Crafting a story based on my readings                  View this email in your browser

Dear avid readers,

This week's digest covers what I read between 20th of April and 8th of May, packaged in a story: freelancing redefines corporate strategy; disruptive innovation and its antidote; visionary Elon vs. the world; free markets and safety nets; value extraction vs. value creation; Shenzhen the new Silicon Valley and Romania the new Berlin; value creation lessons from BlueShore Financial. I hope you enjoy!

Strategy and Business Models in the Entrepreneurial Age

👓 Freelancing, networks and IT - the new core strategic focus
I absolutely enjoyed Laetitia Vitaud's writings on how the rise in freelancing is pushing companies to re-think corporate strategy and HR. Externalising or internalising activities has long been a key strategic concern for companies, with the consensus being that companies should focus on their core business and outsource everything else to other specialised companies. However, with the development of large digital networks and marketplaces, and with the advent of services like DocuSign, a firm's transaction costs (related to information, to negotiation, to contract enforcement) have been fallen massively, hence this dogma must be revisited. As companies must now provide the best possible customer experience by controlling critical areas in the value chain, they can now benefit from the skills of the freelancers to in-source some of the activities that were previously outsourced (and hence out of direct control). The freelancer model gives rise to a question:

"What is a company’s strategic core? Is it one line of business in particular or is it the company’s ability to coordinate teams of different actors around a given project?"

Laetitia also writes separately that the blurring lines between what's inside and what's outside organisations is redefining HR as well, as companies will have to learn to nourish long-lasting relationships in larger communities and freelancer-ecosystems, by embracing the project-based nature of professional relationships, and work in the digital age not being positioned as a lifetime engagement anymore. 

Growing TAMs, disruptive innovation and its antidote
🚕 Successful digital marketplace strategies actually expand the Total Addressable Market (TAM) of the industries they operate in, in parallel with disrupting existing incumbents. This fascinating data-set from Kevin Kwok shows how, for example, Uber and Lyft expanded the total number of monthly rides in NYC by being able to operate in underserved markets in the city's outer boroughs. As they grow, it is only normal to cannibalize existing taxi-rides within the center of the city. And it appears to be the same in music. The internet has unbundled music and saw the industry's revenues plunge. However, the business model of music streaming, which is a new way to create a bigger and better bundle, is actually expanding the TAM, as it improves both the value proposition for listeners and the revenue potential for the music industry.

🎵 📷 ARK Invest models that music streaming platforms could actually boost the music market by more than 10x by 2023. In photography, Canon started with expanding the market by focusing on amateur consumers. How Nikon, as a result, lost the leadership position to Canon in the market for professional photography is a very interesting story, illustrated by Steven Sinofsky, involving technology transitions over a period of 30 or more years. Canon was going after Nikon from the underserved market, as they could not win over professionals, so they were forced to focus on mass-consumers and ease of use (with features like autofocus which were laughed at the moment of launch).

💉 There is, however, an antidote  to this type of disruption. Ben Thompson argues that what makes today's tech platforms (such as Apple and Amazon) so successful and immune to Clayton Christensen' disruptive innovation is their end goal, which is the perfect customer experience.

These companies have educated their market to continuously prefer a superior user experience, which never plateaus but gets more and more demanding, hence the risk of overshooting (meaning that in their chase for higher margins, their technology and products will progress faster than market demand) is non-existent. In Jeff Bezos' words, the customers' divine discontent is the true moat against overshooting and hence being disrupted: because achieving the perfect user experience is a neverending goal. 
But it is critically important for tech companies to strategically manage the context as well, as otherwise they risk striking the responsive chord of customers and easily turn their virtuous circles of trust in vicious ones. Network effects can be dangerous as well, writes Nicolas Colin.

On Tesla, Uber, visionary CEOs vs. pragmatic markets and vestigial metrics
Facing a production-hell recently, Elon Musk declared (=tweeted) that excessive automation at Tesla was a mistake and that humans are underrated. This feels like an acknowledgement of the fact that large-scale car manufacturing is really hard, writes Timothy Lee, reason why traditional carmakers like General Motors didn't achieve it (despite its relentless focus on full-automation in the 80s and 90s). In fact, it seems that Tesla is struggling just to match the efficiency of its more established rivals.

🚗 Steve Blank also argues that, if you want to understand the future of Tesla and Elon Musk’s role, we should look at the story of how Alfred Sloan replaced Billy Durant from the head of General Motors in 1920. Billy Durant was a visionary and he founded the company that grew into General Motors at the turn of the 20th century, and was fired twice from its helm, both times because the company was over-indebted and risked running out of cash, mainly due to tight-integration, centralisation, inventory pilling up, too much speculation from its CEO and in general, a one-man-show attitude that damaged the company. He was replaced by Alfred Sloan, who not only ran the company successfully for the next three decades, but also invented the "Modern Corporation" in the meantime, as he was the first to work out how to systematically organize a big company, putting in place strategy, measurements and principles of decentralisation.

🔥 So it is compelling to see how Elon Musk, after creating a whole new market and captured the imagination and fascination of consumers worldwide, might become the danger to Tesla (as the company is burning money so fast that there is now a genuine risk that it could run out of cash in 2018), which maybe is in need of its own Alfred Sloan (Uber provides a more recent cautionary tale of not acting quickly to oust a value-destructive CEO: the company risked seeing its value plunge to zero before its board took the decision to remove CEO and co-founder Travis Kalanick, and replace it with Dara Khosrowshahi, who is charged with turning the scandal-plagued startup into a traditional company—without sacrificing what made it successful.

🍭 Elon Musk argues that what matters most is the pace of innovation, while "moats are lame" and equity research is vestigial. Network effects can be one of the deepest and most enduring types of moat for many great technology companies, but not all businesses are candidates for a network effect approach, and Tesla, at first glance, seems such a company, hence why Elon might be downplaying the moat narrative. As per Matt Heiman, other types of moats exists in the digital era: 1/ Scale - which has been a feature of business since the Fordist era, but in the Digital Era, the internet magnifies the importance of scale by removing the geographical constraints and reducing the capital intensity of growth (which is not really a feat of Tesla yet); 2/ Brand and 3/ Switching costs.  ... Maybe his Twitter candy-rant at Warren Buffet is some sort of brand-building.

📊 It could also be that, in arguing that Tesla is a digital company, Elon Musk is basically saying that the investors' financial accounting model cannot capture the principle value creator for his company. Being a digital company, investments in its future are treated as expenses in calculation of profits. So the more a digital company invests in building its future, the higher its reported losses. Investors thus have no choice but to disregard earnings in their investment decisions. Or maybe he just doesn't like metrics, and he shares Professor Jerry Muller's theory that today's institutions over-rely on metrics, and this in turn creates nothing but short-termism and economic stagnation.

🔮 Or maybe, Elon Musk understands the paradigm shift that is implied by building a company with Artificial Intelligence at its core. Strategy professor Ajay Agrawal has a very original view on the economic purpose of AI: it lowers the cost of prediction. Understanding this can help business leaders determing RoI for building on top of the technology. Drawing a parallel to semiconductors, which had the profound impact of reducing the costs of arithmetic, which had three main impacts:
1/ an increase in arithmetic being used within applications that were already using it;
2/ using arithmetic to analyse problems which weren't previously framed as arithmetic-problems;
3/ the value of arithmetic-complements went up and the value of its substitutes went down.

With the cost of prediction going down, we can expect the same impacts:
1/ businesses will use more of it for traditional prediction problems (such as inventory management);
2/ re-look at problems from a prediction-angle (driverless);
3/ the value of prediction-substitutes will go down (human-prediction) and the value of complements will go up: data, human judgement (because what A.I is doing is unbundling decision making which is human prediction + human judgement), and action.

How Netflix Became a $100 Billion Company in 20 Years
Netflix is a beautiful example of a company that nailed all aspects we discussed in this section: it understood that the relationship between employer and employee must be based on radical honesty, is project-based and therefore transient by nature; it made its mission to deliver superior customer experience (even if it meant disrupting its own DVD business via what was initially a poorer-quality product = streaming online); it used the internet to un-bundle and decentralise TV entertainment and build a more valuable bundle which increased the total addressable market for video consumption; it focused only on a single North Star metric (rather than optimising individual shows to maximise the number of viewers, it instead optimised its business for movies watched per individual user); this in turn led to key product initiatives in the areas of prediction, such as its recommendation AI algorithm; it used all this infrastructure to vertically integrate in order to continuously chase the divinely discontent customer.

Tech, Policies and Misdemeanours

Social safety nets
🥅 Tech companies already confirm Laetitia Vitaud's theory of the freelancer-model, as they already use a large number of contract workers from third-party firms and freelancers (project-based, no on the payroll). This is, as we've seen in the previous section, an imperative of digital businesses that run more like networks than walled gardens. However, the remaining problem that must be solved before this freelancing-model can scale is that the number of contractors is rising, but many lack benefits, and job and financial security. In an admirable step forward, SurveyMonkey started providing staff-benefits to contract workers this year including health insurance, time off and transportation, as a response to concerns from, not its shareholders of course, but from its full-time employees.  SurveyMonkey's head of HR captured the decision well:

"They're usually the first people I see when I come in the morning and the last people I see at night".

⚖️ What this means is that employees in the tech industry have an unusual power over their employers. In most industries, rank-and-file workers don’t have much say, but tech is different, because tech companies live and die on their ability to attract and retain top talent, hence the balance of bargaining power is in workers’ favour. Some tech workers are already unionising , but not for requesting higher wages, but for pushing for more ethical product development.

But this safety net should be offered by governments, via portable benefits. Ultimately, the Silicon Valley libertarian idea of zero-government and free markets must be brought towards reality: a robust system of government support is critical to maintaining a free market, and you can have free markets and a greater Social Safety Net in the same time.

In fact, they are close complements, argues a new paper from the Niskanen Center think-tank. There is a strong relationship between income security and economic freedom. In reality, the higher the income floor provided by a country’s safety net, the more political buy-in there seems to be for free markets. We just need to re-develop a social insurance for the digital age.

Understanding the value of everything
🤝🏻Financial history has not moved linearly: from barter to money to debt, but all three coexisted and still do. This is important to understand in order to better comprehend the relationship between users and tech platforms such as Facebook. It is not a freemium relationship, it is a barter-one. In the digital economy this means that, in exchange for giving up their data, consumers are receiving something — digital services such as messaging systems, maps, information and apps. The problem is that our leaders, laws and economic models (think of GDP's inadequacy) are not set up to cope with a world where barter is much more than a historical curiosity. It is therefore time to take a more anthropological vision of the economy and enable consumers to impose gradations on this exchange and drive a better bargain, argues Gillian Tett in the FT. This ultimately means that people are not tech platform's product (this is a simple, superficial and dangerous statement, as per Will Oremus). People must regain bargaining power with the platforms, and in order to do that they need to understand that they are well positioned in the value chain to obtain the leverage, both as customers (paying for services with time, attention and data) and suppliers (or data-workers), providing data to make their products better and monetizable).

✊ Interesting concept from law and economics scholars Eric Posner and Glen Weyl, as they propose a data-workers' labor union that could help society getting the right value for the data it provides. We might not care that Facebook is a monopoly when it comes to the social platform we use for consumption, but we should care if it means that Facebook as a data-employer is not competing with anyone for data-workers. The monopsony power of platforms may be holding down wages for data-laborers at 0 (actually, to be fair, the value is the digital service we receive in exchange). An individual data-worker lacks bargaining power, so he or she cannot credibly threaten to withdraw the data from Facebook or Google unless she receives a fair reward. So both on the consumer side, and on the data-workers side, we are seeing new forms of digital-unions forming to unlock the value of this new era. I guess, if society "was un-bundled in the 80s, it is now re-bundling" for the greater good.

In her latest book, The Value of Everything, Mariana Mazzucato explores how undervaluing government, public goods, public infrastructure, ecosystems and social networks, (mis)measuring national income and real wealth, confusing speculation and other rent-seeking activities with the production of value is leading to an economy incapable of fostering innovation, equity and real progress. Understanding the basic difference between value creation and value extraction is a key concept to help us achieve the world we want.

Healthy Entrepreneurial Ecosystems

👩‍💼 First, Steve Blank on why Entrepreneurs start companies rather than join them. Also, the most successful entrepreneurial spirit comes from the middle-aged, not from young millennials, which is why China's tech sector is wrong to discriminate against employees over 30 years old (wrong strategically, as well as ethically).

💰 Daniel Rasmussen on why Private Equity is overvalued and overrated, especially since their operational improvements are more marketing than reality and what they actually do to portfolio companies is addition of debt, which can be dangerous.

🏴󠁵󠁳󠁣󠁡󠁿 California is now the world's 5th economy, surpassing UK's. Silicon Valley and its established venture capitalists used to power U.S.' tech world dominance, but now it has a challenger from Asia, particularly China as per WSJ. There is a debate going on whether Chinese companies know how to innovate, or just how to invest capital, as per a recent essay on Tencent. My bet is on the former, since offering only own-products in an API economy is counterintuitive.


Another way to look at it is the evolution (and future) of programming, as indicated by Stack Overflow traffic from 2009 to 2018, as per Jeff Atwood's tweet.


🇷🇴 And why not, Romania (which recently gave its first ever Unicorn in UiPath) could be the next Berlin by 2020, argues Bogdan Ceobanu.

FinTech snippets

Tech giants looming large
For the moment, there still seems to be a blurred frenemy relationship between banks and tech giants. GAFAs have been circling financial services around payments, but they clearly see a more lucrative opportunity in pushing their cloud computing services to banks undergoing digital transformations, rather than pursuing banking services directly. Other bankers seem to believe that the industry's low profitability is itself a deterrent acting like a moat, but what they seem to forget is that Amazon sees opportunity in low margins.

This way of thinking also misses out the Chinese tech giants who have already made inroads in the entire value chain of banking (see our previous digest on Alibaba). Now, Baidu's fintech arm, which has $7.5 billion in total assets on the balance sheet, has been spun-off into one of the best funded fintech companies, aimed at using AI to provide short-term loans and investment services.

Challenger banks are raising the pressure
Europe recently gave to the world another fintech unicorn - digital banking startup Revolut, valued now at USD1.7 billion and serving +2 million customers across borders. Revolut started as a niched FX payments service, but now, as it is awaiting for a pan-European banking licence, they are bringing the thin, open and vertically model to life.

Banks must become tech companies
While bankers-in-denial will continue to hide behind the imaginative moat of low profitability, the most progressive banks and credit unions will eventually become tech companies, meaning they will put strategy and digital business models at their core, and will re-bundle for value creation . The first step in becoming a tech company is engaging all employees on the importance of business strategy in the digital age. Add a bit of artistic flair, and you get a recipe for success, such as the one inspired by Chris Catliff and Fred Cook at BlueShore Financial. Technology alone cannot create tech companies, but it needs to be complemented by a cultural shift and a renewed customer-centric ecosytem business model, like Nordea's.


Until next time

I would love to hear your thoughts on Twitter, @DanColceriu.
Thank you for reading, warm regards from Geneva!

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     Top 10 articles I recommend which were featured in this digest:
1. Laetitia Vitaud - Why Freelancers are Pushing Companies to Re-think Corporate Strategy - March 2018
2. James Wang - How streaming could create a $50bn music industry - May 2018
3. Ben Thompson - Divine discontent: Disruption's Antidote - May 2018
4. Steve Blank - Why the future of Tesla May Depend on Knowing What Happened to Billy Durant - April 2018
5. Rik Kirkland interviewing Ajay Agrawal - The economics of artificial intelligence - April 2018
6. Samuel Hammon - The Free-Market Welfare State: Preserving Dynamism in a Volatile World - May 2018
7. Robert Costanza on Mariana Mazzucato - How to retool our concept of value - April 2018
8. Daniel Rasmussen - Private Equity: Overvalued and Overrated? - Spring 2018
9. Bogdan Florin Ceobanu - Romania could be the next Berlin by 2020 - April 2018
10. Chris Catliff - Three ways to fire up employee passion - April 2018
     My name is Dan Colceriu and I hope this reading was rewarding. Any opinions expressed here do not represent financial or investment advice. Also, they represent my personal view, and not my employer's, which is in no way associated with this email. 
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