mind this - by Lars Plougmann

The shape of a Downturn 2.0

There have been no recent R-word stats published that I have seen, but predictions that we are headed into a recession are becoming more frequent. No doubt that the prophecies of doom are true: after a boom follows a bust.

Timing the economy's cycle is difficult though, and so is predicting geographical distribution. As for sectors, here is a stab at how a Downturn 2.0 might be different from the previous one.

The technology sector took a tumble in March 2000 followed by the rest of the markets and at the same time the housing bubble was building.

Is the next growth recession going to be different? Consider the following shape:

Tags: economics recession technology property housing bubble downturn 2.0

Collapsing the centuries to explain now

My history teacher at high school was wise enough not to claim that the past defines the present. The valuable insight he passed on to his students was that knowledge of history would make it less like that we would repeat the mistakes of the past.

At the Reboot conference in Copenhagen earlier this summer, parallels were drawn between today and the age of the renaissance (15th century). This week, The Economist sheds light on the competitive situation between the big internet companies (Google, ebay, Yahoo, Microsoft) by relating it to Napoleonic Europe (19th century).

With the reference to Napoleon, it is tempting to tie it up with the information super-highway metaphor often used to describe the internet. Napoleon enforced the drive-on-the-right rule in the European countries his armies occupied. Which side of the road vehicles travel in a country is an open standard, and it is in the battlefield of open standards that today's winners of the internet economy should be sought.

While Google and the others are busy forging alliances it is their work on, and adherence to, open standards that in the long term will define their success. Make it easy to plug your service into other services and you will attract users not just from your current services but from other's future services as well. Inter-temporal business scalability.

Interestingly, as Sweden's history shows, if you at first back the wrong standard you can, at a cost, switch over (Sweden changed from left-hand-side driving to right in 1967 [photo by Leif Engberg found on Wikipedia]).

Tags: Google history internet renaissance Napoleon business model open standards

When and where should be free information

This weekend I learned about two government follies. One is a lesson from history, the other is a current example. Both are about restricting access to information, limiting freedom and economic activity.

• In 1797 the English parliament decided to impose a tax on personal timepieces. As a result, people stopped carrying watches and the national watch making industry withered.
• In Russia today, civilians are not allowed to use GPS. The government is afraid that decentralised mapping threatens national security. This makes it difficult for organisations to record locations of their assets and use of car navigation systems is almost unheard of.

Access to accurate time and location information is an enabler of commerce. In most of the world today, governments subsidise (or at the very least, refrain from taxing) accurate timekeeping and location services (with reference to the "positive externalities" argument).

Today's most important enabler of commerce is the internet. I hope the lessons from the late 1700's are not forgotten in the continuing pressure to sort out the regulations governing the internet.

The 1797 act was repealed after nine months.

Tags: time GPS regulation tax net neutrality internet externalities government

Markets 2.0 and Economics 101

Doc Searls talks about the intention economy as a future state of markets where marketing no longer means advertising and the interaction between supply and demand is about facilitating an efficient transaction. JP Rangaswami explained in his speech at the Reboot conference last week that in the economics of "Markets 1.0",

Advertising filled a gap because it was costly to research a product.

These insights got me thinking about what happens at the micro level: The buying decision and how it is influenced.

In micro economics, an exchange (say, money for a product) happens when the utility of consumption of the product exceeds the utility of the money. Measure utility in monetary terms and we can do away with the tedious 'utility of money' bit. That is simple, but actually too simple. We don't know the utility of a product before we get to use or consume it, so we are dealing with expected utility and, as usual in economics, this is where things get more interesting.

The consumer's idea of utility can be represented as a probability distribution. It is a necessary condition for an exchange to take place that the mean of the probability distribution (the expected utility) is higher than the price. But if part of the probability distribution sits below the price point then the transaction may not happen anyway - that is, if the consumer is risk averse.

At least it may not happen right away. The consumer can reduce the variance of the probability distribution by researching the product. But research is costly, both in terms of time spent and sources consulted. So how much research should we do? Again, economic principles have a precise answer for that: Continue researching until the marginal benefit of research dips below the marginal cost. From a practical viewpoint it means consulting the lowest cost sources that give the best ideas about the utility of a product. The first three sources you consult are likely to influence your idea about a product (and hence sharpen up the probability distribution) more than sources no. 21, 22 and 23.

Various sources are at our disposition when we want to find out more about a product, some examples are:

• advertising (free)
• opinions of people in your network (low cost)
• independent test reports and analyst reports (medium to high cost)
• a poll of consumers of that product (high cost)

And this is where Markets 2.0 kick in, fuelled by technology, transparency, structured and unstructured publishing, better software, search engines, collaboration and the internet's amazing ability to aggregate. Because the cost of research is coming down. On Amazon, every product is presented next to a poll of people's opinions about the product - quantitative and qualitative. On numerous websites that have established themselves as independent and authoritative, test and analysis is available for free (for example, I would never buy a digital camera without consulting dpreview.com). Through email and IM you can reach out to your personal network and ask for advice.

With the collapse in research costs we are back to Doc's intention economy. Consumers form their buying intentions irrespective of advertising and they appear on the market with intent to transact. Very traditional mechanisms brought them to this stage: ask your friends, ask the experts, and tap into aggregate data from the ones who already know - but all of it is now embodied in databases, software and a network that makes it possible.

The winners in the intention economy will be the ones who can detect intentions when they are advertised [excuse the pun] and act quickly to fulfill them.

(Note: While I have used the term 'consumer' above, I believe the same effects are present in business-to-business and financial markets as well. Probably more on that later.)

Tags: Markets 2.0 transparency Doc Searls JP Rangaswami Reboot8 intention economy micro economics

Taxing times in Denmark

It was a bit strange to travel from London, where I live, to attend a conference in Copenhagen, where I grew up. But the Reboot conference offered a good perspective on what was happening in Scandinavia, continental Europe and beyond. In most search engines, the torrent of activity happening in the US can at times drown out exciting developments elsewhere.

There were many opportunities to share thoughts and views with fellow Danes and fellow Danish expats. Some of the discussions touched upon the Danish tax system, a favourite subject with many Danes and the flip side of this thriving economy with a happy, productive and highly educated workforce. Taxes are necessary to maintain a civilised society, but in the future, high-taxation countries like Denmark will have to consider if their system is viable in an increasingly open and networked world.

It's about percentages. The income tax in Denmark depends on where in the country you live, but the government has capped the marginal income tax at 62% (a compound rate consisting of a 59% tax and another 8% tax). Annual property taxes range between 1.6% and 3.4%. The state will collect taxes on behalf of the church (if you are a member of the right one), on average .7%. The universal value added tax is fixed at 25%, but if you want to buy a car there is a special duty of 180% (only 105% of the first DKK 64k) to pay and then VAT on the price of the car plus duty. This level of tax would encourage a huge black market economy if it wasn't for electronic filing of most details concerning tax payers - which also makes it easier to complete the tax paperwork. Until you start a company, then the paperwork becomes a real burden with fines the moment you miss a deadline. (More details about Danish taxation from PwC.)

The Danes take pleasure in sharing bizarre anecdotes describing the level of detail the tax authorities get into. A friend who runs a professional diving business was told that he couldn’t deduct certification courses even though they allowed him to take on other types of work. A businesswoman I spoke to had lunch with a Japanese business connection and deducted the cost of the mal in her tax return. Initially, the tax department overruled the deduction but after a complaint they advised that she would be able to retro-actively deduct the cost of the lunch once she could prove that it has led to business in Japan.

The good news is that if you want to go live and work in Denmark you don’t have to let the high tax level discourage you from participating in the high quality of life enjoyed there. Generous discounts are in place to lure foreign specialists to Denmark: How does a 25% marginal tax and a waiver of vehicle duty sound?

Tags: Denmark tax taxation Reboot Reboot8 adwords income tax

The enduring popularity of street crime

The article in The Economist from which the headline is borrowed was on my mind today, a few moments after I became a street crime statistic myself. A classic smash-grab-run, it was over quickly. Daylight, walking through the park, talking to my sister, other people on their way home from work. Then two tall guys, a few punches, sprinting away with my mobile phone.
    Some helpful people called the police who appeared in two cars within a few minutes and broadcast the vague description we were able to give of the muggers. Later, the mandatory call to the phone company to block the SIM card and the phone.
    But if the phone is blocked from working with any SIM card, as the phone company assured me, what is the value of the device to my assailants unless they are design students? My guess is that the ease with which you can get your phone unleashed from the tie-in used by many phone companies to prevent you signing on with a competing service also works for stolen phones.
    Is there a market for better algorithms to protect wearable devices like phones, music players and cameras? Or are those algorithms inexorably linked to service provider tie-in and DRM shunned by consumers?
    Technology should be one of the weapons we use to fight crime, especially when attractive technology is a contributing factor of crime. (This year, 100,000 people in the UK will get mugged because of their mobile phone.) Better locking, tracking or clever use of the in-built camera to transmit photos of who is handling the phone ("this phone is equipped with MugShot™"). But maybe solutions can be more creative as well: Top of the line phones that are indistinguishable from cheap ones, unattractive colours or personalisation to such a degree that the phone is a pain to use for others?
    Leave a comment if you want to share your opinion. Don't call me just yet.

Found: More information about the Quaero search engine

The March issue of The Economist Technology Quarterly has an article (Attack of the Eurogoogle, behind a pay wall) about the government-backed European search engine Quaero that I wrote about here.
    The article confirms Quaero's multimedia ambitions (images and audio) and speculates that the service will launch this year. The scale of the funding is still unknown; The Economist mentions that the French agency, AII, that was created to oversee the project (and other projects) was itself funded with an initial endowment of $2b.
    To avoid complaints about state aid and unfair competition, the subsidies have been structured as "favourable loans, interest free cash advances, forgivable loans and grants [...] all of which are allowed under international trade rules."
    Scant comfort for all the start-ups out there working in the search space.

Disrupting ForEx profit margins by aggregating and matching supply and demand

The internet's power of aggregation is already matching lenders and borrowers: the main players are Zopa in the UK and Prosper in the US. A recent article (behind a paywall) in The Economist compares the new person-to-person finance services to banks.
    But what about the internet's traditional border-crossing potential? I would be interested to know if any person-to-person foreign currency exchanges are out there and operating successfully. As the UK has chosen to stay outside of the Euro zone, it  means that we have to buy foreign currency whenever we go overseas.
     There are profits being made in the forex markets so the potential for disruption should be great. Large cross-border transactions tend to stay close to the interbank rate and financed by transparent fees but travel money is an area plagued by large spreads and non-transparent fees (witness the many outlets offering "no commission" or "zero commission" currency exchange).
    A quick round-trip to get quotes for 100 pound sterling exchanged into foreign currency (US dollars, Egyptian pounds and the Estonian kroon) reveals the margins charged by some "zero commission outlets (Natwest, the Post Office, Travelex and OnlineFx). When buying US dollars, Natwest and the Post Office will pocket 4 to 5% of your money; the forex specialists will charge you around 3%. Look at currencies with higher fluctuations and lower volumes, like Egyptian pounds, and all four outlets will skim 10% compared to the interbank rate. Some currencies may be classified differently by the different organisations: If you want to exchange your sterling to the Estonian kroon, Natwest and the Post Office will charge a bit more than 10% whereas Travelex will make 5% from the transaction.
    Use your debit card at a cash machine at your destination and you will often end up paying around 4% or more to your bank.
    A person-to-person forex market between the UK and the US, say, would exploit the fact that people travel both ways. Setting up a bank account in a foreign currency is probably too much work, even for frequent travellers. In an aggregated model, US citizens who travel frequently to the UK would set aside a dollar sum for travel money. UK members of the scheme would then be able to withdraw from the dollar fund in the US - up to an  amount equivalent to what they have contributed to the Sterling fund in the UK. And vice versa. Because members only contribute in their own currency, exchange rate risk is eliminated.
    The system depends on a bunch of assumptions, and not all would be easy to satisfy (one is about balancing the amounts needed of different currencies). This suggests that forex is not going to be free. But even at lower margins there is a probably a nice profit for the people who get it right. Who would be best positioned to launch such a service? Banks or existing forex vendors cannibalising their own business? Or the likes of Paypal? Or VC backed new start-ups?

Search for a European market

If there was a demand for a European search engine, surely the market would provide it? In fact, I know of several start-ups focused on this market space. But the internet is a world of market disruption and in this case disruption has arrived in the guise of the French and German governments who last year announced a search engine to launch this month. The name of the search engine is Quaero: I search in Latin.
Apparently Bertelsmann, Siemens, France Télécom and several research institutions are part of a consortium on the receiving end of government funds to finance the venture (sources quote figures between €100m over five years and €300m). It looks like Thomson is playing a leading role as well: Many of the results in a Google search for Quaero point to a Thomson project website which has now been hidden behind password protection. But the site has been partially cached by Google (I wonder if the governments involved regard this as industrial espionage?). The pages reveal the level of the project's multimedia ambitions when they mention speech to text transcription, video segmentation and image recognition. But I don't know if "metadata extensions to ingestion devices" sounds appetising.
Shouldn't governments instead fund basic research into language processing, search, multimedia tagging etc. and leave it to companies and entrepreneurs to develop innovative services if a demand exists and if it can be monetised?

UAE blocks access to websites

Friends in Dubai confirm reports that access to the photo-sharing website flickr, owned by Yahoo, has been blocked in the United Arab Emirates. Flickr users are expressing their discontent with censorship.
It appears that access to the Skype webpage where you pre-pay for SkypeOut has also been blocked within the last few days.
Is censorship being exercised in an attempt to protect cultural values or to maintain the value of the telecoms monopoly, Etisalat? Can censorship ever be justified?