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Reflexivity Capital Group

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OPEN SOCIETY & OPEN


S O U RC E C O D E
“PICKING TOMORROWS LEADERS ”
BIFURCATIONS IN THE TECHNOLOGY INDUSTRY

THE CHOICE OF A GNU GENE RATION

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

INTRODUCTION

Trilogy, the endless sum of threes: Predictions, explanations and generalizations. The D-N model (Deductive
nomological) best explains this intertwining of events. To perceive praxeological events the participant has an existential
choice of formulating a theory.

“Combining the given theory with a set of initial conditions yields predictions., Combining them with a set of final
conditions yields explanations. Comparing known initial and final conditions yields generalizations and serves to test the
validity of the theory.”

This formulation struck me with a revelation. Explanations are the easiest to generate as they can neither be verified nor
falsified.

Before embarking on this thesis I was hesitant my writing may turn out to be nothing more than a regurgitation of today’s
practical philosophers, however upon further thought, I retraced the cultivation of my thinking and came to the conclusion
that I did have something valuable and new to contribute. My journey into creating a new framework began in the
Financial Markets with George Soros and led on to Gregory Bateson, Ludwig Von Misses, David Hofstadter, to today’s
most beautiful science of Chaos theory. I find it ironical how I expect to uncover higher order and patterns in a seemingly
random and disorderly system.

Bateson noted that the majority of us are trained to think by induction from data to hypothesis. But never to test data by
deduction from hypothesis derived from the general laws of philosophy and nature. The deeper one dwells on cultivating
a better framework of thought, the more patterns, correlations, analogous system parallels seem the only expedient form
possible. I do not intend to use this thesis to defend technical analysis but a case can be made. Many criticize and look
to the study of bar charts as mundane. Most systems that involve feedback mechanisms are apt to be chaotic in nature.
Chaos theory suggests observing the chart patterns generated by these systems as an aide to elucidate the system’s
underlying equations. If markets are chaotic and do conform to a feedback mechanism, technical analysis should be of
immense value to the participant.

I have found reflexivity very useful in providing an insight to the workings of feedback systems. Soros claimed an abyss
when it came to applying the theory to the technology sector. Loosely in his book “Alchemy of Finance” he challenged
computer scientists by stating they were too involved in the technology field to observe and understand reflexivity or yet
alone apply it successfully. To the latter, he does have a point. That however is a long story and will be told years hence.
(I can hardly keep a happy face when I think how my meager resources were depleted every time I shorted that sector
with the firm belief we had reached a twilight zone in Internet stocks.)

The bulk of this thesis dwells on Meta classes. Classes are necessary due to the complexity of what I intend to explain.
Recursive cycles within Meta recursive cycles ad absurdum. What makes it even more complicated is that they
intertwine creating strange attractors which give birth to new cycles. To top it all off, it is not the system in itself that I am
seeking to validate but I use it as an analogical parallel to the concept of human open society. I go on to defend this
system by comparing the expedient results it has achieved against other technological developments which ended on
the way side.

How the latter came about was a curious fantasy I had for a couple of years ago after reading Soros description of his
first encounter with Karl Popper. Karl Popper to Soros surprise screamed “But you are not American?” As far as Karl
Popper was concerned it was natural for Soros to understand the ideology of Open Society as he had in his youth
experience closed ones. I have always fancied meeting Soros and commenting. “Why didn’t you use a complete
abstract system that is common to both worlds to explain and validate open society”.

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

The Kondratieff Cycle in Computers

Computer operating systems (OS) are comparable to human matrimonial systems. No mater what the prevailing system
is, the alternative always looks better. Participants of the currency markets would agree, whether in favor of pegged
currencies, free floating or currency boards, none are permanent Holy Grail solutions to the foreign exchange system.

Studies in natural sciences reveal omniscience is unattainable to humans. Through human epistemological apriori, the
ultimate, derived by deduction, becomes with time open to further elucidation. This leads to the cognition of flaws in the
prior accepted “ultimate”. By working with the theory all human constructs are flawed, it leaves room for infinite
improvement. Validity of the expediency of such a theorem can be observed in the gigantic strides software operating
systems have attained.

As the 80’s rolled in, computer programmers sought satisfaction innate within the act of programming. Games and
software were exchanged for practically nothing. It was akin to spend money on such items. Hardware was expensive
and provided by a few monopolistic institutions. Foremost among them was IBM. Monopolistic attitudes within the
hardware industry reached their zenith with IBM developing PS/2 computers to set a demarcation between their systems
and the rest of the embryonic industry. Along came Intel, AMD and NSM providing affordable processors for Personal
Computer. This began a vicious price cycle in Hardware products.

IBM’s regime began in earnest to crumble as hardware prices spiraled in a reflexive free fall rout. Taiwan continued
producing Dram memory at lower prices, and No-name computer manufacturers sprang from all corners of the earth.
The Best Market that could be observed was the German Computer Industry and IBM as a case in point.

Every year Europe has the largest computer convention “CEBIT” similar to the Comdex in the USA. This is organized in
the small city of Hanover, Germany. The German Computer market was organized in a military structure controlled by
US corporate Marshals (IBM, Compaq, Hewlett Packard), channeled by key main distributors (Allnet, Merisel, Actebis,
M&S Electronic) to major wholesale companies (STS Hamburg, P&T, Siemens Nixdorf). (See above Figure).

With no alternatives available IBM maintained the rigid regime of resellers, large corporations and distributors. Even in
the face of Dram and Hard Drive prices continuing their free fall, the regime with its large customer base survived
through revenue generated from repairs, upgrades and the fear of being cast outside the major networks.

Then came the era of the go-go gunslinger Computer Brokers! Foremost was Bluecom Denmark, with a satellite office
Rubicon Computer Brokers in Berlin Germany. Its specific objective was to provide an alternative to name brand
distributors and resellers. Rubicon purchased Major on 3rd based memory from Taiwan or directly from Texas
Instruments, labeled them Q-Byte (IBM, CPQ and HWP Compatible with life time warranty) and sold them for 30% less
than what original IBM memory sold for. Rubicon made a killing in the memory market. It was not long before IBM lost
over 60% of the orders from its distributors and Resellers for upgrades. This regime was benign for Rubicon. On one
hand it bought finished memory products for roughly $30 and sold them with a little beautiful sticker for $90 (IBM original
memory sold for $120). It was the best of all worlds. The regime crumbled to the ground less than 2 years thereafter.

A further dissemination of hardware prices occurred in the networking sector, IBM had dominated for a while with Token
Ring cards. Olicom A/S (olcm) tried to accomplish a similar fit but the era belonged to cheap effective Ethernet
networks, spearheaded by 3com. Again a vicious cycle caught on with Olicom, Novell, SMC, and No-name brands mass

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

producing Ethernet cards. Prices have fallen from $100 down to single digits today. During last year’s financial crisis
th
Olicom (OLCM) sold off from a share price of $25 down to fractions 3/8 . The last I heard the company was bought out.
(I really do not know why? I guess that is the 64,000 question that remains unanswered by the buyers).

No-name brands became household names as Dell, Gateway, Micron replaced Compaq, Hewlett, Packard Bell and
IBM. Investors believe the cycle is that easy and straight forward. As will elucidate later in this presentation I contend a
different kind of bifurcation is occurring. The last announcement IBM made was it had stopping retail outlets from
carrying its Personal Computers. The cost of a Personal Computer has fallen to less than $300 retail. (E-machines are a
case in point). When Yahoo bought Geocities based on a subscriber base at $1500 a user, Idealabs began offering free
PC’s. A ticking bomb awaits Dell, GTW and AAPL.

Time
Origin

Ultimate Price Low Ultimate Price High

At the other End of the 80’s spectrum Bill Gates pioneered the software industry into a capital generator. Windows
(Microsoft), Solaris (Sun Microsystems), Sco UNIX (Novell), Unixware, operating systems (OS) enjoyed rising software
prices. The industry appears to follow a figure 8 maneuver as the two worlds swap position. Software enjoyed benign
rising price while Hardware witnessed a vicious cycle with a veritable rout in prices. Microsoft’s monopoly reached its
zenith with the birth of Windows 95.

Bifurcation in Leadership, the Birth of a new Cycle

Ulcer of GNU License & Open

Source Code

Within the womb of this benign software price cycle, an ulcer unlike any other emerged. Software developers used
whatever tools as a means to an end. The end was money and the means just happened to be software development.
Naturally quality and efficiency was sacrificed. Concepts as Soros puts it should be explained not defined. College
students and computer hobbyists sought an operating system open to further development. A system where participants
do not have to wait for months before patches or updates become available. They sought a system with instantaneous
feedback mechanism that would help propel it to higher heights. College programmers, computer hobbyists and hackers
alike spent countless hours writing applications but didn’t have money to protect authorship. A GNU license was
established which allowed anyone to take source code or complete applications of a fellow programmer, use it to his
hearts content and eventually sell it without offering the original author a fee. This could be done under one condition. He
was not to remove the original Authors name. Satisfaction was derived in being known as the inventor.

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

A university student “Linus Tovald” developed the first kernel for such an operating system “Linux” (A Unix Clone
system). Computer programmers, high school hackers and the science community responded to this the way Indians
respond to wild fire. Three keywords described this operating system.

1.) Fallibility

2.) Reflexivity

3.) Open system:

Fallibility:

At the tenet of the system is the belief that no program is flawless. With every developed kernel, the source code is
posted on mirrored servers all over the Internet. Free for review and update by any one, from Europe, Asia, America,
Russia all the way to Africa. Literally within minutes of a kernel being written, the writer is already pinpointing flaws in his
own work open for improvement. This is of immense relief to developers as they no longer have to shun criticism but
welcome it eagerly. Flaws are sought after in a race for a new kernel update. This leaves room for infinite improvement.

Reflexive:

All developers and users of this system create their own software. No one is paid. As each develops and compiles an
application, he does not consider it as a means for the attainment of a specific end. Satisfaction is derived in the means
itself. It is a hobby to create an application that is more powerful, better and free compared to a similar application from a
commercial vendor. As we shift into a new generation of computer users, participants seek more power and control over
the operating system they use, and the processes run. The Free applications (Commercial applications such as
WordPerfect are free on the Linux Platform) lure users to the Linux system thereby increasing the amount of developers.
This in turn increases the amount of applications coming out every fortnight and Linux websites popping up everyday.
The amount of Linux users has grown exponentially in the last decade. The number one none funded operating system
runs 70% of all Web servers on the Internet. Visit http://www.linux.org for further analysis of this system. Quality is sought
after, making the operating system gain in stride against its competitors in terms of uptime, speed and expediency.

Open System.

Feedback within the system validates its existence. The platform is like an open book.and is able to be run on a MAC,
x86, or Sparc platform. The second the OS is upgraded (happens almost every day) exploits are posted on various
portals and newsgroups so as to expose flaws within the new system. This direct feed back from the users allows
instantaneous adaptability of the system and insures its survival. A vivid example was the “ping of death loophole” two
years ago. This allowed users to compile the source code of the ping program and send large bits to targeted Network
PC’s crashing the targeted computer. Within less than 48 hours an upgrade patch was available for the Linux system. It
took Sun over 3 months to come up with a similar patch for their Solaris operating system and much longer for Microsoft
to catch up.

Many were of the opinion that Linux systems were the most vulnerable as its open architecture and constant printing of
flaws within the system weakened its security considerable. To an extent they did have a point. Any new born baby is
apt to have defects in its first stride. However the same open architecture and belief in endless flaws has allowed Linux
to jump quantum leaps in these few years to be the most secure OS (Operating system) in the Technology industry.

An ulcer unparalleled

The power of this embryonic software is unparalleled. Sun Microsystems charged over $3000 dollars for its operating
system “Solaris” and relied on sales of this product for the bulk of its revenue. Sun tried to come up with a similar version
Solaris for the x86 platform to hamper the growth of Linux. The end result was Sun dropped the price of Solaris steadily
from $3000 down to only $10 today for shipping costs. Yes indeed, they give away Solaris for Free! But they get the

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

classic response, to whom? Novell used to sell SCO Unix with a $1500 dollar price tag. Today one wonders if the
system still exists. Mind you millions are spent daily to create programs, commercials and upgrade the system.

After shunning it and claiming a hobbyist and open system could not survive, commercial organizations are embracing it.
Large funding is being thrown behind it. Hewlett Packard spent over 10 Million on Linux Developers. Redhat got a
standing ovation from the philanthropic wallstreet with its IPO (Rhat). IBM always late to adapt, has forgotten about its
nightmare foray with the closed OS2 product and quickly purchased Whistle (http://www.whistle.com). You need only
mention Linux, FreeBSD associated with a company and the stock soars. The known fact is Linux was the operating
system created from the Internet and community collaboration. And indeed it is FREE.

Comparing Open and Closed Systems

The gigantic strides attained by Linux because of its open system architecture should not be taken lightly. Consider the
hardware division and how IBM blew it. Long before the first 32 bit architecture slots came out, IBM released computers
with the Micro Channel Adapters (MCA). This was the first true 32 bit architecture ever on the market. However not a
single algorithm was released to the masses. This hindered further development from the science world as IBM sought
to keep it as their best secret. Less than two years later the first “PCI” versions surfaced followed naturally with open
documentation. The Science world embraced the PCI standard and MCA’s are a forgotten case. Ask anyone today
about MCA and they would bet you are talking about a record label. With open documentation various vendors were
able to perfect the PCI architecture. This goes to show that when a problem and its flaws are exposed they lose their
power over you.

What about infinite improvement and the power behind such a framework of thought? Have you ever wondered what
operating systems NASA uses? Well do not be surprised if you read about NASA preventing use of Beowulf. Imagine
what happened as Computer prices and Processors fell. As soon as the next generation of Pentiums from Intel come
out the old processor prices are slashed by more than half. Hobbyists thought of clustering old computers together.
Linux was the natural operating system selected. As opposed from COW’s (Cluster of workstations) Beowulf consist of
one main server, keyboard and monitor connected via a private network to several old client workstations. Beowulf
combines the power of these workstations into a giant supercomputer that is 3 to 10 times faster than the fastest
supercomputer in the shop while keeping its cost at 1/10th of the price. You end up making your personal computer a
supercomputer worth high five figures through power multiplication of the cheap old clients you connected to your private
home cluster. How else do you think hackers can afford to crack bank passwords with only a Pentium 133Mhz? That
Pentium 133Mhz becomes a whole different computer when he runs “Free source code” and connects several old
computers to his private network to form a large cluster with Beowulf applications. For more information of Beowulf visit
http://www.beowulf.org. Infinite improvement is virtually endless as long as we recognize no human construct is in
possession of the ultimate truth.

As the womb produces a healthy GNU open source code system, software prices have began a vicious cycle. Sun
Micro Systems rushed off to buy StarDivision’s Staroffice and offered free Cdroms at this year’s Comdex. Piracy over the
Internet has become easier than sliced bread. Free available software together with easily accessible pirated
commercial products feeds on itself. While regulators monitor the standard dot.com, dot.net, dot.org, and dot.to domains,
tldns (http://www.tldns.com the underground Extranet) has became the defactor surfing ground for most Linux machines.
One becomes part of an underground extranet known only to like DNS servers. The domains grow at exponential rates
from dot.finance, dot.hackers, dot.hedgefunds, dot.banks, dot.software.etc.

Hardware The Next Benign Cycle

A like fetus has been developing into the dying womb of the hardware industry. Computers are shifting from the standard
normal PCs to portable gadgets. At the forefront is Sony. They are well ahead of the curve and will rack in tremendous
profits from high priced hardware. From portable Mp3 players, memory pens (64KB), digital cameras, hologram
computer lights, to portable wearable monitors. To view my stock charts I wear a pair of them connected to the output of
my video/TV card and I can perceive a 21 Inch screen at the comfort my sofa.

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com
Reflexivity Capital Group
Europe Tel: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com

For the wrong choice of words I should have referred to the fetus in the womb of the giant software industry as an ulcer
that eats away at the wombs wall eventually sending prices to bottom levels. That within the Hardware industry is simply
shading old skin for new. How does one pick giant leaders in this new rising hardware industry?

A Leading Indicator

The best ideas are the simplest ones. Consider this. The research is free. From the comfort of your desk, Fire up your ftp
client application to ftp://ftp.kernel.org and download the latest unix stable kernel. Then likewise download the latest
experimental kernel. Initiation of a string of commands leads one to the Menuconfig display. If words could shout this
screen would. That and technical analysis is all the X-ray vision one needs to dissect the mind of the NDX (Nasdaq 100).
Anyone who will but take the time would gain much insight from these screens. Ironical how to gain insight to expedient
results one seeks a free system for the clues. This system open to exploits and ever quick to adapt led me to pick
“mp3.com”, “Redhat”. It also makes me look forward to the upcoming IPO’s of VALINUX, COBALT and CALDERA. As
far as I remain a market participant I will do well to keep various insights to myself.

Andrew Shawn 26th November 1999

Reflexivity Capital Group


Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87
USA Tel: +1 702 992 0389 Fax: +1 720 269 0153
Internet link: www.Reflexivityfund.com
E-mail: iadvisor@Reflexivityfund.com