Provo: Awesome or Boring?

The April 24 edition of Forbes listed my city of Provo, UT as the second best city in the United States for Business and Careers (following Des Moines, IA). Meanwhile, Portfolio.com rated Provo the least fun among the 100 largest cities in the U.S.

If you believe the rankings, "good for business and careers" and "fun" seem to be contrary pressures. For example, New York City ranks #1 on the Portfolio "fun" list and #99 on the Forbes "business" list. Nearly an exact reversal of Provo's ranking (#2 for business and #100 for fun). However, I think that the Portfolio ranking is badly flawed. Their categories for ranking are Shopping, Gambling, Popular Entertainment, Culture, Food and Drink, Low-Impact Sports and High-Impact Sports.

There's little question that Provo's not a very good gambling destination (#92 on their list) and I also have a hard time disputing New York's #1 rank for shopping and culture. But how do they get away with ranking Provo as #98 for high-impact sports (represented by an icon of a skier) vs. New York's #2 ranking? I can be on the slopes at Sundance 20 minutes from leaving my front door. And best-in-the-world resorts like Alta, Snowbird, Brighton, Solitude, Deer Valley and Park City are all within an hour's drive. Where do New Yorkers go to ski, much less hike, mountain bike, camp, drive off-road, fish and so forth?

Oh well, I like New York too. And despite it's #99 business ranking I think a brokerage would be better off locating in New York than in Provo. There's a lot more subjective influence than these rankings would suggest.

Toxic Assets Revisited

I just attended a fascinating lecture by Dr. Hal Heaton who was my MBA Business Finance teacher 16 years ago. He outlined what he called the "Perfect Storm" of events that lead to our current financial crisis. Much of what he had to say is summarized in this business case though his live presentation included some nice graphs illustrating many of the financial trends.

Following the lecture I asked him about my theory that the markets could self-correct the problem of toxic assets (outlined in my previous blog post on this subject). It turns out that he has been serving as an expert witness in several lawsuits related to the meltdown and has direct experience in this area. He assured me that, indeed, the derivatives market has mostly shut down and that the remaining derivative instruments are treated as the risky instruments they really are.

According to Dr. Heaton, one lingering problem is that the Community Reinvestment Act that I talked about in my history of the banking crisis remains in place along with enhancements that were passed in 1999 and 2005. Presently the provisions aren't being enforced but if they are, banks will be required to continue to issue the kind of high-risk loans that helped create this problem in the first place.

From his primary lecture I learned that Dr. Heaton views the sub-prime lending and the associated financial derivatives as only two components in a six-part "perfect storm." Here's the full list.

• High-risk mortgages spurred on by the Community Reinvestment Act and it's more recent kickers. (The requirements remain in place though they aren't currently being enforced).
• Enormous increase in the money supply with interest rates reduced to nearly zero. (Rates are still there.)
• Hybrid mortgages that had a two-year low introductory rate. Homeowners expected to be able to refinance after two years because "home prices always go up as they had done almost continuously for the 40 years preceding 2008. (Many of these have already been foreclosed upon but there remain several waves of ARMs yet to create problems.)
• Asset Securitization -- the financial derivatives used to finance high-risk mortgages and an enormous variety of other investments. (Mostly out of favor.)
• The transfer of manufacturing to China and other emerging markets. This results in an enormous trade deficit. Under normal circumstances, such a deficit would strengthen the yuan and weaken the dollar thereby bringing things into balance. But the Chinese government, not wanting to slow the growth, purchases dollars from manufacturers in exchange for Yuan and then invests those dollars in US Treasuries. (The recession has reduced the trade deficit by half but it remains tremendously high by historic standards.)
• The complicity of Moody's and Standard and Poor's in giving excessively high ratings to mortgage-derived securities based on the incorrect assumption that housing prices would not decline. (This has been corrected.)

Possibly even more concerning is Dr. Heaton's Assertion that many of the "rules of economics" he taught me those years ago have been violated in ways he would never have foreseen. Examples: The money supply has been tripled but interest rates and inflation remain extremely low. We've been able to sustain an enormous trade deficit without currency corrections. The Fed has been purchasing treasuries and yet the sky hasn't fallen.

We are in unprecedented territory. What happens next is anybody's guess.

Quote of the Day: Plastic

"Humanity's plastic footprint is probably more dangerous than its carbon footprint." -- Charles Moore, Ocean Researcher Source

Toxic Assets

With health care seemingly out of the way, congress is turning its attention to finance reform. Last fall I posted my summary of the crash of 2008. I think there's little doubt that reforms need to be made in the financial markets. However, I've been wondering if those reforms need to be brought about through legislation or if there might be another way.

Most of the blame for the financial crisis has been leveled at investment banks and other institutions that hid risky investments behind complicated financial instruments. However, Credit Rating Agencies like Moody's and Standard and Poor's were complicit in creating the problem because, like the banks, they ignored the possibility of market-wide problems.

So, just as the cooperation of Credit Rating Agencies helped create the problem, CRA's could likewise drive much of the reform. Unfortunately, there continue to be allegations of inflated ratings and the agencies have avoided liability for past mistakes. Despite this I have hope that reform can come from this sector without legislative pressure.

The term "Toxic Asset" was invented in 2008 to describe the financial derivatives for which a value cannot be determined with confidence. The presence of large quantities of toxic assets on corporate and bank balance sheets froze the financial markets. There's are markets for high and low-risk securities. But when a risk or value cannot be determined with confidence, that's when markets freeze up. "Toxic Asset" is very descriptive term for such things.

What I would like to see is an agency that would report on the portion of a security -- stock, bond, or derivative -- that is composed of questionable derivatives. To do so with accuracy would require cascading fractions through the network of ownership. For example, if 15% of a bank's balance sheet is composed of toxic assets and 20% of a mutual fund is invested in that bank then the mutual fund would be rated 3% toxic (15% * 20% = 3%). Of course, some portion of other stocks in the mutual fund might also be considered toxic so the total toxicity of the mutual fund might be higher.

Creating a database that tracks the network of ownership would be complicated but not impossible. The information required is all in the public record. There would have to be a objective way of determining whether a fundamental asset is toxic. However, once the system is in place, it could also be used to rate cascading ownership in many other types of assets. Fractional ownership in business sectors such as manufacturing, education or hospitality could be measured through the cascading layers. Involvement in totalitarian regimes, conflict assets or vice business could also be tracked.

I suppose this is another of my Business Concepts. It would take a considerable up-front investment and a continuing investment to maintain the database but the ability to analyze cascading ownership would be a potent investment tool.

Scotty, We Need More Power!

Energy production and standard of living are directly connected. My neighbor, Dr. L. Douglas Smoot has a presentation (as yet unpublished) that he's made to various audiences in the last year. His thesis is that in order to raise the standard of living for impoverished nations we have to raise the corresponding energy production. That's because energy is required for the production of food, for manufacture of goods, for the treatment of illness, for the management of indoor temperature and for the transportation of everything.

The graph above, extracted from this excellent Department of Energy study shows the correlation between the Human Development Index (a measure of standard of living) and per-capita energy use. It's arguable that the energy consumption of U.S. citizens could be reduced while still maintaining a comfortable lifestyle. Nevertheless, per-capita energy production of developing countries would have to be increased to somewhere around U.K. levels if poverty and disease are to be reduced to levels seen in industrialized countries

The DOE study indicates the threshold is about 4,000 kWh per person which is somewhere between Spain and South Korea on the the graph. Of course, electricity is only a fraction of total energy use. The same DOE study indicates a ratio of total energy to electricity use of 7.5 should be used for standard-of-living calculations. Therefore we need approximately 30,000 kWh or 108 gigajoules per-person.

There is a lot to be gained through improving energy efficiency. Insulation, hybrid cars, smaller vehicles, public transit, high-density housing and so forth are all important pieces of the solution. However, the initial figures I have used here are less than half of U.S. energy consumption. So, efficiency gains are more likely to reign in high-consumption populations like U.S., Canada and Japan then they are to reduce the needs of developing countries. Besides, it costs energy to manufacture all of these efficiency improvements.

The current world population is estimated at 6.8 Billion. So, in order to eliminate poverty, increase freedom and improve the human condition we need approximately 734 exajoules (734 * 10^18 J) of net energy production per year in addition to massive improvements in energy efficiency. In 2008, worldwide net energy production was 474 exajoules. Given that population continues to grow, we should be seeking to more than double worldwide energy production while still seeking to improve energy efficiency.

If energy production is increased at the cost of environmental damage, we'll miss the goal. Clean air, clear water and wild spaces are just as important to quality of life as good health, nutritious food and a comfortable home. In future posts I'll look into where that energy might come from.

Other posts in this series:
Increasing Energy Production
Energy: The Future is Nuclear

OfThat is Back!

After being down for about 45 days (and a posting hiatus before then) "Of That" is back -- this time hosted by Google's Blogger.

What Happened to Azure?

I originally started hosting on Microsoft's Azure. During the technology preview stage, hosting was free. I was also evaluating it as a platform for future products and based on the early information I could find, it appeared that the cost to host on Azure following it's full release would be modest. However, once the product released I found that the cost was going to be prohibitive.

I'll write more about Azure in a future post. For now, it's sufficient to say that it should grow to be a good platform for enterprise apps and possibly hosted services but it's not appropriate for small-scale things like my blog. There are things they could do to fix that weakness but I don't know if it's a priority for Microsoft.

What About BlogEngine?

I chose BlogEngine because it's a solid solution written in C# on ASP.Net -- a platform I'm familiar with. I wanted the ability to customize more than just the appearance of the blog and I have plans to launch active widgets as tools and experiments. However, it took me hours of programming to adapt BlogEngine to Azure and there was a lot more that I wanted to do. This all took away from any time spent on the widgets and experiments themselves. My new strategy is to let Google/Blogger worry about the blogging side. I'm confident that their available customizations and APIs will be sufficient to let me integrate my stuff.

Why Blogger?

Why did I choose blogger instead of WordPress or TypePad or <insert your favorite here>? First, because hosting is free even when using a custom domain name. Second, because Google allows monetization by placing ads on my site if I ever choose to do so (not yet). Third, because it's simple and straightforward. Sure, it doesn't have all of the features that some other platforms carry but it has all of the features that I need. By avoiding unnecessary bells and whistles I gain ease of use.

Shortly I'll write about my experience in transferring my existing posts from BlogEngine to here.

Comments!?

In recent days the first comments have started to appear on this blog. It's taking a while to generate an audience so I was excited to see this. However, since the BlogEngine software I use allows commenters to include a link back to their own website I soon realized that most of the comments are generic compliments with no factual contribution. Most are there as an excuse to post links back to other sites.

In short, I've become an inadvertent participant in Link Farming. So far, I haven't posted a policy about acceptable comments. Despite being "used" to some extent I still am new enough to this to be flattered by any comments on my site even if they are motivated by other purposes. Therefore, I don't plan delete them... at least for now.

However, in anticipation of future problems, I suppose I should have some sort of acceptable comment policy. For now it's this: My policy is capricious and arbitrary. In other words, I reserve the right to delete any comment without explanation. In practice, however, the sorts of things I won't tolerate are foul or abusive language. The sorts of comments I prefer are factual contributions. I also appreciate opinion contributions so long as the reasoning behind your opinions are explained.

Hacking the Vote

It's Election Day -- albeit an off year election. In Provo we are electing a new mayor and several members of the city council. I've heard and made the argument that local elections like this are actually more important because local officials have a greater effect on our personal lives that those in faraway Washington. Unfortunately I think that's no longer the case.

But I digress.

The subject of this blog entry is election technology. Like many municipalities we have changed to a computerized "Direct Entry" voting system in which the voter enters his or her votes into a touch-screen device. Despite being a technophile, I have serious misgivings with these systems.

To be sure, electronic voting makes tallying the vote quick and easy. My concern is that no matter how secure you make these systems, it remains possible that the vote could be manipulated without leaving any evidence. The computer scientists on Freedom to Tinker have been involved in several reviews of voting system software. They've found numerous security flaws as well as cases of accidental under and over-voting. Even if the flaws were fixed, the systems would be insecure without proper security procedures.

Recently, Sequoia Voting Systems announced that they will be publishing the source code to their voting systems. This is a very important step as it will allow independent reviews to detect and correct security flaws. However, while this makes it more difficult to manipulate the vote it can't prevent it entirely. Even with perfect software, there are other ways to manipulate the data as it passes through the system. And published source doesn't reduce the indetectibility of the manipulation if it does happen.

Another serious problem is attempting to determine voter intent, especially in the case of a recount. Despite dangling chads and other obstacles, at least the recounters in the 2000 U.S. Presidential Election had physical evidence of voter's actions. With direct-entry systems, little physical evidence is preserved. The better systems, like those used in Utah, include a paper tape printer. The voter is expected to verify his or her vote on the printed tape before it is finalized but I suspect that many voters don't bother or don't understand the importance of verification. And for paper verification to work, there need to be random tests where human counters check to make sure the tapes match the recorded vote.

More serious, in my opinion, is that computer security issues aren't intuitive to those not trained in the subject. Despite good intentions (and some training) volunteer election judges can be oblivious to serious security issues simply because they don't know what to look for.
For these reasons, I favor Optical Scan balloting systems. These systems use paper ballots that are marked by hand. For efficiency, they are rapidly counted by an optical scanner.To be sure, optical scan systems remain vunerable to ballot stuffing, voter intimidation and other attempts to manipulate the vote. But these known problems are intuitive to election judges and there are good procedures that can be used to mediate the problems. When using optical scan ballots, paper-only security systems can be augmented by electronic security systems like digital serial signatures that ensure only authorized ballots are cast and that each ballot is only counted once.

Optical scanners are just as vulnerable to computer security issues as direct entry systems. Because of this, published source remains an important security measure. Another verification is random hand-counts to see that optical scans match the counts made by human judges.

Quote of the Day: Steve Forbes

"People say, 'Well, when you make it, you should give back.' ... But 'give back' sounds like you took something that didn't belong to you."    -- Steve Forbes

A Brief History of the Crash of 2008

There are a number of contributing factors to our present financial crisis but the biggest issue (and the catalyst that set it off) is the collapse of the financial derivatives market. My friend, Paul B. Allen, has started Crashopedia.com to document the causes of the crash in detail but it can get pretty thick. Here’s my simplified summary of what happened:

1970	GNMA "Ginny Mae" issues the first Mortgage Backed Security (MBS). A MBS is a way of collecting money to lend out in the form of mortgages. Bonds in the MBS are sold and the resulting cash is invested into a pool of mortgages. FNMA "Fannie Mae" and FHLMC "Freddie Mac" follow suit.
1977	Under pressure from the Community Reinvestment Act banks and other mortgage vendors begin issuing high-risk (also known as sub-prime) mortgages with correspondingly higher interest rates.
Early 1980s	Incentivized by the government and attracted by the high interest rates of these mortgages, bankers begin seeking a way to attract capital to invest in high-risk mortgages. Unfortunately, the market for high-risk investments is relatively small and interest rates are high.
1983	Bankers invent the Collateralized Mortgage Obligation (CMO) which is a type of MBS in which shares are divided into risk "tranches." The idea is that if a lot of high-risk mortgages are pooled together the risk is reduced because only a fraction are likely to default. Risk can be further reduced for some investors by dividing the bond pool – decreasing the risk for premium tranches and increasing it in lower tranches. Bond rating organizations like Standard & Poors agree with this theory and offer high ratings.
1987	Realizing that splitting risk into packages can work for more than just mortgages, bankers invent the Collateralized Debt Obligation (CDO) which is just like a CMO except that it may be backed by corporate bonds, commercial paper or other kinds of loans.
Early 1990s	In pursuit of ever higher interest rates (from higher-risk mortgages) but having trouble placing the higher-risk tranches of CMOs and CDOs, bankers find ways of enhancing the ratings of these tranches by using Credit Default Swaps. This is just a fancy name for an insurance policy. The bankers pay an insurance premium and the insurer pays up if the underlying asset (mortgage or bond) fails to make payments. Bankers can afford the insurance premiums because they collect more interest from the high-risk loan than they have to pay to the low-risk bond. AIG becomes one of the leading insurers of these obligations.
1990s and 2000s	Bankers come up with all kinds of new derivative instruments such as CDOs that invest in other CDOs (CDO squared), Single-Tranche CDOs in which insurance is used to raise the rating of the entire package, Strips, REMICs, PACs, Floaters and more. The tantalizing returns of these investments cause people to ignore Warren Buffet’s advice to invest only in things you understand.
2001	Driven largely by growth in financial derivatives, the Financial sector surpasses Information Technology to become the largest sector in the S&P 500 as measured by market capitalization.
2002-2005	Continuation of the longest sustained growth period in U.S. history masks the real problem with derivative instruments. That problem is that an overall decline in the housing sector or in the economy as a whole would cause simultaneous defaults – something that diversity and insurance don’t account for. Unencumbered by hidden risks, derivatives continue to offer stable income to investors and while enriching the investment banks that handle them.
2006	The housing bubble bursts. Due to the ease of obtaining mortgages and the recent history of good real estate performance, a great deal of speculative building occurred in the early 2000s. By 2006 there was a surplus of homes in key markets like the West Coast, the Southwest, the Northeast Corridor and Florida. A mild recession at the time coincided with interest rate increases on Adjustable Rate Mortgages. The result was a wave of mortgage defaults.
2007	The mortgage crisis cascades into the whole economy. Rumors grow that we may be in for a recession. Mortgages become increasingly difficult to get as investors pull out of the mortgage market.
2008	Derivatives turn out to much riskier than their ratings indicated. AIG becomes insolvent as large numbers of CDOs default and they are required to pay up. Only a bailout by the Federal Reserve prevents it from going under. Credit markets freeze because bankers can no longer reliably determine the value of derivates which now account for an enormous part of the financial market. A new tern, Toxic Asset, is used to describe these because not only can they not be valued but neither can any institution that owns a substantial portfolio of them. Hundreds of banks with large portfolios of toxic assets fail and are taken over by the FDIC. The First Bailout Act including the Troubled Asset Relief Program is passed allowing the Treasury and the buy up toxic assets in an effort to relieve the credit markets.
2009	As of this writing, the bailouts have had little success except to protect the profits made by irresponsible financiers. Credit markets are still extremely tight, the country is in a full recession, and unemployment is approaching 10% with certain markets well into double digits. Despite this, Congress and the White House have focused efforts on Healthcare Reform rather than considering regulations that might prevent irresponsible use of financial derivatives in the future.

Missing from this history are all of the forewarnings. For example, the General Accounting Office warned in 1994 that regulation of the market was warranted. Congress held hearings on the subject multiple times in the 1990s and 2000s and Warren Buffet famously wrote in 2002 that derivatives are "time bombs." There were many opportunities to prevent the train wreck before it happened. Unfortunately, the financial lobby was strong enough to prevent any meaningful reform.

I have some thoughts on how reform can be achieved without government intervention but those will have to wait for a future blog post. Meanwhile, this is yet another example of how government seems to be immune to forewarning. Action, if taken at all, occurs after the crash.

Business Concept - A Virtual Secure Network

Introduction

This is the first in a series. Over the years I have come up with dozens of new business ideas. Some fraction of those dozens are viable and quite a number of them have appeared – though I haven’t been involved in most cases. This has taught me several things. My biggest lesson is that if I have a good idea, most likely someone else has that same idea and if I don’t pursue it, someone else is likely to do so.

Despite this long-known lesson my typical approach to a good idea has been to speak little of each idea in hopes that I may someday have a chance to make money from it. This, of course, hasn’t happened except in a few cases. I’m ready to challenge that strategy. Henceforth I’m taking an Abundance approach to new ideas. So long as it doesn’t compromise my obligations to my current employers, I intend to share my best ideas and simply see what grows.

Of course, if you get serious about pursuing one of these ideas we would both benefit if you were to contact me. I’ve given a lot more thought to these ideas than I can fit in a simple blog post.

A Virtual Secure Network

Most people are familiar with Virtual Private Networking (VPN). In a nutshell, a VPN allows you to connect your computer over the Internet to a private network. Usually this is used by businesspeople to connect to their office network and access private resources. It’s also used to interconnect networks between branch offices without the cost of dedicated private lines. Data that passes over the internet is encrypted to prevent eavesdropping. It may be argued that VPN is a misnomer since what you really have is a virtual connection over the internet to an actual network back at the home office.

I propose a true Virtual Private Network that would allow my laptop, my home desktop and my wife’s computer to all communicate regardless of where they are located on the internet. This would enable secure file sharing, Remote Desktop, Remote Assistance and a host of other things to work conveniently without worrying about firewall traversal, routing and other things. It would also use encryption to protect such communications from external scrutiny. To distinguish this from existing Virtual Private Networks and to emphasize the built-in security features I call I call it a Virtual Secure Network or VSN.

The biggest problem with any virtual networking protocol (VPN or VSN) is getting through the firewall. Most firewalls and routers will allow connections to originate inside the firewall but not from the outside. For example, my desktop PC at home can connect to Google.com but Google can’t contact my desktop because the connection is blocked by my home firewall/router. Specialized protocols such as UPnP NAT Traversal and Teredo have been introduced to fix this problem but adoption is limited.

A couple of years ago a colleague pointed me at this paper: Peer-to-peer Communication Across Network Address Translators by Bryan Ford, Pyda Srisuresh and Dan Kegel. It introduces a method of Hole Punching that opens TCP and UDP communication through a majority of firewalls including NAT firewalls. The system requires a publicly available server to coordinate the connection between two computers but once that connection is made, the individual computers are able to connect directly so the bandwidth demands on the public server are modest. This is the primary method that Skype and as those who have used Skype know, it simply works without any special network configuration.The Internet Engineering Task Force has worked on standardizing the similar methods to those proposed by Ford et. al. The original draft proposal is in RFC 3489 and an update is in RFC 5389.

I propose creating a virtual network adapter driver similar to those used for VPN connections. The virtual adaptor would use the real network adapter in a computer to connect with a public server on the internet and register the computer’s availability and the IP address of its firewall. Other computers in the same VSN could connect to that public server to discover the necessary information to broker a direct, encrypted connection.

From the user’s perspective, it would appear as if all trusted computers in his/her VSN are immediately available and things like Remote Desktop, Remote Assistance, File Sharing, Printer Sharing and the like would "just work" like Skype.

From a business model perspective it’s convenient that a public server is required to set up the connections but the server isn’t involved in the actual transmission of the data. This means that a company could set up the public server and charge a modest subscription fee without the bandwidth cost of actually relaying the traffic. Even if IPv6 and Teredo become popular, the VSN would retain security advantages that preserve the business model.

Failure Subsidizes Success

Some successes would never occur if it weren't for prior failures.

My father was head of the Mechanical Engineering department at Utah State University when he and others started the annual Small Satellite Conference there. At one of the first instances of the annual event a group of engineers presented a revolutionary idea. A set of small relatively low orbit satellites could form a world-wide cellular phone and data network! Moving the satellites into low orbit would allow the use of simple antennas and satellites would hand off connections as they move past a customer the same way that cellular phone towers hand off as a mobile customer moves around the city.

The initial design was christened Iridium because it utilized 77 satellites -- the same number of satellites as the iridium atom has electrons. As the concept evolved, the number of satellites changed but the name stuck. Iridium is a mesh network; messages are collected at the nearest satellite to the customer then handed off from satellite to satellite until being relayed to a ground station. For such a mesh network to work reliably the entire constellation of satellites plus a couple of spares had to be in place.

The capital cost of launching a satellite network was enormous – estimated at more than $6 Billion. The first phone call was placed on 1 November 1998. Only nine months later they had to file for Chapter 11 bankruptcy protection; the expected business subscribers hadn't materialized. A Wikipedia article offers a number reasons for the failure including better ground-based cellular networks, inter-carrier roaming agreements, unappealing handsets, a bad pricing model and mismanagement.

I think the biggest problem was that real potential return wasn't enough to justify the original investment. If the eventual customer base had been accurately projected, the system would have never left the ground. (Puns are easy in this subject.) The Iridium system shut down service and was considering de-orbiting the satellites and ceasing all operations before the assets were purchased by a coalition of private investors in 2001. The purchase price? About $25 million.

Of course, the new investors had to plow a lot more money into the company to restart operations, run sales and marketing and so forth. Those numbers aren't available as Iridium is privately held but a good guess is a total investment of around $150 million. For the year 2008, ten years after operations started and seven years after the buyout, Iridium LLC reported $320.9 million in revenue with operational earnings (EBITDA) of $108.2 million. This means that the 2008 return-on-investment was around 72% for the buy-out investors. However, if the original investors had hung on instead of writing off most of their investment in 2001, the annualized return at the end of 2008 would only have been 1.8% – certainly not enough to justify a high-risk investment like this.

So, today we have a fantastic asset that supports military communications, offers live television reports from remote locations, keeps our Antarctic scientists in contact with home, provides continuous phone service to aircraft and ships worldwide, offers telemetry from automated outposts and a host of other services. The system is operationally profitable and earning enough money to be maintained and improved. The system exists because the business plan that convinced the original investors was fantastically wrong. Those investors took a loss but society benefitted.

The only other way I can think of for such a system to emerge would be for government to step in and offer a huge subsidy. What's better, subsidy from business failure or subsidy from government? I think we need both which is why I believe capitalist societies must preserve the freedom to fail.

The Future of Promotion

Though my professional email address at Agilix isn't published it's not too difficult to deduce. Based on the quantity of spam I get, a lot of people have deduced it.

Since my title is CTO, I get a lot of email promoting outsourcing or placement services. This is really surprising to me given that people with my title are very spam-averse and sending the CTO unsolicited commercial email (spam) is a good way to get you on the company-wide blacklist. The success rate of regular spam is extremely low. It's got to be even lower when spamming an email list of CTOs (unless there are a lot of unqualified people out there that share my title).

Despite the low rate of success on emailed solitations the method remains popular due to its extremely low cost. Thus, for some products (Viagra and Mortgages to name a couple) it remains cost-effective though illegal. But there's a broader issue involved. Our society is becoming increasingly advertising-averse. Among the reasons for TiVo popularity is its ability to skip commercials. So, if people are throwing away junk mail, filtering and deleting spam and skipping commercials, how will future vendors make contact with customers?

A related question is, "How will TV and radio programming remain profitable?" I'll save that one for a future post.

We can find a microcosm of this problem in my experience with outsourcing providers. With the advent of the recession, they've become increasingly aggressive (probably out of desperation). At present I average between fifteen and twenty individually addressed placement or outsourcing solicitations a week. I would get more if I wasn't so aggressive about shutting them down. There a few variations, some offer offshoring services to India, China or Russia. Others offer contract programmers based in the U.S. and others are executive placement firms. The last type are the most entertaining. There are several utah-based placement agents that have been calling and emailing me for the better part of a decade. They treat me with familiarity since they've been doing this so long despite the fact that I have never responded to an email or a phone call.

About a year ago I decided it might be rude of me to ignore some of the more personal messages (or blacklist their addresses). Pasting a canned reply only takes slightly more time than deleting the message. Here's my original version:

Dear Outsourcing, Consulting or Placement Provider:

Your inquiry is one of dozens we get every week. Unfortunately the inquiry rate has increased dramatically with the recession. We are presently fully staffed with very capable engineers. We also have one outsourcing partner that offers excellent service. As a result, we have no need for additional services at this time. If, at some future date the need for outsourced services does arise, our first choice will not be someone who sent unsolicited email to a purchased contact list or interrupted my day with an unsolicited phone call.

Sincerely,
Brandt C. Redd
CTO
Agilix Labs, Inc.

I got some replies to my reply. Some took offense at my attitude. I suppose that they think their messages are in some way above the rabble of conventional spam. I don't see the difference. Whether you're promoting Viagra or offshoring the message was unsolicited, useless and it clutters my mailbox. However, I decided to lighten the message. The new one is more polite but also less informative:

Dear Outsourcing, Consulting or Placement Provider:

Your inquiry is one of dozens I get every week. Unfortunately I don't have time to offer individual replies or to discover what distinguishes your organization from all of the others. Suffice it to say that we are content with our current service providers and are not shopping for new ones.

Sincerely,
Brandt C. Redd
CTO
Agilix Labs, Inc.

One soliciter called me (I didn't answer) and followed up with an email. After receiving my canned reply he complained: How did I expect him to do his job? If I thought it was bad receiving these messages, did I have any idea how difficult cold calling was? Didn't my company generate sales the same way?

I have no doubt that cold calling is difficult. But the difficulty is due mostly to its ineffectiveness. When cold-calling someone you have no idea whether they are shopping for your product. And, in cases like mine an unsolicited interruption is unlikely to buy you favors. Of course, there are much better options. The key is knowing where CTOs shop for services and being in those places.

I was in a charitable mood that day and so I took the time to respond:

I usually don't offer a personal response to blind inquiries. For some strange reason I feel like making an exception this time.

Our sales people follow up on leads generated by the marketing department. The marketing group uses advertising, conference attendance, viral marketing programs, business partnerships, and word of mouth. I think some of our resellers use cold calls but they aren’t very effective.

The point is that I'm not shopping right now so it doesn't matter how you contact me, I won't be interested. Your challenge is to find those who _are_ shopping. Then figure out how to appear in the areas where they shop.

Google Adwords is a good start for CTOs like me. That's usually my first stop when shopping for goods and services. My second stop is to ask colleagues in my industry who they work with. So, the next best thing is to cultivate a word of mouth network.

You need to be very careful when cold-emailing tech people. The usual response is that you get quietly added to their blacklist and there's a lot of blacklist sharing in this industry. We have a strong bias against the mailing list vendors and as a result we actively strive to make that marketing method as unrewarding as possible.

Sincerely
Brandt

In my opinion, that's the future of product promotion. Find out where people shop and then be in those places. Tech people shop on Cnet and we share experiences on various forums. For other products or audiences, the shopping areas may be different but the principle is the same. Find out where people shop and be there.

Liberal Republicanism - My Political Philosophy

I call my political philosophy “Liberal Republicanism.” In doing so, I use the classic definitions of these terms under which they are surprisingly compatible.

Liberal

Princeton University's WordNet offers the following definitions of “Liberal:”

• (n) A person who favors a political philosophy of progress and reform and the protection of civil liberties.
• (n) A person who favors an economic theory of laissez-faire and self-regulating markets.
• (adj) Showing or characterized by broad-mindedness.
• (adj) Having political or social views favoring reform and progress.
• (adj) Tolerant of change; not bound by authoritarianism, orthodoxy, or tradition.

These definitions fit my self-view: I'm a strong believer in free or self-regulating markets; I believe that there is much to be reformed (though I am skeptical of some contemporary directions); I'm a protector of civil liberties; and I love progress.

Despite adopting the liberal label, I find my self at odds with most contemporary liberal and progressive philosophy. My observation is that modern liberals seem to think that the proletariat are too dumb or unenlightened to govern themselves. Therefore, they need enlightened leaders to protect them. The pathological case is when a self-appointed leader sets out to provide for some “oppressed” class while ensuring that they never progress out of their dependent state lest the leader lose his political base. This is a travesty of progress.

Republicanism

I believe in a representational government with governmental powers limited by a constitution and associated laws. The Latin root of “republic” means “the law.” This is the form of republicanism associated with a Constitutional Republic. There are a variety of other definitions. The one I choose focuses on limited government and the rule of law.

When describing the political spectrum it's important to understand what a person means by “left” and “right.” One scale defines the spectrum in terms of governmental power. Dictatorships and monarchies exist on the extreme left where the government has all power. On the extreme right there is anarchy or no government. A Constitutional Republic exists on the moderate right where governmental power is limited by laws and by the people.

At the center of this scale is Democracy which means “rule of the people.” At first this seems to be the ideal we should seek. The Constitution begins with the words “We the People of the United States” indicating the belief of the Founding Fathers that governmental power originates with the people and is delegated to the government, not the other way around. However a pure democracy places power with the majority at the expense of the individual. The only difference between “Majority Rule” and “Mob Rule” is whether you belong to the majority.

Aside: This definition of the political spectrum comes from a great video entitled Overview of America produced by the John Birch Society. Before you write off the “John Birchers” as extremists I suggest you watch the video and consider their cause.

Conservatism

Despite calling myself a Liberal Republican, I more frequently find myself aligned with the contemporary conservative movement than with liberal politics. Like Republicanism, there are multiple definitions of "Conservative." Here are some from Princeton WordNet.

Conservatism:

• (n) A political or theological orientation advocating the preservation of the best in society and opposing radical changes.

Conservative:

• (adj) Avoiding excess
• (adj) Resistant to change
• (adj) Unimaginatively conventional

For me, this is a mixed bag. It’s important to me to conserve many traditional values and I dislike the excesses of Washington. It’s these principals that align me with the conservative movement. While I’m not resistant to change, I’m frequently skeptical of its directions. Too often reforms only create bigger problems – especially when they mean more government programs. I’ve seen so many unintended consequences to government regulation that I want to be sure that changes are correct and well-thought-out before supporting them.

Conclusion

It’s curious to me that the classic definition of Liberalism includes support for laissez-faire markets yet contemporary liberals favor highly regulated markets. Likewise, I believe in the protection of civil liberties and yet I disagree with nearly every cause pursued by the ACLU.

In each case the difference is because I strongly believe in the power of liberty. My focus in free markets is protecting them from fraud and exploitation while preserving the freedom of individuals or companies to succeed or fail according to their skill, timing or luck. My focus in civil liberties is in preserving the freedom of individuals or groups to live according to their beliefs but not force one group to adopt or accept another group’s standards.

So, my philosophy is liberal republicanism with a dash of libertarianism. I believe in limited government, preservation of individual freedoms, free trade and markets, progress and reform. What’s your political philosophy?

Toy Story in 3-D

When Cars came out in 2006 it was the first Pixar film rendered in high definition (in this case, 2048x1024 pixels). All previous Pixar films and most other CGI movies (like the Dreamworks titles) had been rendered at or around DVD resolution (typically 720x480). So, despite viewing them on a big screen in a movie theater, the actual detail of previous Pixar movies was little better than you could get on a standard (pre high-definition) TV.

About that time I conjectured to some of my colleagues that, since Pixar movies are rendered from 3-D digital models, they could be re-rendered at higher resolution or even with 3-D effects. Sure enough, Pixar has done just that. The original Toy Story and Toy Story 2 are being re-rendered at high resolution and in 3-D. The release will be limited to two weeks as a double feature.

Of course, it's a promo intended to generate interest in next June's release of Toy Story 3 which will also be 3-D. Presumably Disney will follow up with a Blu-Ray high definition release of the two titles.

Official Site More Information from Collider.com

Safety in India

We just received the following email from one of our Indian partners:

Due to the unfortunate demise of our State’s Chief Minister in a Helicopter accident, all the Companies in the state have declared half-a-day holiday from 1PM (local time) today.

In order to ensure the safety of our employees (from anticipated riots on the streets by supports), our company has also declared half-a-day holiday today.

There's more detail on the story here. My condolences to the residents of the state of Andhra Pradesh and the families of Minister Reddy and his companions.

This is another reminder that most of the world lives under a threat of violence. I continue to ponder solutions.