15 Sep 2020

Solving the Social Dilemma

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The recent release of Jeff Orlowski’s documentary ‘The Social Dilemma’ on Netflix may prove to be an even bigger deal than their 2016 film ‘The Great Hack’. The latter left you feeling that the villains of the piece were the businesses like Cambridge Analytica who malevolently manipulated social media data to change the political narrative, influence elections and threaten democracy. TSD points the finger squarely at big tech who purposefully design social media to feed their commercial model and in the process fuck up society and the whole of mankind.

 “If you don’t pay for the product, you are the product”.

Social media is not just abusing their tech to sell us stuff, they are selling us – our attention and our behaviour – without us knowing and to our detriment. TSD paints a scary future with overtones of the human batteries in The Matrix and Skynet from Terminator – AI may have started as a technology tool we used but it might become us that are the tools serving the needs of higher artificial intelligence. You think this is fantasy? Watch the documentary.

“Only two industries call their customers ‘users’: illegal drugs and IT” said Yale’s Edward Tufte.

Marketers (who pay for all this with their ad budgets) are trying to wean themselves off calling customers ‘consumers’. (If you drop the ‘m’ consumer is an anagram for ‘con user’). I think ‘people’ would be the best word because it simultaneously captures diversity and common humanity – the ‘we’. But I don’t think the lexicon is the issue and in fact I don’t think marketers or even the titans of big tech are the villains. They are people. A lot of the contributors to TSD, people like Tristan Harris or Justin Rosenstein, are from big tech. They have a conscience and know that many of their former colleagues do too. Marketers are not evil svengalis. They are paid to promote their products but most recognize that this increasingly means doing so in a sustainable and socially responsible way because that is what society wants. It is what will make their customers happy and they like happy customers. So what makes good people in marketing and tech do bad stuff? Two things:-

  1. Not recognizing the unintended consequences
  2. Not having a commercially attractive alternative

On the heels of ‘The Great Hack’, TSD can address the former. As ‘Inconvenient Truth’ was for climate change, this is a tipping point in the debate about social media and the issues around the misuse of the data it generates for the ‘attention extraction’ industry. We all know that something is wrong, we all know this is seriously fucked up and heading in a bad direction – but what is the alternative? What is the antidote? TSD is incredibly powerful and disturbing, very disturbing especially as it leaves you in no doubt things need to change but not much hope they will and no real solutions other than regulation (of some sort not defined) to disrupt the business model on which big tech has thrived.

Just as I concluded in my paper ‘Naked Economics; the new laws of the jungle’ the easy conclusion is that governments need to fix this – ‘they’ need to regulate. Easy but wrong because even if ‘they’ wanted to, ‘they’ can’t. It’s too complex, there is too much vested interest and there is no ‘they’. The legislation would need to be intricately drafted to cover every issue and avoid every unintended consequence. There are $ trillions at stake so expect some resistance and every government would need to act in lock step which they won’t/can’t.

So, as with the new economics, let’s focus on ‘we’ –  what we the people can do about the social dilemma that is social media data harvesting, processing and commercial application. For the wider economic context the macro levers to pull were the attribution of cost and ascribing of value to enable us to make better choices. In the specific area of data the micro levers are platforms that allow us as individuals to own, control and transact our own data.

The solution lies not so much in regulating the current business model, although that might have a role to play, but rather in creating a new business model that empowers people.

At the heart of the current model is data about 3 things:-

  • What you think
  • What you do
  • The connection between these

The tech, the algorithms, the UI and the AI that are all designed to do this can of course then be applied to change what you think and do, to get your attention and to persuade you. The business model is then to monetize this by selling it to people who wish to promote their business. It can also be sold to people wishing to change your politics but that will only ever be a small fraction of the billions social media earns. The big bucks come from big business.

The global industry for advertising and research is roughly $1 Trillion. That is how much business will pay to find out what you think and present the best version of themselves to you at the most opportune time.

What if we just told them? What if we offered the information they want to know and stuck our hand up when they had the best chance to sell something to us? Because if we did, en masse, then the revenues for facebook et al would start to evaporate.

Who would be prepared to do that? We all would. We do it all the time for purchases that are important to us and about which we are unsure. Say we want a haircut, a new car, expensive cosmetics, a new home, a piece of home electronics, a suit for our wedding. We pitch up, tell someone we are interested and then proceed to tell them everything they need to know about our lives, quite often more than they need to know. Yes we may do some research on-line and then purchase on-line but there are still many things where we meet people face to face, people that we know are there to sell us stuff, we tell them we are interested and we answer pretty much any question they care to ask. Why? Because it is in our interest to do so and we get something in return – help in making our best choice.

As long as we feel in control of the exchange of our information, our attention, our data, and this has material benefit to us we are happy to give business what they want.

I have been thinking about this for the last 5 years and I have ideas for two potential tech based platforms that would allow people at scale to exchange their ideas and their data – on their terms – with businesses and brands. These could divert a big chunk of the revenue Social Media generates directly into the hands of us, we the people, and offer what business wants quicker, cheaper and more effectively.

It would not stop the potential of big tech to produce addictive, manipulative social  platforms with the power to affect peoples’ physical and mental health, to undermine truth with fake news, to divide society and swing elections but it would take away their incentive to do so. They would eventually be left with only one option which is to make you pay for their service – and if we pay for it then we control it. It becomes the product, not us.

Let me know if anyone is interested to know more……..

29 Jul 2020

The Roaring Twenties?

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Interesting piece in the Telegraph this week from their highly distinguished economics journalist, Jeremy Warner, in which he speculates that the aftermath of this pandemic might be an economic boom as was the case after the 1918/19 Spanish Flu outbreak. The period that followed the post 1st WW pandemic was known as ‘The Roaring Twenties’. Might we be on the verge of a ‘New Roaring Twenties’ 100 years on?

JW quite rightly warns of the danger of historic comparisons. The Spanish Flu was far worse than Covid 19 (10 million people across the world died) so the scale of the disruption was more than comparable but the situation was different. It’s hard to separate the bounce back from Spanish Flu and the bounce back from the Great War. His point, nonetheless, is that economies can reinvent themselves after, or even because of, catastrophic events as resources flow into new and emerging industries. A lot of people hope that one driver of our economic recovery this time will be Green Energy – a booming industry that addresses a global challenge – but it will need to be more than that, more perhaps than we are capable of imagining. A century ago the industrial landscape was made up of coal and steel, railroads and ships. That was displaced by oil and plastics, cars and planes. There was leisure and entertainment but no-on thought of them as sectors capable of driving an economy. There was data in our parents’ generation but no-one envisaged it as an industry, the new oil.

So what awaits us? Clean energy we hope but also Fintech, Biotech, Robotics, AI we think (so maybe we won’t need to) . There’s no sign of population growth slowing, only shifting geographically. Economic growth is fundamentally fuelled by population growth. As social apes distinguished by three things – our ability to produce more offspring than we can feed, our ability to exist in larger groups and our ability to copy quickly – we have had to develop and been able to disseminate technology to support our growing numbers. From the wheel & fire to electricity & computers, as our numbers have swelled our technology has transformed and our economies have grown. In 1820 the world population was one billion, by 1920 it was 2 billion, in 2020 it is heading towards 8 billion and our global economy has grown by even more than that. In 1820 China accounted for nearly 40% of a global economy of roughly half a $ Billion. By 1920 the global GDP was more than half a $Trillion and USA had overtaken China. In 2020, before Covid hit, the global economy was worth $142 Trillion.

It’s not all about money. Creative expression has also evolved enriching us culturally but also economically. The creative industry is estimated to be close to 10% of the global economy. Charlie Chaplin didn’t see that coming.

Our predecessors in the early 1920’s could not begin to see the explosion in innovation and birth of new industries coming down the track. They would not even recognise most of the job titles that exist today – data scientist, influencer, epidemiologist (the science of epidemiology emerged as a result of Spanish Flu)

The notion that there could more than just an economic recovery from Covid 19, there could actually be an economic boom based on sectors and jobs we cannot even imagine, is perhaps not so daft. I would however make two important caveats. Firstly the dislocation from where we were to where we might be heading will be very painful for some, sadly the poorest and most disadvantaged in society. The medium term might be exciting but the short term could be social carnage, and we know the dangers of that. As a result of social depravation and the rise of populism, the world was at war again less than two decades after the end of the Great War and the subsequent outbreak of Spanish Flu  .

Secondly, as I write about in my paper Neo-naked Economics, the actual economic model has to evolve to meet new challenges, as it has always needed to over the centuries. The new economic model for a new global economy needs to get back to having a social purpose, something we’d lost sight of in business and something we need to rediscover to avoid history repeating itself in the wrong way.

16 Jul 2020

Finance and Accounting 101

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A friend told me the other day that he was re-looking at my eBook “So you want to run an agency (and maybe sell it one day)”. He’d just sold his agency to a big International Group and they had put him in charge of that Group’s Regional office (smart choice, he’s very talented). I was flattered and intrigued. I wrote that book more than 10 years ago and to be honest I could not remember what I’d said so I refreshed my memory and was relieved to discover that the advice I give has mostly stood the test of time. I stand by it as far as an agency or consultancy is concerned.

In the intervening years since writing it I have spent most of my time investing in and supporting technology based businesses plus a couple of consumer goods start-ups, in all cases where professional outside investors are involved. I’ve been a NED and looked at a lot of business plans and financial results. My eBook is weak on finance and accounting for these kind of businesses. I’m not going to try to rectify that here – get yourself a very good finance director would be my first advice. I am, however, going to talk about what all the leadership team need to know about finance and accounting to get the best out of their finance director and run a better business.

The next piece of advice is that all the leadership team should understand P&L, Cash Flow and Balance Sheet. They should know the purpose of each, how they work, what the differences are and how they connect to give the complete picture on a business. They don’t need to know this to the standard of a Chartered Accountant but they need to know the basics. You’d be surprised how many don’t. These are all real and fairly recent examples:-

The CEO who told me their P&L was strong because he’d added the equity finance to the revenue line.

The CEO and COO who thought that being just above break-even meant they would not run out of cash. (They did – twice)

Several CEO’s who had no idea what they could or could not depreciate thus understating their P&L.

The CEO and COO who could not distinguish between equity, loan and deferred costs. (They even mistook an overdraft limit as the liability rather than the actual overdraft).

A senior business advisor (whose experience was all gained in large corporates) appointed as a NED to several start-ups who had no idea what a term sheet was.

Several CEO’s and COO’s who did not understand their various options to raise finance and the pros and cons of each.

I want to pause on this last example of financial ignorance. Of course you can use advisors to explain your financing options but you need to at least understand what they are and how they evolve as the business evolves. You must also appreciate that advisors, banks or financial investors will not weigh the pros and cons in the same way as you might as the actual person or team running the business. I will give three simple examples, all based on real situations I have seen first-hand.

The best way to finance your business is through growth (to be precise, operational cash flow). If you need, say, £500k to invest in the business, to hire new talent, build technology, put behind marketing, open up overseas markets etc, the very first place you should look is your revenue. Even if you can only squeeze a bit more from higher revenues that reduces the need to borrow or raise. Banks and investors will not tell you that, it’s not entirely in their interests.

It may nevertheless be the right option to raise money either through borrowing or raising capital . Where possible, borrow, it’s normally cheaper and more flexible. Selling (or issuing) shares is time consuming and expensive and places additional restrictions on the business.

When you raise capital you need a bit more than you think but not too much. I still hear advisors tell companies to take as much as they can get. There is some rationale to that as the process is time consuming so raising bigger amounts less often is better in some ways. Also, you never want to run out of money and have to ask investors or the bank, at short notice, for more. But the more you’ve raised the more equity you’ve given up plus too much ‘spare capital’ in a business has a habit of promoting the wrong behaviours. You must also be wary of the investors motivation – some US investors always want an early big raise so the business has plenty of capital. Why? Because they want to dilute the founders down so far they have to create huge growth to make their share worth something – if they can’t they’d rather know sooner than later so they can just move on to the next investment – Go Big or Go Home.

Simple but real examples that I hope show you cannot just rely on advisors or worse still the people offering you money. You need to understand it yourself.

Which brings me to the final point – you have to have some realistic understanding of how businesses are valued. Here are a number of things that could be used to estimate the value of a business to an acquiror:-

  • Multiple of Revenue
  • Multiple of Profit
  • Trading record over 3 years (trajectory)
  • Projected Cash Flow (and/or Free Cash Flow)
  • Nett present value of future profit (or cash)
  • Assets (Financial, Human, IP, Client, Distribution)
  • Contractual and other liabilities

I said ‘could be used’ to estimate value. The true value is what someone is actually offering to pay and that can depend on any and all of the above plus many other factors like the deal Structure (how the consideration gets paid). Depends on the business and it depends on the acquiror. But as the business leaders you need to have some appreciation of what they all mean, the implications for how you run the business, how you can raise money and where the information sits in your P&L, Cash Flow and Balance Sheet.

I must stress I am a long way from being an expert in any of the things I’ve covered – but I know enough to ask the right questions and to understand the implications of the answers. Even if finance and accounting is no part of your job description and you have the best advisors you still need ‘Finance and Accounting 101’ to start and run a business. That said, if your basic reflex is to drive the hell out of revenue and run a tight ship I’ll forgive you. Strong revenue growth and effective allocation and management of costs will cover a multitude of other shortcomings.

30 Jun 2020

Solving the facebook problem

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Facebook are in the firing line yet again. Several large advertisers are boycotting them for publishing hate speech – these are big names like Unilever, Diageo, Pepsi, Starbucks. It will concern facebook, they will probably dial up their investment still further in an effort to stamp this out and their spokespeople will double down on on their well crafted defence based on that. “We are making every effort we can, it’s a tiny minority but while there is hate in the world there will be hate on facebook” I heard one say today. After all ‘we’re just a platform not a publisher per se’. There is one obvious solution which is to declare them to be a platform that publishes and impose the same kind of legal restrictions that apply to other media platforms/publishers/broadcasters. Admittedly these restrictions are not perfect. They differ from country to country, some are exercised through government watchdogs and others through a licensing system. If we go down this route the licensing option is the most effective – break the rules and you lose your license to trade, it is awarded to someone else. Can this be operated for the web – of course it can. Not every country or territory would sign up but if enough did it would flush out very quickly whether facebook were “doing everything we can”. But I think there is a better solution which takes the advertiser boycott to its logical conclusion. Reduce facebook ad revenue to zero by making it redundant as an advertising platform and forcing it to charge for its service. Facebook generates $70 billion in revenues from advertising and its costs are roughly $46 billion. But of course a great deal of its costs are incurred to generate the ad revenue. How much would they be if they focused purely on running a really good social media platform? Let’s take a stab – half? So how much would they have to generate from user subscriptions? About $7.50 per user per year. At $10 p.a. they’d be making a very decent $7 billion operating profit. It’s not quite as simple as that but the point is valid – there is a different business model available to facebook or other competing social media platforms. The challenge is how to force them to look for it. Well that is simple – take away their data advantage by creating platforms that allow people to transact their own data.

It has been estimated that your personal data – what you like, where you go, what you buy, what you watch/read/listen to etc – just as much as you want to share is worth $7,600 p.a. on average to you. Much more for high nett worth people, less for the less well-off but arguably more important. If you only earn $25,000 a year then an extra $2,500 for your data is very attractive (this has been proved – people in emerging markets and students are far more willing to sell their data or attention or opinions). Facebook’s model is based on them taking the commercial advantage for having thousands upon thousands of data points on you. The technology exists to allow you to cut them out the loop and transact your own data with whosoever you choose for your own gain.

With no – or at least much lower – ad revenue facebook and their ilk would have to find a better business model, one where people only hand over their money if they appreciate both the service and the ethics of the business. Would you renew your subscription for a business that allows hate speech or pushes content to you in irresponsible ways? No need for government intervention or business boycott’s – problem solved by giving people the rights to their own data and the means to transact it however they choose.

30 Jun 2020

Hand in the Cookie Jar

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Readers familiar with my blogs (how are you both?) will know just how much I dislike ‘digital advertising’. I know it works because advertisers continue to invest in it which must mean it has a ROI of a few percentage points. But that in turn implies that for the vast majority of us, most of the time it is nothing but an irritation. I pay for a few on-line subscriptions to papers and magazines – should I have to look at ads? No different to the physical publications you might say. The model has always been that content is delivered free or heavily subsidised because of ads. In the new model the content may be on-line and it might be the services of a search engine or social media platform but the deal is the same. Ad revenue keeps the cost of your on-line content down and in the case of google and facebook the ads pay for the whole thing. On that basis we should extend the model to include churches, museums, art galleries – why not hospitals? You can go to church for free as long as you are prepared to let someone sell you life insurance. By all means look at the Monet but right next to it, in your eye-line, is an ad for french cologne. While you are waiting for your test results who would object to looking at some ads for a betting company – hey, life’s a gamble. NO, there are just some places and some occasions when I don’t want to have to see ads. And I particularly don’t want to see ads put there because someone’s been sneakily following me around all day watching my every move. So in my case at church, or the museum or in the doctor’s waiting room I get an ad for a car just because I happened to mention to a friend that I liked it or paused to look in a showroom window. That is beyond irritating, it’s plain rude.

I reached a tipping point this week. As I was reading on-line I was being bombarded with ads for backgammon boards – and I mean bombarded. They were not just there, they were flashing and rotating and popping up in the middle of the articles. I knew why – I’d been on a couple of sites looking to buy a backgammon board. I’d done my research, made my choice and the board had been purchased. I wasn’t really in the market for another backgammon board, you really only need one, but yet here I was getting hit by ad after ad all over the sites I visit. I know why, it is because Criteo, the French Ad tech business use 3rd party cookies to track me and sell that information to advertisers and their agencies. They profit from this transaction but I don’t. Turns out it is actually possible to disable them, which I did and the pushy creepy ads disappeared . Some algorithms are doubtless still at work but there at least seems to be some randomness to the ads. If they happen to be for something that interests me I’ll click. I did that recently for ‘Forever Spin’. I have a childish fascination with spinning tops and often spin coins or rings to see how long I can get them to keep going. ‘Forever Spin’ tops go on for ages (but not forever) and actually I might buy one. However, before I switched off Criteo I was going off them as a company due to the incessant ads they were targeting at me. Do you, like me, walk out of a shop if a sales assistant just won’t leave you alone? Normally you can tell them that you’re just browsing and they will back off. I have been known to tell them that if they don’t back off I’m leaving. Hard to do with digital advertisers. Not so easy to tell them to fuck off and leave you alone as long as they have their hands in the cookie jar. And they will even if you manage to disable 3rd party cookies. All the times we accept that the web sites use cookies and give them our permission to download them onto our hard drives, we are saying it is OK to track our browsing history, analyse the data and make commercial use of it. We can’t see it happening, we get a very small share of the commercial benefit, if any, and we have to put up with digital ads that are mostly pointless and very rarely entertaining. The only solution, as I have outlined before, is to use block chain technology to allow us to transact our own data as individuals. Then they would have to fuck off and leave us alone.