What do ringtone sellers, third party shareware sites and print magazines have in common? They’re all struggling for survival, and will stop at nothing to extend their miserable existence by even a fraction.

Monstermob makes its money by selling mobile phone ring tones. Actually, it makes its money by scamming unsuspecting customers. You buy a single ringtone but they sign you up for a monthly subscription. It works on the principle of stealing a little money from a lot of slightly lazy people with better things to do than claw back a few dollars. If you need to trick your customers like this you’re doomed. It’s either dishonest, or a last-minute stand against a broken business model. Indeed, Monstermob’s shares are currently at a record low.

Surely we’d never see a similar thing in the software industry? Think again. A lot of software companies sell their software through third parties such as Digital River. One of these third party ecommerce providers – SWREG – has started asking an additional question at the end of each sale. If you’re not careful you will be signed up to a $10 / month subscription. This is simply dishonest, and clearly not in anybody’s long term interests. It’s a sign that their business model can no longer work. With the arrival of Google checkout, software vendors can now sell their software themselves for a commission rate of effectively 0%. There is no room for third parties such as SWREG. The only way they can survive at all in the short term is to stiff their customers and partners.

I had a similar experience with SQL Server Magazine. I couldn’t find my paper subscription so I downloaded an article from their web site. I was led to understand that I was buying a single article but was signed up for a monthly subscription. This behaviour is so obviously wrong that it can only be a desperate attempt to stave off the inevitable death that most print magazines face.

Although I can’t condone this behaviour, I can understand it. Good people can do bad things. If your company were doomed, what would you do?

The odds are you use psychometric tests as part of your interview process. If you don’t, experts probably tell you should. Unless you understand their assumptions and interpret them correctly then you will hire the wrong people. Here’s why.

Firstly, these tests are based on a number of assumptions. They assume that, fundamentally, we have a constant personality that predicts our behaviour. This might seem like common sense, but it’s good to question common sense occasionally. Do you behave the same when relaxed and when stressed? With strangers and with friends? At work and at home?

The tests also assume that we can all be measured against similar yardsticks. We are all points on a graph with axes corresponding to universal traits.

You need to be aware of how these tests are developed. Researchers ask thousands of people to describe themselves and others and then examine the words used. Assuming that words used correspond to characteristics, they search for correlations between words. If there are strong correlations, then one of the characteristics is eliminated. For example, if ‘nice’ always corresponds to ‘kind’ then both describe the same trait so one is discarded. Of course, there’s never a perfect correlation so information is lost.

Personality is therefore distilled down to between 3 and 16 factors. This results in gross over-simplification. Carry out the same exercise with physical characteristics and you’d end up describing everybody in terms of their height, weight and skin colour. That broad-brush picture would give us some information, but it’s the lost nuances that are important.

You should note that these tests ignore some realms of personality. Some of the missing traits are important to the workplace, some are not. These tests rarely tell you if you’re an asshole, evil, gullible, attractive, intelligent, a hard worker, promiscuous or religious. Although not always relevant to work, these are important characteristics that people have.

The last point is more subtle and is about interpreting the results. When evaluating the world, our minds use certain heuristics and take certain short cuts. Normally, this works well but it can introduce some biases. One of the most notorious is that we tend to ignore base rates. For example, say a doctor tests you for a disease. The disease affects one person in ten thousand and the test is 99% accurate. You test positive. How likely is it that you have the disease? Take a moment to think about it.

Most people – and this includes doctors and statisticians – will say 99%. This is the wrong answer. This becomes clear if you think in concrete rather than abstract terms. Take ten thousand people. One person is ill. The test is 99% accurate so 1% of people will have false positives. That means that 100 people test positive. Since only one of those people is actually ill, the odds of you being ill given a positive test result is actually only 1% (ignoring the negligible effect of false negatives). The important point here is that the base rate is important. The underlying incidence of the disease massively affects the probabilities.

Your mind can take you down a similar blind alley with psychometric test results. You can see this from the diagram below. Say you’re trying to hire a developer. Obviously you want to hire an outstanding one, and they are rare (the small circle). You’ve noticed that the outstanding developers you know almost all share similar traits (the red area) so you decide to test for that trait.

You find a developer with the required trait. This group is represented by the large circle. However, because many average developers may also have the required trait, you are much more likely to have picked somebody in the blue area (average developer with the trait) than the red area (outstanding with the trait).  You have been misled by the base rate – the number of developers in the general developer population with the trait. In other words, if you hire on the basis of the test results, you will likely hire the wrong person.

In conclusion, by all means use psychometric tests but understand their assumptions and interpret them carefully.

We’re giving away a free, signed copy of Rick Chapman’s In Search of Stupidity: Over Twenty Years of High Tech Marketing Disasters to the first 100 people who register for the Business of Software 2007 conference. This an awesome book, with 44 five star reviews on amazon.

Rick is speaking at the conference. He’s definitely worth listening to.

You can find out more at https://www.businessofsoftware.org/register.html

Sign up before August 15th 2007 and you can get $600 off the full 2-day conference pass (a 33% discount). That means you’ll be able to hear a whole range of world-class speakers, including Guy Kawasaki, Joel Spolsky, Eric Sink and Hugh MacLeod for less then the real cost of an iPhone. Go to www.businessofsoftware.org/register.html to find out more

P.S. You can still download a free copy of ‘Eric Sink on the Business of Software’ from the site.

We’re going to open up 3 short speaking slots to the public. To kick it off, we’re setting up virtual auditions via youtube so you persuade us to give you a slot.

If you’d like to speak – and get an all expenses paid trip to San Jose to attend the best software conference ever – then go to www.businessofsoftware.org/softwareidol.aspx to find out more.

DEC used to give a turkey to every employee at Thanksgiving. At its peak, that was 140,000 turkeys. An employee once suggested to Ken Olsen that they buy a turkey farm. Olsen didn’t. What would Google do?

There are a couple of principles here. Firstly, companies should stick to their knitting. When computer companies buy turkey farms, or credit card companies get into cable television (American Express’s doomed joint venture with Warner) or food companies buy tobacco firms (Nabisco and RJ Reynolds Tobacco) the outcome is seldom happy. We all like a good story, and there’s always a good story about why these unions should work, but they almost never do.

Similarly, Google can spin a story to justify getting into the electric car business, or why they should invest in biotech, but these smell like post-hoc rationalisations of the unjustifiable. In the case of 23andMe, the stench is putrid – a classic case of corporate misgovernance, with Sergey Brin using his company’s assets to make a private investment in his wife’s company.

This brings me to the second principle. If the only thing a company can do with shareholders’ money is to piss it up the wall on the founders’ playthings then they should return the capital to shareholders. They can then piss it up walls of their own if they want to.

Google would buy the turkey farm.

At Red Gate, our developers are clever people. Academic qualifications aren’t a perfect guideline to software skills, but most of our developers have excellent degrees from excellent universtities. Almost without fail, they fit a similar profile. Most started coding by the age of 11 and have been writing software ever since.

There is a drawback to this. Put a bunch of very clever, very similar people in a room together and you can get some really dumb ideas out. Think Bay of Pigs. You see this a lot in software – unusable, untargeted applications developed by really bright people.

At Red Gate, we avoid this in several ways. Encouraging discussion is one. Creating an atmosphere where people are allowed to disagree is another. One that works really well is to throw somebody different into the mix. At Red Gate, that person is often Dom, aka Mr Flibble:

Dom isn’t a developer – he’s an interaction designer. To see just how different he is to the stereotypical developer, take a look at Mr Flibble’s flickr pages.

Having a dissenting view is always good. Dom doesn’t always win his battles, but all software teams need somebody with a different perspective. Somebody who’s willing to stand up to a group of really clever, scary people and say "You’re wrong. And here’s why."

They say that a wise man learns from other people’s mistakes.  I’ve always found it easier to learn from my own. They’re more personal, and the lessons are clearer. It’s one thing to read that cash flow that kills a business, it’s another being unable to pay salaries because a customer won’t pay. It’s one thing to read that employment contracts are important, it’s another to be sued by an employee you’ve fired whose contract you cobbled together yourself to save a few dollars. It’s one thing to be told to listen to your customers, it’s another to launch a product and watch it flop because nobody wants it.

I do, however, try to understand my mistakes after I’ve made them. Often the lesson is obvious, but sometimes it’s more subtle. Occasionally I come across a blog entry or a paragraph in a book that helps me understand, deeply and with clarity, why what I did was so dumb. It gives me the information I need to interpret my mistakes and to learn from them. Even more rarely – once or twice a year maybe – I come across a person or a book that streams those insights out, sentence after sentence or page after page.

What does this have to do with software? Eight years ago, Simon Galbraith and I set up Red Gate Software. Since then, we’ve grown from 2 people in a bedroom to just under one hundred people. We’ve been profitable almost all that time. I’ve made all the mistakes at the beginning of this post, and more. The mistakes I’ve made aren’t unusual. Everybody makes similar ones starting out in the software business. I have, however, been lucky enough to stumble across a number of people who’ve helped me learn from some of my mistakes.

Here are a couple of examples. The second developer we ever hired was mediocre. After much hesitation, we fired him. In Peopleware, Tim Lister explains how a hot-shot developer is orders of magnitude better than a mediocre one. Even if he costs twice as much, you’re getting 1000 times more so it’s worth it. It just doesn’t make sense to hire mediocre developers. This is something I’ve always known, but until I made the mistake and read Tim’s book I didn’t truly understand it. More recently, we tried to give our developers performance related bonuses. That was a messy and expensive disaster. Before we tried it, I knew the theoretical pros and cons, but until I’d made the mistake and Tim explained why, that knowledge was useless theory.

Jeff Pfeffer’s book Hard Facts, Dangerous Half-Truths and Total Nonsense gives more insights into performance related pay. Not only does Jeff demonstrate that performance related pay doesn’t work, but he also shows that much conventional wisdom is simply wrong. With his help, I took my specific, first-hand, failure implementing performance related pay and turned it into a general rule about conventional wisdom.

Whether you’re a Micro ISV or Microsoft, Tim and Jeff are but two of the people you should listen to. I’ve put together a conference where Tim, Jeff and some of the other world-class thinkers, writers and doers I’ve come across will be speaking. You should go. You can find out more at www.businessofsoftware.org.

I’m giving away a free eBook of "Eric Sink on the Business of Software" (worth $13) to people who’d like to find out more about attending the Business of Software 2007 conference in San Jose later on this year. Visit www.businessofsoftware.org to find out more.

The conference web site is now live. I’ve managed to persuade a whole bunch of world-class speakers to talk over 2 days in San Jose at the end of October. The speakers include (in no particular order):

Guy Kawasaki
Joel Spolsky
Eric Sink
Rick Chapman
Dan Nunan
Jennifer Aaker
Tim Lister
Jeff Pfeffer
Hugh MacLeod
Bill Buxton

All awesome people with a lot of insights to teach. To find out more, visit www.businessofsoftware.org

How many web 2.0 companies can you name? I can probably think of about 10. The ones that pop to the top of my mind include flickr, digg and youtube.

According to web2.econsultant.com there are over 1,200 companies that call themselves ‘web 2.0’. The true number is probably a lot higher than that. There are 54 bookmarking services alone. I recognise one name in that list (del.icio.us). Digg isn’t on there. The others don’t ring a bell.

When we estimate the chances of something happening we’re not rational beings. We don’t coldly analyse the probabilities. Instead, we’re biased towards vivid, easily imaginable outcomes.  If asked whether murder or diabetes is a more common way to die, we say murder. We’re more worried about our flight than the drive to the airport. We’re wrong on both counts.

We also tend to exaggerate the similarity of things in the same groups. If two items share one characteristic then we assume they share others too. I’m an ex-software engineer. Bill Gates is an ex-software engineer. Therefore I can expect to duplicate his successes. That definitely doesn’t follow.

We’re seeing a similar thing with Web 2.0 sites. When we think ‘Web 2.0’, we think of Digg, the vivid and easily generated example. We don’t think of the other 53 social bookmarking sites that will fizzle out and die. We see superficial similarities between Digg and our site, and draw incorrect conclusions (hey! We both use Ajax! We both use the word ‘social’ to describe ourselves!  Therefore my site will be a success too!).

We can see the same cognitive biases when we think about startup failures. How many internet startups in the 1990s failed? Like me, you’ll probably come up with a figure based on the easily imaginable, high profile failures of the era (think webvan and pets.com). In reality, the five year survival rate of companies receiving VC money in the late 1990s was close to 50%. That’s actually pretty good.

Several things happened in the last bust. A few companies lost spectacular sums of money. More companies lost a few million dollars of VC money. Some companies just lost the savings of friends and family. Others – a significant proportion – struggled on, changed and somehow survived. It’s the dramatic implosions of the first group that we remember and that colour our perception of the bust.

So what will happen this time round? Will the web 2.0 boom lead to a bust? The eye watering and eye catching investments of the last boom are missing, so there won’t be a spectacular bust. On the other hand, almost all of those 54 social bookmarking sites will quietly fizzle out or morph into other, hopefully more sustainable, businesses.

Web 2.0 will die not with a bang but a whimper.

I’m running a conference on the business of software (www.businessofsoftware.org). This is the second venture I’ve set up, so I thought it would be a whole lot easier than the first (in 1999 Simon Galbraith and I set up Red Gate Software). It should have been easier because i) I’ve learnt a lot and ii) The technology now is a lot more mature.

Up to a point. It’s still damn fiddly.

Back in 1999, taking credit card payments was hard. You had to set up at least two merchant accounts (one for mastercard / visa, one for American Express). Or you could use a provider like WorldPay (very expensive, atrocious service and not to be touched – at least my experience has taught me something).

Nowadays, there’s PayPal and Google Checkout. Right, I thought – I’ll just use one of them. PayPal charge about 2.5%. Google Checkout’s actually free, assuming you’re an adwords users.

However, the next few days revealed a few glitches. Google has an unfortunate habit of not actually paying its customers the money it owes them. And I couldn’t even manage to work my way through PayPal’s sign up process. That didn’t stop them from debiting my credit card though. Twice. And they’ve got no record of my payment.

It’s not 1999 any more. This stuff should just work.

So, back to square one. I’ll soon have my old-fashioned merchant accounts through my local bank. At least they’ve not asked me how much inventory I’ve got in my warehouses this time.

Ajax is the dancing dog of software development. Creating platform-independent, highly interactive, installation-free applications is a noble aim, and Ajax is a very clever solution, but it is not a solid foundation for the applications of the future.

Writing thousands of lines of Javascript, running as an interpreted language inside incompatible web browsers, communicating with web servers using slow and verbose data streams via stateless protocols designed for text-based hypertext systems is an absurd solution to the problem.

Abstractions will be developed to eliminate some of the pain. Frameworks such as Atlas will help ASP.NET programmers, and the Google Web Toolkit will help people using Java. But the underlying foundations will still be on sand.

Ajax might be the only – and a very clever – solution to the problem given current constraints, but rather than trying to create more and more hacks to overcome the constraints, shouldn’t we be removing the constraints?

There’s a lot of hype about Web 2.0 at the moment. Currently, it’s just a meaningless label stuck on a meaningless bubble of technology and marketing hype. Why not make it a real Web 2.0, rather than just a pointless naming exercise? Bin HTTP, HTML, XML, the web browser, and Javascript. Web 1.0 was a prototype. Throw it away and let’s do the next version properly.

In the UK, the term ‘dog-whistle politics’ is used to refer to campaigning that contains a deeper message only audible to a certain audience. In politics, the hidden message is often something that’s not quite acceptable. Michael Howard used it in the UK’s 2005 election campaign to appeal to voters concerned about immigration but without explicitly mentioning his plans.

You can get a more benign form of steganography in marketing. You know the big, glossy full-page adverts in tech magazines? They’re not always aimed at you, the technical audience. Their audience is often venture capitalists and private equity firms. The message isn’t ‘buy our software’. It’s ‘buy our company’.

There are other examples of dog-whistle marketing out there too. Adverts can contain messages to regulators as well as to consumers (do you really think those drink responsibly messages in tequila adverts are aimed at you?). Sometimes the message is really aimed at a competitor – in the UK, Ryanair, Virgin and Easyjet have all run campaigns whose hidden aim was to rile British Airways.

You need to be careful with dog-whistle marketing though. It can backfire. Do it too overtly, or use the wrong hidden message, then you can alienate and lose your audience.

In October 1999 Simon Galbraith and I set up Red Gate Software. Over the past 8 years we’ve grown from 2 people to almost 100. Although we have had our successes, we’ve also made plenty of mistakes.

I’m running a conference in San Jose at the end of October. The people I’ve invited to speak are world-class thinkers, doers, writers and speakers who I wish I’d heard of earlier, and listened to more. I’m hoping that by bringing them together in one place, over two days, we will all learn how to grow, set up and run our businesses better.

To find out more about the conference, go to www.businessofsoftware.org