:: The Park Paradigm ::

Markets for the Digital Generation

(via BloggingStocks)

Citigroup (NYSE:C) will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system is “an effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”

Readers won’t be surprised to see me rolling my eyes in disbelief… This is what passes for the leadership for which Citigroup shareholders are paying (hundreds of millions of dollars)?? Did Mr. Pandit expect the stock to bounce on the back of this latest additional coat of shiny eggshell-finish complexity?

However it’s nice to see Mr. Pandit despite living in a house entirely made up of glass (opaque of course) panels, finding the time to wax lyrical about the need for transparency in regulated financial markets. A little bird told me he may have actually just dusted off an old (c. 2005) executive committee strategy document and made a few adjustments to bring it more ‘in line with the prevailing environment’:

Yet transparency is difficult to avoid achieve. It requires continual vigilance to resist standardized products whenever possible appropriate, keeping them away from introducing them to exchanges, resisting creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transaction volumes for our proprietary use. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market the impression it has a chance to make informed judgments.

True, true. Inspiring stuff. Ok maybe not so much (as Felix notes):

If I were a Citigroup employee and I read this op-ed, all my fears about my bank being taken over by robots and consultants would have been confirmed at a stroke. Pandit simply doesn’t come across as human in this op-ed: instead he’s some kind of jargon-generation device, talking about “systemic risk umbrellas” and “alternative accounting approaches”.

I stand by my earlier views that - in it’s current configuration - Citgroup is too complex to be efficiently managed, at least using the prevailing standard corporate management paradigm.

I’m not suggesting that no economies of scale make sense in banking or financial services more generally, only that they are subsumed by complexity within these ‘integrated’ financial behemoths. I even have some sympathy for the seductive logic underlying integrated business models, however in my view the theoretical benefits of an integrated model - while possibly intellectually robust on paper - are impossible to exploit in reality. It ignores what I describe as corporate entropy: ie in any corporate process there exists an inherent tendency towards the dissipation of useful energy.

Indeed - sticking with the chemical analogy and without writing a book about it - it would be fair to say that giant bank mergers are at best an (intrinsically unstable) intermediate product in the reaction coordinate and to make any sense need to be followed by a subsequent division into multiple new end products (which individually release the benefits of economies of scale and synergy without the instability engendered by excessive complexity.) So Citigroup (or UBS or HSBC or RBS/ABN Amro, etc…) should naturally “decay” to form multiple specialist firms that are more focused and efficient than the multiple firms that had been combined first to form these giants.

I’m sure Mr. Pandit is an extremely intelligent and hard working person, my suspicion however is that will not be sufficient to ensure his success. I certainly don’t envy him, however I wonder if he could be more bold. And I forgive any Citi shareholders for hoping I am sadly misinformed. And I’ll admit that we are now (at 16 and change) closer to the bottom than the top, but I’ll abstain from considering a buy order until I see a material sign of reducing complexity…

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Unfortunately conflicting travel plans meant that I couldn’t attend Reboot 10 - although I’m sure JP will fill me in on some of the more interesting themes that emerged - but like most interesting conferences much of the material discussed is made available, analyzed and discussed on the web. And so it is that I am reading Stowe Boyd’s notes for the presentation he gave in Copenhagen - Web Culture: Identity, Belonging, And Scalar Freedom - while thousands of miles away on a humid Sunday morning by the lake…

On the ‘long-tail of human relationships’:

This long tail of relatedness and relationships changes our sense of identity and belonging. We can meaningfully belong to many groups, and invest ourselves deeply — in parallel — in their purposes.

Those of us who become most adept at this may become the most important and respected citizens of the post-everything world: the bridge builders that can arc from one to other groups, and act as arbiters and mediators. Remember that reputation-based authority and the belief in mediated settlements of disputes are universals. So this suggests a future role for the most connected, as people worldwide begin to lose faith in mass organizations to solve our disputes, or to even come up with workable compromise.

On ‘tribes’:

The bonds of trust and friendship that we are building at the Edge, today, may become the initial bridges that connect the tribes of this post-everything future.

We have learned that trust and reputation is personal, non-transferable. That obligation is between individuals, and that any group — elected officials, criminals, prisoners in jail, slum dwellers, and web edglings — will attempt to use whatever power they have to attempt to benefit their own, potentially to the detriment of ‘others’. So we need an ethical system — like that which is emerging on the web — where abuse of power is not tolerated, where rank and office is irrelevant, but where one’s reputation and honor is everything.

I don’t think I agree with everything Stowe writes about but I definitely think it is worth reading as it frames some of the fundamental - tectonic - social and cultural shifts shaking our current dogma to its core. And I continue to be an unapologetic fan of his centroid/edgling meme.

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Here at the Park Paradigm, I try to post only when I see an opportunity to add to the conversation - a unique point of view, specific analysis, a different angle - and so generally have avoided simply pointing to other articles or commentaries I am reading and find interesting. This approach has worked well for me - and I hope for you as well - but left me somewhat frustrated with a virtual pile of links and articles in my groaning ‘to blog about’ inbox: a back-log that probably would never get cleared even if blogging was my full time job. (To be fair, this is almost certainly a good thing for my poor readers who would be drowned in a sea of ranting repetitive ramblings…)

So when I discovered Tumblr (via Stowe I think…) it seemed to be the perfect solution: giving me a clean and easy outlet to record and share my ’stream of consciousness’ without diluting or cluttering up the Park Paradigm. Most importantly, readers can take it or leave it. We’ll see how it goes but it will be interesting to see how you react - I’m curious to see if my tumblr blog ends up helping me decide what to write about in more depth.

I’ve linked to it in the sidebar and you can find it at (I’ve borrowed one of my favorite quotes from Pablo Picasso as a title):

Everything you can imagine is real.

or subscribe to the RSS feed.

Hope you find this useful and interesting. Let me know.

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I’ve been mulling this over for years, but with the release of the iPhone 18 months ago, it became easier to start to imagine the outlines of this future.

Broad reaching changes will emerge from the bottom up - this recent article from Macworld illustrates some possible examples:

…there’s incredible power in a device that knows where it is and that can purchase stuff based on its location…We already have an example of this power in the form of iPhone-friendly Starbucks outlets. Walk into such a Starbucks and a new Starbucks entry appears within the phone’s iTunes application. Tap it and you can learn what’s recently been played in the store and then purchase one of these tracks simply by tapping a Buy button…

It’s 11 a.m. and time for your coffee break. Leave the office and stroll the 14 steps to the café next door. Your iPhone vibrates and asks if you’d like the usual double-wet cappuccino. Of course you do, so you tap Yes. Within a minute your name is called and you have your caffeine-rich libation in hand. Again, no cash or credit card necessary because your iPhone automatically picked up the tab.

It’s not (yet) as sophisticated, but the success of mobile-based payment systems like M-Pesa in Kenya is not only very exciting but is a precurser to much much more. (I first wrote about M-Pesa in November 2006; seeing opportunities like this with no way to ‘participate’ was a significant motivator in developing my current venture.)

(from the CGAP technology blog:)

Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.

Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer…

…Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.

One of the revelations (to me at least) of this year’s Supernova conference was Ken Banks of kiwanja.net. For anyone interested in the innovative use of mobile communications in developing markets, his essay “Mobiles in Africa: A Travellers Perspective” is a must read. (Sadly, I didn’t get the chance to meet him as I had to rush off but hopefully I will get a future opportunity.) An exerpt:

When it comes to mobile innovation, the gap between developed and developing countries is not much of a gap at all. Mobile innovation in the West, largely technology-lead, sits in contrast to that in the developing world where combating the geographic, economic and cultural constraints of users is considered a more sensible way to go. This explains the emergence of the torch phone, for users who live in areas with little or no regular light, or multiple phone books for users who share their phones with family members. On the heavyweight side, a plethora of financial applications have hit the streets, with Safaricom’s m-Pesa service getting by far the biggest press to date…

…Innovation is not always as official or formalised as this, however. People in developing countries are rarely simple, passive recipients of a technology, and rarely wait for outsiders to provide solutions to their problems. The entrepreneurial spirit is alive and well, evident by the masses of thriving small businesses you find on the street corners of every village, town and city.

Many developing countries for all intents and purposes have ’skipped’ the fixed-line telephony paradigm. Wanna bet that they ’skip’ the branch banking/atm paradigm in retail financial services?

I know it’s not their typical market target, but I’d love to see Apple (or RIM) develop a ‘rugged’ iPhone (analogous to ‘rugged’ mobile hard drives), targeting emerging markets. Not as a competitor / replacement for existing mobile phones, but as a substitute to personal computers: effectively giving traders and business people an effective web appliance (ideally with Skype pre-loaded!)

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In case you still aren’t convinced, have a read of what the Consultative Group to Assist the Poor has to say on the subject:

Banking regulators still don’t get it: The best candidate for making access to finance truly universal in a developing country is the mobile phone.

…Globally, mobile phones will handle $587 billion in financial services by 2011, UK. consulting firm Juniper Research Ltd says. In many developing countries, mobile-phone companies are miles ahead of banks in using technology to cut the cost of processing a transaction. In India, for instance, phone companies have a 100-fold cost advantage…

…Real breakthroughs in financial inclusion may only occur when telecommunications companies lead the effort and regulation promises smooth running.

Why do you think I encouraged my friend JP to go ‘get some experience’ at a phone company?

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You could be forgiven for thinking - based on my writing here - that I think investment banks are full of unenlightened dinosaurs, and so not fit for study if one wants to ’see the future.’ In fact this is quite far from the truth - sure there are lots of reasons to pull your hair out if you love change and disruptive innovation and work in an investment bank. BUT there are lots of reasons not too as well; indeed I think much of my passion for accelerating such innovation comes from my many years of first-hand experience of seeing the power of it on the front line in investment banks. Yes, they can innovate (although often they are most succesful when they don’t realize this is what they are doing.) Traders in investment banks invented and nourished social networking 20 years ago. (And they figured out how to make money from it - I’d take Bloomberg’s bottom line any day…)

Anyone who has ever worked on a trading floor also had to manage to live with and remain (ideally improve) their productivity while working in a state of continuous partial attention. This excellent commentary by Stowe Boyd got me thinking about this, I love his ‘Law’:

Connected people will naturally gravitate toward an ethic where they will trade personal productivity for connectedness: they will interrupt their own work to help a contact make progress. Ultimately, in a bottom-up fashion, this leads to the network as a whole making more progress than if each individual tries to optimize personal productivity. (Trust me, its provable. I studied queuing theory in graduate school.) I call this Boyd’s Law, by the way.

While (big) investment banks suffer all the normal pathologies of command and control endemic to large hierarchical organizations, the trading floor - at least on a day-to-day basis - has a parallel life free from this institutional prison. Sure the two collide from time to time (bonuses, promotions, seating plans…) but even power-hungry, centralizing managers in these firms are smart enough that you don’t kill the (ahem…usually) golden goose: working on a trading floor is all about connectedness and continuous partial attention - it wouldn’t work any other way.

Stowe concludes:

The old school thinking is about individual productivity: but the social revolution has moved past that into network productivity, which entails connectedness and social meaning. The personal hit on productivity is real, but it’s not a cost: it’s an investment; and the juice is worth the squeeze.

Although they wouldn’t articulate it in the same terms (they probably wouldn’t articulate it at all!), the denizens (and managers of) the trading floor are somewhat past the ‘old school’ thinking and have been for years. I say ’somewhat’ because at bonus time the decoherence collapses as everyone scrambles to appropriate ‘individual productivity’. The best groups of traders however - for example the top hedge funds and a certain boringly successful Wall St. firm starting with a ‘G’ - don’t and instead manage for network productivity (almost) exclusively (leading to most members of these networks to be rewarded individually exceptionally well.) It really boils down to trust in the end.*

I bang on about “Wall Street” needing to learn from “the Valley”, but wanted to underline my conviction that there is much to be learned from “Wall Street” for others. Indeed that is why I find my new situation so exciting, sitting at the heart of such a potentially fertile cross-road.

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I have to admit to being somewhat disappointed and a little puzzled when I read that Norwich Union was suspending their experiment in ‘pay-per-mile’ car insurance in the UK (via BBC):

Britain’s biggest insurer has suspended a flagship car insurance scheme less than two years after its roll out. Norwich Union’s “pay as you drive” policy used satellite technology to track every journey via a black box installed in customers’ cars. It resulted in cheaper premiums for people who avoided driving at high risk times like rush hour and late at night.

The company said too few customers had joined, and blamed a slow take-up rate of the technology amongst car makers.

It seems only around 10,000 people had taken up this product. I have to admit that our family hasn’t, although I’m convinced it is an excellent product and the ‘right’ way to buy car insurance for many (most?) people. So why didn’t it succeed? I thought about this a bit and boiled it down to two (inter-related) factors:

1. Inertia. Like many services, especially financial services, most people (myself included) have tremendous inertia. That said with the rise of comparison shopping sites like moneysupermarket.com, confused.com, etc. this is changing. I wonder also if the current economic climate will accelerate this trend as family budgets feel the squeeze of higher inflation and weak balance sheets.
2. Ignorance. Not stupidity but the proper definition of ignorance: prospective customers either don’t know about the availabilty of this novel product or if they do are put off by a ‘learning curve’ to understand how it would relate to their driving experience.

I wonder (I don’t have time to research this) how Norwich Union marketed this product: ie how helpful / transparent were they in terms of making it easy for their customers to compare the ‘pay-per-mile’ product with their ‘fixed-rate’ offering. Was this an example of the corporate antibodies winning? What did the middle/senior managers responsible for ‘traditional’ insurance think of this innovation? Fear? How would it affect their margins? (Their power?) Short term? Long term? I have no insight into the particular dynamics of Norwich Union, but I suspect this might be an excellent example of how disruptive innovation cannot survive the caustic environment of large organizations. If I were in charge at Norwich Union, I would have set up a new independent company to offer this product, taken a minority stake - bringing in an entrepreneurial management team and a handful of outside investors (like us) - to build this product. If/when it worked, then I might buy the company in a few years time. (Of course I would say this - its at the heart of our business proposition - but equally obviously we believe passionately in the validity of this model; what kind of entrepreneurs would we be if we didn’t? )

Perceptive readers may have spotted an apparent incongruency in my enthusiasm for the ‘pay-as-you-go’ model in car insurance. After all usually I am seen on these pages touting an ‘all-you-can-eat/flat rate’ business model for many companies who’s stock in trade is ‘pay-per-transaction’. So am I just being a contrarian just for the sake of being provocative? Well, no. The thing is, it (the correct business model) depends on the context and the ‘linearity’ of the underlying service to the cost of providing it. And just to be clear, in many many businesses the best model is to offer both pricing paradigms and let the customer decide what is more appropriate to their circumstances. So what do I mean by linearity? (perhaps not a good description) I mean that the cost of providing the service is highly proportional to the amount it is used. Car insurance fits this - the more you drive (and the more you drive in congested cities or at certain times of day), the more statistically likely it is you will have an insurable loss and so it ‘costs more’ to provide this insurance. If you are running a communications network for example (or a health club, or a stock exchange…) your costs are largely fixed and so one more call, or customer, or trade is essentially free. (Up to the capacity of the existing infrastructure of course.) And so ‘broadband’ / fixed rate plans are usually the best way to go in the long term.

I’d be happy to bet on this space going forward. Norwich Union’s experience is clearly interesting, but I believe their lack of success was due to timing and (probably) execution. A setback. An opportunity?

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Browsing through my RSS feeds the other day and spotted this press release:

RBC Direct Investing - the online trading arm of Royal Bank of Canada - is tapping social media with the introduction of a “community” that will provide investors with access to blogs and discussion forums that are relevant to their trading strategies.

It’s pretty obvious to everyone in the industry that blogs (and online social software tools generally) are a relevant part of the financial services landscape. It seems a long long long time ago when in 2004 we started experimenting with internal blogs at DrKW. Let’s just say that this initiative - led by JP and Malcolm and the other thought leaders we had in our IT department - and championed by yours truly on the ‘front office’ side was met with… well let’s just say some mild scepticism. But to be fair, we were however allowed to continue our experiments, indeed I’m pretty sure that Rod was the first equity analyst from a mainstream sell-side firm to publish a public blog. Most of our competitors were stuck somewhere between anger and denial.

The real take-away however isn’t - “I told you so” (but I did!) - but how fast things (attitudes) actually changed. The world is accelerating. Leaders are losing the option of “letting their succesor deal with uncomfortable change…”

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“There’s a great future in data. Think about it. Will you think about it?”

First Nasdaq,

Nasdaq OMX Group Inc said on Monday it has begun selling real-time share data to the websites of Google Inc’s Google Finance, cable television network CNBC and News Corp’s Wall Street Journal.

now NYSE Euronext…

NYSE plans to launch the new product, called NYSE Realtime Reference Prices, on July 1 for a four-month pilot, contingent on SEC approval of the trial project.

NYSE will charge a flat fee of $100,000 per month for data derived from NYSE trades of NYSE-listed stocks. It hasn’t announced a fee schedule for trades on NYSE-listed stocks on other exchanges.

Exchanges need regulatory approval to sell market data to websites, and in January 2007, Nasdaq OMX and NYSE submitted separate requests to the SEC for the right to do so. The use of pilot projects allows the exchanges to go ahead while they wait for definitive approval.

(I must admit I didn’t know that (US?) exchanges needed regulatory approval to sell data…anyone know why this regulation exists?)

If the exchanges are to prove me wrong, they need to get this right. One of the most important and fundamental pillars of our investment thesis is that in (commoditized/liquid) traded markets, value will inexorably and inevitably migrate from transactions to data and fulfillment. The marginal cost of transaction matching in a digital age will come to equilibrium at the marginal cost of providing this service. Which ultimately will become zero. (I wonder if Chris Anderson will include this example in his book…)

But the good news is that data will become an ever more valuable asset. But not just any old data. I mean in the age of abundance - abundant data - surely this too will become free? Well yes most data, certainly most raw data, will be free. But as the amount and availability increases exponentially (to mind-boggling numbers - googols, ultimately googolplexes?) a small percentage (but large absolute amount) of that data will be very valuable. And even more importantly, the packaging will matter. More and more. Data floating in the ether is of no value to the vast majority of people: they need it packaged, delivered, enhanced (meta-data), contextually situated… and lead can be turned into gold.

If you don’t believe me, just ask the very smart guys that created Markit. This is a company that didn’t exist 5 years ago and yet is well on it’s way to being worth more than the LSE in my opinion (ie several billion dollars.) (Disclosure: I don’t own any shares - I sure wish I did - but was one of the original non-executive directors.) Or Riskmetrics. (Disclosure: I bought a small amount of shares a couple months ago for my pension plan.) Or for that matter…Google. Data drives algorithmic business models. And tomorrow a lot of businesses - not just financial services and trading - will be built on algorithmic substrates:

A few years ago data-driven opportunities were cost prohibitive — and too early for the customer to understand. That was because many businesses were just worried about not getting Amazoned. Today they are all on the Web, thinking about how to drive better results. Which is why we ended up talking about a massive data warehousing project his company was working on, which will take all of that data across his huge customer base, and help them better monetize their sites.

What I love about these kinds of opportunities: Algorithms scale, have high gross margins, and are proprietary and defensible. The next generation Web is not about what you click and see — it’s about what’s happens behind the scenes when you click.

The exchanges can come out of this smelling like roses IF they embrace this and fundamentally remake their business model over the next 5 years. If they don’t however their profits will fall almost as fast as their volumes continue to grow.

“Enough said. That’s a deal.”

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(via TechCrunch):

The browser of the future is likely to become the virtual machine that hosts almost all applications. In this scenario the operating system becomes transparent, so Microsoft has something to protect (the source of its profits), as does Adobe, who currently provides the most common and consistent web virtual machine with Flash. Google has made no secret of its plans to target and harm Microsoft, and they know that the best way to go about that is to make the operating system irrelevant by moving up a layer and turning the browser into a standard, but powerful, virtual machine for applications.

…the best way to go about that is to make the operating system exchanges irrelevant by moving up a layer and turning the browser ??? into a standard…

…and if so who is Google?

just saying…

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