microbyte
The Emergence of Privacy in The Digital Era: Why snapchat and their ilk may be the future of communication

When I first heard of Evan Spiegal’s Snapchat it really made no sense to me. Why would you not want your messages to persist, so you can look through them at a later date? It seemed to me like an app for people to send silly and trivial messages to each other. But recently I realised it might be a little more than sending a random selfie with a strange looking person you’re sitting next to on the bus ride home. Snapchat and the new ilk of vanishing messaging apps might be part of a bigger trend for privacy - let me explain.

It is now widely known (due to ‘superstar’ whistleblowers) that governments have been utilising modern infrastructure to spy on its civilians on an epic scale. Governments may have been infiltrating the mega-corps like Google and Facebook, potentially allowing them to play Peeping Tom into billions of private and public messages.

Now look at the increasing number of retrospective investigations happening at the moment. In the UK media there has been the whole hacking and News of the World scandal. In the world of banking, there is an ongoing FX/IR rigging debacle. These two investigations could be interpreted as retrospective investigations, as when the events were happing in real time - nobody within the specific industries thought they were doing anything off kilter, they probably just thought they were doing their jobs well. The reason these investigations were possible in the first place is because of the availability of the digital correspondence including phone logs, emails and instant messages.

In the past it would have been much more difficult to go back retrospectively and investigate. Look for example into the allegations into the UK houses of parliament and destruction of key documents that may have brought to light certain wrongdoings to the vulnerable in society. However with the ability to store digital communication, process and retrieve almost everything nowadays - this opens up the ability to investigate cases on a historical basis. This is all fine if for example, you are selling some illegal substance, and it is against the law to do so at the time. However, potentially in the above media and banking cases, (I am no lawyer) but it is not 100% clear cut that laws were being broken at the time. The persistence of digital communication means that even if your intentions are good, there is a risk that a re-interpretation of the law in some future time could land you in some very hot water.

A friend having read my previous post on “The permanence of digital communication”, suggested that using crypto could be a way of securing your digital interactions, so only you could read it. There are potentially two issues with this. First is that currently there is no mass consumer service which allows this and has taken off. The second is that even if say, Google or Facebook allows to use crypto to secure your messages so only you and your recipient can access them, depending on how the encryption is done - the law could demand that they be given the digital keys to access the communication (So you see encryption is only as strong as you keep the keys to yourself). The reason given to access your keys? - the law at some future time of course! - which may have been different to when you were sending the correspondence.

I have yet to read into the complete technology stack and methodology of vanishing messaging applications, so don’t know exactly whether the messages are stored centrally at the corporation servers or whether they are as is per the application and deleted once transmitted to the client mobile in order to maintain privacy. It would be good if they were encrypted when sending, so nobody could snoop along the pipes. OK, you can take a screenshot to save your friends message but that isn’t the point, the point is to prevent mass archiving from external sources.

I find it very interesting that applications such as Snapchat, TapTalk and Sobrr may have slipped through the net and although started as a popular app for the younger demographic (school/university) of the population for sending trivial communications - they maybe the kind of communication apps the masses may adopt one day to use in their daily lives - to prevent their privacy being impeached in future times, retrospectively. If you’re a VC or a start up - it might be the time to double down on vanishing messaging apps which highlights privacy as its key strength. Privacy (and power) to the people I say.

image

Might apps like Snapchat signal the trend where society has a thirst for messaging apps which maintain your privacy?

The Permanence of Digital Communication

“I’ve seen things you people wouldn’t believe… Attack ships on fire off the shoulder of Orion. I watched c-beams glitter in the dark near the Tannhäuser Gate. All those… moments… will be lost in time, like [small cough] tears… in… rain. Time… to die…” -

The Replicant (android) from Ridley Scott’s science fiction masterpiece Blade Runner

In an era where it is so easy to share the minutiae of your life online through photos, videos and the written word, there is a question over which of these should remain permanently alive. Which should be searchable for future generations and which can merely remain transitory and forgotten, like tears in the rain?

The permanent nature of online postings is a reason why Evan Spiegel’s Snapchat is so popular with the current youth generation. In previous generations, what we said in the school playground or communicated to our friends through handwritten notes passed around the classroom would be forgotten or destroyed. They couldn’t be stored, processed and retrieved by future times. These words disappeared. Kids could say things, make mistakes, learn and not be impacted by their youthful and misguided indiscretions. The current young generation communicate through digital platforms, and although this allows you to convey your thoughts and actions over large distances, they are stored on servers of multinational corporations. These interactions are stored, processed and searchable. So the current batch of younglings have embraced technology that lets them communicate with their peers but which vanishes into thin air after initial consumption.

How about your working thoughts? They’re not permanently recorded, I guess? You only post the actualised and complete thought, self censored for whatever reason. You are allowed to think through the many alternatives and decide to share the one output. Your transitory thoughts are already stored. The example I give is when you type your Facebook status, and you don’t hit post, instead you delete the line - this metadata is stored on the social network’s servers. The reason being, they want to eventually know why you are self censoring. So it’s not impossible that one day they will collect the deleted text too. Google also does something similar to this. Think about it: how many times do you have to hit save in Gmail? Not much. If your Internet times out, the browser crashes or closes by accident, you often see a draft automatically saved. Your draft thoughts and ideas are captured, stored and processed. Although I haven’t yet read anything to conclude that Google will do anything with this data (the variations of emails you haven’t sent yet) that door remains open.

Now for a bit of future prose. You already see people experimenting with brain wave headsets, to extract signals so that you can control computer devices simply through your mind. If and when this technology develops, it might be possible to record your thoughts, and send them to another person - like you would do with written material though your mobile. Then the question of transitory thoughts will become even more important. You have many more thoughts in the process of deciding on the thoughts than the one you actualise and send. Will society store everything? Or simply just the one you decide is the one you want communicated. We think things are complicated now in the era of click to share. We ain’t seen nothing yet…

PS.  This blog post was inspired by a tweetstorm session from Marc Andreessen in which he talked about how people were incorrect to belittle the efforts being put into communication apps, for example verses other so called “more important” projects. He said that communication apps that are being produced by the Valley is laying the foundation for everything we’ll do in the next 100 years. I won’t paraphrase Andreessen anymore, instead will quote his tweets:

- Subtext often that communication tech/apps in particular somehow aren’t important or don’t matter, vs energy, education, etc.
- I think this is 100% incorrect: Communication tech/apps including Internet are the foundation for everything else we’ll do for 100 years.
- Why? Communication is the foundation of collaborative work, which is how all the important problems gets solved. People working together.

image

How to Co-Exist in Harmony with Disruptive Technology: A Lesson From Pixar, Disney and Apple

Jeffrey Gundlach, the CEO of the investment firm DoubleLine Capital made an interesting point the other day about the new disruptive player in town, Tesla, and how it should play its strategy versus the incumbent automotive industry. In this blog post I shall outline Gundlach’s thought experiment and why his idea is actually very similar to what allowed Apple to thrive and co-exist in harmony with the media content industry.

First, let’s get an overview of Tesla’s vision. Elon Musk’s goal is to get society off of gas guzzling combustible engine cars into environmentally friendly electric motor vehicles. He is up against the fierce and well-built axle of the auto industry, utilising the current law and lobbying powers to stop Tesla. The auto companies see Tesla’s electric car as disruptive in the negative sense. The way they see it is, if Tesla wins - they lose. A zero-sum game. Gundlach sees it differently; he believes Tesla and the automotive industry can both win.

A quick aside: currently the edge for Tesla is in its battery technology, including the newly proposed lithium-ion giga-factory. Manufacturing and assembling cars (with quality control) is a difficult business. It is something Tesla has spent the last decade perfecting. However good they are now in terms of making cars, the auto companies have this process perfected - for example in the sheer volume of cars they can ship, a stage which Tesla is yet to reach. Musk has made it clear, they are supply rather than demand constrained for its electric vehicles.

Gundlach proposes that Elon Musk goes to all the major auto corporations and makes a deal: that Tesla will exit the car-making business IF Musk’s company gets to deliver the battery technology behind the electric cars. Auto companies get to keep doing what they do, making cars on scale (but electric this time) and sell through the dealerships or outlets they choose. Tesla also wins, they become the world’s leading manufacturer of electric car batteries.

The downside for car companies in embracing the rollout of electric cars (against their gas fuelled models) is that it will end up destroying the additional revenue-generating ecosystem built up in order to support the gas models. For example, with electric cars you wouldn’t need to take it in for an oil change, etc. Not to mention all the relationships autos have with, for example, the gas industry. Autos could keep fighting Tesla but if Musk gets his way, Tesla could potentially end up owning the new electric auto sector, just like Amazon owns the online retail world in the West. For Tesla the risk is they don’t have enough power to scale and create “affordable mass electric cars”, or end up spending too much time battling the automotive lobbies.

The other industry that comes to mind which till recently fought technological disruption was the media (content) industry - music, movies and television. With the advent of near zero cost (not really but you get the point!) reproduction and the growth of digital distribution of content through the Internet in the 1990s, services like Napster were established. Media owners were reluctant to cut any deals with the then willing Napster. They believed that they should keep their content off the Internet and remain distributing using physical media. Why kill margins and tight control? Physical media supported an ecosystem too (like gas cars currently do) - retail outlets which sold their media goods. If they gave the content to Napster, it would be difficult to control copyrighted replication. So media companies fought tooth and nail from preventing the future happening in a legal fashion. This forced an entire generation to get their media fix online through anyone other than the content creating media companies, who were getting zero revenues from these downloads.

How did we eventually get to the era of media companies being comfortable to putting content online through the likes of Netflix, Lovefilm, Spotify and co? For this let’s go back to the late 1980s - when Steve Jobs bought this really cool little computer animation company called Pixar from George Lucas’s LucasFilm. Recently I watched a Charlie Rose interview (1996) of Steve Jobs. In the interview, Jobs tells us that the attraction of Pixar for him was that it was a great technology company. When Pixar IPO’d the markets read Pixar as a technology company, too, and the stock was misunderstood initially. During the interview Jobs said that though it was initially a technology acquisition, Pixar was essentially a content creating company. Pixar told stories and good ones at that. These films would produce annuities. Jobs said that a technology company makes things that won’t sell after say 2 years. It needs something new. A content company can sell the same media forever, to the next generation.

Now let’s look towards Apple at the turn of the century. In 2001 just after the introduction of P2P services like Napster, Limewire, eDonkey and co. distributing millions of MP3s for free, Steve Jobs released the very sleek and fashionable iPod. Marketing of the iPod was quintessential Apple - making it the must have premium device of the new millennium. A few months later Apple made the iTunes application, which acted as media player for the Mac. Soon enough, they would release the same application for the PC. Now iPods could be used by more than simply Apple Mac users, it now included the multiple millions more of PC MP3 music lovers.

Another important step came in 2003 when Apple launched the iTunes Music Store. Fast forward to 2006; Steve Jobs sells Pixar to Disney. This I believe has the markings of a genius at work. By selling Pixar, a content creating company to Disney, Steve Jobs was now a director at one of the largest media companies in the world. One can say he was already a media exec being the owner of Pixar – but being Disney’s largest shareholder could only help. In order to sell more iPods, and in the future iPhones (2007) and iPads (2010), you needed media content. Steve Jobs being in the media circle now, could approach the various music labels and talk. Jobs went round to all the heads of the labels, and assured them that their content would be safe on the iTunes store. He said to the media owners that Apple would take a very small cut from selling their content - the media companies could keep nearly the entire selling price. He convinced his now peers (and not rivals) to go for a more modern pricing plan - per track. Jobs told them that Apple would be happy to simply make the margins from selling their iPod. And the rest is history – the iTunes store went on to sell movies, TV episodes and apps. The media companies had made the transition to selling content online, albeit slowly but surely. And Apple became one of the largest corporations in US history.

I don’t know how much effort went into the timing and planning of what I outlined in the events above - but it certainly helped us reach the era where we can legally buy and rent media online with very little friction. Both Apple and the media companies comfortably co-exist now. And the consumer won too. Thank you Mr Jobs.

Maybe Jeffrey Gundlach is right, perhaps Elon Musk’s Tesla might think about collaborating with the incumbent auto companies for a good outcome for all concerned. Then Elon Musk can turn his focus to another amazing project that others fear to take on - Hyperloop anyone?

image

How can old business models embrace disruptive technology?  See opportunity with cooperation and not as threats with isolationism.

Crowdsourcing and 21st Century Lobbying

Internet citizens are capable of more than simply generating likes and re-tweets.  Over the last few years we’ve seen entrepreneurial individuals and groups utilising the Internet to crowdsource financing for projects, with steadily increasing levels of success.  We’ve seen everything from funky e-ink smart watches like the Pebble to bold Matrix-like futuristic virtual reality devices like Palmer Luckey’s Oculus Rift.

Moreover, the interwebs have been a place for funding beyond simply cool widgets – it has been funding people too.  Startups like Pave.com and Upstart are aiming to allow net citizens to invest in talent.  Politicians like (President) Obama and Italian politician Beppe Grillo have leveraged social media and Internet-led crowdsourcing to successfully fund their political campaigns. 

How far can this notion of crowdfunded financing be taken? Can a variation of financing via the Internet enable crowdfunding to assist in making transformative and measurable changes in society?  Can crowdsourcing on the Internet lead to improving the life of the ordinary citizen, on a nationwide basis?  In what form would that take place?  In our current political set up, change can be brought through lobbying.  Arguably, wealthy individuals and corporations currently have control indirectly of lobbying power in many nations, including the United States.  An example in the USA is lobbying through SuperPACs.  Interestingly, a project called MayOne.us attempted a “citizens’ funded and crowdsourced SuperPAC” already.

Let’s look at a current issue - net neutrality. There is a lot of differing opinions on this issue at the moment. In the US, the telco and cable companies* are using all means to weaken net neutrality. Newer technology firms such as Netflix are fighting it but currently it seems that the infrastructure incumbents are winning. Theoretically speaking, this could be a negative for American citizens and may have wider implications than your next episode of House of Cards not streaming well.

Deciding the exact lobby reforms to improve the quality of life of citizens and society at large is not easy.  For example, in an era of technologically led unemployment, and no wage power to the workers, would something like basic income be a good idea?  Maybe.  But even if the electorate thinks it’s a good idea and feasible to implement (after passing through various economists and analysis), it may not be possible to bring it into action, simply due to how things are currently structured.  Perhaps a form of crowdsourced lobbying could be a stepping-stone to improve and evolve the way democracy works in the 21st Century.

image

Whilst writing this post a friend pointed out a study stating: “Multivariate analysis indicates that economic elites and organised groups representing business interests have substantial independent impacts on US government policy, while average citizens and mass-based interest groups have little or no independent influence.” (BBC link)

* Comcast is one of the biggest spenders in lobbing.

The pyramids we build

“Ponder for example that the leading technological companies of this age, I think for example of Apple and Google, find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard. Ponder the fact that WhatsApp has a greater market value than Sony with next to no capital investment required to achieve it. Ponder the fact that it used to require tens of millions of dollars to start a significant new venture. Significant new ventures today are seeded with hundreds of thousands of dollars in the information technology era. All of this means reduced demand for investment with consequences for the flow of - with consequences for equilibrium levels of interest rates.”  - Larry Summers (2014)

The above comment was made last week and everybody on the twitter-and-blog-sphere had their own opinion on Larry’s remarks.  I wanted to make some replies on twitter to add my take on the discussions but it proved somewhat tricky to convey the bigger picture in fragmented chunks of 140 characters.  So I think it’s time I returned to Microbytes.

A particular comment on twitter about Larry Summers’ speech got me thinking. It stated that WhatsApp’s skyrocketing M&A value was only made possible by big capex spend by the telcos. The thesis was that creating giant companies with little investment is a misnomer.  I don’t necessarily disagree with this view - indeed, WhatsApp (and other start-ups) do depend on telcos updating and expanding the existing Internet infrastructure.

So what I want to do in this post is to draw a picture for you to show why this is normal, and why it doesn’t discount the fact that you’ll be able to create giant (valued) start-ups with very little investment. Just like WhatsApp.

Imagine a pyramid.  The lower end (the base) is large, and will probably be costly to build out, in terms of investment cost and time.  After the base is ready, others can build higher up the structure - faster and cheaper.  Note, also, that the people who choose to focus on the lower end of the pyramid will most likely have to maintain the base (let’s ignore the Google fibre model for now), which remains costly.  Remember, we haven’t even mentioned the soil on which this structure is built.  Who put time and effort to create this?  I imagine this took a lot of time, a lot of trial and error. And a lot of risk.

Let’s translate this pyramid metaphor to the example of a modern corporation, like WhatsApp.  Start with the lower end, below the base - the soil and more or less the foundation. This is akin to the US government having funded an agency that today is commonly known as DARPA. During the Cold War, the American government wanted to establish different methods of maintaining communication with command and control, in case a nuclear strike were to knock out communication towers. So they spent a lot of intellectual capital, money and time developing protocols that would eventually morph into what we today call the Internet. It was only natural this kind of large-scale project was executed by a government body - which, unlike the investor-backed corporations existing within capitalism, required no immediate return.  They were in a position of making large bets with an indefinite time horizon of fruition.

At the base of this pyramid sits the telcos.  They enable the pipes where our trillions of bits and bytes flow - which translates into Netflix movies, iTunes songs, Flappy Bird-like games, Snapchat photos, WhatsApp messages, Facebook posts and Tweets.  The telcos buy spectrum, own/buy patents and build out physical hardware infrastructure. This isn’t cheap. Last year, AT&T alone stated they would invest 12 billion USD in expanding out new greenfields of infrastructure. AT&T’s market cap stands at 166 billion USD.  So this capex was about 7% of its market cap.  This is compared to 58.3 million USD in funding (including a Series C round of 50 million USD by Sequoia Capital) that was used up by WhatsApp before its exit - eventually valued with cash and stock at 19 billion USD.  That is 0.3% of funding relative to its exit valuation.

This example (albeit oversimplified) of 7% vs. 0.3% in capex vs. market value is the difference in being at the lower end of the pyramid versus being higher up in the structure.  Since the 1990s, the costs associated with starting up a modern corporation (with its software driven internet delivered model) have steadily fallen.  For example, look at how Instagram, Netflix (the streaming segment) and the countless newer start-ups are reliant on the emergence of cheap dynamic scalable server hosting like what AWS (Amazon Web Services) provides. Jeff Bezos’ Amazon itself spent a fair amount of capex and time developing the tools to reach mass scaled infrastructure the company could sell cheaply. During the dotcom era, if you wanted to start a modern web company, you had high start-up server and scaling costs.  Whereas today, a two-man team on a laptop can launch the next online-based disruption with minimal costs (at least, relative to the to the dotcom era), piggybacking on the infrastructure provided by services like AWS.

I have read a few comments arguing that the era of capex spend isn’t over.  No it isn’t.  It never will be.  It’s just that the most valuable companies by return on investment live in the present Internet space due to the pyramid we’ve built over the last 60 years. What we need is new capex to build new verticals.  New pyramids. But this requires not only a lot of capital but to accept high risk.

Very few people currently seem willing to take the suitable risks - instead issuing share buybacks.  One of the well-known examples of a pro-capex investor is Mr Elon Musk (PayPal, Tesla, SpaceX, Solarcity).  He took a huge personal financial risk to make a play in a historically tough area with a lot of economic (hence government subsidies etc.) and technological issues: electric cars.  Up until very recently, it wasn’t a sure thing he would win with Tesla. Now we see his bigger play - disrupting the energy pyramid - with Tesla’s newly announced lithium ion giga factories - to reduce the cost of batteries. Imagine how many future start-ups will be able to leverage off of this kind of capex.  This potentially turns Elon Musk’s company into the Amazon Web Services of battery technology.  So capex spend isn’t over - but we need more risk takers out there to emerge and create newer pyramids for future generations.Robotics has seen a lot of capex spend in the new millenium to build out this vertical.

In the early part of the 21st Century, the pyramid on which society has depended on and lived off is the Internet.  And this pyramid has been taking shape since the Cold War and the days of ARPAnet.  The pyramid we’ve built for our era is maturing. A mature pyramid means that newer corporations sit high upon this structure feeding over the protocols and physical pipes which came before them. Not requiring much capital to thrive, as Larry Summers indicated in his speech. This diminishing requirement for capital vs. value created (for shareholders) is partly one of the reasons why interest rates should remain lacklustre and low in the near future.

However, these physical pipes/protocols need refreshing every so often, which undoubtedly costs a lot. Back in the day when this pyramid wasn’t mature, the companies building the base created a lot of jobs for workers, generating a nice income for themselves and their employees.  AT&T currently has about 250,000 workers.  WhatsApp has around 50 employees.  Another example is Kodak vs Instagram.  Did someone whisper income inequality skew?  That’s a whole separate pyramid we’ve managed to build…

I will leave you with the words of President Obama from a speech at Roanoke, Va., heavily misunderstood when uttered in 2012:

“There are a lot of wealthy, successful Americans who agree with me—because they want to give something back. They know they didn’t—look, if you’ve been successful, you didn’t get there on your own… If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that. Somebody else made that happen”

image

We need more risk takers out there to emerge and create newer pyramids for future generations.  Robotics, nano-tech, energy, material sciences, space exploration and more.

Monarchy 2.0

It can be argued that the automation and systemisation (via silo-ification) of jobs has contributed to society naturally requiring less human capital to function. Note also the profits are not being redistributed to the workers: meaning real wages have been falling for the last 30 years - it doesn’t look good. Instead the corporate historical high earnings are going into share buy backs and dividends. Meaning, profits are going to capital owners (rentier class). This only helps to accelerate the rise of inequality within society. If you take this cycle to the Nth degree, it means at some point, the ordinary worker may not have sufficient wages to consume any products produced by the rentier class on a meaningful scale. Then the question arises, will this lead to revolution in the developed world? Surely it is not in the interests of the rentier class. This is a question a friend posed to me recently. He suggested that the rentier class will avert this as previous rentier-class type institutions have in the past. My friend suggested an example: look at how effective the UK monarchy has been at protecting the system so they can still exist. He continued to say why would we reach a point in which everybody but the rentiers have next to no wealth? And that people have claimed this would happen since the cotton mills in the industrial revolution (and it seems to wax and wane).

In the past, extreme inequality would indeed be overturned by riots and revolutions. However, presently in the West, you could question how much discomfort people are in.  Would they really be bothered to disrupt their WiFi-ification tethered existence to unlock themselves from their lives to revolt away from their iPhones, YouTube videos, Facebooking and Tweeting? (except when they did indeed riot with their blackberries and social media in the streets of London and Middle East). Historically, the owners of capital (old style rentier class) were often King and Queen like. Like monarchy. Buildings, land and the process to make products (like food) were owned by a few. So if they were smart enough, they could make a decision without consultation to allow their citizens to have a little more. They could then avert riots and continue the status quo. However, in the modern day, the capital power (rentier class) are more widely spread. This means any unilateral decision to avert catastrophe is made tougher. For example, why would Amazon increase wages of its non robotic (factory) workers? Its loyalty is to its shareholders. Bezos* could decide in his wisdom to follow the style of Henry Ford, that his employees should be paid more so they can afford to buy from Amazon. But then investors might punish said rentier class over another company which decides not to increase wages but instead payout in dividends? So what I’m saying is it is much tougher in the modern day to tactically deploy measures to combat the inequality conundrum. Why will Amazon co-ordinate with other corporations to raise wages in unison? If one corporation acts alone for the better good of humanity - they could risk losing investor confidence. Kind of like a prisoner’s dilemma scenario. Helping humanity is not what capitalism is about (post capitalism is. but that’s another post for another time, I think…).

What is the scenario that will pan out if the inequality conundrum continues to play out? You may end up in a situation which is the staple of science fiction dystopian futures. The rentier class will get to a point where they decide it is not worth selling things anymore. It doesn’t make sense. And they don’t need people to work to produce the items. They can continue the quality of life they expect. So you can imagine a bi-modal society on acid emerging. There will be a section of the population which lives in extreme poverty. They have no resources, they don’t have the automation or machines and they don’t have the money (tokens) to buy things they need. The rentier class might not even accept any form of money in exchange for resources. But the poor may have things like the internet to help sedate them into accepting their situation. Perhaps they will have food which costs very little or nothing (with the little bit of tokens they are given). The point being that they will not be allowed into the rentier section of the nation. The rentier section will be fewer people. They will have access to all the resource they need, which will help fuel the machines that run their part of civilisation. They will be the Kings & Queens of the 21st Century. A modern monarchy.

Being rentier means that you have an excellent quality of life but you also naturally want your heirs to continue to have an even better quality of existence. So perhaps the only way out of poverty is to be very smart (through your free internet) and be a scientist or entertainer for the new Kings & Queens 2.0. It’s just like the olden days where scientists and artists used to work directly for the monarchy type establishment. It’s funny that our Web 2.0 and all the automation that comes with it might evolve into something we had many years ago: Monarchy 2.0.

image

The UK monarchy like establishments used to be the olden style rentier class,  Will continued rising inequality fuelled by automation (replacement of workers) lead to Monarchy 2.0 lead by the new rentier class.

* To be fair it is unfair to pick Bezos’s Amazon as an example. Better would be Walmart and McDonalds. As Amazon has recently surpassed the 100k employees overtaking Microsoft. However the premise still holds for their warehouse workers.

Who wants to be a rentier class?

I was talking to a friend who questioned why capitalism should not continue as it is.  He said that people always want the next best thing (to attract a suitable mate).  However I reckon whilst this is not wrong in general something was bothering me about this seemingly intrinsic need for more and the perpetuating cycle it promotes.  For example (in the West) you are taught that if you work hard, work long hours, keep trying your very best and with a touch of luck - you too could live in that big mansion with your red shiny fast car and model girlfriend*.  It is also known on the other side of the pond as the American Dream.

In the West there are two strands of people in general.  The first have most of what they need according to Maslow to be comfortable.  Their basic needs are met and the surplus is utilised to achieve superficial status.  They continue to work as they did when they first started out because they don’t understand the diminishing marginal returns.  This part of society continues to work late every day and many weekends at the sacrifice of spending time with their friends and family.  If they could only keep doing 100+ hours a week they might be able reach the next level.  The next level?  Yes, the mansion, shiny car, the model girlfriend, the yacht, the island and the Learjet.  They might even be able to one day do nothing in return for the income and join the mighty rentier class.

The second group of society doesn’t have the basics to survive comfortably. Maslow is not met and they have no surplus.  They don’t necessarily all starve because of the welfare safety net established in the West post WWII.  However they need to keep working long hours for low wages to make sure they can achieve bare subsistence living.  Most of the profits of their toil winds its way to the rentier class.  The rentiers as it stands have not been sharing their profits back with the workers for the last 30 years or so.  Unless there is radical change in the mentality of the rentier class, this status quo will not change.

So basically we’ve broken down society into 3 streams (for simplicity).  We have the low wage workers struggling to make ends meat who need to keep working.  Then the comfortable middle class who wants to keep working for the dream of joining the rentier class one day.  And finally the rentier class itself.

In the mid 1990s when I was in school, the UK established the National Lottery.  You were sold the dream of becoming an overnight millionaire.  Only thing you had to do was spend 1 GBP.  The nation went lottery crazy.  Mothers, fathers, sons and daughters started ploughing money into this dream.  If they played every week, maybe just maybe, it could be them!  After a while the cold reality set in.  People had sat down and calculated the mathematical odds of actually hitting the jackpot.  I remember a lot of people being excited (media influenced, of course).  They poured perhaps 20, 30, 40 or even 100 GBP per week into hoping to win.  I started showing people the calculations and the odds.  I think it was something like 1 in 14 million.  I recommended to people to instead buy something they enjoyed with their money.  I certainly never put my pocket money into the National Lottery after understanding.  Instead I bought things that I valued and needed. Things like books, games to play or items to do artworks.

Keep in mind how the rentier class operates.  They are owners of the capital and infrastructure.  This enables them to mine the workers and extract profit from the workers and the middle class.  Look at the English Premier League.  Many years ago if you were in a lower division there was always hope and the dream that if you worked really hard, trained well and had a bit of luck - you might be one day able to make it to the top flight football league.  Fast forward to modern day football.  With the rentier class moving into football (eg. the wealthy owners) it has essentially made the old concept of working hard and moving your team up the leagues to join and compete with the top league near impossible.  The gulf between the rentier class clubs and the middle/working class clubs in terms of financial power is too big.  Without the capital and structure to back you up, no amount of good football will let you make it to the top and stay there.  The “American Dream” is over in the English Premier League

What is the relationship between the National Lottery, the English Premier League metaphor and the need for the middle class working more and more?  The middle class are working more than they need to because they have been sold the dream of winning through capitalism.  If they play, they might win.  It worked in the past so must always work.  They have heard and seen so many success stories. They have been told and convinced that if they keep working, every weekend, maybe just maybe, they might be a rentier class too one day with their shiny mansion, fast red car and model girlfriend.  But what they don’t realise is that the gulf between them and the rentier class is so big (like in the football example) that in the modern era the odds are against you.  So instead the middle class should not be doing work they don’t enjoy to earn more money they don’t really need, to buy the things they don’t really want to  join the circle they can’t join.

The path you are taught is that you study hard, then you go to university, you get an expensive qualification, and then you get a cubicle job that you don’t enjoy (ignore for a second your cubicle job is probably going to be automated at some point).  In the past this used to give you an edge.  However the edge is usually lost in anything once nearly everybody else follows the same path. This is what has happened to higher education.  This path once used to fast track you to the rentier class status but nowadays this path grows workers for the rentier class.

Where is the edge now? The edge is in entrepreneurship. Entrepreneurship (including invention and discovery) is more possible today than before due to easier access to capital (because return from other investments are so low). They also have cheaper tools like the internet to leverage free information, people and networks. They may fail but there is a safety net of the welfare state behind them. Intrinsically they take more risk and therefore have higher rewards. But these people may one day be really able to join the rentier class… if they keep trying, working and have a bit of luck.

The question is when will the workers/middle class gain clarity and understand the odds are stacked against them like in the lottery example and stop wasting their lives and playing the “who wants to be the rentier class?” game show. Oh wait, they are too busy to think and work out the odds because they are kept so at bay in playing the 9 to 5 and 100+ hour/week game…

image

The edge is with the entrepreneur and not with the 9 to 5 and 100+ hour per week worker.  Elon Musk the super successful entrepreneur (PayPal, Tesla and SpaceX) joins the rentier class.  It comes with model like girlfriend.

*Your highly unsuitable mate (who has nothing in common with you) the model girlfriend comes with your mansion and shiny fast car. No refunds given. (By the way this could be the other way round, and isn’t gender specific.)

Future shock – a tale of revenues, earnings and iThings

This blog is focused on the ‘fantastic future’.  And this future depends on shocks of investment.  In other words – capex spend.  Let us take this theme of investment (or lack of), join the dots and try to figure out the implications.

First let’s look at the recent past.  Corporations de-levered during the last great recession.  They then spent the next few years strengthening their balance sheets.  They hoarded the cash.  They cut costs left-right-and-center (eg. lay-off paid employees* who produce aggregate demand).  However, just over a year and a half ago, revenue estimates started being revised down (what! no aggregate demand? gasp! I wonder why? – see un-monetizable future).  

Shock horror - the stock markets started correcting.  When the following earnings season arrived – guess what? Revenues beat.  Hooray!  Earnings were also increasing!  Hip hip hooray!  This efficiency in earnings is from various factors including the cost savings during the crisis in terms of lowering workforce numbers, pay cuts and more streamlining from the ‘automation’ type productivity gains we have talked about on this blog.  

Corporations had latched on to this revenue gig and continued to guide lower.  At the same time, revenues were beating from the previous lowered quarter estimates. Markets gave weight to the revenue beats and she continued to climb higher.  The seasons of earnings was a happy time.

Cue 2013 – surprise-surprise the lack of aggregate demand started kicking in harder and harder and now revenues started missing – a very big shriek!  However, earnings still seem to be going higher and beating consensus.  At least investors had the earnings, right? After all that is what they invest for, right? Can we say, ‘blip hip’ hooray?!

Now remember that during this time they hoarded the cash?  This meant no significant investment for future growth.  With the corporations squeezing out breathtaking earnings (and cash) surely they could invest. Nope.  Instead the next and latest trend started forming.  Instead of investing the cash into future growth, CEOs and CFOs decided in their greater wisdom to do more share buybacks and dividends.  This is good for shareholders, right?  Of course!  Due to some weird US repatriation tax situation, a number of American companies started issuing bonds, not to invest, but to pay dividends.  The markets shot to heady heights.

With little capex and other investment taking place over the course of the last few years (actually since dotcom bust, indicated by the cash levels and capex data), I suggest that corporations may have started to ring the productivity out of the system to the max.  Instead of investing, corporations as we have spotted are returning that cash to investors by the bucket load.  This begs the question, why?  I suggest the reason is productivity and automation.  All the automation and productivity positives they were able to gain by reasonable investment has been had (at this point of time).  Meaning for the next big leg up in capitalistic earnings efficiency and productivity, requires far more capital investment and time horizons beyond the taste of public corporations (by their very quarter-to-quarter driven nature).  Everything that can be cost cut has been culled (employees and streamlining production and supply chains).  Everything that can be automated with reasonable investment has been done.  They can’t see anyway of using reasonable capital to invest in order to gain further efficiencies (hence returning cash over investment).  The marginal benefit of investment is not there.  In other words, investment return is not looking very Goldilocks to America Corp. 

So the question is now what happens when in the coming quarters if corporations start lowering guidance for earnings?  Anyone notice a pattern here?  What if the revenue pattern is repeated for earnings?  If this pans out, it won’t be a pretty sight.  Revenues and earnings missing? Nightmare on Wall Street.

However I’m an optimist and see a way back to the capitalist trends of more ‘efficiency gains’ (see 100% unemployment post).  But will it happen soon enough is the question.  Let me explain by linking this post to the previous “Why robotics now”.  I believe that the next wave of corporate efficiencies will not be from the current crop of corporate investments (because there isn’t much) but from investments that governments have been doing in the name of the automated war (post 9/11) and disaster recovery (eg. Fukushima like events) since 2001.  In addition to this, a lot of ‘energy’ and ‘space’ technologies have been indirectly funded by the US government that might see the light of day.  In other words, the drone and humanoid technology capex spent by global governments will be (and probably have already begun) seeping into the start-up scene.  After a certain incubation duration this new technology will allow machines to do tasks that have been only been in the realm of human hands (literally).  For example the next generation of robotics/automation will be able to do a variety of tasks like turning different and unpredictable type of levers, sorting physical objects, driving tractors, crawling over rubble in a disaster zone and preparation of fine cuisine.  No public corporate has the patience to invest in kind of R&D innovation, with an indeterminate payoff timescale (if at all) - even if they have 100+ billion dollars of cash in the bank.  Instead they churn out the next incremental iThing which make immediate earnings (till they don’t).  A future shock is what we need.  The good kind.

 

*A quick primer and context.  The wallet of the consumer is made of two types of money.  The first is cash they earn from their jobs.  The second is the credit they borrow (a trend started during the Reagan/Thatcher era).  After WWI and WWII, the power shifted to labour due to unions and so empowered wage growth.  The power for consumption.  Happy days for the producers, who couldn’t make things fast enough.  However with the era of privatisation starting 30 years ago, the unions were made less important and power shifted to capital.  This forced US real wages on a downward trend post the 70s.  So if the cash part of your wallet is shrinking in real terms, the only way GDP (70% is consumption) goes up is by creating credit.  Hence the consumer easing of credit over the last few decades.  This sustained the purchasing power of ordinary Joe Bloggs.  However since the most recent crisis, not only is real wage still on the downwards trend - jobs being cut and if new jobs are created they…  wait let me give you a quote:

 “In fact, the combined profits of all the major retailers, restaurant chains, and supermarkets in the Fortune 500 are smaller than the profits of Apple alone. Yet Apple employs just seventy-six thousand people, while the retailers, supermarkets, and restaurant chains employ 5.6 million.”

…but not only has debt creation stopped, in-fact it has has actually started reversing (de-leveraging). Lucky for us that the consumer is kept happy through their latest iThing huh.

imageHope we get get the right kind of future shock.  A classic of the same name by Alvin Toffler.

Why robotics now? 9/11, Fukushima and demographic issue

[I wrote this over a month ago but didn’t get round to posting. Since then I’ve seen some of these threads hit mainstream.  So I hope I’m not repeating things you’ve already read]

Why are suddenly robots in vogue at the moment?  When we look back in history what might we say contributed as a trigger point in the momentum behind the innovation and growing expertise in this space.  I believe you can identify two events.  The first is 9/11.  The events of 9/11 set the USA into their first major war of the 21st century.  Like WW1 and WW2 were the first major mechanized wars of the 20th century, with tanks and planes - this 21st century war has pushed forth the investment of capital and intellect into robotics.  US corporations had been given the large chunks of the defence budgets (robotics capex is probably not cheap!), specifically for teleoperated and autonomous robots. Now that this war is being dialled down (including budget sequestration cuts), veterans are returning to civilian life back on US soil.  In turn, they are bringing their expertise to commercial ventures and so forth.  Hence we are reading about projects left, right and centre on drones and other UAVs.

The second event is more recent (relatively speaking) - it is the Japanese Fukushima nuclear disaster in 2011 (a decade post 9/11).  Namely, for disaster and rescue robotics - in the form of accelerated R&D for humanoid robotics.  The tragic events in Japan has forced many countries (including Japan, USA via DARPA and South Korea) to look at developing robotics to aid in the aftermath of disasters.  Disaster recovery poses tricky and interesting problems for robotics to engineer.  By the very nature of disaster zones, they are dangerous for humans to operate in.  So it makes sense to use robots.  Why humanoid robotics?  For example, in the Japanese nuclear power plant, arms are required to pull levels and turn valves.  Why legs? It is useful to walk over the uneven terrain like humans do and so forth (they already deployed wheel based robots but utility is limited).  So after disasters, governments and corporations can deploy humanoid and drone like robots to clear dangerous zones readying the environment for their human counterparts.

What this means is that tasks that were in the last century only possible for humans to do, opening doors, walking on rough terrain, remove obstacles, break walls with tools, climb ladders. turn valves and make repairs (DARPA challenge objectives) are now in the realms of being done by a single body machine.  Given sufficient time it is only the nature of progress that these technologies will become cheap and widespread.  Eventually leading for society to utilising these sophisticated robots to replace people doing these tasks once only the domain of humans beings.  Politicians in the developed nations know there is an impending demographic issue at foot.  Meaning an older skew in population.  They will need assistance.  Robotics.

imageDARPA’s Atlas humanoid robot.  Post 9/11 and Fukushima robotics will help with ageing demographics of developed world.

The un-monetizable future. What happens?

It is increasingly looking like that the future could be un-monetizable - due to various factors including automation and less aggregate demand because of too few new jobs. What happens in this situation to a society that has been built on the system of money as a medium of exchange and accumulation of wealth, which in turn has driven progress for humanity thus far?  I’ll take a shot at speculating using all the ideas and thoughts from previous blog posts here and other thoughts I have not written down yet.

One argument is that the digital and automation driven society is driving the prices of everyday living to an affordable level, more so than previous generations.  So that money doesn’t matter because people will need less of it.  However, even if it costs little to live, you still need the ‘little money’ from somewhere.  If jobs are not being created in large numbers and existing ones being taken over by requiring less people (via automation) then where will the masses get any of their tokens (eg. money) to buy good/services from?  One possible way is to create new jobs which are not classed as jobs today and give money for it.  For example, most of us now sit at a desk looking at computer screens.  Our brains are working but our physical body is at rest.  Was sitting down not considered a leisure activity by our ancestors and for the privileged like kings, princes, princesses and wealthy rulers?  Or look at footballers. Playing football is essentially a leisure activity of the past.  Now society decides to pay them for their activity and it is now a full time job (agreed it’s not for the masses but sitting down is a lot easier for masses to do than play football well).  Or the other solution is to give stipends away (if your morals allow it).

Some people look towards humanity’s past and say it will repeat.  New jobs will always be created.  They say that when you create products in robotic factories (with a fraction of the people you needed historically) you still create jobs downstream.  For example, servicing and transportation of the goods.  But this is also inevitably going to fall away.  Experimental transportation technologies like Google car for example.  How about servicing of the physical world and physical goods?  There are a large number of start-ups engaged in solving this problem.  And if the physical product has a digital component (the most likely answer is yes due to the internet of things and such), like the Tesla car, all updates are done via the net.  I’m not saying there will be no jobs left, that’s not true.  There will be a few jobs but all highly skilled and this sadly won’t quench the income thirst for the masses and give them something to spend.  They will end up poor.

What do I mean by poor?  In the West it means the rentier class could simply switch off their machines which produce today’s standard of living.  For example, if things are automated and nobody can buy their goods/services, why should they make the items?  They will come to a conclusion to just use the machines to make items for themselves.  Look at how banks stop lending when they realised they are making losses.  They stop lending “money” to ordinary citizens.  Money which actually costs nothing to produce.  Due to the fractional reserve system, it is literally made from thin air.  So this is where the governments might step in and ask to “bail” out the rentier class and the owners of  factories/warehouses/server farms.  They will either be given money to remunerate them in the classical sense, or simply they might decide to give the companies energy for the machines.  Governments will do this so society doesn’t crumble.  Or instead, depending on those in power and the public reactions of the era, the establishment might take over the corporations - for national security, of course.  So most people, after this happens, will have a good standard of living, and a few who can innovate will be rewarded by extra access of resources, to do whatever they want (within the rules of the time).  Nanny state you cry?  A refined version of communism?  I hate labelling things as it’s too political.  I would call it a return to community, where everybody is supported by automation.

Looking at the current era and a little towards the past, most people are doing pointless work which they don’t like doing anyway.  Which is why people look towards Friday.  They have to toil for their money during the week.  Very wealthy people live in an automated world anyway, where the normal people like me and you are the human robots to keep the world spinning so they can live everyday like it’s Friday.  So back to the point of many jobs being pointless (but not all though!).  Most of these jobs, there is no extra value created. Its only value is to produce money, which in itself is a goal without meaning.

I suggest the accumulation of wealth is pretty much an idea that could run of out steam.  You accumulate things because historically stuff could not be stored.  However for a long time now, we know that things can be stored for future use, like food.  We are entering an era where you don’t need to store pre-made items.  You are starting to see trends of production - on demand.  A friend argued (rightly) that most sensible rich people, money is a status thing.  I totally agree.  I think status is what the structure of society allowed.  A possible future might be one where it is pointless to be wealthy.  Like owning a million CDs is pointless now, when all you need is there at a click of a button.  What is the point of a 3 star Michelin restaurant when it costs the price of a happy meal to produce?  When it’s suddenly accessible to all.

So even if you had large wealth it gives you only marginally more than public Joe.  I have seen projects to build custom made cars on the cheap, using the community and open source.  This activity would have cost a whole lot before. Even a rich activity of owning special cars will grow old.  What else does the rich have?  Property to live in perhaps?  The way things might develop in terms 3d building infrastructure, you could potentially have any kind of castle or mansion replicated by machines.  Holidays?  Think virtual reality could partly help with that.  It could become totally safe to do dangerous sports or holiday activities virtually.  Or even “plug” into the rich who do travel on their exotic trips. Imagine if you will, a brain linked version of instagram/facebook/twitter of living life itself? Who knows? Anything is possible. Potentially Google Glass is a version 1 of this kind of experience trend.

Essentially the point I’m trying to make is that these days there isn’t much extra you can do with your wealth than the average person can’t do.  This difference will shrink further.  And with that the status of being wealthy will fall away.  And a new kind of status will be there, like today it’s followers or readers you have on blogs.

The last 150 odd years of automation is nothing compared to what we will see over the coming decades.  This post and collected thoughts are not mere idle speculations but is what is happening to the world right now and no one needs to do anything other than continue what they are doing for this different un-monetizable world to materialise.  When it does, it’ll seem obvious and natural.  The only issue with this future from happening sooner (than later) in the West is social unrest and wars which you might naturally get from the disruption of this scale.  Let’s hope for the best.

image

Tesla supercharger. Free to top up your electric car.  Powered by solar. A trend of things to come.

image

Amazon warehouse run mostly by kiva robots.  Amazon makes a lot of revenues but hardly any profits.  It doesn’t care.  A trend of things to come.

imageEncyclopedia britannica used to cost a whole lot of money in the 1990s. Now Wikipedia and a whole lot more is free online.  This was a trend that has accelerated…  Free data is normal now.  Other things will follow.