Dear avid readers,
Again, this is a long one, but do remember that this email works best if you spread your reading over the course of multiple days. Think of it as your go-to source for a follow-up on content that was produced in the past three weeks. Most readers re-visit the email over the course of two weeks at least four of five times.
Earlier this week I took a quick personal trip to Bern, the capital city of Switzerland, with my wife (to whom I am very grateful for putting up with my hours of reading and writing this digest during weekends and evenings) and our 4-months old baby boy, Albert, to sort out his passport. I'll tell you more about how this went at the end, but now I want to introduce you to some fake news which I was reminded of by the combination of Albert in Bern.
While everything in this letter is fake (for a meme to be viral, English language is a prerequisite, like everything else in the digital economy), there is one aspect that was true: the University of Bern did initially reject Albert Einstein's initial application for a doctorate in 1907, two years after his annus mirabilis. However, he was offered a job as a lecturer the next year, in 1908. For the sake of this fake, I`ll take the liberty of doing a "more artistic digest" by including some pictures I took during the trip, to complement the "actual scientific charts".
Before we start, I must touch upon the FIFA World Cup 2018. Not a big football fan, but World Cup, like Eurovision, is guilty entertainment. If you want to explore every World Cup goal ever scored, in an interactive chart, The Economist has you covered. They also explore factors that make a country good at football: it's more than wealthier and larger countries being more sportier. It's also about fostering creativity with children, preventing teenagers from costly mistakes, embracing the sport's network and the quality of training. Prediction saga: Danske Bank - winner Brazil; Goldman Sachs - England reaching the finals; Machine learning simulating the tournament 100,000 times from the Technical University in Dortmund - Spain the winner.
Ever wondered about the impact of the World Cup on the host nation equity markets? Via Axios, I learned that HSBC has done an analysis and "the World Cup host nation equities usually outperform in the run-up to the tourney, but then slip once things kick off. Russian equities appear to be following the usual pattern, outperforming 15% in local currency terms over the past 12 months, but fading recently". And Dennis Coates, Professor of Economics at University of Maryland Baltimore County did an in-depth analysis of the gap between the predicted and the actual economic impact of the '94 World Cup in the U.S.
Anyway, since Romania is not qualified, we are cheering for the country we currently live in, Switzerland. Fortunately, they have just made it successfully through the group stage! Here's some interesting facts I put together about the Swiss football team:
On to the digest!
Strategy and Business Models in the Entrepreneurial Age
Rising corporate debt: Peril or promise?
📈📉 There is a notable development in the past decade in the rise of corporate debt levels, finds a new discussion paper from McKinsey Global Institute. Corporate bond issuance has increased 2.5 times over the period, mainly because commercial bank lending has been subdued, as banks have restructured and repaired their balance sheets. Today, 20% of total global corporate debt is in the form of bonds, nearly double the share in 2007. This diversification of corporate financing is healthy for the financial markets, but does not come without risks, as some of the issuers have fragile finances, and corporate defaults are already above the long-term average (20% to 25% of corporate bonds in Brazil, China, and India are at higher risk of default). In the developed economies, certain sectors and smaller companies are also vulnerable.
🎈 Susan Lund provides a good summary and raises the possibility that we are in a corporate debt bubble (since most of these companies are seeing declining revenues and profits as their business models are being challenged).
Some of this corporate debt is being pushed by private-equity ownership, and some of this push is toxic. One recent example is private-equity owned Toys "R" US Inc., which recently failed due to being too leveraged. And when the situation to be acquired (and thousands of jobs to be saved in-between presented itself), the lenders still pushed for a liquidation (leaving 33,000 employees in agony - they started a legal fight asking for severance pay, launching a debate if PE firms should cover some of the severance, since they saddled the company with too much debt). Another private-equity owned US company, PetSmart Inc. is feeling the debt pressure and has hired restructuring advisers to explore ways to trim its $8bn debt-pile, before facing the same fate as Toys "R" Us. Even private-equity firms themselves (Abraaj) are struggling to agree on debt resettlements with lenders and facing liquidation.
Great times to sell
🤝 The projected total revenue for the top 10 Enterprise SaaS providers in 2018 is likely to reach $110 billion, with each company growing at c. 30% per year. Bob Evans argues that, in the face of rising dominance of a few giants, the Enterprise SaaS industry will no longer support thousands of small apps-firms and the sector is ripe for consolidation. He argues that a successful strategy is M&A consolidation that in turn creates end-to-end, vertical Suites, in order to remain competitive.
And so far, 2018 is a blockbuster year for software M&A (and multiples), as per Tom Tunguz. The prices companies fetch relative to their revenues surpass any of those in the past 7 years. Growth remains the most important correlating factor to sale price, and it seems to be a great time to sell a fast growing billion dollar company.
🆕 There is another angle to look at this "dominance" by a few giants, proposed by Benedict Evans. He inspires us to think in different ways about machine learning and what it could enable for the business landscape. Machine learning is a step change in what we can do with computers, an enabler of technology layers, he writes, much like relational databases (Oracle) enabled us to have Apple, Starbucks, Salesforce, PeopleSoft. So the "the giants have all the data" angle is not really healthy, since data is not fungible, as it is highly specific to particular applications. Also, machine-learning is a platform that will give us many new companies and products. Going even further, Chris Dixon argues in a superb blog announcing a new a16z investment fund in crypto that just as the last three megatrends -- mobile, social, and cloud -- intersected and reinforced each other, giving us completely new companies, services and interactions we never thought possible, so will the combination of the next three megatrends -- next-gen computing devices, machine learning, and crypto networks. It feels like it's the early days of the internet, web 2.0, or smartphones all over again.
Also, Tien Tzuo, Founder and CEO at Zuora, writes about how, in the Age of the Customer, the business landscape is shifting from being product-centric (ERP-driven, relentless focus on maximizing efficiency, scale by selling products into as many distribution channels as possible, margins and planned obsolescence) to a new business cycle: subscription-enabled-services, where companies' access to consumers is critical (declining importance of ownership vs. increasing importance of receiving an outstanding experience, death of customer segments vs. individual subscribers' profiles, linear transaction channels vs. dynamic relationships). This shift is critical as it enables smaller subscription-based start-ups to take down huge enterprises simply because they know who they are selling to (and this happens because of software that is able to generate valuable data from those subscriptions).
🖧 Also, Catherine Tucker explores the idea that network effects as a source of competitive advantage might begin to matter less in current landscape (at least, they are not tied to a particular piece of hardware no more). Purely-digital platforms might grow via network effects, but they won't bring future competitive advantage if the product is not sticky enough (think Uber, Lyft and how easy it is to switch from using one app or the other). Not even data-lock-in generates strong enough moats (iTunes library of mp3s was touted to be the way the platform achieved stickiness with customers, but then Spotify completely reset the music-listening experience to streaming, and made individual's library of mp3s irrelevant). Still, Joshua Gans still argues that it's time for data portability to reduce network effects even further and allow more competition.
🐔🥚Taking a step back, before network effects underpin growth in digital-marketplaces businesses, these firms must solve the classic chicken-and-egg problem (creating the first users: consumers and suppliers). A six months marketplaces-research project from Eli Chait looked into how the top 100 most successful marketplaces solved this problem and explores the different strategies undertaken.
Given the increased variety of business environments and the growing importance of non-competitive forces, corporate strategy is increasingly complex. And the increasing pace of change means that strategic assumptions must be re-evaluated constantly. Given this growing importance of strategy, the board of directors must now focus more on the topic (and more and more boards are actually doing so, as per surveyed CEOs), argue Martin Reeves, Sandy Moose and Kevin Whitaker. This suggests that we should expect an increase in a new type of shareholder activism, focused on corporate strategy and issues with long term impact (n.b. probably the way it was supposed to be?). One challenge with boards' increased need to be involved in corporate strategy is that most board members are ill-equipped: they are either skilled more on audit, governance, compensation, compliance, or they have either built their careers in more traditional business environments which are irrelevant today.
The corporate innovation stack
💡If a startup is a temporary organization in search of a business model, then a corporation is an organization primarily designed to execute and support the current business model. It is why, argues Steve Blank, new, unplanned and unscheduled inventions (also known as innovations) are seen as a distraction and a drag on existing resources. Also, in large corporations, there are usually two types of people who engage in innovation: innovators (those who invent new technology and products) and entrepreneurs (those who figure out how to get inventions adopted and delivered within existing processes). Another barrier in driving innovation in large corporates is that most of the times the innovation teams get embedded in the corporate training department because they evangelize the features of the innovation tools, rather than the results. Ultimately, the innovation teams inside corporates need an Innovation Stack to be able to start working directly with the corporate's operating groups, rather than in isolation.
As per Albert Einstein:
"Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction."
Apple is one company criticised for lacking innovation lately. Neil Cybart explores the reasons why Apple's next innovation, its next platform could be the AR-enabled glasses: decades of experience in integrating hardware and software; ambitions to control core technologies like microchips; recent learnings about miniaturization from Watch and AirPods; ARKit platform; 20 million iOS developers; an eye for fashion and luxury; health/medical turned into a strategic mission; retail spaces for demoes. And the pressure is on to figure out what's next, as smartphone sales are plateauing globally.
Some leading organizations are beginning to make progress digitally, finds the 2018 Digital Business Report by MIT SMR and Deloitte titled "Coming of age digitally".
But as per Josh Bersin, corporate learning and training is still playing catch-up and must evolve to "learning in the flow of work", from the current digital learning stage (micro-learning, real-time video content, courses everywhere). Good read!
Freemium lessons from Hiten Shah
I like Hiten Shah's explorations of how today's most successful digital platforms grew to be valued in the tens of billions: this time Spotify and Slack.
🎼Spotify identified a huge opportunity in how people should consume music, and then worked harder than any other company to reach product-market fit first - legally! From leveraging virality in its sign-up process, to crucial early licensing negotiations with music labels (where a strong understanding of the declining market gave them good leverage), to its freemium model as a competitive advantage, this read is worth your time. Spotify not only identified a gap between two extremes: competing with piracy on one end and with libraries of individually acquired tracks in iTunes on the other end. The early success came by focusing on a frictionless experience, which made it better than piracy (which was free), and this meant prioritizing product development and obsessing over details vs. fast-growth. Growth came at a later stage, by leveraging and then doubling-down on the freemium strategy and by creating the social aspect of the platform (including the Facebook integration - social users are more engaged and twice as likely to pay for a premium subscription). On interesting number to note is that in 2012, they disclosed that it takes c. 12 months for Spotify to recoup their losses from a freemium user, after it switches to a premium package. This means stickiness is critical, and Spotify does well here: because of the accuracy of its recommendation algorithms, it has become an indispensable part of music fans entire week (Discover Weekly and Release Radar). The challenge ahead: it has to reach profitability, and fast. And for this, gaining even more leverage over music labels (or avoiding them altogether) is (probably) required.
Spotify has started licensing some songs directly from artists and their managers, paying appealing advances for tracks. Some argue Spotify is in a stealth-mode competition with music labels, while others smartly notice that Spotify is not buying copyrights, not buying artists' share of revenue and not buying exclusives (so it's not competing with labels) because it doesn't need to do so. It has enough runway from these deals without becoming a "traditional label".
💬 Slack (="Searchable Log of All Communication and Knowledge"), arguably the most popular chat and productivity tool in the world (which Microsoft should have bought, as Ben Thompson often writes), obtained a $1bn valuation after just 8 months of launching (but it had a longer history of trial and error within the gaming communications space, before becoming Slack). Their North Star metric: 2,000 messages sent. After users send this many messages within one team (irrespective of size of team), then the value of the platform kickes in and retention skyrockets. Similar with Spotify, Slack used initially an invitation-only model to iterate the product based on feedback, after which they adopted a freemium strategy (with focus on conversion to paid - which was more difficult because it had to convince entire teams, not individuals). Slack's model is also sticky, because it gives to its users a social aspect of validation of their work (besides the actual value derived from the increased usage over time). Thank you Hiten for these two!
From unit-economics to more debt
💰 Tom Blomfield, CEO and Co-founded of challenger bank Monzo, writes about unit-economics. It begins with how the low-interest rate environments post 2010 have led to capital being invested more freely into tech (as the sector was outperforming the stock market), and in turn loss-making tech companies got a green-light to spend aggressively following the disciplined decade post dotcom crash. This also re-shaped competitiveness in certain market-creating, capital-intensive areas (the more capital you raise, the less chance to be challenged by a competitor i.e. Uber). This created a general entrepreneurial mindset (an "Uber-playbook") where growth matters above anything else, and scale ultimately fixed negative unit economics. For many startups, this did not prove a successful strategy. Fast-forward to 2018, business fundamentals matter again (customer acquisition costs, lifetime value, payback period etc.). But for some businesses, running a negative-unit economics strategy makes sense, argues Tom, and one of their competitive advantage should be ability to fundraise.
📺 Both Taimur Abdaal and Tanay Jaipuria delve into the unit-economics of Netflix taking billion-dollar bets on content. I recommend both for exercising the brain and for assessing on your own if you believe Netflix's vertically-integrated business model is viable. If not, then the recent developments with AT&T being cleared to acquire Time Warner and Comcast bid-war with Disney over 21st Century Fox, all in the chase of vertical integrations into models that offer both content-creation and distribution should give you a hint.
📺 The approval of AT&T's acquisition of Time Warner will create one of the largest content creation and distribution companies in the world. It also spurred a bidding war between Comcast and Disney for 21st Century Fox's entertainment assets. But the repeal of net neutrality rules allows telecom and ISP companies to prioritize content over the bandwidth. Incentivized by the fact that they have more video-content of high quality to directly distribute to consumers, these internet providers could choose to prioritize their content offering over say Netflix, YouTube, Facebook (and more recently Instagram) over the internet rails. And this prioritization needs not to happen in the open. A small level of degrading the internet speed experience for these latter services could make consumers switch to AT&T's vertical offering. This ultimately means two things: Netflix, Google, Facebook will need to step up their inroads in the connectivity market, and the streamed video-content market is becoming out of reach of any future startups, argues Danny Crichton. In other words, Netflix needs to become even more vertically integrated.
What is this race generating? That's right, more debt.
Tech, Policies and Misdemeanours
I think the best investment I made last year was subscribing for the print edition of The New Yorker. It forces me to read non-tech related essays, as well as some fiction.
Is this the nostalgics' club? Yes, but it's not what it used to be.
Privacy is not what it used to be
🔏 This being said, back to tech. An excellent essay from Louis Menand in the New Yorker explores what privacy means for people through the lens of a few historical legal cases. History tells us that every new technological, legal, and cultural development seems to have prompted someone to worry about the imminent death of privacy (from postcards, to telegraphy, to telephony, to photography, fingerprinting, suburbanization, research, blogging and now social media). Privacy lacks any stable significance, and is associated with liberty, but it is also associated with privilege, with confidentiality, with nonconformity and dissent, with shame and embarrassment, with the deviant and the taboo, and with subterfuge and concealment. Excellent.
In the end, let's not forget the truth, summarized in this tweet from Stefano Zorzi:
"An internet without cookies, history, personal preferences is really annoying to use. Convenience is the jail that locks us in. We need a internet that knows our data without owning them."
🏗️ Chris Dillow argues that we must find new ways to measure competition in the digital age (since we cannot rely simply on the number of firms in an industry). He uses an example of an illusion of competition: how broadcasters competing via bidding wars for the right to particular monopolies of video content. One concept he writes about is profits elasticity (if profits fall sharply in response to a rise in marginal costs then the industry is competitive but if they don't then it isn't. A competitive market is one which punishes inefficiency). But the digital platforms have zero marginal costs, so, I subscribe to his point, competition is hard to define and measure.
Markets and monopolies are not what they used to be
📐The antitrust policymakers have it the hardest. The U.S. Federal Trade Commission will hold a series of public hearings (meaning with interested persons and outside experts, and most probably lobbyists) on whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection enforcement law, enforcement priorities, and policy. There is also a case in the U.S. Supreme Court where Apple is being accused of antitrust breach, since the Apple Store is the only available app-store on Apple devices, and because of this control that the company has over developers, consumers suffer by paying more for apps than they should if they were able to access and install apps from other sources (i.e. straight from developers).
🏪 James Plunkett writes about the growing sense that new technologies mean consumer markets don’t work quite like they used to, and this is re-energising longstanding arguments about when, how, and on what basis, the state should intervene. Big data now allows firms to personalise their prices, which means that the idea that the price is a characteristic of the product itself, rather than of the person buying the product, is no longer viable. Opinions differ on the extent to which price discrimination is a widespread phenomenon or not. But it is happening, and it takes multiple forms. For example, search discrimination (consumers being shown different results in product aggregators). There even seems to be an industry of companies whose remit is "helping firms align prices to a consumers' willingness to pay". In practice, competition limits the extent to which companies can raise prices for particular groups of customers, and, as some economists argue, will pull companies back to an old-school model of competing on one uniform low price. This, combined with the sophisticated and growing power of behavioural insights, nudging the customers in more efficient ways to buy, can create a dangerous combination and new challenges for regulators.
Think of Amazon's inroad into selling own private-labels, after years of gathering data about what works and what doesn't from facilitating exchange over its MarketPlace. They have the most sophisticated process for steering customers to its own products, away from competitive offerings. Amazon now has roughly 100 private label brands for sale on its huge online marketplace, of which more than five dozen have been introduced in the past year alone.
Workers' collective-voice is not what is used to be
🕬 A May 2018 Supreme Court decision in Epic Systems Corp. v. Lewis poses a grave threat to collective worker voice by allowing businesses to require that workers, as a term of their employment, surrender their right to participate in class action lawsuits. This ruling has significant implications, and corroborated with the decline in unions, means that in the vast majority of workplaces, workers are now on their own, argues David Weil. This, combined with the growing use of non-compete agreements by employers (once used for a small number of jobs) creates a situation where workers, in most cases in the U.S., have been deprived by two of the main action courses - voice or exit - to correct poor working conditions.
🕬 Historically, unions are a big reason that the working class won many of the protections and rights it now enjoys, but they also created polarization. Economists, too, have long puzzled about how to think about unions, writes Noah Smith. Some economists argue that unions are driving up unemployment (because they raise wages), so it was better to remove them (the share of unionized workers has dropped from 24% in 1973 to 6% in 2016). Unions provide workers with a collective-voice not just at the workplace, but in the political arena, and this means policy has better chances of considering their needs. This is turn creates more inclusive societies, beyond union members. Now economists are looking back at unions as a way to drive down global inequality, so maybe they deserve a second chance?
🏢 David Leonhardt observes that it seems that large companies' (resulted from years of M&A consolidation) have more and more power — to compete, to restrain workers’ pay, to influence government policy and, in the long run, to increase prices. This consolidation boom hasn’t worked out so well for everyone else. Since the modern merger era began in the 1980s, corporate profits have surged, while family incomes have stagnated and income inequality has increased. David is linking this with the fact that the share of U.S. employment of large companies is going up, while the percentage of people working in smaller sized companies is decreasing.
This concentration of employer market-power is what economists call monopsony, and evidence is piling up that employers in the U.S. are able to hold down wages because it’s hard for workers to find new jobs at higher pay in the area. If this power is greater now than in past years, it could be restraining wages.
📄 A new working paper from Jason Furman and Peter Orszag addresses whether there is a relationship between the productivity slowdown and the increase in inequality, specifically exploring the extent to which reduced competition, increased concentration and economic rents and business dynamism.
📄 Mark Paul of Roosevelt institute argues in a new paper that we should not fear automation, but rather the fact that the technological advances in the past few decades have not lead to broad-based economic growth, and workers are right to be concerned about the negative effects of technological change because the historical link between labour productivity and wages, which grew side-by-side for most of the 20th century, is broken. To combat inequality and unemployment and rebuild an economy where productivity gains directly translate into higher living standards for all, Paul reiterates that the institutions currently governing our economy must be transformed.
🕬 Workers in tech have discovered their own collective-voice. Not only did their protests made Google to not renew the contract with Pentagon, but Sundar Pichai has also created Google's A.I. principles. Now, more than 100 Microsoft employees protested in an open letter against the software maker’s work with Immigration and Customs Enforcement and asked the company to stop working with the agency. This prompted a reaction from Satya Nadella. Evan Selinger argues that Amazon employees should mobilize in the same way to ask the company to stop providing facial recognition tech for the government. But, if Amazon won't do it anymore, then other governments will happily outsource their tech, as James Bridle writes in this fascinating story about how Britain exported its surveillance technology to the U.S. We are living in interesting times.
Mobility and fairness are not what they used to be
☁️Romain Aubert explores how the shift to "software eating the world" has led to the growth of digital-communities, which led to the rise of crypto and tokenized networks which will ultimately lead to new "nations" (where ideology is primary and geography is secondary). In other ways, software is reorganizing the world.
🗾This is all nice, but as recently as the early 1990s, 3% of Americans moved across state lines each year, but today the rate is half that, tells us this great essay from Alec MacGillis. Fewer Americans moved in 2017 than in any year in at least a half-century. This can be because people have lost faith in economic opportunities, to deserve the risk of hunting them across states. For policymakers, the low rates of migration to chase opportunities present a conundrum. Should there be a wholesale effort to revitalize places that have lost their original economic rationale? Or should the emphasis be on making it easier for people in these places to move elsewhere? Despite software re-organizing the world, most human beings are still embedded in local, physical communities.
🏡 Also, not everyone can have a chance at sharing most cities’ economic success, since housing costs are a barrier to entry. More permissive zoning codes means more workers would have had access to higher wages, writes Benjamin Somogyi.
👨💼 And these higher wages are not only found in tech clusters. A new study from Michael Böhm, Daniel Metzger, and Per Johan Strömberg finds that there is no evidence linking high-wages in rent-seeking sectors such as finance with talent and efforts. They also show that working hours in finance have not necessarily increased over time, to justify the wage premia (equally skilled workers earn more in finance than outside it). The compensation in finance is so substantial that it even has an effect on overall wage inequality: although the sector is rather small (2.5 to 5.5 percent of employment), finance workers today constitute more than 30 percent of top 0.1 percent earners in both the United States and Sweden, up from around 15 percent at the end of the 1980s.
Work itself is not what it used to be
🤦♀️ A new study from the U.S. Bureau of Labour Statistics finds that the rise of gig-economy workers is mostly overblown, since there was no growth since 2005 in the share of workers in "alternative work arrangements". Now, I`m not even sure of what to be more worried of: the fact that a critical area is being studied by U.S. regulators only every 10+ years, or the fact that when trying to replicate the study, some economists found that the numbers don't add up or the methodology is inadequate.
➕➖Speaking of research replication crisis, the social and political science research suffers from one. Commercial software companies which sell statistical packages to universities and research institutions are constantly making changes in calculation algorithms used by the researchers, and then pressures their clients to upgrade the package every second year at least, which generates inconsistency between replication of studies. Software developers should also play a role in the replication movement (starting with better documenting algorithm changes between versions), and researchers should get used with the practice of stating the version of the software used in their studies, since most of these end up impacting policy and ultimately our lives, argue Anastasia Ershova and Gerald Schneider.
🔍You all know Azeem Azhar and the great Exponential View newsletter. I've recently discovered Marija Gavrilov, she works for the EV in research and she is a great writer (do follow her). She recently wrote a great summary of International Labour Office's study-paper on Future of Work, analysing the impact gig-economy platforms is having on workers' well-being, and whether they are exploited or empowered. Excellent, do read. Do send the link to the U.S. Bureau of Labour Statistics as well, please. Or a fax.
Long-term thinking is not what it used to be
🛣️We live in a time of unprecedented prosperity (driven by long-term efforts such as human inventiveness, political leadership, social activism, and entrepreneurship). We also live in a society where economic inequality and uncertainty is growing (generating a deep distrust of business, globalisation, and technology). There have always been winners and temporary losers (but the past decades have shown that governmental institutions are inadequate to protect the latter). This is turn is creating highly polarized societies (cities vs. smaller communities, young vs. old, highly educated vs. less educated), which leads to a defensive attitude, sentiment which could grow and percolate into politics and then policy. And such policies could prove to be contagious across nations. For globalized businesses, this creates a real risk, which should be managed, meaning corporate leaders can no longer afford to stand by as observers (this also implies that the argument that they have a fiduciary obligation to shareholders to maximize profits no longer stands). In short, Rich Lesser, Martin Reeves and Johann Harnoss expore practical ways in which corporate leaders should deemphasize short-term returns in order to support economic and societal progress, which in turn strengthens the enterprise for the longer term: 1/ re-shape globalization; 2/ support entrepreneurial ecosystems; 3/ leverage front-to-back technology; 4/ invest in humans; 5/ adopt a social-business mindset; 6/ re-align incentives; 7/ renew and own the narrative.
⏩Utimately, every nation’s greatest achievements have always derived from long-term investments, argue Jamie Dimon (CEO JP Morgan) and Warren Buffet. In both national policy and business, effective long-term strategy drives economic growth and job creation. To achieve this, they are launching an initiative to encourage all public companies to consider moving away from providing quarterly earnings-per-share guidance (guidance, not reporting). It is this guidance that is driving the short-termism in public companies, along with withholding investment in tech, hiring, R&D, salaries.
➕➖However, not just public companies are facing this guidance pressure. Steve Blank argues that there are numerous start-ups (mainly the ones that are playing in new, yet to-be-created markets, rather existing ones) that die because CEOs become focused on short-term delivery (or failure to deliver) on the revenue plan agreed with investors.
👎A counterargument comes from James Mackintosh, and he writes that it is mainly a myth that public companies are focused on the short-term, since R&D spending of sales is at highest rate since 1990. A bigger concern, he argues, is the fact that companies are betting on financing costs (interest rates) to stay lower on the long run, hence they become more relaxed about high debt levels (n.b. debt which they take mainly to buy back shares, which is mainly a short-term practice). James also argues that the biggest dangers for businesses and the economy have come from splurges on long-term projects.
Still, in the first quarter of 2018 alone, American corporations bought back a record $178 billion in stock. Commissioner Robert Jackson Jr. believes that the SEC rules are outdated and not serve the purpose anymore, since there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay. Analysing 385 buybacks over the last 15 months, he found that a jump in stock price of more than 2.5% in the 30 days after the announcements led to half of the buybacks where at least one executive sold shares in the month following the buyback announcement, and twice as many companies have insiders selling in the eight days after a buyback announcement than on any other trading day. In other words, executives are spending more time on short-term stock trading than long-term value creation. Somebody please share this with James Mackintosh, above.
Value creation is not what it used to be
🌱Ultimately, as Esko Kilpi argues, today's digital world allows us to imagine and experiment with totally new value creation architectures, beyond corporations, since the value is not embedded in a product or a service anymore, but in interaction which takes place in digital, decentralized environments (and this renders corporate top-down processes obsolete). A shift from centralized corporations to network knowledge, which can merge into temporary bundles whenever and wherever necessary to solve any problems. This can save democracy.
However, we should be wary of tokenizing the world, since there are benefits (and risk protections) from illiquidity (such as forcing investors to think long-term), argues Conor Witt in a great analysis!
Per Albert Einstein:
"In the middle of difficulty lies opportunity"
Snippets of Fintech
This digest turned out to be long! 🤷♂️
Don't blame me, blame the people that write great content!
🏦My colleague Ben Robinson wrote a great blog post, ahead of the Swiss referendum earlier this month on whether the Swiss central bank should be the sole authority for creating money. The referendum did not pass, but I still highly recommend this reading, to understand the downside, the potential benefits, and the implications of central-bank backed crypto currencies and the creation of a Swiss sovereign fund that should invest in digital-age businesses, a fund which Switzerland and Europe desperately needs.
For more opinions on this topic, I recommend:
What is stunning is that such a complex matter was being put to be decided by the mass population, through direct participation. But at the end of the day, the Swiss cannot be bothered with dangerous experiments.
Share your thoughts
In the meantime, the adventures of our baby boy Albert in Bern are following on Albert Einstein's steps. It seems that Bern always asks for a second try to give you what you want, and we might be required to do a second trip if the passport doesn't get issued on time before our August trip, to obtain a special title for travel.
But we're fine with it. As per Albert Einstein:
"Anger dwells only in the bosom of fools"
I would love to hear from you on Twitter, @DanColceriu.
Thank you for reading, cheers from Switzerland!
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An essay for the long commute
📉 Great essay titled 'The psychology of money' from Morgan Housel which explores at length 20 flaws, biases, and causes of bad behaviour that pop-up often when people deal with money. Well worth your time.
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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