:: The Park Paradigm ::

Markets for the Digital Generation

Thinking about information streaming and aggregators, JP writes:

Subscribe aggregators are subscriber-centric. Publish aggregators are publisher-centric. Both types of aggregators, at least in their current form, are backward-looking.

I cannot help but feel that there is a VRM-related innovation to come. Both publish aggregators as well as subscribe aggregators will start dealing with intent, at which point we have digital butterfly markets. Doc, Sean, what do you think?

(For those of you not familiar with the jargon, VRM stands for “vendor relationship management” with the premise being that the traditional producer to consumer paradigm gets flipped to a consumer to producer paradigm - ie consumers ‘advertise’ their preferences and desires to producers who can choose or not to fulfill them. If you are curious to learn more the ProjectVRM blog is a good jumping off point.)

I don’t know if ‘digital butterfly’ markets is the right name (sounds like something out of a William Gibson novel…) but I imagine what JP is driving at is that with all these rivers of data being published and subscribed to, surely embedded in these flows are the ‘fish’. Real, actionable, intentions ready to be fulfilled. I’m not an expert in artificial intelligence, and the little I know (enough to be dangerous) about natural language processing, pattern recognition and semantic search suggests to me that this is not a trivial engineering project. Furthermore the more obvious (ie tractable) use-cases don’t seem to really merit the effort. On the other hand, intuition suggests that the spaghetti theorem should hold (throw enough spaghetti at the wall and some is bound to stick.) Whether or not “We’re pretty sure something cool, unexpected, useful, etc. will emerge” is enough to justify spending millions mucking about is less obvious - certainly with most traditional sorts of capital and organization; but we’ve got Google and open-source, so maybe traditional capital won’t be needed.

I guess what I’m trying to say, is that I’m pretty sure there is a ‘there’ there. But I don’t know yet what it is. I think of it as (information) signal amplification. The current generation of web tools - call it Web2.0 for lack of a better shorthand - are the first generation of amplifiers. What I mean by signal amplification, is that I am able to consume, process and distribute an order of magnitude more information than say was possible a decade ago. Adjust for cost (ie resources) and I’m certain the difference is even greater. The consequences are however profound - they create a new paradigm. The result is not ‘only’ being able to do the same thing only 10 times more productively, the result is that you can do things that simply weren’t possible previously. The business model for our company would not hold up without this substrate. So the next phase, what I think JP is hinting at, is the next order of magnitude of information signal amplification. And you know that’s got to throw up its own universe of possibilities. That’s the thing about power laws. They are like Cracker Jacks. A prize in every box.

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Of course all of you would have seen that Mr. Bloomberg’s blind trust bought out their minority partner Merrill Lynch’s stake in Bloomberg LP, putting a $25bn valuation on the company.

I don’t know why but I keep getting this image of him calling up the trustees, steam coming out of his ears, screaming: “You paid what!?!?!!?”

Actually, given that he already owns the rest, putting in a high print wouldn’t in itself be such a bad thing, especially if one day he decides to sell the whole thing (which now becomes a much more viable and simple option.) I would be very surprised if his trustees don’t get a few incoming exploratory calls on a quarterly basis from now on.

And who else noticed that Merrill’s market cap this week is hovering around $25bn. Love the symmetry.

Anyhow, Mr. Bloomberg was twenty years ahead of his time. He knew… One word: data.

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Today Silicon Alley Insider reports that Monitor110 has closed down:

The company had raised $20 million, including an $11 million round in 2006. Last month, we reported that the company had cut a third of its staff and was trying to sell itself to Reuters. Carley subsequently told The Deal that he was looking at several options: “So while we have been looking for investment and distribution, we are open (given the right terms) to an outright sale of the company as well, and several parties have expressed that kind of interest.”

From the start, back in September 2006, when they burst on to the scene with much fanfare, while I wholeheartedly agreed with the concept (of helping traders vastly broaden their information horizons by tapping into the exponentially growing alternative sources emerging on the web,) I was politely sceptical as to whether or not Monitor110 had the right approach. To be clear, beyond what was available on their website, I didn’t know much about their technical approach or even get to see what their product looked like. So that’s not what put me off. Rather, what made me uneasy was that they seemed to be taking a very traditional Wall Street approach - business model, budgeting ($20mn !!!???), even look & feel - to what for me was clearly a non-traditional proposition. It may be cliched but successful solutions in this space will have much more of a Web2.0 feel about them. (I know this is oversimplifying.) One company that I think may be on the right track for example is Skygrid. But there are many others. And given the cutting-edge nature of this space, even good ideas well executed, with really smart people like Roger might not succeed. At least not on the first try.

I guess the point is that opportunity abounds in this space and I would not be put off by Monitor110’s demise. I would however take away the lesson that selling information services using the traditional model (a la Thompson Reuters) is very hard unless you are the incumbent or you have a data-set that is immediately and obviously unique and valuable. Start-up companies in the emerging unstructured information/AI space have neither and so need to take a more creative approach to their business model and a more cautious approach to their burn-rate. Artificial intelligence, semantic search, natural language processing, trust(reputation)-based filtering, etc. etc. all will continue to grow in importance and relevance to all the various players in the financial services industry (and for that matter any industry where finding, organizing and synthesizing information is core to value creation.) Indeed this is very much the context for my interest in Powerset for example.

So I hope other budding entrepreneurs and technologists looking at this space will not be put off by this. And I hope to have invested in one or two of them by this time next year!

Update:

If you haven’t seen it already, please read Roger’s excellent post-mortem analysis of Monitor110. There are a number of lessons that are universal (to start-up ventures) - two key factors being money (yes, you can have too much) and leadership (clarity clarity clarity)… to give you a taste, here are his “Seven Deadly Sins” (for a start-up):

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the Company and with the Board

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Yet again, Microsoft strikes buying a very interesting private company with excellent potential: Powerset, who describe the deal thus:

Powerset has always been a small company with big dreams, with the ultimate goal of changing the way humans interact with computers through language. We set out to improve search by indexing Web pages based on the meaning expressed in them rather than just the literal words. Powerset licensed breakthrough technology from PARC, hired world-renowned computational linguists and search engineers, and recently released a search and discovery experience for Wikipedia articles. Our technology helps to improve search results and also makes new features possible, such as Factz, which aggregates information from many articles to summarize a topic.

With any startup, the challenge is to take the seeds of an idea and grow it into a viable company. At Powerset, we transformed our idea into a world-class semantic search platform, demonstrating the future of search with our Wikipedia search experience. But building a large-scale semantic search engine is expensive, requiring an engineering effort and computing resources beyond what most start-ups could ever imagine. Because our goals around improving search align so well, Powerset has decided to team up with Microsoft. We believe that this is the fastest way to bring our technology to market at a large scale.

I have been following Powerset closely for approximately 15 months, ever since I first learned of the company and had I been up and running with my new venture at that time I certainly would have tried hard to learn more with the goal of becoming involved as an investor. Ex-colleagues can attest to my long-standing belief that search - and in particular semantic search - lay at the very heart of the core value proposition of a modern investment bank. Further, intelligent search is key to creating robust markets in just about anything. Indeed, a few years ago I tried to interest my former employers in doing what I thought was a very low risk and potentially highly valuable (strategically and financially) deal with Fast Search & Transfer (which btw was acquired for $1+ bn by Microsoft(!) in January.) Suffice to say that my views did not command a consensus amongst management at the time…

For me the value of intelligent search in financial services and markets is self-evident and so I’m not inclined to waste your time elaborating. With this in mind, despite having no ’skin in the game’ I have to admit to feeling a certain disappointment upon hearing the news that Powerset was selling up to Microsoft. And given the valuation as guessed by TechCrunch, the investors certainly haven’t hit a home run (c. 2-3x would be my guess), so why did they do it?

The answer seems to be in a nutshell: the very significant capital costs of building the computing and storage infrastructure needed to scale up Powerset to the entire web. This certainly seems reasonable, and I get the impression that both sides are very keen to ‘over-communicate’ (see for example this great interview on TechCrunch) in order to counter the expected ‘default’ view that here is yet another great emerging company about to get swallowed then crushed by the Borg… I hope I’m wrong and “Powerset: A Microsoft Company” really does turn out to be a win-win. Still even if it does, I remained convinced that it will only be an exception that proves the rule.

The Economist framed it well in their recent article titled “After Bill”:

Mr Gates’s reply to Mr O’Reilly was not entirely reassuring. The firm, he said, now has dozens of “quests”—revolutionising television, automating data centres and creating software ten times faster. Perhaps this fragmentation of Microsoft’s ambition is only natural. In its 33 hectic years the company has swollen to nearly 90,000 employees (see charts); revenues this year should exceed $60 billion and net income reach almost $18 billion. Even Microsoft’s own senior executives struggle to grasp its growing empire. The firm now sells 75 different products, many of them in lots of versions.

I’m sorry but 90,000 employees? In a business that is wholly reliant on human creativity, initiative and in a market that demands resilience and near real-time reactions to a fast-changing environment? 90,000 employees? 75 different business lines? Too complex. Too much complexity.

In this, Citigroup and Microsoft are highly analogous: their core ‘innovation roll-up’ strategies should work a charm but in reality don’t seem to work at all. This comes down to the drag from increased complexity and bureaucracy, more than offsetting the gains from new and innovative technologies and business opportunities. Many companies fall into this trap. And yet the only time we see even the potential for breaking up these behemoths into more optimal pieces is either in situations of distress (and even rarely then) or through vigorous ‘activist’ outside shareholder pressure. It’s a mystery to me why more CEO’s don’t have ‘cell division’ on the top of their corporate agenda. Too much testosterone? (A derivative of the ‘power corrupts’ rule?) It mystifies me because if they did this, it would almost certainly bring them success and more importantly a giant ego boost: just imagine the powerful wave of growth and innovation that would be unleashed if these corporate giants divided into more manageable elements and released their excess capital in the bargain?

They could be heroes. If just for one day…

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A year ago Nate wrote:

Finally, this is all assuming nothing changes with the way the carriers do business. Indeed the ball could be in their court on the subject of mobile payments, because if they set-up their own mobile payment option as a stand-alone service and turned the phone into a credit card, they could sign users up at the point of sale (POS) or any point along the way and really get into an interesting a lucrative business. I say stand-alone because the current set-up with SMS payments feels too much like how sketchy 900 numbers work (WTF is this charge on my bill!?).

Take home point: Phone bill must remain clean and consistant, and mobile payments must be as flexible as an AMEX. Meanwhile, carriers hold the key to this, but likely won’t move very soon and consumers won’t adapt too quickly, so your best best is extending your online presence to the “third screen” and streamlining payments on the back-end.

More recently he wondered whether or not the killer business model for Twitter wasn’t as a mobile payment platform:

Forget infrastructure, forget great partnerships: the most important place a mobile payments system can start with is ubiquity.

Twitter is far from being a ubiquitous mobile platform, but they have more penetration and usage than any other mobile service and their current user base is the same important group of technology early adopters that PayPal enjoyed when it convinced the world that you could send money to an email address.

Two and a half years ago, I asked if telcos were set to become the new banks:

…the mobile phone is likely to be the platform of choice in delivering financial services to hundreds of millions in the developing markets over the next decade. But this idea does not just apply to developing markets; mobile devices are already important platforms for commerce in developed economies and there is no reason to doubt that the growth of mobile commerce will not continue apace everywhere. Indeed the ability to reduce transaction costs to a point where you can easily and profitably transact micropayments, then you have the basis upon which to compete for any business.

Following which JP took me literally and left a bank to join a telco!

Well now ‘mobile’ is all the rage with the VCs and Twitter is the society phenomenon of the (mainly) West Coast digerati, so is Nate correct in mapping out payments as the silver bullet to convert tweets into dollars?

I’m not entirely convinced. Or more specifically, I think the $64k question is exactly how and where Twitter might position itself in this process. However, Nate’s thesis did get me thinking about how Twitter might go from a passionate but relatively small group of ‘early-adopters’ to a more lucrative long-term future out in the ‘real’ world. And it would seem to me that one path the management of Twitter should explore is licensing their service to corporates and other communities who might want to host such a service within a prescribed universe (for commercial and/or regulatory reasons.) This clearly could include banks and other payment providers. It could be sold as SaaS, hosted or as an appliance (installed behind the firewall for instance.) I have a few ideas as to examples of where this approach might make sense but will demur sharing these for the moment.

What do you think?

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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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On yesterday’s announcements from Apple. Many hundreds and thousands of professional and amateur commentators I’m sure have already insightfully and accurately dissected Steve’s keynote and written complete and intelligent reviews of Apple’s new products. So I’m not going to bore you by trying to compete. Just two observations - admittedly first impressions, one which is somewhat tangential but still germane to some of the ideas I’ve been throwing around with respect to the entertainment industry (although I’ve been mainly focused on music and live events.)

1. The new Apple TV might just be as transformative for the movie business, as the iPod was for the music business. Very impressed. The rental model also - while not ideal - is probably a good compromise (at least in the short term): a good transition model to clear the way for future business models that are completely digitally native. I would have liked to have seen slightly longer time windows, in particular for the once started viewing - say 48 or 72 hours (instead of 24) but not a bad start. And being able to buy DVD’s with digital copies is also a good idea. (What would be fantastic would be a DVD exchange facility whereby you could exchange your old DVDs for new (HD if available) DVDs that include a digital copy, for say half-price. I think the studios would make lots of money as people would then be motivated to renew their entire DVD libraries at once, and as an added benefit, the old DVDs (collected in bulk) could be disposed of in an environmentally friendly way.
2. Apple needs just one more piece of hardware - one more appliance - in order to kit out a 21st century digital home: something that combines the Apple TV, with a touchscreen (and iPod Touch GUI) and an amplifier. For anyone that has their home wired with speakers in each room, this appliance would allow you to access your iTunes music and play it through the speakers in each room.

Apple (AAPL) was down heavily yesterday with the rest of the market, but if my first gut feeling about Apple TV is right, it goes from being a very expensive stock to something worth considering once more (especially if this market sell-off knocks it even lower.) Thoughts appreciated. (Disclosure: I own a small number of Apple shares in my pension plan.)

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In 1971 Intel unveiled the world’s first commercial microprocessor, a technological revolution that heralded the Age of Information and Telecommunications - the fifth techno-economic paradigm since the dawn of the industrial revolution in the 18th century.* Although it is almost impossible to identify the core elements of each successive technological revolution without the distance of historical perspective, I wonder if Betfair’s recently announced Flywheel trading engine might be an analogous revolution at the dawn of the sixth paradigm - the Age of Markets. Will Moore’s Law be joined by Yu’s Law? (or Devine’s Law?):

“The number of transactions per second per $1000 of hardware increases by X every Y months…(!)”

(Remember future wikipedia contributors, you read it here first! )

To put this into context, and using Carlota Perez’ framework, let me outline some of the elements I believe will characterize the Age of Markets. Firstly, new technologies and new or redefined industries will emerge:

• truly global financial markets (including ‘developing’ countries)
• entirely new concept of risk management and insurance: “outcome” markets
• convergence of retail and wholesale risk markets
• ubiquitous worldwide realtime trading in “digital goods and services”

These will be supported by new or redefined infrastructures:

• cheap electronic exchange software
• digital transaction costs converging on free
• abundant (almost free) computing power and communication bandwidth
• worldwide dissemination of mobile networked computers (phones)
• vast social networks (breaking institutional monopoly on trust)

Indeed, unleashing the potential for ubiquitous traded markets in heretofore “inaccessible” products, services and outcomes depends on a number of foundation elements: essentially free transaction mechanisms (allowing high frequency, low value transactions), vast distributed digital communication platforms, robust and secure trust frameworks, and intuitive (ideally invisible, at least in the conscious sense) and painless trade capture and risk management interfaces. It would seem that Flywheel has the potential to meet at least the first of these requirements (from BusinessWeek):

Betfair CEO David Yu set the company’s R&D team the task of increasing throughput by 100 times for free. Project 100X took two years to develop and was run both internally and with three other partners, in what Carter calls a “bake out” - whichever team came up with the best prototype would get the investment for the rollout.

The budget for the entire project was less than £1m over two years.

In the end, the R&D team came up with a betting engine, called Flywheel, that could demonstrate a throughput of almost 100,000 transactions per second, while also reducing the cost per transaction by 200 times.

Even with a traditional betting engine, Betfair processes five million transactions per day - much more than the London Stock Exchange’s transaction processing system is capable of.

The R&D team expects one million trades per second to be possible through Flywheel, which it estimates is the equivalent of the entire combined annual global equity trading volume being processed in a matter of hours.

However, for Carter, the key achievement is the cost levels. He explained the whole system runs on two servers with an approximate cost of £25,000. This, he said, is in comparison to a high street bank with a similar throughput load that will typically use a mainframe costing many millions of pounds.

Ok, just in case you skimmed over that last bit, it probably bears repeating:

ONE MILLION TRADES PER SECOND. ON £25,ooo OF HARDWARE.

I’m talking my own book sure, but honestly who’s stock would you rather own? The NYSE Euronext? Nasdaq? how about Deutsche Borse? or OMX? or the LSE? …or Betfair???

In Amazonbay, I suggested that someone like eBay might move into financial markets, leveraging their technology and associated low transaction costs by buying a financial exchange, leading electronic agency brokers and ultimately Betfair (in the summer of 2010!) With a market capitalization of c. $44bn eBay could probably afford NYSE Euronext (at c. $21bn plus a takeover premium) but the real prize would be Betfair. By 2010 they should still be able to afford it but it’s far from clear it will be for sale and one imagines it will be a far sight more expensive than the £1.5bn valuation Softbank acheived when it took a private stake in April 2006. Speculating about big brand name corporate deals is obviously fun but risks confusing the real point.

Any business predicated on charging a significant ‘metered’ transaction fee for matching or facilitating a (digital) trade is likely to see it’s business model washed away like a sand castle at high tide and needs to be ready to compete in a world where marginal transaction costs are zero and value is derived ‘because of’ the trade, not ‘with’ the trade.

Oh, and one more thing… ONE MILLION TRADES PER SECOND. MILLION.

…this is not your father’s oldsmobile…

(* see Technological Revolutions and Financial Capital, p. 11)

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Jed Christiansen at Mercury Research & Consulting has just posted an excellent and comprehensive listing of the many and varied prediction market companies and software solutions available today - a great resource and jumping off point for anyone wanting to research this emerging phenomenon. Although I think I understand why, I was surprised not to see Betfair listed: clearly for anyone in the UK interested in this space they will have already heard of it and it is perhaps not exactly a “prediction market” at least not in the same genre as many of the companies listed, nonetheless in other ways it is the shining success among outcome exchanges and especially in the US (due to Betfair’s strict adherence to US law) is not necessarily known or understood by everyone.

In any event, well done Jed for making this mini-survey available to all.

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Thanks to Boing Boing for the pointer to this article on using game theory and mathematical models to predict event outcomes:

Predicting the future is not very hard, according to Bruce Bueno de Mesquita: a little mathematics is all you need. Figuring out how to manipulate a situation to achieve specific aims is a bit less straightforward, but Bueno de Mesquita says his mathematical tools can usually do that, too.

The New York University political science professor has developed a computerized game theory model that predicts the future of many business and political negotiations and also figures out ways to influence the outcome. Two independent evaluations, one by academics and one by the U.S. Central Intelligence Agency, have both shown that about 90 percent of his predictions have been accurate. Most recently, he has used his mathematical tools to offer approaches for handling the growing nuclear crisis with Iran.

Bueno de Mesquita provides the computer tools, but he relies on political or business experts to identify specific issues, their possible outcomes, and the key players. He asks experts narrow, carefully delineated questions about which outcome each player would prefer, how important the issue is to each player, and how much influence each player can exert. But he does not ask about the history of the conflict, the cultural norms of the area, or what the experts think will happen.

Another example of the emerging potential of algorithmic business strategies? Come by next Tuesday at 5pm at Web 2.0 Expo in Berlin if you are interested in hearing more!

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