Software comes from the sky and labor is overpaid: NOT!

John Dvorak concludes an otherwise sensible  article on the effect of Linux/Office-clone packages combined with netbooks with the following:

If Intel can provide users with powerful little systems for $99 and has been pushing prices lower and lower over the years, why can’t Microsoft? Intel makes elaborate hardware in billion-dollar factories. Microsoft stamps out a disk.

Does Dvorak really think that a disk stamper is all that is needed to create software? This is the argument that Eban Moglen makes. The argument is that  programers, authors,  musicians, and other developers of “creative content” should be content to work for a salary (a low one) or be paid by performance. All that royalty stuff for copies that can be made with a disk stamper or less is obsolete. Yo Yo Ma and Bill Joy and Sean Penn  can stop bleeding the consuming public for stuff that Pirates Bay is able to copy for nothing, and should be content to perhaps put out a hat on a street corner or find cubicle to inhabit and a friendly corporate manager who can get them properly identified in the HR department’s pay scale process.  Because the marginal price of making a copy is the determining factor of the value of a product.  Well, that’s not really how the argument goes, because we are asked to consider Intel’s plant investment for that “elaborate hardware” too – the marginal production cost of a chip being a whole lot lower than the sales price.

The argument that Mr. Dvorak apparently has not considered is that the value to the end customer of the combined software hardware package depends on the use, not the cost of production. The labor of all those engineers at Microsoft (and Xerox Parc and elsewhere), the creative work of the user interface and the file management software, the search and replace code, the formatting, the typeface management, the design of the typefaces themselves – all of that is considerable. If hardware becomes profitable to sell at a few dollars, the costs and risks of making software don’t change and the value of the software itself is not necessarily reduced.

Whatever the merits or demerits of Microsofts product and pricing strategy for Office, the idea that copy cost determines sales price is, in the end, one which has far reaching implications for the way the economy should work and those implications often are not seen by people making that argument.

Program structure and threads

Threads were initially used for telephony systems where each request to connect could be given to a new thread to manage. The simplification was, in theory, dramatic. The programmer could just write the code for handling a single line, and the OS and network code would multiplex operation over 100,000 calls. The programmer does not have to worry about what operations block  and delays. Imagine writing this same code using some sort of request queue. The only way to do it would be to make extensive use of asynchronous I/O, something that was uncommon when threads became popular.  In fact, any multithreading design seems convertible into a single threaded design via use of asynchronous events and asynchronous I/O. But these methods are not noticeably easier than threads.

rcvm(fd, &buf, n, func); // call “func” when the data arrives – pass it the return val and arguments to read as well

then

while(1){

rcvm(fd,&ptr++,n,got);

if(noresources)wait();

}

got(fd,&p,n,code){

look at message

queue_response

return;

}

Worse or better?

Marine One Blueprints via Pirates Bay

Goodness. The US blueprints for Marine1 show up in Iran.

“What appears to be a defense contractor in Bethesda, Md., had a file-sharing program on one of their systems that also contained highly sensitive blueprints for Marine One,” Boback said.

Tiversa also found sensitive financial information about the cost of the helicopter on that same computer, WPXI-TV reported.

AIG and me

The New York Times has an article explaining the business model of the  failed insurer AIG that is giving me a new perspective on why I walked out of a bank in New Mexico wondering whether it was worth it to put my kids college funds at risk to get a loan.  As I understand it, AIG got into the business of selling insurance on mortgage backed assets to banks that wanted to be able to put more of their depositors money into crazy bets.

In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage.

AIG put away reserves of precisely $0 for this insurance on the incredible assumption that housing prices would go up forever – or more likely, until the AIG managers had moved on to something else.  I’ve been in business for a long time now, and I’ve seen some deals that made me edge away to the door fast, but this is mind-blowing – and the bank side of the deal was worse.

A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.

How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.

Bernie Madoff was a small-timer compared to this scheme. Imagine all the people who had money in pension plans that went into buying bank stocks – without knowing that the banks were  betting everything that housing prices would never, ever, go down!  And that’s where I come in.  While the banks were buying CDOs and fueling the run-up in real-estate prices, they were not buying municipal bonds to pay for infrastructure and schools or lending money money to Wind and Solar power projects, biotech, computer systems,  and small business.

I tried to borrow $250K for FSM to expand the business in 2005 and the banks refused to make the loan unless they got the rights to take all of my personal assets.  I wanted the loan also as a form of insurance. The idea was to expand sales and engineering (using our own funds) and the 1/4 million would have been there to cushion the landing if sales did not take off as hoped. That is, if we spent $1M expanding and money failed to come in, the loan would have meant we could give employees severance and keep operating as we cut back. This was a loan qualifying for government insurance – so the banks were covered 90%. We had a great credit record, some nice patents, and had been profitable every year of operation.  But I was supposed to sign over my house and my kids college fund in order to make sure that there would be plenty to cover the last 10% and whatever expenses the bank would have collecting. So at the very moment they were happily throwing hundreds of billions of dollars into bets that would have made Los Vegas croupier wince, the  banks would not consider risking $25K on a loan to a profitable small business.  We ended up doing very well – but I can’t believe that our situation was in any way unique. And it’s hard not to think of what might have been and how much of my taxes are now going to AIG and its banking partners.