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.

Friday, July 18, 2014

NPR is the problem

Not literally of course. But they do represent the responsible, sober, official position on matters economic and thus it's good to remind oneself of exactly what that is after spending some time in the vapors of the Internets. From Richard Fisher of the Dallas Fed:
First, I believe we are experiencing financial excess that is of our own making. When money is dirt cheap and ubiquitous, it is in the nature of financial operators to reach for yield. There is a lot of talk about “macroprudential supervision” as a way to prevent financial excess from creating financial instability. My view is that it has significant utility but is not a sufficient  preventative.

Quite possibly.
When we buy a Treasury note or bond or an MBS, we pay for it with reserves we create. This injects liquidity into the economy. This liquidity can be used by financial intermediaries to lend to businesses to invest in job-creating capital expansion or by investors to finance the repairing of balance sheets at cheaper cost or on better terms, or for myriad other uses, including feeding speculative flows into financial markets.
Nonsense.

When the Fed pay for something by creating a reserve, that reserve does not enable lending by a financial intermediary nor does to repair a balance sheet. In the interview itself, Fisher said that the Fed had done it's job by creating reserves, and now it's Congress' job to get Americans to spend them.

But you don't spend reserves.

Instead the Fed should tell Congress that Americans cannot spend reserves, and that Congress needs to run higher deficits to encourage spending.

This is essentially why I see MMT and MMR as differences without a distinction, as this consensus view is, in my opinion, the core problem to solve.

Thursday, July 17, 2014

Market Caps when there is no Market

Recently, I wrote about the crazy valuations of companies in our current Internet 2.0 bubble, arguing that it was not Sarbox, poorly considered as that piece of legislation might be, which was leading to the dearth of IPOs, but instead simple supply and demand effects where there was so much private demand for these tech companies that they did not need to go to the public markets for capital.

As always, everything is a self portrait. The Epicurian Dealmaker puts it very well:
So, therefore, one should firmly embed notions such as the “market capitalization” of short squeeze scams such as CYNK in pulsating neon scare quotes, so the great unwashed and their blinkered guides in the media do not take them as anything other than arithmetic exercises. So, also, one should not take reported implied market values from the technology economy, such as Series D or pre-IPO round investments by professional investors in vaporware startups, as anything other than the revealed price preferences of that particular investor in that particular company. The fact that Fidelity invested $100 million for a 1% stake in the illiquid equity of Doofr-rama does not make a strong case that Doofr-rama’s “value” is $10 billion. All it really tells you is Fidelity desperately wanted 1% of Doofr-rama. If you want to know why, you better go ask Fidelity.
From this perspective, one should not ask why Uber is valued at whatever it is valued, one should ask why the last round of investors in Uber wanted it so badly.

Wednesday, July 16, 2014

Consumer debt ratios

Mosler shows how consumer credit expansion coincided with periods of economic growth and, as one would expect, higher employment and wage growth:
Circled are the credit expansion from the ‘regrettable’ S and L expansion (over $1 trillion back when that was a lot of money), the ‘regrettable’ .com/Y2K credit expansion (private sector debt expanding at 7% of GDP funding ‘impossible’ business plans), and most recently the ‘regrettable’ credit expansion phase of the sub prime fiasco.

All were credit expansions that helped GDP etc. but on a look back would not likely have been allowed to happen knowing the outcomes.
So the question is whether we can get a similar credit expansion this time around to keep things going/offset the compounding demand leakages that constrain spending/income/growth.
Based on this, I would say that the household sector has de-leveraged, but without some "irrational exuberance" they are not going to start leveraging up again to produce another boom. What is also interesting is how the booms to supported by a mix of credit bubbles (very damaging to the economy when they pop) and asset bubbles (less damaging). The asset bubble in primary markets, aka Internet 2.0, seems to be too small to be impacting household debt levels at a national scale.

Wednesday, July 09, 2014

Tom Perkins on the Internet Bubble 2.0

An aside from the New Yorker:
Instead, [Tom Perkins] blames the [San Francisco gentrification] problems on social and monetary policy set by Washington—low interest rates and the recent Keynesian interlude. In Perkins’s eyes, San Francisco’s tech boom is the result of these policies. The venture market is a risky, low-return investment environment, but it’s currently the only option available for reasonable returns. If interest rates rise once more, wealth will settle into other spaces.
Actually, I agree. While Sarbox may be a bad law, tech companies aren't staying private because being public is so bad, they are staying private because now there is plenty of money there. In our current economic climate of low interest rates and too-small deficits, money seeking a return has few options and VC, plus later mezzanine rounds, provide some return. You no longer need to go public to reach a $1B valuation.

Monday, June 30, 2014

Sarbanes Oxley working as planned

Contra Fred Wilson, let me make a case for why Sarbanes Oxley is working as planned with regards to the current Internet market (frothy in private markets, OK in public markets). Fred says:
Marc lists investments like Netscape, Microsoft, Oracle, HP, and IBM as companies that went public at relatively small valuations and grew their valuations in the public markets. I would add Apple, eBay, Yahoo!, Cisco, and a host of other silicon valley success stories to that list...
The Netscape IPO was a genuine event and kicked of the Internet 1.0 bubble of the late 90s. The company was bought by AOL for $10B in 1999, shut down 8 years later, and is now a discount ISP brand. I don't think it ever earned cash to justify it's initial loft valuation, so I'm surprised to see it cited as a market success, although it certainly made it's early investors very rich (including Andreeson). If Sarbanes Oxley was designed to stop Netscape IPOs, then I don't see why that's a bad thing and it's good to see it's working.
Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.
Agreed, but you can also add Pets.com, Kozmo.com, and even Netscape in that same category. If the private markets today are making the same mistakes public markets made in the late 90s, then that's hardly an argument that public markets are worse than they were.

The question of course is whether the private valuations are accurate, and even if they are accurate, they strongly suggest that companies are getting fully valued out before they trade shares publicly. It is possible that Airbnb may go from being a $10bn company to a $100bn company, but I don't think that individual retail investors are best positioned to speculate on that nor do I think enabling that is important for markets.

Turning to look at private markets then, it's worth noting that just as sky high valuations were tied to small floats back in the late 90s, today's valuations may be more a sign of entrepreneur strength than actual valuation per se. Palm had a massive valuation when 3Com span it off, but the number of shares available were pretty small and everyone thought mobile computing was going to be big. The combination of strong demand and limited supply pushed the ticker price about $95.

In the private technology market, there are only a small handful of usual suspect companies with material traction, so there must be oceans of promising start-ups that aren't getting traction (cue complaints about Apple's iOS discovery support). So if you are a private investor and you want more start-up exposure, you only have a handful of options, so entrepreneurs may be able to get the cash they need without having to give up much of the company, with the resulting valuation being very high. There may not be much more to this story than limited supply, not much cash needed, and entrepreneurial savvy and bargaining strength.

Thursday, June 26, 2014

More on disrupting Aereo

In my last post, I spoke about how the Supreme Court disrupted would-be regulatory arbitrageur Aereo by saying that if it wanted to be a cable company, it would need to pay the same re-transmission fees that other cable providers do.

Mark McKenna writes on Slate that:
It would be one thing if the consequence of this approach were simply to block Aereo from offering its services. That would be a loss to consumers who don’t want to pay $150 a month for cable subscriptions, but at least the damage might be contained. Unfortunately, the problem is bigger than that, for in glossing over technological details, the opinion potentially implicates a wide range of other services. What about Dropbox and other cloud computing services, for example, all of which use their own equipment to retransmit what they receive to their customers, often transmitting many user-specific copies of the same works? How do those avoid liability? Not to worry, says the court, those technologies might be different. Why? Because cable system.
Nonsense.Dropbox is in no way coming anywhere close to the sort of copyright infringement that Aereo was, and everyone knows it, including Dropbox which is why they didn't bother building the crazy Rube Goldberg contraption that Aereo had hoping that minor technical distinctions would get them off the hook for what was plainly cable company operations. This is not to say that the regulations around cable or OTA operation in the US make any sense, they don't, but to make some kind of slippery slope argument that the Aereo ruling imperils a company like DropBox is fear mongering and suggests that the court ruled correctly.

Wednesday, June 25, 2014

The Supreme Court disrupts Aereo

Just when you thought Silicon Valley has cornered the market in disruption, SCOTUS pops up and does a little disruption all of it's own:
CBS and other broadcasting and media stocks are up in early Wednesday trading after the U.S. Supreme Court ruled that Web TV startup  Aereo could no longer capture their signals  and stream them over the Internet to subscribers.
The court ruling upholds contentions by broadcasters and the Justice Dept. that Aereo’s streaming service violates broadcasters’ copyrights. The Supreme Court agreed, reversing a lower court ruling that sided with Aereo and would have cut into broadcasters’ retransmission fee revenue stream.
Aereo is a service which let customers view programs that were once broadcast over-the-air via the internet. They positioned this as a "cloud DVR" hoping that since DVR was OK (via the original Betamax case 30 odd years ago) and cloud is OK, cloud + DVR was OK. Apparantly the majority on the Supreme Court disagreed.

I'm not going to argue the merits of the case or the decision -- legal history around copyright, broadcast rights, cable and fairly insane -- but I would like to highlight a couple of things which I think are interesting in light of the media discussions I see around the tech industry currently (which I did not see in the late 90s bubble).

1. The CEO of Aereo, while rightly disappointed at the ruling, is a little over-the-top in his public response:
Court decision denies consumers the ability to use a cloud-based antenna to access free over-the-air television, further eliminating choice and competition in the television marketplace
New York, New York (June 25, 2014) – The following statement can be attributed to Aereo CEO and Founder, Chet Kanojia:
What is a cloud based antenna? Sounds like a rhetorical device used to make a bunch of hard drives recording content in various warehouses seem like a metal rod sticking up into the sky. I'm sure Kanojia would like this to be true, but it's certainly open to interpretation, and that incidently is exactly what the Supreme Court did.

Also, I don't think lack of choice in media options is a major issue in the US today. There are genuinely oppressed people in the US, but not TV watchers.
“Today’s decision by the United States Supreme Court is a massive setback for the American consumer. We’ve said all along that we worked diligently to create a technology that complies with the law, but today’s decision clearly states that how the technology works does not matter. This sends a chilling message to the technology industry.  It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17) That begs the question: Are we moving towards a permission-based system for technology innovation?
I'm sure the decision is a massive setback for Aereo and it's investors, but I'm not sure the American consumer will feel set back very much. Aereo's goal to comply with the law is a good one, and the law probably makes no sense, but they didn't meet the mark and I'm pretty sure they knew they were skating close to the lines. That might be why their taglines are "Record & Stream Live TV Online with Aereo Cloud DVR" and "Watch live TV online. Save shows for later. No cable required" -- they were aware that this was going to be a potential issue and were careful to position it was something different.

I cannot see why Aereo's business was a disruptive one in the Clay Christensen sense, it seems more like regulatory arbitrage in the same vein as Uber and AirBnB. “Consumer access to free-to-air broadcast television is an essential part of our country’s fabric," which is politically uncontroversial, although may not be actually that true, but following it with "using an antenna to access free-to-air broadcast television is still meaningful for more than 60 million Americans across the United States" is the kind of wrapping the flag exercise which has been used to justify all kinds of nuttiness in regulating communications in the US.

Most importantly, the tech industry needs to realize that it's in the same boat as all the non-tech people around them, regardless of how much they may wish to exit. Getting to grips with that reality, and learning how to navigate it skillfully, may be the next major milestone as the industry continues to mature.

Wednesday, June 18, 2014

Silicon Valley, the New Yorker, and Disruption

A nice piece by Jill Lepore on "Disruption"; key paragraph:
A pack of attacking startups sounds something like a pack of ravenous hyenas, but, generally, the rhetoric of disruption—a language of panic, fear, asymmetry, and disorder—calls on the rhetoric of another kind of conflict, in which an upstart refuses to play by the established rules of engagement, and blows things up. Don’t think of Toyota taking on Detroit. Startups are ruthless and leaderless and unrestrained, and they seem so tiny and powerless, until you realize, but only after it’s too late, that they’re devastatingly dangerous: Bang! Ka-boom! Think of it this way: the Times is a nation-state; BuzzFeed is stateless. Disruptive innovation is competitive strategy for an age seized by terror.
I think that Clay Christensen, in the Innovator's Dilemma, was tackling a very particular business puzzle which was why incumbents don't necessarily continue their dominance when their industry undergoes a technological platform shift. After all, they begin with all the advantages in resources, talent, channels, etc. Why can't they adapt?

Clay's answer to this was very interesting, and actually quite specific. For example, I don't think Uber is "disrupting" the taxi business with their app in the CC sense. I think Uber is engaging in regulatory arbitrage by using technology to take advantage of a loop hole in the law. The law may be wrong, Uber may be right to want to replace the system with something more consumer friendly, but this is not "disruption" in the CC sense. Also, it will predictably hurt both the medallion cartels (yay!) and the drivers (boo!) who end up being price takers in a market with easy barriers to entry and exit. Micro 101 would have predicted this, but you can also do the math yourself. This is not any sort of judgement on Uber, or its critics and champions, but merely an observation that "disruption" in the CC sense is quite narrow, and the term is being used very broadly in Silicon Valley today, and it is being used in a way which connotes "refusing to play by the rules and blowing things up."

Set aside the problems one may anticipate from such a tin ear, or a lack of appreciation of the interconnectedness of a society, and look at how the overly broad use of the term dumbs down the discussion itself. A nice comment on the article from a friend of mine who is in this field and currently a professor at a well known B-school:
Okay, I had a seminar on innovation with Clay during my PhD, and studied a related field with lots of the other key academics who research innovation. I think this article is totally fair to Silicon Valley and totally unfair to Clay and the concept of "disruptive innovation" as used in academia. (I do not research the topic anymore, so I have no particular dog in this fight)

Yes, "disruptive innovation" is based on case studies, but Leporte is completely off base when she says that "The handpicked case study, which is Christensen’s method, is a notoriously weak foundation on which to build a theory." In fact, handpicked case studies are a terrific way to build initial theory. In fact, one of the most cited articles is recent social science discusses exactly this point. Case studies are terrible at proving theory, but they serve as a great way to think through a problem.

The reason they are bad at proving theory is exactly the issues that Leporte raises: establishing clear historical facts is hard, and sometimes slippery. I think she has some valid points on the history, but does miss the fact that there is a difference between firms and individuals, and that fact that Shugart had to start multiple firms to compete in hard discs was the point - the organizations couldn't always deal with technological change.

However, she makes it seem like academics (and Clay) basically stopped working on the topic in 1999. One need only look at the Google Scholar cites to see that this is wrong. Since Clay's initial book, a huge amount of empirical evidence has been amassed on this topic, and discussion has become a lot more nuanced. We talk about modular, sustaining, incremental, and discontinuous innovation, and about how to manage the issues that cause firms to fail to innovate: absorptive capacity, ambidexterity, and problemistic search on rugged landscapes. I throw out this jargon not to be overwhelming, but because these are, by and large, ideas that have followed on the work of Clay (and other scholars working on the topic at the same time). It is incredibly unfair to point at one concept, as introduced in one book, by an academic with a long career and yell "the emperor has no clothes!"

Now, the criticism of the popular view of disruption strikes me as right on target, but I think it is like a lot of academic topics that become part of the pop intellectual landscape. They quickly become cultural shorthand with little to do with the original ideas. For what it is worth, Clay is a humble guy who has never seemed to claim that he has it all figured out, and, quite frankly, no one in academia feels like "disruptive innovation" as he introduced it is still at the cutting edge of theory.

That being said, it is still a powerful way of thinking about a really, really important question: "Why don't incumbent firms always win?" Clay was one of the first people to ask why firms with the best people and most resources don't innovate over and over again: why did Kodak fail to create digital cameras? Why did DEC not come up with the PC? Disruptive innovation is one piece of the answer to this puzzle, and to attack it in isolation, or to blame Clay for annoying startup guys, seems disingenuous.
Bizarrely enough, there seems to be some noise around this in the case for the iPhone, namely, why is android not disrupting the iPhone? The real question is, why is it important to someone that Android is, or is not, "disrupting" the iPhone? Why is disruption important here, instead of more prosaic measures such as stealing market share, or mind share, or developer support, or whatever is actually important? To the degree that these two are imperfect substitutes, how much are they even in the same market? Most importantly, why is this the framing at all? When it comes to mobile and the changes it is bringing, surely there are more important questions than "Apple vs Google".