Tag Archive for 'future'

Bitcoin makes sense for the future

Bitcoin fascinates me. Whether it’s the future of currency itself I don’t know, but it will pave the way for the future so it’s worth studying.

There are two reasons that people claim make Bitcoin flawed.

The first is that it’s based on ECDSA (Elliptic Curve Digital Signature Algorithmwhich consists of a private key (a secret number known only to the person that generated it), a public key (a number that corresponds to a private key which is calculated from the private key but that is very difficult with current computing to reverse engineer to predict a private key), and a signature (a number that proves an operation took place that  used a hash and the private key). Values can be determined without the private key ever being disclosed, so that a bitcoin can correspond to a public ledger to prove the authenticited of ownership — for example, an algorithm can determine with the public key on a signature to determine it was produced by a hash and the private key, without needing to know the private key.

And so the critique goes, if someone can build a sufficiently powerful quantum computer, Shor’s algorithm will enable someone to steal bitcoin’s at will as they can crack the secret of someone’s private key. But basically, it’s practically impossible for this to happen. I’m not crypto expert, but I’ll leave this for others to digest further.

The second critique is due to the known limitation that bitcoin will one day cap at 21 million units. If bitcoins go missing, we will never be able to replace them — such is the case with physical currency today which goes out of circulation (but a central authority issuing it can reprint them). And inherently, Bitcoin is considered to be deflationary — the problem with deflation is the decreased price level of goods and services. Meaning, because it’s got a future guaranteed scarcity it will get scarcer and lead to deflation so therefore it’s doomed.

This is what I want to explore further because it’s worth clarifying some fundamental assumptions about the world.

What is value?
Let’s start with a functional definition of value. “Value is energy applied to resources where the perceived utility of the output is more than the inputs.” That definition implies there are three sources of value in the world: energy, resources, and outputs that have used the application of energy on resources and becomes a transformation. And the utility of a transformation, is different from say energy and the resources that went into it, simply due to perception of it. Basically, value is at core about utility.

Resources are finite: we only have a limited amount on earth that we can use. And most of it is not usable, as we don’t have the capacity to extract the resources in a usable way. Energy on the other hand, by the human definition, is unlimited — the sun sends 1.KW for every square metre of the earth surface for free. But what limits energy is the ability to capture it, store it and transport it — so therefore energy has value. We need energy to function: animal and plant life need it to function, and we need it to extract resources as well as apply it to transform resource into new products.

Is energy in itself valuable? Well, only if we use it: if a plant sits in the sun, it’s free — as does a human who will get Vitamin D that helps it function. Just because it’s free though doesn’t mean it doesn’t have value: it’s just the price is low. Humans also need other vitamins to survive, and it requires the expenditure of energy to acquire future sources of energy — that energy could be valued as time to hunt down animals for example.

Do resources have value? If it’s utilised, it has value — and the more it’s used, the scarcer it becomes for other uses which is why it gets regulated by price when there are competing seekers of the resource. Like energy, the question isn’t if there is value: the issue is what is the price of that value. It’s how to price that utility to regulate its usage.

Theoretically, you could say the current available energy in the world that can be used and the current available resources are what is value in the world, as well as the products created through the transformation of resources with energy. Value is what the total utility in the world is. And if there are no competing uses of those pieces of value, then prices are practically nil: but once there is competing needs for limited pieces of value like resources, that’s when we see the price increase.

And that is, why fundamentally, all value is tied to scarcity: the scarcer the value (supply) and the higher the demand, the higher the price.  This is fundamental economic theory which is the study of how to best allocate limited resources in an world that is based on the assumption of unlimited wants — which theoretically, makes sense. What breaks down is that interpretation of the theory.

For example, it’s fine to say there are unlimited wants in the world — but that’s a assumption that says there will always be competing demands for resources so therefore everything needs a price. Which again, is fine: it’s just this assumption of an assumption needs to assume a more fundamental assumption: a price of zero doesn’t make something less valuable than the same resource which has a price of more than zero. If you can buy a diamond for $1 but it normally would be valued $1000, that doesn’t mean it’s less valuable fundamentally: it just has less competition and so therefore less cost to acquire.

What is currency?
Arguably, you could say the sum of value in the world is all the stored energy, available resources, and transformations in the world which has utility. The world’s currency system should be tied to that: if you could exchange all the value in the world, it should be equal that.

Currency should be a way to store value and transport it. The energy I applied with my time which created more perceived value than the energy itself in the form of knowledge,  I want to store for a future use where I can exchange that for something of similar value. Therefore, a currency needs to have a consistent form of pricing (to make value comparable) and it ideally has a stable means of being valued (ie, storing it a year ago should theoretically be valued as the same as storing it today).

But the hard thing about utility  is that it’s hard to measure at the one point in time –even though we know there is a fundamental fixed amount that can be used in the world. But that’s why the assumption that a currency should have a fixed supply makes perfect sense: the price mechanism of currency adjusts for changes in utility (assuming the supply of currency doesn’t degrade, which is another factor why modern day currency can adjust in value).

Bitcoin’s fixed supply
Which brings us to the question: does Bitcoin having a fixed supply make sense? Yes.

But what about the risk of “deflation” in the world due to a fixed supply? Well, it’s not that value in the world goes does — it’s just the pricing of that value might go down.

The above discussion I hope answers those questions.

And what about if there are missing bitcoin’s in the world, which creates a supply constraint on this new currency? Bitcoin’s are divisible up to 8 decimal places which means one bitcoin has 100 million components (yes, they have a name: called a “Satoshi”). Ignoring the clear economic incentive to not lose Bitcoin’s, lost coins get lost in the noise and this divisibility allows it to adapt. With 21 million final bitcoin’s divisible by 100 million, that means 2.1 quadrillion units of currency or Satoshi’s. To put that in comparison, in 2009 there was approximately 8.3 trillion US dollars in the world or 0.0083 quadrillion cents. If one cent was one Satoshi, that would be 2100 trillion US cents or 21 trillion US dollars.

Some say the value of the US economy to be 188 trillion dollars (different from GDP, which simply accounts for   spending in one year). Assuming the US economy in 2009 accounted for one quarter fo the world economy (based on GDP), we can assume the world has a price on the value in the world of about 750 trillion US dollars or 0.8 quandrillion.

If the total *value* of available Satoshi’s in the world one day equals that amount (One Satoshi equals 0.35714285714 US cents  or 750 trillion divided by 2.1 quadrillion) — then who cares if a few bitcoin’s get lost along the way. What we have now is a currency that does what currency is meant to do: store value for the exchange of value in society.

The changing dynamics of news

In the recent controversy that has erupted due to the firing of Michael Arrington from TechCrunch, I believe it represents an era in innovation led by TechCrunch that we’re only starting to appreciate.

To start on this thought experiment, consider how four years ago (meaning, things haven’t changed) I wrote about the two kinds of content that exist: data like breaking news or archived news; and culture which includes analysis like editorials and entertainment such as satire.

UnderstandingI argue that each content form has unique characteristics that needs to be exploited in different ways. Think about that before digesting this blog post, because understanding the product (such as news) impacts the way the market will operate.

Some trends of the past
Over the last two decades, we’ve seen the form (and costs) of news be disrupted dramatically.

It started with hypertext systems that helped humans share knowledge (with the most successful hyperterxt implementation, the world wide web 20 years ago forever changing the world); search engines helping us find information easier (with Google transforming the world 10 years ago), and content management systems helping people reduce the costs of publishing to practically zero (with Moveable Type and especially WordPress driving this).

While the sourcing of news still requires unique relationships that journalists can extract to the world, even that’s changed due to social media that’s created a distributed ‘citizen journalism’ world. Related to this is a movement Julian Assange calls “scientific journalism” where the sourcing of news is now democratised and exposed in its raw form.

Some observations of the present
With that, I’ve noticed two interesting things about the tech news ecosystem, who are are helping shape the trends in news more broadly: tech bloggers kill themselves to break stories, to the point where blogs like TechCrunch have become cults for those that work there; separately, the rise of the news aggregators like TechMeme and HackerNews (or Slashdot and Digg before them) have built the audiences who have been overwhelmed by information overload and crave a filter from a quality editorial voice (the latter being why news personalisation technologies cannot work on their own).

The big secret (that’s not particularly secret due to the abundance of ‘share this’ buttons on webpages) about the news ecosystem is that it’s the aggregators who drive traffic to news outlets that report the news. When you understand that point, a lot of other things become clearer.

Content Aggregation infographic

On the other hand, tech entrepreneurs break their backs for the hope of getting written about on the Tech blogs. The reasons vary from getting credibility so they can recruit talent; exposure so they raise money; and a belief that they can acquire customers (the whole point of building a startup).

Which leads me to think despite all these random observations I’ve listed above, there is a fundamental efficiency evolving in news reporting that may give an insight into the future.

Let’s keep thinking. Other things to consider include:

  • The audience starts with the aggregators for news and the articles whereby the better headlines tend to perform better
  • News in its barest form is making awareness of an event (data); anything additional is analysis (cultural) which is to shape understanding around the event
  • The rise of ‘scientific journalism’ and social media allows society to discover and share information without a third party (due to technology tools).
  • Press releases are an invention to communicate a message so reporters can base their writing on, who often just copy and paste the words.

Some thinking about the future
News should be stripped to its barest form: a description of the event. It should be what we consider currently a “headline”, with preferably a link to the source material. Therefore professional journalists, bloggers, and the rest of the world should be competing to break news not on who can write the best prose but who can share a one line summary based on their ability to extract that information (either by being accidentally at the event or having exclusive relationships with the event maker). The cost of breaking the news should be simply a matter of who can share a link the quickest.

News Article - Wichita Falls Record News

Editorial, which is effectively analysis (or entertainment in some cases) and what blogging has become, should be left to what we now consider as “comments”. Readers get to have the “news” coloured, based on a managed curation of the top commentators.

Tying this together: Imagine a world where anyone could submit “news” and anyone could provide “editorial”? A rolling river of news of submitted headlines and links, and discussions roaring underneath the item reflecting the interpretation of the masses.

You could argue Twitter has become the first true example of that where most content is in full public view but with a restricted output (140 characters); people can share links with their comments; and the top stories tend to get retweeted which further gains exposure. Things could be similarly said about Digg, Reddit and Hacker News. But these services, along with Twitter (and Facebook) are simply an insight into a future that’s already begun. I think they are just early pioneers before the real solution comes, similar to how Tim Berners-Lee created a hypertext system in a saturated market that then became the standard; Google created a search engine in a saturated market that then became the standard; and WordPress created a blogging platform in a saturated market that then become the standard. Lots of people have tried to innovate in the news ecosystem, but I still don’t think the nut’s been cracked.

News has a lot of value, but there is different value based on who breaks it and who interprets it. For example, when I fire up some of my favourite aggregators, I tend to not click on the original headline but on brands I like so as to read their take on the event (though when I’m deeply looking into something, I dig for the source material). But the problem with news now, is there is a fundamental disruption on the cost structures supporting it: the economics favour those who break the news, with those that interpret news suffering as traditionally both these roles were considered the one function. Something’s going on and the answer is cheaper production, faster distribution and more of a decentralised effort across society and not the self-appointed curators.

While the newspaper industry is collapsing, something more fundamental is happening with news and we’re simply in the eye of the storm. Stay tuned.

Why blogs are turning into newspapers and Quora is the future of journalism

MG Siegler wrote a post following our exchange on Twitter. I called him out because for the second time that day, I had logged into Quora only to see minutes later a TechCrunch post being Tweeted that was rehashing the original Quora discussion. Is this the future of journalism?

Blogging 3.0
Siegler wrote an eloquent post expanding on my original jibe that he was practicing blogging 3.0 (I called it that as over the years Marshall Kirkpatrick would constantly joke Twitter is what paid his rent). Now don’t get me wrong: Quora is one of my favourite websites right now, and Siegler (as well as Kirkpatrick) are two of the more talented writers in the blogosphere. But it made me wonder: what’s the role of the journalist in the world, and by implication, the news blogger?

For the bloggers out there who receive bonuses by getting headlines on Techmeme — what’s stopping Gabe Rivera (Techmeme’s founder) from simply importing the RSS feed of Quora posts and having its human editors headline the best answer? As Siegler points out, he (worryingly) already has. Given Quora responses are like blog posts and get aggregated into a community wiki-like answer summary, I can’t see why this won’t become a new input source for Techmeme, completely bypassing the traditional blogs.

And while we are on the topic: Julian Assange of Wikileaks argues that they are pioneering a new form of journalism, which he recently argued in an editorial for The Australian, as “Scientific journalism“. Scientific because you can read the source of the material in its naked form or accompanying an article that discusses the source.

Source material is democratised
Journalists, it is said, are becoming curators of information. Siegler claims he has retrieved information from an obscure source, amplified it, which in turn will be broadcasted by a bigger publisher like CNN. But if Quora democratices the source gathering — it’s so obscure that everyone in Silicon Valley is on it, include billionaires like Steve Chase who founded AOL and Mark Zuckerberg of Facebook — what’s stopping me from “breaking” the apparent news? Or Rivera from doing a direct RSS import of the top answers, direct to his audience of thousands?

If the big blogs are traffic hungry that have them reliant on the aggregators like Techmeme to feed their pageviews….And if this trend to scientific journalism is being promoted, where journalistic bias adds colour to a source only if you want (rather then the bias being the source of your information consumption) — then one has to ponder. That the evolution of journalism will come not from changes in journalistic style, but by changes in technology — an evolution where every single one of us can talk openly about the world and in an applied way.

Siegler says this is business as usual for the bloggers, but I think it’s business as usual for the disruption technology is generating for the news making business. Disruption that will continue to favour those who tease out the source of news (like Quora, Twitter and Wikileaks has) and those who curate it into an efficient way to consume (like aggregators such as Techmeme, Google News and Digg).

The future of journalism resides with those that create the originating value: traffic or content
Before the Internet, newspapers were the sole source of information and so had an elevated role in society. Now they are being relegated to just one of the many sources of news; once considered a horror if they disappeared, they would not impact the world if they went bankrupt today (as there are plenty of online mastheads to replace their value). As social media technologies continue to be refined — where the participants curate the source material themselves — blogs will not disappear like how newspapers won’t disappear. But their position in the world is far from guaranteed, as the audience curation is being done better by the aggregators and the source material is now no longer proprietary to a journalist.

Why the seed investment bubble is exactly that

Jed Christiansen wrote a thesis on the rise of Y-combinator and other seed-accelerators. He also released the data behind his research, which gives an insight into the success of the seed-accelerators. It’s fascinating to look at these numbers, because Silicon Valley is seeing a bubble emerge — and unlike the previous ones like the Dot Com boom when people realised the potential of websites, or the Web2.0 bubble where shiny AJAX and social was the new black — now we are seeing a bubble emerge on the ‘backend’ through the capital investors.

Why is it a bubble? Well first of all, the hype. Last March at SxSW, I met Mark Nathan who told me he was helping yet another seed accelerator. He told me that 44 of them had been created to date in the US. That and the recent success of Angel List by the Venture Hacks crew — which is effectively commoditising the seed market — is seeing a mini revolution occur in the tech sector.

But as I sit here with my buddy Stephen Weir: a serial entrepreneur who’s invented the spoon-less yoghurt cup, licenced super model of the world for a reality TV show, tried the tech startup thing (like launching the biggest online invitation website in Japan and a reward based mobile gambling application on all three carriers in Japan) but now works in property — we asked, are the returns actually supporting this hype?

How good a business is it

Christiansen says the following:

Y Combinator and TechStars are two of the oldest seed accelerators, and are the only two to have had substantial exits. The TechStars exits have likely already generated a profit, and there are several companies that may still exit at some point in the future. The Y Combinator company exits have likely already brought Y Combinator to break-even, even after having funded over 100 companies. More impressive is that there are a good number of companies in the portfolio that could reach substantial exits at some point in the future. (And potentially a handful that could reach the vaunted $1billion+ exit.)

Y Combinator for example has funded 206 companies to date. At an average $10k in capital as well as $600 in travel costs (applicant companies can get up to $600 in reimbursement costs), they’ve put at least $2m in seed capital and assuming 10-20% of companies get accepted (an assumption by us), then reimbursed travel costs are between $450-900k.  (Note: this is extremely conservative to the point of unrealistic, as companies receives $10k per person so the cost is actually  closer to double or $4m in seed investment — but we’re doing this to prove a point.)

And what’s the return? According to Christiansen, of the 206 companies invested in Y Combinator there has been $89,008,000 in exist value generated. Y Combinator claims the average stake in each company is 6-7%, so the group made $5,340,480 on a 6% return. But we think the companies that actually exited would have been able to negotiate a lower rate, as well as the fact Y Combinator would have got diluted by some of the companies that took additional funding. If we use 4%, then the return is $3,560, 320.

After five years, that’s a gross profit of between anywhere between 500k (assuming 900k travel costs, and 4% return) to $3m (assuming 450k travel costs and 6% return). That means on a conservative back-of-envelope guess, the operational side of Y-Combinator gets about $600k a year, which is what a fund manager would make.

Our conclusion

When paying out salary costs and other admin expenses, break-even seems very likely. Or at least, the profits are very ordinary right now. Put a more realistic capital base of 20k per startup, and you’ve got a terrible loss making business in the medium term. Now to be fair, this is doing it over only a few years. For this analysis to be really accurate, it needs to take into account that the window for a return is ten years – you can’t do dollars-in dollars-out in just three years. Otherwise, how would firms like Sequoia have existed so long. And Y Combinator has got some super-star startups that are the talk of the town now, like Dropbox and Airbnb — an exit on either of those will make a huge difference.

But that said, looking at this at a  high level, we’re not sure if the hype is justified. Paul Graham may emerge a wealthy man, but we don’t know how the other 43 seed accelerators will.

The information age is still filling up its rocket with fuel

Today, the Wall Street Journal published an article by a fund manager who suggested the Internet is now dead in terms of high growth. While I can respect the argument from the financial point of view (although he’s still wrong), it also shows how widespread and unsuspecting even the educated are for the transformation the Internet is preparing us. Yes, ladies and gentlemen – we ain’t seen nothing yet.

But I won’t get into the trends right now that are banging around my head, making me willing to change careers, country and life to position myself for the future opportunities. Let’s instead start with his core thesis:

The days of infinite margins, 1,000% productivity gains, and growth of market throughout the universe are long over. Internet companies now should be treated, at best, like utility companies that get bought at about 10 times earnings and sold at 13 times earnings. Even then, I’m not sure I would give the Internet sector the same respect as the monopoly-protected utility sector.

I am glad that was said, because this is more of a world-wide problem we have, that has lead us into the Global Financial Crisis (GFC). The ridiculous false economy generated over decades of speculative growth – where fundamental asset values were supported by unreal cash – is something we need to stop. The best thing the GFC has taught us, is that valuations need to be supported by independent cash flows with markets not manipulated to inflate their true value. And I can’t wait to see the technology sector (who along with their partners in crime in banking and property) use some basic accounting skills, and come to the rude awakening that, in the real world, that’s how things roll.

Where he is wrong however, is in the innovation that is creating new ways of generating revenue. More importantly, what we are seeing is a stabilisation in technologies invented half a century ago. The Internet and hypertext (the web is an implementation of a hyptertext system) have all been in development for 50 years – and it’s only *now* that we are coming to grips with the change. So to say this is a fad that’s now over, is really ignoring the longer term trends occurring.

As identified in the article, the biotech market will be massive, but I was told by the head of the PwC Technology park Bo Parker in March 2009 that it’s only just resembling Information Technology in the 1970s. However, when in comes to information, things are ramping up for a lot more as the industry has had a lot more time to evolve.

Where do I see things going? Oh man, let’s get a beer and talk about it. Data portability, Semantic Web, VRM, Project Natal, the sixth sense, augmented reality – try that to get your imagination started. I call it the age of ubiquity: ubiqitous connectivity, ubiqitous computing, ubiqitous information – where we have those separate things accessible anywhere and everywhere and when combined will change our lives. Information and communications, after all, are a fundamental aspect of being human that underlie everything we do – and so its impact will be more broadly applicable, obvious, and transformative.

Where’s the money in that? Are you kidding me?! The question is not how many dollars these changes can generate, but how many new industries will they spawn. We seriously don’t know what’s about to hit us in the next two decades for information technology, and clearly, neither do the Fund Managers.

Rethinking copyright and its scope creep

Modern copyright has been influenced by an array of older legal rights that have been recognised throughout history, whose legacy development may be harming our future. It traditionally protected the moral rights of the author who created a work, the economic rights of a benefactor who paid to have a copy made, the property rights of the individual owner of a copy, and a sovereign’s right to censor and to regulate the printing industry. I’m not going to say copyright is dead, but perhaps now irrelevant, given the evolution of media. As I’ve argued before, access to information is more valuable than ownership and modern copyright law doesn’t recognise this fully.
Is copyright a little fuzzy?

Rethinking media
Media, content, and other related words essentially are words that reflect human expression. When you read a book or a newspaper article, it’s another human being expressing something to you. That expression in turn, generates an experience for you – such as (but not limited to) interpretation, entertainment and reflection. You can’t “capture” media and lock it in a jar – you can only remember it. No one can own the individual words in a body of text because no one owns a language. But that power of provoking emotions in other people is powerful and outright scary if you truly realise the power.

We are now seeing a dramatic evolution in the media landscape. The disruptive influence, of what was called “user generated content” yesterday and now called “social media”, is making us rethink the media in our world. The thing is, it’s the same thing as any media – it’s human beings expressing themselves. The only difference now, is that the means of that expression has changed – less so technologically and more so the actual process – to one that is many-to-many.
This image is copyrighted

Rethinking value
Social media is about discussions rather than broadcasts. It’s about the producer and consumer of the information interacting. Everyone has an opportunity to respond to my blog post here, and sometimes I respond. Other times I don’t, but that doesn’t matter because it still impacts me and future readers of my blog post with an alternative perspective.

What we are seeing now is a move way from the mass production of media, and a growth in the mass socialisation of media. It’s not about how many people you can push your content to, but how engaging your content can be. The economic models supporting content are still evolving, but it’s engagement that pays the bills. An engaged reader will be more receptive to advertising (which is increasingly important as advertising performance is now more accountable) and for the subscription model of content, engagement is what retains a customer. To retain a readership, you need compelling content.

However this old media adage about compelling content is changing. The socialisation of content isn’t just about pushing content, as insomuch discussing it. It’s about building a community of people that are passionate and interested: an expertise network where value comes from being in the same place as others that are like-minded. An example of this can be see with Read Write Web, who have created an exclusive community manager community. GigaOM, another innovator in the media space, has done the same thing for premium content that runs in parallel with its popular (free) blogs. Compelling content is now about building compelling communities. Copyright works well for static objects – but not so much for people interacting freely.
RWW aggregator

Rethinking copyright
This is a complex subject and I by no means am being definitive here. But I simply want to raise a question of what really is the value of copyright? If content is an expression that generates an experience in a human, then specific types of expression need specific treatment. And if compelling communities are now a new form of engaging with content, requiring a lock down on the content produced may actually hurt value. As another form of content, news has value in its immediacy and is useless a day later as the news is constantly evolving. There’s no value of copyright there as ‘time’ is where news derives its value from – not long-term protection.

Should copyright be dead? No, that’s not what I am arguing – rather, it needs a rethink of what exactly it’s protecting, with its scope reduced. Like a parent protecting a child, if you protect them too much, they might never actually experience life, be happy and potentially ignorant to future dangers – which is what a parent is ultimately responsible for. The aggressive remarks of newspaper executives I’ve heard in the last month about being more aggressive in their copyright may not be the right solution. Protection of assets is valuable only when it enhances future value.

Let’s be careful we not lose sight of what we are protecting and why.
Copyright is for losers

Why we should support movie piracy

Across the entire developed world, you will see piracy warnings from the entertainment industry. They usually make some emotive video about piracy costing jobs (because of six billion dollars in lost revenue) and that you as a consumer should join the fight. But is this really the case? I think laziness is what is costing jobs. Executives are clinging onto an old way of doing things in a new world, and instead of exploring alternative mechanisms, they fight for the past. I think if the industry lets go a bit, they might actually improve the status quo.

Let’s have a look at the movie industry and see the difference.

Piracy: it's a crime
Currently
Hollywood studio invests in the production of “The man with a Blog”. They have an all star cast, filled with James Bond action scenes and circus freaks.

Movie theatres around the world premier the movie, after months of publicity. Box office sales smash the predictions in that weekend – millions of dollars are spent by people buying movie tickets. Several months later, a DVD version is distributed, giving a second hit at having consumers spend their cash on experiencing this masterpiece. Television networks several years after that will license the movie and play it on TV.

Money continues to stream in – it’s a model that’s worked for decades.

Pause: two important things to note
Unlike reading a blog, for example – where your attention can wander and not be fully engaged – a movie has the full engagement of the consumer. They’re absorbing every sound and image being presented to them. So engaged are the consumers that people will rewind the movie to rehear a line they missed. They will pause the movie if they need to go to the bathroom, for fear of missing out on a scene.

Another thing to note is that the consumer is having an experience. Even if they “own” a copy of the movie, all they are truly buying is a license to replay the movie in the convenience of their homes. When a consumer buys tickets or a DVD to a movie, what they are really buying is access to an experience that can provoke them intellectually and stimulate them emotionally. Beyond stimulating an individual, it also serves as a cultural tool in our society, allowing people to have shared experiences that can then allow them to relate to each other – like how two strangers laughing over a movie will create a bond.

Replay
So why can’t movies be free? And if they were, who are they hurting? Let’s now replay the blockbuster described above and see the difference.

Hollywood studio invests in the production of “The man with a Blog”. They have an all star cast, filled with James Bond action scenes and circus freaks.

Movie theatres around the world premier the movie, after months of publicity. Box office sales smash the predictions in that weekend – millions of dollars are spent by people buying movie tickets who are paying for the experience of being in a room of people laughing with premium surround sound, a premium screen, and an excuse to snuggle up with their first date. Several months later, a DVD version is distributed, giving a second hit at having consumers spend their cash on experiencing this masterpiece – consumers will pay for the DVD because they like to store their movies on a shelf for reuse. Downloading the movie over the computer eats their bandwidth and storage space, and while some will do it, the value proposition of a physical storage item still exists. Because although they can download a medium-quality movie over their connection – they might want to one night experience a high quality version on their big plasma TV. So they will willingly pay for that DVD, which in bandwidth terms, is a hell of a lot cheaper.

Movie theatre

Television networks several years after that will license the movie and play it on TV. Because at the end of the day, if other people are going to generate revenue on your assets, they should continue to seek licenses to do so. Sharing a movie to other consumers should not be a crime, but showing it to mass audiences where you take the full sales, is.

Money continues to stream in – it’s a tweaked model that honestly don’t affect the world that much. Or jobs in the industry, other than the lawyers.

Fast forward
The movie industry is under-exploiting two essential characteristics I mentioned above: the undivided attention of the consumer and the fact they generate an experience for consumers. In the old world, that’s what advertising agencies were paid for to achieve!

I’ve previously argued that online advertising is a bubble economy, but that’s not to say advertising is dead. If fact, brand advertising is something I expect to thrive, and something like a movie is the best opportunity to take advantage of it.

Movies are replaying our lives, in a real or fantasy way. They are a replication of life, with consumer products filling the screen just like they do in our lives. When I watch my favourite actor talking in a scene, I am taking in the visual experience – and allowing product exposure to my attention. If I see a funky piece of furniture in that room, I should be able to interact with that – like clicking on it for more information and perhaps even create a direct order to buy. Television networks have spent decades monetising movies by showing advertisements in between regularly scheduled breaks (which disrupt the experience). Why not make advertising an embedded experience during the movie? It’s non intrusive and it’s relevant – a much better way of doing it.

Every time someone clicks on a table in a movie, the movie studio gets a cut out of the sale. Indeed, the supply of the table in the movie could also come as a form of premium sponsorship, as the studio is promising the supplier guaranteed exposure to an audience. The exact reason why people advertise: exposure to an audience.

Taking it a step further, we haven’t even got to explaining brand advertising opportunities. Imagine if your favourite actor is wearing a new style of jeans – isn’t that going to influence your thinking? Even if we consciously don’t think much of the jeans, the experience of being in a happy state watching our favourite actor, generates an emotional bond with that consumer product. It’s doing what advertisers have spent decades trying to master: building an emotional connection and a need with a new product.

The scenes that have been cut out
What I’ve just done here, is made you realise that movies can still be sold despite being free – but people will happily pay for it as they are really buying a unique experience. The actual movie itself should be free for consumers and there is untapped opportunity to innovate in this sphere.

There is an Israeli startup that allows you to embed advertising in a movie. What’s the big deal about that? Well every time someone downloads the movie, they will get an updated ad. So the original publisher can actually control the content for an entire lifetime: once an ad has been inserted, it can simply be replaced with the newest advertiser to sign up.

Imagine if movie studios distributed free versions of their movies, with commercial breaks like TV – and an option to pay to remove those ads for those willing to do so. And imagine, if with a bit more research, technology could be evolved so that scenes within a movie showcasing consumer products, could be updated with a new product. The painting on a wall can now be replaced with another painting. It’s already being done for computer games – why not movies, that themselves now rely on computer generated graphics?

When thinking of the opportunity in that way, restricting access to that movie is no longer in the studio’s incentive. With an audience, you monetise more by having a bigger audience. And so making something free, actually could make more money because demand will not be affected by price elasticity.

Illegal movies

La Fine
Once you think about things in this light, you realise the enormous opportunity available. And hopefully, you too also realise that what’s holding us back from this innovative, less-obtrusive, higher-value-generating future – is outdated thinking. Because as long as we cling onto the past, we are preventing bold strides into new models that potentially will make more money, if done right.

It’s a bold statement to say that you should support movie piracy, but it’s actually forcing the industry to adapt to this new world. Piracy has made us reevaluate the value of movies when the distribution line can no longer be fully controlled, and continuing to do it forces our legislators to reconsider public policy on intellectual property that was made for another age.

Using pirated material isn’t costing jobs in the entertainment industry – it’s doing something much better. It’s getting some media company executives in trouble, as they haven’t got the guts to innovate.

Why Twitter will make advertising an endagered species

twitter-logo-small Twitter has transformed the way we communicate in the world. That’s a big deal, because as human beings, the ability to communicate is how we broke free from the rest of the animal kingdom. Our entire society is based on this fact, and so it should come as no surprise that so are some of our biggest industries. Advertising, the billion-dollar industry that funds the web and media, is literally about communicating to the public.

More fundamentally, that’s how the market economy operates. There are three elements to a market: conversations, relationships, and transactions. In the industrial age, we forgot about this and came to associate markets as purely transactional: we see a price attached to a mass produced item, and that is meant to convey everything we need to know. But as Doc Searls shares the story with his African friend, the conversation at the market is how selling used to be done, underpinned by a relationship.

My firm PricewaterhouseCoopers is one of the biggest firms in the world. In Australia, we are almost twice the size of our nearest competitor and manage to charge more than our competitors as well without consequence. I’ve often wondered how this could be, but it was only until I broke down the fundamental components of the market that I realised. Price matters – but only when you don’t know anything else. When someone gets to know someone at the firm, they have conversations – and build a relationship. Those relationships are what makes PwC the behemoth it is. It’s not that price is irrelevant, but now with additional information to inform an economic buyer, it’s no longer the sole determinant.

Demand and Supply, sitting in a tree
Twitter co-founder Isaac “Biz” Stone recently defended the company’s stance on advertising as a revenue model. He rightly says the banner ad model is dead – no kidding. But his brilliance comes through when he says that they are exploring ways in “facilitating connections between businesses and individuals in meaningful and relevant ways”. Those words so simply explain more than just Twitter’s opportunity, but the entire future of advertising.

My half-cousin Alex Lambousis has created his own fashion label. Primarily a Jeans business, he controls the entire design process as he owns an industrial laundry, and so can compete on the global scale with high-end jean product. Like any startup, he’s trying to crack new markets.

Think about Alex’s issue. He’s a wholesaler, who relies on retail outlets to sell his product – not exactly the best of customers. He’s reliant on celebrities wearing his clothes, and negotiating special rack space in high end fashion outlets, to get exposure of his world-class product. But it’s a hard market to crack – he’s had success, but is not where he wants to be. What’s a man to do?

Have a look at this search query I just did on Twitter’s community. Twitter allows you – in real time – to search for what people are talking about right now. My first attempt, without trying to be creative with the search string, yielded the following results:
new jeans - Twitter Search

A new customer just appeared on the market half a minute ago. A few of the others can be identified as market opportunities. Imagine if Alex simply responded to them, giving them a discount on his range or just pointing them to a blog post where he can show case his in-depth knowledge. Before the Internet, for a wholesaler like Alex to make money, he relied on advertising in fashion magazines. Now he can interact directly with his customers, and even if he can’t make a sale – he can at least invest in a relationship for future sales.

He’s having a conversation and building relationships. Price is no longer the only source of information for the customer. Those curves on the demand and supply curve have now been personified. That’s better than some poster stuck on a billboard – that’s a return to how our world used to work before factory’s pumped our standard-issue Model T’s.

I might not have solved Twitter’s revenue challenge in this post, but I sure as hell am excited about the future opportunities afforded by tools like Twitter for the economy.

Downloadsquad.com interview

The bulk of the panels at SXSW have been on the whole ordinary. Rather than pulling interesting people around a topic to project new ideas about the future – the panels seemed to have a different formula. One that is “how can I promote my company/personal brand the best, under the guise of an interesting topic filled with buzz words that will suck the audience in”. There are outliers of course, but that’s how I feel most of them have been.

It’s wrong for me to be judgmental of the entire conference, but I have to contrast that with the bloggers room. I’m a new face to the industry, especially the US world where I know few people. But sitting down working on my things (outside of the bubble that is SXSW), I randomly meet people who introduce me to other people. Interesting conversations, interesting people, and you never know who you will bump into.

Like Grant Robertson who interviewed me for one of the most trafficked websites around! (number 23 blog in the world.) Check out what I say, explaining what the DataPortability Project is, and what we’ve been doing since last years SXSW. I wish I said more informative stuff (ie, this is not self-promotion, if I think I did lame!) – but just goes to show where the real value out of a conference like this is: the centralisation of so many people that think alike, interested in each other, thinking about the future.

The music industry and a glimpse into its future

Before I share this insight, I want to explain how I met the guy which just validates the uniqueness of SXSW. Otherwise, skip to the subheading below the first image to get to the meat of this post.

sxsw2009

At 6pm, I went to my first social event at SXSW, and walked around a pub (“divebar” in America – I’m learning!). I was alone, didn’t know anyone, and so sat down on a couch near the pool tables sipping my beer.

Some dude was sitting there, and we got into conversation. We had absolutely nothing in common – he was a project manager from Virginia, and I was an accountant from Sydney. The conversation was strained, and was injected with occasional remarks where this fairly camp guy was trying to find out if I was gay. When it was clear I wasn’t, he got up to get another drink, and that’s when the man of the hour sat down.

Again – I introduce myself. I’m the accountant from Sydney, but this guy was a product manager at a music company. After realising that he effectively drives strategy in one of the world’s biggest music companies, I couldn’t help myself and started prodding him with questions about the new music model.

And so that’s my story. I randomly came across one of the more influential people in the music industry. I also finally found someone that thinks about the same problems I do, which is how to monetise content. And after I revealed later on I was the vice-chair of the DataPortability Project, I floored him and so ensued hours of conversation where I got to test some of my unpublished thoughts about business models.

The fact this conference is the intersection between interactive, music, and film – is the reason why we know each other and could challenge each other on ideas. Austin is for this week a city with the worlds best minds in New Media. SXSW – we are both thanking you for creating this relationship!

So now to the insight I got, which was before I corrupted his views with what I think!

Artist

A view where the music industry is going
The record label model is actually going to work (as I was told). What’s happening is a change, and the crisis the industry has faced is actually a good thing, because its forced them to rethink and renegotiate their value proposition.

Record labels have realised that the value they provide to artists is that of a talent management agency. In fact, an almost complete parallel can be made with the venture capital industry. A new internet startup, like a new musician, is fresh and not able realise their potential. Venture Capitalists discover this talent, and invest in them for a future return. The VC’s will give them money and access to their exclusive networks – and the startup in return, gets to grow in ways they never thought possible.

The record label is now evolving into a similar model. Overnight, they can make a new star by giving them exposure to foreign markets, the capital they need to record music and distribute it to the masses, and all the other costs that are needed to become a big star. In return, rather than deriving 90% of their revenue from CD sales as record labels used to, they instead ask to get a 50% stake in the artist.

I raised this is effectively like slave labour, but when you think about it, a five year contract is completely reasonable given the amount of investment the label puts in. The labels are finding they can generate a lot of money on the merchandise and live concerts sales, as opposed to just the distribution sales. By taking a more diversified revenue mix, and taking more of a partnership approach to an artists career, what we are seeing is a more robust music model.

Records

Will that mean music can now be free? Well this company makes several billion dollars a year on music sales still, of which 75% are due to CD sales (and just the fact they make 25% in digital amazes me in itself). If music going free is the trend, my friend doesn’t see it happening for at least another decade.

And by that time, they’ll be ok. It appears the music industry is experimenting with a new approach to monetising artists based on the “experience” and is more about creating a connection with their fans. It’s still early days, but after our very long chat, I’ve now come to realise the record label isn’t dead – it’s just evolving. And they are well onto that path of a future model that works in this new world.