In the past year, you have probably clicked through dozens of license agreements in various software programs and Web pages.   (That estimate may be low:  you probably clicked through more than a dozen agreements last year simply to run system software upgrades.)

These are binding contracts. But have you read all of them? Any of them?

Of course not. There isn’t time. It could take over 100 hours a year — weeks of work time — just to read your clickthrough agreements. So you don’t. No one does.

This leaves you with a somewhat opaque legal relationship with your software and Web service vendors.  You have made commitments, but don’t know what they are.  Yet there is no alternative, because the aggregate complexity of all such agreements exceeds your real-world capacity to absorb their meaning.

I’m no lawyer, but this dilemma seemingly creates two problems with contract enforceability.

1. System software bug fixes with click licenses probably run contrary to the “implied warranty of fitness for use” in California and other states.  By selling you an operating system, Apple or Microsoft implicitly claim their product works.  When they send you a bug fix update, they are making good on that pre-existing warranty, and thus cannot require you to sign a new deal.
2. More generally, sooner or later, some consumer may claim in court that a reasonable man cannot be expected to understand all his clickthrough licenses, because there are just too many of them out there.  Hence they are all unenforceable.

If tech companies were smart, they would create an industry association to standardize consumer software and consumer web service licenses.  This would hugely decrease cost, both to companies (legal costs of drafting) and to consumers (read and understand a single license for all similar products).  This would simultaneously increase enforceability, since no one could claim it exceeded the resources of a reasonable man.

This is a specific instance of the complexity-vs-transparency dilemma mentioned in a previous post.

The media inexplicably painted this as a countermove against Google.  But, ah, how is dropping your own price to zero an offensive maneuver?

Microsoft still has momentum, but two big things changed in July 2009.

1. For the first time, a competitor with vast engineering resources pledged to release a free alternative operating system.  It will run on netbooks, the fastest-growing computer segment, and where Microsoft is weakest due to performance problems.
2. For the first time, Microsoft pledged to give away a version of Office.

Most of Microsoft’s profit comes from those two products, and ever-increasing price pressure is now nearly certain.  I had purchased MSFT very cheaply last November at about 20, on the stock market swoon, and was only too happy to dump it at a 20% profit last month.

One risks later embarrassment by mentioning specific trades, and that may well happen here.  I prefer to hold for years, so this runs against style.  Moreover, I still think MSFT could have years of stability ahead.  But I’m less sure of it than before.  Selling now offered over 30% CAGR pretax.  A very pretty bird in the hand.

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Contemplate the decline of Network Solutions (hereafter NS), which was the #1 Internet domain name registrar in 2000, but now a fraction the size of GoDaddy (hereafter GD), which has registered 5x more names.

NS was a pain to use, but not unusable.  Support was bad, but not terrible.  GD beat them somewhat on these fronts, but they are not the reason for the lopsided outcome.

The battlefield was simply price. Domain name registration is a nearly pure commodity, and GD took over simply by charging less.

It didn’t have to end this way.  NS was much bigger, and hence presumably had at least a small cost advantage a decade ago.  If NS had simply charged a penny less than GD, there would be no GD.  That option no longer works, because GD now has huge scale and presumably the lowest costs.  Inexplicably, NS never reacted.

At the time, I recall reading that NS treated the business as a cash cow.  Rightly so:  domain registration is a good business for a sustainably low-cost producer, as with any commodity business.  But you have to connect the dots tactically, watch the competition, etc.

GoDaddy management, though undoubtedly sharp, really owes its biggest thanks to the mistakes of Network Solutions (which still charges triple vs GD).  If NS had done the right thing, no amount of brilliance at GD would have worked.

Another business facing this same situation is the Corporation Service Company, which most people have never heard of.  Venerable CSC provides “registered agent” services in Delaware.  Tons of corporations form in Delaware, because it has a huge stack of corporate case law, making lawsuits cheaper for both sides to resolve.  But to form there, you need a “registered agent” there.  CSC is the gorilla of that business.

But till recently, they were not a nimble gorilla.  As the world moved online, cheap one-person shops arose to provide the same service.  I saved 70% by changing to one of these.

Unlike Network Solutions, CSC got wise, simply phoned all their lost customers, matched the low offer, and got all their business back.  This is not brilliant — it’s simply doing the obvious, which NS didn’t.

But this is not frontal assault. More like a joyride around the Maginot.

Logically GOOG would attack MSFT at its weakest, most inflexible point: netbooks, where Vista doesn’t run at all, and Windows 7 Beta is reportedly slow (and also unfinished).

Just as logically, GOOG would attack MSFT where switching costs are lowest. Netbooks are not used for heavyweight desktop software, and hence their users have lower OS switching costs than users of, say, Windows-based accounting software.

Why do it? Because user-friendly netbooks would hugely increase the total number of Google users. For now, netbook adoption is limited by the expense, footprint and slowness of Windows, and by the user-unfriendliness of Linux.

Linux distros, though super useful (I run several), have low consumer adoption because of less polished UI and peripheral support. These are solvable problems, but remain unsolved because no one entity has had both the resources and interest to polish up free software.

But given is an economic reason, it can be done. Apple built its slick UI and driver stack atop BSD Unix to sell more hardware. If Google thinks it can sell more ads and services atop a consumer-friendly Linux, they certainly have the resources to make Linux friendly to Peoria, Shenzen or Santiago.

Summary: they have no intention of moving up the ladder to heavyweight PCs. Instead, this is an “Innovator’s Dilemma” move, creating a low-end mass market product that will always remain economically unviable for Microsoft.

To see why, pay a quick visit to the World’s Scariest E-commerce Site.  Savor the broken English, salted with nonsequitur French and Italian.  Admire the ragged formatting and non-matching fonts.

The site claims its location is “Alabama,” but they ask 20 business days for delivery, and the domain is registered in Shenzen, China.  Er, Alabama is far from California, but not that far.

If you actually buy something at that site, as I did, you’re greeted with the chilling purchase completion message, “Dummy string.  Actual purchase completion message goes here.” You then experience two weeks of deafening silence from “customer service” before your order arrives. But it does arrive.

What?  You’re not running out to buy from this site?  Before deciding, consider this:  on my first $100 purchase there, I saved 70% off the price of an equivalent item from a US site.  Including shipping costs.

So don’t look at the site itself, but rather what this site is trying to do.  Where is that $70 being saved?  They are cutting out the entire wholesale-retail chain, and shipping directly to your door from factories in Shenzen.  This is quite interesting.

And it gets better with scale. Once they are receiving 50 or 100 orders a day, they can ship them all in one box to the US, then break them up to trans-ship domestically.  Inventory? All in China, almost free to store.  Website?  Maintained in China, nearly free.

Perhaps most interesting is that, by locating near the factories, the retailer can eliminate inventory entirely, simply buying as needed directly from the factory.  This, in turn, permits the retailer to list a vastly larger catalog, since need not actually stock anything, but has immediate access to everything.

In the most extreme manifestation, the end buyer becomes the endpoint of a just-in-time delivery system, in which retail orders directly trigger production runs in China.

Yes, there are site quality issues. For now. But I would not bet against the ability of the industrial titans of Guangdong to solve that problem.  Web vendors of imported durable goods should be squirming, because this system is inherently and vastly more efficient.

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1. Only one phone line.
2. Only one person answers it and picks up VM.
3. Same complaint has occurred with 3 different VM services.
4. Company uses Google VM, which keeps a record of every call.

Thus, the customer’s claim seems as if it cannot possibly be true.

The callers all have one thing in common:  they are forgetful.  How do we know this?  Because when finally reached, they have all called for the same reason:  they do not recognize the company’s charge on their credit card bill.  The company reminds the customer, who says, “Ohhhh yeahhhh.”  Every time, at least so far.

Since these customers are forgetful about what charges they have committed to, perhaps they also forget that they have not left 4 messages?  My theory is that they may have called 4 times, but never actually left a message before.  Thus no contact was made, yet the customer has a vague feeling the company was unresponsive.

Suggestions invited from this blog’s massive readership.

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With Google, the response to a new release is, “I will sign up for Google Wave immediately, lest I miss a developing trend.”  The response to a Microsoft release is, “I will delay trying Bing until proven, lest I waste time on yet another failed initiative.”

The Microsoft image develops in response to a series of failed or incoherent releases. Palm suffered the same image problem among its developers after a series of failed attempts to update its operating system after 2002.  Apple suffered the same problem during the 1990s, after repeated false claims of innovation.

The requirements for a positive brand image among early adopters are surprise and utility.  The new offering must not only work well and do something useful, but also must innovate in a direction unexpected even to industry enthusiasts.

So, for example, a product like Microsoft AdCenter is not only unsuccessful as a business, but also hurts the Microsoft brand among early adopters, because it is utterly derivative, does not work well (slow, poor browser compatibility, basic bugs in the site’s business logic), and is not useful (doesn’t generate enough traffic to be worth the hassle).

By contrast, Google develops its brand by innovating in unexpected, but useful, directions: big Javascript apps;  open APIs;  super-effective collaborative spam filtering.  Enthusiasts themselves can no doubt come up with more and better examples.

Underlying all this is the idea that early adopter branding is product-driven.  You actually have to have a good product.  You can’t promote your way to a brand in this arena.

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Traditional newspapers consist of reporters (gather content), editors (judge and shape content), ad sales staff, a printing facility and distribution trucks.  Reporters and editors provide the value to end users, and the ad sales pay for it all.

Newspapers were able to charge money largely because printing and distribution costs created barriers to entry for other newspapers.  You can’t afford to buy a printing plant and fleet of delivery trucks if you don’t have circulation, but you can’t get circulation without a printing plant and fleet of delivery trucks.  That’s a big barrier.  As a result, the city paper was the only way to reach a consumer in print on a daily basis.  Local monopoly.  They charged a lot for that, and this is why Warren Buffett loved to own newspapers.

Printing and distribution costs are now zero, thanks to the Web.  This lowers entry barriers, while pushing price down to marginal cost:  zero.  That’s why Web news is mostly free, and Web ads are nearly free.  Oddly, ten years into the collapse, news industry pundits still sometimes ask, “Why are we giving away content?”  They simply don’t understand that free-ness is a microeconomic certainty, given the conditions. Google internally describes the situation very simply:  ”information wants to be free.”  That was always true, but distribution costs created the opportunity for distribution control, which pushed up prices.  Until now.

So that whole industry is the walking dead, excepting a few very strongly branded papers.  What might replace the other 500 papers that disappear?

Go back to the second paragraph and look at the list of functions performed by newspapers.  Note how only two pieces of this puzzle are useful to the reader:  reporters and editors.  The rest, from the end user perspective, was just an unavoidable cost of getting the content.

So the real question in news is how to pay for information gathering and editing.  And we already have a partial answer to the editing problem:  bloggers.

Not all blogs are collections of random ruminations (as this one is).  There is a small but growing handful of blogs that act as meta-editors for the news.

For example, Calculated Risk and Naked Capitalism, two respected finance blogs, are increasingly quoted by traditional media.  They are written by industry professionals with over a decade each of experience in their respective specialties (mortgage and investment banking).

From the reader’s perspective, these two blogs do what the city newspaper editor used to do:  edit the news.  They read everything publicly available on a given story, condense it, and tell a pithy and interesting story.  

They also have a business model.  Each has a wide readership, which lets them sell ads.  Though each author could, so far, probably make more money doing something else, there are certainly cases where bloggers are already making a living by acting as meta-editors.

In short, the editing function may be a solved problem.  Each successful news blogger becomes a sort of one-person brand.  That brand sustains a readership, which in turn sustains an ad base.  

This leaves a harder problem:  news gathering.  Currently nearly all news bloggers are parasitical on newspaper reporting.  They don’t actually fly to Geneva to talk to a banker, but instead judge the comments the banker made to a NY Times reporter. Obviously this will fail when the newspapers go under.  What will pay for content gathering?

Basically, bloggers will eventually have to pay the Associated Press, or a lightweight Web-only equivalent of AP, for stories.  This will probably work once blogs completely replace news, but we are headed for a chasm, during which newspapers and AP have laid off all their reporters, but blogs (or their proxies) have not yet hired any back.

More hypothetically, there is probably a way to crowdsource some kinds of reporting.  If 100 people send “earthquake in Karachi” over Twitter, you know there is something going on.  This solves event reporting, but not the higher-end stuff like interviewing experts.

Whatever happens, there will be a transition period in which there is very little news gathering for print.  Reporting in that period will likely be done by non-newspaper sources:  government data, subsidized reporting (BBC, CS Monitor), television, and magazine investigative pieces.  The transition period might last years.

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Let’s say I want to outsource a $1000 job to a specialist, such as a computer programmer.

If I contract it to an American, in addition to the job itself, I must also:

• Have a system in place to remember to file a 1099 next year.
• Have a system in place to recall the paid amount next year.
• Re-read Forms 1099 and 1096, which change a bit every year.
• Fill out and mail Form 1099.
• Fill out and mail Form 1096.
• Risk making a mistake, incurring penalties.
• Risk being late, incurring penalties.

This consumes hours of work, but more importantly consumes valuable attention.  Another half dozen things to worry about.  But it all goes away if I send the work offshore.  Poof.

Yet we really do need 1099s, or something like them, to limit tax evasion.  A reasonable simplification might be:

• Enter data directly at IRS website — eliminate paper and PDF filings.
• IRS Web API for financial app integration.
• PayPal and QuickBooks auto-report to the IRS Web API whenever you send a payment (assuming you set them to do so).
• Eliminate form 1096.
• Stop changing the 1099 every year.

This is at once obvious and subtle.  The obvious part is that I, as a manager, have little incentive to produce efficiently if I can produce inefficiently, for less, with cheap labor. The subtle part is to reconcile this with (suddenly unpopular) laissez-faire economic policy, which has a compelling argument for free global labor markets (see comparative advantage).

Here is a micro-anecdote.  Prior to 2008, I did bookkeeping for Company X.  In 2008, I outsourced it.  This was super cheap, just $300 for an entire year of data entry, and that was not even the low bid.  They did good work.

Of course, it was not frictionless.  It took several hours of my time to bid out the job, choose a winner, collect and send the year’s statements, check the results, etc.  But a big improvement over doing it all myself.

Still, for Q1 2009, I decided to see what could be better automated, rather than outsourced. After surprisingly much research (Intuit is stuck in 20th-century communications mode), turns out Company X’s bank still can export transaction data to my arcane old Mac version of Quickbooks.  Yesterday, I reconciled most of Company X’s first quarter financials by myself in an hour.  This included my time to prepare data and check results, and eliminated the friction of working with a counterparty.  Result:  automation beats outsourcing in bookkeeping for Company X.

So is comparative advantage the wrong paradigm for labor?

I assert it is not wrong, but overstated, limited in application, in areas where labor productivity can improve rapidly by just thinking or learning.

Since low wages are easily measurable and easily implemented, there is a tendency to just outsource and be done with it.  But it’s not the only solution, nor the best solution, from the business owner’s perspective.  Even in the short run.

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