Wednesday, May 13, 2015

Unicorn valuations and the internet bubble

An interesting analysis of unicorn valuations and the term sheets behind them from Fenwick & West. Their conclusions:
  • Investors received terms that provided a fair amount of downside protection for their investment, especially in the event of an acquisition, but relatively few upside benefits.
  • These terms could result in a divergence in interest between early and late stage investors at the time of a liquidity event.
  • A significant percentage of the highest valuation unicorns had dual class common stock which provided founders/management and in some cases other shareholders with super voting rights.
  • Attaining a unicorn valuation appears to be a goal of promising companies raising money, as 35% of the companies we analyzed had valuations in the $1-1.1 billion dollar range, indicating that the companies may have negotiated specifically to attain the unicorn level.
The emphasis on downside protection over upside opportunity suggests that investors, most of whom are not traditional VC btw., are concerned about overvaluation. One wonders why they did the deal at all -- maybe just to add window dressing in their marketing materials?

Also interesting that the bulk of the downside protection is in the event of a white-knight/acquire. If Google buys Unicorn X, they are going to need to pay KKR.

Thursday, April 30, 2015

Should you be able to short internet Unicorns?

This article wonders if you should be able to short private internet stocks with (seemingly) excessive valuations:
Private tech companies could benefit from relaxing restrictions on stock transfers and allowing short-selling, bringing more investors into the market for their stock.
OK, so the summary is a little disingenuous, but more seriously, if someone thinks that a stock, public or private, is too high, then isn't the ability to short it both a good way for the market to capture that information and hopefully come up with a better valuation, and also getting naysayers to put-up or shut up? Also, aren't better valuations important for the economy as a whole, and the sector in particular?

I disagree with both assertions. Firstly, I don't believe that shorting is captured particularly well as market information. It didn't help with the Internet bubble of the 1990s, which is primarily a public market phenomenon, and it contributed to the real estate debt bubble that followed in the 2000s (by banks selling the securities with one hand specifically so they could short them with the other).

Secondly, I don't believe that asset bubbles in general, and this asset bubble in particular, are harmful to the broader economy. Unlike debt bubbles, which wipe out bank capital and so generate a systemic contagion effect, equity bubbles wipe out assets within individual entities, limiting their spread. We bounced back quickly from the crash of '98, but are still struggling with the crash of '08. Japan has yet to emerge from their crash of '91.

When/if this bubble pops, it will knock out some venture capital and private equity firms, will be a damper in a couple of overcooked real estate markets, but the broader economy will continue just fine. If you see stocks tumble, rush in to buy them.


Monday, April 27, 2015

Why does active asset management still exist?

At U Chicago, I was confronted with the paradox of 1) being at the intellectual ground zero for the efficient market hypothesis while 2) being at the vocational launching bad active investment managers. And yes, it was the same people in both classes.

Robin Hanson talks (briefly) about why index funds have not taken over the world:
Even employees who invest for themselves tend to pick at least one high fee intermediary: an active-management investment firm. Few take the low cost option of just directly investing in a low-overhead index fund, as recommended by academics for a half-century.
Whatever the reason, this is why the recent spate of Roboadvisors have come to the fore (that, and their very slick websites).

Looking at my own portfolio, I see lots of index funds, and the effort to patch together international index funds back when that was hard to create, plus strange situation specific hedges (REIT, Muni Bonds) and a handful of experiments (BP, Greece, Fannie Mae bonds).

Certainly time to rationalize it all, but tricky to do without triggering a lot of capital gains.

Friday, April 17, 2015

Awesome!

No idea how it works, but these will be great (.pdf).

Monday, April 13, 2015

LinkedIn acquires Lynda.com

Yesterday, on Crunchbase, I could sweat that the Lynda entry said it raised it's series B at a pre-money valuation of $1B in Jan 2015, giving it a post-money valuation of about $1.2B. The LinkedIn acquisition at $1.5B then represents a poor cash-on-cash return, it seems.

I wonder why the company sold for $1.5B just 4 months after raising money at a $1B-$1.2B valuation? What does this say about the online education space?

If anyone has insights, I'd love to hear them in the comments.

Friday, April 10, 2015

Job-to-be-done by the Economist

It's worth reading the entire interview of Economist deputy editor Tom Standage, but this really stuck out:
...what we actually sell is what I like to call the feeling of being informed when you get to the very end. So we sell the antidote to information overload — we sell a finite, finishable, very tightly curated bundle of content.
I have to believe that this came out of some deep customer insight work, because it is not normally how media organizations present what they do, or more precisely, what role they play in their readers' lives.

This level of understanding what job your product does, in the Economist's case, giving the reader all they need to know in 90 minutes a week, with a clear finish line, is very specific and insightful. As the Economist continues to move to move to digital, the question will become, is this job important on the phone? And if not, what new job takes its place?

Friday, March 20, 2015

California has plenty of water

I was driving through the Central Valley recently and saw an orchard of uprooted trees. I don't know what they were, but I assume that they'd been dug up because the farmer didn't want to irrigate them any more.

A pity. But California still grows rice.

Which is why I say California has plenty of water, it just does not use it particularly well. Since farmers do not pay for water in a metered way, or at market prices, they waste it. And since ground water is not regulated, they waste that too. Instead, we have a series of hairshirt awareness raising measures that do little to address the real, long term water needs of this area, and may actively hurt by crowding out such considerations with theater.

Some good references in this MR post.

Tuesday, March 17, 2015

Why MMT is still important

Mosler refers to individuals who understand MMT as being "in paradigm", which those who do not as "out of paradigm". I've had pushback from JKH about the term "paradigm" when talking about this, which is fine, but I think this post from Sankowski on China and consumer demand, who I would consider someone to understands this stuff, illustrates just how, well, paradigmatic the whole thing remains.

The issue is China switching from a production economy to a consumer one:
“China is changing from a producer model to a consumer model,” said Stephen Roach, a senior fellow at Yale University in New Haven, Connecticut, and former chairman of Morgan Stanley Asia. “That’s an enormous opportunity for the U.S.”
Surging Chinese exports blew a big hole in the U.S. labor market over the last quarter-century, all but wiping out some industries. As many as 2.4 million American jobs were lost from 1999 to 2011 as a result, according to calculations by David Autor, a professor at the Massachusetts Institute of Technology in Cambridge, and his fellow authors in a paper last year.
Sakowski adds:
“The bleeding has stopped” China is really the only economy large enough to do significant damage to the US at this point.
So who is next? Which countries can disrupt the U.S. economy with both low wages AND the the supply chain which supports those low wages.
But this whole notion of exporting countries, such as China, damaging labor markets in the US is completely out-of-paradigm. The MMT argument goes, that if China wants to trade real goods and services for US$, then the US Gov needs to run higher deficits to satisfy the Chinese demand for US$ while maintaining full employment at domestically. Any domestic labor market weakness is due to insufficient spending (as always) and not actions by the exporter. The terms of trade, in this case, are firmly in favor of the importer as deficit spending is easy, while the exporter needs to forgo the real output of their labor.


I think this highlights just how much of a mental shift you need to really look at fiat currency as what is it, instead of the various barbarous relics that continue to cloud our thinking.

Tuesday, February 24, 2015

Social in the Media Age

A number of interesting articles about how various social media phenomenon came into being and have grown over time.

1. The argument that Snapchat is like a TV channel and so may be better for brand advertising:
If the growth in Ads is primarily all driven by higher click-through rates due to better relevant ads on mobile, than all of the private mobile companies that have a great medium for advertising will be viewed much more favorably and be more valuable…Specifically if ads on mobile are more engaging for consumer and more relevant than desktop ads than the addressable ad market for mobile will be bigger than desktop ad market and the valuations of mobile companies will be greater than desktop all else equal on audience size etc. This would be a very positive factor for Snapchat.
If Facebook knows this to be true it would result in them being willing to pay higher valuation for mobile companies than other acquirers because Google won’t know nor will yahoo msft etc because none of them have scale in mobile to understand these powerful secular trends and in essence they under value mobile vs FB and thus under invest and fall farther and farther behind.
Viewers, particularly younger ones, may be viewing more media on Snapchat, but have there been any truly aspirational marketing messages on mobile (aside from the inherent "medium is the message" quality inherent in the device and popular apps themselves?). My experience with FB is that it's driven by being the only channel you can make a mass buy in which delivers installs because it has good size. And the buys are made because it's the only way to get into Apple's top 10 lists. If/when Apple develops it's own Adsense, FB's mobile market goes away.

2. Great essay on the history of YouTube. Nice to see how the positive feedback mechanisms created social economies of scale. This is something I see a lot of in consumer facing entertainment businesses.
The constant stream of copyright-infringing Family Guy and Daily Show clips fed YouTube’s exploding traffic. Uploaders of “user-generated content” (as YouTubers used to be called) were able to mooch off of some of that traffic, and so chose YouTube either when starting consistent projects or uploading potentially viral videos. YouTube built the initial audience, and the more content it had, the more that audience grew.
3. In music, the artist is now the product:
There have been numerous successes in the music industry in recent years that were clearly not built on music, but on the extreme popularity of an artist’s online profile. Some artists branded themselves and promoted themselves to the point of becoming veritable online reality stars, before they had even released any music. Some of these online reality stars were picked up by large record labels; their music was just good enough to release, and with the notoriety already established on social media, the artist became a marketing machine for the record label.
In these cases the music was a loss-leader; it was showcased as the product being sold, but all of the money the artist generated was through ancillary income: touring, merchandise, endorsements and live events, maybe even public appearance fees. Nobody was buying their music, people were buying their image. These artists essentially achieved some sort of twisted fame, but not on the strength of their music.
People were never buying the music. They were buying the zeitgeist. Art is called into being to fill the space which precedes it. Venue first, content second.


Thursday, February 05, 2015

Grexit!

Is Grexit (Greek Exit) the most wonderful sounding word since blog (web log)? Regardless, you'd expect to see more written about this from MMT circles but it seems not.

Krugman has some talking points about the possibility of Greece exiting the Euro, (which seems to be scheduled for Feb 28th?):
3. If the creditors do play hardball, their leverage does not come from the ability to refuse new loans to the Greek government. With Greece running a primary surplus, all new loans — and then some — are going to pay principal and interest on old loans, with less than nothing going to the Greeks. There was modest de facto aid to Greece in 2010-2012, but no aid is currently flowing, nor will it.
By "primary surplus" Krugman means that the Greek government will take in more via taxes than it spends, so Greece will shrink it's overall debt level. Running a surplus in this way is naturally contractionary, both in the direct sense (there will be less spending, which directly contributes to GDP) but also in the indirect sense that the non-Govt sector will have less money, and as a consequence, try to save more to get to their desired savings target as their budgetary constraint tightens.

The ECB can essentially cut Greece off from the euro banking system, but they cannot cut Greece off from it's drachma system, and as economists keep telling us, "money doesn't matter". Real assets are the same whether denominated in drachma or euros. This is a chance to show how true that is by simply exiting the euro, converting to drachma, and spending while at the same time dramatically improving the ability to tax (not to "raise revenue" but to create downstream demand for the drachma and manage inflation).

Monday, January 26, 2015

Technology and the unbundling of commercial banks

A quick thought on this piece by how technology is unbundling commercial banking. Specifically:

Loans

On the loans front, startups are of two types (1) those that help companies find the best loan terms (marketplaces) and (2) companies that either directly or indirectly give loans to businesses using data and by connecting businesses to those with funds (alternative lenders)
Some examples of the first type include:
  • Fundera is an online marketplace that connects small businesses with funding providers
  • Creditera which helps businesses build and monitor credit and find the best loan terms Some examples of the second type include:
  • OnDeck which leverages electronic information including online banking and merchant processing data to identify the creditworthiness of small businesses in minutes
  • Funding Circle which is an online marketplace which allows savers to lend money directly to small and medium sized businesses
  • Square Capital which uses a businesses transaction history on Square to offer funds with payments tied to sales volume
  • Kabbage which leverages data generated through business activity such as accounting data, social media, shipping data, and other sources to understand performance and deliver financing options for small businesses instantly.
  • Biz2Credit which is a marketplace peer-to-peer lending platform
  • Lendio is a platform that helps small business owners find lenders and secure loans
The primary purpose of commercial banks, the function that makes them banks, is making credit evaluations. Any company which takes on that function without the accompanying risk if the loan is not paid off, is in a moral hazard situation which will ultimately create a credit bubble. I'm not sure which of these does that, but worth keeping an eye on.

Wednesday, January 21, 2015

Market Risk vs Technical Risk -- the VC industry

Absolutely outstanding piece on the history of the venture capital industry. The whole thing is worth reading just for the quotes across the decades, but I'll post the final two paragraphs here:
Saying VCs used to take high technical risk and now take high market risk is both an overly optimistic view of the past–the mythical golden age of heroic VCs championing the development of new technologies–and an overly optimistic view of the present–gutsy VCs funding radical innovations that create entirely new markets. Neither of these things is true. VCs have never funded technical risk and they are not now funding market risk. The VC community is purposely avoiding risk because we think we can make good returns without taking it. The lesson of the 1980s is that no matter how appealing this fantasy is, it’s still a fantasy.
Tomorrow
People in the VC industry talk about the ’60s, when institutional venture capital took off. They talk about the ’70s, when iconic companies like Apple and Genentech were founded and the microcomputer industry emerged. They talk about the ’90s and the Internet bubble. They don’t talk about the ’80s; the ’80s are the missing piece of the puzzle. You can have lots of plausible theories about what venture capitalists as a class can do to get good returns, until you take the 1980s into account. Then you can only have one: the only thing VCs can control that will improve their outcomes is having enough guts to bet on markets that don’t yet exist. Everything else is noise.
The 1990s are not our map, the 1980s are. Don’t worry about irrational exuberance fueling a bubble, that is not what is happening. Worry about fear of risk. We know where that leads: once again straight into the ditch.
What's creating new markets?

Wednesday, January 07, 2015

Private market intoxication, Public market sobriety

From Sigalow:
The number of privately-held companies valued at over $1BN is at an all-time high.  There are currently 40 venture-backed start-ups valued at over $1BN in the private markets, and 27 of these companies are headquartered in San Francisco. Investors assume that each and every one of these Unicorns will have a successful IPO at many multiples of its current valuation.

In case you believe the public market will absorb these companies at a premium, here is a point of reference. There are only 71 publicly-traded technology companies headquartered in Northern California with a market cap of at least $2BN… and this list is declining at the same rate as the market in general. Meanwhile SF-based VCs have been minting similarly-valued companies, in the private markets, at a rate of one per month for the past two years.

Earlier this year one of my partners made the comment that we are witnessing “private market intoxication and public market sobriety.” I have been struggling to explain why this is happening, and I think the answer lies in a structural difference between VC investors and public market investors.
40 private market companies, valued at $1B+, all with expectations that they will trade at multiples of that ($3B+? $5B+?) when the number of such extant companies is only 71 in California?

(Note the weird math. Why are we limited the number of public companies at $2B valuations to California? Quick googling does not give me an answer -- please post in comments if you know. Let's assume the actual number is 200. So 40 companies out of 200 is 20%. An optimistic amount.)

This is the private market bubble I've mentioned earlier in my blog. The incentives in the VC industry mean they have to swing for the fences to justify their fees to LP, which means the asset class as a whole is likely to underperform. LPs will then either adjust their portfolio out of the asset class, or remain inside it betting they can  beat the odds as they continue to reach for yield in our current ZIRP environment.


Friday, January 02, 2015

2014 Tech retrospective

Fred Wilson posts a thoughtful piece on 2014. Some of my own reactions, and then what that might mean for this new year:
1/ the social media phase of the Internet ended. this may have happened a few years ago actually but i felt it strongly this year. entrepreneurs and developers still build social applications. we still use them. but there isn’t much innovation here anymore. the big platforms are mature. their place is secure.
By this, I think Fred mostly means that there will be no new social networks beyond Twitter and Facebook, and such ventures are not going to be funded. He does not include messaging apps in this category as he talks about their growth explicitly in his next paragraph.

I think 2014 was the year Facebook fully evolved into AOL 2.0 and that's where it's going to stay (at least on the web. Who knows if it will launch a true messaging app, or do anything interesting with Whastapp or Instagram or Oculus). But Facebook itself has become essentially those email our grandparents used to send to each other (and us) of jokes, news stories, etc. Young people do not use it to communicate any more.

On the messaging side, the social graph is in the phone's address book, which means switching from provider to provider is very easy. This is where the young people are, and also where families and friends actually communicate. I think the monetization model here is still unclear -- interruptive display ads have usually not done well in a 1:1 communication medium, but I don't see metered pricing or bundled plans working either above and beyond what the carriers already charge (and which, these apps are a reaction against, particularly Whatsapp).

To this point, I think the money Facebook's been making on mobile is driven by display ads for paid downloads, particularly games, as that market is very aggressive at acquiring users because of how Apple's app store works. Being in the top 10 generates a large amount of additional traffic, because customers look at the top 10 list when figuring out what to buy, so it makes sense to spend a lot of money to get your revenues to where they need to be to break into that list, and then spend to stay there. This spend goes directly to whomever can deliver installs, and right now Facebook is the best channel in that market.

If other online destinations start beefing up their paid install market as well, and most importantly, if Apple supports proper discovery (or an ad market) then we'll see what happens to Facebook's mobile revenues as competition and inventory begin to drive down mobile ad rates.

Tuesday, December 23, 2014

2014 roundup

To cap off the year:

The book I read which influenced me most was probably The Rest is Noise, by Alex Ross (although I use the word "influenced" reservedly), which I read at the same time as How Music Works by David Byrne.

Byrne, in his first chapter, talks about how spaces call music into being as much as music is created, and then finds a space to be played in.
I had a slow-dawning insight about creation. That insight is that the context largely determines what is written, painted, sculpted, sung, or performed. That doesn't sound like much of an insight, but it's actually the opposite of conventional wisdom, which maintains that creation emerges out of some interior emotion...
The goes on to talk about how the percussive poly-rhythms in african music would turn to mush if played in a reverberant cathedral, while the overtone heavy organ with its long flowing lines and slow decay would wither in the anechoic veldt.

So with this in mind, what to make of the atonal cacophony that Ross, very earnestly, and very appealingly tries to sell in Noise? Ross is blind to the cultural context that created the politics which Berg, Schoenberg. Webern et al capitalized upon, but it's all there for readers in the know. Regardless, I was interested to learn that Sonic Youth, and the entire shoe-gaze scene, came from Glenn Branca and the avant garde music movement of the early 70s. I'm very glad I've heard Messiaen's Quartour pour la fin du temps, and Scott Bradley's atonal work in Tom & Jerry (seriously, try and listening to anything by say, Boulez and not picture a cartoon mouse hitting a cartoon cat with a mallet. It is impossible.)

The big insight, from Byrne, is that this music is unlistenable because it was never meant to be listened to, it was just meant to be looked at in score form, discussed in academic settings, and written about in scholarly papers. Modern academia called forth modern music and its native habitat is text on a page, not sonic vibrations in the air. Good this Ross is an engaging writer.

Regardless, without all that I'm not sure I would have been able to find and appreciate Arvo Part, starting going out to hear live music again(!), and listened to the Cage and Reich pieces you should listen to once.

Podcast wise, Serial was a standout, and of course NPR's All Songs Considered. Q2 Music's "Meet the Composer" is also very enjoyable, but it helps to come with a lot of context, and Song Exploder is so much better than it really needs to be.

Have a great Christmas everyone!

Monday, December 08, 2014

A T. Rex named Sue

One of the highlights of last summer was seeing Sue at the Field Museum in Chicago. She is magnificent, and if you're in town you should stop by. You may even want to make a trip just to see the largest T. Rex ever found (and while you are there, checkout the whole collection. It's amazing).

Yesterday I spoke to a fellow rider up at Alice's and it turns out he's friends with Pete Larson, who found Sue. He had quite a story, as I was aware of (but have not seen) the movie, Dinosaur 13, about the dig and subsequent legal action. And then there's this Slate article.

What's remarkable about the Slate article is it's intemperate, hectoring tone. Slate isn't a news site, and so has no "moral" obligation for truth or an unbiased perspective, but the clumsiness in a diatribe calls out for some serious editing. Or maybe a writer with a little more style or humor.

Ironically, the first comment seems to be from this guy:
This story is a crock.  I worked for the Department of the Interior and was the lead Departmental Attorney working on this matter.  We even had to go to war against the then U.S. Attorney who wanted to give the fossil to the Smithsonian.  We were able to prove under the Antiquities Act and other law, that once the fossil became a permanent part of the land, since the land was held in restricted status, the sale of the item had to be approved by the BIA as required by Federal law.  Believe me, nobody involved, including DOI had clean hands in this case.  Hendrickson and crew knew that fossil was worth more than they originally paid Williams.  Williams was a slickster from way back.  The Tribe overstepped their reach by trying to pass an ex post facto law to take the fossil.  And the U.S. Attorney was grandstanding and trying to enhance his career until we had the Assistant Attorney General put him in his place.  In the end the fossil is probably where it should be, Hendrickson probably should have received some sort of finder's fee and the law is now clear on the issue.  Just another day in the world of Federal Indian Law.  
I don't know if he is who he claims, but what he says jives with what my motorcycle buddy told me. Williams, by the way, I believe passed away shortly after getting paid.

Internet anonymity is currently under some fire, but it pays to remember the old saying, if you want a man to tell the truth, give him a mask.

Go to Chicago and marvel at this amazing object.

Tuesday, November 18, 2014

We build our own cocoons

Great piece on how, making music more democratic, also leads to less music discovery as network effects kick in and people only want to listen to what's popular already:
Now that the Billboard rankings are a more accurate reflection of what people buy and play, songs stay on the charts much longer. The 10 songs that have spent the most time on the Hot 100 were all released after 1991, when Billboard started using point-of-sale data—and seven were released after the Hot 100 began including digital sales, in 2005. “It turns out that we just want to listen to the same songs over and over again,” Pietroluongo told me.

Because the most-popular songs now stay on the charts for months, the relative value of a hit has exploded. The top 1 percent of bands and solo artists now earn 77 percent of all revenue from recorded music, media researchers report. And even though the amount of digital music sold has surged, the 10 best-selling tracks command 82 percent more of the market than they did a decade ago. The advent of do-it-yourself artists in the digital age may have grown music’s long tail, but its fat head keeps getting fatter.
So radio, key for music discovery, plays the same hit songs again and again so people won't change that dial. Labels used to pay radio stations to take the risk and promote new music, but this was killed under the anti-payola rules. Be careful what you ask for. Here's Steve Albini:
Radio stations were enormously influential. Radio was the only place to hear music from any people and record companies paid dearly to influence them. Direct payola had been made illegal but this was a trivial workaround. Record pluggers acting as programming consultants were the middlemen. They paid radio stations for access to their programmers and conducted meetings where new records were promoted.
It would be ironic if radio and the labels, long criticized for homogenizing popular music, actually were key forces in keeping it diverse.


Tuesday, September 16, 2014

Amazon vs Big Publishing

Clay Shirky characterizes Big Publishing's beef with Amazon in class terms:
The threat Amazon poses to our collective self-regard is the usual American one: The market is optimized for availability rather than respect. The surface argument is about price, but the deep argument is about prestige. If Amazon gets its way, saying, “I published a book” will generate no more cultural capital than saying “I spoke into a microphone.”
Big Publishing responds, by saying no, it's about the money:
6. Amazon was partly enabled to give the big discounts to consumers because publishers gave discounts too big to them, foolishly aping the print book business model even though a retailer’s costs drop much more than a publisher’s do with the change to digital. Stock turn is the key profitability metric for retailers. Stock turn on digital books is “infinity”. (I’d note that these are small points in this piece but are really really big points that go ignored in most of the discussions about ebook economics, which are almost always “fails” at understanding the core economics of publishers or retailers.)
...
8. It is misleading to attribute the publishers’ desire to keep “hardbacks” (really, all print) alive as a desire to protect “first editions”. It was primarily a desire to protect the brick-and-mortar bookstores. It should be said that way for accuracy but also to make the motivations of the sides clear. Publishers want to strengthen or maintain bookstores because their ability to reach them is a core competence that keeps them in business. Amazon wants to weaken or eliminate bookstores because it is clearly established that many customers of each bookstore that closes come to them. Another motivation for the publishers was to maintain a diverse ebook ecosystem, which at that time had just added Nook to its ranks and was about to add Apple. It is likely that Amazon’s discounting — thanks to the DoJ’s and court’s actions weakening agency — did as much to weaken Nook as any mistakes made by Barnes & Noble. And let’s not forget that Kobo has also abandoned active marketing in the US ebook market since then as well.
Amazon is the only publicly traded company I know of whose valuation is way in excess of profit and this is justified by arguing (out loud) that, once Amazon has cornered the market it will raise prices. This is called dumping and it is illegal.

Note that I'm not saying Amazon is guilty of dumping, or that if it is dumping, it is alone, or even that dumping should be illegal at all. I am saying that the mechanism by which people say Amazon justifies its share price is, on it's face, illegal. Regardless of how true it is, it should give one pause to take economic arguments by those poor souls on the receiving end with a sympathetic ear.

Amazon primarily is a transactions engine. If you know what you want, it will get it to your door for a lower price more quickly than pretty much anyone else. What it will not do is marketing, and by that I mean generate downstream demand.

If you look at the product chain for books, each stage of the chain both competes with and complements the subsequent step. This is not unique for books, pretty much every complex, multi-step product has this. Publishers claim that their policies enable the co-investment needed between them and booksellers to generate demand for books, and that Amazon is utterly uninterested in this, and that this is important.

I honestly have no idea to what degree publishers and booksellers work together to generate demand, but I do believe that Amazon is uninterested in this, and it is this lack of interest which is at the heart of the antipathy towards the company from that community.

Shirky is being obtuse when the mocks Packer saying "[T]he big question is not just whether Amazon is bad for the book industry; it’s whether Amazon is bad for books." Amazon doesn't care about books, and yet their actions will profoundly impact that industry, and by extension tradition, which stretches back over 2000 years. This lack of concern portends a carelessness, the same sort of carelessness the tech industry seems to display whenever it stumbles upon some segment of society with deep roots, strong social norms, and any sort of long standing tradition that's generated value over time. Tech stopped being the scrappy underdog about 10 years ago, and now needs to grow into an elder statesman role to help demonstrate that it is ready to lead in these human, social arenas just as it has lead in protocols, application stacks, and hardware.

Tuesday, September 02, 2014

What is a card?

More importantly, how is it not a page and/or a widget?

Thursday, August 14, 2014

IRS says Bitcoin is not a currency

The IRS says bitcoin is not a currency. The IRS is correct. The IRS is also, incidently, the institution that would signal that bitcoin was a currency when it begins to accept bitcoin as payment to extinguish the very same tax obligations that it has the sovereign power to create.

Fiat currency is a manifestation of sovereign power. It comes fundamentally from the power to tax. States which are ineffective at taxing also find themselves operating in mixed currency regimes as the locals bolster their local units with land, gold, US$, and now perhaps Euros as well.

Recognizing the fiat currency is a manifestation of sovereign power makes many people uneasy, particularly those who have a suspicion of Government and do not with to trust it with something as important as a currency. I sympathize with that position, but it is what it is.

I've also heard arguments that the historical record does not show, in general, currency evolving via initial taxation, but I think that's looking at the picture too narrowly. The origins of money came from debt, where individuals did favors for each other and became indebted. Various tokens then became acceptable substitutes for extinguishing that obligation. The State puts the cap on this process by both generating the obligation, and the means of extinguishing it.

Fred Wilson:
But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.
He's looking at this in the wrong way because the "store of value" vs "medium of exchange" is not the right way to understand money. So when Fred says:
An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.
For Bitcoin to be a medium of exchange in Canada, the Canadian Government would need to accept Bitcoin instead of the Loon for taxes. The Canadian Government can print Loons as and when it pleases. It has not control over Bitcoin. Why would it hand over it's sovereignty? More importantly, why would Canadians, if they understood what fiat currency is and how it works, want their Government to do this? It means Canada cannot operate fiscal policy. If I was a Canadian citizen, regardless of whatever reservations I may have over a particular administration, I would want the Government to be able to run counter-cyclical fiscal when necessary or else risk becoming like Greece.

Fred, who has invested in Bitcoin, then encourages the rest of the world to give up their Sovereign powers over currency and increase the risk of Greece like Depressions with all the coincident social ills that that brings. But he does not see this because he thinks the frame of the conversation is "medium of exchange vs store of value" and that's not his fault.

So, contra Fred:

It is my view that treating Bitcoin like a financial asset is the most helpful approach. That would allow Bitcoin to find its best use cases while having to operate under the same legal and regulatory regimes that the rest of the financial world operates under already. We need good financial innovation that serves the public, not regulatory arbitrage which enriches the financial sector. Bitcoin is not a currency, it is a protocol, and the sooner it realizes that the sooner we can see the innovation we all hope for. Those who confuse it with a currency are consigning their population to a financial catastrophe which will take us back to the Great Depression, while ironically blocking the technological advances it promises.