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

Dear avid readers,

Here is what I read from January 18th to February 13th 2018.

From rockets, to fintech, to this carefully curated digest. 
Made on Earth, by humans.

Strategy and Business Models in the Entrepreneurial Age

👓 We will focus this section on the internet platforms of today's digital era.
 
Over the past 23 years, 70% of the value created in tech comes from business models based on network effects, finds a new analysis done by James Currier. Of the companies created between 1994-2017 valued at $1b+, 35% of them had network effects at their core. Some companies created network effects to their business model as they went along, some thought them through from Day 1, as part of their moat. Also a classification of the types of possible network effects

🖧 Amazon, has of course, a moat made up of multiple factors. The focus on the best possible customer service at an incredible scale, the vertical integration, and of course, network effects. Steven Levy explores how Amazon has developed network effects in artificial intelligence. A fascinating story.

⌚ Apple's main competitive advantage is the superior integration of hardware and software. The company's network effects appear in the services business (Apple Music, App Store). To further drive these network effects (Apple Music) or to create a completely new of type of App Store, Apple is in constant search for the next big hardware platform. The Apple Watch might be just that - the bridge to the future of personal assistants. A future where all hardware that Apple produces will be a personal assistant, while Google might struggle with that, due to its fragmentation of its ecosystem. Only 400m devices of the 2 billion Android devices worldwide run Google Assistant.

📽️Netflix's network effects come from machine learning, meaning the more customers watch shows, the better it knows what to recommend/licence/produce. Its competitive advantage is then superseded by its vertical integration (content producing), as a differentiating customer experience comes by better controlling the value chain. This is something that Apple is starting to do as well (NY Times link), although it still remains to be seen if strategically or if it is pure marketing. Netflix's quest to offer the best possible content consuming experience, at scale, by leveraging data network effects, explored by Tren Griffin (and Part II ).

⚖️ Last but least, what makes the business model unbeatable is the customer intimacy - highly tailored problem solving capabilities, which generates customer loyalty, writes Ansu Sharma. And as Tom Goodwin came to realise, that doesn't necessarily mean asset-light.

So this is how the internet platforms have come to dominate the digital landscape, becoming super-aggregators (Stratechery link). Rhys Landmark, however, sees the blockchain technology as something that could disrupt the aggregation theory, and hence offer a path for successfully challenging the tech giants' dominance. Rhys sees blockchain potential in disrupting the moat: 1/ network effects - by offering monetary incentives to early adopters in a new network; 2/ data advantage - by offering the technological means to achieve data portability, where all customer data sits securely in an open and shared architecture. Maybe this is why Mark Zuckerberg suddenly cares about time-well spent on the Facebook platform (while blocking crypto/ICOs ads). Soon enough, that might be the last-standing competitive advantage...

Tech, Policies and Misdemeanours

⌛  ... and time-well spent and meaningful interactions might differentiate Facebook, from say, Twitter which is filled with abusive bots, identity theft, fake influencers and fake engagement. Beautifully illustrated NYTimes essay! To counteract this, Facebook doubles down on the importance of user identity, by acquiring an ID verification startup, in a move to catch-up with China's WeChat, which is actually on a path to possibly become the national ID system.

🤝The challenge with becoming too obsessed with customers-alone (digital-era companies), or with shareholders-alone (industrial-era companies) is that an important part of the ecosystem gets ignored, or abused: employees (or lately called network participants, gig-workers) and society (e.g. negative externalities through consumer surplus). This is why AirBnb's CEO is starting a new narrative, in which it is educating its public on the importance to find the balance and deliver value to all stakeholders, which requires long-term thinking. Or why Publicis' Chief Growth Officer is expecting a 20% to 30% decrease in reach for advertising over the next 5 years, as the narrative moves from serving ads to time-well spent (and paid for). Rana Faroohar sees this as a bigger trend, as we are shifting to an activist-CEO era. Of course, understanding the"you've convinced me, now go out there and put pressure on me" rule of radical change, none of this shift would happen without the pressure of collective bargaining that digital platforms like Glassdoor give to employees. Beautiful essay.

✋ Further down the ethics line, employees are also taking a stand against what they build. Ex-employees of Facebook, Google, Apple, have set up a new initiative called Centre for Humane Technology that aims to repair some of the damage created by smartphone addiction and social media black box algorithms.

Healthy Entrepreneurial Ecosystems

🗠 AirBnb, now profitable, is rumoured to be eyeing an IPO in 2018. At least, this is what its recent board appointment hinted to. However, CEO Brian Chesky, dismissed those rumours recently, and also separated ways with its CFO. Seems that long-term thinking within the short-term flat rental market is complicated. Or maybe it does indeed require a new narrative, a new long-term stock exchange market.

🗠  Maybe Slack will IPO in 2018? Or Europe-darling Spotify, after it cleans up the lawsuits and debts? Excellent Spotify-product analysis from Denis Kazakov.

🌏 Mattias Ljungman writes about the radical re-writing of the European tech ecosystem, led by France under Macron. The importance of truly understanding how a healthy tech ecosystem can transform an economy is key and should be obsessing governments in all countries. Just look at China. The good news is that more capital is available than ever before.

FinTech snippets

🚫 On blockchain and crypto-currencies
💱 Bitcoin and Ether: we call them crypto-currencies built on decentralized ledgers, because in theory, the mining is available to anyone. But in reality, a two-year study shows that 53% of Bitcoin mining is done by 4 operations, while 61% of Ethereum mining is done by 3 operations. Another big problem within the crypto-space is that there is no solution yet for safe custody of the crypto-assets, and recently another exchange got hacked for $530m worth of crypto. And where there is risk (of theft), there is insurance. Hence some insurance companies now offer policies aimed at protecting against bitcoin theft. Which means that the custody space is filled with opportunity, and some smaller banks are stepping in and offering crypto-vault solutions. It makes sense for banks to offer safe custody for crypto-currencies, because they already have the compliance culture, the high cybersecurity standards, and the customers trust. Ultimately, banks will act as vaults for digital identity, argues Dave Birch. Through my work, I have interacted with Metaco Silo solution, which offers an integrated hardware-software solution for banks to offer safe custody of crypto-assets to their clients. Just like we observed with cloud in mission-critical applications, regulatory guidance is required before banks adopt it. Hence, eyes forward on the G20 meeting in March where crypto regulation will be on the agenda. Waiting usually means time for reading, so we propose JPMorgan's newly launched Bitcoin Bible, or if you really want the most comprehensive quality reading list on the topic, I recommend a16z's curation.

🔌On Open Banking and Collaboration
Banks face an imperative to move into value-ecosystems, driven both by regulations and the realities of the digital era, including new competition. McKinsey delves into what the opportunity for banks might mean, in practical terms. Good read. And unlike popular belief, Open Banking is not just an European thing. Australia moved forward with its implementation of an Open Banking regime, publishing draft regulation.

📲New entrants
Open Banking is therefore generating a lot of interest in the banking industry. Following the likes of O2 Telefonica and Orange moving into banking, another telecom operator, this time U.K.'s giffgaff plans to move into the personal financial management space, aggregating financial services into one place. Challenger banks (new entities with banking licence) have also been making the frontpages more often recently, but mainly in Europe, and mainly in the U.K. However, this trend is expanding. In the U.S., there are currently 9 de-novo banks planning to launch in 2018, pending licence approval. That is a big spike from nearly dormant activity in past years. And Hong Kong regulator is issuing new guidelines for challenger virtual-only banks. Probably safe to say that both Open Banking and Challenger Banking are becoming global.

💳FinTech titans
One of Europe's fintech darlings, Adyen, is getting a lot of attention. A profile into how it became a multi-billion valued company in Forbes, then a look into how it snatched eBay as a customer from PayPal, and a glipse into a future IPO, possibly in 2018.

Jumping from Adyen's $5 billion valuation to a $100 billion fintech valuation. Ant Financial, an affiliate of Alibaba (the Chinese tech giant), is raising a possibly final round of private funding before a possible IPO. The company is offering payments to 520 million users, and also wealth management, credit scoring, micro lending and insurance.

Until next time, a personal note

👀 I was joking today with a work colleague around the radical approach in my writing, probably triggered by my fascination around the nature of collective power in the digital era. Perceived as being somewhat leftist, I was asked "if I am creating a union movement". To which the answer came: "well, you can take one out of Romania, but you cannot take..."
 
Joke aside, through my work I am aiming for something in that lines of a movement - one that enables radical innovation in the banking industry, because ultimately better finance, not necessarily less, will create a better society. And this can only be achieved by creating a network of value, in which banks are empowered to adapt their strategy to the digital era and become better aggregators, and where fintech entrepreneurs are benefiting from the scale and education of the ecosystem to grow their companies sustainably. 
 
Would love to hear your thoughts on Twitter, @DanColceriu


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     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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Copyright © 2018 a p e r t u r e, All rights reserved.


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