember that the social graph just makes it even more important that you have a good product.

I thought Arianna Huffington put this very well:

The great upheaval the news industry is going through is the result of a perfect storm of transformative technology, the advent of Craigslist, generational shifts in the way people find and consume news, and the dire impact the economic crisis has had on advertising. And there is no question that, as the industry moves forward and we figure out the new rules of the road, there will be -- and needs to be -- a great deal of experimentation with new revenue models.

But what won't work -- what can't work -- is to act like the last 15 years never happened, that we are still operating in the old content economy as opposed to the new link economy, and that the survival of the industry will be found by "protecting" content behind walled gardens.

Andrew Anker has more coverage of the Great Upheaval at Quid.Pro. I like Clay Shirky's description of an industry unwilling to confront reality:

When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse.

So how do you move forward without obsessing on the past? Well, ironically, learning from history may help.

L. Gordon Crovitz writes in WSJ about how Bernard Kilgore transformed The Wall Street Journal when it faced a disruption of it's business model from technology as stock information, which had been the paper's core differentiator, became plentiful via radio and other sources:

The Journal had to change. Technology increasingly meant readers would know the basic facts of news as it happened. He announced, "It doesn't have to have happened yesterday to be news," and said that people were more interested in what would happen tomorrow. He crafted the front page "What's News -- " column to summarize what had happened, but focused on explaining what the news meant.

You often hear professional media dismiss blogs and other new media because, it is claimed, the latter can only do opinion, and not "real" news. First, this is simply untrue, as attested to by the emergence if hyperlocal media. But second, this attitude may have compelled the media industry to focus too much on a misperceived comparative advantage -- news -- when they could have been innovating more on the analysis side of things.

As Crovitz points out:

"Kilgore's first critical finding," Mr. Tofel wrote, was "that readers seek insight into tomorrow even more than an account of yesterday." This "may only now be getting through to many editors and publishers." Indeed, at a time when print readership is declining, The Economist, with its weekly focus on interpretation, is gaining circulation. The Journal continues to focus on what readers need, growing the number of individuals paying for the newspaper and the Web site.

Professional media have tended to view the world as a cascade, starting with their news, and trickling down to the blogs that, sometimes parasitically, feed off of them. One wonders whether the future will looks inverted from this past -- with media companies focusing on their brand advantage, and the trust that many of them still earn, by aggregating and analyzing the news that is now becoming so plentiful across the Internet.

The evidence would appear to suggest not:

The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.

The confusion began when Treasury Secretary Timothy Geithner recently told Congress that large venture capital (VC) firms should be forced to register with the Securities and Exchange Commission (SEC), and submit regular reports on their investors and portfolios. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren't "a threat to financial stability."

Since then, venture investors have been trying to solve the mystery of how they could possibly threaten the financial system. Their work involves very little banking. Venture firms raise equity from wealthy investors to buy ownership stakes in small companies. The VCs and the companies in which they invest use little or no debt.

James Freeman gets it:

If our economic system is to thrive, venture capital is exactly the place where we have to encourage risk. In pursuit of innovations that will enrich themselves and the world, employees at start-ups accept low pay and reputational risk, while well-heeled investors accept the possibility of losing every nickel of their investment.

Attempts to limit risk pose a systemic threat to American technology. Venture capitalists, mainly veterans of the tech industry, are deeply involved in the companies they back, often helping to recruit each of the key employees at a start-up. This hands-on feature of venture investing means that innovative companies and their backers tend to cluster in areas like Silicon Valley. If the VCs move offshore, that's probably where the next generation of companies will be born.

I'm hoping Geithner's comment is born of ignorance, not calculation, for if it's the latter then we're in trouble.

UPDATE: comScore's Gian Fulgoni has some VC quotes on this.

I just wrote about the disturbing trend of Internet censorship in democracies around the world, and this story is a case in point. A bill supported by President Sarkozy that would have cut off Internet access to people was defeated, but may be resurrected next month. What crime must you commit to lose your Internet connection?

The measure would have created a government agency to track and punish those who pirate music and film on the Internet. Analysts said the law would have helped boost ever-shrinking profits in the entertainment industry, which has struggled with the advent of online file-sharing that lets people swap music files without paying.

So a department of Internet monitoring and censorship, empowered to cut of your Internet connectivity with the full force of the French government, would be established to help boost a flagging industry. How long before the censorship agency would be used for other sorts of control over Internet freedom?

Legislators and activists who opposed the legislation said it would represent a Big Brother intrusion on civil liberties -- they called it "liberticide" -- while the European Parliament last month adopted a nonbinding resolution that defines Internet access as an untouchable "fundamental freedom."

I am very sensitive to the rights of copyright holders, but let's remember that it is not a natural right, such as freedom of expression or even physical property rights. It is a man made right -- an artificial monopoly created by government fiat to provide a limited economic incentive for creators to produce.

In the US, you don't find copyright in the listed in the Declaration of Independence as an "unalienable right," such as "life, liberty, and the pursuit of happiness," but rather its justification is found in Article 1 of the US Constitution that "The Congress shall have Power To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

Your copyright comes at a cost of my freedom, and so it is a right that should only be very carefully applied when there is a compelling societal interest, and in a limited fashion. I'm not against punishing lawbreakers, but this bill is beyond the pail.


UPDATE: NYT covers this story.

From Foreign Policy, a disturbing piece on how Internet censorship is not just on the rise in places like China and Iran, but also in democracies including Australia, France, India, Argentina, and India. An international declaration of Internet rights is in order.

UPDATE: Reid expands on his ideas in this TechCrunch piece. He still hasn't won me over on point 3 though.

Here is a great column by in the Washington Post making the point that entrepreneurship is a major engine of growth for this country and it deserves some stimulus.

Entrepreneurs are the fertile soil for job growth and recovery. Small companies represent 99.7 percent of all employer firms, Commerce Department data show. They pay nearly 45 percent of U.S. private payroll and have generated 60 to 80 percent of net new jobs annually over the past decade.

There are few people who are more credible or smarter when it comes to technology entrepreneurship than Reid, who has PayPal and LinkedIn on his resume and, as he mentions in this piece, has invested in over 60 companies. I should also mention that he is an investor and board member of Six Apart -- and a friend.

I think he is right on when he makes the point that although there is some focus in the stimulus package on scientific research, that "new ventures -- not merely new technologies -- need to be championed as the course to stability."

As for Reid's proposals, I would support some and I am more skeptical of others (this would not surprise Reid :) ).

First, he proposes that we "encourage small business with loans. Apply to the United States the micro-lending model that has proved successful in developing countries, extending credit lines of up to $50,000." I would like to hear more about this. There are parts of this I like. The costs of starting a tech business -- an Internet business especially -- are now relatively low and it would be great to have more start-ups get financed by small loans. VC is in a sense the most expensive form of financing, but it has come easy in the past and so entrepreneurs haven't relied on raising money from banks or, heaven forbid, customers (i.e. selling something!) as a means of funding operations as much as they should. So I like the general idea.

However, I'm a bit wary because we saw what artificial incentives for banks to lend to those that couldn't afford mortgages did to the overall credit market, and I wouldn't want this $50k incentive to similarly distort markets. If there is a way to free up lending to start-ups by lowering barriers but without artificial distortions in the credit market, I'm all for it.

Second, he would "welcome foreign innovators" by urging lawmakers to remove "the cap on H-1B visas while imposing a 10 percent payroll tax above and beyond the benchmark salary for any position being filled by holders of such visas." This is the subject for much more discussion but I am strongly in favor of eliminating the cap on H-1Bs. I think it's crazy that this country is severely gating our ability to attract the best and brightest from around the world and Reid is right to focus on this as a severe hindrance to entrepreneurship in this country. I don't like his 10% payroll tax increase, but I'd accept it if it were the only way politically to remove the cap.

Third, "match funds for venture capital and angel investments. Venture firms and investors need financial incentives to invest in companies that create U.S. jobs. What if firms with credible histories could receive as much as $100 million in federal matching funds if their investments create jobs in the United States?" This is my least favorite of his proposals. In the first place, my sense of the angel and VC markets is that there is in fact plenty of money out there still, though this may be changing, and investors don't really need artificial incentives to invest. What they need are returns.

And it's on the liquidity side that investors are having the biggest challenges with unstable and plummeting public financial markets and regulations such as SarBox making it ever harder and expensive for companies to go public. Companies from around the world are now looking elsewhere to list when they used to look only to the NYSE and Nasdaq. There is a whole lot that could be done to improve liquidity options for companies and I'd like to see more focus on this.

Also, I am very skeptical of injecting the federal government into private investing. It will undoubtedly come with strings attached, as so much of the recent government intervention has, and frankly it's not needed. And once a system gets hooked on federal funds, it rarely weans itself off. Finally, "credible" venture funds as a class have not had a challenge raising capital, so this seems to be a solution in search of a problem. The scarce commodity is not private capital but the time and talent of capable investors who should want a full return on their effort rather than giving half of it away. Such a system would actually lower the returns on investors time, which is a zero sum, and probably not be in the best interests of the industry.

(Fred Wilson has a more detailed and eloquent take on this which I endorse.)

If the goal were to infuse more capital into private investing, I'd prefer a different approach. Right now there are a huge number of impediments for individuals to invest in private companies. Reid can invest in 60 companies because he is experienced and is an accredited investor, but most people simply can't invest in these companies by reasons of law, regulation, legal cost, and sheer logistics. Many of these limitations are imposed on people to "protect" them from themselves. Thank goodness we've been preventing people from private investing so that they can keep their money in the public markets! Another classic example of a system that punishes the responsible in an attempt to protect the irresponsible.

I am sensitive to the need to protect less sophisticated investors from shams, but it strikes me that there should be some middle ground between the public market which is easy and open for investors but difficult and expensive for companies and the private market, which imposes fewer restrictions and costs on companies but is much more challenging and restrictive for investors. This, more than anything, restricts the flow of capital to start-ups.

The very purpose of a financial market is to provide capital and liquidity to businesses -- they are not an entitlement for individual investors -- and when they stop serving that purpose effectively we should ask what we can do to fix things. Whether this means lessening the burden on public companies, or loosening the restrictions on private investors, or coming up with a middle way, perhaps by freeing up personal investment in venture funds or creating mutual fund like vehicles -- or all three -- we should be exploring these avenues.

And finally, I have to say that I'm a bit disappointed that there is no comment here on the Obama tax increases. Whether you are for or against the income and capital gains tax increases and the massive implied taxation on the energy sector put forward by President Obama, we should not kid ourselves that these don't come at a cost to entrepreneurship. These taxes will hit many wealthy individuals who fund a lot of start ups and many SMBs that file as individuals -- and capital gains is the return on their investment so higher taxes here will further impede growth. Rather than take this money out of the financial system, and then use the political system to dole funds back to favored constituencies, how about leaving it there in the first place?

Finally, as Internet companies grow we depend on energy (how much does LinkedIn spend on power in its data centers?) and so I believe this heavy regulation on energy will come at a real cost to growth in the Internet sector.

I think this is a good conversation that Reid has started. I support much of it, but I would love to have more discussion not on what the government can do to play favorites but instead what it can do to remove impediments for people like Reid to do what he does best -- grow companies and create jobs.