Cheap Thoughts

If you're at all interested in trying to understand how technology originates and evolves I couldn't recommend a better book than The Nature of Technology, by Brian Arthur. It's a fascinating read, and one which I expect to keep close by for years to come.  More to the point, there is a section in the book where Arthur is describing how innovation and competitiveness evolves in specific fields over time. He argues that technical expertise in a given field tends to be concentrated in a specific geographic region.  In making this argument he either knowingly or unknowingly perfectly summarizes why Silicon Valley is "Silicon Valley."  The excerpt goes:

"Real advanced technology-on the edge sophisticated technology-issues not from knowledge but from something I will call deep craft.  Deep craft is more than knowledge.  It is a set of knowings.  Knowing what is likely to work and what is not to work.  Knowing what methods to use, what principles are likely to succeed, what parameter values to use in a given technique.  Knowing who to talk to down the corridor to get things working, how to fix things that go wrong, what to ignore, what theories to look to.  This sort of craft-knowing takes science for granted and mere knowledge for granted.  And it derives collectively from a shared culture of beliefs, an unspoken culture of common experience."  

"It follows that once a region-or country for that matter-gets ahead in an advanced body of technology, it tends to get further ahead.  Success brings success, so that there are positive feedbacks or increasing returns to regional concentrations of technology."

If you think about entrepreneurship as a form of technology (which it is) Arthur's description of the concentration of technical expertise also perfectly describes how and why Silicon Valley is what it is today.  The positive feedback loop is not limited to one specific form of technology but rather to the process/practices/shared knowledge of building great companies.  To draw the analogy out even further, Arthur also makes a strong case for anyone who is long on Silicon Valley.

Brian Arthur's research into increasing returns is one of the most important methodologies for anyone trying to understand how technology is reshaping the modern global economy.  He argues that as software continues to eat the world the global economy will move from one of decreasing returns to one of increasing returns.  His basic premise was that up until about twenty years ago most industries were dominated by labor or the bulk processing of resources, everything from metals to lumber and retail goods to grains.  One of the principles of this type of industry is diminishing returns.  Diminishing returns hold that companies operating in those resource/labor intensive industries will eventually run into certain natural limitations (capacity or labor problems).  Those limitations create what economists call perfect competition or economic equilibrium, characterized by thin margins and multiple competitors.

Arthur goes on to argue that the modern economy is in the midst of a major transformation where knowledge has replaced labor, and where the products and services that get ahead first get even further ahead over time.  In Arthur's own words increasing returns

"are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage. They are mechanisms of positive feedback that operate—within markets, businesses, and industries—to reinforce that which gains success or aggravate that which suffers loss. Increasing returns generate not equilibrium but instability: If a product or a company or a technology—one of many competing in a market—gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market." 

You can already see the winner-take-most outcome in action.  Search is dominated by Google, online video by YouTube, professional networking by LinkedIn, social media by Facebook & Twitter, mobile OS by Apple & Google, e-commerce by Amazon and eBay.  So how does all of this effect wealth inequality?  

1) The shift from labor to knowledge-based economies puts a premium on workers who have access to high quality higher education.  Those who don't will be faced with fewer employment opportunities and will be forced to have their wages depressed in the face of increasing automation.  Although there is already a huge disparity in long-term earnings powers between college and non-college educated workers those differences will be compounded in the new economy.

2) This type of competitive environment will create monopolies across a ton of different industries, which Peter Thiel argues is actually a good thing.  While I agree with Peter's argument what happens if the companies grow through the use of AI, replacing human labor?

3) Companies will grow to become much larger today than any other time in history while employing fewer workers.  At its peak in 1979, GM employed over 600,000 workers in the US and over 800,000 worldwide.  Today, Apple, the world's largest company employs about 98,000 people and generated roughly $182 billion in revenue in 2014.  The wages for those highly coveted workers will continue to rise exponentially while the average American will be left with fewer opportunities for stable long-term employment.  It won't be long before a one-person start-up is sold for $1 billion.

(I'm sure there are many other effects that I am overlooking)

I see a world with more profits flowing to fewer companies, and where those companies employ a small percentage of the population than in previous years. And as a result of the characteristics that define an economy of increasing returns if will also be much harder for new entrants to compete/dethrone the incumbents.  Cynicism aside, it will also be a world in which most humans are better off.  Technology is lifting millions of people out of poverty, child mortality rates continue to decrease, fewer people are dying of preventable diseases, per capita GDP continues to rise and billions of people are now coming online, opening the door for an untold number of entrepreneurs to change the world.

Ultimately I believe this will be the defining issues of the next 30 years.  

Almost any time Jeff Bezos speaks he is able to deconstruct complex economic, business and management issues to their core principles, leaving those paying attention with invaluable nuggets of wisdom.  In a recent blog post, Bill Gurley of Benchmark Capital referenced  one of Bezos' best pieces of advice. The quote is as follows,

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.” 

Invest in things that you know are not going to change in ten years.  I submit that this would be a very useful exercise for politicians to attempt as well.  Like in business, if you know what American's are still going to want 10 years from now you can invest heavily in those areas.  As a qualifier, I would add that the key word in this exercise is "invest," not "spend."

Below in no particular order a brief list of four things that will not change in America over the next 10 years and warrant significant investment. 

American's will want their children to receive and exceptional education.  This one is important for two reasons, 1) A democracy cannot function without a well-educated citizenry 2) As technology continues to eliminate jobs the US is going to need a greater percentage of skilled workers in order to retain its position as the world's strongest and most innovative nation.  This means reevaluating education from the ground up to ensure that all children have access to a world-class education regardless of class, gender, race, etc.  It means making sure that everyone has access to a college education at a reasonable cost and that the nature of education has to evolve with the times.  I would like to see computer science  become compulsory (like learning a new language) and for technology to facilitate a more personalized learning experience for students while making access to high-quality education more readily available.  

American's will still want to feel safe.  A strong national defense is one of the pillars our country was built on, and the government should invest heavily in ensuring that her citizens are protected from all threats, both foreign and domestic.  This means committing a significant amount of time and money to both our traditional armed forces as well as our nation's cyber defenses, which are quickly becoming the premiere battlefield globally.  It will require collaboration between the government and our nation's leading technologists and tech companies to ensure that our continued dominance in the 21st Century.  These parties are going to have to reconcile their differences and come to agreements about what types of policies are in America's best interest.  For the government that means a more transparent and less intrusive domestic surveillance policy and for tech companies and ordinary Americans it means understanding that we all have a reasonable expectation to privacy, not an absolute expectation.  

America will want to attract the world's brightest immigrants.  I think Paul Graham did an outstanding job of explaining why this is so important, but I will summarize here.  Paul argues that because the US only represents about 5% of the world's population it is reasonable to assume that 95% of the world's greatest scientists, engineers and entrepreneurs are born outside the US.  As technology continues to creep into the darkest corners of the world and billions of people come online it is in our best interest to be the place that any young, smart ambitious entrepreneur wants to live.  This is important because 1) Any current technology executive will tell you that there is a severe talent shortage, which is being magnified by an ineffective immigration policy and 2) Because in order for the US to remain a hub for innovation we need to attract as many high-quality thinkers 

American's will want an economy that is growing sustainably. This is one of the trickiest topics to discuss because not only does everyone and their mother have an opinion about  how to achieve sustainable growth, but the nature of work is undergoing a major transformation as software continues to eat the world.  Generally speaking I believe that if you attract the smartest people, create the right incentives and introduce a regulatory framework that makes starting and growing a business as easy as possible you will end up with a positive outcome over the long run.  

I've been really frustrated recently with the state of online news content, specifically the lengths to which news outlets go to in order to get someone to read an article.  The overuse of misleading adjectives like Insane, Amazing, Miserable, Craziest are one of their favorite tactics and one that frustrates me to no end.  It's like a replay of the story of the boy who cried wolf every time I want to see what's going on in the world, and I think any serious journalist should recognize that by constantly creating misleading headlines they are doing their readers and the public at large a huge disservice .  How should a consumer know when a specific article really is a must-read and when it is just an article.  Case in point is this article I came across on Business Insider titled, "The insane ritual Tim Cook goes through every time he visits and Apple Store."

I am an Apple fan and appreciate the work Tim has done at Apple since taking over from Steve Jobs so I figured I would give it a read.  My expectation was that maybe Mr. Cook is known to spent hours in a  random store making sure everything is just so.  That the level of perfection he expects from all Apple Stores at all times is as high as the quality of the products they're selling (which I'm sure it is). Maybe he is known to get on his hands and knees and scrub the floors until they meet his expectations.  Anything that a normal CEO would find beneath them. To my dismay the article's main point was that with the exception of the store manager employees do not know when to expect a visit from Mr. Cook and that (drum roll please) he enters through the back door before talking to employee's.  I don't believe that anyone in their right mind would find the content in this article approaching anywhere near the level of "Insane." 

The question is why do media outlets and journalists feel the need to misrepresent their work to their readers. The easy answer is that there is so much content out there right now it is necessary to be successful, which I can appreciate to a point.  In the long run, I think these types of tactics undermine great journalists and writers everywhere and insult the intelligence of readers.  

I was surprised the first time I read that roughly 98% of employers in the US have fewer than one hundred employees.  It's easy to view the employer landscape in the US as one dominated by large multinational corporations because those are the companies we hear about on the news every day.  Reality is in fact  quite different as most members of America's workforce are employed by SMBs.  From a technology perspective, these companies have traditionally  been underserved but represent a massive opportunity for enterprise companies that understand how to bring technology downmarket.  Most of these companies still rely heavily on paper and manual process to keep their businesses running, and are aggressively looking to partner with vendors who can either eliminate some of their pain points or  at minimum modernize the way their business operates.

I expect to see more of the products and services that have previously only been made available to large cap, Fortune 500 companies do just that in the coming years.  In order to scale down the software is going to have to move towards a more self-service and standardized model.  Small and midsize companies don't have time or resources to pay for custom built heavily serviced software solutions, nor should they have to.    

I'm going out to Colorado with a buddy of mine to do some skiing in February, we just finalized our accommodations and the sharing economy has really come in handy.  Rather than paying a few hundred dollars per night at a hotel we're staying in someone's basement via Airbnb for roughly 40% of the cost.  I have been following Airbnb closely over the past few years and recommended them to friends and family on numerous occasions, but this is my first time using them.  We also decided to try Relay Rides as opposed to Hertz, Enterprise, etc. for our car rental, which if you're not familiar is like Airbnb for cars. Both of these companies have saved us several hundred dollars, but more than that they have changed how I travel altogether.  These idea's would have seemed utterly outrageous five years ago, but this trip was an "ah-ha moment" for me and one which made me realize how much potential those "utterly outrageous" ideas can have.

The quality of our trip is now in the hands of individuals not companies (for the most part).  The variety of options available to us when making our accommodations has increased dramatically and the costs have come down significantly.  Furthermore, the economic value is now going directly to a person as opposed to a company (again for the most part).  If you would have asked me five years ago what would have to take place for the Hilton's and Alamo's of the world to have their business model threatened I would not have had an answer for you.  When you start to estimate how much money companies like Airbnb and Relay Rides are costing incumbents it really makes you appreciate the nature of innovation. 

I think sometimes we all tend to underestimate how much companies like Airbnb and RelayRides are affecting the world around us.  I urge everyone to take a step back every once in a while and appreciate the progress being made right in front of us.  

For the past several years I, like so many others, have wondered why Apple has not come out with an Apple Television.  In his biography, Steve Jobs noted that he finally cracked the TV and knew how to make a better one (I'm paraphrasing).  More recently during an interview with Charlie Rose, Tim Cook let it slip that Apple had at least been experimenting with the idea of coming out with a TV. As a huge fan of Apple that sounds great but when you think of where the future of TV might be heading it's easy to understand why Apple has not come out with one yet. 

An important question to ask is, could the TV end up being the dumb device in our house?  With streaming devices such as Apple TV, Chromecast, Roku, Amazon Fire TV and many more continuing to pop up it's becoming very clear that the content we watch won't actually be coming from our TV's, rather the TV will just be the dumb device who's only purpose is to play the content.  Not only are we seeing a proliferation of streaming devices, but the unbundling of cable services in recent years has the potential drive more people away from traditional offerings.  Unbundling gives the consumer the freedom to watch more content on a variety of devices without having to pay for cable.  With HBO and CBS now allowing you to subscribe to their streaming services and Starz suggesting they will do the same it's clear the cable companies are going to have to rethink their business model at some point in the next 3-5 years.  They simply won't be able to charge consumers an arm and a leg for a bundle of 150 channels when most people are only concerned about 10% of them.  

If that does end up being the case then Apple choosing not to develop their own TV makes more sense. Another big issue to consider is that TV's offers a much less attractive business opportunity.  Most iPhone users upgrade to new devices every year or two, but that's not the case with TVs where we might have the same TV for up to five years.    In short that means less money in Apple pocket.  It's a problem they are already facing with the iPad and one which they would probably like to avoid in the future.

I read an article last week that discussed how the Chinese Communist Party believes it has a responsibility to oversee and control education at the university level (a moral imperative).  It is another step in the wrong direction for a country who citizens are clearly looking for a more democratic government and greater protections of their free speech.  It's controls like this and others that will continue to make it very difficult for Chinese citizens to live up to their innovative potential, as they faced continued resistance from their government, including:

• Making it more difficult to access Gmail
• Tighter control of University education
• Banning the use of puns in the media 
• The list of more than 2,700 banned websites
• The Hong Kong protests 
• Continuing to jail dissidents

The story of Chinese growth over the past twenty years is one of the most astonishing economic triumphs in human history.  In a very short period of time, China has established itself as one of the world's greatest economies, creating hundreds of billions of dollars in new economic value and introducing nearly 700 million of its citizens to the internet.  Those citizens are now spending billion of dollars every year on goods and services and have the leverage to move China to a modern consumption based economy.

As China continues to integrate itself into the global economy and as the explosion of the Chinese consumer continues it is going to be increasingly difficult for the Communist Party to reconcile these trends with their ideologies of ever-tightening government control.  Furthermore, as technology makes it way deeper into China and millions of new users gain access to the internet I suspect the government will find itself between a rock and a hard place.  Every step taken to further integrate itself globally will make it harder for the Chinese government to hide their policies restricting the rights of the citizens of a "free country".  Furthermore, as their role in the world grows they will simultaneously be inviting more criticism of those same policies.  The growth that they are so eager to sustain comes with expectations from other developed nations that their citizens have access to similar basic rights of any other free nation.  

-With all that said I still expect to see China produce some of the most innovative companies of the 21st century, just don't expect them to gain control of the title "Most innovative country in the world" anytime soon.

-I'm also excited to see how technology is leveraged by the Chinese to force change on their government.

Investment is the healthcare space has been a hotly debated topic for some time now.  Most people agree that the opportunities are huge, but many VCs and CEO's disagree on the prospects of success.  The regulatory environment in healthcare is so convoluted it has scared more than a few investors away.  Even Google co-founder, Sergey Brin, has said that it is such a difficult space to work in he would prefer to spend him time and money elsewhere.  

What my experience at Employee Navigator is teaching me is that healthcare is undoubtedly one of the most difficult industries to innovate in (financial services would be up there too) but there are huge gains to be made by companies who are willing to put in the time necessary to have a real impact.  In our experience that literally means dragging every insurance carrier we speak with until they understand what we're doing.  We're going to keep explaining to them why we're right until they agree with us.  

The opportunities to make a quick buck in healthcare are few and far between, my hope is that the slow moving environment does not scare away outside capital.  

For the past year, everyone in our office has been trying to solve a difficult, but important problem our business is facing.  How do we educate and engage with our clients so that they are armed with the tools and understanding necessary to use our software effectively with their clients?  Catchy phrases like engagement and customer success were tossed around, we have simplified the software and adjusted our on-boarding process.  Nothing was working.

One of our engineers was listening to our problem at lunch and said that we should treat our clients like a franchise, much like opening up a McDonald's or Subway.  Everybody at the table went silent for a few seconds, then we realized that was the perfect way to frame our problem.  When someone opens up a McDonald's they are given exactly what they need to run a successful operation.  Everything from what vendors they work with and how to cook the food to how to talk to customers and take orders. I'm sure the exact level of detail McDonald's goes into to ensure a consistent experience for all customers around the world is astounding, but you get the point.  And while the franchisee is given all of the tools needed to run a successful operation the new owner still has to hire the right people, treat their customers fairly and execute a business strategy.  The stores are given a recipe for success, but some follow it better than others.  What's beautiful about the franchise model is that it is also very repeatable and we love repeatable.  

We have to go into the same amount of detail, educating our clients and giving them the resources necessary for them to succeed.  Unfortunately, our industry is incredibly complex there is no looking for a silver bullet is a waste of time.  We have to go well beyond the traditional support and training that we are accustomed to providing.  Ultimately we're going to have to teach them how to train their clients on the software, what to say, who to work with, etc.  If done successfully then we will not only have solved our initial set of problems but will have also created a small army of evangelists who are able to speak to the strengths of our software like they were one of our employees.  And just like MsDonalds some of our clients will execute better than others, leading to a better experience for their clients.

For me, this was also a case study in collaboration.  It was not the sales or support team who framed the problem correctly, it was an engineer who looked at it from a different perspective.