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This past weekend marked the 30th anniversary of the nuclear accident at Three Mile Island.  If you are old enough you may remember where you were at that time and what it was like.  I remember VERY well because I was on my way to the crippled plant near Harrisburg, Pennsylvania.  Our President at the time, Jimmy Carter, was also a micro-manager and a former nuclear engineer: he wanted his own eyes and ears on the scene.  Our little group eventually coalesced into the Presidental Commission on the Accident at Three Mile Island, led by Dartmouth College president John Kemeny, who was also the co-author of BASIC.

The lessons of Three Mile Island have been, for the most part, forgotten.  The nuclear industry changed and improved somewhat, but the deep understanding of what went wrong was lost on the public in general and the real lessons that we could have learned as a society were, too.  The financial mess we are experiencing right now isn’t all that different from Three Mile Island.  If we’d taken better to heart the true lessons of TMI we might not be in our present jam.

I spent a year of my life coming to understand TMI and even wrote a book about it, now long out of print.  I was there.

There was a partial nuclear core meltdown at TMI.  We all knew what that meant because, ironically, The China Syndrome, had just swept through American movie theaters six weeks before.  Years later there was a much more severe accident at the Chernobyl nuclear power plant in the Soviet Union.  Some people argue that TMI was actually worse than Chernobyl in terms of the actual core damage.  I don’t know.  There’s no doubt that Chernobyl killed a lot of people and TMI didn’t.  The difference was that TMI had a concrete containment vessel and Chernobyl had none.  Building nuclear power plants without containment vessels was insane and Chernobyl proved that.

Looking back at the accident with the benefit of knowing what it took to clean it up and what the workers found when they were finally able to send robots inside the containment, the TMI accident was very bad indeed.  There were pressure spikes during the accident that would have cracked an average containment vessel, releasing radioactive gases into the atmosphere.  Fortunately the Unit 2 containment wasn’t average.  TMI-2 was built on the final approach path to Harrisburg International Airport, a former U.S. Air Force base, and was therefore beefed-up specifically to withstand the impact of a B-52 hitting the structure at 200 knots.  A normal containment would have been breached.

TMI wasn’t caused by a computer failure but the accident was made vastly worse by an error of computer design.  Specifically, TMI-2 had a terrible user interface.

We had a confluence of bad design decisions at TMI, some of them made by the U.S. Congress.  U.S. law specifically prohibited using computers to directly control nuclear power plants.  Men would do that and nearly all of those men would be former nuclear reactor operators from the U.S. Navy.  Computers could be used to monitor the reactor and in fact it would probably have been close to impossible to monitor it without the help of computers.  There were just too darned many valves and sensors for any team of humans to keep track of reliably, 24/7.

So the computer (there was one) monitored the plant and raised an alarm if specific parameters changed.  Then a guy would flip a switch to open or close some valve, solving the problem.

Here’s how it was supposed to work.  Something went wrong.  The computer noticed what went wrong, set off audible and visual alarms, then sent a description of the problem to a line printer in the control room.  The operator would read the print-out, check the trouble code in one of many manuals, then make the adjustment specified in the manual.  Simple, eh?

Too simple, it turned out.

What happened at Unit 2 was a little more complex.  A cascading series of events caused the computer to notice SEVEN HUNDRED things wrong in the first few minutes of the accident.  The ONE audible alarm started ringing and stayed ringing continuously until someone turned it off as useless.  The ONE visual alarm was activated and blinked for days, indicating nothing useful at all.  The line printer queue quickly contained 700 error reports followed by several thousand error report updates and corrections.  The printer queue was almost instantly hours behind, so the operators knew they had a problem (700 problems actually, though they couldn’t know that) but had no idea what the problem was.

So they guessed.

Not good.

U.S. Navy reactor operators, the sort who served under Jimmy Carter in the 1950s, were selected primarily for their temperament.  This was a nuclear device, remember, so having trustworthy operators was most important. Besides, their Navy job – as at TMI – was to follow the manual.  All knowledge was inside the book.  So knowing the book was everything.  Unfortunately knowing the book isn’t the same as knowing the reactor.  This approach was extended to most civilian U.S. reactors, where knowing the book meant passing the test on the book NOT really understanding the guts of the machine.  Civilian reactor operator training in those days was nearly all about how to pass the test, not how to operate the reactor.

So when a real accident happened the operators weren’t prepared to handle it.  Their superiors at General Public Utilities weren’t prepared to handle it, either.  Nor were the experts at the Nuclear Regulatory Commission.  And don’t even get me started about FEMA.  The outcome of Hurricane Katrina was no surprise to me.

Every level of command waited too long to ask for help at TMI.  Sometimes this was because they thought they were on top of the situation, but more often it was to avoid embarrassment or – in the case of General Public Utilities – to avoid hurting the stock price.  The FEMA guys were just plain stupid.

Nobody died, eventually the reactor was brought under something like control, and a lot of lessons were learned in the process.  Reactor operators learned better how their reactors worked, for one.  The NRC generally gave up the job of promoting atomic power that had been its primary calling as the old Atomic Energy Commission, for another.  Reactor control rooms everywhere were dramatically improved and line printers banished as interface devices.  And for the next 29 years we didn’t build another nuclear power plant, leaving that mainly to the French and the Japanese.

Now nuclear energy can be mighty dangerous and is not something to be messed with lightly, but another irony in this story is that nuclear power is actually pretty simple compared to many other industrial processes.  The average chemical plant or oil refinery is vastly more complex than a nuclear power plant.  The nuke plant heats water to run a steam turbine while a chemical plant can make thousands of complex products out of dozens of feedstocks.  Their process control was totally automated 30 years ago and had an amazing level safety and interlock systems.  A lot of effort was put into the management of chemical plant startup, shutdown, and maintenance.  The chemical plant control system was designed to force the highest safety. So when manufacturing engineers from chemical plants looked at TMI, they were shocked to see the low-tech manner in which the reactors were controlled and monitored.  To the chemical engineers it looked like an accident waiting to happen.

The folks at TMI did not really know how to manage the technology of a nuclear power plant, and that led to a huge mess.  The same thing has now happened to our economy.  Congress changed the banking and mortgage lending rules without regard to their purpose.  Many firms bought derivative securities without the slightest thought to the math behind them or the risk they were incurring.  Nuclear power plants run on a chain reaction process of atomic decay.  Our government and investment community created a chain reaction of economic decay.

Chemical plants were better designed than nuclear power plants in part because Congress did not legislate how the chemical industry designed their plants.  But more importantly most chemical firms of that era had CEO’s with engineering degrees.  They had respect for the technology and the risk of misusing it.  But that doesn’t make the chemical industry blameless.  With the off-shoring of manufacturing a lot of chemical production is now being done in places where there is little respect for the dangers of technology.  The chemical industry’s TMI was Bhopal.  There will be more Bhopal’s coming because those companies are now being managed by bean counters, not engineers.

There is a place for nuclear power in our energy future.  I say this not as a particular nuclear advocate but as a realist.  The end of the Cold War has left us with a legacy of weapons grade nuclear materials that must be dealt with.  Thanks to the 1950s we’re stuck with all the issues of storing this stuff no matter what Obama or any other U.S. President does.  It just makes sense to me to take this stuff that used to be bombs and degrade it into something that can no longer make bombs but, oh by the way, can power millions of homes with no CO2 emissions.  It seems like making lemonade to me.  Yes, there are other renewable power sources that are even better than nuclear, but I seriously doubt whether they will add up to enough total watts in the time available.  We’ll need all of them.

Just as we neglected the economy for the last decade or more, we have also neglected nuclear energy.  We don’t have a national storage system for spent fuel.  We don’t have a spent fuel recycling process.  We don’t have a standard national reactor design.  We add incredible costs to power plants for an amazing list of things, many of which contribute nothing.

Life doesn’t get simpler, it gets more complex.  TMI led us to repudiate nuclear power as a nation – something in the long run we probably can’t afford to do.  We just have to find ways to manage technology – all technologies – more responsibly.  Sadly, we tend these days to put the wrong people in charge.

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“Where are the tumbrils?” asks my friend Adam Smith. If, like me, you have no idea what is a tumbril, it is a type of horse cart used during the French Revolution to transport condemned prisoners to the guillotine for beheading. What Adam wonders is how we can get so deep into such a hellacious financial crisis without finding at least a few bad guys to behead?

It’s a good question.

In one sense there simply have to be bankers or money managers of some sort who have benefitted greatly from the financial discomfort of the rest of us. On the other hand it is difficult to find many such people. Maybe they are hiding. I know I would.

I’m beginning to think there aren’t as many devils as one might suspect in this passion play. There are a few devils, sure, but also a lot of innocent dopes who may have made the situation much worse while not even making very much money from our pain.

A lot of it comes down to a probable misapplication of technology, something that hasn’t been discussed much in the coverage of this financial crisis. We talk for seconds at a time about the confounding complexity of derivative securities then quickly go on to something more understandable.

Is technology our friend in this mess or our enemy?

If we’ve got a tumbril idling in the driveway and really need to find people for beheading, there are still plenty of successful hedge fund managers to choose from. According to Institutional Investor’s Alpha Magazine, which comes out today, the top 25 hedge fund managers were paid a total of $11.6 billion last year, which isn’t bad for the worst financial year since the Great Depression. Most of those managers correctly foresaw the market fall and found ways to benefit while making as much as $3.7 billion for the year.I could live on that. Heck, I could live on the interest on the interest on that.

But most hedge fund managers DIDN’T make money in 2008 – a very bad year for their industry overall. I have an interesting take on how some of that could have happened.

Let’s start by looking back to the dot-com era, which also happened to be the era of the day trader. Remember them? A successful day trader in the late 1990s could gain a following over Internet chat then use that following to make money by becoming an alpha trader. He’d say “I’m selling this” or “I’m buying that” and copycat day traders would do the same. If enough of them acted they could influence the price down or up and – since the leader was leading – he could almost always liquidate his position with a profit. The quickest of his acolytes would make profits, too. Those who didn’t profit weren’t seen as exposing the inherent flaws of this system, they were just viewed as too slow.

To a certain extent, the heirs of day trading have taken the lessons of that earlier era and applied them with devastating effect in the Twitter Age.

If a bunch of wealthy traders get together at Starbucks and agree to short-sell a company or a financial instrument, driving down that price ideally to the point where it never recovers, well that’s against the law. But with trading automation and the Internet as a platform it is possible to accomplish this same end WITHOUT it being explicitly illegal. It is even possible that the perps don’t know the level of damage they are inflicting, though I doubt that’s true. The trick is to avoid communication. If there is no communication between traders there is no chain of causation, no conspiracy, just an unhappy accident.

Where the alpha day traders of the 1990s were squeezing nickels out of penny stocks and settling-up at the end of every day, trading automation makes it possible today for Wall Street to make bigger and longer bets against much larger targets, with the perfect trade being one that leads to the quick and certain death of its victim.

The ideal short sale, you see, is one that never has to be covered because the company or financial instrument being shorted goes to a value of zero. That’s WAY more profitable than making a few cents or a buck or two here or there before covering that short. It’s much better to go for the headshot.

But as I say, that’s also illegal.

The market hasn’t worried about this much because the SEC hasn’t worried about anything in many years. And the task is viewed as requiring so much financial muscle that it was considered impossible to keep such a huge conspiracy quiet. You can’t take down a Bear Stearns, for example, without a LOT of help. And you can’t get a lot of help without two-way communication, or so the regulators – stupid regulators – thought.

Remember government regulation is by definition reactionary. The regulators have to observe bad behavior before they can move to control or prohibit it.

What ISN’T illegal is for a trader to essentially train the market and then rely on a conditioned response on the part of other traders or trading programs to achieve his deadly end.

Think of this in terms of physics. Force equals mass times acceleration. In order to have the greatest economic impact on the market you need to concentrate your efforts on a single target. It is much more lucrative to bet that a single company will die, for example, rather than that a market sector will rise or fall. So choose a target, finding leverage on that target, if possible. Apply mass by getting (or attracting – more to come on that) a large number of traders and their capital to your side. Then use acceleration by acting as quickly and as uniformly as possible, ideally within seconds. The effect can’t be anything but devastating.

Remember the story of George Soros and the Bank of England. Soros quickly made $1.1 billion in 1992 by selling the Pound and finally forcing the Bank of England to devalue that currency, thus lowering Soros’s cost of covering his shorts and generating a huge profit. Soros’s success in 1992 came from believing the Bank of England when it said it would defend the pound at any cost. Well the cost was $1.1 billion, thank you, transferred into George Soros’s bank account.

On Wall Street the Soros story is always told with admiration because he beat the bank and won the game. At the Bank of England they probably look at it somewhat differently. What Soros did, though, was identify the algorithm that governed the behavior of the Bank of England. Then he found a way to take advantage of that algorithm and the Bank’s unwillingness to change or adapt. From today’s view what Soros did was hack the Bank of England.

That was 17 years ago. The average workstation running on Wall Street today has 1000 times the power of its 1992 counterpart. Trading data is today available vastly quicker and in vastly greater volumes than before. It’s time to think about program trading.

We don’t hear much anymore about program trading, which was something that seemed to play a big role in the 1987 stock market crash. Computers back then were for the first time managing lots of money automatically and it took awhile to see the dark side of that – massive trades that were un-commanded and unexpected and only acted to hurt the market. And those trades were very crude with only a dozen or so firms even capable of making them. This was before Soros when computers were FIVE THOUSAND TIMES less powerful than they are today. So we learned from 1987 to put some wait states in the code, to turn off the programs under certain rules conditions, and program trading hasn’t been much of a problems since.

Or so we thought.

Think about piranha fish. These little guys with their big teeth travel in large schools. They kill and eat their prey, which can be as large as cattle drinking in the river. Piranha, too, take advantage of force times acceleration. The trick is getting a lot of fish – hundreds of fish – to attack at exactly the same time.

How do they do it? How do the piranha know to attack? They don’t wait to bump into a cow leg under water. They don’t sniff for the smell of blood in water. Both of those responses are too slow and would lead to too many victims escaping. Force equals mass times acceleration, remember? And besides, piranhas have tiny little brains to go with their big teeth, so don’t look for any insight there. These are just violent little eating machines.

Piranhas hunt as a school and take all their cues from the fish beside them. Only one fish has to smell blood or bump into some food for the entire school to reflexively attack.

Now we’re back on Wall Street in today’s era of hedge funds and genetic trading algorithms. At any given moment in the market there is more than a $1 trillion in cash that can be brought to bear in seconds by computers that are functioning essentially like piranhas. The cash isn’t held in a few funds or hidden behind some mainframe interface – it is held by hundreds of workstations each operating independently yet as part of a global economic system – conscious or not.

These trading workstations are running in hundreds of offices, all scanning the same data. They have learned over time that certain signals lead to certain outcomes. They may be following an alpha trader but they don’t have to because at some point the market signal, itself, is going to be too strong to ignore.

Here it comes. An alpha trader makes a bold move against a firm or, more likely, against one or more of that firm’s financial products. Say the firm is big stupid AIG, an insurance company, and the instrument is a credit default swap sold by AIG.

Though AIG seems to have forgotten or ignores it, Credit Default Swaps act like insurance and are treated by the market like insurance, but they technically AREN’T insurance. They are ultra-hyper-purified demonic risk and nothing else. That’s because CDS’s are not regulated (they are in fact IMMUNE to regulation – funny that), they can be shorted without having to EVER actually own the underlying security (naked shorts of CDS’s are perfectly legal), because they don’t have to be owned the volume available to be shorted isn’t limited, and – here’s the best one of all – there’s no requirement that the trader have any causal, custodial, or familial relationship with the covered debt. In other words, while most credit default swaps are intended to hedge debt defaults, they don’t have to be. It’s like buying a life insurance policy on the guy down the hall because you hear him coughing at night. His death is meaningless to you so buying the policy is just a gamble, not insurance.

Here’s how it works in practice. The alpha trader senses, guesses, or maybe just wishes for weakness on the part of AIG and its particular CDS issue, so he shorts that mother. The signal from that short (it is big and aggressive, having as much force as possible) is detected by 500 trading workstations running genetic algorithms – workstations that are not regulated in any sense whatsoever. AIG’s CDS begins to glow in front of 500 junior traders. Some programs kick-in automatically and sell, too. The CDS glows even brighter and begins to throb as if its heart was beating. Traders pile-on like piranhas, sensing opportunity, smelling blood, until the CDS is oversold to nothing, until it is dead.

What we’ve accomplished here, through the miracle of synthetic derivatives, is buying a $1 billion insurance policy on a $10 million asset.

It isn’t investing, isn’t even trading, it’s just betting.

Nobody started it. Or at least it is impossible to figure out who started it. No one trader could have saved the issue by staying out of the fray (doing so would only have cost easy profit). There was no meeting at Starbucks. Yet the final result was just as certain.

The problem with this scenario is that conditions – primarily technology – have changed enough to allow what were always parasites to become true predators. Parasites need a healthy host to maintain their lifestyle. If they eat too much the host dies and the parasites die with it. But predators just find something else to kill and eat when all of one prey is gone.

In this case that prey is the American mortgage market, which is a fair proxy for the American economy.

Better make that two tumbrils.

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I obviously hit a nerve (probably several) with my column on Parrot Secrets. Some of this was expected. The idea of making so much money from an inexpensive web site would appeal to a lot of people, I knew. And I felt good about sharing the story after sitting on it for five years for just that reason. But I wasn’t at all expecting the outrage that some readers felt over the owner of Parrot Secrets not being the nice blonde lady in the picture but a young Indian man who doesn’t even own a parrot. People were pissed and yes, it probably says something about me that I still can’t really understand why they were pissed.

But, as always, I have a theory.

When I was a teacher 26 years ago I worked with a colleague who graded on the basis of improvement and perceived effort while I graded strictly on the final product – the paper or the test – not on how I felt about the student.

We discussed this a lot and my colleague, who still teaches in the San Francisco Bay Area, though no longer at Stanford University where we both worked at the time, felt that she was rewarding hard work, which she saw as far more important than talent. I thought that was crazy. While it may have made some sense to give a student the benefit of the doubt if they showed special initiative and improvement over time if that consideration meant, say, half a grade, I just couldn’t allow the other side, which would have been to grade down the student who just finds that work easy.

Yes, he missed class last week and yes, he may have arrived in class with a hangover, but did you read that paper? The kid’s a genius!

I feel genius should be rewarded.

In retrospect I have to admit that my colleague WAS, herself, a very hard worker and not in any sense a natural while I may have had a hint of a hangover about me, too.

So each of us may have been favoring our own kind.

I think this relates very much to the story of Parrot Secrets. You see what matters to me is not whether Nathalie or Kumar owns the company or even owns a parrot, but that the information provided by Parrot Secrets is useful and customers generally find it to be worth their money. And it seemed to me that was very much the case.

But to some readers that was absolutely NOT the case. They weren’t going to accept Parrot Secrets from Kumar no matter how clever he was, ESPECIALLY if the guy didn’t even own a parrot. They were offended, outraged, betrayed.

Yet I wonder how many web sites, even if they have a Nathalie working there, actually use her picture. While I HAVE seen pictures and video of Orville Redenbacher of popcorn fame and Colonel Sanders of Kentucky Fried Chicken was definitely the real thing, I don’t think Wendy of Wendy’s Restaurants ever appeared in an ad, and Colonel Sanders in his later years absolutely hated what PepsiCo was doing with what had been his restaurant chain.

So is it better to use a real founder in your ads if the founder is lying?

Most web sites don’t use pictures of people they actually know because real people don’t look that good and stock photos are cheaper. Yes, the GoDaddy girl works for GoDaddy, but she doesn’t work AT GoDaddy.

At heart here is truth in advertising, which is s sticky subject for a global network without end-to-end standards of almost any sort. But where truth in advertising CAN be enforced, it always comes down to performance: in this case, is the information from Parrot Secrets useful for raising and training parrots? Based on the company’s commercial success, lack of consumer complaints (until I wrote about it) and the number of competitors who have essentially ripped-off Parrot Secrets material, I’d say it gets a passing grade on truth in advertising.

But that’s just me and I am apparently an unprincipled idiot, or so I am told.

Let’s take it from another angle. When I was in high school the line from the College Board was that SAT preparation wasn’t necessary. Their tests would give you the same grade whether you took a prep class or not. Looking back 40 years later it is fairly clear that was wrong – that prep courses like those pioneered by Stanley Kaplan CAN help and almost always do. I’ve confirmed this, by the way, with friends who later worked at the College Board.

Who is the bad guy here? The College Board explained later that they were trying to maintain a level playing field, which works up to a point, but when enough students are taking prep classes this policy starts to hurt people who are rejected from the right colleges for the wrong reasons.

Does Parrot Secrets hurt people? How? That’s MY measure.

Which brings me, of course, to bowling.

One winter back at the College of Wooster, in Wooster, Ohio, I took a bowling course that changed my life. P.E. courses were mandatory, and the only alternative that quarter, as I remember it, was a class in wrestling.

A dozen of us met in the bowling alley three times a week for ten weeks. The class was about evenly divided between men and women, and all we had to do was show up and bowl, handing in our score sheets at the end of each session to prove we’d been there. I remember bowling a 74 in that first game, but my scores quickly improved with practice. By the fourth week, I’d stabilized in the 140-150 range and didn’t improve much after that.

Four of us always bowled together: my roommate, two women of mystery (all women were women of mystery to me then), and me. My roommate, Bob Scranton, was a better bowler than I was, and his average settled in the 160-170 range at midterm. But the two women, who started out bowling scores in the 60s, improved steadily over the whole term, adding a few points each week to their averages, peaking in the tenth week at around 120.

When our grades appeared, the other Bob and I got Bs, and the women of mystery received As.

“Don’t you understand?” one of the women tried to explain. “They grade on improvement, so all we did was make sure that our scores got a little better each week, that’s all.”

No wonder they turned the Stanford University bowling alley into a computer room.

I learned an important lesson that day; success in a large organization, whether it’s a university or IBM, is generally based on appearance, not reality. It is understanding the system and then working within it that really counts, not bowling scores or body bags.

In the world of high-tech start-ups, there is no system, there are no hard and fast rules, and all that counts is the end product.

The high-tech start-up bowling league would allow genetically-engineered bowlers, superconducting bowling balls, tactical nuclear weapons—anything to help your score or hurt the other guy’s.

Anything goes, and that’s what makes the start-up so much fun.

But evidently only I see it that way. You probably know better.

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Let’s face it, the economy is in trouble and so are the rest of us.  Based on the dregs I find in my spam filter that makes this a hot season for folks selling plans for how to make big money on the Internet – plans that mostly aren’t worth what people pay for them.  Either these advertised sites are simply scams or they are promoting the obvious — often free government web sites that diligent folks could find on their own.  But that doesn’t mean there aren’t legitimate Internet businesses that can be started on a shoestring.  So to do my part for the economy I’m going to offer-up what I have always considered to be the cleverest little Internet business of all: www.parrotsecrets.com.

I assume you’ve taken a look at the site and are back now.  What makes Parrotsecrets so great?  It doesn’t look like much, does it?  I’m sure there are a thousand – maybe 10,000 – very similar sites on the net right now.  And that’s the point: there is plenty of opportunity to replicate this model.

Before I lose you here’s the literal bottom line on Parrotsecrets.  The site sells 15-20 eBook sets per day seven days per week.  Using the low end of that range is 5,475 copies per year for gross sales of $437,726.25 from a web site that costs less than $10 per month.

The profit on Parrotsecrets, even after various expenses I’ll detail below, is WAY north of $400,000 per year.

Could you live on that?

Me too.

The thing I love the most about Parrotsecrets is not the great money but that it actually serves a need.  People really do have problems with their parrots and there isn’t that much information out there about how to train and care for parrots that is in an easily accessible form.  Parrotsecrets not only isn’t a scam, it isn’t even a waste of money.  This is a real business doing real good for real customers.

Parrots are apparently a huge financial drain and $79.95 is nothing to pay if it saves a vet visit per year and keeps you from losing a fingertip or having your parrot call Grandma a whore.

The first thing that’s remarkable about Parrotsecrets is how it came about.  The owner of Parrotsecrets, for one thing, doesn’t even own a parrot.  Rather, the owner set out to find a niche in the information economy that could be filled with eBooks as sold here.  The first step in the development of Parrotsecrets, then, was to identify the frustration of Parrot owners.

I’m not going into the fine details of how parrots were isolated as a subject, but it involved a lot of scanning discussion forums and looking for unrequited Google searches.  In time it became clear to the entrepreneur that parrots were an untapped market.  If you were to undertake something similar you could either isolate a topic you actually know a lot about (either as a master or a victim) or go searching like the Parrotsecrets owner did.  Either way, I’m sure you’d soon come up with a topic.

The young and lovely Mrs. Cringely has a particular health problem she darned well doesn’t want me to reveal to anyone including you that I have figured is perfect for the Parrotsecrets treatment.  I’ve been urging her to move forward on her own but she just won’t.  So if I ever get a weekend off (I’ve waited over a decade so far, which makes that unlikely) I’ll write the darned eBook myself and retire.

eBooks have no manufacturing costs, no inventory costs, and almost no distribution costs.  Best of all, it is a GLOBAL business.  People are having trouble with their parrots everywhere, you know, not just in the U.S., and Parrotsecrets can deliver anywhere.

But first you must have something to deliver.  Having identified a topic, the founder of Parrotsecrets needed an eBook.  The easiest way to do this was to post the requirement on one or more of the many freelancing web sites.  Writers bid on the job and the original eBook (note there are now four eBooks in the offer) went for around $2500, deliverable in 30 days.

The Parrotsecrets founder ordered from Amazon.com every book on parrots (deliverable to the winning freelancer) then waited a month for the eBook to appear.

That month was used to buy the domain, design the web site, prepare a Google AdWords campaign, and be ready to be up and running as soon as the eBook was finished.

If you’ve been keeping track you can see that starting this business cost substantially under $10,000 and probably under $5,000.  The Kauffman Foundation on Entrepreneurism says 95 percent of small businesses are started for less than $10,000. This is one of those.

The web site follows a popular design philosophy.  It is a single page that scrolls on and on forever, pounding the reader with testimonials and reason upon reason for buying the eBooks.  These characteristics have shown themselves to be very persuasive with the Parrotsecrets target audience, which are older women stuck with (or thinking about getting) naughty parrots.  That’s why the figurehead for Parrotsecrets is Nathalie Roberts (“A Parrot Lover For The Last 12 Years”).

Nathalie (“A Parrot Lover For The Last 12 Years”) looks like someone we can trust.  

Nathalie also doesn’t exist.

Nathalie Roberts (“A Parrot Lover For The Last 12 Years”) is like Betty Crocker – a character created to market a product.  If you are offended by the idea that Nathalie isn’t real, then start boycotting cake mixes, kids.

EVERYTHING about Parrotsecrets is calculated.  Nothing is left to chance.  The site is promoted by word-of-mouth (remember it performs a real service) and with Google AdWords.  Of course AdWords can kill you if you aren’t careful and that’s part of the reason why parrots were chosen in the first place: there simply isn’t that much competition for the word “parrot.”

According to the Internet Archive’s Wayback Machine, Parrotsecrets has been around since May, 2004 or almost five years, during which it has generated more than $2 million for its owner. 

The owner of Parrotsecrets isn’t Nathalie Roberts, isn’t even a woman, and isn’t even American.  He’s Indian and lives in India.  When Parrotsecrets began he lived (and still lives as far as I know) with his parents, who are both medical doctors.  When the site started in 2004 he was 18 years old, making him 23 today.

Parrotsecrets doesn’t run on autopilot.  The owner has invested continually in improving the product adding eBooks and free extras to improve the appeal of his product.  He (or someone) corresponds with his customers using e-mail.  But given that the service is coming primarily from India you can imagine that his continuing costs are quite low.

Imagine what it would be like to make $400,000+ per year.  Now imagine what it would be like to be 23, single, living in India, making $400,000+ per year.  And Parrotsecrets is not his only web site.

I have known about Parrotsecrets since 2005 when I met the owner in Las Vegas, of all places (a surreal experience — an Indian teenage tycoon on his first-ever visit to America starts with Vegas).  In one sense I didn’t want to blow his cover because it is so cleverly drawn.  But now I can see the need for a lot of smart people to make a new living as they lose their jobs.  I’ve also rationalized that this column may actually drive business his way, not just from parrot owners but also from entrepreneurs who want good examples of a product to emulate.

Go forth and multiply.  May the Parrotsecrets be with you.

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I received a large response from my most recent column on the Neokast mystery.  The most interesting post was this one:

• Robert X. Cringely says:

  March 9, 2009 at 7:53 am  (Edit)

  Now THIS suddenly sounds plausible!!

  I have met the people involved and see a lot of wisdom in this response. I heard that the Microsoft offer was low-ball. I believe the company fumbled the chance for quick funding which I, frankly, handed them. While I didn’t at the time sense frustration in the dev team it comes inevitably if the work is left too long on the stove. Adam Johnson was WAY too much into being with all those pretty girls. The only part I can’t understand is why none of these guys will talk to me? Are they just embarrassed?

  Thanks for the insight. 

   

   

   

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What happened to Neokast?  It’s a mystery to me.  But I suspect the answer will surprise us all soon enough.

Neokast, as readers of my old PBS column will recall, was a peer-to-peer live video streaming application developed by graduate students from Northwestern University near Chicago.  That’s me talking about it there on the left, back in 2007.

I loved the company instantly. It was out of the Silicon Valley limelight, away from the technical mainstream for such software (Neokast was a .NET application and therefore pretty much Windows-only), but most important of all, it seemed to actually work.  The potential was extremely compelling.  Here’s how I described it back then:

“…the more people who watch your Neokast the more efficiently will your server bandwidth be utilized. According to Birrer, under normal circumstances the server bandwidth should plateau at 3-4 times that of a single stream NO MATTER HOW MANY VIEWERS ARE BEING SERVED. With a per-stream bandwidth of 700 kilobits per second, this means that Neokast would never require more than a continuous three megabits per second of server bandwidth per video channel. Let’s put that in a real-world context. Three megabits per second is almost precisely 1000 gigabytes per month, which is half the allotted monthly throughput for a $6.99-per-month web site at 1&1. So if Neokast’s claim is valid, it would be possible to broadcast American Idol or the Super Bowl or friggin’ CNN worldwide for $7 per month.”

I called it “The $7 Television Network.”

Response to that column was electric, as was the reaction to Neokast, itself, when the beta software was shown shortly thereafter at a trade show in California.

Neokast was on a roll.  Now all they had to do was deliver.

But apparently they didn’t because now Neokast is gone.  Their web site is dark.  The entire technical team, as far as I can tell, left last September to start a new company in an new product space – content management.  The company’s sole patent application even lost its legal representation in January when a Chicago-based law firm withdrew.  Only NeoKast CEO Adam Johnson remains with the company and that’s only according to his Facebook page, where he appears with a remarkable variety of very attractive young women.

It’s a familiar story, right?  The idea was good but the code wasn’t.  OR the code was good but they ran out of money.  OR the code was good and they had enough money but the founders had a falling-out.  OR any other mundane reason that you might care to come up with.  Neokast is gone, so what?

I’ll tell you so what.  My 32 years in this industry tell me that none of those possibilities is true and that some aspect of Neokast is alive and well, though probably under a different name.

I put these guys on the map.  I wrote about them in a way that gained them a huge amount of attention at a time when they were getting no attention from anyone.  All that means, really, is that their mothers would teach them to be nice to me.  And sure enough, on January 28th, when Adam Johnson and I happened to share a birthday, though almost 30 years apart, we wished each other well within hours on Facebook.

But Adam DIDN’T tell me then that his company was effectively dead.  It took a reader to point that out to me a couple weeks later.  And when I went down that same Facebook path I’d used to wish Adam a happy birthday — this time to ask what happened to Neokast — I got no reply at all.  So I tried again, more forcefully.  Still no reply.

So I tried a couple of the ex-Neokast technical guys at their new startup.  No answer.

No answer?  Don’t these people want to promote their new technology?  They know what I can do for them; don’t they want me to do it again?

No answer.

This doesn’t happen, not to me.

So what’s the deal?  I don’t know.  But I have a theory.

I think Neokast was bought for a lot of stock or money by some well-known company. The way the technical team was handled in this transaction it looks like the acquirer wanted the code, not the coders, which suggests a company with confidence, even arrogance, and technical depth.

The reason I can’t get anyone to respond is simple under this scenario: they have to all be under a particularly onerous non-disclosure agreement that will take back the money if they say anything – ANYTHING – about the deal.  They aren’t prohibited from just discussing it, they are prohibited even from ACKNOWLEDGING it, hence the total silence.

At one point last year I was told that Microsoft had made an offer for Neokast but was rebuffed.  So maybe Microsoft came back again, this time with the BIG checkbook.  I think this is most likely.  But there are other possibilities.  Apple could have acquired Neokast to kill it.  IBM could have acquired it to become a player in the streaming video business.  Or Sun.  Or Cisco. Or some other company, up to even a Comcast, though I don’t see the cable company as being so techie as to rebuff the coders.

If you’ve been paying attention to entertainment news you may have read lately that there is a lot of shuffling for position going on between cable companies, telephone companies, cable and broadcast TV networks, and various startups for dominance of  live or on-demand TV channels over the web.  But all this talk so far seems to be based on using content distribution networks, not peer-to-peer.  Even Joost, the p2p video site from the founders of Skype, has publically given-up on using peer-to-peer distribution, leaving only Grid Networks, as far as I can tell, ostensibly in the live p2p space, if just barely so.

Let’s guess for a moment the acquirer IS Microsoft.  Because there has been no public announcement of such an acquisition the buyer has to be a big company like Redmond, where the size of the deal wouldn’t be considered “material” to their business, so they could avoid being required by the SEC to even issue a press release.  Of course it could just as easily be the other suspects I named.

But there are many reasons to believe the buyer is Microsoft.  They took a run at the company before, remember.  They are perfectly equipped to handle the technical job on their own, provided they keep the number of hands to a minimum.  They could still screw it up.

There’s no indication, by the way, that Microsoft has done this.  Certainly none of my friends who know Microsoft have heard anything.  But that could just mean they changed the name and Neokast is now MicroKast or some such thing.

Now here comes Windows 7 – a perfect place to stash a Neokast p2p client.  On the other hand, Microsoft could put Neokast code in its regular monthly update and get it running on 20 million .NET nodes overnight.  That’s what I would do. What’s funny is if a startup did that there would be an uproar about security, but if Microsoft deploys Neokast overnight it will be seen mainly as a clever move.

Microsoft is desperate to have something new to control and media distribution is their target.  They want to control movies and television the same way they have long controlled software.  But right now Apple and Google are both doing better than Microsoft is in this space.  Ballmer will do anything to beat Apple and Google and the only way to do that – the ONLY way to do that – is by introducing some new game-changing technology like massive, really cheap, delivery of LIVE video.  Bring the TiVO video experience to the World Wide Web without requiring a cable box OR an antenna.  Well Neokast takes a good shot at doing just that.  And bringing the horsepower of 20 million servers to the task would make it even easier. 

Maybe the acquirer isn’t Microsoft.  But I’ll tell you right now that some big company somewhere has snapped-up Neokast, is continuing to develop the software and intends to introduce it soon with a big splash.  I just wish I knew who it was.

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Friday I was in Kansas City for a meeting of economics bloggers held at the Kauffman Foundation.  My claim to being an economics blogger is slim, I know, but it was a chance to hang with some interesting people and learn something so I went for it.  And in honor of that event, then, I’m making this column entirely about how we can tell when the economy is finally turning.  There’s a strong argument that time is right now.

Yet the economy doesn’t feel any better to me.  Does it feel better to you?  Probably not.  But what we’re looking for is the bottom, or rather that moment just past the bottom when things start to head north again.  The question on every investor’s mind, then, is “have we hit bottom?”

What we are looking for is a leading economic indicator, something we can easily measure that reliably rises in advance of the overall economy.  That’s easy, you say, just wait for the stock market.  And it’s true that the market always leads the economy by six months or more at the end of every recession.  So economists look for that unambiguous turn in the market indices to guide their own predictions that the overall economy is about to improve.

But what if you are an investor and aren’t interested so much in the economy, itself, but in the markets, where you want to make some money? I keep reading that the market is so over-sold that this is going to be one of the great long-term buying opportunities ever, that trillions of investment dollars are waiting, stuffed in money market funds, ready to buy-up depressed shares ONCE THE MARKET TURNS.

That’s the problem: the investors don’t want to buy now in case the market drops another 10 percent.  See how stupid even Warren Buffet is looking this week.  Remember Warren was the guy telling us all to buy stocks (and leading with his company’s money) last fall when the market was 30 percent higher than it is today.

What we want, then, is not just a leading economic indicator but an indicator that LEADS the traditional leading indicator – the stock market.  Well George Morton thinks he has one.

George is a double Cisco Certified Internetwork Expert or CCIE.  In the world of network techs earning a CCIE is as high as you can go and being a multiple CCIE (more than one subspecialty, like routing and switching, security, storage, voice, etc.) is like being an MD-PhD or, in Germany, a “doctor-doctor.” It’s a big deal and George is a smart cookie.

Just as an aside, notice that the “E” in CCIE stands for “expert,” not “engineer.”  Cisco learned a lesson from Novell’s Certified Netware Engineer program that ran afoul of licensing boards in several states that said only they could declare anyone to be an engineer.  So while nearly all CCIE’s are engineers, they only claim to be experts.

Cisco has taken to publishing statistics on how many CCIE’s of what type there are in various countries and regions and George pays attention to this stuff and sees wisdom in it where others see only Cisco PR.  It was George who suggested to me a couple years ago that CCIE’s were a good proxy for 21^st century economic leadership – that the nations showing the most CCIE growth were likely to be the most powerful for their size moving forward.  If that’s true, and I have no reason to doubt it, then China will be a LOT more powerful than India this century and Singapore will be a technology power to be reckoned with.

George’s new idea is to look for flux in CCIE numbers to use as a leading economic indicator.  Specifically the number of CCIEs in the U.S. has lately been going DOWN and the number of new CCIEs has stagnated.  This could be for many reasons and Cisco in its statistics makes no effort to educate us.  By the way, you can see George’s compiled numbers on the effect here.

The numbers may have dropped because companies aren’t willing to spend the money to send their people for CCIE training, because CCIEs who aren’t U.S. nationals may be going home, because CCIE’s who ARE U.S. nationals may have been recruited overseas — any number of reasons.  George doesn’t try to figure that out, he just sees the change in CCIEs as a leading indicator of sorts that suggests the market is about to turn.

 “An interesting event took place this month (when) the number of CCIEs grew at a greater pace than any time over the last six months,” said George.  “The six month average has been running around 300 a month, this period the number jumped to 460.  Now, we know that we are not counting month to month, but the sudden spike is refreshing for a number of reasons.”

George looks to the early work of Charles Dow, founder of Dow Jones, the Wall Street Journal, and author of the long-forgotten Dow Theory, which was intended to help investors understand what was going to happen next in the economy and the stock market.

Among the many rules that constituted the Dow Theory was that Railroads stocks would lead any market rally or decline.  That was because Dow figured that businesses would start (or stop) shipping items before the revenue from those sales hit their bottom-line. 

George’s theory is that IP networks are to the 21^st century what railroads were to the 19^th.

Over the last six months the CCIE numbers have been steadily going down.  Last August the U.S. CCIE number went down by one. The last report in January the number of U.S. CCIE’s grew by eight.  Over the last 50 or so days the number has grown by 83 new CCIEs in the U.S.

Is this a change in trend?  Are the markets starting to bottom?  With all of the bad news in the press, you have to want to be a contrarianIf this were the Dow Theory, then the prediction would be that companies are creating more CCIE’s in anticipation of expansion and adding new networks. 

Is George Morton correct?  I say “yes,” but wearing my economics blogger hat I’ll endorse his conclusion for what might be a surprising reason: it doesn’t matter.

The market will eventually bottom and turn.  It always does.  Those trillions of dollars parked in money market funds are real and will emerge when the market turns.  This CCIE number might indeed indicate that the market is turning for exactly the reasons George postulates, though the numbers are so small that it could really be for any number of reasons.  AT&T could simply have noticed, for example, that its top network folks aren’t CCIE’s and should be, so they sent them all in to take the test.  It could be that slim.

But investors are optimists, remember, or they wouldn’t invest.  That bit about the market turning followed by the overall economy is important.  I can argue that the economy turns BECAUSE of the market and the market turns IN ANTICIPATION of the economy, which means it’s all voodoo economics and always has been.

No matter.  If the market makes that bold turn in the next 30-60 days George will be shown to be the genius I always knew him to be, the market will in turn lead the economy (though because of the huge housing inventory I expect this to be a bumpy recovery and you should, too) and we’ll all be eventually prosperous again. 

It always happens, you know.  All we need is a sign. 

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“The only thing worse than being talked about,” said Oscar Wilde, “is not being talked about.” That has until recently applied in spades to Steve Jobs of Apple, a guy who, when I’ve interviewed him, has always asked what other people have said about him, “especially the bad stuff.”

Steve is a guy who likes being talked about.  He likes it so much, in fact, that he’s adopted a strategy to encourage it.  This strategy involves very carefully doling-out bits of himself to the press not in an effort to discourage coverage, really, but to ENcourage it by limiting the supply.  Like everything else about Steve it is brilliant and cold.

This was the case until Steve Jobs got sick, of course, at which point he went from skillfully managing the press to just as skillfully avoiding it.  I wonder why?  What did he have to fear about the world knowing he’d been ill?  It’s probably just an artifact of his obsessive need to control.

Whatever the reason, ever since his bout with pancreatic cancer in 2004, Steve and his Apple minions have tried valiantly to keep his health condition out of the news, citing it as a “private matter.”

Except of course it isn’t a private matter at all.  Steve is the CEO of Apple, Apple is an enormous publicly-held company, and many Apple investors are onboard (or remain onboard) specifically because of their confidence in Steve as a sort of high tech rainmaker.  This is a concept that over time Jobs and Apple have done absolutely nothing to discourage or dispel.  And so now I (and the SEC from what I hear) believe Steve and Apple have to live with it.

Steve Jobs’ health is material to Apple and to Apple shareholders.  To say that having taken a six-month leave of absence changes that would be wrong.  What WOULD change that would be Jobs’ resignation, which he hasn’t yet given to the Apple board.  As long as Steve is still intending to return to Apple, his health is material to the company and should be disclosed.

Whatever Apple claims about privacy and however much whining and threatening Steve does to reporters by e-mail and phone, his condition remains squarely on the table, hot and steaming and ready to be served-up, as it should be.

Maybe he wants it that way.  Maybe this is just more of the same limiting supply to increase demand.  It’s possible but I simply don’t know.

Now look, we’re nine paragraphs into this story and I’m finally getting to the lead, which should have been in the first graf.  But by now you understand why I have to do it this way, because you don’t give out unseemly news (at least I don’t give out unseemly news) without putting it in some proper context.  The eight grafs above explain why I feel it is important to say that Steve Jobs has stopped using his computer.

Huh?

Steve Jobs has stopped using his computer.  He’s off curing himself of something he won’t name and in some manner we can’t know but I CAN tell you right now it doesn’t involve using his computer.

A friend of mine has for years been one of Steve Jobs’ Internet chat buddies.  And as such his chat client has – again for years – shown as Steve came online each day and remained there for hours and hours as you’d expect a Silicon Valley mogul to do.  And it’s a trend that continued well past Jobs’ announcement that he was taking a six-month leave of absence to get well.  But then Steve started logging-on less and less.  And several weeks ago he stopped logging-on at all. 

Silence.

No big deal, right?  He’s off the clock; Cook and Schiller are fighting for the tiller; Apple’s in good hands; who cares?

Anyone cares who actually expects Steve Jobs to return to Apple.  

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As promised, here’s part three of my series on fixing Microsoft for the 21^st century.  This assumes we’ve already spun-off the Internet properties to Yahoo as I suggested a few days ago and a Bank of America/Merrill-Lynch analyst quickly copied.  Does that copying qualify me for a Federal bailout?

The big Microsoft news this week, at least from the press it has received, is Redmond’s decision to open a chain of stores.  Nearly all the pundits think this is stupid, while I think it was merely inevitable, given the nature of current Microsoft management, which seems to be more and more from Bentonville, Arkansas, home of Wal-Mart.

See that guy in the picture?  That’s Microsoft Chief Operating Officer Kevin Turner, who spent his entire pre-Microsoft career rising through the ranks at Wal-Mart.  I’ve interviewed the guy and he’s smart and a lot tougher than he looks.

Microsoft has drawn heavily from Bentonville and for good reason: those Wal-Mart folks sure know how to make and manage money.  Wal-Mart and Microsoft make about the same amount of profit each year, though Wal-Mart has over four times the sales of Microsoft.  This makes them more similar than they are different, because each exists in a rarified financial atmosphere where the amounts of money involved dwarf the budgets of most nations.  When these companies hiccough, the world economy sneezes.

So it seems inevitable to me that as Microsoft is operated more and more by executives from a giant retailer, that Microsoft will try doing some giant retailing of its own.  And sure enough they are doing just that through this new plan to open Microsoft stores – a plan that could equally be laid at the feet of Apple as yet another Microsoft tactic copied from Cupertino.

Only Microsoft stores are different from Apple, stories, we’re told, and that’s true: Apple needed distribution while Microsoft HAS distribution, in spades.  In fact Microsoft has so much distribution that this chain of stores could be viewed very negatively by Microsoft resellers but probably won’t be because I doubt that Microsoft will be actually trying to sell much stuff, and what they do sell will be at full retail unlike everyone else.  It’s like buying wine at the winery: you never get a deal, but the samples are free.

So you can try out that cool game computer at Microsoft but actually BUY it at Best Buy, just as you would have before.

Why even do it, then?  Why have these stores? 

Propaganda.

Phil Schiller of Apple made the point back in January when he explained that Apple stores had 400,000 visitors per day or the equivalent of 20 Macworld shows EVERY DAY.  Microsoft wants the same thing.  They want to bypass the press machine that they feel has tainted users against Windows Vista, making sure the same thing doesn’t happen to Windows 7.

If Microsoft can achieve that one goal – just that one – then the Microsoft stores will have been worth doing even if they never have a dollar of retail sales.

So Microsoft will build those darned stores and they’ll build them fast because they’ll want 100 or more to be open for business by the time Windows 7 officially launches, which we’re told is this year.

In this economy finding retail space is easy, Microsoft has lots of money, so of course this retail build-out will be simple.  AND I predict that Microsoft will achieve its goal of disintermediating pundits like me.

In my case I have long made it clear that for the right price I’ll simply go away, but Microsoft never takes me seriously. 

There was a time in the late 1990s when I had an interview scheduled with Bill Gates.  His net worth back then was growing at a calculated $34 million per day or more than $1 million per hour on a 24/7 basis.  So I offered to give the hour back to Bill for half price — $500,000 – but for some reason he didn’t see it as such a bargain.  Nor will they this time.

So look for the Windows 7 roll-out to go a lot smoother than any other Windows release, ever, simply because in every major media market there will be real people down at the mall in Microsoft shirts ready to explain how to do all the arcane crap required to keep running Windows – even Windows 7.

The Microsoft stores are a brilliant move.

But the impact on Microsoft of the Bentonville Mafia hasn’t been entirely positive.  They ran out of town Jeff Raikes, for example – one of the best Microsoft executives.  The Bentonville crowd, you see is brutal even in Microsoft eyes and Raikes just couldn’t take it any longer, which is why he “retired” and then un-retired a minute later to run the Bill and Melinda Gates Foundation.

Enough about the stores, already — now should be done with the rest of Microsoft?

Break it up.

This is not, by the way, a prescription for justice or vengeance or an attempt to get really good service the next time I visit Paris.  It’s a 1980’s “greed is good” style prescription for giving current Microsoft shareholders better value for their money.  Simply put, the parts of Microsoft are worth separately more than the whole, mainly because of all those anti-trust shenanigans but also just because Microsoft forced itself to get too fat simply to keep its earnings growth in line.  Well it is time to release some of those excess divisions and let them find their own values, which I guarantee will be uniformly higher,

Here are my quite specific – AMAZINGLY SPECIFIC – recommendations, then, for the restructuring of Microsoft.

1) Cut by job category.

Don’t simply cut products. Cut by job function. There are too many testers and Project Managers across the company. Probably too many developers, too, but it’s hard to imagine Microsoft ever conducting a mass layoff of developers, since they form the core of Microsoft’s corporate culture, and most are valuable employees.

There are scores of new job functions at Microsoft, many of dubious importance. For example, one of the latest buzzwords at Microsoft is “business intelligence.” As in, “We need to look at the BI for this project.” There are many new “BI analysts” who look at spreadsheets and analyze all sorts of business and customer data, looking for trends. There’s nothing wrong with this, but a lot of these people could be cut with little impact on the company, since they’ve clearly had little to no impact and left all this crap for me to clean up.

Total cuts by job function — 5,000 Project Managers, testers, business intelligence analysts, and other job categories with more people than Microsoft needs for its surviving products.

Microsoft should balance this with 1,000 new hires in the areas of usability, design, and Project Managers who actually want to create more usable software.

 2) Microsoft Research  

This has long been a favorite pet area of Bill Gates, but Gates is gone now and Microsoft Research has ballooned during years of fat profits to thousands of PhDs scattered around the world. Hundreds of these highly paid people could go, and many others could be transferred to product teams.

 3) Product lines

Here’s where the bulk of the cuts should be – 15,000 to 30,000 jobs. When deciding what products to cut and keep, the devil is in the details.

Products to cut:

MSN – We’ve dealt with this already – MSN should go to Yahoo as I described recently, or absent Yahoo it should go somewhere else, just not in Redmond.  Why is Microsoft in this online business that keeps losing money year after year? Microsoft is not a content company. The cuts should include:

MSN Home Page – persuade MSN users to create a Windows Live home page instead.

MSN’s many individual websites – MSN Money, MSN Music, MSN Entertainment, MSN Video, MSN Celebrities, etc. Why is Microsoft creating a big new website for celebrity news? Is there anything more ridiculous for a software company to be focusing on?

Microsoft adCenter (online advertising system) and Display Ads Platform – Microsoft is not an advertising company. They should hire advertising companies to do this work, and sell this business to Yahoo.

MSNBC – Microsoft is not a news organization – sell to Yahoo or GE.

MSN Games

Tools

Microsoft Expression – Does anyone actually use Expression? This is a weak attempt to compete with Adobe in the graphics market.

Windows Live – This is a major future push for Microsoft, and Microsoft is doing a lot of experimenting by tossing out dozens of Windows Live programs and services to see which stick and people actually use. Microsoft could definitely do some cutting here, and focus on a core group of popular Windows Live services, such as Windows Live Mail, HotMail, Messenger, and Photo Gallery.

It is probably cheaper for Microsoft to ACQUIRE future Windows Live services than to create them.  That’s how Cisco does it.

Don’t know if Microsoft should keep or cut:

Live Search – This is a tough call. I don’t know if Microsoft should give up on search or keep trying to compete head-on with Google. But I think it’s sunk too much money hiring the right people to give up now before giving these smart new hires more time to try. And they have a big new launch planned this spring, with a new name, so what the heck.

Windows Embedded and Windows CE – I don’t know how successful these are. They seem like niche products.

 

Keep some, cut some:

Office – Obviously, Microsoft should not get rid of its most profitable Office products. But the product line has ballooned in recent years and could use trimming. SharePoint is successful, but Microsoft could cut:

MapPoint

Office Live Meeting

Office for Mac (does Microsoft really need to sell Mac software?)

Office Accounting (sell it – there are buyers)

Probably some other small Office products

Microsoft Dynamics – I don’t know much about Microsoft’s business solutions division. But they sell a whole line of products (Dynamics AX, CRM, Enterprise Reporting, GP, NAV, Retail Management, SL). Some should probably be cut.  Or better still just sell the whole darned group to some private equity firm.

Server products – Microsoft’s line of enterprise server software is huge and constantly growing. Many of the products are undoubtedly successful and Microsoft should keep them. But the product line appears to have ballooned out of control to more than 40 products.

Figuring out exactly what to cut and keep here would take some work. I’m no expert on this, but Microsoft should keep Exchange Server, SQL Server, and its other big server products.

But a lot of small products like these should probably go:

Forms Server

Groove Server (sorry, Ray)

Identity Lifecycle Manager

Keep and grow:

Windows client = Cash cow. ‘

Internet Explorer – Microsoft needs to offer a free web browser, despite the antitrust headaches this causes for the company in Europe.

Windows Server – Another big cash cow, and the basis of its server product line.

Office – Keep most Office products, but cut some (see above). Another cash cow.

Office Live – Microsoft needs to start pushing its successful Office apps onto the web.

Hardware – Microsoft has sold millions of mice and keyboards over the years. This seems like a successful and profitable business, but Microsoft should be careful not to let the product line grow out of control. It’s already expanding into presentation pointers and other dubious new hardware peripherals.

Microsoft Auto – Ford Sync seems to be successful, and other auto companies reportedly want Microsoft to create similar software for them. Although the auto industry has tanked recently, it should recover when the economy recovers.

Microsoft Surface – A small product with promise.

Xbox – Although Xbox lost a lot of money for years, it reportedly is profitable now. It seems too successful now to cut. But Microsoft should be careful how much it invests in Xbox and give up on casual games. Stop trying to compete against the Wii and position Xbox as a great family gaming system. It’s not and never will be. The Xbox is all about Halo and other violent shooting games and racing games played by teens and young men.

It would help, too, if Microsoft would respect its customers and support the Xbox better.  Look for a sad story about this from me soon.

 Zune — Many people say Microsoft should give up on Zune, but I think Microsoft should keep its Zune software and hardware and work to merge Zune with Windows Mobile, perhaps forcing Apple toward a music subscription model.

Windows Mobile – I think Windows Mobile is too promising to cut, even though Microsoft has screwed it up by being extremely late with its long-promised Windows Mobile 7 touch-screen update, now not due out until mid-2010. A lot of carriers still sell Windows Mobile phones, which are popular with business people.  Heck, the future of personal computing IS mobile.

Have you noticed I didn’t mention any of Microsoft’s languages?  I have long felt that these should be spun-off as a group.  This is controversial, I know, but if Microsoft was forced to use third-party languages we’d see a lot fewer undocumented APIs and other nasty surprises.  And I think it would get the Europeans off Microsoft’s back entirely.

And there you go – 30,000-50,000 heads later Microsoft would be smaller but stronger, more focused, agile, and better able to compete on a level playing field.  Call it the Cringely Plan.  Ballmer can implement it, drive Microsoft stock to $150 and then retire a gazillionaire, leaving the Bentonville Mafia to spend the next decade doing what they do best, optimizing processes.

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This post first ran on January 29th on my mortgage blog.  It got some traction there and  a  few mentions in the press so, lazy bastard that I am, I’m reproducing it here in a slightly improved form that corrects my own math error.

Take a look at this chart that someone sent to me a couple days ago.  I’m making it big so you can see as much detail as possible.  Have a look and then come back, okay?

Pretty scary, eh?  It’s a chart showing the deterioration of major bank market caps since 2007.  Prepared by someone at JP Morgan based on data from Bloomberg, this chart flashed across Wall Street and the financial world a few days ago, filling thousands of e-mail in boxes.  Putting a face on the current banking crisis it really brought home to many people on Wall Street the critical position the financial industry finds itself in.

Too bad the chart is wrong.

It’s a simple error, really.  The bubbles are two-dimensional so they imply that the way to see change is by comparing AREAS of the bubbles.  But if you look at the numbers themselves you can see that’s not the case.

Take CitiGroup, for example.  The CITI market cap dropped from $255 billion to $19 billion — a difference of 13.4X.  If we’re really comparing the areas of the bubbles, that means 13.4 of those tiny CitiGroup-of-today bubbles should precisely fill the big CitiGroup-of-the-good-old-days bubble.  Only they won’t.  As a matter of fact it would take about 13.4 times as many little bubbles to fill the big bubble as the chart preparer thought or 179.64 little bubbles.  Pi r squared, remember?  This is because the intended comparison wasn’t two-dimensional but one-dimensional — the chart maker was intending we compare the DIAMETERS of the bubbles, not their areas.

So it’s a typo: no big deal, right?  Yeah, but what a typo!  It got past Bloomberg and JP Morgan and pretty much all of Wall Street before someone said, “Hey, this makes no sense!”

And who was that someone? Me!  A nobody.  Or at least someone unimportant enough not to be asking for a Federal bailout.

How could this be?  It’s because Wall Street doesn’t work the way we think it does — the way we are led to believe it does.  Wall Street is a marketplace, a selling ground where everything from ideas to stocks and bonds are on sale every day.  And there is nobody easier to sell to than a salesman. Come up with a good chart that’s ALMOST within an order of magnitude of reality, put a disclaimer on the bottom, and let ‘er rip.

No wonder we’re in a global financial crisis.

The people we count on to understand what’s going on can’t even read a chart.