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Articles filed under 'Economics'

The Financial Reformation

Last week I spent the week in Amsterdam at Sibos 2010 where I had kindly been invited by Peter Van der Auwera to participate in the Innovation stream, and in particular in the Cloud Computing and Long Now streams within Innotribe.  On Monday, I gave a short “scene-setting” talk on cloud computing and app stores in finance called The New Financial Stack (more on this / link hopefully later this week) and also I agreed to produce a video aimed at provoking and/or inspiring some original and non-linear thinking about the future of finance. Called “The Financial Reformation”, it sets the scene for two decades of fundamental change in the financial services industry based on the amazing democratising power of information technologies. I hope you like the result:

But as you might suspect if you have watched the video, this is just a start… Indeed, this initial video could be considered as simply the trailer for a longer form video which will look at the period from 2008 to 2028 in more detail; similar in some ways to the AmazonBay video of several years ago. The first draft of the script for this story is already written but I am very keen to build on and enrich it, not only with the fascinating concepts and insights that I absorbed in the Innotribe sessions at Sibos last week, but also – insofar as anyone is interested – with comments and ideas from the wise crowd of Park Paradigm readers. I’ve got a few ideas as to how best to go about this, and plan to post these later this week or next, but in the mean time if you would like to share your thoughts, please feel free to comment below.

ps I’d like to give a special thanks to the amazing team at Motherlode who were instrumental in turning my ideas into reality and who worked tirelessly to deliver the video in time for the world premier at Sibos;  I’d also like to thank and congratulate Peter, Kosta and the rest of the Swift Innotribe team for what was simply an incredible four days.  I hope Swift gives you the recognition you deserve!

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Platforms, Markets and Bytes (video)

A couple of months ago, I had the privilege to have been invited to speak at eComm 09 in Amsterdam. I have posted on this previously but recently the video of my talk was posted and perhaps will make it easier to understand my accompanying presentation. If you can spare 20 minutes (there is an additional 10 minutes of q&a at the end) and are interested in understanding how Nauiokas Park defines our opportunity space, please have a look as it is probably the most succinct expression of the worldview we bring to investing and analyzing potential investment opportunities.

And here is the presentation again, in case you would like to follow along as you listen to the video:

Well-built developer platforms are the future of every industry. (-ReadWriteWeb)

The future of business is in ecosystems. (- Jeff Jarvis)

Note: Their is a small glitch around 7:40 where the video skips over a few seconds; funnily enough (for the conspiracy theorists out there) this is exactly where I say that had ZSIN’s existed, the extent of the disasters that occurred in the mortgage securitization markets would have been at least an order of magnitude smaller…)

UPDATE: Thanks to eComm, you can now find a complete transcript of my presentation online (including the missing minute!)

Platforms Markets Transcript) Oct09

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Platforms, Markets and Bytes

This morning I gave my presentation – “platforms, markets and bytes” at eComm 09 in Amsterdam. I’m not sure if it makes sense as a standalone but if Lee posts the video, I’ll link to it here later.

Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.

I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.

Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)

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Wisdom of (this) crowd?

Renault 14
Image via Wikipedia

I was very kindly invited by Paul and Lee to attend my first ever eComm conference, which will be in Amsterdam from October 28th to 30th.

The Emerging Communications (eComm) Conference & Awards was created to promote and accelerate communications innovation. Telecom, mobile and to a lesser extent, Internet based communications, had been innovation stagnant for far too long. Yet the opportunities for innovation had never been greater. Those opportunities are only going to grow as drastic changes further impact the multi-trillion dollar a year telecom industry.

The speaker line up looks fantastic and I’m the spare tire on an otherwise star-studded panel Thursday afternoon, that is if they still want me after my plenary talk that morning at 9:30:

Platforms, markets & bytes: the economic landscape of the 6th paradigm(?)
In a world where everything can be expressed as 0s and 1s, are the traditional ways of defining sectors and industries (as verticals) still relevant? If not what new business models and industry structures are likely to emerge? Oh and what’s the difference between a bank and a telecom company really?

Now at the risk that tumbleweeds blow through the comment section, proving once and for all that all my dear readers are in fact spambots (but in which case no one will see this and no embarrassment suffered), I thought I’d take a page out of the legendary Fred Wilson‘s book and ask you all for thoughts and comments on this theme that I might incorporate them into my presentation. (Or not!) So fire away!

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Moore’s Law redux

Moore's Law, The Fifth Paradigm.
Image via Wikipedia

The Economist writes:

There is strong demand for technologies that do the same for less money, rather than more for the same price.

The focus of the article is on computing and software – obvious and direct beneficiaries of Moore’s Law:

The “good enough” approach also works with software. Supplying “software as a service”, via the web, as done by, NetSuite and Google, among others, usually means sacrificing the bells and whistles that are offered by conventional software. Google Docs lacks the fancy features of Microsoft Word, for example. But hardly anyone uses all those features anyway, and Google Docs is free. Once again, many users are happy to eschew higher performance in order to save money.

But this is one of the key foundation pillars we look for in the business models of companies we look at in the financial services space as well; ie can you give the same (or better) service at a paradigm-shifting price point. A (successful) mainstream example of this would be ING Direct. However – even in a recession – price is rarely the only, sometimes not even the main driver in a purchase decision. This is especially true when it comes to (many) financial services; often the key driver is trust. And “trust” provided a significant barrier to entry, protecting incumbents irrespective of how anachronistic their business model may have been. How ironic then that it would seem that most large financial institutions played loose and fast with what ultimately was their one true differentiating asset, and largely trashed the trust they had built up (often over decades or even centuries) potentially opening the door for much better adapted new competitors to compete in their markets for their customers.

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Investment Scarcity Banking (doesn’t work anymore.)

A Light Breaks on the Horizon
Image by ecstaticist via Flickr

(from Mark Sigal at O’Reilly:)

George Gilder once pointed out that when the availability of a given resource shifts from scarcity to surplus, a lot of wealth is created. In the technology realm, one can think of processing power, storage and bandwidth as the great “wealth exponential-izers” of first the PC era, then the Internet era, and now, the Mobile Broadband era (as these resources went from scarcity to surplus items).

Beyond wealth creation for entrepreneurs, part of the miracle of surplus-powered markets is that they are generally a great boon for consumers as well, yielding them a greater diversity of offerings to choose from and democratizing markets by broadening accessibility and lower relative product costs.

By contrast, scarcity markets are kindred spirits of the toll road; they are all about pricing controls, and limiting both choice and access (think: cable/satellite TV, gas-powered cars, etc.).

While the entrenched incumbents understandably love scarcity markets, surplus markets are the proverbial rising tide that lifts all boats for consumers and upstarts alike.

One of the underlying causes of the financial crisis of ’08 as I alluded to in my last post, was the obsolescence of a large swathe of the financial services industry’s business models. This didn’t happen overnight (or even in 2008) but was the culmination of a number of outside forces shaping the operating environment over the last decade or more. These business models, these ‘entrenched incumbents” relied on scarcity markets. But since (most of) financial services is a pure digital information business, in our day and age it is obviously now a surplus market.

There are no prizes for guessing which businesses and business models I find more compelling going forward. Indeed looking at companies through the scarcity/abundance prism is a very powerful analytical tool for trying to handicap future success.

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Now what?

(…the President) insisting that the crisis came “solely from our extravagant and vicious system of paper currency and bank credits, exciting the people to wild speculations and gambling in stocks.

The period (of the past 10 years) was one in which it was easy to grow rich. There was a steady increase in the value of property and commodities, and an active market all the time. One had only to buy anything and wait, to sell at a profit; sometimes, as in real estate for instance, at a very large profit in a short time. (- a well-respected leading banker)

As you will have seen, I have not been posting much over the past several weeks. Indeed a few kind readers have gone so far as to contact me directly to ask why and in some cases to compare notes on the unfolding financial drama. There have been two main (entirely unrelated) reasons for my recent silence. The first is simply – I’ve been very very busy: as anyone who has ever started a business will know, there aren’t enough hours in the day or days in the week. I suppose the economic backdrop only contributes further to an already innate sense of urgency. The second is more practical: insofar as I can make an intelligent contribution to understanding current events and more to the point, what actions might be intelligent or appropriate and what opportunities and outcomes may now be possible or probable, it is almost certainly in taking a step (or several) back from the torrent of daily news-flow.

Not that blow-by-blow commentary is not valuable – I’ve been enormously impressed with the breadth and quality of (informed) opinion that the new information ecology has provided me in these incredible markets – just that there are many people who are already doing it, and in many cases exceptionally well – better than I ever could.

There are a number of observations I think are worth making (many though not all, would in fact dredge up ideas that have formed the foundations of the narrative here over the past three years.) And most of these I think would be more or less immune to the vagaries of the swirling markets (and so ‘waiting for it to play out’ / ‘waiting for the dust to settle’ is not really a relevant or accurate excuse.) What I have struggled with is how to articulate these observations – eloquently, concisely but yet accurately, with context – in the short form that is a blog post. At the risk of being delusional, I kept thinking to myself that this or that thesis was the basis for a chapter in a book…

There is one theme in particular – at the heart of the current crisis – that I am very keen to develop, as much as anything to organize my own thinking on the subject as so often is the case. Not the least because in addition to helping to explain the current situation, I think it will be an enormously fertile ground for generating business opportunities in the next financial services industry paradigm. (Can we now all agree that the prevailing paradigm is now well and truly dead or dying and that something new and different will emerge from the ashes of the current wreckage? Hey, if you like we can even call it the sixth paradigm, but I’m open to suggestions. 😉

So watch this space: Part 1 later this week…

PS The first quote above is President James Buchanan in…1857. The second, Thomas Mellon speaking following the panic of 1873. (Both via Ron Chernow’s remarkable biography: Titan – The Life of John D. Rockefeller.) 2008 is bigger. Global. But not unique. It is also worth noting that the roots of some of the great fortunes of the 19th century can be traced back to the opportunities thrown up by these brief periods of extreme turbulence and distress.

Coming up for air.

Clay ShirkyImage via Wikipedia

It’s like when you are 10 and you get a brand new bike for your birthday and it rains, torentially, for the next month.  And all you can do is sit there and stare at it shining in the garage…

So think of this post as a short, sweet sortie into the rain of meetings, deadlines and travel that have stuffed September fuller than a turkey bound for Christmas…

As you know, I believe that markets and financial services in the 21st century are ultimately digital businesses, cornerstones and representations of the “information economy”.  As a result, I would suggest that anyone wanting to lead and/or succeed in these businesses needs a lucid and enlightened understanding of this information economy and the internet substrate that underlies it.  This probably sounds obvious but, at the risk of sounding patronizing, I would suggest that many (heretofore successful) business people in financial services have at best a superficial or tangential understanding of these powerful currents running under the surface of our emerging information economy.

In the spirit of trying to redress this situation,  I would like to bring attention to two people who I would suggest could form the core curricular foundation for an executive course in Information Economy 101.  These are not obscure personalities but in their universe, mainstream thought leaders, celebrities even.  Indeed for many (most) readers of the Park Paradigm, this will be old hat.  However my hope is that some readers will not have been exposed to their thinking previously and that perhaps others (already familiar) would be nudged to push this information into their organizations and to their leaders.  Call me crazy, but I think any person tasked with running a large financial services company is unqualified unless they are familiar with the concepts so powerfully articulated by people like Clay Shirky and Cory Doctorow.

Cory’s Cambridge Business lecture is a great place to start:

PS This is the first post I’ve done with tools from (that great seedcamp winning company) Zemanta …can’t believe it took me almost a year!

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Averting (financial) ecological disasters.

Paul McCulley (MD Pimco) (via The Big Picture):

Information technology, more specifically the development of parallel processing, “gigabit-terabit-petabit” bandwidth and networking logic, is changing the way we conduct our lives today. While jet-setting executives (or policymakers) of this decade can be present in more places in less time than any predecessor, corporate information, corporate processes and corporate controls can now be shared around the world in real time via information superhighways. These advances in information technology are catalyzing the globalization of business and finance in ways far more important to global central banks than something as basic as physical transportation. These advances are driving the age of financial networking, and what has been described by some as leading to the vastly narrowing ecologies of finance.

Basically what I’ve been thinking for coming on a decade and evangelizing for the past 5 years or so, and now a defining part of the thesis underlying my new business.

The first phase of this “age of financial networking” has unsurprisingly driven the creation of a very tightly coupled system, with a relatively small number of very large, very important nodes or hubs (the global financial services mega-fauna*), in effect create a “scale-free network”, which has a number of advantages (played out nicely from 1987-2007 in financial services) but also some key – potentially fatal – vulnerabilities. John Robb (someone everyone involved in senior policy and management decisions should read) describes it better than anyone:

A scale-free network is one that obeys a power law distribution in the number of connections between nodes on the network. Some few nodes exhibit extremely high connectivity (essentially scale-free) while the vast majority are relatively poorly connected. The reason that scale-free networks emerge, as opposed to evenly distributed random networks, is due to these factors:
Rapid growth confers preference to early entrants. The longer a node has been in place the greater the number of links to it. First mover advantage is very important.
In an environment of too much information people link to nodes that are easier to find. This preferential linking reinforces itself by making the easier to find nodes even more easy to find.
The greater the capacity of the hub (bandwidth, work ethic, etc.) the faster its growth.

The Strength and Weaknesses of Scale-Free Networks
The proliferation of scale-free networks and our increasing dependence on them (particularly given their prevalence in energy, transportation, and communications systems) begs the question: how reliable are these networks? Here’s some insight into this:

  • Scale-free networks are extremely tolerant of random failures. In a random network, a small number of random failures can collapse the network. A scale-free network can absorb random failures up to 80% of its nodes before it collapses. The reason for this is the inhomogeneity of the nodes on the network — failures are much more likely to occur on relatively small nodes.
  • Scale-free networks are extremely vulnerable to intentional attacks on their hubs. Attacks that simultaneously eliminate as few as 5-15% of a scale-free network’s hubs can collapse the network. Simultaneity of an attack on hubs is important. Scale-free networks can heal themselves rapidly if an insufficient number of hubs necessary for a systemic collapse are removed.
  • Scale-free networks are extremely vulnerable to epidemics. In random networks, epidemics need to surpass a critical threshold (a number of nodes infected) before it propogates system-wide. Below the threshold, the epidemic dies out. Above the threshold, the epidemic spreads exponentially. Recent evidence indicates that the threshold for epidemics on scale-free networks is zero.

and on tightly coupled systems:

…the networks of our global superinfrastructure are tightly “coupled”—so tightly interconnected, that is, that any change in one has a nearly instantaneous effect on the others. Attacking one network is like knocking over the first domino in a series: it leads to cascades of failure through a variety of connected networks, faster than human managers can respond.

“Recent evidence indicates that the threshold for epidemics on scale-free networks is zero.”
“…leads to cascades of failure through a variety of connected networks, faster than human managers can respond.”

And so Bear Stearns (and others) are caught out. But they could not fail. Nor can Fannie and Freddie. Given this understanding of the current global financial system as a tightly-coupled, scale-free network, the effects of stupid and fraudulent mortgage lending in Las Vegas mushrooming into generalized system-wide distress is easier to understand…

Loose coupling describes a resilient relationship between two or more systems or organizations with some kind of exchange relationship. Each end of the transaction makes its requirements explicit and makes few assumptions about the other end.

The risks inherent in this mode of organization are clearly unsustainable. The world’s financial network will need to adapt. (The same is true of many other critical infrastructures: telecoms, utilities, transportation…where progress in this direction is already starting, to emerge.) We need to (and I believe we will inevitably do so) move towards a more robust, loosely coupled financial system: and the beauty is by adopting and adapting lessons computing and networking technology (which ironically underpinned and drove the creation of today’s brittle financial system) we already have a roadmap (and some of the tools) to do so.

Furthermore, these ideas aren’t new. John Hagel (another person anyone running a large corporation needs to have read**) wrote about this in 2002 (!):

A good working definition: loosely coupled is an attribute of systems, referring to an approach to designing interfaces across modules to reduce the interdependencies across modules or components – in particular, reducing the risk that changes within one module will create unanticipated changes within other modules. This approach specifically seeks to increase flexibility in adding modules, replacing modules and changing operations within individual modules. (Note: if any of you have come across a better definition of loosely coupled, please let me know – I’d like to follow up on this in a future blog.)

Three things stand out from this definition. First, it assumes a modular approach to design. Second, it values flexibility. Third, it seeks to increase flexibility by focusing on design of interface.

…The desire for flexibility is a powerful force driving the move towards loosely coupled systems, but there’s an even more powerful reason to adopt loosely coupled systems. It has to do with experimentation, learning and performance improvement. Within well-designed, loosely coupled systems, there’s a lot more room for experimentation…

He goes on to make the point that this move towards loosely coupled systems in business will fundamentally change the way we manage and organize our corporations:

Rather than traditional hierarchies driven by command and control management styles, we are likely to see relatively independent organizational modules brought together to perform one set of processes and then different arrangements of modules to perform other processes. Some of these modules will belong to the same enterprise, but modules from other enterprises may be brought in to perform specific tasks on an as needed basis…Conventional business strategy approaches emphasize the need to develop a detailed strategic blueprint and then tightly couple operational initiatives to execute the blueprint. As uncertainty grows in business environments, these hard-wired approaches to business strategies are becoming less and less viable.

Reading Robb and Hagel, I hope it is as obvious to you as it is to me that: (a) the global financial system clearly not loosely coupled, and (b) would be infinitely more resiliant if it were. I don’t expect these changes to happen overnight. Given the human factor, I suspect it will occur alongside the generational shift over the next 10-20 years. That said, the opportunities for those that ‘get it’ and adapt sooner rather than later are enormous: this sort of discontinuity is one of the only occasions where it is possible to completely alter the competitive landscape, and is particularly perilous for ‘incumbents’ (everything to lose.) Furthermore, given the critical importance of the financial system to our globel economy and societies, and its manifest vulnerability in the current regime, some of this change needs to happen quickly (more quickly than is comfortable) if we are to avoid a potentially very bad outcome. I guess you could say that one of the good things about having swung to the fear side of the fear/greed pendulum is that change – albeit painfully and begrudgingly – is seen as unavoidable.

We are deliberately going to build our new business to align with this new paradigm, so no matter how successful we may be, expect our ‘ecosystem’ to grow exponentially in size and complexity in comparison to our actual firm. For better or worse, we will never be ‘too big to fail’… 😉

* spent 15 minutes searching the web for a list of the world’s largest financial institutions by assets with no joy…a bit surprised, something for freebase?

** I often wonder about the paradox that our most powerful and important corporate and political leaders – the very people who need to be the most widely read and open to new ideas – are by the inevitable constraints and conventions of their position, are probably unable to do so. Think about it, how likely is it that the CEO of a giant corporation will be allowed to block out 4 hours in his diary on Wednesday afternoon to read and think? For the good ones this must be incredibly frustrating. As for the others, well let’s just say I would question the robustness of the process that got them there in the first place…

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Peak Hierarchy

Regular readers will know that I have a healthy skepticism with respect to the supposed benefits of ever-increasing size in corporations and in particular with respect to financial services firms. Given the preponderant importance of human capital to creating and maintaining a competitive advantage in financial services, the exponential increase in complexity arising from imposing traditional hierarchical organizational paradigms on tens or hundreds of thousands of employees quickly outweighs the benefits of economies of scale in infrastructure and financial capital in today’s hybrid / universal banking and insurance giants.

Until now however, I have been without an elegant and robust metaphor for this thesis. But when I read Michel Bauwens’ essay (thanks to a pointer from Gordon Cook) comparing the current fundamental, secular changes in societal organization driven by the revolution in information and communications technologies, I knew I had found my meme:

…there is also the emergence of a new form of horizontality, no longer local and disconnected and unable to compete with hierarchical forms, but able to scale globally, through the global coordination of a multitude of small teams, outside of a logic of command and control. I think this is the significance of peer to peer (and peer production specifically), and that it points to the concept of Peak Hierarchy.

In my view, we have already reached the point in history, where ‘peer to peer plays’, i.e. interconnected horizontality, outcompetes hierarchical and diagonal plays. The two examples we have are of course Linux and Wikipedia.

In other words, we have reached a point in history, a true turning point, where a new form of social organization, starts to outcompete hierarchy. (But of course, just as early hierarchy was a hybrid with the system out of which it arose, so the new early forms of p2p are hybrid forms within the dominant system)

If this is true, and I of course believe it is, then we have indeed already reached Peak Hierarchy. It should be historically situated at the mid-point between the moment that Linux became the dominant technological force in the internet, and that the Wikipedia was outreading and outproducing the Brittanica. From that moment on, faced with these undeniable examples of success, the scramble for adaptation to distributed forms of organization, to integrating participation in the very heart of hierarchy, has started to make itself felt. There has been a magnetic reversal of the poles. The chaotic attractor has become the peer to peer mode. Hierarchy is still dominant, and will stay so for a determinate amount of time, but social forces are already looking elsewhere, mostly unconsciously, but nevertheless.

This is unprecedented, and is changing the whole course of human history. Of course, it will take time to play out, see how difficult it was to realize the truth of Peak Oil, how adamantly the forces of biospheric destruction fought and are fighting back. But we can also see that it is ultimately a losing battle for them.

Not only does this thesis capture the essence of the issues facing the prevailing global political and economic paradigm but it neatly frames the diminishing returns characteristic of the twilight of a golden age and the accompanying bewilderment of the existing elite who either fail or refuse to understand the tectonic changes inevitably undermining their comfortable sinecures. Shades of the fall of the Roman Empire? Listen to Michel’s take on this:

Not only is the concept of ‘Peak Hierarchy’ an important pillar in our investment thesis, but it also directly colours how we think about building and organizing our own firm over the coming years. We are convinced that this will give us an additional competitive advantage, especially as many of our potential competitors are likely to continue operating more traditionally for many years to come.

So I’m adding it as a category here at the Park Pardigm and expect to read more of my thoughts on its meaning and implications on business and finance going forward.