Dave Jenkins

Every year, the geeks declare ‘Year of the Linux Desktop‘.  So often, in fact, that’s it’s become a running gag.  In fact, Apple has made in-roads, and Ubuntu is more popular than ever.  Progress comes in small steps.

We actually may have taken a relatively large step this week: the new Obama adminstration has declared a very open information policy, and their IT structure shows promise in moving this same direction.  While not running Apache and Red Hat yet, they’ve certainly adopted some open social interaction structures.  It would be safe to say that the Obama administration is the best so far at “getting it“.

The missing element here, and the biggest specific step the US Government could make next would be to demand that all documentation be saved in an open format.  Want proof that Microsoft still has a monopoly?  Try sending someone your resume, proposal, or memo in something other than .DOC format.  If the government simply declared that all archives and transactional documents must be saved in .  The ODF is a deeply-flawed, but acceptable good start.  Ultimately, I am not sure the document format will matter.  Within the next 3 years, I bet that words and numbers and tables and figures and images are simply kept in the cloud.  I know I am not the first one to say this– but I can hope that the government would take an active role in pushing documentation into the common external places.  Cloud computing is not a technological hurdle, it’s a social acceptance problem.  I still encounter many people that resist putting things “out there”.  When pressed, there is no specific reason, other than people think the hard drive on their laptop is somehow safer than the huge servers tucked into concrete bunkers somewhere along the Columbia River.

I would hope that the transparency issue continues to gather steam.  I would hope to see the day when the government simply insists that all documentation: project bids, meeting minutes, deliberations, and especially lobbyist efforts, get published in a format that is easily remixed, chewed up, and boiled around in ways that slightly scare the powers-that-be.  We’ve seen a steady march forward with DARPA since the 60s and 70s, early gopher scientific info in the 80s, and then Thomas in the 90s, but the government certainly has dropped the ball in the last 5 years.  If the government can resume its Jeffersonian role in pushing new things for the republic, and allowing the market to fill in where advantageous, then maybe someone’s next interaction with the government will force them into putting things out there for scrutiny (policy or code), and they’ll realize that privacy ultimately depends on open scrutiny, not secrecy.

No home wifi firewall will protect us from an opaque government.

A good friend of mine (Let’s call him Sam Rothstein) is just finishing up a stint in the hedge fund business.  He is a bit of a quant and an overall critical thinker, so I ran the Keyword Derivative Market idea by him.  His verdict?

“It won’t work”

“Why not?”

“The risk– there’s no way to calculate the risk.  You think you’re all smart and have worked out the percentages on the bell curves and all the possibilities of what might happen that would wreck your prices, then wham! That one-in-a-billion thing that could sink your risk hedges actually happens, because it turns out to be a one-in-a-thousand thing.”

“Yeah, but that’s why I pad the keyword bids a little.”

“By how much?  What amount?  That padding is your determination of the cost of the risk– you cannot calculate it, therefore you cannot come up with a price.”

“shit.”

Sam went on to describe the basic flaws in risk-based hedge funds.  He complimented me on coming up with a business model that had recently bilked billions out of the market, but simultaneously reminded me that there are thousands of people trying to figure this out– many of them much smarter than me.

In the end, a keyword is an expungable commodity, but it also has something what I’ll call “high sucker elasticity“: Retail companies calculate the price they are willing to pay for a keyword position, usually based on some determined cost-of-acquistion equation.  If the price of a keyword bid gets pushed too high (according to a rational cost/revenue calculation), there is always another sucker to buy that irrationally high keyword postion.   Google’s profits are intrinsically linked to the irrationality of the market.

Keyword management software providers like efficientfrontier, kenshoo, marin, and others are making great headway in bringing rationality to this market, and are good for the long haul or large corporate spends– but the little man will always make keyword purchases with snap decisions based on insufficient information.  He’ll get suckered.

To their credit, Google tries to explain this out as much as possible: they make their API open to the keyword management companies, they give away performance statistics for free, they try not to be evil.

The odds on craps are written right there on the green felt, too.

“Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information?” –T.S. Eliot

Many people think back to their juvenile literature classes and remember that Farenheit 451 was a cautionary tale.  They then assume to remember that it’s a cautionary tale against oppressive governments that burn books.  I would proffer that this ‘oppressive fascist regime’ interpretation is a remnant of post-war public school social engineering.  I think that Bradbury might just as much have been lamenting the death of the book as a medium.  The populous of his future dystopia voluntarily stopped reading– preferring abridged versions to formal novels, then pamphlets, and finally, a small steady diet of word-pablum from the government.

I am a few days into Twitter so far, and I am starting to think that we may be one step closer: books became articles several decades ago.  The web shortened those further to summaries, and RSS shortened the news even further.  On a personal level, publishing has exploded; everyone’s an author, a film critic, a technomaven, a pop-diva queen.  However, the publishing medium is getting shorter and shorter.  Back in the day, we had to code our HTML by hand (dammit).  Soon enough, we publi-shit-izens [yes, intentional] realized we could get attention and traffic by simply uploading pictures of our cat, or describing the toast we had that morning.  TypePad made this all too easy.  Blogs got shorter.  Now we’ve come to twitter, and we’re down to a simple 160 characters.  Services now can simply ping each other’s mobile phones and tell you if a friend is within 500 feet (physically).

My money is on the iPhone app that can sense your mood from your body heat and movement while it sits in your pants pocket– and broadcasts out to all your peeps when it judges that you’re likely in heat.

Mind you, I’m not passing judgment one way or the other on this.  It’s not evil or good– the text is just getting progressively shorter.  I am still trying to figure out if it’s because the reader attention-span is getting shorter, or because 99.9% of the masses have anything viable to say beyond 160 characters.  I suspect the latter.

This post took me ten minutes to write.  I still haven’t said jack that has not been said a thousand times previously.  Do you feel smarter now that you’re at the end?  This post was really just a way to get my twitter address out: @davejenk1ns

note: that is a real photo of a real book burning in 2007 New Mexico, United States.  Some Christians think Harry Potter is evil.

Google is worth bazillions of dollars because they’ve created a commodities market: people bid a price on a keyword, and when someone clicks, that keyword bid is consumed, just like a barrel of oil, pork hind, or frozen concentrated orange juice.  The trick is that the core commodity here, marketing budgets, is pretty large and very renewable, and with constant upwared pressure on prices.

If we were to look at this system like a commodities market, would it be possible to create a derivatives market?  Could one short-sell keyword bids?  Could one create meta-bids on the value of a group of keywords?  One possible model might be to offer a time-limited, set price for clicks for a given keyword regardless of the current “market price” trading on that keyword position.

For example:

1. Let’s call our derivative trading company “Keyword Derivatives, Inc”
2. An online shoe company buys a contract from “Keyword Derivatives, Inc” for 100 clicks before the end of the week for “Chuck Taylor High Tops” at $1 each.  Total price of the contract: $100.
3. Keyword Derivative traders in turn will bid to get position for “Chuck Taylor High Tops“.  Depending on demand, they may pay Google $.05 per click, they may end up paying $5 per click.  Keyword Derivatives is assuming that risk.
4. Keyword Derivative traders must increase their bid amounts in order to fulfill the 100 clicks before the end of the week, while trying to maintain their profit margin by keeping bids under $1.  Keyword Derivatives may end up spending $50 to google, it may also end up spending $172, depending on its ability to optimize keyword placement and bidding strategy.

Many ecommerce companies try to manage their keyword budget as a certain percentage of sales.  Most companies who are buying keywords have a set price in mind for the cost of acquiring a customer.  The problem is that the bid structure of Google keywords is highly volatile and only trackable in hindsight  This makes keyword management very hard to manage and track for optimization.  There are many keyword management companies out there with predictive modeling to try and guess the optimal price for a given bid, but what if these companies were to go ahead and offer their own set price, and take care of the optimal bid themselves?  The keyword management software company could actually become a keyword brokerage.  They have the expertise, the software, and the ability to contract with their client to deliver the clicks.  The only missing part here is the in-house arbitration expert to figure out how much risk is in the keyword, and what price to charge the client for the guaranteed 100 clicks.

Hmmm… this might just work.  Does anyone know any quants looking for a job?