Quote of the day

I think the future of television is more fragmentation, the bundle has no more elasticity in it.” – Barry Diller.

This explains everything from ManUnited TV to the new channels that Amazon has launched as Prime add-ons in the UK and Germany yesterday. Media has been driving an increasing share of household spend over the past 15 years.

In a time of stagnating economic growth and declining incomes (in real terms) that middle won’t hold. Much of it becomes discretionary spending.

Barry Diller

Mobile payment mania

I use my Apple Pay as a stopgap measure for when I have left my wallet on my desk rather than as a main form of payment. I use PayPal mainly because eBay doesn’t allow other options.
So I find it puzzling that the likes of Tesco really thinks that this payment app (and others like it) would stand a chance of succeeding. The reason why Visa, MasterCard and Amex work is because of their near universal acceptance.

Oprah time: Heaven’s Bankers – inside the hidden world of Islamic finance by Harris Irfan

I was given Heaven’s Bankers to read as a friend. I can’t say I had thought that much about Islamic finance before. I knew that it had a couple of patches of ‘heat’ behind it in the banking sector. One was in the late 1990s. It then took a back seat post-911 and took off again as Dubai boomed.

It helps that Harris was not only an insider, but passionate about banking in its widest sense. He’s also sickening polymath who is a top flight racing driver.

History never repeats itself, but the Kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken fragments of antique legends. – Mark Twain and Charles Dudley Warner

Irfan delves into the intricacies of how modern Islamic finance grew and contracted. The industry he provides us an inside view of is now worth a trilliion dollars.  The start of history like most things were pretty straight forward. As the industry grew more arcane and complex financial instruments became the norm. This reminded me of a lot of Mark Lewis’ Liar’s Poker. Lewis dealt with bonds and modern derivatives became so complex customers didn’t understand them. The Savings and Loans debacle of 1985-1996 foreshadowed subprime mortgages.

Where Irfan really excels for the non-banker as reader is in his ability to break down the basics. He takes the concepts many of us learned in business or economics classes back into pre-medieval history. He provides a historical perspective on modern capitalism as we know it. So the book becomes invaluable regardless of how you feel about the current economic system. The background gives you a more informed perspective.

What does Zero Based Budgeting mean for agencies?

After talking with a friend I pulled together a brief presentation for them which explained what Zero Based Budgeting (ZBB) practices at a client were likely to mean for an agency.

The key takeout for me are is one of attitude. ZBB isn’t about cost cutting but about spending the money in the most effective way where it matters the most.

The return of Radio Rentals in the smartphone era

This post came out of a couple of conversations that I had over the past few months.

Sony Trinitron TV

As of February this year Apple was sitting on a cash hoard of 178 billion US dollars, most of which is kept outside the US to ensure it doesn’t get taxed. It has made the bulk of the money from the iPhone.  However the smartphone market is changing, the growth in mature markets is slowing down dramatically, as has smartphone growth in China. The growth in developing markets is being driven by smartphones priced so low that margins are razor thin. Things are so tight that component suppliers have gone under.

Apple is at the premium end of the market but other players are trying to migrate in that direction to which means that the middle of the market and premium products are very similar in terms of industrial design.  So if one had a cheap source of capital it would be advantageous to come up with a way to stitch in clients and making it easier to onboard clients from the competition.

So when Apple launched the 6S range of handsets, this wasn’t much of a surprise

Exclusively at Apple’s retail stores in the US, customers can choose their carrier and get an unlocked iPhone 6s or iPhone 6s Plus with the opportunity to get a new iPhone annually and AppleCare+ on the new iPhone Upgrade Program with monthly payments starting at $32 (US) and $37 (US), respectively.

From a carrier point-of-view this presents a set of mixed blessings, it decouples the handset upgrade path from the consumer’s mobile carrier plan. On the one hand carriers no longer have to foot the high cost of iPhone purchases, but iPhone customers have less of an incentive to sign up to two-year contract with the likes of Verizon or Sprint which will make their cashflow less predictable in the longer term as consumers churn contracts and carriers will have get more creative with their contract incentives.

We may see hybrid deals of content, voice minutes and data – rather like cable companies or BTVision. Of course, having those kind of OTT bundles has implications for for their networks and the likes of HBO are probably not likely to commoditise their product prices so that bandwidth and be saved from a downward spiral.

Apple’s move has some advantages, but isn’t without risks:

  • Moving consumers to a lease model means a degree of predictable revenues
  • It provides with a modicum of control over the market for pre-used handsets, if they use it. This huge. Think about the roles that smartphones play in our lives for a moment; they aren’t just communications devices but give an idea of status and self expression as well. Just because cheap smartphones are for sale in the developing world doesn’t means that consumers don’t want the real thing. Apple could tap into a pre-existing informal market of channels to sell pre-owned smartphones into these markets and make their competitors hurt a lot more. It would effectively dig a trench between mid-market and premium handsets and force competitors to go to lower price points
  • It raises competitive barriers against competitors. Not that many competitors have the access to easy cheap money in order to finance this kind of scheme. If it could be done profitably by third parties; we would see the  likes of ICBC and the Bank of China setting up subsidiaries to finance Huawei phone purchases. There is little to no margin in the financing itself. For investors the opportunity cost wouldn’t be worthwhile.  Given its lack of profitability the leases can’t be securitised easily to palm the risk off on institutional investors – which was how the likes of MBNA grew their consumer finance businesses. Third parties would need to get involved in areas that aren’t their strength such as a superior supply chain and channel strategy to that held by the wireless carriers to bring down the cost per handset and ensure that the handset was available near the consumer. Apple doesn’t need to make a profit on the leasing business, it just needs to not make a loss

The risks in this move are:

  • Increased amounts of handset repairs. Many consumers today put up with cracked screens rather than having them repaired due to the cost and inconvenience involved. Going to the leasing model puts all of that back on Apple. If a third party were  to attempt it, there would be a whole service network which they would need to build out
  • Leasing agreements like this will be a magnet for organised and disorganised crime. There will be small but significant loses of handsets from false address fraud to ‘fake thefts’, Apple will be facing the kind of persistent criminal problems that face catalogue retailers to credit card companies
  • What happens when the US economy tanks and Apple faces default payments on its handset leasing programme?
  • The strategy relies on consumers seeing a continued value in regularly upgrading their handset. What led to the demise of TV rental companies was: more reliable televisions with the move from discrete components to integrated circuits, real cost reduction of TVs as they became more popular and a lack of compelling reason to upgrade once they had a colour TV. When we think about smartphones, the cost of a handset is being reduced  (at least in the Android eco-system), they are generally pretty reliable – the weak points being the easily damaged screen and chemical life of the battery and there hasn’t been significant new use cases from successive generations of handsets

More information
CCS Insight cuts global handset forecast | TotalTelecom
SMARTPHONES: Price Wars Topple Huawei, ZTE Supplier
Apple Introduces iPhone 6s & iPhone 6s Plus

Apple Pay in the UK

Even if I wasn’t interested in technology I would have known about the launch of Apple Pay in the UK some eight days ago. My inbox was bombarded with emails from credit card providers explaining how I use their card on the service. Apple Pay logos appeared in retail partners and on billboards in tube stations.
However despite this onslaught of media hype, educational material and free advertising for the service I have only seen one person use it. A tech forward looking gentleman twisting his arm around to pay for a coffee in Starbucks with his Apple Watch.

Now this isn’t necessarily a big issue. Apple Pay is a feature that Apple provides rather than being a money generating service (a la iTunes) in its own right. I tend to see the service as an emergency measure of if I left my wallet at home (as I do on occasion). For retailers and TfL there is not really a compelling argument for supporting Apple Pay, beyond the brand positioning of being ‘on trend’. Indeed TfL warns that transactions take longer than NFC enabled credit cards – which isn’t that desirable when you have a big queue of people looking to go through the gate during rush hour on the central line.

More information
TfL cautions users over pitfalls of Apple Pay | The Guardian

George Packer on The Unwinding

The Unwinding describes the shifting fortunes of the post-war middle classes in the US, which mirrors the decline of the middle classes throughout the western world.

One tends to forget that whilst the middle classes are considered to be a measure of the health of a country, it has always been unstable and in the past a destabiliser: hippies and 19th century anarchists were both the children of the middle classes on the up. Now globalisation, technological change, changes in the nature of conservative politics and changes in global financial structures have dramatically changed things over the past 50 years. Nostalgia for a golden age of the middle class was part of the reason The Wonder Years was so popular.

Facebook’s share price decline

One thing that has surprised me about the Facebook share price and trading around it is the relatively low volumes involved; part of the reason why the share price is moving downward is because the market is relatively illiquid.
You can see from this chart that I got from Google Finance, huge volumes at first when trading opened and then relatively speaking nothing.

According to pwc the future looks uncertain

The pwc US Trendsetter Business Outlook April – May 2012 report has one diagram that I thought was interest. You can see how quarter on quarter respondents had a higher degree about the world economy over the coming 12 months.
pwc Trendsetter Business Outlook April - May 2012
More information
pwc US Trendsetter Business Outlook April – May 2012 (PDF)

Jargon Watch: malemployed

Urban Dictionary has turned into a kind of Wikipedia for slang and the latest rude words or crude acts. But it is also a great zeitegist metre providing a language for how people are thinking or feeling. In a time when the global middle class is challenged by changing corporate structures and an economic reset workplace anxiety is building up. Urban Dictionary had a word for it – Malemployed:

When what you do for a living makes you want to kill yourself.
For example: I re-edit text that has already been edited in India; I am so malemployed.

It sounds like life inside a Dilbert cartoon, but having tried to edit an analyst newsletter written by an agency’s Indian office into something useable a number of years ago, I can relate to the example provided REALLY well.

More information
Urban Dictionary

Facebook: the Yahoo! patents case

I had delayed writing about this as I had a busy run-up to Easter and just about everyone of note in the Bay Area seems to have weighed in on the Yahoo! versus Facebook legal case over patents. Fred Wilson (aka A VC) channeled the concern that the start-up community in general over wide-ranging patents being a tax on innovation.

There is a certain amount of prejudice inbuilt against incumbents going on; Silicon Valley doesn’t make big money from existing large businesses but the new, new thing – for example:

  • IBM vs. Apple, VisiCalc, Oracle and countless Boston corridor enterprise technology brands before them
  • Beckman Instruments vs.the traitorous eight who went on to found just about every other semiconductor company from the late 1950s through to the early 1970s: Fairchild Semiconductor, Intel, Intersil, AMD, National Semiconductor, LSI Logic and venture capital firm Kleiner Perkins
  • Microsoft vs. Apple, Oracle, Sun Microsystems, the open source community
  • Google vs. Facebook and just about anybody else looking to make money from online advertising

I don’t necessarily hold this against them, it is the classic tale of David and Goliath that resonates at a deep level in the human psyche. It probably helped us move beyond being slightly smarter than the average ape and turn our use of tools into a decisive advantage with humans becoming the apex predator throughout the world.

What a lot of these arguments are failing to do is look at the underlying form:

  • Yes, the patent system is broken
  • Yes, Yahoo! has multiple business issues which would merit a series of posts in it’s own right
  • Yes, Yahoo! is unlikely to survive at least in its present form. Though for reasons that I have gone into previously  I don’t think that Microsoft is a suitable suitor (just look at what has happened to its continued inability to match Yahoo!’s previous returns on search with Microsoft AdCenter) and more controversially I didn’t think that it was serious about its takeover bid first time around
  • Yes, Yahoo! is likely to be outmaneuvered by Facebook and be on a hiding to nothing

But for me, the story isn’t about Yahoo! or the inequitable nature of patent laws, but about Facebook and its business practices in relation to data.

In the 1990s file formats: .doc, .xls, .ppt and others were used by Microsoft to leverage a competitive advantage. Competitor applications couldn’t open them; so your information was locked into using Microsoft Office software. This was one of the reasons why the web was so transformational; HTML opened up publishing of documents that had been previously locked into Microsoft Office – electronic versions of scientific papers, price lists etc.

Data portability is the document format of web 2.0 (or social web). During my time at Yahoo! we introduced the requirement to sign into Flickr using a Yahoo! ID, Stewart Butterfield and the team at Flickr worked hard to ensure that existing Flickr customers who didn’t want to have a Yahoo! ID could move their pictures off the service.

The idea was that the customer’s data was their property and allowing them to freely move was as American as apple pie, capitalism and the free market. Allowing customer’s data to be portable fitted in with the web being free as in speech ethic that had predominated up until then. Portable customer data kept you honest and encouraged you to innovate as losing a customer was only one export click away.

In the case of Facebook; the data that really matters is your address book. Whilst Facebook eventually allowed consumers to download their profile information (after it had gained hegemony in the US social network sector), it holds on fast to your address book. Om Malk over at GigaOM wrote a really good post on how Facebook leeched off Yahoo! user’s address book to build its business, but didn’t allow Yahoo! users to transfer data back the other way.

This had a detrimental effect Yahoo!’s already weakened business. It wasn’t only Yahoo!, Facebook did the same on Plaxo and has been in conflict with Google over the same issue. In the Yahoo! patent case; Yahoo! is in the position of shooter and patsy – but like the dreams of conspiracy theorists looking for a dark hand moving the pieces around the board – Facebook is responsible.

So consumers and some companies got screwed on their address book; but what the great and good of the start-up community who criticised Yahoo! forget is where Yahoo!, Plaxo and Google have gone before their start-ups could be tomorrow. The problem is the over-reliance on Facebook Connect as a federated ID and as a marketing tool using consumer news feeds in their word-of-mouth marketing campaign strategies.

Federated IDs are not a new concept, Microsoft tried to have their Passport technology adopted in a similar way some ten years ago and it was stymied because of early adopter and technology sector mistrust.

Like Facebook, the businesses adopting Facebook Connect usually rely on some sort of advertising-related business model, either for their revenue, or for garnering customers; yet with Facebook Connect – Facebook holds all the cards on targeting information that means:

  • Your advertising platform will always be worse than Facebook’s because they have a better customer view – as we’ve seen in search this is likely to turn into a zero-sum game
  • For more e-commerce-based businesses, Facebook data could be used by rivals to directly target your customers – because Facebook already has your customer list. By using Facebook Connect you already gave it to them and they could even infer a good estimate of customer engagement were by how often and how long they logged in

It has the potential to be digital equivalent of the way Standard Oil used its dominant position as a buyer of railroad transportation to screw over rivals. By supporting Facebook in the Yahoo! patents case; I believe that leading players within the start-up community inadvertently darkened their own futures.

It is hard to imagine now, but in the mid-1990s Silicon Valley was genuinely afraid of Microsoft:

Another big factor was the fear of Microsoft. If anyone at Yahoo considered the idea that they should be a technology company, the next thought would have been that Microsoft would crush them.

It’s hard for anyone much younger than me to understand the fear Microsoft still inspired in 1995. Imagine a company with several times the power Google has now, but way meaner. It was perfectly reasonable to be afraid of them. Yahoo watched them crush the first hot Internet company, Netscape. It was reasonable to worry that if they tried to be the next Netscape, they’d suffer the same fate. How were they to know that Netscape would turn out to be Microsoft’s last victim?

That was Y Combinator’s Paul Graham on Microsoft back in the day and how fear of it partly sewed the seeds of failure at Yahoo! Great ideas couldn’t get funded if they where considered to fall anywhere near the purview of Microsoft – and Microsoft wanted everything, at that time the company mission statement was:

A computer on every desk and in every home running Microsoft software

Now the vision uses softer language that also takes into account technological change with Steve Ballmer describing it as:

…enabling people and businesses to realize their full potential

Microsoft still isn’t a cuddly business by any means. Let me show you: Some six years ago I spent a weekend in San Francisco on the dime of the agency I worked with at the time. The reason why I had a free weekend was that I was originally going out there to pitch an international brief for an enterprise technology company – and the weekend should have been very busy and productive in preparation fo the pitch early the following week.

The US folks had checked the substantial non-compete list that we had been provided with by Redmond and senior clients had been checked in with and they were ok with it.

Happy days, I was put on a Thursday flight from Heathrow to San Francisco with British Airways. I deplaned, got through immigration and got a taxi into town. I went to the hotel first; dropped by bags off and washed my face and then got a taxi to our San Francisco office down near the ball park.

As I walked in the door, I could see of the office general manager getting off the phone. Apparently my trip was a waste of time; someone at head office had a call with someone at Microsoft who asked us to withdraw at the last minute as the company operated in a space that Microsoft would like to enter in the next five years.

I ended up spending the Martin Luther King day weekend at the Hotel Monaco close to Union Square and spent much of the Saturday exploring the Asian Art Museum, the then Sony Metreon centre and shopping off Haight.

The point I am trying to make is that fear is relative, Microsoft is a changed but still fiercely ambitious and competitive business.

Facebook is much more than Microsoft. If we look at address books as an example; Facebook bought and closed down Malaysian start-up Octazen to close the door on others using their technology to import contact lists in February 2010.

Facebook is keenly competitive in the way that Microsoft has been, but it has learned from Microsoft’s mistakes; it has lawyered and lobbied-up much earlier in its development, so with Facebook there will be no humiliating Judge Jackson trial which gifted the start-up culture of Silicon Valley a second chance.

I believe that in the medium-to-long-term Facebook will have a neutron bomb effect on the Bay Area start-up finance community and at the moment they only have themselves to blame.

Although it may seem counter-intuitive to the start-up community at the moment, fueling Yahoo!’s patent duel with Facebook may make more sense in the long run.

More information
Yahoo! Crosses The Line – A VC
Will Yahoo Torch its Search Deal With Microsoft, Outsource Search to Google? – Search Engine Watch (#SEW)
Is the internet too perfect a market? – renaissance chambara
A quick primer re @blakei @yahoo #delicious – renaissance chambara
Yahoo-Facebook patent fight: more than meets the eye | GigaOM
Google Renews Battle Over Facebook Contacts, Removes Phone Directory Sync On Nexus S – TechCrunch
Why Scoble Got the Boot from Facebook: Plaxo’s New Feature – Mashable
What happened to Yahoo – Paul Graham
Steve Ballmer: Microsoft Venture Capitalist Summit 2008 – Microsoft News Center
Facebook Acquires Contact Importing Startup Octazen – GigaOM

Oprah Time: The Greatest Trade Ever: How One Man Bet Against the Markets and Made $20 Billion by Geoffrey Zuckerman

I wanted some light reading as I traveled and Zuckerman’s account of how John Paulson bet against the US housing market seemed as good a read as any. As a non-financial person I found some if it very illuminating:

  • Like innovations such as the the light bulb there were a number of people trying to make this trade work, some of them like Michael Burry had the trade messed up by his own investors who were withdrawing funds as he was making money killing the trade in the water. Quite why Burry was a zero and Paulson was a hero wasn’t clearly articulated
  • The banks not only packed toxic investments that drove the market but also developed the interests that could hedge against it in a cost-effective manner, with many of them screwing themselves
  • Banks actively screwed their customers, even when they were being paid for advice. If I did that as an agency person I would leave myself open legally and would also likely get censured by the CIPR
  • There was generally a lack of critical thinking and what-if scenario planning at the banks involved. On the one hand some of the most numerate people I have known come from an investment banking background. On the other hand investment models are often kludged together with massive Excel spreadsheets and macros – which I imagine plays hell with trying to get a helicopter view of an institution’s financial position
  • The key problem was one of timing, with investors essentially continually betting on black until the roulette wheel swung in their favour. They had no sense of the when beyond a vague ‘soon’

Zuckerman managed to make the subject matter accessible and understandable. One gets the sense that Paulson was fortunate rather than immensely talented as there didn’t seem to be a lot separating him from other people making the same bet until he rolled the dice one last time.

Zynga and the IPO – thoughts | Zynga 首次公开发行股票

I had held off writing on Zynga’s ‘failed’ IPO at the end of last year. I am not going to say that Zynga is a great business; in many respects I don’t think it is, without even looking at its numbers I think that Zynga has three big challenges:

  • Facebook owns their customer base
  • Facebook owns their payment system
  • Facebook owns their customer acquisition strategy

But was Zynga’s IPO really a failure? Before I answer that I wanted to talk about another IPO.

Back in 2000, I had the experience agencyside running the European launch of a company called VA Linux and took its then CEO Larry Augustin around the media. At the time VA Linux’s primary busness was building specialist workstations and servers were optimised for Linux and had Linux pre-installed. This meant that they thought carefully about component choices: the ethernet card in the computer was from Intel rather than 3Com because Intel did a better job in supporting Linux  in terms of the quality of its drivers.

My experience of Augustin was of someone who was whip smart, with a dry wit and a genuinely nice guy – which made my job a hell of a lot easier to do. Life was good, Augustin gave good copy on the Judge Jackson finding of fact that had happened the previous November, Linux was building momentum in the enterprise and with web servers because it performed better than Windows, required less skill than the BSD distributions and was more of an entry level product than Sun Microsystems, SGI or IBM Unix hardware on RISC architectures. One of the things that audiences wanted to talk about was VA Linux’s at the time record-breaking IPO.

VA Linux’s underwriters had priced its IPO at US$30 per share, on the first day of trading the price topped US$320 per share. It was described as a stunning success but that success was double-edged. In economic terms, the bank staff working on the IPO had obviously under-priced it because the price had surged so much – depriving the company of a substantial amount of potential capital that it could have raised. Admittedly it was crazy times and VA Linux wasn’t worth the absurdly high valuation in the end, as businesses like Dell started competing with them head-on. But one has to ask what difference would the extra capital have made? How big does the pop have to be to go beyond rewarding initial investors and become negligent underpricing of a company’s stock?

Back to Zynga, which had the opposite challenge, the bank staff working on the IPO had optimally priced the stock so that the company got pretty much the full amount that at least some people were prepared to pay. Rather than a pop, a price decline occurred which investors got upset about as late arrivals to the Zynga party made a financial loss. The underwriters for the IPO earned their money on this occasion. If you want to be the first kid on the block in a new set of the latest Nike Air Jordans, the latest gadget or the season’s must-have handbag, you have two choice get in early enough or pay over the odds. Who is to say if you’ve overpaid, once the heat goes those items are then likely to become cheaper again. And so it goes with Zynga, this shouldn’t be your pension fund; it is part of the new hotness, a fashion stock if you will and was priced and paid for as such.

Disclaimer: this doesn’t constitute investment advice or a recommendation to buy stocks. I am not a financial services professional nor do I profess to be. If you want investment advice, pay someone who does this for a living for it.

More information
THE TRUTH ABOUT ZYNGA: The Only Reason The IPO ‘Flopped’ Is Because Idiot Investors Paid Too Much

Wall Street versus Sesame Street |華爾街 与 芝麻街

I noticed the #occupysesamestreet hashtag on Twitter and decided to delve a bit further vis-à-vis #occupywallstreet.  #occupysesamestreet is a small meme but I wanted to get an idea of how many people it had reached versus it’s more serious competition. I used Google Insights for Search as a kind of measure of wider audience awareness.
Google insights
Orange is the search term occupy wall street and blue is occupy sesame street. There isn’t much competition but you can just see the slight uptake that Sesame Street has gained over the last few days measured.
Then I dipped into the great satan of social: Facebook to see what was happening. I was quite surprised to see that the Occupy Sesame Street page had over 35,000 likes compared to just south of 5,000 for the Occupy Wall Street page.
Now there are factors that come into play with Occupy Wall Street:

  • People maybe reluctant to put their name down as they may be seen as a troublemaker
  • People may be interested in signing up instead for their local protest page

I suspect that at least part of it is that the silent majority (yes I am aware of the Richard Nixon reference), whilst curious about the happenings are just not that engaged with the political action taking place. They are passionate about Sesame Workshop (what used to be Children’s Television Workshop) programmes and shows the continued power of the Sesame Street brand amongst adults.

Which is why I won’t be holding my breath waiting for a popular uprising leading to a worldwide revolution just yet.