Economics

  • May 2, 2018
  • Adam Smith famously referred to “the invisible hand” of the free market in his landmark book “The Wealth of Nations” and with that made himself one of the very first political economists. Smith’s observation was so on point that today most of us assume markets run through the agency of individuals pursuing their enlightened self-interests. A lot of this drove the evolution of CRM as a tool for tracking customers.

    If you pay attention today you can notice a not-so-invisible hand functioning in multiple areas. For instance, if you’ve been following the aftermath of the school shooting in Florida, you know that an activated group of kids and adults nationwide has begun a movement to get something done about gun safety. The #MeToo movement in which women are banding together to change the workplace by eliminating sexual harassment is another, and so is the Black Lives Matter movement. But you can argue that all of them are free market responses in that they arose from the grass roots without much prompting from elite power centers.

    What each has in common is the initiative by engaged individuals to cause change in what are essentially marketplaces in the broadest conception of that term. Much closer to home, even in the technology world we’re seeing the stirrings of user dissatisfaction with social media and it’s not clear where this will go. Its impact on CRM could be big because social has become one of the key channels linking vendors and customers.

    A recent article in Wired, “Facebook Doesn’t Know How Many People Followed Russians on Instagram” by Issie Lapowsky, documents Facebook’s foot dragging on producing information for the various inquiries surrounding the 2016 American election. Jonathan Albright of Columbia University’s Tow Center for Digital Journalism, has been looking at the details and producing information that’s uncomfortable to Facebook. He’s been quoted in Wired, The New York Times and elsewhere.

    Albright’s work has uncovered many things concerning Facebook’s approach to the investigation which you might call passive aggressive. For instance, when asked why it had not produced information about how many people had seen Instagram information produced by Russian operated troll accounts, a spokesperson for Facebook, which owns Instagram, said, “We have not been asked to provide that information.” So little curiosity…

    It’s not necessary to repeat the article here; it’s worth reading but that’s your call. It documents how Facebook has so far assisted investigators but only if they ask the right questions. The final paragraph summarizes this point,

    Facebook has shown consistent reticence in detailing how these trolls infiltrated its platform and who that propaganda reached. They’ve repeatedly had to correct prior statements about the reach of these ads and accounts. By working with outside researchers like Albright, the company might be able to paint a more complete picture, but Facebook has been unwilling to open its data up to researchers.

    It’s not necessary to re-examine every time Facebook denied their involvement or disputed findings that upwards of 150 million people saw content from the Russians or that all the US intelligence services agree that the Russians did indeed hack the election. That’s all very interesting from another journalistic angle but not this one.

    The totality of Facebook’s unwitting involvement in the hack plus its efforts to downplay their importance brings up a bigger issue for Facebook, and by extension all social media: How useful are Facebook and social media generally considering the Russian hacks?

    A glib answer might be that it doesn’t have to be terribly useful because it’s free and users get whatever utility they can from using it. But that misses the point. If Facebook’s utility is small or especially if it’s disputable, its business model would be in serious trouble.

    Social media’s primary product has always been the user. It is valuable to each of us when we use it to gather information about our personal grafs and we knowingly pay an in-kind fee by letting social sites collect data about us, which they can then sell to advertisers. It’s a classic network effect—the greater the audience the more valuable the output of its data.

    But what happens if the veracity of information on social media is in doubt? Social media’s value is directly proportional to its veracity and if one can doubt that veracity it might be prudent to seek alternatives. People and corporations that invest heavily in using social media’s information might begin doubting if their investments deliver value.

    My thoughts

    So far Facebook’s approach to the hacking scandal has been to deny and ignore it only admitting something when there’s no other choice. This presents another problem associated with stonewalling—dissipating trust. However unpleasant the facts, the more a party tries to ignore or hide them the lower the market’s trust in that entity and the greater the opening for a disruptor.

    The truth value of what people put up on the networks and what they believe about the truthfulness of others’ posts makes social media’s world go around. That truth is what makes some people spend hours a day surfing the sites and it’s what makes advertisers purchase ads. Once that trust begins to erode, even a little, the business model can begin to unravel.

    Whoever is advising Facebook on its strategy should reconsider. It’s human nature to not enjoy dealing with criticism and serious accusations. But impinging the free flow of information won’t solve the problem. Free markets depend on transparency and Facebook is a free market of ideas. If it stops being that, or even if people stop believing it, there’s no reason for them to continue using it.

    Published: 3 months ago


    Salesforce announced today that it had finalized its acquisition of MuleSoft a company specializing in software integration. The companies announced their intent back in March raising eyebrows when the price of the merger, $6.5 billion, was announced.

    The cost of the acquisition is roughly two thirds of Salesforce’s current annual revenues and is exclusive of other mergers that the company has engaged in whose prices ranged from millions to billions. The announcement caused a fair amount of wonder and consternation in some quarters because of its cost and because MuleSoft was seen as, forgive this please, a one-trick pony.

    Fair enough, but one can also say that the price reflects value pricing for the technology and not simply a more familiar cost-plus-some-profit-margin, for a very good reason. Companies buy other companies as a short circuit for conducting costly and time-consuming research and development and that’s where the value pricing comes in. Buying a company drastically shortens time to market.

    Salesforce is one of the companies in the vanguard of the cloud computing revolution which, in a few years, will leave us with a global information utility that looks superficially like electricity or telecommunications but will be so much more. We’re already seeing the outlines taking shape as multiple vendors continue to deploy scores of datacenters around the world to handle the load.

    This should be seen as a break with our information technology past when we relied on a corporate datacenter or a small regional cloud infrastructure. It is the commoditization of information and the crowning achievement of the post-World War II evolution of the information industry.

    So back to MuleSoft. In a heterogeneous world with multiple competing and sometimes cooperating information utilities the need for integration is assumed. No matter how any vendor tries to convince the world that it should just run every app it makes, there will always be a need for integration. Moreover, our patience with the integration process will continue to decline. Salesforce has now built up an Integration Cloud for that contingency and it looks like MuleSoft is an important part of it.

    As for cost, there was an article in the business press recently comparing management styles that focus on cost vs. those focusing on opportunity. I don’t know where it is but the important part is that those who focus on opportunity do better in the real world than the others. So in my mind the question for all parties both inside and outside of Salesforce isn’t the cost of the acquisition but how it will be used. We’ll have to wait for results but Salesforce’s track record is pretty good in this regard.

     

     

    Published: 3 months ago


    Ok, this is kind of long. Go get a cup of coffee.

    Amid the anxiety and revelations of the Russia scandal including the Cambridge Analytica story that showed how easy it was to steal 50 million Facebook user profiles, it’s easy to mix up cause and effect. Importantly, Facebook wasn’t hacked or broken into but it was used as it was designed.

    This has led some to question whether Facebook as such can exist at all in our pluralistic society while others believe the problem of surreptitious psychographic profiling will blow over once everyone plays by the same rules. After all, others have argued, other entities do the same thing. They point to Google, Amazon and even the traditional print industry as culprits for gathering personal data for analysis and, it should be said, weaponization.

    Of course, the issue is manipulating and weaponizing the data. If we can’t trust the data, then we are disassembling one of the pillars of democracy, the acceptance of scientific rationalism. Boiled down, it means facts are facts even if you don’t like them.

    If you remember a time before social media when identities were not so readily stolen and you think that reality was good, you might also recoil at the thought that those were the good old days, that things are now permanently different. There is a third option though and there are probably many that seek to balance the benefits of new technology with the protections we’ve grown accustomed to.

    This article can’t be all things to all those people but it attempts to find safe harbor in a storm and therefore makes accommodations. If we can’t live with the compromises, perhaps it can at least point out some of the major obstacles to be over come.

    Business model

    It is an article of faith that Facebook’s business model, as well as those of other social networks and search engines, is selling advertising. But it is my contention that this model has run its course. It was effective when the companies were smaller, when their consumers were more innocent to the ways technology can be used for both good and ill purposes. The advertising model was even necessary in a time when the Internet was new and finding people and things was strange.

    The advertising business model was a default that data aggregators took on the way to phenomenal profits and who could blame them. The tech sector has a habit of minting money and the founders of social media and search engines were merely the latest in a long line of prolific brainiacs who struck gold. It is hard to believe that any human in a similar situation would act much differently.

    The latest dustup that dragged social media into the political spotlight now presents two choices to these businesses. They can hobble their products, which could reduce the amount of data they collect making them less interesting to advertisers, or they can change their business models slightly to prevent unethical use of their networks.

    Disruptive innovation

    Anytime a new technology reaches market, it has the possibility that it will disrupt the existing order of things. Disruptive innovations have coexisted with Capitalism since its origins in the Industrial Revolution. Disruptive innovation means making thread and then cloth with high-speed mechanical means, making a steam engine powerful and small enough to be mobile, or making a computer that could fit on a sliver of silicon about the size of your thumbnail.

    The world changed with each of these disruptive innovations and others, because they immediately made an old order irrelevant and they organized whole economies and even civilizations around new driving forces. The Internet and its children are the latest innovations that have rocked the world. In each, humanity has had to grapple with both the benefits and the deficits of the innovations.

    So far, we’ve benefitted enormously from these innovations but recently we discovered their less sanguine side. If history is a guide then regulation in some form is a likely next step. Some leaders in congress have already broached the idea on several occasions but it’s important to get the idea right before pulling the trigger, which is why we need to discuss business models.

    Regulation?

    Regulation could happen in social media and search but there’s much that the technology companies can do to either avert it or ensure that its mandate is as light and congruent with company interests as possible starting with the prevailing business model.

    Although the advertising business model has served many companies well, they’ve morphed into data companies with big responsibilities for safeguarding the data they collect and that’s not something they’re eager for.

    The big data gathering companies like Facebook, Amazon, and Google and their competitors, have become data companies first and advertising vendors second and if this understanding had been realized sooner, many data breeches would in all likelihood have been thwarted. Rule One of business is never give away your product, it’s what you charge for because it pays the bills. Applying the rule should be as obvious as encrypting user data in this case. Additionally, no expectant user of the data should be able to access it in its unencrypted form without, of course paying, but more importantly presenting valid credentials and stating a beneficial and productive purpose of the use.

    I’ve written before about credentialing and how it’s actually harder to pull permits to remodel your kitchen than it is to advertise any message you want on social media so I won’t perseverate. So let’s turn to encryption.

    Security as a business model

    Social and search’s business model must turn from advertising to data management, curation, and selling access to it and we live at precisely the moment when these activities are possible on a very large level. This includes encryption and the same form of certification that applies to other professionals from doctors to beauticians and plumbers.

    Encryption and its reverse take time and require compute and storage resources which have often cut short discussions involving them because of cost considerations. But new, shall we say disruptive, innovations in computer hardware and software are reigniting the discussion.

    In hardware data storage was long accomplished with the hard drives of most computer systems. Data enters and leaves storage on millisecond time scales, which is very fast. However, computer CPUs and memory operate one million times faster at nanosecond speeds. CPU chips spend a lot of time waiting for data to become available even when, as most modern computer systems do, there is memory caching for frequently used data.

    Innovative hardware designs now offer solid-state memory devices that replace disks. This memory operates at nanosecond intervals and eliminates the lag time of older mechanical systems. What should we do with all of this newfound speed? One possibility might be to dedicate a small portion of it to encryption. Typical encryption modes on the market right now could be broken but that would take so many years that the resulting data, when finally available, would be useless and encryption is getting better.

    Encryption would be a good thing but it wouldn’t solve all problems and securing our information infrastructure so that it operates more at utility grade, requires other changes. Bad software, malware, viruses, Trojan Horses, and the like may still get into systems.

    Mark meet Larry

    As luck would have it free markets generate inventions faster than they can be adopted. Often a disruptive innovation exists at the nexus of several disruptions that just need one more critical piece. That’s the case with many of the system level inventions that Oracle has brought to market over the last several years. They’ve pioneered important developments in solid state storage, encryption, chip sets that weed out intrusive malware, and a self-patching autonomous database that just hit the market.

    All of these things turn out to be essential to safeguarding data which will enable the information revolution to continue burrowing its way into our lives and enriching society. They are also the underpinnings of a new business model that turns big data companies into ethical data providers. They might also continue being social media companies but the data tail would now be wagging the dog.

    My two cents

    What do I know? I just read and write a lot. But what I see is an industry about to be regulated and, in my mind, the smart play is for the social media companies to lead the charge to ensure they arrive at something they can live with instead of remaining aloof and having some regulations imposed on them.

    There’s a wild west mentality in Silicon Valley in which what isn’t proscribed is encouraged. But we should keep in mind that the west only remained wild until the pioneers arrived and established towns with roads, schools, and churches. The wild bunch might have disliked the idea of settlement, they might have opposed it, but they were quickly in the minority and civilization won. That’s what’s happening in tech today and we all need to seize the moment.

     

     

     

     

     

     

    Published: 4 months ago


    We should say this clearly but maybe just once: Not everything Donald Trump thinks or says is whacky.

    The exception that might prove the rule is the western approach to trading with China and Trump’s initiative to put upwards of $60 billion in tariffs on goods emanating from the Middle Kingdom. Lest you think $60 billion is a tad rich, read on.

    Last year, Trump also said that more than 60,000 factories (not jobs) had left the US for China since China was admitted to the World Trade Organization (WTO) in 2001, a claim that is right directionally but that fails to account for factories moving to other places such as Mexico and Canada to name two. But when you round up, the total number is solid. It comes from a US Census Bureau report in 2014.

    China’s tactic on global markets has been decidedly mercantilist meaning its method is to accumulate foreign reserves by exporting finished goods while keeping its markets relatively closed to imports. Lots of nations do this, especially when they are emerging onto the world stage. Import tariffs were even an important part of US trade policy throughout the 19th century and into the 20th until the Smoot-Hawley Tariff Act (1930) contributed materially to the Great Depression. Open markets and global trading have been a hallmark of US commerce strategy for over 70 years but Trump wants to change the status quo.

    More importantly, Trump is also focused on a more important aspect of relations with China, intellectual property (IP) theft, which has been going on for a long time.

    The New York Times reported in 2013, that IP theft was a specialty of the People’s Liberation Army (PLA) unit 61398,

    The hackers were behind scores of thefts of intellectual property and government documents over the past five years, according to a report by Mandiant [a security firm], in February that was confirmed by American officials. They have stolen product blueprints, manufacturing plans, clinical trial results, pricing documents, negotiation strategies and other proprietary information from more than 100 of Mandiant’s clients, predominantly in the United States.

    This is in addition to the other requirements western companies face when setting up shop in China including technology transfers and taking on Chinese companies as partners.

    None of this is news. In “The Great Industrial Wall of China,” in The American Prospect, a liberal leaning magazine, Carolyn Bartholomew noted back in 2009 that,

    In order to provide an advantage for Chinese industries and companies, and to attract U.S. companies to locate in its country, the Beijing government manipulates its currency, showers subsidies on favored industries, provides low-interest loans from a state-owned banking system, tolerates and even encourages the theft of intellectual property, and ignores WTO rules.

    So there in a nutshell is Donald Trump’s not-so-crazy case against unfair Chinese competition, but justifying tariffs is an entirely different matter. The time for this approach to fighting back was before China became a powerful global economy by taking the markets for the goods, not the factories, admittedly on other presidential watches. But all presidents have messes to clean up from previous administrations. Most take this in stride.

    Trump’s approach to solving difficult problems or cleaning up messes, has been to simply wish away the problem by rolling the clock back but that’s impossible. His promises to bring back coal are a good example of how this approach fails. Coal is now more expensive than natural gas because advanced techniques like directional drilling and hydraulic fracturing, have produced a glut. It’s also less polluting. So the odds of bringing the coal industry back to its former predominance are nugatory.

    Similarly, China is now in a position in which it makes a great deal of the products consumers need, which were once made locally. The Chinese took markets, not jobs or factories. They now make things at a fraction of the cost of western goods because their labor costs are much lower. There is good reason to think that production jobs that left first world locations will not be coming back for the same reasons that natural gas is ascendant in power generation. Notably, gas will have a brief time in the sun because the alternatives are becoming cheaper and replacing all kinds of fossil fuel power production and because, in the long run, they are far less polluting. That’s the way markets work.

    My take

    Some industrial migration can’t be stopped because it is a natural part of economic evolution—part of how countries climb the economic ladder. But industrial espionage in which a country makes off with blueprints, strategies, research data, and other intellectual property is different. It steals the future as well as the capital and effort that go into creating the IP and in the long run it impoverishes the victim of the theft.

    A tariff might be proper given what’s gone before and $60 billion per year may sound large—and it is in comparison with the $375.2 billion trade gap between the countries and it is certain to grab the attention of the Chinese. But it has to be part of a larger strategy. Tariffing Chinese goods in general doesn’t make sense for goods that carry no IP developed in the last few decades. Such tariffs only make everyday goods more expensive for consumers without changing the equation. They are like the zero-sum moves in a checker game.

    If the goal is to make trade more equitable then the strategy should include much better adherence to the WTO rules of globalization and an agreement that recommits the parties to fair trade. In a less well publicized move Trump has said the US would file a trade case in the WTO against China.

    But also, other countries are feeling the same pressure from the Chinese that the US feels. So it would make sense to form a coalition with allies to confront China with one voice. But Trump continues to alienate allies at the same rate he antagonizes adversaries (except Putin). This is a chess game that plays out over time and Trump has not shown the savvy or the patience to pursue.

    But this is all vitally important because when the trade war gets going, the Chinese aren’t going to retaliate over consumer items, they’re going for the things that will hurt like not buying our airliners (Boeing), heavy equipment (Caterpillar) and just about anything that emanates from Silicon Valley and environs.

    On the other hand, trump’s negotiating strategy includes making a ridiculously high demand followed by downward negotiation when the other party comes to the table. If so the trade war might look a lot like the steel and aluminum tariffs which builds loopholes for almost all other nations.

     

    Published: 4 months ago


    In 1906 President Theodore Roosevelt signed the Pure Food and Drug Act into law. It had been a long time coming and corporate interests had done their best to derail and delay reformers who advocated the contents of the act. The meatpacking industry had been a major focus of reform as was the over the counter drug industry, each for different reasons.

    Meat was unwholesome especially in the warm weather. Cattle were driven by cowboys to railheads in Kansas City Missouri and then transported live by rail to Chicago which became a major distribution point after the American Civil War. Meat packers slaughtered cattle in Chicago and shipped to markets in the east. This prompted the need for refrigerated railroad cars or reefers. At first, reefers were cooled by ice and not necessarily very well. People in the east got sick from tainted meat and Upton Sinclair’s novel, The Jungle was a story about abuses in the industry that led to unsafe products.

    Over the counter drugs contained high quantities of alcohol and opioids and their makers over promised what they could do for patients. Newspapers, which relied on advertising revenues from the drug companies, were enjoined from expressing support for legislation regulating the drug industry on pain of losing their ad revenue.

    Muckraking which we might call investigative journalism today, came into its own and crusading journalists like Sinclair and many others published exposés of abuses that led to the Pure Food and Drug Act as well as the Federal Meat Inspection Act which Roosevelt signed into law together.

    A century later, the meat supply still has occasional problems, but no one tries to hide the truth and both producers and regulators work to correct issues when they arise. Also, producers rigorously test over the counter drugs both for safety and efficacy before going to market. Libertarians and conservatives might want to complain about the added costs involved or the rights of participants in free markets in other situations, but they are largely silent here.

    Today

    The social networking industry today is in a similar position to meat packing and pharmaceuticals more than a century ago. Our news is full of stories such as Cambridge Analytica stealing 50 million Facebook profiles while that company did little to protect its users. The US intelligence services all point to Russian active measures in interfering with the 2016 presidential elections by using the tools available with social networks as they were designed.

    All of this is awakening many people to the understanding that social networks are not free because they collect a fee in kind; namely consumer data which they use to model profiles and sell to advertisers. Some have suggested that in the face of these revelations that Facebook might be doomed or that social networking in general may be. But nothing could be further from the truth.

    Social networks are at the same place that meatpackers and drug companies were in 1906. Regulation was and is a way to enable the people to influence markets in such ways as to not interfere with any single company. Regulations apply equally to all those regulated and businesses should, after a period of adjustment continue as they were in the newly regulated markets.

    My two bits

    Regulation can take many forms. I’ve previously advocated for treating the social networks as utilities and that’s certainly one approach. Another is simply to put  forward legislation like the Pure Food and Drug and the Federal Meat Inspection Acts of 1906. The Pure Food and Drug Act ultimately spawned the Food and Drug Administration which regulates industries without treating them as utilities.

    The history of regulation in the US and much of the west has involved setting standards and fines for violation. Government agencies randomly sample many aspects under their direction and in some cases government meat inspectors work at slaughterhouses. But the regulation and enforcement is largely something that individuals take on because they are good for business.

    The point is that regulation can work well with business and it doesn’t necessarily mean the end of an industry or crippling rules. A level playing field is good for all  and often increased the size of markets.

    Social networks, and the Internet more generally, need some regulation right now for the good of the society they serve. There are approaches and models that we can adopt. The current issues we face are not unique in history and we should heed its lessons.

    Further reading

    Time to call it—the social utility has arrived. That has important consequences 

    The Social Utility

     

    Published: 4 months ago