Journal of Bionomics
Edited by Steve Waite

Version 1.1 (July 1996)

An Interview With Bill Melton

From The Editor:

Question: What do you get when you take a preacher's son from Nebraska, send him to Asia to receive a Master's Degree in Chinese Philosophy, and supply him with an entrepreneurial spirit that would bring tears to George Gilder's eyes?

Answer: Bill Melton, CEO of Cybercash Inc. Version 1.1 of the Journal of Bionomics is an engaging and provocative interview with Bill Melton courtesy of Frank Gregorsky, a freelance writer and fellow at the Discovery Institute.

Bill Melton's Biography

JOB: The Graham and Dodd "book value" mindset is useless in your industry, so help me replace it. Futurist Alvin Toffler says we should look at companies in terms of creativity and human assets. So what do the people here DO -- not even by department, but their four or five big functions, week to week?

BILL MELTON: We have three components. Marketing and Sales are outward-looking -- prophesying the future, and then fulfilling it. Marketing talks to the opinion-formers, and Sales talks to the industry components who will generate the revenue -- in our case, banks.

Another section is the product-development staff: Converting the grand architectural concepts into code [that can perform] whatever was being done before at perhaps a 10-to-one advantage in cost. A financial transaction that cost 80 cents to complete would need to fall to eight cents.

JOB: That's the Drucker standard of a 1,000% gain in efficiency, so you sweep away existing systems and vendors.

MELTON: AND break the existing inertia. Generally, that's what the Internet is doing. Another section of the company manages relationships. In the old world, you acted autonomously. The new world is an incestuous network, to be constantly nursed and managed. In biological terms, the [neighboring entities] have to be willing to let you survive.

JOB: Explain that a little.

MELTON: For example, one of my competitors talks about "dominating a marketspace." But this creates an immediate "immune reaction" in the rest of us. Yes, there are corporate walls and "perimeters of defense." But a LOT of information passes through these "molecular walls," and relationships are -- well, codependent is probably not a good word [laughter], but mutually supportive. It's no longer a mechanical world, but one of neural networks.

JOB: That cuts against the entire turf-conscious "male model" of large corporations, in just about any industry I can think of.

MELTON: Absolutely. But now let me offer the only way to make [investment] sense out of ANY of this stuff.

The stock market is looking for pregnant spores of growth -- guesstimating the potential growth rate, and what's sustainable over five to 10 years. Looking not at quarterly but at five-year rates, today's market [seeks] the chance of getting 10 times its money back -- like the venture capitalist of old. Because, out of every 10 investments, eight fail -- leaving two to pay off those eight. Today's market is trying to play that same game.

JOB: How can the entire market play venture capitalist with no obligation to tie up [a given] investment for seven years?

MELTON: Whoever knows how to pick the two (out of 10) also has to know how to stay with those two. And they can easily get out of the other eight. But can the market as a whole be as smart as venture capitalists? That's yet to be shown.

JOB: One more attempted industrial analogy for investors. Wall Street thinks it knows how to gauge the biotechs, which are in many ways like you: Negative book value, years before a profit comes in, high expenditures on research, relationships are critical, and -- like Cybercash giving away software -- the biotech companies give away their drugs to groups of users and the FDA.

MELTON: You touched it.

JOB: Any other category of investments you think analogous to this digital sector?

MELTON: I guess anything that has to do with intellectual property. Look how the entertainment industry seeds the market with a motif. Disney gives away Michael Jackson. Thru tours and in other ways, he generates a Michael Jackson "signature," a meme that becomes a life of its own, beyond Jackson the biological entity.

JOB: So Beatlemania in the mid-'60s --

MELTON: Exactly. And they invested a lot to get to critical mass. Or, to use a biological term, the entity comes to life -- it can sustain itself. Other entities then gather around; they draw their own life force from SUSTAINING that -- and they will do anything they can [to keep this up]. The Elvis "industry" exists today almost 20 years after the biological entity died.

JOB: What is the root of your lifelong passion for technology, or for this family of transaction technologies? How far back does it trace, and to any particular person?

MELTON: I've always been interested in how things work -- from a philosophical standpoint. It's a quest for personal autonomy. Grew up in Nebraska and Iowa, under a fundamentalist world model --

JOB: Was your Dad a preacher?

MELTON: Yeah. And in college I realized that model was flawed. Then I spent five years in Taiwan, as a college student and "bum." Learned Chinese, LIVED as a Chinese. It was a way to crawl out of my own midwestern skin. I even went to Vietnam to avoid the draft -- got a job as a civilian there [laughter] and convinced the draft board I was an essential industry: "We're a tugboat company!" Came back in 1970 with a Masters Degree in Chinese philosophy, which wasn't worth much.

JOB: You called your quest "philosophical." This is very different from the Ross Perot engineering mindset -- always tinkering.

MELTON: Oh yes. Yes. I want to know how the world works -- in the largest sense. And, eventually, I became able to determine "what is natural" -- from a human-condition standpoint rather than from a cultural imperative.

JOB: What's your all-time favorite book?

MELTON [15-second pause]: If you really want to get far out --

JOB: I do [grinning]. We want to understand the ESSENCE of Melton.

MELTON: Ever heard of Schrodinger's cat? [Laughter] You can't ever find the real essence of anything. As quick as you measure it, it's no longer there. But there's a book in the far-out circles called THE COURSE IN MIRACLES. No self-respecting macho entrepreneur/investor would ever admit to reading it. But it's a very powerful set of books -- of the sort read much more by psychotherapists.

JOB: I read a lot of that stuff, too, and my Republican friends can't stand it.

MELTON [Laughter]: Yeah, it bothers them. And this one was "written" by the secretary OF a psychotherapist, but who really wrote it is a mystery. This chain-smoking atheist goes home one evening and hears voices telling her, "Take this down." She fears she is nuts, but eventually she [complies].

JOB: Plays the scribe.

MELTON: Yeah, and it turns out to be about how does one live his life.

JOB: Thirty years later, you're still "trying on" replacements for fundamentalism.

MELTON: Yeah, yeah. And, having never been burnt with one ideology in my youth -- because I never really trusted that first one -- whatever the next one is can be tested by seeing how it works in the real world. [A current theory] is that Life in general is on a continuous process toward ephemeralization. By [stressing] knowledge and communications, we're using less and less material resources -- physical substance -- to generate the same amount of energy.

Apply that to business: How do I make a profitable company? Well, I create efficiencies -- this 10-to-one rule. Instead of $600 and six hours, how can I get to San Francisco for $60 or 60 minutes?

JOB: Or get as much done in San Francisco with only 10% of the time you spent five years ago.

MELTON: Exactly. And these efficiencies mean applying knowledge, which can be done in strange ways. Take a network model -- a whole bunch of nodes. Several ways exist to make that network smarter. One way is to make each individual node smarter. A much SIMPLER way is to create connectivity. Right now the whole business world is a social experiment to try out [this particular] weird idea.

JOB: Any recommended reading on the digital front?

MELTON: [Michael] Rothschild's BIONOMICS [Henry Holt, 1990, 423 pp.] is excellent. I pretty much make all my senior management read him; otherwise we don't have a shared vocabulary. Beyond that, a lot of network theory -- [where] much derived knowledge is coming out of programming science. I'm reading books on queuing theory [and] on how to build redundant networks.

I was never trained in computers. So I often had to hire programmers who knew orders of magnitude more than I knew. They would look at a screen all day, and I had no idea whether they were being productive. So you have to develop a large amount of trust and rapport. When you do so, a feedback loop of productivity [comes about] -- because they are instructing you! The manager's job now is to make sure these "respected entities" share their experiences, and connect them with as many other "nodes" as you can.

JOB: Everyone says Americans do a lot of [off-hours] voluntarism. You're starting to make employment sound like voluntarism. Employees are paid professionals, but you have to treat them like volunteers.

MELTON: Absolutely. Any programmer today that understands C++, databases and telecommunications -- those three things -- can walk anyplace in this country and get a job real fast, unless they've done something to blow up their record.

JOB: In WIRED last winter, Steve Jobs said having children ended his technological romanticism. Net support-groups and medical info-sharing are great, but he said "it's a disservice to constantly put things in this radical new light... The Web is important, but [will it] be a life-changing event for millions of people? No. I mean, maybe. But it's not an assured Yes at this point, and it'll probably creep up on people."

By contrast, in a major address to the Bionomics Institute last Fall, you said, by using the Internet, producers can "make the distribution channel go away" and bring about [consumer] savings of 20 to 50%. To the extent your vision for social change is radical, and in effect rebuts Jobs, is this why? Business will make make geography disappear from commerce? And won't that REALLY change 50 million lives?

MELTON: Absolutely, and thru more than simple cost-reduction. But I don't need to disagree with Jobs. He grew up as a Hare Krishna radical and then radical technologist. Finally he has his first child. And anyone who stands beside the birth of their first kid realizes that, compared to the great miracle of life, everything we do is a joke.

JOB: Spoken like a former divinity student!

MELTON [Laughter]: I understand his perspective! But human organization -- from bearskins and swords, to feudalism, to the Machine Age -- encounters important changes. The tools of man change, which allow him to redefine who he is.

A great discovery of the Roman Empire was the flanks: Having seven men, with shields and swords, stand beside each other. And they conquered the world, locking offense and defense together, as a team.

JOB: But what does your Bionomics theme mean for whole sectors of this economy? You say "distribution channel." But shipping and trucking, to move the appliances and cars, will still be needed. It will simply be easier to check these items out on the way to purchase.

MELTON: Anything that has to do with brick-and-mortar and its DISPLAY is -- to use some poetic license -- dead.

JOB: But you shouldn't claim the same about distribution. We'll still have to move around things much bigger and heavier than a CD, right?

MELTON: If you like "display" better than distribution, okay.

JOB: Distribution is moving things to customers.

MELTON: But now we move them multiple times -- from a warehouse in California, to another one in Iowa, and then to Ohio, and finally to a Tennessee music store [for display]. What if you could put EVERYTHING in a single warehouse in Memphis, right outside of FedEx? It moves once, from the factory, and then once more, to your home in Ohio. As for how to splice and dice [the savings in] distribution versus display, we'd have to get into individual industries.

JOB: Exactly. So name some you see as most threatened, i.e. losing maybe 50-80% of their revenue base in the next decade.

MELTON: Anything marked by brand-recognition, meaning consistent known quality out of the factory. Music, software, wine.

JOB: How much of the stuff in a Best Buy or a Circuit City?

MELTON: Almost all of that. I only go into Circuit City for a general display of what's available, and maybe a recommendation from a supposedly knowledgeable [salesperson].

JOB: Which a Website run by CONSUMER REPORTS or some good audio person --

MELTON: Absolutely. The way I buy cars now: Go on computer, use a fleet-buying service [to learn the price ranges], find out the participating local vendors, see who can beat that price and if they have my color, go down that day and pick it up. End of my car-shopping [laughter].

JOB: Walking around the lot, looking at all the models, you would think to be an American pastime. Maybe not for under-30s?

MELTON: Most of your car information comes from friends, magazines, ads. The choice then narrows down fairly quickly -- and at that point I can go on the computer. The last three cars I bought, I bought them before ever getting to the lot.

JOB: Turning to the digital signature, which "comes out of the concept of very large prime numbers, which can be divided in such a way that, once used, you cannot deny you actually used them." Any further analogy or concept at the heart of [understanding] the digital signature?

MELTON: Absolute non-deniability is one critical element. The other is the pyramidal nature of digital signatures.

JOB: And non-deniability is simply a function of cheap computer processing to juggle these numbers --

MELTON: Juggle numbers that are mathematically, algorithmically PROVABLE. Nobody but a mythical-you could have generated this number. The trick is to make sure the mythical-you ties back to a biological you. You can get on the Net and say "I am me." Well, how do I KNOW you are "me"? We have to authenticate the unique digital identity as being tied to a biological entity -- and that's a separate step. The only way is to have somebody else -- not you, because you may be lying --

JOB: Assign your identity.

MELTON: Not assign it, but come along and VOUCH for you.

JOB: And you want competing methods to achieve that, as opposed to the "hierarchical, proprietary, patented and non-disclosed" info-base tied to the PC operating system you warned against last Fall.

MELTON: Microsoft and VISA have moved away [from what I spoke out against then].

JOB: To what? What are the industry bigwigs doing now?

MELTON: They are building TWO pyramids. One is a VISA pyramid, the other is a MasterCard pyramid. These two pyramids will have what I call the "rights of Kings."

What did the King do in feudal times? Created a lord, gave him his identity as a lord; and the lord had peasants and could say, "You are my peasant." Without [some such] identity, the poor human was a nomad. So the power of the King is really the power to create identity -- to give you validation of your existence. In return for that, I get the right to tax, to control, to direct -- my power as a King.

Modern technology allows us to not have a single King. Many groups -- my school, my church, my local community -- can give identity. Many pyramids compete, and I can chose to belong to a plurality of them.

JOB: A lot of critics say America is too fractionalized. Too many of us act like our own little church, hobby, political party. And you're saying we could be lurched back --

MELTON: To having only TWO Kings. It won't happen, but that's the way it's going at the moment: If you want to exist on the Internet, you gotta have a VISA or a MasterCard. If you don't, you can't play.

Part of my pitch, to the banking community, is that they -- thru their own pyramidal structure, up thru their own governments, thru the automated clearinghouses, thru the feds -- must have a separate pyramid there. That way I, thru my checking account, can be authenticated, by my bank. They assign me identity to operate as an individual, in this Internet, non-visible, economic community.

By granting authenticity of identity, separate from either the VISA or MasterCard pyramid (even though the banks would participate in them as well), we would have at least three pyramids going.

JOB: You say "it won't happen that way" [having only two Kings], but MasterCard and VISA think it will, or they've made that bet.

MELTON: They don't "think" it's happening that way but, given the natural imperative of life to extend itself, they want to grow and dominate as much territory as they can. Since they know they can't blow each other off the face of the Earth, they're going for a mutual oligarchy. "We'll control the whole banking community -- you and me."

JOB: But last October you gave MasterCard credit for not trying to emulate that model.

MELTON: I gave them credit for calling Microsoft and VISA at that game. They had to say that, because they weren't PART of that system. Since then, in part because of the uproar they created, we now are using "public certificates" rather than proprietary ones.

"Certificates" are digital elements that authenticate you as who you are; they are the way you carry around, on the Internet, your identity -- and they come from a third party. MasterCard got VISA and Microsoft to give up this proprietary method of certifying people. We're now using a public-domain "509."

JOB: Isn't that progress?

MELTON: Absolutely. It's interoperable, interchangeable -- so I as a company can use "509" kinds of certificates. I can say to MasterCard, "If any of my employees want to have a MasterCard, I will certify that they are my employees, and guarantee all of their financial activity, for corporate actions."

We're on the way to having a lot of little independent kingdoms, where the individual has portable autonomy. Maybe I don't really know who you are -- but you have certificates from AOL, from MasterCard, from your employee, and after awhile that's good enough.

JOB: Thinking of the securities analysts and brokerages who will read this, I assume that, during the Winter, you spoke to more of those groups than in the previous decade, because of your IPO and road-shows.

MELTON: Uhm-hmm.

JOB: What did these groups tend to not "get" -- what vital truth about Cybercash or the new economy was frustrating to communicate?

MELTON: I wasn't frustrated. Looking at our stock price, we were successful beyond our wildest imaginations. I wouldn't say --

JOB: They could've bought for other reasons, though.

MELTON: I guess that's the point. In my perfect world, I would like the analysts to understand the whole philosophical approach here. But a large percentage are momentum players. And maybe they're smarter than all of us. Because, if you seek to build an all-encompassing philosophy, by definition you're going to be wrong -- because none of us is that smart.

JOB: Right.

MELTON: Growing up, I used to watch water run down irrigation ditches -- great big ones, with thousands of gallons per second. The water out front would be frothy and foamy, and carrying a lot of leaves. The ground it was about to run over would be cracked and dry, and a lot of that water would run up these little dead-end cracks.

But the whole stream kept going; momentum carried it forward. And these momentum players, on a 24-hour basis, watch were the stream is going -- without any philosophy of where is the ultimate end of the ditch. They don't care. All they want to know is where it will be in the next five minutes.

Well, from an investor's standpoint, maybe that's what you want to do.

JOB: We may come back to work with you on these [new] technological indices. Two researchers are looking at statistics from all different viewpoints.

MELTON: I doubt George Gilder will be able to do it statistically. If you look at chaos theory, if you look at non-linear math, in all cases you have a continuing and sort of predictable linear math -- right up until some basic shift, the straw that breaks the camel's back. Water gets colder and colder until it freezes, or hotter and hotter until it changes into steam.

JOB: Drucker's term is discontinuity.

MELTON: And that is a good term. Non-linear math is about discontinuities [and] phase shifts. If you take statistical predictive analogy, by definition, you will miss that. The only way to get at these really new phenomena is to somehow use non-linear math to find out: When are we gonna have a phase shift? As an investor, that's what we're looking for: How do you get the 10-to-one? Without a phase shift, you're not going to get it.

So, if he's trying to do this from any sort of statistical approach, in my opinion, the only HOPE he has is to go to places like the Santa Fe Institute. These kinds of multiples we [i.e. Cybercash and other companies] have make no SENSE in linear math.