Musings of a Restless Mind

In 1982 when I first started a realistic career as a software engineer to replace my manual labor/freelance writing aspirations with an actual money making venture, I bought a book on how to succeed in business. The very first page said to pick your end goal first and then start your career on the first step to that goal. For an example they suggested that if your long term goal was to become CEO, you should start your career in finance. Even without any experience in business I knew how wrong that advice was, so I trashed that book. Years of experience have taught me that my instinct was correct, so I should explain it in some way better than, “Just take my word for it.”

First Principles:

1. Feedback is life

The sole thing that distinguishes all life from inert rocks is response to stimulus. An amoeba has no brain, but if you put a drop of acid in a petri dish with an amoeba, the amoeba moves away from the acid. The difference is the rock isn’t alive and the amoeba is. It needs no intelligence to recognize a hostile environment and respond to it appropriately.

Many software and management solutions fall under this rubric. One problem of great import to manufacturers for many years was how to get a robot arm to pick up an item. Original attempts focused on algorithms to precisely move the arm a fixed distance and direction, but if the object to be picked up had been moved only slightly, the arm would fail and frequently knock the item to the floor. The solution lay in imitating life by adding a feedback loop. When humans reach for something, they don’t try to repeat a pre-programmed movement (most times), rather they move their arm a small distance, and using their vision and depth perception, decide whether they are closer or further away from the object. Then they correct their movements appropriately. The movement appears smooth because the feedback loop is so short–hundreds of corrections in a few seconds.

2. Time is money

Trite but true. Ultimately time is the only real item of value in life. One might argue that food and health are more important than time, but if the necessities of life are not met, one’s time on earth is drastically shortened. Hence, immediate concerns outweigh long-term uses of time. If there’s enough food on your table every night, then figuring out what to do with your time becomes your number one concern. People are willing and eager to use their income that is not required for food and shelter for travel, books, stories, movies, sporting contests, or video games. This principle is the main stumbling block to economists and politicians in the post-industrial economy.

You can get people to spend money on what you create by making things that increase their time by decreasing the amount of time spent on necessities, or you can produce items or knowledge with which people want to spend their free time.

3. Knowledge is everything

How do you decide how to use free time? It all depends on how much you know. Before the phone, if you needed a shovel, you went down to the local general store and bought whatever they had. With the phone you could call around to several hardware stores and find out which one carries the type of shovel you want. You’ve gained the advantage of using the shovel you need for a specific purpose.

In 40 years as a computer programmer, I have created maybe a dozen algorithms or architectural gems. The rest of the time has been spent ferreting out interfaces and data items and formatting outputs and input interfaces. A good programmer will spend maybe an hour or two in an eight hour day actually coding, compiling, and testing software. The rest of the time is spent trying to find out how to achieve something. Windows, MOTIF, and other Application Programmer Interface and Javascript libraries are an attempt to limit the amount of knowledge a programmer must have to do his job.

So now we come to the question I raised with my provocative headline.

Is the Bottom Line Wrong?

How did Amazon survive its early years when it was just an online bookstore? The bottom line says that Amazon lost money every quarter and by large amounts. Yet the stock price kept soaring, and the business model inspired imitation from corporate giants like Barnes & Noble. Were all the investors crazy? Clearly a lot of investors not only think the bottom line is wrong, they bet their money on it.

Everyone recognizes that if you want to sell gasoline, you need to invest in the infrastructure to extract and refine the oil before you can sell it. Those are direct costs that are obvious even to accountants. Ethereal infrastructure (like software, stories, or art) is harder to measure, however. Because of that, many economists have lamented the failure to capture the productivity of high tech.

If the Bottom Line is Wrong, How Do You Make Money?

If we go back to our first principles, that time is money, then everyone’s goal should be to maximize the time available to do whatever they want.

When I was a young geography graduate student, I was given access to a social sciences data set that included income, race, education, marital status, type of job, and hours worked among other data of interest to the social sciences. To learn statistical techniques I chose to see what variables were most highly correlated with income. To my surprise I found that the one variable that explained all the variance in income was average hours worked in a week. Figuring that part-timers and the unemployed skewed the data, I eliminated anyone who worked less than 40 hours a week and re-ran the test. The results were nearly identical! I was stunned. Here I was trying to get into the business world to make a better living for myself and my family, and I was confronted with the futility of the entire endeavor.

I had been taught, and I viewed education as the key to a higher income, and a higher income as a means to more leisure time. The sad truth seemed to be that although you might enjoy what you do for a living, if your life is to have any meaning in any other area, you must set limits on the amount of time you work and therefore on your income.

In later years I got to know a number of entrepreneurs. Most of them worked long hours for an income only as good or marginally better than they could have made as employees. A few however grew their business by leaps and bounds and made huge amounts of money. When I visited the companies of the entrepreneurs who weren’t wildly successful, there was clearly attention to the bottom line. There were no frills, the offices were cramped, no mahogany desks or fancy artwork; clearly attention to the bottom line, but it never seemed to translate into success for them. The companies of the successful entrepreneurs however were outfitted with fancy furniture, the newest equipment, with prominent place reserved for unique artwork. Salaries and benefits were generous to attract the best employees. Usually there was still a culture of excessive long hours, but it seemed to pay off handsomely for the owners and even the employees.

Were these expensive habits that ignored the bottom line only acquired after success and riches were achieved? Or were they something that characterized the successful entrepreneurs from the beginning? They were there from the beginning, but it was probably a biased selection sample as statisticians talk about. I’m sure many entrepreneurs who spent lavishly and were visionaries still failed. I just didn’t know those ones, but Hollywood history is littered with passion projects that failed and even brought whole studios down with them.

The Knowledge Economy

There’s been a lot written about the knowledge economy, but there’s precious little actual understanding of the implications of the transformation from an industrial economy to a knowledge economy. The confusion is understandable. Economists are conditioned to think in terms of goods that you can touch and feel, that you can lock up in a warehouse. How can knowledge be traded? Even more confusing, how can people continue to produce goods (knowledge) that they just give away? The shareware movement in software, in which software authors allow anyone to copy and use their software and request payment if they find it useful is at least analogous to previous business practices of loss leaders because the authors frequently offer enhanced features or updates when the nominal registration fee is paid.

What about the enterprises that consist of giving away the product? There is always advertising. If you have enough followers, people will pay you to expose your audience to their products. But there is another, related quality that enters into the calculation—reputation.

Good name in man and woman, dear my lord,

Is the immediate jewel of their souls.

Who steals my purse steals trash; ’tis something, nothing;

‘Twas mine, ’tis his, and has been slave to thousands;

But he that filches from me my good name

Robs me of that which enriches him not,

And makes me poor indeed.

A reputation takes time and constant effort to build in an online world, but, unlike in the old world, the reach can be worldwide. At the same time a reputation in the knowledge economy is easy to lose. It didn’t take much for Bud Lite to associate itself with something anathema to its purchasers and quickly lose market share. I’m sure it’s easy for you to think of many examples.

Unions and Pilgrims

The Pilgrims were devout Christians who dedicated themselves to live holy Christian lives. When they came to Massachusetts, their leaders resolved to live the Christian life as mentioned in the Acts of the Apostles where, “no one said that any of the things which he possessed was his own, but they had everything in common.” After a year, they nearly starved to death and had to rely on friendly native tribes for help. The Pilgrim leaders lamented the idleness of the strong, who only did enough work to feed themselves and did not do extra effort to feed the more feeble. The leaders wisely recognized their mistake, and allowed for private property. The next year provided the bountiful harvest that they could share with the native tribes in their first Thanksgiving.

Likewise unions believe that all should be treated equal. Merit counts for nothing in a union shop, only seniority. When I worked in a union shop, I knew I would be paid the minimum until I had lasted 90 days, when I would get a raise, another at 6 months, then another every year, until I left or dropped dead. I was actively discouraged from going beyond the minimum required for my position by my fellow workers. This is not to say, I don’t believe in greedy, exploitive bosses or uncaring owners. I saw enough of those too, so I understand how the working folks decided they needed to stick together to restrict their bosses and allow them a sustainable living. But sometimes a solution sows the seeds of its own destruction.

How Accountants Make Money

Accountants are numbers people. They learn to make money on the margins, that is to say, by not spending it. Say you make a brand of vanilla ice cream with a well-established reputation as high quality. Vanilla beans come from tropical orchids however and are not cheap or easily sourced. Years ago chemists found a way of making a similar molecule they called vanillin that mimics the taste of a vanilla bean however without all the minor parts of the true vanilla that, seemingly, only gourmets care about. It’s expensive to harvest and process vanilla beans from far flung places like Madagascar, and most people don’t notice the difference, so your accountant points out all the money you save by using the lab-created artificial vanilla. Your reputation as a high quality vanilla ice cream will eventually decline, but by then you will have acquired boat-loads of money by making your ice cream cheaper and maybe even branching out into other vanilla-flavored products that you didn’t have enough vanilla beans for. You’ve traded your reputation for big, short-term profits, but now you’re just another ice cream company the same as all the others.

The Role of the Visionary

Man does not live by bread alone, despite the recurring attempts from archaeology to marxism to convince themselves and the rest of us that we do. Archaeologists and anthropologists who argue that the cave paintings at Lascaux were created to appease or thank whatever gods the artists worshipped (in other words as a transaction), ignore what is in front of their faces—it is art, and its appeal is most prominently aesthetic. Only those who live too much in their heads can convince themselves that the plain, brutalist architecture of the USSR and the socialist inspired school of post WWII building is preferable to that of ancient Greek and Roman temples and their cultural descendants in cathedrals and the Capitol Building of Washington DC. Even Islam which condemns depiction of living beings, is famous for its architecture and pleasing geometric artwork.

In the late 60’s Mario Puzo, a struggling writer, took his agent’s advice and wrote a book focused on the Mafia which had figured in a small part of his previous book, but that was the part that audiences seemed to find most interesting. To everyone’s surprise The Godfather became a historic best seller. Puzo who had been paid a $5,000 advance for the book, sold the film option to Paramount for $12,500 with an additional $50,000 due him if they actually made the film. The producer of the film, Al Ruddy, famously sold the CEO of Gulf & Western (that owned Paramount at the time), by saying, “I’m going to make an ice-blue terrifying film about people you love,” and that sold the stoic businessman on the idea. Why do I mention this incident? At one point, another movie studio offered one million dollars to obtain the option to make a film adaptation of The Godfather from Paramount. The accounting head at Gulf & Western wanted to jump at the chance. Here was a chance to make an amazing profit, turning $12,500 into $1,000,000 with no actual effort involved! Ruddy fought hard to keep the rights and shepherded it to completion despite overspending his $1 million budget by $6 million. The result was a film that brought in over $250 million at the box office, not to mention the TV and eventually video profits as well as sequels.

In a different way, the career of Steve Jobs is instructive. Jobs had electronics and literature as his main early interests, something others considered an odd combination. He has been described as part hippie and part nerd, but fitting in neither group. His friend and early partner Steve Wozniak was responsible for the electronics of their early products. Jobs’ influence on Apple was never hardware expertise, but rather the vision. His relentless drive to make products as simple to use as possible and as aesthetically pleasing as possible were the contributions he made to the computing industry. Famously he clashed with the numbers guy, John Sculley, at Apple, leading to Jobs’ ouster. By the time they brought Jobs back 12 years later, Sculley, and his careful, prudent ways had turned Apple into a fading failure. Jobs with his fanatical insistence on making things thinner, more user-friendly, more innovative, and making Apple screens more pleasing reinvigorated Apple.

Visionary Failures

As I mentioned, just because you’re a visionary doesn’t make you right. There have been many visionaries who pursued their ideas and projects into disaster instead of success. One famous one is the Ford Edsel. Henry Ford II wanted to make a totally new, spectacular car that he believed in so much that he named it after his father, Edsel Ford. Ford Motor Co. dedicated 10 years and $250 million on research to create the car. Ford wanted the car to be innovative and created new methods as well as new designs for the car…, and the car bombed. There are many reasons people give for the Edsel’s failure from poor market research, to the market passing them by, to the laborers not being able to learn how to make the new car. Those engineers who worked at Ford at the time though will tell you that they learned and innovated so many things that they used for years. So, although the Edsel itself was a failure, the project wasn’t necessarily a failure.

In my field of computers, there is the cautionary tale of Xerox’ Palo Alto Research Center (PARC) which was certainly another visionary project. Xerox decided to create a research center to do basic research. They decided to start from scratch to build a computer and reimagine everything, including inventing a new computer language, Smalltalk. From this project came the invention of the ethernet cables and connectors, the mouse, the graphic user interface. Most of us look at how PARC let Apple and eventually Microsoft run with those things and make unbelievable fortunes off them while Xerox failed to capitalize on those developments. I heard Alan Kay speak about PARC once, and he pointed out that Xerox actually made 40 times their investment back with technologies that were developed by PARC that they did use. So not exactly a failure.

Before I end, I should mention one more instance where very smart marketing can salvage a worthless product. In the old days before the microbrewery revolution, American beer was known throughout the rest of the world as tasteless swill. Someone decided to run a scientific taste test and found that no one could tell the difference between the well-known brands of American beer. Some visionary marketeer at Schlitz (the worst selling of the major brands) saw an opportunity instead of an obstacle. He created a marketing campaign of live taste tests with 50 dedicated beer drinkers. In each test, the tasters were dedicated users of one particular brand. He confronted them with two identical mugs, one with their preferred brand and one with Schlitz. Lo and behold, half of the dedicated Budweiser (or Miller, or Michelob) lovers said they preferred Schlitz. The implication was that, even if you’re a devoted Bud drinker, there’s a 50% chance you’ll prefer Schlitz. Of course all they proved was that they couldn’t tell the difference.

So, if they hire a guy from finance to be your company’s new CEO, it’s time to find another job, or you can hope that he hires a brilliant marketer that can convince your market that quality doesn’t matter. Following the bottom line may get you short term gains, but the markets are made of people, not numbers, and you can only cut costs until you get to zero. Zero cost also means zero product. People respond to visions, and dreams, and beauty, and, if you want to prosper long term, make those the goals you work towards. You may lose, but as the old saying goes, nothing ventured, nothing gained. Life is not and never has been risk free.