Archive for the 'Capitalism' Category

The unowned public corporation

[link] Sunday, April 27th, 2014

Good column by Will Hutton on why the notion of “shareholder control” is a myth. Sample:

Banks have grown this large, complex and profitable because, like all plcs in our times, they are not owned by a mass of responsible, long-term shareholders who care for their purpose, sustainability of business model or wider economic obligations. Their overriding concern is high returns on equity. Long-term investors such as Standard Life, which voted against Barclays bonus hikes, are now a tiny minority. The majority of shareholders are hedge funds or multitrillion global asset management groups. They don’t own companies: they either trade them like casino chips or use them as temporary ports of call for their money. A bank CEO such as Antony Jenkins at Barclays has to tread a path between appeasing these non-owners and creating a bank that builds long-term value: if he falls, be sure Barclays will be under enormous pressure to replace him with another Bob Diamond, who will go all out for short-term profits and sky-high bonuses come what may.

The emergence of the ownerless corporation seeking to maximise short-term profits is now the key feature of modern capitalism. But “unowned” banks, unlike other PLCs, engage in the unique business of creating money and credit, knowing that governments must ultimately stand behind them if anything goes wrong. This guarantee always meant there would be a bias to increase credit as a share of GDP: between 1950 and 2000, it doubled in the major industrialised countries.

But between 2000 and 2010, as short-term profit maximising banks became the norm, credit doubled again in scale. By the time of the banking crisis, returns on equity had more than doubled as all this lending had been supported with ever less capital – bankers trading on the implicit government guarantee but delivering the returns their shareholders wanted. Moreover, much of this credit has been directed to lend to property in every country, rather than risky new investment.

Modern banking, as Adair Turner pointed out in an important lecture at the Cass Business School last month, has become an engine for credit, leverage and property price inflation. Britain, with its companies uniquely “unowned”, uniquely focused on the share price and its economy uniquely organised to favour finance over industry, was inevitably going to be the most acute example of the trend.

What Zuckerberg is really up to

[link] Wednesday, April 2nd, 2014

Very perceptive post by Felix Salmon. The gist:

Is it too early to declare that Zuckerberg has ambitions to become the Warren Buffett of technology? Look at his big purchases — Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I’m sure he promised something similar to Snapchat, too.

Zuckerberg knows how short-lived products can be, on the internet: he knows that if he wants to build a company which will last decades, it’s going to have to outlast Facebook as we currently conceive it. The trick is to use Facebook’s current awesome profitability and size to acquire a portfolio of companies; as one becomes passé, the next will take over. Probably none of them will ever be as big and dominant as Facebook is today, but that’s OK: together, they can be huge.

Zuckerberg is also striking while the iron is hot. Have you noticed how your Facebook news feed is filling up with a lot of ads these days? Zuckerberg is, finally, monetizing, and he’s doing it at scale: Facebook’s net income grew from $64 million in the fourth quarter of 2012 to $523 million in the fourth quarter of 2013. At the same time, his stock — which he is aggressively using to make acquisitions — is trading at a p/e of 100. If you’re going shopping with billions of dollars in earnings multiplied by a hundred, you can buy just about anything you like.

Eventually, inevitably, Facebook (the product) will lose its current dominance. But by that point, Facebook (the company) will have so many fingers in so many pies that it might not matter.

Hmmm… We’ll see.

Michael Lewis on Lightspeed

[link] Tuesday, April 1st, 2014

Michael Lewis is, IMHO, one of the best long-form journalists around and his new book is well up to his usual standard. In many ways, it adheres to the classic Lewis formula: find a scandalous set-up of which most people are blissfully unaware; locate some smart guys who have detected the systemic scam and figured out a way to profit from their ingenuity; and then tell their story.

In this case, the story is basically about the speed of light – or, to be more precise, about how the time-difference (in millionths of a second) that it takes an electronic share transaction to traverse one fibre-optic connection rather than another can provide an exceedingly lucrative trading advantage to those who have the kit and the know-how to exploit it.

In the video clip he explains the nub of the idea but, as always, it’s not so much the story as the way Lewis tells it — which is why his book is a must-read for anyone who cares about this stuff.

Writing about it in Quartz, Matt Phillips quotes from another part of the TV interview

“If it wasn’t complicated, it wouldn’t be allowed to happen,” he says. ”The complexity disguises what is happening. If it’s so complicated you can’t understand it, then you can’t question it.”

“This problem”, Phillips says, “goes beyond stock markets: The US financial system is awash in unnecessary complexity. And the reasons are simple: Complexity is profitable and it keeps regulators at bay. ”The jargon of bankers and banking experts is deliberately impenetrable,” wrote economists Anat Admati and Martin Hellwig in their indispensible The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. “This impenetrability helps them confuse policy makers and the public.”

There are some echoes of the sub-prime/CDO scandal in Lewis’s new book, in that the people who are supposed to understand how the system worked had little or no idea what was going on under their corporate noses. He recounts how the ‘good’ guys in his tale discovered this when they sought to enlighten leading figures in the financial world about flash trading:

The most sophisticated investors didn’t know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money-management firms like T. Rowe Price and Capital Group. Not even the most sophisticated hedge funds. The legendary investor David Einhorn, for instance, was shocked; so was Dan Loeb, another prominent hedge-fund manager.

This is an indicator of a really serious underlying problem in our networked world — the stupendous power that superior knowledge, IQ and technical understanding confers on some people. We are completely dependent on systems that are so complex that virtually nobody understands how they work — and how they can be manipulated and gamed by those who do understand them. The obvious rejoinder is “twas ever thus”, but I think that’s too complacent. What’s different now is that the level of technical expertise needed is beyond the reach or capacity of almost everyone. Which means that the elites who do ‘get’ it — and those who employ them — have colossal advantages.

LATER The book has made a BIG impact, to judge from the media coverage, and mostly the reactions have been complimentary. But there were a few contrary opinions. And Andrew Ross Sorkin, writing in the New York Times made some good points.

There is only one problem with Mr. Lewis’s tale: He reserves blame for the wrong villains. He points mostly to the hedge funds and investment banks engaged in high-frequency trading.

But Mr. Lewis seemingly glosses over the real black hats: the big stock exchanges, which are enabling — and profiting handsomely — from the extra-fast access they are providing to certain investors.

While the big Wall Street banks may have invented high-speed trading, it has gained widespread use because it has been encouraged by stock markets like the New York Stock Exchange, Nasdaq and Bats, an electronic exchange that was a pioneer in this area. These exchanges don’t just passively allow certain investors to connect to their systems. They have created systems and pricing tiers specifically for high-speed trading. They are charging higher rates for faster speeds and more data for select clients. The more you pay, the faster you trade.

That is the real problem: The exchanges have a financial incentive to create an uneven playing field.

Footnote: Readers on IoS devices may not be able to see the video clip, for reasons best known to the late Steve Jobs.

Internet giants: capitalism red in tooth and claw

[link] Sunday, February 23rd, 2014

This morning’s Observer column.

Like the other titans of the online world – Google, Facebook, Yahoo and to a lesser extent, Microsoft – Amazon is driven by data and algorithms. But not entirely. What many of its customers may not realise is that the results generated by Amazon’s search engine are partly determined by promotional fees extracted from publishers. In his book The Everything Store: Jeff Bezos and the Age of Amazon, Brad Stone describes one campaign to exert pressure for better terms on the more vulnerable publishers. It was known internally as the gazelle project, after Bezos suggested “that Amazon should approach these small publishers the way a cheetah would pursue a sickly gazelle”. (With a nice Orwellian touch, company lawyers later changed the name to the “small publisher negotiation programme”.)

That’s a revealing metaphor: capitalism red in tooth and claw. And it’s a useful antidote to the soothing PR of the corporations that now dominate our networked world…

Read on

LATER: Ram Reddy emails to point out Jeff Bezos’s wife’s very critical review of Brad Stone’s book — published on the book’s Amazon.com site. Excerpt:

Everywhere I can fact check from personal knowledge, I find way too many inaccuracies, and unfortunately that casts doubt over every episode in the book. Like two other reviewers here, Jonathan Leblang and Rick Dalzell, I have firsthand knowledge of many of the events. I worked for Jeff at D. E. Shaw, I was there when he wrote the business plan, and I worked with him and many others represented in the converted garage, the basement warehouse closet, the barbecue-scented offices, the Christmas-rush distribution centers, and the door-desk filled conference rooms in the early years of Amazon’s history. Jeff and I have been married for 20 years.

While numerous factual inaccuracies are certainly troubling in a book being promoted to readers as a meticulously researched definitive history, they are not the biggest problem here. The book is also full of techniques which stretch the boundaries of non-fiction, and the result is a lopsided and misleading portrait of the people and culture at Amazon. An author writing about any large organization will encounter people who recall moments of tension out of tens of thousands of hours of meetings and characterize them in their own way, and including those is legitimate. But I would caution readers to take note of the weak rhetorical devices used to make it sound like these quotes reflect daily life at Amazon or the majority viewpoint about working there.

Interestingly, when she came to look for a publisher for her own novel, she took it to an old-fashioned bricks ‘n mortar publisher: Knopf.

WhatsApp: in the end, money talks

[link] Thursday, February 20th, 2014

The thing I liked most about WhatsApp is that it had a sustainable business model that did not require it to screw its users: you paid for it, just like you pay for electricity or petrol in the offline world. And now it’s been gobbled up by one of the “siren servers” that makes its money by spying on its users. Bah!

I also admire Jan Koum, WhatsApp’s co-founder and CEO, who seems to me to be one of the sanest people in the Valley. This interview (with Kara Swisher) gives a flavour of the man.

Google’s choice: between a rock and a very hard place

[link] Sunday, June 9th, 2013

My Observer Comment piece about the dilemma facing Google and the other Internet giants: do they co-operate with the National Security State? Or look after their users’ (and their own commercial) interests?

The revelations of the past week explain why Schmidt was so preoccupied with the power of the state – especially of the national security state, which is what our democracies are morphing into. The apparent contradictions between, on the one hand, Google’s vehement insistence that it has “not joined any programme that would give the US government – or any other government – direct access to our servers” and, on the other, the assertions to the contrary in the leaked National Security Agency slide-deck that demonstrate the extent to which Google (and the other internet companies) are caught between a rock and a very hard place.

The rock is that the national security state, as embodied in the National Security Agency, GCHQ and kindred agencies, shows no sign of withering away. Au contraire. In the end, companies such as Google, Microsoft, Facebook and Apple will be compelled to obey the state’s orders. If they don’t, their executives will find themselves sharing jail cells with the likes of Bradley Manning.

The hard place is corporate terror that their users will become alienated by the realisation that personal communications cannot be safely entrusted to internet companies based in the US. Crunch time has arrived for Google & co, in other words. I look forward to the second, revised, edition of Schmidt’s book.

Sic transit gloria mundi

[link] Sunday, January 27th, 2013

This morning’s Observer column.

Nothing lasts forever: if history has any lesson for us, it is this. It’s a thought that comes from rereading Paul Kennedy’s magisterial tome, The Rise and Fall of the Great Powers, in which he shows that none of the great nation-states or empires of history – Rome; imperial Spain in 1600; France in either its Bourbon or Bonapartist manifestations; the Dutch republic in 1700; Britain in its imperial glory – succeeded in maintaining its global ascendancy for long.

What has this got to do with technology? Well, it provides us with a useful way of thinking about two of the tech world’s great powers.

Broken Windows and the iPhone 5

[link] Tuesday, September 11th, 2012

It’s not every day when one finds Paul Krugman writing about technology, but here he is today on the strange theory that the iPhone 5 (out tomorrow, for those who have been vacationing on Mars) might give a boost to the US economy:

I can’t judge how plausible the sales estimates are; but it’s worth pointing out how the economic logic of this suggestion relates to the larger picture.

The key point is that the optimism about the iPhone’s effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them.

In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the “broken windows” theory, in which destroying some capital can actually be a good thing under depression conditions.

Of course, it’s nice that the reason we’re junking old capital is to make room for something better, not just for the hell of it. But you know what would also be nice? Building useful stuff like infrastructure employing labor and cash that would otherwise sit idle.

Smartphones, clouds and control

[link] Sunday, July 22nd, 2012

This morning’s Observer column about the latest Ofcom survey of the communications market.

The Ofcom document runs to 411 pages, so it is custom-built for empirical masochists. Given that life is short, and you may have other things to do on a Sunday morning, I will just focus on some findings in the report that leapt out at me, and ponder their implications. The survey shows that home internet access in the UK rose by 3% between 2011 and 2012 and now stands at 80%. So eight out of 10 people have access to the network. And the speed of that access is increasing: by the first quarter of 2012, for example, 76% of UK homes had a broadband connection of some description. Equally interesting is the discovery that the largest rise in internet access over the last year – 9% – was among 65 to 74-year-olds. So the idea of “silver surfers” as an endangered minority needs recalibrating.

Next, we find that two-fifths of UK adults are now smartphone users. Take-up has risen from 27% in 2011 to 39%. This is interesting because the mobile networks and the telecoms industry have in the past consistently underestimated the popularity of internet-enabled mobile phones. It’s also one of the reasons why Nokia finds itself in so much trouble.

It’s hard to exaggerate the significance of the smartphone tsunami, especially when we see Ofcom’s discovery that more than four in 10 smartphone users say their phone is more important for accessing the internet than any other device…

How to blow $6.2bn

[link] Thursday, July 19th, 2012

Verily, you could not make this up. A headline saying that Microsoft had made its first-ever loss caught my eye. I assumed it must be a mistake: Microsoft doesn’t make losses for the simple reason that it has a licence to print money. It’s called Windows+Office. But then it turns out that Microsoft blew $6.2bn a while back on an advertising company which has now turned out to be worthless. What always amuses me about tech company valuations is how solemn are the assurances from men in suits that the valuation they have arrived at by consulting the entrails of a goat is in fact a perfectly rational assessment of the asset’s value. I am sure that that $6.2bn valuation was likewise quality-assured by the same clowns.

Microsoft has written down the value of an online advertising firm it bought five years ago by $6.2bn (£4bn).

Microsoft bought Aquantive for $6.3bn in cash in an attempt to catch rival Google in the race to increase revenues from search-related advertising.

The writedown effectively wipes out the acquisition’s value, although there was little impact on Microsoft’s shares in after-hours trading on Monday.

The purchase of Aquantive in 2007 was then Microsoft’s biggest acquisition.

It has since been eclipsed by the company’s $8.5bn purchase of internet phone service Skype last year.

Microsoft said in a statement on Monday that “the acquisition did not accelerate growth to the degree anticipated, contributing to the writedown”.