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 4th of April and 20th of April, packaged in a story: platforms power and price discrimination; the subscription economy; the un-bundling to re-bundling strategy; redefining privacy and creating a data-as-labour world; blockchain's pros and cons; lessons from disruptive fintech innovation in Sweden. I hope you enjoy!


Strategy and Business Models in the Entrepreneurial Age

👓 What makes tech platforms so powerful?
Lina Khan points to the gatekeeper power (these companies serve effectively as infrastructure for digital markets, which means they use this power to extort and extract better terms from the users that depend on their infrastructure, such as ample power to raise prices like Facebook did with hiking ad prices last quarter by 43%), leveraging power ( placing the platform in direct competition with the firms using its infrastructure, creating a core conflict of interest, incentivising a platform to privilege its own goods and services over those offered by third parties), and information exploitation (such as price discrimination, charging each consumer a different price for the same good or service).

Price discrimination
🔖 Price personalisation means that companies are figuring out what individual customers will pay—and charging accordingly. Fixed price tags appeared in the 1870s when Wanamaker's Grand Depot's scale made it impossible to leave price discovery to "negotiation dance between clerk and customer". Others soon followed and fixed price tags became the norm for most goods and services. 150 years afterwards, with the advent of technology, data collection and online shopping, companies move once again to tailor prices to individual customers. Case study here on how the fastest-growing online employment marketplace in the United States tested switching from a fixed $99 subscription model, to a price range from $19 to $399 based on information they collected about potential customers upfront, and the potential drawbacks.

People are starting to observe that on-demand transportation companies, such as Uber, are quoting different prices for users who happen to call an Uber to the same place at the same time, or when switching payments methods inside the Uber app (from personal credit card to corporate credit card) . While personalised pricing could raise businesses’ profits considerably, it is very difficult to implement in practice for three reasons, and can be easily seen more as price discrimination. First, customers often get upset when they find out that another consumer has paid less for a product or service than they have paid. Second, the perfect price discrimination can lead to arbitrage, where opportunistic buyers purchase the product at a discounted price in one market and then sell it at a profit in another market. The third reason is that, in certain instances, it is illegal (especially when it is calculated based on individual transactions and not generic demand patterns).

The rise of the Subscription Economy
🚀 Can such dominant platforms be challenged? The rise of the Subscription Economy (which itself is enabled by software like Zuora eating the world), can offer the right opportunities, as they uncover two big trends: 1/ the slow death of the ad-driven models; 2/ the 'un-bundle to re-bundle' strategies.

👁️ Take Facebook, for example, as it stands alone in the depth and variety of network effects they've built (most of which are undetected) and as a result, their defensibility in the digital ad-space is unparalleled. USV's latest investment thesis is built on the idea that, since the advertising based businesses have proven to put companies into some degree of conflict with their end-users (including publishers), the future will be about companies whose incentives are aligned with their users, in order to build trust over the long-term. The consumer-subscription model provides a great alignment of incentives between end-users and the company, because it needs to provide enough value in their service so that customers continue to subscribe.

🗒️ Ev Williams, the CEO of Medium, writes a great essay on how the ad-driven aggregator model seemed rational back in the time, especially since no one could have predicted that publishers  - who traditionally differentiated on brand, quality, and audience  - were entering a commodity business that would be dominated by software and scale. But businesses always optimises for where the money comes from, and advertisers weren’t in it for the public or publishers' good. Hence, subscriptions for publishing on a wide scale now seem inevitable . This is why Medium's business model is built on the belief that bundles are a large part of the future of content monetization, and aims to become one of the largest bundles of original content of its type, offering end-users value from curation, organisation and personalisation.

The un-bundling to re-bundling strategy
🎶 The emergence of subscription-based models are also enabling disruption of the incumbents via the un-bundling to re-bundling strategy. Tren Griffin exemplifies how the traditional financial services businesses, which created a broad portfolio of services and then packaged them in a bundle for customers. However, with time, bundles can become so expensive or complex that, as the bundle grows, it can become exposed to an un-bundling attack, like we have already witnessed over the past years. The un-bundling strategy is about one service (or a subset of services) done really well, which is not to be confused with Clayton Christensen's disruptive innovation strategy because an unbundled strategy can involve a service that is better than an existing solution and/or targeted at a high-end customer segment. The common problem with this strategy is that the service by itself may not cover the cost of the business or at least provide an attractive return to investors. This is why the strategy eventually shifts from un-bundling to re-bundling for higher profits.

The saying goes that,

"In business, there are two ways to make money. You can bundle, or you can unbundle",

but Tren is arguing that un-bundling is usually a cost-effective way for a business to build a customer base that can eventually be used as a fulcrum for re-bundling other higher margin services (and uses the example of an independent robo-advisor to illustrate it). Therefore, powered by technological easiness of building subscription-based businesses, the tech-driven re-bundling begins. As consumers do possess some limit to the number of transactions they're willing to put up, we should start to see more bundles of bundles (like the recent one between Spotify and Hulu).

The problem with creating bundles of bundles is splitting up the credit between bundle participants, as usually the highest value component is typically hesitant to join in. However, the inefficiency of large, infrequent transactions might make it appealing, argues Eugene Wei. These type of transactions create an information asymmetry, which leads to higher margins  for businesses that might create some moats simply by replicating some of the qualities of such transactions, even if the underlying businesses don't consist of those. What is subscription pricing but a way of grouping many, frequent transactions into many infrequent transactions where it's difficult to determine the unit cost of all the components of the bundle? asks Eugene.

Incumbents defending
🛡️ Defending against these strategies requires vertical integration, because, in the digital era, it's the route to customer, not the lightness of the balance sheet, that matters. For example, Apple's R&D bonanza, as it aims to control the core technologies powering its devices (such as replacing Intel chips in Macs), but also implying that its future lies in other industries. Or Foxconn buying Belkin, Linksys and Wemo, moving from a behind-the-scenes manufacturer to consumer electronics brands. Or Zillow, an online real-estate database company, which announced it will begin buying and selling homes. Zillow's strategy as an aggregator seems to be shifting to the idea that while there is one thing to sit on top of an existing industry, the power comes from not just aggregation but also integration across the value chain, as Ben Thompson argues.

I couldn't end this section without sharing Jeff Bezos' latest annual letter to Amazon Shareholders. At the end of the day, Amazon is a clear example of integration across the value chain, while also having created the biggest bundle of all -  Prime. And for the first time, Amazon made public the number of Prime subscribers: more than 100 million, with more new members joining Prime than in any previous year. 
In the digital era business models, it's still Day 1.

Tech, Policies and Misdemeanours

👎  With the ongoing development in the FB/CA scandal, and the latest news about thousands of apps in the Android Play store that may be tracking the online activity of children under 13 years old in ways that violate US privacy laws, tech giants seem to be in a ethical PR-rush: YouTube Kids is going to relaunch with a white-listed, non-algorithmic version of its app, meaning that the platform will pre-approve all channels allowed to post, giving parents a firewall against an algorithm that's often proved lacking. Or signing public pledges that promise to defend all customers everywhere from malicious attacks by cybercriminal enterprises and nation-states.

But will social platforms ever take ethics seriously?
🤝 Asks Evan Selinger. He argues that Facebook systematically overvalues AI, engineering, and automation, and devalues compliance, legal expertise, and ethics, hence the days of being optimistic about self-regulation are over, even though the prospects aren’t good for bold governmental approaches either. He identifies two main ethical areas which are ignored: 1/ Design, because by definition, it allocates power between platforms and users, and it is never neutral. Lawmakers focus on data processing but too often ignore rules for the design of digital technologies; 2/ Philosophers, which should also get a more prominent seat at the corporate table, because their knowledge will offer companies a competitive edge. In the long run, successful social platforms will be those with designers that understand our values, how we want to relate with each other, and who understand the challenges of social life in depth. Joe Edelman writes that Zuckerberg and the politicians imagine privacy as a software feature (good privacy = consensual and configurable), but it looks very different if you take privacy as a way of living, rather than a software feature.

Another angle of the debate around users' ownership of data is data portability. ⚡Drawing paralells with the PSD2 moment in the banking industry, where banks are regarded as the custodians of the consumer’s financial transactional data, but not the owners, Tim Richards argues that the same rules don't apply to tech platforms. As it stands at the moment, tech giants can access bank customers’ data with the appropriate user consent, but the banks (or insurers, see Admiral UK vs Facebook) can’t access their data, and the tech companies are definitely not permitting it. This asymmetry of information access is likely to lead to even greater asymmetry of market power than already exists. PSD2 is a template that can be applied to other industries.

Platforms and the gig-working class
👷‍♀️Scholars are exploring the idea of governments treating data-as-labour. Today's data flows are a two-way in-kind transfer, in which technology users often get free services and tech companies get their data, but a recent paper argues that this arrangement is unfair. The paper’s main contribution is a proposal to treat data as labour, instead of capital owned by the firms, as a way to provide income and address the users' absence of any bargaining power to meaningfully negotiate over payments for their data and privacy invasion. This way, each of us are being given a share in the economic value of the production our data empowers. The paper argues that, in a data-as-a-labour world, new institutions are necessary, such as digital-data labour unions.

🤜As we advance our way into the Platform Economy, policy frameworks (enforce existing regulations, enact new regulations, deregulate, or tolerate) for protecting public interests that are common to most sharing and gig platforms are critical. Because these online platforms are not ‘free markets’, since they act like a 'private regulator' when they organise the flows of the platforms, governments' challenge lies in finding the right balance of co-creation and co-enforcement of regulations, meaning that collaboration with platforms is needed (e.g. to collect tax, detect fraud, or monitor working hours). Governments must also acknowledge that the gig economy keeps growing (at a faster pace than traditional payroll employment), but gig-worker benefits aren’t - hence the importance of a system of portable benefits (where gig platforms would make contributions to a worker’s benefits on the basis of how much the employee works for them). However, the paradox that must be solved is that, while for some workers, gig-platforms such as Uber are further fuelling the insecurity in their lives, for a majority of the workers, such platforms represent in themselves a form of a social safety net (like generating income in-between permanent jobs, supplemental income during cash-strapped periods).

FinTech snippets

On blockchain and crypto
You might remember Kai Stinchcombe from his previous article criticising the lack of use cases for blockchain technology, 10 years later after its appearance. He has come up with a follow-up article, arguing that no matter the technological progress, the philosophical vision in itself is wrong and not dignified for how we want societies to be run. His main idea is that the continuous improvement of institutions will always be a much better solution for solving the transactional trust issue, rather than decentralised, tamper-proof repositories.

To quote: "As a society, and as technologists and entrepreneurs in particular, we’re going to have to get good at cooperating — at building trust, and, at being trustworthy. Instead of directing resources to the elimination of trust, we should direct our resources to the creation of trust".

Of course, doing a tech-teardown is easy, and documenting ways a technology can fail is far more appealing. Steven Sinofsky has the counter-argument, reminding about the history of the world wide web and how it is better to be cautious in prematurely judging modern fintech. And one more for the critics, Coinbase acquiring suggests that the blockchain and crypto space is maturing. The "paid email" product from is already one of the first truly useful applications of the blockchain. allows senders to pay users in digital currency for replying to emails and completing tasks. In a way, it is an application of how micropayments can solve the low email campaign response rates, while enabling users to also earn cryptocurrencies for a form of labour. Interesting mission and vision: "turn the billions of smartphones worldwide into a new source of work."
         Arival bank - the first crypto-friendly fintech bank to work with crypto-related, SMEs
         George Soros' family office to begin to trade cryptocurrencies 
         A $660mn ICO scam could be the largest such scam in recent memory
         India's central bank prohibits the country’s regulated FIs from dealing in crypto 

Digital Banking
According to McKinsey, most big banks have the advantages and motivation to push the boundaries of their existing business models. What hampers their progress is uncertainty about how best to build on core strengths to create sustainable outcomes: 1/ growth beyond core activities into complementary ecosystems (meaning more bundles of bundles); 2/ create a financial supermarket; 3/ increase value across the entire customer journey; 4/ monetize data; 5/ become a product or infrastructure manufacturer; 6/ adopt digital-only models. Analysing European banks and their investment in fintech, CB Insights finds a growing activity in VC-type funding into startups, with Banco Santander leading the way. While VC-type investment in fintech is lucrative in itself, would be interesting to follow how these fintech solutions get embedded into the banks offering ecosystem.

Looking at China, Ant Financial, Alibaba's fintech arm, is looking to raise $9 billion in a private funding round, which could value Ant at close to $150 billion. This would create a new biggest private tech company in the world, which is given by the fintech sector. My view of Ant Financial is that is it and vertically integrated fintech ecosystem, offering a mix of own core products and third parties. 

Artificial intelligence in banking
Excellent essay from Laura Noonan looking beyond the hype to see where banks really are with A.I. While the banks want to use A.I. for: 1/ Chatbots and virtual personal assistants; 2/ profiling customers; 3/ streamlining processes; 4/ spotting patterns; it seems that strategies for A.I. vary at European banks, where the number of personnel assigned to drive A.I. across the organisations varies from 25 FTEs at one bank up to 800 FTEs at other banks. This probably suggests there is a massive inconsistency in defining what A.I. is and what it is not, across the industry. 

Disruptive innovation and more bundling
In Sweden, dedicated consumer finance specialists take up to 60% of the consumer finance market, up from 20% in 2001, as opposed to other European countries where universal banks retain a larger slice of the consumer-finance market (in Germany, only 5% of the market is captured by new players and dedicated specialists). Given retail banking’s recent performance in Europe (return on equity in 2016 was below its cost for the seventh straight year), the industry can't afford to let the profitable consumer-finance segment slip away. Lessons from Sweden: initially, the appearance of dedicated consumer finance specialists expanded the market, as they were serving segments which were previously underserved. In recent years, these specialists grew their investments in technology, perfecting their offering and thriving, while universal banks were relatively slow to innovate, and hence the battle has now moved towards market share. Clayton Christensen's Innovator Dilemma 101. 

To further illustrate the "un-bundling to re-bundling" strategy
discussed in the first section, Social Finance (SoFi) moves to start offering banking-like products such as deposit accounts and debit cards to some customers next month, followed by credit cards somewhere in the future, in a move aimed at mitigating the profitability pressures on its personal loans business. To quote its CEO: "There is an opportunity to build relationships with our members that go beyond these initial products". In other words, un-bundling is a customer acquisition strategy, while re-bundling is a moat and profit center
       PayPal is setting its sight on the unbanked sector with launch of prepaid debit card;
       PayPal is also partnering with Safaricom's M-Pesa, to allow seamless transfer of funds between the two wallets. In other words, bundling 22.7 million customers with another 227 million into one ecosystem;
      Uber and its debit card for drivers.

Until next time, one more essay

👀 Mr. Robot
Geoffrey Hinton spent 30 years hammering away at an idea most other scientists dismissed as nonsense. Then, one day in 2012, he was proven right. Canada’s most influential thinker in the field of artificial intelligence is far too classy to say 'I told you so'

Would love to hear your thoughts on Twitter, @DanColceriu.

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     Top 10 articles I recommend which were featured in this digest:
1. Lina M. Kahn - What Makes Tech Platforms So Powerful? - April 2018
2. Ev Williams - The rationalization of publishing - April 2018
3. Tren Griffin - Friar Tuck Financial Services: A Classic Unbundle/Re-bundle Strategy - April 2018
4. Ben Thompson - Zillow, Aggregation and Integration - April 2018
5. Jeff Bezos - Annual letter to Amazon shareholders - April 2018
6. Evan Selinger - Will tech companies ever take ethics seriously? - April 2018
7. Arrieta Ibarra, Imanol and Goff, Leonard and Jiménez Hernández, Diego and Lanier, Jaron and Weyl, E. Glen - Should We Treat Data as Labor? - December 2017
8. Kai Stinchcombe - Blockchain is not only crappy technology but a bad vision for the future - April 2018
9. Laura Noonan - A.I. in banking: the reality behind the hype - April 2018
10. Albion Murati, Oskar Skau, and Zubin Taraporevala - Disruption in European consumer finance: Lessons from Sweden - 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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