The Age of Convergence

I am Dan Ramsden. I have been in finance, markets, media and tech for over twenty years. And I have some other interests. The title of this blog is the title of the book I wrote.

Sep 20

The modern hyper-specialty: everything

"One must be absolutely modern." (1)

But it was easier to always be modern in the days of the quoted poet, when modernity turned over no more than once a generation, if that. One had time to settle in and solidify a stance, to become expert in the novelty. When conditions perpetually change, however, the most up-to-date trendsetter is at risk of turning passé, at almost any moment.

It’s hard work to stay modern in these circumstances. It isn’t something you do once and then forget about, like getting a new degree or moving downtown. It is something to refresh, it is continuous labor and an ongoing education. One must not only understand one’s present time, but one must gather particles of the future. It’s really like investing, and doubly difficult because it isn’t just some asset whose prospects one needs to estimate, but that very same asset in an ever changing context.

And some things that may be still considered modern in the business world may not be so for much longer. For instance, specialization: It is probably unfair to say that specialization may be(come) outmoded, but certainly it has turned into a more complex subject than it was even a few years ago, is more nuanced now to say the least, and in important ways requires a revisit. Its narrow footprint may not (yet) be outright obsolete, but it has its limiting aspects:

Retail is becoming finance is becoming media, which in turn begets data used in retail to complete the commercial loop. Manufacturing is becoming robotics that can be printed and connected through wireless networks. Healthcare ties in wearable devices that are part of a growing mesh of nodes that feed into artificial intelligence systems and other analytics, which feed into commerce. The arts – music, images, and combinations in television and film – are both drivers as well as mirrors of these new economic ways, which are distributed through perpetually evolving access points.

To be modern, truly modern, at least for a little while to come, one must specialize in all these things, because these are increasingly convergent and unified. The specialization of greatest value is not in technology or commerce or finance, but in the blend; not in the art or the science, but in the overlap.

To be absolutely modern, in other words, one must avoid rigid definition and confining formula. To be most effective as a modern-era specialist, one must be as generalist as possible.

(1) Opening quote from Arthur Rimbaud: a poet turned entrepreneur in pursuit of far flung ventures, who met his end in the desert of Abyssinia; providing further proof, if this was necessary, that context, timing, conditions, communication, interaction, traffic, learning, are all as important to entrepreneurial success as are individual traits such as inspiration and energy. Rimbaud’s poetry was a product of Paris, as much as it was of Rimbaud.

Related reading…

image

… a collection of essays about a new technology environment and its new fundamentals.

For paperback or eBook edition, click here.


Jun 28

Innovation & disruption in context

The Innovator’s Dilemma has recently turned from an economic and somewhat scientific thesis into what is essentially a cultural debate between philosophies and factions. It seems a missed opportunity that the discourse has gone the route of editorial finger pointing because the topic is material enough, now more than ever in an increasingly tech-centric economy. The consequences of innovation and disruption – terms that are central to the argument – are quite pragmatically real, and on countless levels so. The subject, like economics more broadly, warrants renewed and extensive attention in the context of a new information era, which is a profoundly different era from that in which The Innovator’s Dilemma was born.

This will be a major undertaking in a complex field. A small but important sub-task would be to start with the basic elements or an approximation of what these may comprise. The basic elements seem unfortunately to have gotten crowded out of a debate that – in reflection of the subject’s vernacular – has adopted a loose and wrongly interchangeable hodgepodge of terms that signify very different things: (a) innovation and (b) disruption. To clean up the mess, below are three principal distinctions that are worthy of consideration and some initial notes on the possible significances of each one.

The particles

Innovation, rooted in novelty, is to bring forth something new, which is to contribute, or to add. Disruption, rooted in rupture, is a breakage. Taken in isolation, the first is a positive movement driven by curiosity and advancement, while the second is a belligerence of sorts. Taken in isolation, innovation is an accretive act in at least one way of measurement, while disruption is detrimental to its target without a defined benefit to its perpetrator.

But to consider these abstractions in isolation is a flawed approach. That is an error we more and more commonly observe in the public discourse, and also, at times, in the prevailing entrepreneurial mood: to hold up the prospect of disruption as an isolated ideal, and to accept it as both a means and an end. Economically speaking this makes no sense. Not in isolation.

The formations

This leads to the second distinction between the terms – that of context, sequence, and causality – because isolation, as noted, won’t do. Innovation can bring about disruption (per Christensen) although not always. When taken in holistically, innovation and disruption together, the latter becomes a byproduct and one among several possible results – which result often depends on the source of the innovation. Not all sources are disruptively inclined, nor are all innovations.

We have come to take it for granted (in part due to the Innovator’s Dilemma), that innovation happens with the upstarts. If this was at one time true, it seems no longer necessarily the case. Whether the iPod, which begat the iPhone, which begat the iPad, and which all more or less set the stage for mobile computing as we now know it, were born in a large enterprise or what was essentially a startup (or restart) is up for debate, but it is also the point. The difference between startup and mature enterprise is now murky, as is the difference between innovation and reinvention, at times. By the same token, disruption is also harder to pin down, (did Napster disrupt the music segment or, in the end, was it the other way around? As long as innovation happens does it matter?)

What’s more, innovation itself no longer needs to be technical at its core. It has on the contrary proven itself in many instances to be based on process, which too can lead to greater efficiencies and different forms of productivity. And sometimes innovation involves the integration of disparate assets or categories: examples in mobile commerce, wearable devices, or the connected home. And in some such instances there isn’t a disruption in the classic sense but rather a new frontier that is opened (at the very least this idea can be argued), while many such cases are now driven by the strategic combination of incumbents.

The motion

This dovetails into the third and maybe most important distinction between the two related terms of our subject: the relativity of one versus the absolute of the other. Innovation is relative – new in relation to something – whereas disruption (a breakage) is absolute, even if it can be measured.

That innovation is relative to an old and established order, however, is no longer necessarily the case. This would be true (and was) when the market expectation was for the establishment to continue, but in an environment in which novelty is expected the level of innovation can also be measured in relation to that. One could argue, perhaps, that any innovation that meets expectation is not disruptive, while innovation that exceeds it, is.

This takes us into issues of velocity and acceleration (themes that are never far from relativity in its proper physics sense). A steady velocity, even if very fast (as is presently the case), creates and expectation that it will continue, which circularly feeds on itself and forces both the incumbent and startup to (try to) keep up. Once in a while, however, one or the other picks it up – often the startup – which acceleration catches the market by surprise. This is disruptive and constitutes a breakage, which is absolute if only for the moment. 

Why this matters

As it relates to strategy, which drives execution, which impacts valuation, and might cause capital to flow, this outline and its variants is much more than academic. In an environment in which software is eating the world, in which information technology and its derivatives underpins all industry, and in which economics is continuously scrutinized for clues and recipes for improvement in a changing landscape, it is of pragmatic importance to carefully consider the basics. Some of these have changed, even if many have not. The mixture makes the analysis especially complicated, and the complexity makes the analysis especially necessary.

In his tome on economic growth (g) and return on capital (r), Thomas Piketty proposes a fix to his described inequality, r>g (the fundamental cause of other inequalities, according to the author), by, in a sense, attacking the r factor. In a sense, this is an approach of disruption and is characterized by aspects attributable to other forms of disruption described. Innovation, alternatively, would be to seek out ways to accelerate g. One might argue, a positive emphasis on innovation is more likely to lead to fundamental and lasting benefits all around, whereas an emphasis on disruption is more likely to be narrow and short-lived. This is another way to look at it.

Related reading…


Jun 15

On divergences & convergence

Although attention has been singularly focused on Piketty’s research of wealth inequality, the author comments on two parallel mechanisms “pushing alternatively towards convergence and divergence.” If divergence is the growing economic divide that is at the core of his investigation, convergence is, according to the author, the reduction and compression of the gap and contrast between groups. According to Piketty convergence is a mechanism of which “the main forces are the diffusion of knowledge and skill… [and] is the key to overall productivity growth as well as the reduction of inequality within and between…” This is no small matter, and might be in some ways more significant a commentary than the notion of haves and have-nots that has dominated ensuing discourse.

Its noteworthiness can be reduced to two principal qualities: (1) Whereas wealth inequality has been a phenomenon at least as ancient as history itself, convergence caused by knowledge diffusion is a special byproduct of the modern era and its information tools and resources. (2) Whereas Piketty’s study of divergence is necessarily predicated on data - which is in turn predicated on historical interpretation and the myriad imperfections that ensue - the convergences alluded to can be directly observed, all around and in real-time as it were.

The empirical clarity and currency of the phenomenon replaces an argument about data accuracy and economic theory with a series of pragmatic questions. What does it mean and how does one prepare? How does one ply one’s trade? How does one measure value and try to create or protect it? How and when does one invest or divest, and why? These and related questions deal with matters of which we can individually take charge. Or try to.

And on an economic level, in keeping with the author’s comparison of r and g - where r is return on capital and g economic growth - such practical considerations and empirical investigations might let us optimize for both… in the context of redefined parameters determined by a new value unit and system: the bit and its flows.

Related reading…

image

… a collection of essays about a new technology environment and its new fundamentals.

For paperback or eBook edition, click here.


Jun 13

Notes on velocity when it is expected

Announcing the opening of Tesla’s patents to the world, CEO Musk made this comment: “What we are doing is a modest thing. You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters.”

The following post from the recent archives bears revisiting: 

The dilemma revisited

The Innovator’s Dilemma is based on the idea that certain businesses fail precisely for acting properly. In these instances a market-leading firm, (or an established system, or a widely used technology), is disrupted by a new order not because the former had become too comfortable in the status quo but because the status quo was too comfortable in it. In other words, a quality product is being delivered in the best possible way to a satisfied market that expects the product it knows. The incumbent, thus, is doing its job. 

All the while, innovation festers in the niches under the wide terrain, and these percolating upstarts rise to the surface to overturn market leadership by becoming widely accepted and dominant. The incumbent, who was beholden to a market, fails when the market changes its demands and allegiances. Then the cycle repeats for the new entrant; and the dilemma, thus, is about breaking the cycle while operating a successful established enterprise.

The described theory is built on several key suppositions. It presupposes a customer base that doesn’t know it wants something until it is shown the way. (“If I had asked people what they wanted, they would have said faster horses,” according to a well known innovator.) And it presupposes a contrast between novelty and repetition, between invention and the accepted state. On one hand, therefore, we are dealing with a market conditioned on establishment, and, on the other hand, a clear distinction, a gaping difference, between new and old orders. 

I wonder, though, to what extent these qualities still hold. In the past decade or more the rhythm of product introductions, new technologies, and related market growth, has been so fast that in many segments innovation is now the expectation. The establishment, in other words, is no longer surprised by invention but awaits it and takes it for granted. By the same token, novelty is less limited to niche targeting and adoption, or at least this isn’t necessarily the case anymore, while some niches become mass market sensations in record time. One might even say that the marginal difference between new and old is on the whole no longer gaping.

Maybe it would be going too far to claim that the innovator’s dilemma has been resolved – even as large corporations are dedicating capital and resources to the development of startups – but on a relative scale and at least in select industry segments, the issue is less pronounced. Or rather, the subject bears revisiting in a new context, which would be an exercise more than merely academic. Inherent in the theory are the definition of innovation, the requirements of markets, the expectation on modern enterprise and costs associated with satisfying these, the evolution of technology, and ultimately, the opportunities for investors.

One could make a case, I think, that we are entering a phase of economic development in which the invention of new technology is as much the domain of large enterprise as it is of new ventures. And one may also argue that strategic integration of new platforms into old, and incumbent systems with one another, are new forms of innovation in which the establishment (as much as the startup community and its backers) can be seen as new disrupters.


Jun 2

Notes on new market fundamentals

A shortfall of economic theory and its branches in finance is this: To prescribe a scientifically actionable course in a perpetually changing environment isn’t wholly scientific, particularly in a time of accelerating change. There has recently been increased attention to economics and its shortfalls, and a growing number of voices are calling for renewed scrutiny of accepted norms. Below is an attempt to hone in on new fundamentals taking shape in a new information economy.

The value unit & its nature

At the core there is the value unit, which is not the bit but what its batches stand for. We may call this information, but it includes a great deal besides. In the sense of media there is content. In finance and commerce there is data. There is knowledge more broadly, related to knowledge work, in science, education, law, and so on; in all services. Increasingly information (via bits) is integrated with production of goods. The list goes on, and its categories tend to overlap. So for simplicity we may generally call the items information, and regard this core as the value unit.

This is a depleting asset when left alone, because it has life only as information is relevant. Data, news, behavior changes, are information that might only be momentary. Some information has much longer shelf-life, especially if we include arts and entertainment. But it’s always a matter of degree, even in the sciences. Supply and demand factor in and complicate calculations, but when dealing with information we’re dealing with perpetual supply, almost by definition, and some knowledge is more quickly set aside than another. For purposes of this discussion, we should limit ourselves to information shared in bits (in the age of mechanical reproduction): A depleting asset.

The systems & their value creation

This value unit is processed through systems. These serve to renew, replenish, refresh the life and thus the value of information, more or less effectively as different information lends itself to such processing more or less readily. Information systems in the technical sense of bits and their flows have tended to be deflationary in nature. Moore’s Law, open-source, web distribution, shared storage, and other such efficiency features of digital technology contribute to a lowering of barriers and business costs, and to a set of consumer expectations predicated on “free” or, at the very least, lower prices over time.

In this environment of a depleting value unit processed through deflationary systems, platforms exist to create enterprise value. They do so in a variety of ways that includes technology upkeep and improvement, feature integration, economies of scale, security, network effect, brand presence, and other such staples of various digital segments – which are increasingly converging with counterparts in finance, commerce, education, healthcare, hardware, and others. The link, again, is information and its qualities and flows. It is the common language, in a sense, and enterprise value created through it very much depends on its fluency and economics.

Ingredients of enterprise economics

Enterprise value consists of two basic ingredients: a core business asset and its optionality. The former is the foundation, the actuality, and the latter is its future possibility, much of which unknown. More than the success with which a platform currently operates, its value is determined by its ability to do so with equal or greater success ahead. For an enterprise to grow into and justify its option value, in the context of the information environment described, it must continuously fine-tune and reload its systems. In the financial sense, this raises questions about longevity, perpetuity, and the ongoing stream of willing buyers for its product (even as it may be reinvented), and for itself.

The balance between the asset and the optionality varies with different types of platforms and different stages in the enterprise cycle. At one extreme, the pure startup, the value proposition is option based. At the other extreme, say, the mature utility, option value will be very low. In between these two ends is where most financial activity takes place, and where most business platforms currently reside: a blend of actuality and possibility, each depending on the other for sustenance.

Consequences in finance

Funding types and terms should in theory reflect the age-old concept of match-funding, even if the nature of the enterprise has evolved. Simply stated, the asset and all that it represents ought ideally to be financed by a liability of similar duration and return profile. In this context, funding structures are determined by the blend of optionality on the upside and asset coverage on the downside. The expected life of an asset varies with the nature of its technology at one end of the spectrum and network effect at the other. In an information-based environment – characterized by economic drivers as described – market characteristics and business valuation take on special features that reflect it.

Or so they should…

In summary

The nuances of venture capital, later-stage lower-risk equity, debt funding in its many manifestations, the differences between liquid and illiquid positions, strategic versus purely financial investment, and the timing of investment entries and exits, all should be understood in the depicted framework of bits, value units, systems, and business, even as financial asset classes themselves converge and take on characteristics of the underlying sectors they target and support.

The question of investment bubbles, in this light, is overly simplistic and misplaced. By the same token, the subjects of employment, inflation, productivity, and growth, should all be reconsidered from a new perspective that reflects new capital realities.

Further reading…

image

… a collection of essays about a new information economy and its new fundamentals.

For paperback or eBook edition, click here.


May 10

The statement & its significance

Skipping past the right or wrong, we focus on the signal, in order to not miss the statement that was made. 

In Apple’s acquisition of Beats, this is the preface:

  1. With more than $150 billion in cash and $15 billion in quarterly additions to the bank, Apple has not made use of the stockpile to any meaningful extent.
  2. Apple’s core product is consumer hardware, and this has become a less differentiated and more price competitive situation to be in.

In short, Apple is competing in a commoditized field, selling a commoditizing product that will necessarily be cheaper with time. And yet, due to its formidable market position Apple is (still) producing steady massive cash from proven reserves.

In Apple’s acquisition of Beats - a premium headphone brand that is also a streaming music service owned and promoted by a team of notable music and Hollywood names - this would be the buyer’s executive summary:

  1. Use a seemingly large ($3+ billion) but realistically tiny portion of cash on hand…
  2. … to acquire a hardware accessory that is complementary to Apple’s own core product…
  3. … at a reasonable multiple of revenues (reportedly $1+ billion per year)…
  4. … extending the life of the combined product portfolio in so far as premium profile may or may not go…
  5. … and in the process bring into the fold a streaming music option that may or may not be exercised…
  6. … while signing up a roster of entertainment industry stars with popular clout and insider connections.
  7. Items #1-3 are financial and sound, items #4-5 are options and can’t hurt, item #6 is true.

Agree or disagree, as is our shared prerogative, there is a statement in Apple’s past and current actions of which we should all take note:

  1. Conservation of cash (and its careful and conservative use, when used) is indicative of a deflationary mindset. In deflation, the value of cash increases as its opportunity cost shrinks. Apple is saying to us that it is operating in a deflationary environment.
  2. When the distribution of content becomes commoditized - as commoditized hardware sends and receives bits through commoditized pipes and airwaves - the premium product and differentiator can only be the content itself… to the extent this is indeed proprietary and differentiated and unique. Apple is saying that it will pay up for Hollywood.
  3. In a volatile technology environment in which consumer preferences are always changing and not even the social network is immune, the market leader in digital download commerce may or may not derive value from that position for long. A streaming substitute or augmentation for iTunes purchases is not necessarily prescribed, but the option is valuable. Apple is saying that optionality matters.

As we enter a new information economy driven by new economics and capital flows, it behooves us to listen when the world’s most valuable company speaks. We can then opine, debate, agree or disagree with renewed confidence.


May 7

The book and its discourse

Many thoughtful and interesting essays about the new economy have emerged in the wake of Thomas Piketty’s tome. I submit, however, as I have in the past, that an assessment about a new economy on the basis of old economics is a flawed exercise. Here the discourse and its trigger fail to satisfy.

While we may well enough observe symptoms that can be represented by conventional economic definition and formula, the analysis will be misguided to the extent that root causes - the single or combined elements that lead to observable symptoms - exist in a new context that must necessarily be studied as a new thing.

By extension, any prescription to remedy new economic ills on the basis of old economic science - which is in any case more truly an art, as everyone knows - will be a prescription that might only work by accident. That is an improbable scenario.

This isn’t to suggest that a new economics will necessarily offer up true solutions, because economics never necessarily does anything, but perhaps the probability will rise in our favor. And the attempt would be worth the trouble, as difficult as it often is to burst out of established norms.

To begin with, for instance, we may revisit the nature of information, which is the value unit and currency in an information-based economy. Its characteristics are different from, say, agricultural products or precious metals. And its production is likewise different from the production of, say, cars (for the time being). By the same token, the operation of information processing and transference is a different operation from the operation of physical transport. These and other characteristics all influence economic inputs and outputs in an assortment of ways that are materially different from what was the case several decades ago even, let alone longer… But it isn’t clear that our analytic tools and filters have adapted to the change.

There is some work to be done, and maybe Piketty’s book will, among other things, prod the debate forward in a way to make this happen. The discourse perpetuated by the book will be most constructive when it is also accompanied by a recognition of such work’s necessity.

Related reading…


image

… a collection of essays about a new technology environment and its new fundamentals.

For paperback or eBook edition, click here.


Mar 27

The acquisition spree in context

As the information network branches into transportation and wearables and health and entertainment and home devices and fiber to the home, the social network seeks to become an information network, too.

But there isn’t any blueprint, only possibilities, as many predecessors have failed to recognize. And even with the recognition, there is the gamble, which is to say, the business value. There is the asset, the core that must be guarded, and the option, or the upside. The two interconnect and one doesn’t exist without the other.

The balance of the two, the relative importance, varies with the circumstance, the market, and the era. Volatility feeds option value and erodes the asset. A deflationary economics does the same. It isn’t a matter of taste, but of survival.

… All of these big tech companies are looking for the next thing to make sure they don’t miss it. And they will pay… for a call option on the next thing. It isn’t clear if the next thing is virtual reality, the internet of things, drones, machine learning, or something else. Larry doesn’t know. Zuck doesn’t know. I don’t know. But the race is on to figure it out. Trillions of dollars of collective market capitalizations are on the line. So a couple billion here or there is chump change…

- @fredwilson, The Search For The Next Platform

And anyway, the opportunity cost of expired options at the expense of building robust assets isn’t high.

Fred’s comments made me wonder: so are smartest minds of our time as clueless about the future as the rest of us? [Or] is it that both Google and Facebook realize that there is only so much they can do with web-based advertising and ensuing revenue stream? If you ask me, that is the real story here…

- @om, Billion Dollar Dart Throwing

The currency of choice also bears noting, because this points to a risk-appetite and financial strategy of its own. When equity is cheap and cash is dear - as doubly happens in a strange bull market characterized by deflationary business fundamentals - strategic option portfolios come to resemble venture capital formation.

His stock currency has given him plenty to play with. It’s the way the Valley has come to think about startup valuations. Consumer Internet success is binary. It’s a home run or a disappointment. As long as there is a liquidation preference to protect you on the way down…

- @sarahcuda, Even Facebook’s biggest fans should be thrilled its stock traded down today

For additional background on converging segments and financial asset classes, on the breakdown of value between the business core and its optionality, on the emergence of a new economics fueled by a new economy, and on the interconnectedness of all these things by way of context…

image

… a collection of essays about a new technology environment and its new fundamentals.

For paperback or eBook edition, click here.


Feb 23

Broader signals from the isolated case

The argument was simple. At one polar end there is the technology, which requires continuous reinvention and upgrade. It is said that technology companies are in the business of innovation. At the other extreme there is the network, which is robust because it has effect, because there are switching costs for its users, who preserve the value of its base with their interconnected presence. At one end there is a high degree of option value, at the other there is a greater element of stability.

The argument is no longer simple. When the world’s largest social network makes it a point to acquire the up-comers, at ever increasing prices, at first for merely 1% of its market capitalization but soon enough 10%, this is a signal from the other side that times have changed. It is a signal that the effect is not what it once was and that the network needs to be defended and preserved and reinvented, much like a technology.

When one large social network buys a smaller one (partly as defensive tactic), the transaction is a symbol. When the price is high, the message isn’t subtle. When the payment is in stock, there is a statement in that as well, because buyers with multiple and ample resources will use the least expensive to transact. And when the successful up-comer quickly sells to the deeper pocket with the greater resources, there is in that too a sort of comment, possibly about necessity.

It has been argued in this space that in an information economy marked by deflationary trends and rapid innovation, there are convergences underway that are diminishing distinctions between previously disparate sector categories. It has also been argued that option value is the order of the day in this environment of technical volatility.

All these themes are represented in the referenced transaction, which additionally hints at a new convergence, previously less pronounced: the blend of network and technology, whereby the former assumes the volatile insecurities of the latter.

Further reading…

image

… a collection of essays about a new information economy and its new fundamentals.

For paperback or eBook edition, click here.


Nov 29

A thesis & its elements

In an economy increasingly shaped by information processing and flows, in which innovation, technical efficiency and entrepreneurship play a central role, new macro and micro fundamentals are taking root that should be understood and interpreted holistically.

In this economy, information technology is not merely a tool but increasingly the core business - in fields as varied and dominant as finance and commerce, markets and marketing, hardware and software, healthcare, entertainment, and even heavy industry. These sectors and others will increasingly overlap, pulled by a shared language of mechanized knowledge and the processing of bits.

The evolution is from an age of hyper-specialization to an era of synthesis and combination. In this, elements that were previously apart and self-contained are beginning to blend and become one. We see this already in areas of design and logistics, content and distribution, networks and applications; while definitions and categories are tracking the change with their own combinations in finance and funding structures, the variety of markets and marketplaces, and in the notion of consumer and vendor.

In this evolving environment, aspects of inflation and deflation, productivity and growth, supply and demand, employment, operating and financial leverage, enterprise value and optionality, all take new forms, meanings and stature.

We’re not there yet, but we’re moving fast.

Further reading…

image

… a collection of essays about a new information economy and its new fundamentals.

For paperback or eBook edition, click here.


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