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Why 2002 Will Be Better Than 2001
Commercial Web Sites Will Make Money in 2002
Commercial Internet expansion will not stop just because some of the most-publicized early dot-coms were run badly and are now going broke. For every Amazon that goes down, there will be another company like J C Penney that expands its Web presence and turns it from brochureware into a complete online shopping experience, another airline like Southwest that decides to rely more on its Web site than on travel agents to sell tickets, and a whole new crop of online businesses that will be started by people who learned their lessons from the first burst of ecommerce and will be more hardheaded and profit-oriented than their predecessors.
There may never be as much venture capital looking for silly Internet schemes as there was before 2001, but so what? I started the limo business that gave me the "Roblimo" screen name without venture capital, and it is a lot more expensive to buy limousines than it is to make a Web site. I have many friends who own and operate small and medium-sized businesses they founded either with their own savings or with the help of friends and family, who are making excellent livings today and aren't thinking about going public or getting bought out. They take in more than they spend every month, expand a little at a time, and that's all they need to keep them happy. I believe we will see more of this thinking applied to Internet businesses in the future by both small-timers and big companies. The land-grab mentality is over. The Internet is now part of the business landscape, not something special.
Internet businesses will still come and go. The classic figure is that 80% of all small businesses fail in their first five years. But plenty of online businesses will grow and prosper, buy or lease server hardware, and hire programmers and Web designers. They aren't going to do it in frenzied end-of-the-20th-century style, and the days of workplace-as-playground are probably gone, but there will be more Internet jobs than ever once we get through today's shakeout.
Hardware Will Wear Out
Advances in hardware, especially desktop and laptop units, have been negligible over the past few years. Yes, you can now buy a GHz uP for less than you paid for a 500 MHz one a few years ago, and RAM is cheaper, and so on. That's all very nice, but it means nothing. A majority of desktops and laptops in the world today are used for nothing but running business software, email, and Web browsing. In this context, rather than in the geek/techie world of speed for its own sake (and for game playing), there is little practical gain in doubling CPU speed, and a 20 GB hard drive is plenty big enough, especially for a business desktop connected to a network -- as most are nowadays.
The generally accepted lifespan of a computer in the world of corporate accounting is about three years, and the IRS depreciation schedule says it's five years. So all those computers purchased in the last half of 1998, in all of 1999, and into the first quarter of 2000 are still new enough that there is no compelling financial reason to replace them. But computers wear out. Keyboards get grungy, monitors get dim, and cases start to get a yellow tinge even if they are cleaned regularly. Hard drives crash after they've spun around umpty-ump times, and parts failures in general increase with age. A manager who is trying to look thrifty might not feel comfortable asking to replace two-year-old computers, but can easily justify replacing three-year-old computers that are starting to need regular repairs. And after five years, when those computers are "depreciated out" by IRS standards, and buying new ones can start the depreciation tax break cycle all over again, it becomes mighty tempting for even the worlds' most penny-pinching boss to start taking bids for new boxes.
Computers bought in 1997 will reach the end of their tax-depreciation life next year. Computers bought in 1999 will be three years old in 2002. Even if no great new technologies hit us in the next few months, we are going to see a lot of old computers replaced before long, probably starting in the fourth quarter of 2001, in a cycle that is going to continue for at least another three years after that.
Why Corporations Will Happily Lease Software
As co-owner of DSM&RM Inc, the holding company that owns Robin's Limousine and rights to any freelance writing I do outside of OSDN, I love to lease instead of buy. For many years, the limousine I drove was owned by a corporation controlled by a friend, who leased it to me. We did this because limousines, like computers, have a five-year tax depreciation lifespan, while lease payments are 100% deductible in the year you make them. It gets a bit more complicated than this in practice, and you can buy up to $20,000 worth of computer equipment and deduct it all in a single year, but Slashdot is not a tax advice site and I am not a CPA or a tax lawyer (and this article should not be considered personal or corporate tax advice, which you should only get from a qualified professional) so we'll keep things simple here.
Suffice it to say that from a tax standpoint, most companies consider leasing better than buying. And as a side benefit, leasing leaves capital in your hands to carry you through a slow month or make a sudden purchase instead of tieing it up in things like computers, limousines, trucks, bulldozers, office furniture or whatever -- or in software, which the IRS allows you to depreciate over three years.
You can laugh at the idea of software having a three-year lifespan if you want, but that's the IRS rule right now, and if you look at Microsoft's release cycle, you'll notice a three-year pattern. You may not like Microsoft, and the company may make a lot of mistakes, but when it comes to macro-marketing, especially in the commercial arena, their people generally know what they are doing. And Microsoft is turning to software leasing.
"Ha ha," lots of techies say, "Who in their right mind is going to lease software instead of owning it?"
Answer: Lots of corporate managers who listen to their financial people and tax strategists.
Besides tax advantages, leasing software with upgrades as part of the deal makes software budgets predictable, and unless your business is software, you'd just as soon not spend any time or energy worrying about it. It's lots easier to sign a lease contract once every two or three years than to constantly track software upgrades. I'd like to do that myself. Of course, since my business runs entirely on Linux, I am not interested in leasing software from Microsoft. But isn't the Red Hat Network essentially the Free/Open Source Software equivalent of a Microsoft software lease program? If I sign up with Red Hat Network, every dime I spend on it is tax deductible, and I have a fixed-price contract with a known company that (for a fee) makes sure my computers have the latest stable versions of all the software I use, and will take care of security patches and upgrades so that I don't have to worry about such things and can concentrate on running my business instead.
And note that everything I say about my tiny, home-based business applies even more to larger companies. I have five computers, three of which are critical for everyday operation. If you have thousands of computers, anything that makes managing them and making their cost more predictable is worthwhile. Whether you are using Macintosh, Windows, Amiga, OS/2, BSD Unix or Linux doesn't matter. Money and taxes are totally OS-independent.
Open Source Opportunity
What I -- and most people in business I know -- really want from our computers is to have them do their jobs without any fuss. I have more personal commitment to Open Source and Free Software than most small business owners, and I'm more than typically willing to experiment with hardware and software, but in the end my main desire, most of the time, for my business computers, is to not think about them at all!
For me, business computer nirvana would be the ability to write a single monthly check (of moderate size) to a local company and have that company take care of all my computer needs. Other than out of curiosity, I wouldn't care whether my computers were running an RPM-based or Debian-based distribution. As long as my computers worked reliably and ran all the software I needed at a reasonable speed, I'd be satisfied
There are plenty of systems packagers and value-added resellers [VARs] that provide this level of service for Windows-based business computing, but few for Open Source users. This is silly, and it is going to change. There is a grand business opportunity in this area for small entrepreneurs who don't have a lot of capital, and it continually shocks me that companies like VA (which owns Slashdot, remember), Red Hat, and others that play heavily in the Open Source sandbox haven't been encouraging resellers and systems packagers all along, right down to providing franchise-style "Linux Consultant in a Box" packages complete with "approved" software, "certified" hardware packages, and all the rest of the support structure that has long been availbale to Windows-based VARs.
This is not the first time (or place) I've suggested this business opportunity, and it won't be the last. But now that investment capital is not easy to come by, and Linux companies need to make profits just like car parts warehouses and all the other businesses in the world, maybe a few more people will listen to the idea.
What I Say Here Doesn't Matter
Real life is real life. It will take its course whether you agree or disagree with what I have said here. Aging computers are going to wear out and get replaced either way. The cost of developing proprietary software is going to keep on rising, and Open Source is going to become an increasingly attractive alternative. Sooner or later -- probably sooner -- at least one innovative politician will claim he or she can save taxpayers millions (on the local or state level) or billions (on the national level) by switching from proprietary to Open Source Software and, especially if the local, state or national economy is in "down" mode at the time, will get additional votes by taking that stance. Other politicians will notice, and suddenly you'll see Linux and Open Source popping up all over the place in government buildings, even (perhaps especially) on office desktops.
IRS policies have -- and will continue to have -- more effect on corporate computer purchasing policies than all of the articles and comments on Slashdot put together. All the dying "pure" dot-coms in the world aren't collectively spit next to the big, established companies like J C Penney and Wal-Mart that are just now starting to pick up steam on the Internet (and are hiring laid-off dot-commers). And even these giants aren't going to have as much of an effect on Internet spending over the next few years as the millions of small businesses that are only now discovering that a Web site is less expensive (and often more effective) than a big Yellow Pages ad.
So relax. Whatever you and I say or do, things will be better next year than this year for almost everyone who works with computers or the Internet. And while Linux and Open Source may not dominate the world as fast as some people would like, you are going to see them become steadily more popular over the next few years, no matter what happens to any particular Linux or Open Source company.
They will not. They are just another business model.
First off, the internet. The only companies that can make money online are companies that can also make money offline. There is nothing fundamentally new about the internet, and by the law of diminishing returns it is a lot less revolutionary than the telegraph and telephone were in their day. It eases communication and remote business, sure, but it does not provide some new paradigm. The people, usually the High Priests of Wired magazine and denizens of this site, who claim that the internet is radically new are completely wrong.
Open Source, too, does not change business plans. Microsoft is moving to .NET and distributed application hiring models anyway. Redhat, Sun and the like are doing the best they can to keep up with this. Because in 10 years most businesses will be running dumb terminals and applications will be actually running inside the software giants houses, whether something is open source or not is largely irrelevent. This is the new reality we are moving too - what matters is not Linux, Windows and other OS's, what matters is applications and the ability to keep them up stably. MS can do this, as can Red Hat and Sun and IBM. We will see the return of an effective closed source business policy, as Red Hat will be leveraging its .NET equivalent, and customers will not be able to access the source code as said source code will be running on Red Hat's machines.
My view is that all the twaddle talked of new paradigms and so on is just rot. Business models haven't changed since the 1850's in any significant way. The law of declining returns is showing that new technologies effect our profit making capabilities less and less.
The British East India Company, the largest company the world has ever seen (who said multinationals were a new phenomenon? They have benefitted us for a couple of centuries, and are smaller now than they were last century), had a business model no different from Microsofts. While people may despise MS, I must say that as a libertarian I cannot in all conscience say that I would like them to be punished. Libertarianism is about allowing companies like MS to do what they want, as the market is always right. I agree.
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Leasing equipment makes some small sense for small business- leasing software is a disaster.
If you own the software, you own your data.
If someone else owns the software, it is thier data as they control every aspect of it's use- especially if you're leasing it. If they don't agree to your usage, you're not entitled to it after you've put it there.
Personally, as a businessman, I don't want anyone except myself owning the information that I use and collect on a daily basis. If a business sees that, they're not going to like leasing as it's a liability not a benefit like it might be with physical items like equipment.
I am not merely a "consumer" or a "taxpayer". I am a Citizen of the State of Texas
Roblimo is right, for us Americans, taxes can have a huge impact on what you buy.
If you don't have a homebased business, you should, it's amazing what you can deduct. And the IRS rules let you get creative on deductions. Ie, computers must be depreciated over 5 years, but I think you can claim parts all in one year. Buy a $50 Pentium, deduct it $10 a year for 5 years. Buy a 40 gig HD, a Pentium 500, 128 Meg of RAM, a burner, that's all supplies/office expenses, $600 you can deduct right away (about $150 back in my tax bracket).
So, gentlemen, start you SOHO businesses.
later, thermo
More money in the economy, less money in the consumer's pocket, less consumer confidence. It's six of one and a half-dozen of the other.
The Free Software Movement was an inevitable response to the way corporate america was handling software development. We let Microsoft do it their way for a long time, and computer experts were frustrated because the "hood was welded shut".
Interoperation is there, but done poorly. Microsoft had no interest in the internet by themselves, it took other people to point out that it was the next big thing.
Was I the only one to notice that Microsoft quit shipping a free programming environment many, many years ago? Now why the hell would they go and do that? Because they hate developers. Developers are their primary source of competition.
We won't see the fruits of the free software movement for another decade (in a way), and there had to be a downside when the overinflated market corrected itself.
The free market can work wonders, but it isn't very innovative. Something like government investment in R&D or free software has to come along to shake things up every now and then. It's life.
This is an old argument, trotted out and tarted up for review every time some new technology or business practice leads to greater efficiency. Unfortunately history has proven this argument to be a fallacy. It never makes sense in the long term to stick with a less efficient means of production. Never, ever, and greater efficiency has so far lead to every increasing wealth. Somehow all those manually telephone switchers found jobs elsewhere in the economy when automated switches replaced them.
It is getting to the point now where in my projects I can usually search the net and find a piece of free code or a free library that does a specific function, no matter how arcane or niche I might find that function to be - the code is out there and it is free.
Now, do you realize how marvelously productive this can make a single programmer? No license fees to pay, and little code to write - just script together other's components to create a new and unique piece of software. In the past this would have taken 1000's of man hours of programming, or thousands of dollars in licensing fees. Now it can take me a weekend.
How long can Microsoft compete? Not long. Sure, Microsoft will lose money, but the market as a whole will remain robust, I just think that the money will be more evenly distribute among smaller companies and freelancers whose job it will be to integrate and repack the free software for those that don't want to muck with the details.
-josh
Rob, I think software leasing will, if it catches on at all, last only a short time. There's one fundamental difference between leasing a car and leasing software: with a car you know what you're getting and what you'll get when the lease runs out. The car won't change on you for the life of the lease, and when the lease runs out you'll get to pick which car you want to lease again and won't be in the position of having the car company decide they'd rather you used station wagons instead of limos.
Compare that to leasing software. Take a look at the havoc that comes when you upgrade critical parts of an OS. Linux is less obnoxious when it comes to kernel and libc upgrades than Windows is when you jump versions, but it's still a headache and you don't do it to production servers quickly if you value your business's stability. Yet most software leases include provisions for automatic, unannounced updates of exactly that sort. RedHat's better about that in that you can avoid the update if you want, but I doubt Microsoft's leasing plan will let you continue to run 98 or NT4, no matter how well they work for you.
Software leasing may eventually work, but before it does it's going to have to not be designed as a revenue generator for the software companies and not have automatic upgrades and such added in to the basic concept.
It removes the greed/growth that fuels our economy, our sandwich shops and our luxury goods, and replaces that with a communistic ideal which leaves no potential for any advancement.
You're not an engineer, are you?
In just about every system you design, the problem is not producing force or power. The problem is always how to efficiently control the energy of the system to do useful work. You can throw a 5,000Hp engine into a Honda Civic, but without a extremely well engineered drive train, all you will ever do is replace tires and CV joints as the engine rips both to shreds.
And so it is with capitalism. Unmitigated capitalism doesn't provide for the best society. It allows for certain parts of the system to destroy other parts. If one part of the system is broke, the whole thing is broke. Open source can be a mitigating/controlling factor, ensuring that commercial software houses continue to advance the state of the art. Why should M$ be able to rest on their collective laurels, reselling the same tired '80s technology? If a group of hobbyist can produce an OS as good as M$' flagship product in their spare time, why should I pay M$ anything? Linux has pushed them to feverishly develope better alternatives.
The greed/growth that fuels our economy has not been destroyed by open source. I has only been controlled.
Anyway, lost revenue for M$ means more revenue for my company, and eventually me (I hope). How does that damage society? I buy coffee, too!!
Aah, change is good. -- Rafiki
Yeah, but it ain't easy. -- Simba
Dude... You are smoking crack:
Here is the msdn download center and here is the code example center. Just about every microsoft binary on the system is usable by a third party in COM without having to hack the source. All of MSDN exists for developers. What do you have to pay for? A gui, the convience of having MS send you updates to the sdk's on cd, and in the unversal subscription case the right and access to play with any ms development related products you don't already own. Also to get that remaining stuff free/cheap for students, Msdn is doing this
I don't really mind your comment, I just think that the moderation on it is really bad.
>Now recently as these companies have started to do less well, beset by open source, antitrust and so on, the economy has done badly.
One, if open source is really a major cause then you should see RedHat stock pretty high, its not. Two, alot of tech stocks were overvalued. I don't think that Cisco has a direct Open Source competior, yet its market cap has crashed as Microsofts has.
>If people now buy one $50 Redhat installer instead of 10,000 Microsoft licenses, there is that much less money into the economy.
I don't get this part and don't think the moderators understand what this implies. Say that MS gets $1 million less in sales, that money doesn't disappear from the econmoy, it still exists in the hands of other business, who will use it for other expenses. It still goes into the economy. One can even make a good case that the $1 million gets distubuted more since its goes to say 100 different companies rather than just one. This would be a good thing.
>Companies such as Microsoft will find that they will do less well,
Fine, but I don't support welfare for one single company. That would be like communism or something.
>It removes the greed/growth that fuels our economy,
But isn't the corporation RedHat based on an Open Source product?
The surprise isn't how often we make bad choices; the surprise is how seldom they defeat us.
I am sick and tired of the oft repeated adage that the only people who care about the new CPU speeds are speed freaks and game players. There are a huge amount of applications for which CPU speed is critical outside of the game market. The entire field of academics revels in CPU speed for analyzing data, as well as any kind of industrial or governmental research arena.
We're here, we buy fast computers, and we put them to good use. It's not just about games.
The only companies that can make money online are companies that can also make money offline.
I have to disagree, in my experience it is the companies that offer products to a niche market that really take it to the bank. The only reason most people buy things online is because they can't get them locally or easily. The companies that offer products or services that can be aquired locally will end up suffering because they cannot compete with the local marketplace. Enter the niche market, want a Transformers T-shirt? How about the latest Martian Successor Nadesico resin kit? I can't find stuff like this around town, where do I go? The 'net of course!
I guess what I'm trying to say is that there are two effective business models for online sales.
-Have an established company already, therefore loss will be minimal and you can offer better deals/service
-Be a niche supplier and don't get grandiose in design, keep it small and effeiciant and you will make money. Bloat and fear the reaper!
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crazy dynamite monkey
I have the perfect solution for this! Send all that money which isn't going to Microsoft directly to me. I promise to put 100% of it into the economy. I won't save a single dime. Even Bill Gates can't claim that. I won't have any wasteful foundation either. Remember 100% straight back to the economy. I know it will be difficult, but I am sure I can handle it.
Another interesting tidbit, although second-hand: I heard a prominent venture capital lawyer speak a couple of weeks ago, and he said that most vc firm contracts specify that if their funds are not spent within four years, they must be retruned to the investors. I can't imagine that happening, so all those $1 billion+ funds raised in late 1999 and early 2000 will have to be spent in the next three years, and it takes a little time to spend $1 billion. So my next prediction is for the return of venture capital in 2002, no matter what the economic mood is.
Milo
Computers don't really wear out, my master browser at home is a 486/33 running FreeBSD, it must be 7 year old at least. But I'm getting ready to rotate it out and replace it was a P90.
What drives hardware sales is new applications that make older computers nearly useless. I think the latest one coming down the pike is DIVX:).
My main computer for a few years was my 486 laptop. When I started to write books, it was too slow, so I upgraded to a Pentium 75.
I had a Pentium 75 for my main computer for a year, but when I started to get into MP3's, it was inadequate. I upgraded to a Celeron 300.
Now, I'm getting into DIVX:), so I bought a barely adequate Celeron 566 Dell NETPC as a set top box. I hardly know anyone else who can play DIVX:), which is a shame, since I'd like to trade them RL.
The IRS is lame about that depreciation schedule,. I think 3 years is a lot more reasonable.
The .com boom/bust cycle was yet another tech cycle, similar to rail, telegraph, automobiles, radio, and TV initial cycles. Very, very similar. In fact, if you look at the Stock Market Crash and the Great Depression, you'll see a familiar tech stock market speculation cycle as part of it.
That said, your statement "something we won't see in my lifetime" is probably wrong. Unless you're in your 80s.
My guess is something similar will occur sometime between now and 2022, given the current rate of technological change. It might even be fusion power or something else, but we will have another popular stock market delusion.
There are two ways to avoid losing your shirt in these speculative cycles:
1. Buy only sound companies with good prospects for profits, good cash positions, and reasonable P/E projections. Choose the leaders, not the me-toos. And if you ever find more than 5 per cent of your money is in a single stock, start selling out of it slowly - it's better to have 28 percent tax on a 50 percent gain (36 percent real return) over three months than to have an 80 percent loss. And never go on margin, unless you are selling something else that day.
2. Don't participate - be a contrarian. Buy up the out of favor "boring" stocks (or even bonds) as their price drops. Real value wins almost all the time.
--- Will in Seattle - What are you doing to fight the War?