Tag: technology

I’m Shocked, Shocked!

By James Kwak

Technology-land is abuzz these days about net neutrality: the idea, supported by President Obama, (until recently) the Federal Communications Commission, and most of the technology industry, that all traffic should be able to travel across the Internet and into people’s homes on equal terms. In other words, broadband providers like Comcast shouldn’t be able to block (or charge a toll to, or degrade the quality of), say, Netflix, even if Netflix competes with Comcast’s own video-on-demand services.*

Yesterday, the Wall Street Journal reported that the FCC is about to release proposed regulations that would allow broadband providers to charge additional fees to content providers (like Netflix) in exchange for access to a faster tier of service, so long as those fees are “commercially reasonable.” To continue our example, since Comcast is certainly going to give its own video services the highest speed possible, Netflix would have to pay up to ensure equivalent video quality.

Jon Brodkin of Ars Technica has a fairly detailed yet readable explanation of why this is bad for the Internet—meaning bad for the choices available to ordinary consumers and bad for the pace of innovation in new types of content and services. Basically it’s a license to the cable providers to exploit a new revenue source, with no commitment to use those revenues to actually upgrade service. (With an effective monopoly in many metropolitan areas and speeds already faster than satellite, the local cable provider has no market pressure to upgrade service, at least not until fiber becomes more widespread.) The need to pay access fees will make it harder for new entrants on the content and services side; in the long run, these fees could actually be good for Netflix, since it won’t have to worry as much about competition. The ultimate result will be to lock in the current set of incumbents that control the Internet, ushering in the era of big, fat, incompetent monopolies.

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Software Is Great; Software Has Bugs

By James Kwak

I’m not qualified to comment on the internals of Bitcoin; I’m neither a programmer (OK, Alex, not much of a programmer) nor a computer scientist. But I do know that Bitcoin exists because of software that people wrote, and every means by which we use Bitcoin also operates because of software that people wrote. The problem here is the “people” part—people make mistakes under the best of circumstances, and especially when they have an economic incentive to rush out products. That’s why, while we love what software can do for us, we also like having a safety net—like, say, the human pilots who can take over a plane if its computers crash. This is the subject of my latest column over at The Atlantic. Enjoy.

Random Variation

By James Kwak

As I previously wrote on this blog, one of my professors at Yale, Ian Ayres, asked his class on empirical law and economics if we could think of any issue on which we had changed our mind because of an empirical study. For most people, it’s hard. We like to think that we form our views based on evidence, but in fact we view the evidence selectively to confirm our preexisting views.

I used to believe that no one could beat the market: in other words, that anyone who did beat the market was solely the beneficiary of random variation (a winner in Burton Malkiel’s coin-tossing tournament). I no longer believe this. I’ve seen too many studies that indicate that the distribution of risk-adjusted returns cannot be explained by dumb luck alone; most of the unexplained outcomes are at the negative end of the distribution, but there are also too many at the positive end. Besides, it makes sense: the idea that markets perfectly incorporate all available information sounds too much like magic to be true.

But that doesn’t mean that everyone who beats the market is actually good at what he does, even if that person gets a $100 million annual bonus. That person would be Andy Hall, the commodities trader who stirred up controversy when he apparently earned a $100 million bonus at Citigroup—in 2008, of all years. (That was a year with huge volatility in the commodities markets.)

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No You Can’t

By James Kwak

Yesterday the Obama administration announced that healthcare.gov “will work smoothly for the vast majority of users.” Presumably they intended this as some sort of victory announcement after their self-imposed deadline of December 1 to fix the many problems uncovered when the site went live two months ago. But anyone who knows anything about software knows that it’s not enough to “work smoothly” for the “vast majority” of users.

Apparently pages are now loading incorrectly less than 1 percent of the time. Well, how much less? Pages failing 1 percent of the time make for a terrible web experience, especially for a web site where you have to travel through a long sequence of pages. There is evident fear that the current site will not be able to handle any type of significant load, like it will get around the deadline to sign up for policies beginning on January 1. And we know that “the back office systems, the accounting systems, [and] the payment systems”—in other words, the hard stuff—are still a work in progress.

None of this should come as any surprise—except to the politicians, bureaucrats, and campaign officials who run healthcare.gov. The single biggest mistake in the software business is thinking that if you throw resources at a problem and work really, really hard and put lots of pressure on people, you can complete a project by some arbitrary date (like December 1). It’s not like staying up all night to write a paper in college. This isn’t just a mistake made by people like the president of the United States. It’s made routinely by people in the software business, whether CEOs of software companies who made their way up through the sales ranks, or CIOs of big companies who made their way up as middle managers. You can’t double the number of people and cut the time in half. And just saying something is really, really important won’t make it go any faster or better.

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Bad Government Software

By James Kwak

Ezra Klein, one of the biggest supporters of Obamacare the statute, has already called the launch of Obamacare a “disaster,” and it looks like things are now getting worse: as people are actually able to buy insurance, the data being passed to health insurers are riddled with errors (something Klein anticipated), in effect requiring applications to be verified over the phone. Bad software is one of my blogging sidelights, so I wanted to find out who built this particular example, and I found Farhad Manjoo’s WSJ column, which fingered CGI, a big old IT consulting firm (meaning that they do big, custom, software development projects, mainly for big companies). (See here for more on CGI.)

CGI was a distant competitor of my old company. I don’t recall facing them head-to-head in any deals (although my memory could be failing me), but they claimed to make insurance claim systems, which is the business we were in. So I don’t have an opinion on them specifically, but I do have an opinion on the general category of big IT consulting firms: they do crappy work, at least when they are building systems from scratch. (They generally do better when installing products developed by real software companies.)

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Can You Say “Bubble”?

By James Kwak

Yesterday’s Wall Street Journal had an article titled “Foosball over Finance” about how people in finance have been switching to technology startups, for all the predictable reasons: The long hours in finance. “Technology is collaborative. In finance, it’s the opposite.” “The prospect of ‘building something new.'” Jeans. Foosball tables. Or, in the most un-self-conscious, over-engineered, revealing turn of phrase: “The opportunity of my generation did not seem to be in finance.”

We have seen this before. Remember Startup.com? That film documented the travails of a banker who left Goldman to start an online company that would revolutionize the delivery of local government services. It failed, but not before burning through tens of millions of dollars of funding. There was a time, right around 1999, when every second-year associate wanted to bail out of Wall Street and work for an Internet company.

The things that differentiate technology from banking are always the same: the hours (they’re not quite as bad), the work environment, “building something new,” the dress code, and so on. They haven’t changed in the last few years. The only thing that changes are the relative prospects of working in the two industries—or, more importantly, perceptions of those relative prospects.

Wall Street has always attracted a particular kind of person: ambitious but unfocused, interested in success more than any achievements in particular, convinced (not entirely without reason) that they can do anything, and motivated by money largely as a signifier of personal distinction. If those people want to work for technology startups, that means two things. First, they think they can amass more of the tokens of success in technology than in finance.

Second—since these are the some of the most conservative, trend-following people that exist—it means they’re buying at the top.

The Importance of Excel

By James Kwak

I spent the past two days at a financial regulation conference in Washington (where I saw more BlackBerries than I have seen in years—can’t lawyers and lobbyists afford decent phones?). In his remarks on the final panel, Frank Partnoy mentioned something I missed when it came out a few weeks ago: the role of Microsoft Excel in the “London Whale” trading debacle.

The issue is described in the appendix to JPMorgan’s internal investigative task force’s report. To summarize: JPMorgan’s Chief Investment Office needed a new value-at-risk (VaR) model for the synthetic credit portfolio (the one that blew up) and assigned a quantitative whiz (“a London-based quantitative expert, mathematician and model developer” who previously worked at a company that built analytical models) to create it. The new model “operated through a series of Excel spreadsheets, which had to be completed manually, by a process of copying and pasting data from one spreadsheet to another.” The internal Model Review Group identified this problem as well as a few others, but approved the model, while saying that it should be automated and another significant flaw should be fixed.** After the London Whale trade blew up, the Model Review Group discovered that the model had not been automated and found several other errors. Most spectacularly,

“After subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR . . .”

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Another Perspective on Bad Software

By James Kwak

Last summer, Lawrence Baxter wrote these two posts about the toxic combination of bad software—actually, software in general, since no software system is perfect—and too-big-to-fail banks. Baxter knows whereof he speaks, as he was previously a technology executive at a very large bank. Here’s what he has to say about it:

I don’t care what a CIO or even a CEO might say:  if they claim that they can eliminate the real risk of such missteps, they just don’t know what they are talking about no matter how good they are.  And if such missteps are inevitable, then we simply cannot avoid the question whether the dangers posed by large, complex financial institutions and systems could outweigh their benefits.

Think about that the next time you hear some CEO talking about his company’s state-of-the-art technology.

 

More Bad Software

By James Kwak

Last week BATS admitted that its software suffered from systematic problems for four years, failing to obtain the best execution price for about 250 customers and costing them about $400,000. That should be a giveaway: no self-respecting company would break the law just to steal $400,000 from its customers. This was a programming error, pure and simple.

Also last week, a RAND study revealed that, despite billions of dollars of investment, electronic medical records have done little to reduce costs for healthcare providers. This is more complicated than a simple programming error. The issue here is that projected savings of this kind are typically based on some model of how operations will be done in the future, and that model depends on perfectly-designed software functioning perfectly. Medical records systems apparently fall far short of this ideal: as the Times summarized, “The recent analysis was sharply critical of the commercial systems now in place, many of which are hard to use and do not allow doctors and patients to share medical information across systems.”

The common feature to these stories, however, is that big, complex, business software is really, really important—and a lot of it is bad. In many niches, it’s bad because there aren’t that many companies that serve that niche, it’s hard for customers to evaluate software that hasn’t been delivered and installed yet, and there are all sorts of legacy problems, particularly with integration to decades-old back-end systems. And most of the incentives favor closing the sale first rather than making sure the software works the way it should.

I don’t have much to add that I didn’t put in my Atlantic column on a similar topic last summer. Nothing has changed since then. So I’ll stop there.

The Problems with Software Patents

By James Kwak

Charles Duhigg and Steve Lohr have a long article in the Times about the problems with the software patent “system.” There isn’t much that’s new, which isn’t really a fault of the article. Everyone in the industry knows about the problems—companies getting ridiculously broad patents and then using them to extort settlements or put small companies out of business—so all you have to do is talk to any random group of software engineers. And it’s not as much fun as the This American Life story on software patents, “When Patents Attack!” But it’s still good that they highlight the issues for a larger audience.

The article does have a nice example of examiner shopping: Apple filed essentially the same patent ten times until it was approved on the tenth try. So now Apple has a patent on a universal search box that searches across multiple sources. That’s something that Google and other companies have been doing for years, although perhaps not before 2004, when Apple first applied. There’s another kind of examiner shopping, where you file multiple, similar patents on the same day and hope that they go to different examiners, one of whom is likely to grant the patent.

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The Future According to Facebook

By James Kwak

From the Times:

“Doug Purdy, the director of developer products, painted Facebook’s future with great enthusiasm . . . One day soon, he said, the Facebook newsfeed on your mobile phone would deliver to you everything you want to know: what news to digest, what movies to watch, where to eat and honeymoon, what kind of crib to buy for your first born. It would all be based on what you and your Facebook friends liked.”

Does that sound to you like a good thing? Even assuming for the sake of argument that Facebook does not let commercial considerations interfere with that “newsfeed” (and we know it already has, with Sponsored Stories), or otherwise tweak its algorithms to influence what you see:

  • First, do you really want your view of the world shaped by your friends? I mean, I like my friends, but I don’t count on them to, for example, tell me which NBER working papers are worth reading, let alone what crib to buy. (In Facebook’s theory, my friends are the people with similar tastes to mine, but that’s not how it works in the real world. For example, I liked Laguna Beach, and most of my friends thought were horrified to find out. In reality, you have plenty of friends with different tastes from yours, and that’s a good thing. This is why Netflix ratings work better than Facebook friends.)
  • Second, doesn’t that seem like a terrifying vision of the future? It’s kind of like 1984, except kindler and gentler, because Big Brother has been replaced by the most effective form of peer pressure ever invented. At the same time, humanity has splintered into millions of tiny (though overlapping) tribes, each with its own version of the Internet and hence its own set of facts.

Facebook’s Long-Term Problem

By James Kwak

Facebook went public a week ago, to great embarrassment. NASDAQ creaked under the strain and, more important, the price dropped from an offer price of $38 to as low as $27 over the next week as investors decided that Facebook wasn’t so exciting now that anyone off the street could buy it.

In the long run, this could become a footnote. (Remember all the criticism of Google’s IPO?) With over $200 million in profits per quarter, Facebook’s P/E ratio is still less than 100, which isn’t bad for an Internet company that dominates its market and hasn’t fully opened the advertising spigot yet.

In the long term, Facebook’s ambition is to succeed Google (or Apple, depending on how you see it) as the dominant company on the Internet. And that’s where its real problems lie.

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My Daughter Will Be CEO of the World’s Most Valuable Company Someday

By James Kwak

At least, that’s the impression I get from reading Walter Isaacson’s biography of Steve Jobs, which I finally finished this weekend. It’s not a particularly compelling read; it basically marches through the stages of his professional life, which is already the subject of legend, so there isn’t much suspense. I fear that it will inspire a new generation of corporate executives to imitate all of Jobs’s personal shortcomings—but without his genius.

The picture you get from the book is basically that Steve Jobs acted like a five-year-old for his whole life. He could be wrong about some basic, uncontroversial fact yet insist stubbornly that he was right. He divided the world into things that were great and things that were terrible, and his classifications could be arbitrary. He was an obnoxiously picky eater, constantly complaining about his food and sending it back. He threw epic tantrums that only a CEO (or a five-year-old) could get away with.

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Stock or Cash?

By James Kwak

I’m sure many of you saw the article featuring David Choe, the artist who painted the walls of Facebook’s first offices and received stock that now could be worth $200 million. Nice story. I was thinking, though: why was Facebook paying its vendors with stock?

I understand what you pay your early employees with stock: (a) you have to in Silicon Valley and (b) you want their fortunes aligned with those of the company. Outside board members also will often demand stock. But in most circumstances, you should pay your vendors with cash.

Giving a vendor stock instead of cash is equivalent to raising capital from that vendor—at the existing valuation. When you’re an early-stage startup, you want to raise as little money as possible, at as high a valuation as possible—because the whole point of the startup is that it should be getting much more valuable over time. There are tactical considerations, like not letting your bank balance get too low (because then your VCs will have too much negotiating power). But in general, you want to delay raising more capital until you reach some milestone that will boost your valuation significantly.

Obviously, things turned out just fine for Facebook. But it doesn’t seem like the smartest business move.

Facebook and Mark Zuckerberg

By James Kwak

I must admit that I find Facebook’s impending glory a bit awkward, as it touches on two themes I have written about previously. One is that I just don’t like Facebook. And, I confess, I don’t really understand it. I sort of understand why people like it, but I don’t really understand why it’s going to be the most valuable technology company on the planet in a few years. I don’t understand why anyone would ever click on an ad within Facebook (or why anyone would even see them, since you could just use AdBlock), since I don’t understand why you would want your shopping choices to be dictated by who is willing to spend the most money for your attention. (When I want to buy something, I prefer using organic Google search results, since at least they aren’t affected by ad spending.) Maybe I’m just too old.

At the same time, it’s pretty clear by now that Facebook does whatever it is that it does pretty well. $1 billion in annual profits is impressive, and it’s also considered a pretty good place to work. And who is the CEO of Facebook? A twenty-seven-year-old kid with no other work experience. So while, as a customer (“user,” in software industry parlance), I’m less than thrilled, I can’t deny that Zuckerberg is doing something right as a CEO. Which is further evidence that the myth of the experienced CEO and the cult of the generalist manager are just a myth and a cult, as I’ve written about before. According to Reuters, Zuckerberg will soon be the fourth-richest person in America, after Bill Gates, Warren Buffett, and Larry Ellison. Which means that, like Gates and Ellison, it’s a good thing he never let anyone convince him that his company needed an experienced CEO.