Month: February 2014

It’s the What’sUpApp-Economy, Stupid!

I don’t have  a problem with anybody receiving some outrageous monies for his work. 19 billion USD might seem a bit over the top for a mom and pop pseudo-SMS operator. But it’s Mark Elliot Zuckerberg billions, so I don’t care if he spends them on platinum popsicles or a piece of heavily used software.

Unfortunately, the deal points to a pattern. That’s what Robert Reich is pointing out, first on his Tumblr (sold for 1.1 bn USD), then at Salon. It might be an occupational hazard that the former secretary of labor under President Bill Clinton is keeping an eye on he job market. But his diagnosis is pretty spot on:

The winners here are truly big winners. WhatsApp’s fifty-five employees are now enormously rich. Its two founders are now billionaires. And the partners of the venture capital firm that financed it have also reaped a fortune.

And the rest of us? We’re winners in the sense that we have an even more efficient way to connect with each other.

But we’re not getting more jobs.

Cars don't buy cars.
Where’s the money? Messages don’t buy cars.

It’s the core problem of our networked digital economy (just ask Jaron Lanier). And it’s a reiteration of the pitfalls of productivity, which lead Henry Ford to his famous statement “cars don’t buy cars”.
Back then, the problem was a bit more in the open. Pay your workers well, and the humming economy will pay you back with interest.

But, as Reich states: our new economies have a different problem. It’s not that the WhatsApp-workers are impoverished human beings, wrought out in the treadmills of late stage capitalism.
The problem is: they’re hardly needed anymore. Look at a traditional telco like Sprint Nextel. Their market cap is just 50% higher. Now look at the employment numbers:
– WhatsApp: 55
– Sprint Nextel: 79,000

That’s right. Merge the app team into the telco, and it disappears as a mere rounding error.

 

Can productivity be the problem? Hm. In the first electrified trains, a mandatory stoker had to be on the train. This approach may have solved one family’s bread and butter problem, but reeks of institutionalized madness.

So maybe it’s more about the distribution of the productivity gains? Let’s have a look at the wealth creators of the last years: Facebook, Twitter, AirBnB, Uber, Soundcloud, and now, WhatsApp. Great services all of them, highly successful as well. I prefer (almost) any AirBnB accommodation over  a run of the mill business hotel. Me likes Twitter. Facebook. You name it.

All those services share one thing: they are highly centralized. In terms of the service, and in terms of the wealth they created. I tweet and become a participating member of the attention economy. But the intrinsic value of the tweet is absorbed somewhere else. I rent out my place. But the listing service receives a huge percentage.

In terms of the value distribution, the chain looks like that

  1. founders and early investors
  2. later stage investors
  3. early employees
  4. service providers to the company
  5. employees on the payroll
  6. eventually: outsourced service providers (Uber drivers, AirBnB hosts, …)

You may rent out to peers. But the value distribution is definitely not peer to peer.
Producing value as in content usually is valued as zilch. Look at Medium as a new publishing model. All words are meant to be free. Not as in speech. But as in freebie.

Don’t get me wrong. Founders and early investors should get a big chunk. They’re taking an oversized risk (I know what I’m talking about). But it might be the right time to look at different models of value creation and distribution.

As I’ve been annoying everybody in the last couple of months with my harping on crypto currencies, you might know what’s coming. Yes. Let’s talk about crypto currencies.

Crypto currencies may look a bit weird. But they have some serious implications.
Just try this thought game:
– A crypto coin like Bitcoin is a token of ownership.
– Ownership always comes with increased interest (as nicely described in the endowment effect).
– Ownership of a crypto coin makes you a stakeholder in a crypto economy.

Now look at this: crypto coins like Bitcoin are basically programmable money. You can build economic entities which practically run themselves (like WhatsApp). But those new entities can share the created financial values between all stakeholders. 

How can this look alike? David Johnston’s paper on Decentralized Applications is taking a very good lead here. One of his examples would be a Meshcoin: a crypto system to run a decentralized network of meshed WiFi hubs, which is not based on donations or the “hey, we could sell some ads”-model, but offers economic incentives to run and mesh up your hub with many others. Which could look like a FON on steroids.
Because, don’t forget: routers don’t buy routers and jobless Tweeters do not need any ads.

 

 

Bitcoin = Platform 9 3/4

You want to learn what this Bitcoin thing is really all about? Try this well written introduction: Bitcoin: It’s the platform, not the currency, stupid!

Bitcoin: the Nakamoto Express into the digital future is leaving now.
Bitcoin: the digital Hogwarts Express is leaving now.

A tl;dr might go like this: the crypto currency express is leaving now. Please take your seat and learn your magic – or stay a muggle.

No, really. As Arthur C. Clarke wrote in his third law of prediction: Any sufficiently advanced technology is indistinguishable from magic. And if you follow the arguments of two authors of the study, you will probably want to board the train to a virtual Hogwarts ASAP.

The authors know pretty well what they are talking about: Sander Duivestein is a software engineer and works at VINT, the trendwatching think tank of Sogeti (which is a subsidiary of french IT giant Cap Gemini S.A.). His co-author Patrick Savalle is the founder and technical director of Mobbr, a brand new payment platform for network economics, based in the Netherlands.

They start with a nice intro why the current trend of economist debunking Bitcoin is not Hogwarts, but hogwash. Like Alan Greenspan asking for its intrinsic value, just seeing a bubble. As his contributions to the Great Recession are quite undisputed, the verdict of the co-creator of the largest financial bubble of the history of finance could have some weight.

But Duivestein and Savalle treat the aging economists quite nicely (There is a lot of confusion about bitcoin.) They could have quoted Clarke’s first law.  When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.

But they do explain to everybody, what the real, technological impact is.

Thanks to the Bitcoin protocol (crucially distinct from bitcoin, the currency it underlies), for the first time in history it is possible to transfer property rights (such as shares, certificates, digital money, etc.) in a fast and transparent way, which cannot be forged.

Moreover, these transactions can take place without the involvement of a trusted intermediary  such as a government, notary, or bank. Anyone who fully appreciates these attributes will immediately acknowledge the tremendous value of Bitcoin.

It’s the platform, stupid! And this platform can have some serious implications for anybody’s way of doing business. Just have a look at the all the oversized successes of the Internet economy. What do Twitter, Facebook, Google, Yahoo have in common? They are media businesses. Their business model is advertising, meaning: they have found no intrinsic way to make users want to pay for the services they render. More than one eight of the world population uses Facebook quite extensively. But they need to extract their value exclusively from third parties.

Or look at the posterboys of the sharing economy, like AirBnB, Uber, Lyft. They are all highly centralized businesses, which outsource the grunt work to some local drone (who might even get sued for making a couple of Dollars or Euros on the side). I love AirBnB. But as a company, they’re the 1% of the digital Uberclass.
Bitcoin pioneers a different model: everyone becomes a stake- and shareholder in this new networked economy.

Bitcoin is key to the success of the Collaborative Economy. Bitcoin enables a frictionless and transparent way of sharing ideas, media, products, services and technology between people without the interference of corporations and governments.

It’s ideas like the DAC (Digital Autonomous Corporation, or Community), the Decentralized Application (DA), which are driving the process. Sometimes a bit wild-eyed. But hey, Bitcoin shows a valid path: it’s a completely bootstrapped economy, still in beta and its infancy, with a market cap of 10 bn USD (not counting the capitalizations of the startups and businesses – just the money rolling around in the system).

In a system like this, ownership rights can flow through the Internet like ‘normal’ content (from e-mail to video streaming) already does. And no one can dispute or counterfeit who has ownership. It is safe, transparent, and mathematically secure.

What we see is an emerging commercial operating system, on top of the global communications layer the Internet already offers.

What we enter, is a totally unchartered area. At the Inside Bitcoins-conference in Berlin, even the crypto-savvy lawyers talking about “Emerging Issues in Regulatory Compliance and Law Enforcement Efforts” were a bit out-of-bounds, when asked about the legal ramifications of DACs and DAs. Think about an autonomous soda machine and …

… who exactly is legally and economically responsible (say, if someone were to get sick from a can of soda from one of these machines, for example).

So why touch crazy stuff like this anyway? Duivestein and Savalle have a historic answer:

In 1937 Ronald Coase published a groundbreaking article, The Nature of the Firm. In it he posed a very simple question: “Why do firms exist?”.

In his research he came up with the concept of transaction costs to explain the nature and limits of firms. Companies exist primarily because the underlying coordination mechanisms of the market aren’t perfect.

According to Mitt Romney, corporations are people (which sounds nicer than saying corporations are oversized homunculi). But the basic idea is already nicely embodied (sic!) in the English term “incorporating”: you give a transactional structure a legal body (sic!). Coase gave the answer to the nowadays mostly unasked question why we are doing that. Yes, deflecting liabilities can play a role here. But at its core it’s all about transaction costs.

Young Harry entering Hogwarts.
Young Harry entering Hogwarts.

Of course, the crypto currency based democratization of money and finance can be a scary thing as well.

Like any powerful technology, Bitcoin can either be seen as a Pandora’s box, or as a step towards Utopia. Bitcoin just obeys the First Law of Technology:“Technology is neither good nor bad; nor is it neutral”.
Asking yourself whether Bitcoin will fail is like questioning yourself whether technology can be “un-invented”.

If you accept that there’s magic, you may ignore it at your own peril. Even if you hide all evidence in a tiny cabinet under your stair case, you might still end up as a pigtailed Muggle.

It is much better to experiment and innovate with this new platform. 

And not just that. Becoming an active participant means you can shape this really new economy. Because, to stay in the metaphor: The “You-Know-Who” and “He-Who-Must-Not-Be-Named” will there be present  as well, not just young Harry and his merry band of friends.

So, let’s end with Clarke, again, quoting his 2nd law of prediction. Please don’t forget: he was a prediction pro. In 1945, as a Sci Fi writer, he proposed the rather farfetched idea of putting communication satellites into a geostationary orbit, now sometimes nicknamed the Clarke Orbit. Farfetched, because it took another 12 years until the Russians launched Sputnik (first satellite ever) and another seven years for NASA to launch Syncom, the first geostationary communications satellite.
So, what is Clarke’s final advice:

The only way of discovering the limits of the possible is to venture a little way past them into the impossible.

Bitcoin raised this bar already to quite some extent.

Coins are Brands (and have to work on that)

The known world is divided into three parts: if you say Fiat,

Fiat: public image
  • 30% (estimate) will describe something like this red thing here: four wheels, metal, internal combustion engine. Italian. Depending, of course, a bit in which part of the world you live. In Europe, you’ll get >99.9%, in South-Korea probably <1%.
  • 0.5% will talk about evil bankers issuing fiat currencies.
  • the rest will just say: huh? Whatever.

Brands are about relationship. When launching their cuddly 500, Fiat (the Italians), had to put a little bit more effort into that. In the US, just 8 percent had any brand recognition at all. Fiat did some nice things: they hired JayLo, had a nice viral video making inroads, and pushed themselves up to 30%. Still room to grow, but a nice base.

If you now think, that a brand is something you can create in a lab, or by hiring a branding agency, you are wrong. Brands are the collective public image of who or what you are, in the eyes of the consumer. You can try to nudge their perception into a certain direction (hiring Roseanne instead of JayLo might not have been that kind of perfect fit for the Italian accessoire-car for the generation Desperate Housewife). But that’s just about it. Your core values will still be represented in your product, you service quality, your tonalities.

A real doge: Leonardo Loredan.

Brands are about trust. And that’s were the importance for Bitcoin and all other crypto currencies begins. As crypto currencies are backed solely by trust, supply and demand, and a mutual understanding of the economic value this produces.

Growing the whole ecosystem from 0 to 10 bn USD was already an amazing feat. But where will the future growth will come from? A network needs a reason to join. Get rich quick A.K.A. speculation on growth works only, if the underlying message comes across to a growing user base (which finally might make the step from investment to every day use). 0 10 bn is fantastic. But 10 bn USD is just about doubling the M2 monetary supply of West Samoa. So there’s some need for growth, if one wants to become a global currency.

Now, how does Bitcoinese currently sound? I’m not talking about the misinformed media misconception of yeah sure, just good for buying drugs online, tulip bubble, yadda yadda. I’m talking about how the community talks itself. Brand-linguism (if such a crazy thing would exist) would probably dissect the language as having heavy influences of survivalist, fortified with some geekspeak, with a side serving of free market lingo.

The doges of Venice would have been proud to become a part of that. But as far as I know, crypto currencies are not about creating another financial playground for the 1%.

Now, please watch this video, about another doge:

Yes, it’s a stupid one trick pony taking over popular meme and exploiting. And, no, this is NOT Bitcoin 2.0 or the future of monetary transactions and whatever else is in the DNA of crypto currencies.
But reddit, as always representing the virtual finger on the geeky pulse of the times, shows something happening here.

There’s something about this fuzzy nonsense coin, which the crypto crowd has to take serious. Because: Shiba Inu, so much impact. And nobody wants to hug any Austrian economist.