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.
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.