Sean Park Portrait
Quote of The Day Title
As industries become digital industries they become free.
- Chris Anderson, Editor, Wired Magazine

Somethings change everything

Carlota Perez is one of my heroes. Her fantastic articulation (in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages) of how technological revolutions mark turning points in long economic cycles, building on the work of Schumpeter and Hayek, is in my opinion an incredible lens through which to understand long term economic growth and its effect on financial markets. Her approach is a key foundational pillar for our investment thesis, and is why we feel confident that it is possible to generate excess returns by catching the long term secular economic waves that ultimately govern capital markets. (Think of it as the polar opposite of day trading.)

In her thesis, each successive long wave of the economic cycle is initially catalyzed by a technological revolution, usually only visible in hindsight:

Perez - Recurring phases of each great surge in the core countries

My suspicion is that we are living through a “phase change” now (be careful, “now” in this context means a period of a few years, not “today” or “this quarter”…) – and so I’ve been wondering what will come to be seen as the foundational technological revolution of the sixth paradigm. The previous five, as defined by Perez, are below:
Perez - Approximate dates of the installation and deployment periods of each great surge of development

There are many possibilities, but I’m starting to think that the transition to cloud computing (enhanced by ubiquitous wireless connectivity) just might be it. And for the sake of taking a punt on what might be a good symbolic starting point for this revolution, how about the launch of Amazon‘s S3 and EC2 in 2006?

Google Trends:

And it just keeps getting better (via GigaOm):

Amazon today said it would bring web-scale computing power for use in workloads such as web indexing and data mining to just about anyone. The bookseller now offers MapReduce (a programming model created by Google to help deal with incredibly large data sets) using Hadoop on Amazon’s Elastic Compute Cloud and Simple Storage Service. This allows AWS customers to access the power of a Google- or Yahoo-style server and programming infrastructure to model business decisions and analyze huges sets of customer or corporate data without having to invest in thousands of servers (as well as dozens of programmers). Dana Gardner over at ZDNet says one could think of it as having access to a personal supercomputer.

Just as Intel’s 4004 microprocessor was the catalyst for a wave of creative destruction in the 70s and 80s, will AWS prove the same for the 00s and 10s? Probably. We’re seeing it already. And it’s going to disrupt the hell out of the mastodons of industry across most sectors of the economy. Why? Because their cultures and leaders are entirely ill-equipped to face such a fundamental paradigm shift. They know how to play by the old rules. The strategic competitive advantages they built up over decades risk suddenly – poof! – to become obsolete. (from Dan Gardner:)

Think of it as having your own tuned supercomputer that you can plug gigantic data sets into and ask questions that will determine the course of your businesses for the next decade. Oh, and you can pay for the pleasure on a credit card.

This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises. But there are plenty of people, researchers, government agencies, academics, small to medium enterprises, venture capitalists and the like that would hugely benefit from sussing out important trends and findings from the growing reams of raw data generated by modern businesses and societies. Talk about metadata on steroids!

“This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises.” Not anymore… Think about that for a moment.

Size used to be an advantage in almost any industry…now? Not so much. New rules, new winners.

Thought experiment: Let’s take, oh say…banking. Which would you rather run (if say your life depended on success, which I know these days is a bit far-fetched but humor me…)?

  • A greenfield start-from-scratch-bank (assuming you had access to sufficient capital to get started, say $100 million or so)? Or,
  • [insert favorite megabank here] (assuming you had access to sufficient capital to not be immediately insolvent, say $100 billion or so)?

Well unless you are a sociopath as per Hugh Gapingvoidand see the key metric of success being how many people report to you and whether or not global political leaders will take your call, I think the answer is pretty bloody obvious.

So what does all this mean? Well, for us it means investing in companies that are positioned to ride this wave (not build a levee against it, hoping it won’t break.) Some – like cohesiveFT are right in the heart of the technology facilitating this new paradigm. Others, like our most recent investments Zoopla and FX Capital Group, are building new business models adapted to the new technological landscape that will allow them to disrupt and extend existing markets. But it also means remembering that you can be right (about the future) but still not come out on top:

The network is the computer. - Sun Microsystems (1982-2009)

These really are incredibly exciting times.

UPDATE (jan2011): Great graph from Cloudkick via The Economist:

Growth in virtual machines on AWS

UPDATE (apr2011): Nice summary of recent MSFT white paper on the (overwhelming) economic advantages of cloud computing.

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  • Chuck Farley

    Thanks for the thoughtful reply, PP. I would love to think that the real Cloud momentum among technically aware people will finally commoditize computing resources, but the skeptic in me has heard this all before. Wasn't Enron trading bandwidth back in the 90's?

    (On Mozilla Firefox 3.0.8 on Windows, I do not get the Disqus AnonymousUser "area" for commenting. And on IE 6.0.2900, the reply-to-comment function only scrolls me to the top of the page.)

  • Ah, Enron... the funny thing is - and I say this at the risk of being shouted off the internet! - Enron was a very interesting place and was ahead of it's time in many many areas: online trading, credit derivatives, weather, bandwidth, etc. And the sad irony is what happened to Enron - actually in the end put a lot of innovation back several years or more: since they were such a visible, brash proponent of these innovations, when Enron went down the proverbial baby was thrown out with the bathwater. Take the weather derivatives markets for example, while potentially an extremely valuable risk management tool for many many companies and industries, because most CFO's only experience of these was having rabid Enron sales people banging on their door they are often extremely cautious or even dismissive of looking at these solutions. (Although the time decay on this - almost 10 years later! - is finally starting to have its effect and smaller/newer businesses were never "infected" in the first place.) A couple years ago when

  • Chuck Farley

    A small world!: I also witnessed the Enron stigma around weather derivatives! Did some structuring for a bulge bracket a few years ago that involved bundling inclement weather protection with an... ahem "entertainment" loan. This was not a cat bond, because the borrowers already pay for protection against the biggies like hurricanes and flooding. We spent a bunch of mental energy thinking about how to avoid looking like we were brokering CME weather derivatives, when we were actually hedging OTC with a protection seller. Alas, the credit crunch happened and that structuring work evaporated. Still would have been an amazing, strange product.

  • Interesting article on AWS v Cloudera by James Urquhart at CNET:

    Will the so-called "barrier of exit" stand up? I'm not even arguing that the choice will be based solely on the comparative costs to the business. In fact, what I am interested in is the extent to which business units and departments will simply bypass IT altogether to build and run their own jobs in Amazon Elastic MapReduce.

    HT to @AAinslie for tweet.

  • Chuck Farley

    Cloud 2009 = Client/Server 1994 = Mainframe/Dumb-terminals 1982

    So-called cloud computing is probably the most overhyped trend today. How long will it take people to realize that "it's the software, stupid?" The CPU is very rarely the bottleneck in most apps, even at big evil banks and hedge funds. Instead the choke points are the network bandwidth, persistent storage, and (above all) finding patient and skilled software developers who solve problems elegantly and simply, with minimal buzzword compliance. How is having a 10000% faster CPU going to improve the Wifi speed on my iPhone? How is a low-power, mega CPU going to make my OS more stable? How many times do we have to hear "once we use SilverBullet v2.3, we won't need programmers?"

    (Please make your website compatible with Firefox, since Internet Explorer is very insecure and unstable.)

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