Sean Park Portrait
Quote of The Day Title
I say profound things
Einstein

The making of AmazonBay

Erick Schonfeld and Ben Metcalfe have highlighted to me that it would be helpful to put some context around the AmazonBay film.

First why Amazon? Why eBay? (as opposed to Google or Yahoo or somebody else?)

I just happened to pick eBay/Amazon (perhaps because they are already in the auction/exchange business or perhaps because in ’05 everyone used Google in their futurology,) indeed all the ‘real’ companies mentioned I chose more to illustrate (in shorthand that would be easy to grasp conceptually) what might happen, rather than use generic BigBank and XYZ Bank or GiantSearchCo and InternetAuctionCo… I’m not trying to suggest that any of this will come to pass exactly (or even closely) with these specific companies (that really would be spooky!) but more to provoke thought that one of these giants eBay/Amazon/Google/Yahoo, or MSN or even perhaps the ‘next Google’ (a company that isn’t even yet on the radar screen or perhaps doesn’t yet exist!) could transform the financial services industry in the next 5-15 years.

My premise is as follows: the basic structure and ecosystem of the financial services industry has remained relatively unperturbed by the internet revolution.

At first glance this might seem counterintuitive in the sense that it is obvious to anyone who has a bank account or invests or trades securities – individually or institutionally – that the impact of improving information and communication technologies, including the internet – have had a massive impact on how banks, brokerages and other financial services companies deliver their products and manage their businesses. Indeed, the financial services sector has probably invested more money in ICT than almost any other industry sector over the past 20 years.

So how does this square with my initial statement?

My point is that while there have been very important and very real improvements in productivity in financial services due to this investment in ICT, the underlying business models have changed very little – if at all – and there has been no ‘disruptive’ newcomers to the party. This is not completely surprising as the barriers to entry in financial services are very high: highly regulated, powerful (financially and politically) incumbents, extremely high customer inertia and a natural embedded conservatism given that we are dealing with people’s money. So if I am an eBay or an Amazon or Google or the next great WebCo, it is natural that I aim my innovation at softer targets like media or retailing (or even sports betting!) first. Main Street before Wall Street.

But while this entry barrier is very high, one day it too will be breached. It may be a few years away or more, but I believe it is ultimately inevitable.

London 2015?

Was the inclusion of Sports betting or trading just for fun? Do I really think sports hedge funds might come to pass? That sports could become yet another asset class?

I do think sports it will become a very significant market in its own right, without having a specific view as to its exact position (in terms of volumes or importance) versus more traditional asset or information markets. (Apparently I’m not the only one that thinks sports hedge funds are viable, I thought I was the first but after I published my original AmazonBay article last June, my brother pointed out this post on Mark Cuban’s blog that pre-dates me by several months!) The biggest thing holding this market back is the cultural and semantic perceptions of people, especially in the United States, with respect to betting or gambling. Dealing in stocks or bonds or even commodities is seen as ‘investing’ or ‘trading’ or ‘hedging’. Dealing in the outcome of a football game or the winner of an election is seen as ‘betting’ or ‘gambling’. Why?

In my eyes the difference between investing and gambling, betting and trading lies not in the underlying but in the approach of the person dealing in whatever instrument. Investing or trading involves a careful and analytical approach to decision making and risk taking. Betting or gambling involves a purely impulsive or emotional speculation. The irony is that many ordinary people are much more informed about sports or politics or the weather than macro-economic trends or the financial prospects of this or that company, and yet are encouraged by the prevailing culture and legislation to risk their savings investing in the latter through bonds or stocks while being chastised and in many cases legally prohibited from seeking to profit from their detailed knowledge of particular sporting or political outcomes.

Given that this semantic gap is largely driven by culture, religion and emotion, it is extremely difficult to speculate as to when – if ever – it may change, again especially in the US. However, I think it ultimately will if only due to the borderless nature of the internet; it is already happening in the UK and increasingly elsewhere. For instance, it is estimated that Betfair ‘traded’ just under $10bn in volume in 2005 and regularly executes between 2 and 5 million trades a day which is more than any financial exchange in the world (and this without accepting any business from the US – clearly potentially the biggest market in the world.) The market in Europe alone is predicted to top $150bn. I think it will become hard for the US stay aloof. Another factor that will drive this in the longer term will be generational change. The digital generation now growing up I think will not have the same historical prejudices as to what assets – real or virtual – can or should be traded. Indeed, sometime in the next decade or so I would expect ‘prediction’ markets more generally to become ubiquitous.

Ben Metcalfe asks: “is it a spoof?” And also: “Financial markets close under pressure from sports-related trading?”

Well no – although it is admittedly provocative and somewhat hyperbolic.
And as to the second question, I think he may have misunderstood the idea being presented (which is admittedly more clearly presented in the original article Through the Looking Glass” than in the film. In 2014 it is entirely plausible that advertising rates trade freely and so fluctuate in response to events like other assets. As a result large media companies would have every interest to hedge against events that might adversely impact the rates they receive.

In the example in my film, the idea is that the stock market sells aggressively the shares of a large media company (GoogleCorp) when two minnows – Denmark and Iraq – improbably make it through to the final of the World Cup because of the expectation of traders that the advertising revenues GoogleCorp would receive from the broadcast of the game would be much reduced (from what they would be if say the final had been Brazil vs China.) However, the company stops this sell-off in their shares when they announce that they had cleverly hedged against this eventuality by laying the favorites (ie betting against Brazil and China and Germany, etc. actually a complex nuanced strategy in the story but…) so what their opportunity cost of the lower than expected advertising income is made up for by their gains on these trades. Obviously this is a somewhat simplistic scenario but again my goal was to paint broad strokes, rather than a photographic image of some possible future.

Comments
  1. At 8:25 am on 11 Jan 06 Steve Rocliffe said:

    The execution and concept of the video are very, very similar to EPIC 2015. However, you don’t appear to have thanked its creators, Robin Sloan and Matt Thompson. Why not?

  2. […] To find out more, you can read the Making of interview, that put’s some context around the film. […]

  3. […] According to AmazonBay, the NYSE wins but as I wrote below the point wasn’t in guessing the exact combinatory ballet but to highlight that consolidation of the financial exchange space is a distinct possibility. Will be interesting to watch this one play out over the coming months. […]

  4. […] I wonder if he’s been watching AmazonBay? Trackback · […]

  5. At 11:08 am on 01 Mar 06 The Park Paradigm » Developments at Betfair said:

    […] Yet another step towards the converged AmazonBay future? […]

  6. At 10:18 pm on 03 Mar 06 blogwürdig » Blog Archive » said:

    […] [Zitat aus The Park Paradigm] […]

  7. […] Is this an early substantive step towards an AmazonBay future in financial services? I think so. […]

  8. At 7:27 am on 28 Mar 06 Riel Miller said:

    Hi Sean
    Great work. I would like to follow up with you on a few of these topics. Back a few years ago I put out the OECD’s book entitled: “The Future of Money”. http://www1.oecd.org/publications/e-book/0302011E.PDF
    It’d be fun to do an update (to see which way things are moving, since I’m not sure that the potential is getting any closer to being practical).
    Best
    Riel

  9. […] Ebenfalls interessant: Infos zum “Making of AmazonBay” von Sean Park unter http://www.parkparadigm.com (englisch) […]

  10. At 12:27 pm on 18 May 06 |immediate effect| said:

    AmazonBay

    Have a look on this amazing vision of the future…
    AmazonBay (the film), The making of AmazonBay, Through the Looking Glass (the original articel). It’s is conceived and made by Sean Park.
    Some issues I see (I know, it’s no exact futur…

  11. […] Yes, AmazonBay is fictional and speculative and is not supposed to be taken literally. […]

  12. […] One of the questions that followed his presentation was: ‘Is this (building powerful algorithmic reccomendation/navigational engines) Amazon’s ‘real’ business (as opposed to ’selling books’)? Indeed with initiatives like A9 and the fact that by their own admission they are a ‘technology’ company, it would seem plausible that this might be the case. Jesse opined that it was likely that – either from Amazon or from others – these kind of tools would likely be available for sale ‘off the shelf’ in the near future. (I must admit that framing Amazon’s business in this way was one of the reasons I picked it as an avatar in my AmazonBay metaphor.) […]

  13. […] The second point I have addressed previously. Clearly the relative importance (of sports markets) is overstated in AmazonBay but there are two serious points I was trying to make. Firstly, sport will – in my opinion – come to be considered a viable alternative investment market. Indeed it already is. As far as I can tell, Betfair alone will probably match over £2 billion of bets (transactions) on the World Cup football tournament. (To put this into perspective, this would be similar in terms of average daily turnover to the smaller European stock exchanges. In terms of number of trades it would be on a par with or exceed the largest global exchanges.) And alongside traditional ‘punters’ having some fun and/or trying to make some money the traditional way, a new breed of professional sports traders are driving volumes and liquidity on this and other betting exchanges using sophisticated algorithms and active risk management. I’m sorry you can keep your semantics, a rose by any other name… It’s a market. It has a substantial economic impact (directly and indirectly.) It is uncorrelated and diversifying to other asset classes and I’d sure rather have my pension fund manager investing in a smart sports hedge fund than yet another convertible arb fund chasing the same over-fished, highly-correlated (with other ‘traditional’ financial assets) markets. Secondly, and much more importantly I used sports as a metaphor for new (in the sense that people don’t currently think of these outcomes as tradable/investable markets) and important markets. Ok, ok, fair enough I should have made this more explicit. I should have mixed it up a bit: weather, politics, the number of mobile phones sold in Africa… the point is that in an AmazonBay world many many more markets will become viable as traded, liquid markets. […]

  14. At 11:05 am on 30 Jun 06 ClickRich said:

    Very thought provoking. I think it’s also true to say that although the barriers to entry are high (the reason why there hasn’t been revolutionary money market restructuring to date) the technology side of the equation has reached a level of acceptance where the fact that the product is essentially digital could begin to swing the balance.

    I’d be interested in your thoughts on a market where there are high barriers, but the product is not digital- healthcare provision. This is a market which NEEDS to restructure for economic reasons, but what is the role of technology in this?

  15. At 9:23 am on 21 Aug 06 The Park Paradigm » Regulatium Arcadium said:

    […] In any event, this is yet another example of anachronistic and entrenched regulatory and legal environments deleteriously holding back the benefits afforded by a modern approach to finance. A clear example of why AmazonBay is far from a (metaphorical) foregone conclusion: My point is that while there have been very important and very real improvements in productivity in financial services due to this investment in ICT, the underlying business models have changed very little – if at all – and there has been no ‘disruptive’ newcomers to the party. This is not completely surprising as the barriers to entry in financial services are very high: highly regulated, powerful (financially and politically) incumbents, extremely high customer inertia and a natural embedded conservatism given that we are dealing with people’s money. So if I am an eBay or an Amazon or Google or the next great WebCo, it is natural that I aim my innovation at softer targets like media or retailing (or even sports betting!) first. Main Street before Wall Street. […]

  16. […] So how is this fundamentally different from a spreadbet on the daily closing level of the Dow (or any other financial underlying)? I’ve discussed these semantics previously here and here: In my eyes the difference between investing and gambling, betting and trading lies not in the underlying but in the approach of the person dealing in whatever instrument. Investing or trading involves a careful and analytical approach to decision making and risk taking. Betting or gambling involves a purely impulsive or emotional speculation. The irony is that many ordinary people are much more informed about sports or politics or the weather than macro-economic trends or the financial prospects of this or that company, and yet are encouraged by the prevailing culture and legislation to risk their savings investing in the latter through bonds or stocks while being chastised and in many cases legally prohibited from seeking to profit from their detailed knowledge of particular sporting or political outcomes. […]

  17. At 11:39 am on 23 Jan 07 The Park Paradigm » Betfair Case Study said:

    […] As many of you may know or have guessed, I have followed Betfair from the start and have been inspired by many of their successes and in particular Ed, Bert and David’s transformative application of technology to create a new business model in a traditional and hidebound sector. I am especially interested in the many parallels can be drawn with financial markets (as articulated in AmazonBay and dozens of other posts on this site.) For any budding entrepreneur, it is certainly worth spending the five minutes or so to read the whole case study (and if possible spending several hours studying their site.) Trackback · […]

  18. […] Just as I did for AmazonBay, it is probably worth taking 5 minutes to put a bit of context around the 3 things presentation. Once again, the premise was to take 3 examples or metaphors – distillations – for 3 broad concepts. When I originally gave the presentation in person, the audience had no problem ‘getting this’ for the Digital Generation (changing behavioral patterns and expectations driven by generational shifts) and the Singularity (impact of exponential vs linear change in power of technology) but got hung up on Second Life as being my point; when in fact my point (admittedly the most oblique metaphor amongst the three) was that the UI was likely to evolve significantly over the coming years (think branch -> telephone/fax -> internet browser -> virtual reality(?) a la Second Life… We discussed this at the end of the ‘film’ and then extensively in small groups during coffee and dinner later in the day. I suspect this might also be the case for those of you watching the slideshow for the first time and so thought it worth clarifying. […]

  19. At 4:36 pm on 10 May 07 The Park Paradigm » Who is the Walrus? said:

    […] Actually, following in a long tradition of ‘[insert-your-own-moral-here]’ in interpreting Lewis Carroll’s writing, and seeking a tiny thread of continuity with AmazonBay – which was based on an article I wrote that I titled ‘Through the Looking Glass’ (for hopefully more obvious reasons) I wanted to weave an underlying warning into the message of 3 things. In this context I saw the Walrus as the confident (perhaps even arrogant), somewhat pompous and patronizing embodiment of the financial services (or more particularly for the original audience – the asset management) industry and the oysters as their customers who (mostly, with some usually ignored dissent) follow innocently and blindly the entreaties of the Walrus. Of course, they end up getting eaten. Bad for them, yes…but also bad for the Walrus. Eating all your customers is ultimately a poor strategic option. A cautionary tale. […]

  20. […] Looking at it again (it’s probably been almost a year since I last viewed it) the thing that struck me most is how dated it now seems (the scenario just celebrated its 2nd birthday…); on the other hand, many of the themes are more relevant than ever, and some of it has even come true. (For those of you seeing it for the first time, some context can be found here and here.) […]

  21. […] If you care to delve more into the theme about the parallels between banking and the internet information space, stop by at Park Paradigm. He has a number of posts relating to this topic and he has even created a movie depicting a future scenario for the convergence of internet technology and the banking industry in a Blader Runner-ish setting. […]

  22. […] gambling oligopolists have decided now they are ready to compete in this market? No idea. Or maybe the message on the absurdity of prohibition coming from the Park Paradigm has worked its magic! (Sure, it could happen…ok probably […]

  23. […] can also catch some notes on the making of that […]

  24. […] AmazonBay.) It was a retrospective told from the point of view of an observer in 2015. It was never meant to be taken literally – in particular with respect to (most of) the specific corporate mergers – rather I […]

  25. […] to any risk management tool that is non-traditional and can be characterized as gambling. Of course gambling, trading and hedging are indistinguishable in practice and can only be differentiated in c…, and really only represent differences in intent. As such, it is very difficult to proscribe one […]

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