Facebook, Groupon, Netflix Drive the Next Big Thing and America's Economic Resurgence - 01/12/2011

Facebook, Groupon, Netflix Drive the Next Big Thing and America’s Economic Resurgence

Jan. 11 2011 - 2:50 pm | 2,487 views | 0 recommendations | 3 comments

The 2011 Consumer Electronics Show (CES) was abuzz with wireless broadband – the unfettered Internet, released from the bondage of desktop computing.  Most of the news focus and appetite for devices and bandwidth is driven by social networking and video-everywhere.  Hot, hot, hot.  Maybe the next Big Thing.  Big enough to inspire Qualcomm’s [NASDAQ: QCOM] pricey $3 billion acquisition of wireless chipmaker Atheros [NASDAQ: ATHR].  Maybe hot enough to drive another Silicon Valley dot-com-like investment frenzy.  Witness the stratospheric valuations and expectations for still-private Facebook and Groupon as iconic faces of social-networking.

But something more fundamental is going on.  Not to stretch a well-worn analogy, but focusing on the social and entertainment industry in this context is akin to focusing on vacation travel as the chief economic benefit enabled by the 1950s construction of interstate highways.  Obviously the new highways (plus cheap automobiles) spawned a huge tourism industry, but that was a side benefit.  Construction jobs abounded too during the highway construction phase, but that new system provided economic value far broader and longer lasting, virtually reshaping America.  Analogies are imperfect, but we are today experiencing a comparable infrastructure build-out, with comparable implications.  It’s just much less visible than tarmac and engines.

The pleasing functionality of smart-phones, touch-screen tablets, and lightning-fast desktops is enabled by another combinatorial infrastructure — mating cheap and blazingly fast wired and wireless Internet ‘superhighway’ with thousands of leviathan-scale data centers.  The latter is what Google engineers are calling "warehouse-scale computing.”  When you can have fast real-time anywhere connections to ubiquitous logic and storage, the device in your hand doesn’t have to be so smart to appear brilliant.  The heavy lifting is done elsewhere, in what has come to be known as The Cloud.

The early Cloud feeders, much the darlings of CES chatter – Twitter, Zynga, Netflix [NASDAQ: NFLX] and many others yet to appear – are essentially entertainment and social plays.  Certainly a Big Thing for some investors.  But in and of themselves such companies are not the next Big Thing our economy needs to re-ignite.  True, social-network-type capabilities can improve businesses productivity — LinkedIn and Salesforce.com [NYSE: CRM] come to mind.  Important but largely incremental at the macroeconomic level.  Our eye should be on the underlying infrastructure explosion that enables social networking and video everywhere.

The unprecedented adoption rate for wireless broadband, epitomized and led by Apple’s [NASDAQ: AAPL] iPhone and iPad, drives and funds the massive expansion of the Cloud.  The Cloud’s wireless connectivity and computing power are practically free.  Measured in inflation-adjusted terms, wireless bandwidth and computation are a million-fold cheaper than in 1970.  George Gilder gets credit for years ago predicting that bandwidth would become free.  It’s the catalytic combination of free bandwidth with free computation that brings on a new era.

It may not be actually free (just pretty amazingly cheap) to stream an episode of "Glee” to your Android phone, mainly because that activity alone consumes more bandwidth and computing power than the entire telephone network of a small city circa 1970.  But if what you want to do is make a phone call itself – which uses an infinitesimal amount of bandwidth and computing power – - that is essentially free.  (Hence the migration of phone companies away from a voice-based revenue model.)  And if your call required an even smaller share of the highway than voice, then the real cost does approach nothing.  That’s the reason companies like OnStar and mbrace can add for practically nothing features such as door unlock, and baby-cams can add features such as room-temperature monitoring.  The massive ubiquitousness of the new wireless-plus-Cloud infrastructure makes it practically free to connect things, and information about things.  Things like thermostats and toll booths, brake pads or crates of bananas.

There is no official definition for the Internet of Things.  But in simplest terms it is when things and objects, or parts of things instead of people, initiate communication and are networked.  It’s when your car, via EZpass, tells a toll-booth where you are and to charge your bank account $2.50.  It’s when your home thermostat sends information to you, or a shipping pallet of refrigerated pharmaceuticals alerts shipping-and-receiving of condition and time-of-arrival, or when your brake pads tell not just you but the dealer’s warehouse and the manufacturer, that you need new pads.  It’s when the trucks for a fleet manager, and customers and producers, keeps real-time tabs on location, fuel-use, and on every pallet and even every box on the pallet.  When a farmer’s field knows by the square-meter where more or less water or fertilizer are needed.  Also when the manual push-button help-I-fell-and-can’t-get-up monitor becomes location and position smart, and automatically alerts all relevant parties to Gramps’ fall, location, heart-rate and blood pressure.

In short, any thing that has a condition of interest to someone, somewhere, can be accessed in principal now, or very soon, cost effectively, in real time.  At the most basic level, most conditions of interest are rather simple: on/off, here/there, hot/cold, ready/stopped, fast/slow, far/close, thin/thick.  And one small level up are metrics such as speed, temperature, height, location, and energy use.  All these have value in every domain of human activity, e.g., in manufacturing, services, entertainment, travel, the environment, health care.  And each piece of information about some thing requires trivial communications bandwidth, so that case-by-case the use of wireless access is practically free.  And with the Cloud, the use of capacious computing power to add intelligence to the object is nearly free too.

So the emergence and acceleration of the Cloud driven by Facebook and its cousins and progeny now enable the Internet of Things because the capabilities are so broad in scope and scale, and the per-byte costs are so low as to be free.

As an historical aside, credit for the phrase, if not the idea of the Internet of Things belongs it appears to engineer Kevin Ashton who may have been the first to coin the phrase in a 1999 presentation presciently envisioning the network of objects, not people.  It bears noting that Ashton is today General Manager of Belkin Conserve, after that company’s April 2010 acquisition of Zensi, an energy sensing/monitoring company Ashton founded.  Credit probably belongs to Michael Chui, senior fellow at McKinsey Global Institute, for articulating the fundamental sensor-centric metrics of this new era.  The concept has spawned an entire subculture of research, investment, conferences and even an Internet of Things Council.

Why should anyone care?  Much of the inefficiency – - the inverse of productivity – in what we build, fabricate, grow, move and use resides in what we don’t know, what we have to prepare for.  Information has value.  There is more value in the information about the location of a shipping container than the cost of the steel to build that container.  The scope of the information of value is nearly beyond imagination.

It has been said that every human is surrounded by 100 to 1,000 objects.  That apocryphal statistic undercounts reality, since it’s not what surrounds us individually, but what constitutes the universe of things we care about on the planet, from the health of a fruit tree in some remote orchard, to the health of an industrial bearing in a critical pump in a remote oil field, or critical joints in a bridge, the state of roads, or state of your suit at the laundry.  The number trillions doesn’t come close to counting the potential points of information.

The growth of the Internet of Things starts by connecting existing sensors.  This trend underpins, for example, the emerging utility smart-grid with its hundreds of millions of existing sensors and switches.  It also the trend in vehicle and engine diagnostics added to the real-time uplinks for fleet vehicles – and in things like the aforementioned enhanced baby-cam.  At the moment, the Internet of Things is still only marginally significant.  Gartner has estimated that sensors will shortly account for about 20 percent of non-video Internet traffic.

The next step involves the creation of entire new classes of sensors – since piggy-backing the free networked Cloud effectively and radically reduces the total system cost to just that of the sensor.  So how cheap can we make new sensors to put them where they’ve never been before – from under the farmer’s field to under your skin?

Easy to answer: the trend will follow the still collapsing cost, and power appetite, of silicon-based devices — Moore’s Law.  And ever lower power matters, since energy always matters.  The talk is of "smart dust.”  But because the smarts are in the Cloud, the challenge is made easier since all you really need is dust that can sense, and talk.

Low-power sensors can use imbedded cell-phone chips powered by micro-batteries to episodically transmit kilobytes of data with operating lifespans of weeks, useful for many shipping domains, or human-centric activity.  Even lower power millimeter-scale sensors are already in development that require mere picowatts of power.  At these levels – a jumping flea can generate thousands of picowatts — you can scavenge energy needed from vibrations or heat in the ambient environment, and even from the pervasive existence of radio waves themselves.

For the potential scale of the Internet of Things one should count sensors since some things may contain several to thousands of sensors.  Each of America’s 100 million homes contain hundreds of sensing points.  So too each of the 200 million vehicles on the road, and the 70 billion square feet of commercial office space.  There are dozens of relevant sensors points within each of the hundreds of millions of cell phones and similar.  Then count trucks, trains, aircraft, factories, fields, farms and the list goes on. The total Internet traffic from all these sensors?  Consider the math.

A billion people using a video-level megbatye of network bandwidth yields a million-billion, or petabyte, of activity.  A trillion sensors each piggy-backing the network using a mere kilobyte of bandwidth is also a petabyte.  And in many cases the sensors will ‘talk’ more often.

The Internet of Things creates unprecedented capabilities for every aspect of an economy’s function.  And while building it out will create jobs, and investment opportunities for both the businesses who make and deploy the hardware, software and services, in the long-run the biggest winner will be the U.S. economy as the new and largely unanticipatable features and benefits of this radical infrastructure upgrade take hold enhancing efficiency and productivity, these being the essential drivers of economic growth, always and everywhere.  The 1950s highway system had the same effect.

The evolution of the Internet has undergone two main phases thus far, epitomized by the most common things it was used for.  First came email.  Then came shopping, news and static entertainment.  Now comes video.  Next comes things.  Each earlier phase drove a boom in demand and construction of networks and the back-office hardware (data centers) – each time in a typical boom-bust cycle.  And each phase was also associated with, and contributed significantly to, underlying American economic growth.

Thus far, the creation and growth of each phase of the Internet has been dominantly associated with American enterprise.  It can continue to be thus — assuming some reasonably sensible behavior on the legislative front (largely staying out of the way) — because the nature and growth of each phase of the Internet has been unpredictable, semi-chaotic, tech-centric and entrepreneurial driven.  All the hallmark features of the American scene.

Returning to the high-level bellwethers – Intel [NASDAQ: INTC] has voted on the wireless-Cloud infrastructure trend with their summer 2010 $1.4 billion acquisition of Infineon’s wireless chip business.  Intel’s CEO Otellini said the addition of computing power and Internet connections to smart phones, tablets and the like is "changing them and changing the world.”   It will change more than phones and tablets. And it will change America first, then the world – if we don’t mess up.

More recently, and contemporaneously with the CES 2011, Qualcomm’s announcement of a record-setting $3 billion acquisition of wireless chip-maker Atheros is already heralded as an early bellwether for an unleashing of corporate cash hordes.  All true. But the back story points to another cycle of American tech resurgence.  Explaining the acquisition, Qualcomm CEO Irwin Jacobs said "All sorts of stuff is going to get connected. …It’s probably the theme of the next five to 10 years in the industry.”  He doesn’t know the half of it.  But then, maybe he does given Jacob’s track record.

The Internet of Things enables the rise of the machines – but unlike the hyperbolic Hollywood movie of the same phrase, this rise will enable and free humans to do more, produce more, and ultimately become healthier and wealthier

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