Digital capitalism, red in tooth and claw

Posted on November 23, 2014 by jjn1

My Observer comment piece about Uber & Co.

The real lesson of the Uber exposé, though, is that it’s time to discard the rose-tinted spectacles with which we have hitherto viewed these Silicon Valley outfits. For too long, they have been allowed to trade fraudulently on the afterglow of the hippie libertarianism that supposedly infected the early days of the personal computer industry. The billionaire geeks who currently run the giant internet companies may look and talk like a new species of entrepreneur but it would be more prudent to view them as John D Rockefellers in hoodies.

And the economic philosophy that’s embedded in this new digital capitalism is neoliberalism red in tooth and claw, which is why they minimise the number of “ordinary” (ie non-geek) workers on their payrolls, outsource everything they can, despise trade unions, view regulators as barriers to “innovation” and are outraged by the temerity of European institutions that seek to curb their freedoms of action.

There’s a geopolitical angle to this too…

Read on

If you’re interested in the impact of digital capitalism, then the place to go is the work of Dan Schiller, particularly his new book, Digital Depression: Information Technology and Economic Crisis. If you’re pushed for time, here’s a useful short interview with him about the book, and an informative review by Richard Hill.

Bobbie Johnson has a terrific essay on Medium about why we are so steamed up about Uber. People use it because of its convenience, even though they are also aware of its disruptive impact on things we supposedly value.

The dick-swinging, the gluttony, the not-quite-lies and the full-on bullshit… All of these things, and in particular the spectacular combination of all of these things, are enough to dislike a company, and even to hate it. But it’s incredibly popular, too, because, man, if people vote with their feet — or in this case their fingers — then they keep voting, again and again, for Uber.

And that, in the end, is the real reason so many people hate Uber: Because whatever we do, we can’t stop ourselves from making it bigger and more successful and more terrifying and more necessary. Uber makes everything so easy, which means it shows us who, and what, we really are. It shows us how, whatever objections we might say we hold, we don’t actually care very much at all. We have our beliefs, our morals, our instincts. We have our dislike of douchebags, our mistrust of bad behavior. We have all that. But in the end, it turns out that if something’s 10 percent cheaper and 5 percent faster, we’ll give it all up quicker than we can order a sandwich.

How the network is evolving

Posted on October 26, 2014 by jjn1

This morning’s Observer column:

Earlier this year engineer Dr Craig Labovitz testified before the US House of Representatives judiciary subcommittee on regulatory reform, commercial and antitrust law. Labovitz is co-founder and chief executive of Deepfield, an outfit that sells software to enable companies to compile detailed analytics on traffic within their computer networks. The hearing was on the proposed merger of Comcast and Time Warner Cable and the impact it was likely to have on competition in the video and broadband market. In the landscape of dysfunctional, viciously partisan US politics, this hearing was the equivalent of rustling in the undergrowth, and yet in the course of his testimony Labovitz said something that laid bare the new realities of our networked world…

Read on…

More…

Wired had an interesting series about this shift, the first episode of which has a useful graphic illustrating the difference between most people’s mental model of the Internet, and the emerging reality.

Krugman on Amazon’s abuse of market power

Posted on October 22, 2014 by jjn1

Paul Krugman had an interesting column about Amazon the other day. He dives straight in:

Amazon.com, the giant online retailer, has too much power, and it uses that power in ways that hurt America.
O.K., I know that was kind of abrupt. But I wanted to get the central point out there right away, because discussions of Amazon tend, all too often, to get lost in side issues.

Among those ‘side issues’ are the fact that Amazon is good for book buyers and good at customer service (which it is). Krugman is a Prime subscriber, as am I. “The desirability of new technology”, he writes,

“or even Amazon’s effective use of that technology, is not the issue. After all, John D. Rockefeller and his associates were pretty good at the oil business too — but Standard Oil nonetheless had too much power, and public action to curb that power was essential”.

Krugman sees Amazon’s tactics in its dispute with the publisher Hachette as an exact analogy to Standard Oil’s treatment of rail companies that refused to grant the company special discounts for shipping its oil. Amazon is delaying and impeding the sale of Hachette titles on its webssite, because Hachette won’t agree to give discounts to Amazon on the same scale as other publishers apparently do.

In economic jargon, Amazon is not acting like a monopolist (i.e. gouging customers) — not yet anyway. Instead it’s behaving like a monopsonist — i.e. a dominant buyer with the power to push down suppliers’ prices.

Way back in the 1920s, it was that kind of behaviour that triggered state action. “The robber baron era ended”, Krugman writes, “when we as a nation decided that some business tactics were out of line.” The question is whether analogous state action is now likely.

You only have to ask the question to know the answer. The neoliberal ideology has so entered our rulers’ souls that the concept of taking on Amazon is not only verboten, but unthinkable.

The unowned public corporation

Posted on April 27, 2014 by jjn1

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

Posted on April 2, 2014 by jjn1

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

Posted on April 1, 2014 by jjn1

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

Posted on February 23, 2014 by jjn1

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

Posted on February 20, 2014 by jjn1

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

Posted on June 9, 2013 by jjn1

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

Posted on January 27, 2013 by jjn1