Presents! Presents, falling from the sky!

The class-action legal juggernaut that was the law firm [and organized criminal conspiracy] now known as Milberg Weiss suffered more body blows yesterday as its co-founder, Melvyn I. Weiss, was indicted…

[P]rosecutors in Los Angeles charged Mr. Weiss, one of the architects of class-action securities lawsuits, with conspiracy, racketeering, obstruction of justice and making false statements to a grand jury… could face a sentence of as much as 40 years…

The indictment also broadened existing charges against Milberg Weiss, the firm Mr. Weiss co-founded in 1972, contending that the firm received some $250 million in legal fees over the last 25 years from class-action cases in which it paid kickbacks [bribes] to individuals who had served as named, or lead, plaintiffs…

“The indictment outlines a decades-long kickback scheme that was deliberately concealed from courts that were overseeing significant class-action cases,” said George S. Cardona, the United States attorney in Los Angeles, in announcing the charges against Mr. Weiss…

The charges against Mr. Weiss contend that he knew about and participated in the plaintiff kickback scheme since its inception in the late 1970s, and that he continued to participate in it in even after federal prosecutors began their investigation.

But there’s more!

In a related development, Steven Schulman, a former named partner at Milberg Weiss, agreed to plead guilty to a conspiracy charge in connection with the plaintiff kickback scheme.

Mr. Schulman, who will cooperate with prosecutors, also agreed to disgorge $1.85 million in profits, pay a $250,000 fine and accept a prison sentence that is likely to be 27 to 33 months, according to court papers.

All the gory details about this organized criminal conspiracy were outlined in detail in a sworn statement from their partner and now convicted felon David Bershad from earlier this year. Fun reading!

News clippings from the New York Times.

Go boomers!

For Americans ages 35 to 54:

     

  • 18,249 deaths from overdoses of illicit drugs in 2004, up 550 percent per capita since 1975…
  •  

     

  • 46,925 fatal accidents and suicides in 2004, leaving today’s middle-agers 30 percent more at risk for such deaths than people aged 15 to 19…
  •  

     

  • More than four million arrests in 2005, including one million for violent crimes, 500,000 for drugs and 650,000 for drinking-related offenses… [representing] a 200 percent leap per capita in major index felonies since 1975… [and this doesn’t even include OJ!]
  •  

     

  • 630,000 middle-agers in prison in 2005, up 600 percent since 1977…
  •  

     

  • 21 million binge drinkers (those downing five or more drinks on one occasion in the previous month), double the number among teenagers and college students combined…
  •  

     

  • 370,000 people treated in hospital emergency rooms for abusing illegal drugs in 2005, with overdose rates for heroin, cocaine, pharmaceuticals and drugs mixed with alcohol far higher than among teenagers…
  •  

     

  • More than half of all new H.I.V./AIDS diagnoses in 2005 were given to middle-aged Americans, up from less than one-third a decade ago…
  •  

    What experts label “adolescent risk taking” is really baby boomer risk taking. It’s true that 30 years ago, the riskiest age group for violent death was 15 to 24. But those same boomers continue to suffer high rates of addiction and other ills throughout middle age, while later generations of teenagers are better behaved. Today, the age group most at risk for violent death is 40 to 49, including illegal-drug death rates five times higher than for teenagers.

    From Mike Males writing in the New York Times.

    p.s. Think anyone’s ever going to notice that these people are the children of the quote-unquote Greatest Generation? Paging Tom Brokaw…

    Look up “hugely satisfying” in the dictionary…

    …and you’ll find this:

    Bill Lerach, the renowned [well, that’s one word for it] class-action attorney who won billions of dollars in securities fraud settlements, pleaded guilty on Wednesday to criminal conspiracy. He will pay $8 million and spend one or two years in prison for scheming to pay illegal kickbacks to the lead plaintiffs in some of his lawsuits.

    From the Financial Times.

    Lerach and his equally appalling — and increasingly equally indicted — colleagues at a quote-unquote law firm called Milberg Weiss terrorized the high-tech industry for over a decade, filing baseless lawsuit after baseless lawsuit against many public company executives for theoretical crimes for which the only evidence was a falling stock price, putatively on behalf of individual shareholders — who, it turns out, were frequently being illegally bribed by, you guessed it, Lerach and Milberg Weiss.

    Lerach’s malfeasance helped create the current climate of fear and paranoia in the public equity markets that have made it so dauting for new companies to become public, which in turn raises the cost of capital for growth companies, and in turn drags on the growth of the American economy and therefore on your pocketbook.

    However, I must confess that my true satisfaction about this miscreant going to meet his new friends in the federal pokey is caused by Milberg Weiss’s 2001 lawsuit against me and my former company, Loudcloud, in which Lerach alleged — I am not making this up — that we defrauded investors because the founders and board members of the company bought shares in the IPO. Yes, that’s right — since they couldn’t sue us for insider selling, their normal MO, they sued us for insider buying.

    Bye, Bill!

    Counterpoint: Ben Horowitz on micromanagement

    [This is a guest post from my business partner Ben Horowitz, reacting to my recent post about hiring, managing, promoting, and firing executives. I have italicized the parts where he really tears into me for your added humor value.]

    While I enjoyed Marc’s post on hiring and firing executives, I think that he unfairly dissed micromanagement.

    Here’s why.

    Everyone knows that the hyper-controlling manager with the severe personality disorder who micromanages every crummy decision is no fun to work for. However, it is wrong to condemn the practice of micromanagement on that basis.

    Specifically, there are times and situations where micromanaging executives is not just ok, but also the right thing to do. Andy Grove has an excellent explanation of this in his classic book High Output Management, where he describes a concept called “Task Relevant Maturity”. Andy explains that employees who are immature in a given task require detailed training and instruction. They need to be micromanaged. On the other hand, if an employee is relatively mature in a task, then it is counterproductive and annoying to manage the details of their work.

    This is also true when managing executives. Marc might think that he hires an executive because she has the experience and know-how to comprehensively do her job, so any detailed instruction would be unwise and unwarranted. Marc would be wrong about that. It turns out that even — and maybe especially — executives are also immature in certain tasks.

    It is almost always the case that a new executive will be immature in their understanding of your market, your technology, and your company — its personnel, processes, and culture. Will the new head of engineering at Ning walk in the door with Marc’s understanding of the development process or the technology base? Would it be better for this new head of engineering to make guesses and use her own best — not so good– judgment, or for Marc to review the first say 20 decisions until the new exec is fully up to speed?

    In reality — as opposed to Marc’s warped view of reality — it will be extremely helpful for Marc [if he were actually the CEO, which he is not] to meet with the new head of engineering daily when she comes on board and review all of her thinking and decisions. This level of micromanagement will accelerate her training and improve her long-term effectiveness. It will make her seem smarter to the rest of the organization which will build credibility and confidence while she comes up to speed.Micromanaging new executives is generally a good idea for a limited period of time.

    However, that is not the only time that it makes sense to micromanage executives. It turns out that just about every executive in the world has a few things that are seriously wrong with them. They have areas where they are truly deficient in judgment or skill set. That’s just life. Almost nobody is brilliant at everything. When hiring and when firing executives, you must therefore focus on strength rather than lack of weakness. Everybody has severe weaknesses even if you can’t see them yet. When managing, it’s often useful to micromanage and to provide remedial training around these weaknesses. Doing so may make the difference between an executive succeeding or failing.

    For example, you might have a brilliant engineering executive who generates excellent team loyalty, has terrific product judgment and makes the trains run on time. This same executive may be very poor at relating to the other functions in the company. She may generate far more than her share of cross-functional conflicts, cut herself off from critical information, and significantly impede your ability to sell and market effectively.

    Your alternatives are:

    (a) Macro-manage and give her an annual or quarterly objective to fix it, or…

    (b) Intensively micromanage her interactions until she learns the fundamental interpersonal skills required to be an effective executive.

    I am arguing that doing (a) will likely result in weak performance. The reason is that she very likely has no idea how to be effective with her peers. If somebody is an executive, it’s very likely that somewhere along the line somebody gave her feedback — perhaps abstractly — about all of her weaknesses. Yet the weakness remains. As a result, executives generally require more hands-on management than lower level employees to improve weak areas.

    So, micromanagement is like fine wine. A little at the right times will really enhance things; too much all the time and you’ll end up in rehab.

    Quote of the week: Alan Greenspan says Fed not independent

    Critics say the Fed should have tried harder [in 2004-2005], raising rates sooner and faster. Mr Greenspan counters that that would not have been acceptable “to the political establishment” given the very low rate of inflation. He says “the presumption that we were fully independent and have full discretion was false.”

    Completely aside from the interest rate decisions, I would like to please know which elements of the political establishment had control over the Fed and how those elements exercised that control in 2004-2005. Specifics. George Bush? Dick Cheney? Harry Reid? Nancy Pelosi? The Supreme Court? Michael Brown at FEMA?

    From the Financial Times.

    Funny, this is the same way the media companies reacted to Tivo…

    As a successful venture capitalist, Howard Hartenbaum had grown accustomed to some measure of deference from the entrepreneurs who pitched him. So when one particularly brash CEO called him a “nut case” and then said that a meeting with him “made me want to vomit,” Hartenbaum was livid.

    Hartenbaum, a partner at Draper Richards in San Francisco… stumbled upon those comments, posted by an anonymous entrepreneur, on a website called TheFunded.com. Incensed, Hartenbaum fired off a series of e-mails, threatening litigation and demanding to know who ran the site. He also expressed interest in investing.

    From Inc. Magazine.

    Clearly they should get divorced and then immediately remarry

    A married couple who didn’t realise they were chatting each other up on the Internet are divorcing.

    Sana Klaric and husband Adnan, who used the names “Sweetie” and “Prince of Joy” in an online chatroom, spent hours telling each other about their marriage troubles…

    The truth emerged when the two turned up for a date. Now the pair, from Zenica in central Bosnia, are divorcing after accusing each other of being unfaithful.

    “I was suddenly in love. It was amazing. We seemed to be stuck in the same kind of miserable marriage. How right that turned out to be,” Sana, 27, said.

    Adnan, 32, said: “I still find it hard to believe that Sweetie, who wrote such wonderful things, is actually the same woman I married and who has not said a nice word to me for years”.

    From The Daily Telegraph.

    The three kinds of platforms you meet on the Internet

    [Title with sincere apologies to Mitch Albom and his wonderful book.]

    One of the hottest of hot topics these days is the topic of Internet platforms, orplatforms on the Internet. Web services APIs (application programming interfaces), web services protocols like REST and SOAP, the new Facebook platform, Amazon’s web services efforts including EC2 and S3, lots of new startups talking platform (including my own company, Ning)… well, “platform” is turning into a central theme of our industry and one that a lot of people want to think about and talk about.

    However, the concept of “platform” is also the focus of a swirling vortex of confusion— lots of platform-related concepts, many of them highly technical, bleeding together; lots of people harboring various incompatible mental images of what’s about to happen in our industry as a consequence of various platforms. I think this confusion is due in part to the term “platform” being overloaded and being used to mean many different things, and in part because there truly are a lot of moving parts at play that intersect in fascinating but complex ways.

    This post is my attempt to disentangle and examine the topic of “Internet platform” in detail. I will go at it by identifying three distinct approaches to providing an Internet platform, and project forward on where I think each of the three approaches will go. At best, I might be able to help make a new landscape clear. At worst, hopefully I can at least provide one framework for future discussion.

    Let’s start with a basic definition. From a previous post:

    A “platform” is a system that can be programmed and therefore customized by outside developers — users — and in that way, adapted to countless needs and niches that the platform’s original developers could not have possibly contemplated, much less had time to accommodate.

    We have a long and proud history of this concept and this definition in the computer industry stretching all the way back to the 1950’s and the original mainframe operating systems, continuing through the personal computer age and now into the Internet era. In the computer industry, this concept of platform is completely settled and widely embraced, and still holds going forward.

    The key term in the definition of platform is “programmed”. If you can program it, then it’s a platform. If you can’t, then it’s not.

    So, if you’re thinking about computing on the Internet, whenever anyone uses the word “platform”, ask: “Can it be programmed?” Specifically, with software code provided by the user? If not, it’s not a platform, and you can safely ignore whoever’s talking — which means you can safely ignore 80%+ of the people in the world today who are using the term “platform” and don’t know what it means. (Yes, there are hardware platforms too! But those are different and I’m not talking about them.)

    Now, traditionally in the field of computing, there has been a single main way of providing a platform. You provided a computer system — a mainframe, a PC operating system, a database, or even an ERP system or a game — that contained a programming environment that let people create and run code, plus an API that let them hook into the core system in various ways and do things.

    To quote Tony Stark, “That’s how Dad did it, that’s how America does it, and it’s worked out pretty well so far.”

    The Internet — as a massive distributed system of many millions of internetworked computers running many different kinds of software — complicates things, and gives rise to three new models of platform that you see playing out in the Internet industry today.

    I call these Internet platform models “levels”, because as you go from Level 1 to Level 2 to Level 3, as I will explain, each kind of platform is harder to build, but much better for the developer. Further, as I will also explain, each level typically supersets the levels below.

    As I describe these three levels of Internet platform, I will walk through the pros and cons of each level as I see them. But let me say up front — they’re all good. In no way to I intend to cast aspersions on what anyone I discuss is doing. Having a platform is always better than not having a platform, period. Platforms are good, period.

    So, let’s walk through the three levels of Internet platforms.

    Level 1 is what I call an “Access API”.

    This is the kind of Internet platform that is most common today. This is typically a platform provided in the form of a web services API — which will typically be accessed using an access protocol such as REST or SOAP.

    Architecturally, the key thing to understand about this kind of platform is that the developer’s application code lives outside the platform — the code executes somewhere else, on a server elsewhere on the Internet that is provided by the developer. The application calls the web services API over the Internet to access data and services provided by the platform — by the core system — and then the application does its thing, on its own. That’s why I call this an “Access API” — the key point is that the API is accessed from outside the core system.

    This is of course the approach taken by eBay, Paypal, the Google Search API (before they killed it), Flickr, Delicious, etc. Whenever someone pulls photos out of Flickr to put them on another web site, or whenever someone creates a Google Maps mashup, they’re using a Level 1 Internet platform.

    This is undoubtedly a very useful thing and has now been proven effective on a widespread basis. However, the fact that this is also what most people think of when they think of “Internet platform” has been seriously confusing, as this is a sharply limited approach to the idea of providing a platform.

    What’s the problem? The entire burden of building and running the application itself is left entirely to the developer. The developer needs to provide her own runtime system, programming language, database, servers, storage, networking, bandwidth, and security, and needs to take responsibility for running all of the above — and then exposing the application to users. This is a very high bar in terms of both technical expertise and financial resources.

    As a consequence, you don’t see that many applications get built relative to what you’d think would be possible with these APIs — in fact, uptake of web services APIs has been nothing close to what you saw with previous widespread platforms such as Windows or the Mac.

    This is, however, by far the easiest kind of Internet platform to create. As the platform owner, you don’t have to worry about developer code running inside your system or developer functionality injecting itself into your system; you retain completely control over your user interface; and you can sharply limit the load impact that third parties can have on your systems — i.e., throttling is straightforward.

    Because of this and because Level 1 platforms are still highly useful, notwithstanding their limitations, I believe we will see a lot more of them in the future— which is great. And in fact, as we will see, Level 2 and Level 3 platforms will typically all incorporate an Level 1-style access API as well.

    Level 2 is what I call a “Plug-In API”.

    This is the kind of platform approach that historically has been used in end-user applications to let developers build new functions that can be injected, or “plug in”, to the core system and its user interface.

    For example, Photoshop has for a long time had a widely used and highly successful plug-in API. Lots of people have used the Photoshop plug-in API to buildtons of new functionality for Photoshop ranging from support for new file formats to new ways to retouch images to new special effects to apply to images.

    More recently, Firefox is well known for having a great plug-in, or extension, API that lets third parties build a wide range of Firefox plug-ins. These plug-ins span functions from blogging to dowloading to search to language translation.

    In the Internet realm, the first Level 2 platform that I’m aware of is the Facebook platform.

    When you develop a Facebook app, you are not developing an app that simply draws on data or services from Facebook, as you would with a Level 1 platform. Instead, you are building an app that acts like a “plug-in” into Facebook — your app literally shows up within the Facebook user experience, often as a box in the middle of a page that Facebook otherwise defines, such as a user profile page.

    Your Facebook app can of course also use Facebook’s Level 1-style access API — their web services API — to pull data or services from Facebook’s core systems — and in fact the two approaches neatly complement each other, because without the access API your embedded Facebook app wouldn’t know anything about the system in which it was embedded and wouldn’t be very useful.

    I think that Facebook’s platform approach is a harbinger of a large number of new Internet plug-in APIs that will be created for lots of other Internet services from here on out. Which is great: developers will be able to inject new functions into many other Internet services in the future, just like they can with Facebook today.

    As a historical side note, in retrospect, this is what AOL should have done in the mid 1990’s when the web first popped up. At that point, AOL had a huge user base relative to the consumer Internet. However, AOL was completely closed — third parties couldn’t build new functions or apps that could plug into AOL and be used by AOL users. As a consequence, all of the creativity and third-party effort that AOLmight have harnessed had they provided a plug-in API — a way for third parties to build apps that would inject new functions into the AOL user experience — went to the web instead. A few years later, it became clear to AOL users that the web is where all the interesting stuff was, and then when broadband came along and people had to switch ISPs anyway, the users bailed on AOL.

    Seen through this lens, Facebook — and I mean this in the best possible way — is the new AOL, but, by also being a platform, executing the opportunity correctly.

    Technically, with an Internet plug-in API approach such as Facebook’s, the third-party app itself lives outside the platform — outside the core system — just like I described for Level 1 platforms. The code for the app runs somewhere else. This means that just like with Level 1 platforms, the entire burden of building and running a Level 2 platform-based app is left entirely to the developer — who still needs to provide her own runtime system, programming language, database, servers, storage, networking, bandwidth, and security, and who still needs to take responsibility for running all of the above.

    As a result, the technical expertise and financial resources required of a Level 2 platform’s developer — if she intends to build a meaningful app — are very high.

    Technical expertise: the developer has to be a world-class expert at building and deploying Internet applications, which have lots of moving parts.

    Financial resources: the developer has to foot the bill for servers, storage, networking gear, bandwidth, etc., which can be significant for meaningful apps —especially if they succeed.

    In fact, if an app succeeds on a Level 2 platformthe technical and financial burdens on the developer can rapidly become overwhelming — leading me to summarize with the phrase “success kills”.

    On top of that, there’s an issue for the platform provider as well. When a third party app embedded into a Level 2 platform is down, because the developer doesn’t know how to scale or doesn’t have the money required to do so, the error shows up as an error within the core system. For example, whenever an individual Facebook app is down, users see the error within their Facebook pages — even though Facebook itself is not responsible for the app outage, nor could Facebook do anything about that outage even if they wanted to. Ordinary users will not realize who is at fault and will tend to blame the core system — in this case, Facebook.

    For these reasons, I think that while Level 2 platforms are clearly very powerful and are wonderful for users, these issues sharply constrain the number of developers who can build apps to those who have the technical capability and the financial resources to build their own primary Internet systems anyway — which is a small fraction of the people who will ultimately want to be developers on popular Internet platforms.

    The great news, though, is that unlike a Level 1 platform where the burden of exposing the app to users is also placed on the developer, Level 2 Internet platforms — as demonstrated by Facebook — will be able to directly help their developers get users for their apps. This is one of the reasons I have called the Facebook platform a breakthrough — Facebook provides a whole series of mechanisms by which Facebook users are exposed to third-party apps automatically, just by using Facebook. This is great for developers, and hopefully new Level 2 Internet platforms will follow in Facebook’s footsteps — and not in MySpace’s, which could have been a Level 2 Internet platform well before Facebook but instead took a very hostile stance towards third-party developers.

    It is also worth nothing that Level 2 platforms are significantly harder to create than Level 1 platforms. Facebook, for example, had to anticipate and provide technical solutions for a whole series of issues — user interface issues, security issues, performance issues, caching issues, etc. — to provide their plug-in API that providers of access APIs don’t have to worry about. This is perhaps why we haven’t seen more Level 2 platforms — yet.

    Level 3 is what I call a “Runtime Environment”.

    In a Level 3 platform, the huge difference is that the third-party application code actually runs inside the platform — developer code is uploaded and runs online, inside the core system. For this reason, in casual conversation I refer to Level 3 platforms as “online platforms”. Let me explain.

       

    • A Level 1 platform’s apps run elsewhere, and call into the platform via a web services API to draw on data and services — this is how Flickr does it.

       

       

    • A Level 2 platform’s apps run elsewhere, but inject functionality into the platform via a plug-in API — this is how Facebook does it. Most likely, a Level 2 platform’s apps also call into the platform via a web services API to draw on data and services.

       

       

    • A Level 3 platform’s apps run inside the platform itself — the platform provides the “runtime environment” within which the app’s code runs.

       

    In addition, it is highly likely that a Level 3 platform will also superset Level 2 and Level 1 — i.e., a Level 3 platform will typically also have some kind of plug-in API and some kind of access API.

    Put in plain English? A Level 3 platform’s developers upload their code into the platform itself, which is where that code runs. As a developer on a Level 3 platform, you don’t need your own servers, your own storage, your own database, your own bandwidth, nothing… in fact, often, all you will really need is a browser.The platform itself handles everything required to run your application on your behalf.

    Obviously this is a huge difference from Level 2. And this difference — and what makes it possible — is why I think Level 3 platforms are the future.

    Let’s start with one big issue right up front: Level 3 platforms are much harder to build than Level 2 platforms.

    As a platform provider, once you accept the idea that user code — code that you didn’t write and you can’t vet for quality or security — is going to run within your platform, you have a whole pile of issues you have to deal with that a Level 2 platform can simply ignore.

    The Level 2 platform’s apps will be running their code elsewhere — at the end of the day, the running code is someone else’s problem. With a Level 3 platform, all the running code for all the apps is your problem.

    What are some of those issues? To list a few: You have to provide a runtime environment that can execute arbitrary third-party application code. You have to build a system for accepting and managing that code. You have to build integrateddevelopment tools into your interface to let people develop that code. You have to provide an integrated database environment suitable for applications to store and process their data. You have to deal with security in many different ways to prevent applications from stepping on one another or on your system — for example, sandboxing. You have to anticipate the consequences an application succeeding and needing to be automatically scaled. And you have to build an automated system underneath all that to provide the servers, storage, and networking capabilitiesrequired to actually run all of the third-party applications.

    And you probably also have to provide Level 2 functionality — a plug-in API — and Level 1 functionality — an access API — so that third-party applications can actually do useful things once they are running within your system.

    The bad news is that this is a truly intense technical and business undertaking, and not for the faint of heart.

    The good news is that what it makes possible is magical.

    Here’s what’s magical: the level of technical expertise required of someone to develop on your platform drops by at least 90%, and the level of money they need drops to $0. Which opens up development to a universe of people for whom developing on a Level 2 or Level 1 platform is prohibitively difficult or expensive.

    Actually, it gets even better than that. You can provide an open source ecosystemwithin your platform to let users freely share code with one another — actual running code! You can in essence have your own open source dynamic within your platform — in the best case, allowing users to clone and modify one another’s applications with a level of ease that the software industry has never seen. The rate of rapid evolutionary application development that can result from this approach will, I think, be mind-boggling as it plays out.

    You can also, if you want, provide a marketplace that lets people buy and sell code — then you can have the open source dynamic and the profit incentive. The sky’s the limit in terms of how much development can happen on a platform like that.

    The Level 3 Internet platform approach is ironically much more like the computer industry’s typical platform model than Levels 2 or 1.

    Back to basics: with a traditional platform, you take a computer, say a PC, with an operating system like Windows. You create an application. The application code runs right there, on the computer. It doesn’t run elsewhere — off the platform somewhere — it just runs right there — technically, within a runtime environment provided by the platform. For example, an application written in C# runs within Microsoft’s Common Language Runtime, which is part of Windows, which is running on your computer.

    I say this is ironic because I’m not entirely sure where the idea came from that an application built to run on an Internet platform would logically run off the platform, as with Level 1 (Flickr-style) or Level 2 (Facebook-style) Internet platforms. That is, I’m not sure why people haven’t been building Level 3 Internet platforms all along — apart from the technological complexity involved.

    However, I think this will change, because the advantages of being a Level 3 platform — particularly the advantages to the developer, and thereby for the platform — are so overwhelming.

    So who’s building Level 3 Internet platforms now?

    First, I am — Ning has been built from the start to be a Level 3 platform.

    I’ll be writing more about this in another post, but in a nutshell, Ning is a full online platform for creating and running social networking applications. We provide all of the platform functions I described above, including the ability for users to either create their own applications or run clones or modified copies of applications we or other people provide.

    There are close to 100,000 such applications currently running on the Ning platform — you can see them at Ning in the form of all of the various social networks and applications in the system — and that number is growing very quickly.

    Second, in a completely different domain, Salesforce.com is also taking a Level 3 platform approach — Salesforce now provides quite sophisticated ways for users and developers to create and upload code and program the Salesforce platform from a browser.

    Salesforce provides a Level 3 platform both because it lets users easily customize Salesforce to do whatever they need, and also because it definitively trumps the criticism they historically got from packaged software vendors like Siebel who accused Salesforce of not being as adaptable as a piece of software you install on your own servers.

    You probably don’t see this in action much — unless you’re a Salesforce user — but they’re doing really interesting work in this area and getting great results.

    Third, and again in a completely different domain, Second Life is a Level 3 platform.

    It’s a little different in that Second Life provides its own client — for its immersive 3D world — but you can think of the Second Life client as analogous to a browser in that it’s an Internet client that draws on content being sent down from Second Life’s servers.

    Then, within Second Life, there is a complete runtime environment for running code provided by any user — you can create items within Second Life and program them to do anything and behave in any way that you can possibly imagine. And you can, with permission, look at the code of another user’s item and then make a copy or modify it to do whatever you want. And all of that code is running on Second Life’s servers.

    It’s a tremendously dynamic platform that lets users build a dizzying array of worlds and objects that are all completely customized — programmed.

    Fourth, Amazon is — I would say — “sort of” building a Level 3 Internet platform with EC2 and S3. I say “sort of” because EC2 is more focused on providing a generic runtime environment for any kind of code than it is for building any specific kind of application — and because of that, there are no real APIs in EC2 that you wouldn’t just have on your own PC or server.

    By this, I mean: Ning within our platform provides a whole suite of APIs for easily building social networking applications; Salesforce within its platform provides a whole suite of APIs for easily building enterprise applications; Second Life within its platform provides a whole suite of APIs for easy building objects that live and interact within Second Life. EC2, at least for now, has no such ambitions, and is content to be more of a generic hosting environment.

    However, add S3 and some of Amazon’s other web services efforts to the mix, and you clearly have at least the foundation of a Level 3 Internet platform.

    Interestingly, Amazon’s FPS — Flexible Payments Service — is itself a Level 3 Internet platform. You actually upload code written in a specialized programming language — which they called GK, for “Gatekeeper code” — that controls how payments happen; that code runs within Amazon’s online systems. It’s a really innovative way to provide a highly flexible vertical service — and great to see!

    Fifth and last, Akamai, coming from a completely different angle, is tackling a lot of the technical requirements of a Level 3 Internet platform in their “EdgeComputing” service — which lets their customers upload Java code into Akamai’s systems. The Java code then runs on the “edge” of the network on Akamai’s servers, and is distributed, managed, and secured so that it runs at scale and without stepping on other customers’ applications.

    This is not a full Level 3 Internet platform, nor do I think Akamai would argue that it is, but there are significant similarities in the technical challenges, and it’s certainly worth watching what they do with their approach over time.

    These examples illustrate one final point about Level 3 platforms: you have to commit to never killing your platform. This is a sharp difference.

    Think about it: For a Level 1 or Level 2 platform, if you kill the platform, you still have a working and useful system. If the Google Search API gets killed — and it was! — you still have Google Search which is still useful to its users. If the Facebook platform gets killed — which presumably it won’t be — you still have Facebook which is still useful to users as a social networking service in exactly the same way it was before they introduced their platform.

    On the other hand, if you kill a Level 3 platform, you destroy the whole reason people use your system to begin with — to develop and run custom code. If you remove the platform from Ning, Ning is useless — applications don’t run, and users can’t do anything. If you remove the platform from Salesforce, all the users who are using customized apps can’t use Salesforce anymore. If you remove the platform from Second Life, none of the objects or experiences in the virtual world work anymore and the whole user experience collapses.

    Like my old boss Jim Barksdale used to say, it’s the difference between the chicken and the pig at a ham and egg breakfast. The chicken’s involved but the pig is committed.

    I believe that in the long run, all credible large-scale Internet companies will provide Level 3 platforms. Those that don’t won’t be competitive with those that do, because those that do will give their users the ability to so easily customize and program as to unleash supernovas of creativity.

    I think there will also be a generational shift here. Level 3 platforms are “develop in the browser” — or, more properly, “develop in the cloud”. Just like Internet applications are “run in the browser” — or, more properly, “run in the cloud”. The cloud being large-scale Internet services run on behalf of users by large Internet companies and other entities. I think that kids coming out of college over the next several years are going to wonder why anyone ever built apps for anything other than “the cloud” — the Internet — and, ultimately, why they did so with anything other than the kinds of Level 3 platforms that we as an industry are going to build over the next several years — just like they already wonder why anyone runs any software that you can’t get to through a browser. Granted, I’m overstating the point but I’m doing so for clarity, and I’m quite confident the point will hold.

    Three closing notes!

    First, how will we see the new platforms of the future?

    We are used to seeing platforms ship as products — you buy and install a PC or a server and you build an app that runs on it, or equivalently you download and install an open source platform such as Perl or Ruby and you build an app that runs on it.

    The platforms of the future won’t be like that. The platforms of the future will be online services that you will tap into over the Internet, perhaps with nothing more running locally than a browser. They won’t have anything you download, or even an SDK. They will look more like services than software. To paraphrase the Book of Matthew, “you will know them by their URLs”.

    Second, beware overfocusing on the apps of the past when thinking about the platforms of the future.

    Lots of people got confused by the idea of apps running in the browser because when they thought of apps, they thought of the apps they used already on their PCs — Word, Excel, Powerpoint — and not the apps that would get built on the web — eBay, Amazon, Salesforce.com. Now, it turns out in the fullness of time that word processing, spreadsheets, and presentation apps are also moving into the web — asGoogle is demonstrating. But way before that happened, the web led people to create lots of new kinds of applications that were not possible on the PC.

    A new platform typically enables a new set of applications that were not previously possible. Why else would there be a need for a new platform?

    But: keep this in mind; look for the new applications that a new platform makes possible, as opposed to evaluating the new platform on the basis of whether or not you see older classes of applications show up on it right away.

    Third, lots and lots of people have opinions about platforms, but the people whose opinions matter are programmers, and people who can make decisions about what programmers program.

    This sounds incredibly elitist, to which I say: first, the whole point of platforms is that they let people program on them. So people who aren’t programming, or making decisions about programmers programming on them, don’t have a lot to do with them, and often don’t know what they’re talking about. Second, is is really easy to learn how to program — in fact, it’s never been easier. So there’s really no excuse for anyone who wants to have opinions to not learn to program — in fact, that’s a great excuse to learn how to program!

    And on that note, I’m going to go to sleep now and dream about “for” loops and “if/then” statements.

    How to back up the truck in the leveraged buyout business

    From the Wall Street Journal:

    [A new Wharton] study shows that, on average, leveraged-buyout funds can expect to collect $10.35 in management fees for every $100 they manage. In comparison, slightly more than half as much — $5.41 for every $100 — comes from carried interest [their share of the profits on the actual deals they do]…

    The Wharton study draws from a unique trove of data, the actual performance records of a large institutional investor in private-equity funds. That investor shared data from 144 separate buyout funds from 1992 to 2006, with authors Andrew Metrick and Ayako Yasuda, both Wharton professors of finance…

    In the 1980s, fledgling private-equity firms — with funds rarely topping a few hundred million dollars — charged investors a fee of 2% to 3% of cash under management. The fees were to “keep on the lights” — to pay the rent and hire assistants — before their funds generated any profit. Since then, multibillion-dollar funds have become common, and that management fee has evolved into a lucrative source of revenue. A $10 billion fund can generate $200 million a year for a private-equity firm just in management fees…

    Now, what happens if the broad-based credit crunch dries up the supply of cheap debt for leveraged buyouts? Logically, leveraged buyout firms will still raise a lot of money from investors and do a lot of deals, but with less leverage, which will driven down returns on invested equity, which will drive down profits to investors, which will drive down carried interest. Which means that management fees will make up an even larger amount of private equity compensation than before.

    Actually, it gets even more interesting than that. As the graphic in the Journal story explains, management fees and carried interest aren’t the whole story.

    LBO funds also get paid “monitoring and exit transaction fees charged to portfolio companies” (fees that vary based on deal exits), plus “entry transaction fees charged to portfolio companies” (fees that are fixed based on deal entries). These fees of course also come out of the shareholders’ pockets, i.e. the investors who invest in the LBO funds. And they add up — in total, another $4.00 for every $100 managed. Which means LBO funds extract total fees of $19.76 for every $100 invested — of which, as noted above, only a little more than a quarter actually comes from carried interest, i.e. their actual economic purpose for existing.

    What a business.