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… this is pure unadulterated speculation, I suspect they aren’t. I suspect like the newspaper, music, bookselling, banking, etc. sectors before them, the main focal point of their efforts is to keep the bloody genie in the bottle . At least for long enough for the old hands to ride off into the sunset and let the next generation deal with it.
It’s a shame really, because on paper – as for most incumbents – not only do they have the most (everything) to lose when the paradigm …
Anyone who has ever used an Apple product understands that a key part of the value flows from the design aesthetic that covets simplicity, intuition and beauty; harnessing these attributes to provide solutions and services that users find a joy to use right out of the box. The complexity of their products is hidden from view, Steve Jobs having understood that the extra effort needed to transform complexity into simplicity was something that created tremendous value both for his customers and his shareholders.
Creating simplicity is hard. Much harder than creating complexity. Entropy and all that. But it is very often worth the effort. Helpfully, John Maeda wrote a great guidebook “The Laws of Simplicity” where he articulates 10 basic laws:
Reduce: The simplest way to achieve simplicity is through thoughtful reduction.
Organize: Organization makes a system of many appear fewer.
Time: Savings in time feel like simplicity.
Learn: Knowledge makes everything simpler.
Differences: Simplicity and complexity need each other.
Context: What lies in the periphery of simplicity is definitely not peripheral.
Emotions: More emotions are better than less.
Trust: In simplicity we trust.
Failure: Some things can never be made simple.
The One: Simplicity is about substracting the obvious, and adding the meaningful
Finance and financial markets are often complex. This complexity can arise within products (exotic derivatives), infrastructure (clearing, settlements and payment platforms) or regulation. And most financial services firms (and professionals) revel in this complexity. Not only do they not seek to hide it away, but they often compete vigorously to show it off in all its glory (and of course by association they seek to validate their virility and cleverness by navigating all this complexity on behalf of their hapless customers.) Of course – sticking with the computing metaphor – this ‘look how clever I am’ approach is very Microsoft-ian (and no, that isn’t a compliment) and very rarely does it provide the most utility or best value for the customer. So one of our key investment themes is to find and nurture companies who are to finance as Apple is to computing (and media!) The complexity of modern finance and markets is the ideal substrate for simple products and services, to quote John:
Simplicity and complexity need each other. The more complexity there is in the market, the more that something simpler stands out. And because technology will only continue to grow in complexity, there is a clear economic benefit to adopting a strategy of simplicity that will help set your product apart. That said, establishing a feeling of simplicity in design requires making complexity consciously available in some explicit form. This relationship can be manifest in either the same object or experience, or in contrast with other offerings in the same category—like the simplicity of the iPod in comparison to its more complex competitors in the MP3 player market.
One of our portfolio companies does exactly this. They take a simple service, using technology and their market knowledge to engineer a solution that keeps the complexity away from the customer and behind the scenes. (Where it should be.) A solution that embraces simplicity and transparency in a market heretofor characterized by complexity and obfuscation. It’s not a new music site or social network. It’s probably not something anyone would get too excited about. It’s boring. But it’s big. Billions big. And important. And for many individuals and corporates, unavoidable.
The service is foreign exchange (aka FX) and international payments. And the company, as you might now have guessed, is FX Capital Group. (See also my FX 2.0 post from this spring.) And the reason I am writing about them today is that they have just launched their new website and online trading platform and it is by far the best FX user experience I have seen. Simple. Transparent. Complete. Easy-to-use. From the initial client take-on, all the way through to the onward payment to the account of your choosing, every last detail of the process has been engineered to make the customer’s life simple. The “iTunes of foreign exchange”. After all selling one currency to buy another should not be that hard.
And now, it isn’t.
FX Capital Group’s vision is to combine technology and traditional phone base services with competitive and transparent pricing to deliver on the promise of simple, cost effective, and customer friendly foreign exchange and international payments services for clients.
Leveraging experienced individuals, the best technology and a deep understanding of both international foreign exchange and payments markets, FX Capital Group brings transparency, simplicity and automation to meet the foreign exchange needs of clients in a robust, easy and effective manner.
Buy, Sell and Hedge Currencies: A full range of phone based and online services to buy/sell currencies and hedge currency risk. Competitive, consistent and transparent pricing for all customers.
Manage Currency Risks: Guidance on strategies to hedge currency risk within your business. A great service for firms who contract in multiple currencies or import / export goods and services.
Sell on Your Website in Multiple Currencies: Expand your online customer base by selling to customers in multiple currencies using our real-time FX API’s at rates that are better than those “bundled” with merchant service providers.
Invoice in Multiple Currencies: Invoice your international clients in local currency. Embedded hedging of any currency movements and no need to maintain bank accounts in multiple currencies.
Make International Payments: Our international payments service (online and phone) will save you money over you bank for making international payments and may be free if you transact your FX with us.
And other brokers and financial intermediaries are also welcome to partner with FX Capital Group, either via API or white label agreements. Indeed, first and foremost this is very much a platform company, FXaaS really. The customer facing website is in fact just an implementation of the underlying platform, and shortly the company will be launching the second implementation – RabbitFX – which will be tailored specifically to private and retail clients. Going forward we hope that many other partners choose to build innovative and customized services on top of the core FXCG platform. We also are excited by the ability for partners to integrate FX into their products and workflows simply and powerfully. Imagine for example an ERP provider, or online accounting services, or an ad network, etc. etc. …the list of potential partners is almost endless.
One area that is particularly close to my heart is the ability to allow even the smallest start-up to offer their customers payment in any currency – easily, cost effectively and transparently. Or helping start-ups with geographically dispersed operations pay employees, contractors and suppliers in any currency without having their eyes ripped out by their bank or payments provider. I’m sure most of the seedcamp finalists from the last few years have foreign exchange payments to make from time to time, many on a regular basis. In the spirit of helping to get the ball rolling on this front, I’ve convinced them to sweeten the bargain for all the companies that have applied to seedcamp (or mini-seedcamp) over the past three years.
If you have been a seedcamp applicant, finalist or winner, if you open a corporate account and do a trade before December 25th, FX Capital Group will send you a £25 iTunes or Amazon gift card and also contribute £25 to the charity of your choosing. Just let them know when you register for which seedcamp event you applied or attended. They’ll do the rest. And then sit back and save time, money and energy and never worry about managing FX payments again.
Like all good start-ups a big part of the excitement and frustration is knowing what is ‘in the pipeline’ and wanting it all to be released to users ‘yesterday’. However we also know that the best ideas and certainly the best prioritization algorithms emerge from getting a product into the wild and so after 9 months of development and private alpha, I can’t wait to hear ways in which customers and developers will want to use the platform. So for all you early adopters out there, know that the platform is probably not perfect (although we’ve stress-tested it up to 250,000 trades a day without any problems, which gives us a bit of headroom to grow into! lol) but (we think) it’s damn good and would rather challenge you to help us make it even better than pretend we’ve got it all figured out.
In case you were wondering, the team is indeed working on putting a screencast/video demo of the trading platform online and but in the mean time they are more to happy to walk you through a short online demo if you are interested. Alternatively you can go yourself to https://demo.fxcapitalgroup.co.uk/ and use the following credentials:
username: demo@splashypants
password: demosplash
pet’s name: splashy
favorite animal: whale
favorite city: atlantis
Have a go and be sure to let the team know what you think. Best channel is probably twitter where you can find them at @FXCapitalGroup or on Facebook.
Finally it’s important to make clear that I’m not just writing this post as an investor, commentator or director but first and foremost as a customer. My entire adult life I have had to deal with managing FX risk and struggle with the pain and cost of doing international transfers. When the founder Nigel Verdon came to me with his vision, I thought ‘Hallelujah!’ – at last. It may not be the sexiest business in the world but there is real pain and real profits to be made in using technology to disrupt the old way of doing business and give customers a better deal. And so I did a ‘Victor Kiam’. So next time you have to make a foreign payment, whether its for yourself or your company, give FXCG/RabbitFX a chance, I’m sure you won’t be disappointed.
When speaking to start-up investors about their track record most of the time the conversation revolves entirely around the investments they have made in the past. The winners, the losers and why. More rarely do people talk about the investments they didn’t make. This is understandable for a number of reasons, one of the most important being there is usually no obvious record to fall back on and there is no way to short bad start-ups. So one relies on the investor keeping track of the investment opportunities they looked at and passed on, and further keeping tabs on how these companies did. Not many investors do this – at least not publicly, one (great) exception being Bessemer who with great humor points out their heroic misses – opportunities they declined that turned out to be home runs – in what they term their ‘anti-portfolio.’ But it would also be interesting to see a record of the deals an investor didn’t do that failed. But this is even harder (if one is to avoid noise) – even a small, relatively new investor like us sees hundreds of proposals and even this depends on what one considers as having ‘seen’. Is it an email in passing saying XYZ is raising money, would you like to look? Is it spending a few hours going through an executive summary / pitch book / website finding out more? And it is also important (if this information is to be meaningful) to qualify why the investment wasn’t made. Is it because it didn’t fit a certain sectoral or geographic investment criterea? ie Good prospect but not for us. Is it because of a conflict with an existing portfolio company? ie Good idea but we like these guys better or they were first in the door and now we’re stuck. Is it because of apathy or lack of resources (time, money)? ie Good idea but just can’t focus and isn’t top of the list? Or is it because, well it’s just not a very good opportunity? ie Mediocre or downright bad idea.
In order to have the discussion, an investor needs to keep a record of all of this. How many do? We are trying to – or at least have plans to do so – but I’ll admit it’s harder than it sounds. It’s not something that generally gets anywhere near the top of a priority list, when the days are filled with making and managing the investments you do make. (And when you are trying to raise capital and/or keep existing investors happy or informed if you are a professional.) Don’t get me wrong, it’s not rocket science and I think it probably comes down to spending a bit of time and energy upfront to put a workflow in place to be able to capture and manage this information efficiently. And to be truly useful, this record needs to be ‘timestamped’ and auditable: we all suffer from hindsight bias. ie We definitely would have invested in Google given the chance, and obviously we passed on Webvan….
OK, fair enough, but why is this important? It’s because I think knowing which investments (and why) an investor didn’t make, and comparing these to the ones they did make, is a much better way to analyze their skills and approach. I think this is true in any asset class, only in most (all?) others it is practically impossible to do the kind of analysis I describe above if they are a long only investor (private equity perhaps being the exception.) Of course for long/short hedge funds this type of thinking is embedded in their performance.
Nauiokas Park is too new for this kind of analysis to be relevant but I was thinking about it in the context of my prior angel investing experience. I didn’t keep a complete record but there are a few deals that come to mind, two of which I was fortunate enough to blog about before the outcome was known, one after (discount appropriately) and so are public record. Hopefully you’ll trust me on the other two.
The first example is a company called SpiralFrog which is now the poster child for the second wave of bad ‘internet’ investments. I was approached in early 2006, through my Wall Street/City network to look at this, as people new I was interested/knowledgeable about “tech” start-ups and had had some success as an angel investor. When I saw the prospectus (and yes it was a prospectus) and looked at who else was involved as investors, I was immediately suspicious: this wasn’t a nimble start-up, it was packaged like a Wall Street deal – the scale and approach were way too heavy. Looking into the plan and the projected financials it just got worse. I passed and when they launched to considerable fanfare, I wrote this in September 2006 and followed up with this a year later.
The third is Powerset. What attracted me was the great team they pulled together and my conviction that semantic technologies were going to become increasingly important and valuable. I didn’t directly have the opportunity to invest but was one degree away and think I could have if I had agressively pursued.
Zopa is the fourth. I was approached by a friend when they were raising their initial outside round. I loved the idea but didn’t think it could get traction – at least not enough, fast enough to disrupt the market it was targeting, especially given how free and easy it was to get credit (something I new about…) I think I was right then. But I still love the concept and would be open to taking a closer look again in the future should the opportunity present itself. My focus would again be on understanding whether or not they can scale and whether or not the business model is optimal.
The final example is Skype. I didn’t directly have the chance to invest, but again at one degree of separation I could have tried. That said, I’m pretty sure had I been given the opportunity I would have passed: I didn’t see (until everyone had figured it out) how it could be a good investment despite loving the product. I’ve changed my mind and if I were running a big private equity fund, I’d definitely be trying to run my slide rule over them to see if I could make eBay a better offer than the public market.
Good investing is about managing your failures, your losing trades. The best way I know of doing this – whatever the asset class – is working hard to figure out what could go wrong before putting on the trade. (I guess it’s the bond trader in me…) There is always something that can go wrong. If it is big or likely enough you should pass. If not, by having a clear understanding and focus on these risk factors, you give yourself the chance to adapt and/or mitigate before its too late. This is especially true in venture investing as many risk factors in these companies tend to be endogenous; obviously if your basic premise turns out to be wrong that’s tough (but not impossible) to mitigate and sometimes it doesn’t work out. But by actively knowing what is going wrong and why at least you can avoid throwing good money after bad while also knowing when the odds are in your favor and you should double down.
In the spring of 2005 I wrote the “screenplay” for AmazonBay and we launched DrKW Revolution on July 1 2005 – I still have the t-shirt to prove it. So I must admit I had to laugh when my old colleague Stu pointed me to the Morgan Stanley Matrix I nearly fell off my chair laughing: it was deja vu all over again…
Don’t get me wrong, it looks pretty useful and I completely endorse the vision. In fact I sort of have to given that it is exactly in line with the vision we had for Digital Markets at DrKW over 5 years ago! (Although not quite as comprehensive as far as I can tell…) But what I love most is that in terms of look and feel – the hexagons, the music, the video (but I can re-assure you I didn’t wear a tie or speak from a teleprompter!) – it is Son of Revolution. Amazing. Actually feel quite proud that we at least left an impact, even if it didn’t happen to be at Dresdner Kleinwort.
I just spent a few minutes digging around on the wayback machine but unfortunately couldn’t find any good links. Really too bad because the Flash intro page was very cool and would have loved to be able to look at it side-by-side with MS Matrix. (Any current Dresdner folks would be great if you could dig this code out of the archives if it still exists!) Fortunately, I did have an old marketing card brochure hanging around:
I’d be lying if I didn’t admit that I can’t help but feel a little proud seeing some of my vision start to come to life, especially at such a blue chip conservative firm like Morgan Stanley, but I would also be lying if I said I didn’t feel like screaming ‘I told you so’ to all the senior executives at DrKW who refused to stick their necks out and support what I was trying to do. Let’s just say I’m not surprised at how it all ultimately turned out there. Karma. The good thing is that this bad feeling is way more than offset by remembering all the truly exceptional people I got to work with while I was at DrKW and the support I received from so many of them especially since it wasn’t necessarily politically correct to do so. It meant and still means a lot to me. Anyhow, it would be cool if Hishaam Mufti-Bey, the guy behind MS Matrix would add us as a little historical footnote on his About Us page, as I imagine it won’t be long until all the old DrKW links have disappeared; it’s important to remember!
Just one final point though. What the hell is it with traders and black Bloomberg-looking web design??? Every bloody website I see focused on institutional capital markets customers seems to use this look. Get over it! It was fantastic for Mike (and rooted in a real engineering problem by the way) but when other people copy them, well… it just makes you all look dumb. Hire a designer. Do something original. Your content and you customers deserve it.
“The future is already here – it is just unevenly distributed.”
- William Gibson, Author
Update: Thanks to Martina for finding a slide version of the website stills / product look and feel…as you can see MS Matrix looks even more like DrKW Revolution than I remembered!
A few years ago I bought a few Apple shares (AAPL) in my pension plan. When I got the idea they were trading in the high 20s and when I finally capitulated and pulled the trigger (after chasing it for months with unfilled limit orders) it was in the high 50s. I bought it because the first time I saw an iPod I was blown away and the great experience we had had with our iMac at home after ditching our old Dell. It’s been a pretty good investment and my expectations in terms of their success with iPod/(then iPhone) driving gains in marketshare for their computers has been met or surpassed. I probably should have sold when it ticked over $200 (if only to reload when it traded lower) but that is back-trading and oh so easy. A more useful question would be: is it worth buying today? and if so, what is going to drive the next leg of the company’s growth. I think the answer is yes, and I think you’ll find the kernel of the answer as to why in this graph (hat tip to @azeem for the pointer):
The latest computing survey results from the University of Virginia’s freshman class show evidence of continued Apple marketshare growth in the higher education market (via Daring Fireball). The chart above shows that Apple has made steady gains since 2003 in the percentage of incoming UVA freshman who own a Mac. The latest year (2008) shows that 37% of incoming students owned a Mac while the percentage owning a Windows computer had shrunk to 62% from a peak of 96% in 2001.
Ok, so Apple’s selling lots of laptops to college undergrads, nice but not a game-changer, right? Wrong. I think it just might be. And better yet, it’s all about tipping points and power laws and stuff.
Firstly (and most obviously) substantially growing market share with this key demographic (young, upwardly-mobile, educated, proto-professionals), in a product with significant (perceived) switching costs, is great for long term sustainable sales growth. But it gets better (and here is where tipping points come in.) Very soon, over half of university graduates entering the workforce will have grown up / come of age using Macs. And they won’t exactly start doing cartwheels if they are forced to use PCs at work. (As an aside, this will thrust into stark relief the coming colossal collision between big company culture rooted in a 1990s technology paradigm – ie a bright line separation between corporate and personal IT assets and usage – and the reality of the 2010′s when the best and brightest will expect (almost) complete convergence of the two and regard trying to distinguish between the two as ridiculous and anachronistic.) I fully expect a story in Fortune or the WSJ etc. within the next 2-3 years, reporting on graduates
…who had turned down a job with ABC Inc in favour of one with XYZ Inc. because the former allowed only corporate PC’s at work while the later was a (mainly) Apple environment and was happy for employees to buy their own laptops as long as they complied with data and security policies…
Apple as a competitive recruiting advantage. You don’t want to be short the stock the day after this tipping point triggers.
As an added bonus, catalyzed (or at least accelerated) by the current Great Recession, a large number of 30/40/50-something professionals are leaving big corporations and striking out either on their own or in smaller enterprises. Many of these professionals have never worked with anything other than a PC at work and quite frankly never gave it a second thought. But many of them also had Macs at home – they were cooler, easier to use – especially for music and home media (which drove the purchase decision) and could even run Windows easily if absolutely necessary (like for the kids EA game collection…) And when these folks leave Megacorp Inc and start working on their next venture, doing a bit of consulting, writing a business plan, day to day networking…they’re using the Mac at home. And then when it’s time to get an office, it hits them: why on earth would I want to go back to using a PC. So they don’t.
People criticize the smugness of the cool Mac vs. the loser PC commercials but the reality is that this positioning is only gaining momentum amongst some of the most desirable demographic groups in the economy. Here’s a little experiment: if you are a senior executive in a Fortune 1000 firm, send an email to all of your employees (that your currently provide with a PC) and ask them if they could choose what computer to use at work, what would they prefer: iMac/Macbook or a Windows PC? (A few smart-assed geeks might answer they would like a Linux Box but you can ignore them because they are probably using whatever they want already, being smart and geeky enough to have circumvented standard corporate policy.) Warning: only do this survey if you know how you will react if 30% or more say they’d rather use a Mac. Waking sleeping giants and all that…
I hesitate to wade into this debate with my observations or suggestions: it is complex, has been studied at length by many academics and professionals much more qualified than I, and almost certainly does not lend itself to simple, mechanistic solutions. (Which is why I am highly skeptical when any politician suggests that more detailed laws or rules are the answer.) However I’m extremely frustrated with the lack of ‘outside the box’ thinking in this debate – not because it is necessarily where the answers will be found – but because unless one steps out of the frame of conventional wisdom you are almost certainly condemning yourself to come up with sub-optimal solutions. Especially since some of the fundamental tenants that are taken as gospel might be wrong. So with the disclaimer that I don’t pretend that the following suggestions are not without their own problems, I think they are worth considering, if for no other reason than to change the frame of the debate. Indeed I first thought of writing this post 3-4 years ago but it always seemed kind of pointless as at that time, there was absolutely zero appetite for considering any other compensation paradigm in the industry. I mean why would you, right? It was all good. Happy days.
I would suggest that most investment bankers (and MPs) are not paid enough. Enough base salary that is. But wait a second I hear you saying (well perhaps not today but certainly a couple years ago), the strength of the system is you can make a lot of money sure, but only if you perform. Who could argue with that? Well I will. For two main reasons. And I think if my suggested approach had been the norm in the industry, we would not have seen the same degree of egregious and venal behavior and may even have avoided some of the worst excesses.
First is the problem of credibility and the fit-for-purposeness of the bonus. In a system when even average employees in average years get half or more of their total compensation in bonus payments, and top producers in top years get most of their total compensation in bonuses, the idea that bonuses are entirely discretionary and variable is delusional. Paying out zero bonuses – even in poor years – is a nuclear option – the credibility of the bonus as a completely variable element of compensation is significantly if not completely undermined. So in effect the variability (both to the upside and the downside) is in reality highly damped. ie It starts to look like mostly fixed costs; and yet crucially for the employee it is not and so you have the worst of both worlds: the employee does not benefit from the security of a larger fixed remuneration, but the company effectively is committed to paying a high quasi-fixed cost. It’s worth taking an example: imagine a banker with a base salary of £100,000 per year who over the past 5 years has received bonuses ranging from £90,000 in a really poor year for the firm and his activity to £250,000 in a great year. On average his bonus’ have been £160,000 over this time. I would suggest this is a dumb way to pay this professional. Rather his salary should be around £200,000 and his bonus should have been beetween 0 and £40,000 every year except for the stellar year when perhaps it should have been £100-200,000. ie The norm should be c. 0-20% of salary. By taking this approach – given that the employee will value the greater certainty of the second construct, the company will be able to pay this banker less on average and yet have a more satisfied and aligned employee. As long as the first question asked when considering the bonus of an employee continues to be “what did he/she get paid last year?”, the robustness of the bonus process will be somewhat of a farce.
Which brings me to the second point. I can already hear some of you screaming out that this would just encourage a bunch of freeriders and goes against the core tenants of paying for performance. Well no and no. First of all if your employees are being paid these kinds of salaries and choose to freeride, they should be sacked and then you should be sacked for hiring the wrong people. Without exception, the very best professionals I have met, at all levels of the organization, do not work more or less hard because of the money: they work hard because they want to succeed, because they are passionate about their work. And they expect that if they are successful that the money will come. Any of you who have ever worked on a trading floor, do this thought experiment. To the best of your knowledge, what was the correlation between those that worked the hardest, put in the most effort, and those that were paid the most? Clearly, and especially in big companies, there will always be people ‘along for the ride’, trying to live off the efforts of others; often knowing they probably won’t get paid the most but they will certainly work the least. Worse, if push came to shove most people in most organizations can easily identify most people like this. By paying salaries that accurately reflect the value of the opportunity and the median pay for people with the skills to capture the value of the opportunity – I would guess that you would actually have fewer freeriders. The company couldn’t afford to tolerate them. They would have to remove them.
Adjusting the compensation paradigm towards a higher fixed component and a more sensitive and truly variable component (including averaging payouts over 4-7 years, including the possibility of down – ie malus – years) would also go a long way in improving risk management by going with the grain of human nature rather against it. Behavioral Finance 101 applied to human resource decisions. Again I suspect that had banks (a) had proper internal transfer pricing of cost of capital and liquidity and (b) a more salary-based compensation policy perhaps we could have avoided the most toxic behavior that developed in the structured credit market. A lot of the original ‘mark-to-market’ profits that were generated out of thin air (upon which very real bonuses were paid out) essentially were nothing more that arbitraging long term risk against overnight funding and the inability of the bank to charge appropriately for the capital used to allow these trades. Indeed the extreme complexity of many of these structures was imo just plain old misdirection – like a magician’s illusion. It made the profits seem plausible – after all it was really clever stuff – and created an illusion in management’s eyes as to the real source of the profits and the associated risks. Plus these very clever – and increasingly rich – people also, like most of us, liked to show off a bit and so – like musical virtuoso’s – competed to produce the most elegant and complicated embellishments, just to prove what could be done. If the average MD in this business had had a salary of say £500,000 with an expected bonus of £0-750,000; rather than a salary of £125,000 and an expected bonus of £500,000-2,000,000 you would have produced a very different, more healthy, set of behaviors I believe.
To conclude, I’d like to reiterate that I am not suggesting that this is a perfect solution – it clearly has its own problems – but rather I am suggesting that it is a much better system than the existing one, and would produce better and more balanced economic outcomes over time for all stakeholders (employees, shareholders, taxpayers.) So as a roadmap to the great and good who are currently tasked with revisiting pay in banking I would leave them with these three suggestions:
encourage smaller organizations (in particular for high risk/reward activities) where it is much easier to align and monitor the interests of all stakeholders
Morgan Stanley is changing its compensation scheme by de-emphasising the year-end bonus and increasing executive salaries as the Obama administration prepares to introduce a set of broad reforms aimed at changing Wall Street’s pay incentives.
The firm’s board of directors approved an increase in the base salaries of several of its top executives, while at the same time reducing the end-of-year bonus, according to a regulatory filing. Other banks, including UBS and Credit Suisse, have moved in a similar direction.
Wow. Watch them all fall in line now. It’s all about not being different than your competitors. Great to see this idea being put into practice (even if it did take a Level 5 financial storm to do it…) When I first suggested this idea to my peers and bosses 5+ years ago it’s not an exaggeration to say they looked at me like I had horns growing out of my forehead…
In May 2007 I wrote a post entitled “A requiem for last.fm?” in which I expressed my anxiety (as a very happy customer of last.fm) at CBS‘s ability to f*ck things up:
As a customer, I just hope that in the medium term they are allowed to continue to innovate and especially that they are able to continue to treat their customers with respect. As partners. That may seem self-evident, but the track record of the music industry in this regard does not inspire much confidence. Indeed it is testimony to the compelling and real value of creative artists and their product, that the industry continues to function at all. If music truly was a ‘discretionary’ good, I suspect the industry would have collapsed on itself as customers disgusted by the convoluted and adversarial service they are asked to endure simply said ‘enough, I’ll take my money elsewhere…’ There is also the more universal (non-sector specific) issue of the inability of large organisations to avoid suffocating innovation.
So when I read things like this, well I wonder, sadly, if my fears are being fulfilled:
Last.fm didn’t hand user data over to the RIAA. According to our source, it was their parent company, CBS, that did it. That corresponds to what our original source said in conversations we had after our initial post and before CBS lawyers became involved. But we didn’t want to update until we had an independent source for that information, too.
Here’s what we believe happened: CBS requested user data from Last.fm, including user name and IP address. CBS wanted the data to comply with a RIAA request but told Last.fm the data was going to be used for “internal use only.” It was only after the data was sent to CBS that Last.fm discovered the real reason for the request. Last.fm staffers were outraged, say our sources, but the data had already been sent to the RIAA.
At best, CBS is living down to low expectations: once again large corporate antibodies do their best to kill off the virus of innovation.
It’s really sad because last.fm not only has a great product but one where – if CBS spent less time, energy and money on lawyers and corporate pencil pushers – and more on building and promoting the business – they would discover that there are real, paradigm shifting, monetizable business opportunities screaming out to be truly developed. But of course many, perhaps all of these would probably end up destroying the old businesses and ways of operating. Hard to get the turkeys to vote for that…
My last two significant music purchases, and the last live music event I went to were all driven by last.fm. The music purchases were buying (several) albums of a couple artists I had never before heard of which last.fm recommended to me on the basis of my listening history. No way I would have discovered them otherwise. No way. Not at my age anyway. And by the way both of these artists are reasonably obscure – ie have not been promoted up the ying yang by the traditional manufactured music business. So the profit margins are great. No wasted marketing spend. And the “Events recommended for you” functionality is quite frankly unbeatable – geographically and musically relevant. Blows any other events listing service out of the water. Awesome.
I’m a paying customer of last.fm but if packaged in the right way, I’d be happy to pay even more. And it’s not because I’m particularly generous. It’s because they provide a bloody good service and I think it gives value for money. And by the way I’m pretty unhappy about them having sent my listening data to the RIAA. I’m happy and chose to give this data to last.fm because I get value from it and I trust(ed) them. The RIAA? I can’t say anything nice so will leave it at that.
If Apple had bought last.fm it would be ruling the world right now. I wonder if this was ever an option that was on the table?
My friend Alex wrote a great post on how the current UK government just doesn’t get it. And it’s not about policy per se – upon which intelligent people can disagree – but more fundamentally on how the whole socio-economic-institutional paradigm is shifting, massively, below their feet. And there’s not a damn thing they can do about it. And therein lies the rub. The fact that they are powerless to change this despite commanding the heights of power does not compute.
To be fair, they aren’t alone – the instincts of many (most) politicians is to try to stuff the genie back in the bottle. Just look at the surreal-if-it-wasn’t-real going ons in France as just one example. The same is true of many Fortune 1000 business leaders.
And when I look at this through a demographic prism – as I am wont to do – I see a distinct pattern. I suspect that a propensity to cling to the historical norms of power and control is a cultural pathology that is particularly acute in the Baby Boom generation. This is partly a coincidence of timing – ie the power paradigm is changing on their watch – and exacerbated by their generational self-image: they are not old and reactionary, they are not “the man”. They are the vibrant transformational free-spirited children of the 60s and 70s, they are the ones that “get it”. Sixty is the new thirty right? But they worked hard to climb up the greasy pole of success, to make it to the corner office, to the top of the hierarchy. And it was bloody hard work. And they deserve to now be able to wield the levers of power as their predecessors did for generations beforehand. Besides as a more enlightened generation they would do this with even more wisdom. So it is unsurprising that they are not bloody happy to see the rules change. They are in charge. They set the rules. It’s their turn. It’s only fair.
Spot the odd one out.
Gordon Brown: 58. Peter Mandelson: 55. Michael Martin: 63. Barrack Obama: 47.
Age at start of mobile phone/internet mass adoption (1995)
Gordon Brown: 44. Peter Mandelson: 41. Michael Martin: 49. Barrack Obama: 33.
Clearly this is a generalization. Not everyone over 50, not every baby boomer is at odds with the changing world. In fact there are a fair number (many of whom we have to thank for building the technological foundations of this new age) who are leaders – in their actions and thought – in this transformation. However – and this is completely anecdotal and a personal view – I suspect that they are rarely found and disproportionately under-represented in the halls of traditional power.
It’s time for a change. But it won’t be easy. And given increasing life expectancies these guys are going to be around and healthy for another 20 or 30 years so nature isn’t going to help because we don’t have that long. The funny thing is I think if they overcame their fears and actually “let go” many of these leaders would find it incredibly liberating and empowering at the same time. Interesting times indeed.
If I had a billion dollars. (If I had a billion dollars.)
Well I would buy you a Skype. (I would buy you a Skype.)
I would buy a Twitter for your Skype (so you could tweet and chat and call all your friends.)
The news has left many in the industry wondering if eBay will put Skype, which it paid a hefty $2.6 billion to buy in 2005, on the auction block. Donahoe had said last year that eBay would consider selling the business unit if it couldn’t be integrated with its auction or PayPal payment system.
And according to statements made during the conference call, it looks like Donahoe doesn’t think there is much the Skype technology can do to help eBay’s other businesses. When asked what eBay was doing to add shareholder value to Skype, Donahoe admitted that “the synergies between Skype and the other parts of our portfolio are minimal,” the paper said.
Well if it were up to me, I’d sell eBay – maybe Ken Lewis at BoA might be interested, would look innovative and might distract the federales from the Afghanistan that is the Merrill acquisition – and keep Skype. eBay could have been the Betfair of consumer goods, instead it became the Microsoft of marketplaces…
Anyhow, I’d buy Skype. Maybe not for $2 billion, but I think it is potentially a very valuable asset and I’m convinced that it is not even scratching the surface of its potential. The problem is that they seem to be trapped in linear thinking with respect to their business model. Selling minutes and add-value telco services. A telco. An alternative and innovative telco. But a telco. Nothing wrong (well you know what I mean…) with telcos but if you want to buy a telco, buy BT – its a lot cheaper. And its not just management (that can’t think out of the box) – it’s the press, analysts etc:
So an acquirer would likely be buying Skype for its 370 million registered users, which is nothing to sneeze at. But the big question is how much money can be made from these users? Sure, people love using Skype’s free services, but most of its revenue is made from a small portion of its users. Skype generates most of its revenue from its SkypeOut service, which charges users to make calls from the Skype service to regular landline phones and cell phones.
The SkypeOut revenue stream is sufficient to sustain Skype’s business model today, but as IP networks are deployed throughout the world and all communications becomes IP-enabled, there will be fewer opportunities to make money from connecting Skype calls to the regular phone network. What’s more, as Skype adds more subscribers, those users are more likely to talk to one another over the free Skype-to-Skype network rather than paying to call these friends and family on regular phones. Of course, it will likely take years for this scenario to play out, but this fact could color a potential acquirer’s willingness to pay a premium for the service.
“As more people adopt Skype, there’s potential for the asset to peak in value,” Friedland said. “It won’t likely happen for another five to eight years. And unless Skype comes up with a new meaningful revenue driver, it could start to decline.”
370 million registered users. Three hundred and freakin’ seventy million. And growing. Fast. And more people joining is a bad thing?!?
Let’s just pause here for a moment. So Mr. Friedland, if Skype ended up having say one or two billion – BILLION – registered users and so like became the de facto communications substrate for the vast majority of the connected citizens of the planet, that would be…ummmm…bad?
There are a hundred and one ways to bootstrap amazing, profitable, cash generative businesses off of Skype’s brilliant platform and installed base, and they are all in my new book: Managing Skype for Dummies. Actually, I didn’t write it. And it’s usual title is the Cluetrain Manifesto but still…
1. Markets are conversations.
I don’t know what Meg was thinking (those of you who listened to the eBay analyst webcast and pored over the accompanying presentation the day eBay announced it was buying Skype will surely remember that at the end of both you were even more confused than at the beginning…) But even if it was by accident, she was on to something (admittedly she did get a bit punchy with the pricing, although if she had paid in paper instead of cash…) It’s just that that something wasn’t being able to call EvilRabbit467 and haggle over the price of an iPod nano to ‘close the deal’…
Seriously if I was the captain of some vast private investment capital pool, I would be sitting around with my partners and a handful of clever young associates and putting together a plan for Skype. But if I were Donahoe, I’d spin Skype out to my shareholders as a separate listing, this would create value and possibly more importantly, especially in these interesting times, give Skype an explicit valuation and an acquisition currency. Then it gets interesting.
Just a quick post to welcome Mike Chadney to the conversation. For those of you who have not yet had the good fortune of meeting Mike, he is the founder/CEO of CityOdds, an expert (and expert commentator) on all things derivatives, and a kindred spirit in terms of having identified something “rotten in the state of Denmark” and better yet, via his new venture, seeking to do something about it.
He starts his blog with a comment on venture finance for musicians (and kindly highlights some of my thinking over the years on the topic…)
In any event, for anyone interested in the future of (financial) markets, one to add to the feed reader I think.
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