Articles from June 2006
I had the good fortune to meet Dave and a number of other great people (Tara, Chris, Brittany, Ben, Tantek, John & Malgosia…) at dinner last week in San Francisco. Sushi conversation: raw, spicy and good with beer (or sake.)
Anyhow I guess I’m GenX. And even if I try really hard (what’s the geek equivalent of buying a Ferrari in some sort of mid-life-where-have-the-years-gone-existential-mini-crisis? and don’t say writing a blog…) I’ll never be a native member of the Digital Generation. Now I’m not old by any stretch of the imagination, but when I went to university you had to go to the computer lab (and that was considered normal) if you wanted to work on a computer. Hell the web browser wouldn’t even be invented until after I graduated.
(Shock. Awe. A world without the internet??? Really? You were there? Tell us what it was like! How did you manage?!?)
Anyhow… these guys are a part of it. They are changing the world. Very exciting stuff. Too big to ignore. Read or re-read Perez. Success and survival in business in the coming decades will depend on serving this generation, this community.
You still don’t believe me? Read it here and here. Straight from the horse’s mouth so to speak:
You may think we’re a generation born of entitlement. That we think we deserve great jobs, and great job environments. (In reality, we want to take cubes away for your sake too) The fact of the matter is that if you don’t let us work how you taught us to, we’ll search elsewhere. I just had 3 friends quit Morgan Stanley because they couldn’t send an instant message or personal email during their work day. We’ll leave your company too. I’m fortunate to work at a company that embraces digital culture.
Don Marti asks the question – “Why not a market in Net Neutrality?” Why not indeed. Economically relevant, topical…only potential problem is setting a strike and calculation method (as to what exactly, quantitatively defines a given level of neutrality.) Although he makes a suggestion on this as well.
Over the past few months, I’ve received a number of comments and criticisms of AmazonBay (see here and here for example.) Two in particular are frequent and valid enough to merit a response, and can more or less be paraphrased as follows:
(1) What’s the deal with the focus on gigantism??? Why would every thing merge into Megacorp???
(2) Why the obsession with sports (markets)???
And another which I would classify as artistic:
(3) What’s with the ‘Darth Vader’ -esque tone???
So let me try and shed some light.
The first point is something that struck me as well almost from the first time I saw the completed film. It was in fact an unintended derivative of the story I was trying to tell and in that sense I guess was more of a conceit that (in a chronological story structure I chose, inspired by Googlezon) allowed me (using real firms representing existing business sectors and models) more easily to force viewers to look at the way markets are organized from a different perspective. To step outside ‘received wisdom’ so to speak. Especially for viewers currently involved in banking and financial services who – like in any walk of life – can too easily fall into the trap of not questioning the status quo. So yes I would agree with the critics view that merger upon merger as described in the film is not really plausible, interesting or original.
Actually – and this is something I hadn’t really thought about when I wrote AmazonBay – the question of giant versus small (corporations) in itself is an interesting question in the context of how the corporate landscape will evolve in 21st century market economies. What will be the optimal size of a firm in 2015? 2025? Can we use Coase’s “The Nature of the Firm” as an analytic starting point?
Coase argues that the size of a firm (as measured by how many contractual relations are “internal” to the firm and how many “external”) is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.
Other things being equal, therefore, a firm will tend to be larger:
the less the costs of organizing and the slower these costs rise with an increase in the transactions organized.
the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized.
the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.
How will these factors play out in a world with ubiquitous connectivity, massive and distributed access to computing power, social networks and knowledge-based production and consumption? Does it mean a world where companies like Google or Citigroup with their financial and computational firepower become ever larger? Or do they fall victim eventually to dis-economies of scale where organizational complexity overwhelms their primary advantages? If so does technology nonetheless push back the frontier at which these constraints arise? (ie the ‘optimal bigger is better is bigger than today but not infinite.) Or on the other hand will our new technologies render the (large) firm irrelevent by allowing frictionless, dynamic and continuous allocation and reallocation of resources and agents outside the traditional corporate structure? (I actually tried to raise this possibility – however obtusely – in the film in the episode concerning the IBM buyout and how it was transacted.) I don’t know. I guess I could take the lame route and say it will be some combination of the two, but that obviously isn’t very insightful! Perhaps it is more useful to think in terms of ‘infrastructure’ tending towards the very large while ‘commerce’ and ‘fashion’ will tend towards a smaller and more fluid future (as framed by Stewart Brand):
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.
Finally, for all you film critics out there, now I know what it feels like to be an artiste (!) Hey, I’m not Speilberg. Hell I’m not even Randall M. Badat. Yes I was inspired by Googlezon. But also Blade Runner. (Has the Digital Generation even heard of Blade Runner???) I thought it would be an effective way of engaging the people I most wanted to reach – 40 to 50 something leaders of financial services firms, including my own – as (a) it is in their cultural programming (Blade Runner, 2001, etc.) to see the future through this comic book dark prism and (b) I wanted to create a sense of foreboding to frame the message in the context of ‘wake up’ or the future may look scary. If I had Ferris Bueller’s economics teacher narrate it, no one would have paid attention:
In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the… Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered?… raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. “Voodoo” economics.
So to conclude, I fall back on the words of the great Yogi Berra:
“Prediction is very hard, especially when it’s about the future.”
When I was at reboot8.0 a couple of weeks ago I was pointed in the direction of this white paper entitled “The Ethical Economy”. The premise is that a new form of economic organisation is emerging – based on peer-to-peer production, cooperation, sharing and social utility. It is worth reading if only as it collects coherently some of the cultural, behavioral and economic trends that are emerging in today’s networked global knowledge economy. That said I was in disagreement and/or uncomfortable with some of the ideas and solutions outlined, especially the idea that some ‘universal minimum income’ guarantee would free us (collectively as a society) to let our innate skills and creativity free and in so doing create further wealth and prosperity. Perhaps I’m too old or too cynical but I don’t see this happenning. For one thing I have very little faith in the ability of governments to manage this kind of concept efficiently. I might even agree that a no-questions-asked flat income (per person, every person) might be a good thing – if only for the massive amount of money and unproductive resources it would free up; resources that are currently spent micro-engineering (with the inevitable introduction of bureaucratic and political corruption that arises.) However one idea that did strike a chord (although I’ll admit there are devils in the details, so easier said that done) was the idea in creating a true and transparent market to foster free and fair competition for government (collective) research resource. Basically, my interpretation would be that technologies are allowing us, perhaps even forcing us, to rethink (in many if not all instances) the need for a centralized / top-down governance paradigm for allocating collective resources. To be clear it is not that this was a bad mechanism historically, indeed it probably was optimal given the circumstances; however to cling to it in the face of new developments facilitating better governance and resource allocation paradigms will ultimately be futile.
Or something like that…
At the risk of confusing people and implying that AmazonBay is meant literally (which it isn’t!), following the commercial tie-up between eBay and Yahoo announced a few weeks ago, maybe I should make a YahooBay version. 
I was catching up on some reading when I came across this article from the Economist on the growth of the mobile phone market in Afghanistan.
Regular readers will know that I view the mobile phone as the enabling technology for the four fifths of humanity not living in the developed world. (see here and here and here) It is difficult to imagine a more challenging business environment than Afghanistan and yet:
When the Taliban fell, there were just 20,000 telephone lines in the country and no means to phone abroad. Today there are 1.3m mobile phone users taking advantage of mobile coverage that stretches to many rural areas. Last month, delegates from across Afghanistan gathered in Kabul for a conference on information and communications technology to discuss, among other developments, the construction of a new optical-fibre voice-and-data network which will follow the ring road that girdles the country and finally connect it to the outside world.
…The arrival of mobile phones has had a far-reaching impact, not only on business, but also on the country’s social fabric. In Kabul, mobiles have revolutionised the previously minutely controlled contact between the sexes.
…But how big is the market? Mobiles are a lifestyle accessory aspired to by many Afghans and they can bring huge economic benefits to town and country alike. But the absence of reliable power supplies in all but a couple of cities will probably limit the take-up.
I think the problems will be solved. The tide is coming in and the fundamental human desire to communicate will continue to drive the adoption of these technologies in even the most troubled and challenged corners of the world. And with it will come fantastic opportunities for commerce as this vast pool of talent, demand and aspirations is connected to the rest of the world. In this context I don’t think it is overstating the case to say that people like Iqbal Quadir, founder of Grameen Phone are the modern day equivalents of Columbus, Cartier and Magellan, opening new frontiers and bringing the world closer together.
From the Pew Center’s report “Politics and the “DotNet” Generation”:
Based on the uptick in voter turnout among DotNets in 2004, their relatively high levels of civic engagement, and their willingness to express their opinions to political leaders, the media, and their peers, this cohort of Americans is not likely to be a silent generation.
They call 18-29 year olds the “DotNet” Generation. I call them the Digital Generation (anyone born after 1980 in my view) and the most popular label I have seen is Generation M.
Nomenclature isn’t important. The important thing is they will change the world. Get ready.
From the Pew Research Centre’s annual survey of global opinion, via the Economist:
In Japan and most of Europe over 80% worry about global warming a lot or somewhat. But in America and China—the two countries that emit the most greenhouse gases—only just over half of the respondents were concerned.
…and make money (?)
Here at Esther Dyson’s Release 1.0 Flight School 06 learning about the emergence of an exciting new market in air taxis and VLJ’s (very light jets.)
Ed Iacobucci of DayJet pointed out that they were essentially in the business of saving time with the challenge being able to provide a service that meets a price point (per hour) that people are willing to pay (for their time.) From their website:
What is DayJet all about? It’s about flexibility, convenience and control. But most of all, it’s about time. Your time. DayJet gives you back the valuable time you need to become more productive in business, while enjoying a better balance between work and your personal life. With DayJet, more timely and efficient business travel is just on the horizon.
I’m no expert – in fact I know very little about this space (I’ll know a little more by this evening) – but unless I’m mistaken, advancing aircraft and engine technology leading to less expensive (to buy and to run) and more reliable small aircraft are key facilitators for this emerging market. But having read the recent report in the Economist on the challenges that CO2 emissions might pose to the global commercial air travel business over the coming decades, I have to wonder if this might not be a key success factor in the medium to long term for air taxis.
I asked the question as to how the President Gore (!)) there was and emmissions trading system in the US and carbon had a price?
The honest answer was that nobody really seemed to have looked at this before. Vern Raburn of Eclipse Aviation made the point that there actually wasn’t any data on this as engines below a certain size are not even required to be tested for CO2 emissions, but that said he made the point that an Eclipse 500 burns approximately the same amount of fuel climbing to cruising altitude as a 737 does in 10 minutes sitting on the stand …
Now I understand that this is not relevant in the short term (both because of the scale of the market size and the initial market opportunity and obviously because the US does not – and will not conceivably under a Bush administration – have a carbon trading regime) but it would seem to me that there may well be an environmental advantage (carbon footprint per passenger kilometer) to the air taxi (point to point.) In the short term, maybe it’s (just) a marketing/pr advantage. But in the longer term it could be a real economic advantage (in a world where CO2 costs $50+ per tonne to (have the right to) produce…)
And imagine if you marry a real market for carbon, jet fuel, seats from point to point (Slipstream Air? OneSky? LinearAir?)- and you have a dynamic (quasi real time) pricing in air travel that can compete with the rest of the transportation complex – not only on price – but on mass customization. Maybe this market (in flight hours?) will be traded on AmazonBay! A real Priceline; the granularity of this network is what would lend itself to a true market approach. Imagine leaving a limit order at $2650 for 4 people from Calgary to Kelowna on a Friday after 5 pm. Imagine traders and algorithms entering this market speculatively, adding even more liquidity and driving the optimal price points (arbitraging with fuel, carbon, weather, etc. prices) doing what markets do best. 2015? 2020? sooner? never? Is this good material for a long bet?
The consensus at the conference seemed to be that the market (for VLJ’s in the US) may ultimately be measured in tens of thousands, perhaps hundreds of thousands of units. Also the obvious point was made that volume would be the biggest driver (along with improving technologies) in bringing price points down (to $500,000, why not $250,000 per plane.) This seems low to me. 16 million cars are sold in the US every year. Ok, not a fair comparison but how many $100,000+ cars are sold each year? How many of these cars are on the road (ie what is the size of the existing US fleet of these cars?) How many people’s time (either professional or personal or both) is worth more than $1000/hour? $500/hour? Could there be a market for a million of these aircraft? And what if there were a million of these aircraft flying each day to 10,000+ small airports? Wouldn’t that in itself fundamentally transform not only the economics but the underlying conception of what is normal? (Will Generation M be followed by Generation F(light)? The ramifications in the long term are pretty substantial. Think of how the car (and the interstate highway system) transformed how and where we live and work. How many people living in increasingly giant and congested urban conurbations would rather live elsewhere? The internet has made it possible for many people to work remotely. (Think about how ‘remotely’ in this context assumes implicitly that outside a major population centre is ‘remote…what about everyone working in the city being ‘remote’ from nature, space and congestion?) But this is potentially the other shoe dropping. The real end of distance. Talk about the world is flat. Or big parts of it.
The last panel of the morning discussed the ability to finance this new industry. Paul Maeder of Highland Capital Partners did a good job of explaining why this industry was not (quite) ready for mainstream institutional private equity/venture capital, but that this would change probably over the next 1 to 3 years as the planes start getting delivered and the (expected) return/liquidity timelines drop a bit more (currently probably 10+ years.) I am actually surprised that there seems to be such difficulty in raising finance although clearly the capital intensity and minimum investment thresholds are challenges especially in the start-up phase, there are two sources of capital that would seem to be ideal: very high net worth private money (not concerned with liquidity and income, but chance of very high exit multiples) and pension plans (who are structurally short duration and so looking for multi-decade forward payoff investments, or should be…) Now I happen to know that there is not exactly a lack of funds available from either of these two investor classes so the rational conclusion is either the market / intermediaries are doing a bad job of connecting the money with the opportunity or the business is doing a poor job of selling their story or (most likely) a combination of the two.
Finally if you had a prediction market in the number of VLJ’s sold in 2010, 2011, etc. these (and other investors) could dynamically ‘manage’ their investment in the industry by trading forward sales numbers. Of course for US investors this might be construed as betting by the government so that could be problematic…
So I talked about air taxis and carbon, as for how this saves the world…? Well let’s just say – read between the lines! (btw this is just one more small piece in the whole save-the-world-thing, not the whole enchilada )
Jesse James Garrett, founder of Adaptive Path opened this morning’s session at reboot with an interesting presentation on how tags and other user generated information will need to continue to inform and drive UI design, information architecture and optimization going forward.
He used Amazon’s algorithmic architecture as a example of leadership in this respect, although he pointed out that even Amazon has only started to scratch the surface of what will be possible. Interesting factoid: Amazon have a Chief Algorithm Officer, underlining the importance they assign to this as being core to their business model and value.
At the risk of mangling his message in an inaccurate shorthand, some of the points Jesse made are as follows:
‘How does Amazon do it?’: …in their url they create a ‘session-id’ that then allows them to track – by tagging all items on each web page, using query tags – all movements by mining their server logs…
‘What’s next?’: …need to use sophisticated statistical techniques to transform raw data into actionable items, to find patterns in consumer/user behavior is key…
…algorithmic architecture to become transparent to the user, but data needs to be better: both about the content/products (ie metadata!) and users/customers (turn every visit into a usability experiment data point)
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.)
Stowe Boyd followed up with a counterpoint presentation – The Revolution will be socialized – “all e-commerce will be socialized” using his thesis of social architecture – individuals to social groups to markets – projecting that the future of markets lay not in Jesse/Amazon’s paradigm of giant centralized algorithmic engines but “at the edge” with social, peer-to-peer transactions driven by community and social connectivity.
Funny, I agree with both of their points of view; I don’t see the conflict or any contradiction. For Stowe’s social architecture to work properly (in a scaled fashion against the background of the infinitely complex and growing backdrop of data and metadata) in my opinion you will need the algorithms. If I understood him correctly, I think Stowe agrees with this point but argues that these will all be localized at the edge. I think that both (large central and small edge) will exist together forming a powerful symbiotic partnership, allowing the ‘socially-driven’ transactions and interactions that will proliferate at the edge to flourish alongside more banal and commoditized transactions that will be more efficiently executed at a ‘super-node’ on the network.
I suppose I could be accused of sitting on the fence but I genuinely can’t see the future of markets evolving into either (to take it to its extreme logical conclusion) one super Hal9000 central hub or to a completely dispersed dust storm of bilateral virtual markets (like virtual particles that appear and disappear a trillion times a second). The imagery that springs to my mind as to what the future structure of markets may look like, with this combination of super-nodes and distributed micro-nodes is the map of the earth at night or the heavens. Not perfect visualizations but hopefully helpful nonetheless.
What would this mean for financial markets? Well, a combination of giant global exchanges (NYSE – Euronext to …AmazonBay?) and an ether of micro/virtual exchanges (which could be as small as two parties connecting bilaterally.) One consequence is the greying of the distinction between ‘exchange’-traded and OTC (over-the-counter) markets. This will pose real issues for the current regulatory paradigm in most markets and geographies, indeed it is already straining the existing received wisdom; as will the very idea of national or regional regulatory regimes in the context of global dematerialized markets. It will also continue the ‘deconstruction’ of traditional boundaries within financial markets (banking, securities, insurance, etc. etc.) as these frames are rendered more and more obsolete but the ability of the network and its users to build up any needed financial product from its base risk components and cash flows. I’ll stop now because to elaborate on these ideas would mean to write a book (or at least a long essay) and I’m not sure their is much demand for that…
