Very excited to be making my first trip to Bulgaria later this week for TISEE 2011 which we have generously been invited to co-host by Pavel and Deven of Neveq who are the brains and the driving force behind what I’m sure will be a fascinating day:
The Technology Innovation Summit: Eastern Europe (TISEE) is an annual gathering of leading technology visionaries, executives, investors, and entrepreneurs. The event is focused on bringing exposure to the Eastern European technology landscape and connecting innovative companies in the region with global leaders in these fields.
There will be a broad set of events including keynotes, interactive panels, networking sessions, and a startup competition focused on emerging technologies, with a particular focus on Financial Technology, Mobile Technology, and Online Services (social media, personalization, etc.).
There is a great line-up of speakers, panelists and attendees both local and international. If you don’t have plans for Thursday, you can still book your place and jump on a plane to Sofia Wednesday evening. I’m sure you’ll enjoy it. If not, follow @TISEE2011 and/or the #TISEE hashtag on the day to follow along from home.
And so it’s hard to blame them when they ignore it. Still, call me crazy but I can’t help but being somewhat surprised and disappointed when one of the smartest, most reasoned leaders of the financial world writes that “the signs of a deep transformation in the financial landscape are very visible” and then ascribes this to two main driving forces without once mentioning the impact of changing technology (Mario Draghi from the Financial Times, 17sep10):
The first is a different perception of risk. For many years an optimistic view that underestimated the level of risk and overestimated its dispersion across participants had become the conventional wisdom; that view has been wiped out by the crisis. A re-pricing of risk of all sorts, higher volatility, reduced valuation of certain assets, more careful examination of credit quality and greater attention to the longer-term sustainability of debt positions – as highlighted by the recent sovereign debt crisis in Europe – are all manifestations of this changed perception. Business models are being reassessed according to their ability to manage risk. Complexity and opacity of financial instruments are no longer rewarded; the demand for transparent, complete and accurate information has increased.
The second source of change is policy driven. After Lehman, any remaining doubts on the need profoundly to reform the financial sector were dispelled. It became clear that a common, internationally co-ordinated approach, involving both advanced and emerging economies, was needed.
I’m not taking issue with his two drivers – they are clearly both important and relevant. I just think he should have added a third driver. And the fact that he didn’t, just confirms my conviction that way too many of our leaders – political, economic, financial, industrial – are increasingly disconnected from the world as it is (as opposed to the world as it was.) Which in my opinion can’t be a good thing. Indeed it’s worse that ‘not getting it’ – it’s not even knowing it is there…
Of course this throws up a multitude of opportunities, but it also carries with it the risk of more a more volatile and dangerous transition from old to new paradigm as our leaders remain blithely unaware of the sphere that is about to envelope their plane…
We can make our world smarter.
Intelligence can be infused into how we manufacture and sell… move goods, people and money…
The world is ready for a smarter planet.
Find out how to build it together.
If you would rather avoid wading through the inevitable corporate speak on IBM’s website, a good place to find out about what they are doing and how they are thinking is this recent article “IBM’s Grand Plan to Save the Planet” from Fortune:
In the parlance of the information technology industry, these situations all represent “dumb network” problems. The term sounds pejorative, but it simply means that we don’t truly understand commuter traffic or electricity flow or the inner workings of the cacao genome, and as a result our highways, utility grids, and cash crops are not managed as effectively as they could be.
The good news is that we now have the technology to convert these analog distribution systems into multidirectional “smart” networks. Readily available sensor technologies like RFID chips and digital video can track movements in granular detail. Cheap data storage, powerful analytics software, and abundant computing capacity give us the ability to warehouse and make sense of all that information. With the knowledge we’re gaining, we can remake our world in a more efficient way…
…So Palmisano is encouraging his employees to think even bigger, to scout out any dumb network that can be made smarter. Because, as any self-respecting capitalist knows, in great pain lies dormant profit. “We are looking at huge problems that couldn’t be solved before. We can solve congestion and pollution. We can make the grids more efficient,” he says. “And quite honestly, it creates a big business opportunity.”
By now, you probably understand why this resonated with me; there is significant congruence with the themes explored here and that underpin the foundations of out investment thesis at Nauiokas Park. In particular applying the amazingly powerful computing technologies that exist today to make sense of highly complex systems and networks, and of course to analyze and extract meaning from enormous and growing data sets. (Of course it’s also nice that they seem to have been inspired by our logo when designing their icon for ‘Smarter Money’!) On their website, IBM describes the opportunity they see for Smarter Money for a Smarter Planet:
Money, in other words, has been reduced to zeros and ones. It’s intangible, invisible. It’s information. Which is central both to the problem we face and to its solution.
Without question, the replacement of physical money with electronic money — and the spectrum of financial innovations that have accompanied it — have helped the world’s economy grow and prosper. But our technical and management systems haven’t kept pace. They couldn’t provide warning signals of risk concentrations, over-leveraging or underpricing. Banks could repackage risk and sell it, but they couldn’t value an individual loan in order to unwind the debt when needed. However, the same digitisation that has helped create this challenge is starting to provide the means to solve it. Intelligence is being infused into the way the world works, including our financial systems.
We’re all aware of advances like online banking, but the transformation happening underneath is far more profound.
Unprecedented computing power and advanced analytics can turn oceans of ones and zeros into insights, in realtime. Which means we could potentially have a more transparent, predictable and intelligent financial system for a smarter planet.
While it is very exciting to see a giant like IBM get behind such an intelligent and forward thinking strategy, I must admit I was a little disappointed not to find more substance on the Smarter Planet websites. It’s not that I suspect this is just a nice marketing campaign, rather that the communications department needs to work a bit harder to plug in to the projects and ideas IBM is working on in the trenches so to speak to make this vision a reality. And I think they could do more to engage a wider community through their Smarter Planet Blog and/or other social communication tools. Again as it is now it seems a bit sterile and very much a one-way broadcast, as opposed to a two-way dialog. Indeed one of the things I’ve tried to do – both through this blog and with our company – is to help to build a community of people interested in debating and shaping the future of financial services and markets. I think we have had some success, however I have nothing like the reach or resources of a giant like IBM and so it would be fantastic if they were to join the conversation and amplify it far beyond our modest community.
The Fortune article concludes:
Leadership positions, as the company knows all too well, come and go. But with luck, the tone of “Smarter planet” will remain. The message – that technology can be deployed to greater ends than creating the next fetishized cellphone – is bigger than any single company. And so, too, is Palmisano’s epiphany. He deftly led IBM out of the dotcom doldrums. Perhaps more important, he has revealed a model for monetizing scientific research in a way that benefits humanity.
Sure, not everyone can afford $6 billion a year for R&D. But real innovation rarely comes from big, rich companies. With luck, IBM’s ad campaign, coupled with its blowout 2008, will call scientists and entrepreneurs to arms. They’ll see our archaic global shipping infrastructure, a dilapidated educational system, disappearing honeybees, the fraud on Wall Street, and think, I know how to fix that. And I can make a killing doing it.
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…
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 Salesforce.com, 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.
One of the most important ideas one can understand from reading Kurzweil is humans propensity to think of the future as a linear extrapolation of the present when very clearly in many domains the appropriate framework is exponential change – the power law. A good way to get better at thinking in power laws is to look in the rear-view mirror from time to time, a great example of this being Bret Swanson’s recent look back to 1992 (at Forbes.com).
Today, an average consumer can buy a terabyte hard drive (1 million megabytes), on which she might store her family photos, videos and other digital documents for as little as $109.99. In 1992, a terabyte drive, if such a thing had existed, would have cost $5 million. The chief digital storage medium at the time was the 3.5-inch floppy disk, which held 1.4 megabytes. When digital photos came along and consumers found the huge square disk could only hold one photo, it was instantly obsolete.
In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are selling for $14.99. But back in 1992, four gigabytes of flash memory would have cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set back the teenage Nirvana or Boyz II Men fan around $3 million.
Apart from research scientists and a few early adopters of Compuserve and AOL, the Internet essentially didn’t exist in 1992. Monthly Internet traffic was four terabytes. All the data traversing the global net in 1992 totaled 48 terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds.
He goes on to worry about the possible damaging side-effects of the current swing towards massive government intervention in the economy:
But innovation is by definition unexpected. We can’t force it or compel it. Certainly not from Washington. The dramatic centralization of money, power, information and influence now under way seriously threatens the entrepreneurial revelations and technological revolutions that drive long-term growth. If we quasi-nationalize the energy, finance, auto and health care markets, and possibly bar dynamic new business models on the Internet, as with possible network neutrality regulation, we will close off many of the most promising paths to needed efficiencies and, more important, new wealth.
I sympathize with his anxiety; while overall I would grudgingly endorse recent government economic interventions (as lesser evils) I would be much more comfortable if the explicitly stated goal was to facilitate an orderly winding down of the many obsolete corporate institutions in order to make way for a new crop of vibrant, innovative, 21st century-adapted companies and sectors. Basically a giant defeasance scheme for the old economy. (There is precedent for this – Charbonnages de France comes to mind…)
Of course this is what Perez had in mind when she spoke about the disconnect between techno-economic and socio-institutional paradigms…
Last week, Eric Schmidt – the CEO of Google – gave a talk on the future of technology at the offices of Bloomberg in New York. For many readers of this blog, much (most) of what he says is old hat, and indeed I’ve been evangelizing on many of these same points for many years. But of course I’m me, and Eric is well…CEO of Google. So I suspect that if you are trying to convince your management, your colleagues, your peers of some of these points of view, citing Eric Schmidt will be more powerful than a reference to the Park Paradigm!
For those of you who can’t spare the time to watch this, here are a few of my favorite quotes:
Everyone has a thirst for information.
(The) web is about speed and access and quick manipulation.
Set no limits to your platform strategy. Take the biggest risk you can to get the most reach for every single idea you have.
The notion of restricting access to information doesn’t work anymore.
Better decisions are made by teams that see all the information.
The internet is shifting power in a really really fundamental way: it’s shifting from institutions to individuals. And it’s not going away.
The existence of a digital demographic barbell* – generation Y/M + seniors – is something I’ve observed and have been talking about for several years. Indeed I became more confident of this thesis about 3 years ago when my parents came to visit and I saw my Dad spending an hour or so a day on the web (mainly checking weather, stocks and local (back home) news.) So I was nodding in agreement when I stumbled upon this recent article from the Spectator, ‘Wired, retired and so hip it hurts’:
On a personal level I can see evidence of a new approach to technology taking place. My parents-in-law do not consider themselves to be technophiles, but they were the first people I know who downloaded Skype. Skype, a VOIP (Voice Over Internet Protocol) application, allows you to use your computer like a telephone and ‘talk’ through the microphone to other computers for free. Next they added a webcam as they wanted to be able to video-chat with their three young grandchildren in Paris. After quizzing my friends about their experiences with their own parents, I realised that digitally savvy grandparents are increasingly becoming the norm whereas none of us urban young professionals are using anything like webcams.
The theory goes as follows: the pre-baby boomers, retired yet healthy and engaged, have the time to learn and adopt powerful new technologies and the motivation to do so: whether to stay in touch with increasingly dispersed children and especially grandchildren, or to more actively manage their capital (increasingly important given lengthening life expectancies and more active retirements), or to organize their active travel and social agendas.
Less obvious – but I think also important – is that, having left the traditional rat-race, they have less fear, less of a chip on their shoulders than the slightly younger baby-boomers. They have nothing to lose. The baby-boomers, having spent a lifetime driving change and being ‘in charge’ and now settled in the proverbial corner office, suffer from a collective ‘not-invented-by-us’ disdain and clearly have the most to lose (if the proverbial rules of the game are changed.)
The implications of this digital generational barbell are clearly significant for many sectors of the economy. However for financial services firms its importance is impossible to overstate. And for the most part I don’t think the industry has really come to grips with this. (BBC reports: “Online banking boom for over 55s”):
The recent boom in internet banking has been greatest for people aged over 55, a report suggests, with 3.6 million of them banking online last year.
The Association of Payment Clearing Services (Apacs) said between 2001 and 2006 the number of internet bank users in this age group rose by 350%.
This compared to a 175% rise in the total number of adults banking online.
That means 17 million adults in the UK banked online last year, compared with 6.2 million in 2001.
“While younger people continue to make up the majority of online banking users, the greatest proportion of new internet bankers are the over 55s,” said Sandra Quinn, from Apacs.
*the term barbell in markets originally referred to replicating a position in a medium maturity bond using a combination of very short and very long duration securities (leading to a gain in convexity); it has however become generalized to mean any strategy that uses two extreme elements (often instead of a more traditional ‘mainstream’ element), for example investing in ETFs and Hedge Funds (instead of in a traditional long-only mutual fund.)