Wednesday, April 07, 2010
Investors Letter: The Roaring Teens?
"...After months of penny-pinching amid the recession, new figures — showing an improving job market, rising factory output and increased retail sales — suggest that consumers are no longer restricting their budgets to necessities like food and medicine. They are starting to buy clothes, jewelry and even cars again.
The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”"
Welcome to...the Roaring Teens? More than a few investors I've spoken to recently think that because consumption appears to be skyrocketing upwards again, all's well that end's well. And on the basis of that conclusion, they're ready to pump capital back into the same old industrial era assets and businesses.
Would that it were so. A slightly deeper logic suggests a very different conclusion.
Consumption is what broke the global economy. What's going to fix it - and what are likely to be tomorrow's most significant returns - differ radically.
What's happening is this. From the consumer's perspective, disposable income has risen sharply.
Now, that's a striking graph - note how sharply it peaks, and the sudden inflection points. They suggest a combination of drivers at work. First, that Geithner's bag of tricks "worked", at least in the near term, and for the consumer. Second, that the mortgage default are, if anything, understating impact. Third, that the impact of rate resets and other kinds of contractual contingencies was more severe than we thought.
So where's that cash going? Unfortunately, not into the right place. Americans should be saving probably around 6% of their incomes, to yield a sustainable current account deficit. But look at the very, very end of this graph.
What do you see? The savings rate is nosediving, hard. Far from 6%, it's closer to 3% - half what it should be.
It's as if Americans believe the crisis never happened, that it was all a fiction - and that tomorrow can be just like the day before yesterday.
Of course, it can't. Needless to say, American consumption is (still) being financed by China essentially buying dollars. But today, China's got to invest, instead, in more productive assets than low-yield loans to Uncle Sam. And it's got to free room for domestic consumption.
Both will happen by letting the renminbi adjust (and, of course, the stage is being set for exactly that). Whether this month, next month, or next year - doesn't matter. When it does, America's grateful return to yesterday's consumption path will be revealed as an illusion, and develeraging will have no choice but to begin in earnest.
Deep recovery for the global economy depends on the American consumer becoming the American saver, investor, and builder. That, in turn, depends on a new generation of businesses, that lay the foundations for tomorrow's industries, sectors, and markets. Those businesses - Constructive Capitalists - are what fuel meaningful investment in people, communities, and society, not just naked consumption by them.
Betting on a return to yesterday - as many consumers are essentially doing - is a poor choice to make. A better idea is betting on a more constructive tomorrow.
Sunday, April 04, 2010
Social Strategies: Choreography
Here's a nice NYT article discussing how one of my favorite recent startups - Kickstarter - is changing how, um, stuff is financed.
Kickstarter's a killer example of social strategy in action. It's an example of one of the most complex - but almost most disruptive - social strategies: choreography. In the choreography strategy, a new architecture for interaction between buyers and sellers is crafted from the ground up. Literally, the steps of the dance of economic exchange are newly choreographed.
Examples of choreography are tough to find. Most industries and markets have had largely the same choreography for decades, some for centuries. LinkedIn didn't change the choregraphy of recruitment, for example - it just made the steps in an existing dance slightly easier to perform.
So consider Kickstarter's new choreography for a new sec. A total amount to be raised is explicitly stated, and pledges are made conditional on everyone else's pledges exceeding the desired amount. From a technical perspective, Kickstarter is letting one party (like a band) buy a psuedo-binary call option from N others, where the strike price is the fundraising amount, and the option either pays off in full, or not at all. The steps of the dance are altered.
That's a new choreography for stuff like books, music, and film: one that promises to unlock significant efficiency gains. More information is aggregated at less effort, risk is transferred, atomized, and spread, and, perhaps most interestingly, Kickstarter users are themselves beginning to align risk with reward (by offering funders limited edition stuff, etc).
So will Kickstarter take off? Anywhere outside a prop trading desk, these economcis are pretty radical. To really ignite a financial disruption, Kickstarter might wanna think about the other half of the equation. Kickstarter pledges are still illiquid investments. But what if they were tradeable instruments?
Now that would be a radical new choreography. It would move beyond the simple risk-spreading economics of a binary call option - to the self-organizing network effects of a market.
It's just one idea. The bigger idea is choreography itself, and it's power as a path to advantage. So the question is this. Most organizations are choreographed. Are you choreographing?
Friday, April 02, 2010
Social Strategies: Clarity
Recently, at my HBR blog, I discussed shifting from 20th century strategy to a new approach: social strategy. The simplest social strategy is clarity - and here's a killer example.
"Two researchers at HP Labs, Sitaram Asur and Bernardo Huberman, have discovered that you can actually use Twitter mentions to predict how well a movie will do in it's first couple weekends of release. What's more, the method works even better than the most accurate method currently in use, the Hollywood Stock Exchange (HSX)."
Twitter, in other words, offers media decision-makers more clarity about which movies are people are likely to value most. How? By unbundling conversations, letting people send and receive in real-time, more knowledge is aggregated faster.
It's a fascinating - and telling - example. Movie studios think of social media as another channel by which to market the same old lame blockbusters.
But clarity is a better strategy. Huberman and Asur's work suggests that a far more productive use of social media is learning how to make better movies in the first place. Now that's radical. Expand that across industries, and the future of strategy begins to come into stark relief.
Thursday, April 01, 2010
The McJobs Big Bang
Lately, the word on the Street is: jobs boom.
What's interesting is that analysts are far more bullish than economists proper about the prospects of jobs booming once again. The consensus amongst economists, I think, is far more pessimistic.
Here's what's really happening. We're trading yesterday's jobs - relatively high value, secure, jobs, with career paths and safety nets, of a sort, at least - for the opposite: low value, insecure, often temporary, narrow, and limited jobs, with no safety nets, and little skills gains.
We are, in short, trading real jobs for McJobs. The so-called jobs boom is, examined more closely, a Big Bang of McJobs. That conclusion's as tight as a drum: the rational person needs only to look at the underemployment numbers to see it confirmed.
"...A measure of underemployment that counts those people has almost doubled over the past two years, to 15.6 percent."
The question is: why a Big Bang in McJobs? The answer's simple. Yesterday's industrial economy is today's zombieconomy. Yesterday's businesses are slowly but surely dying, and the entire base of the economy is in decay. Replacing real jobs with McJobs is just another way to keep it afloat a few months longer.
The real problem is this. We haven't reinvented the economy for the 21st century. When we create tomorrow's industries, tomorrow's jobs will appear in droves. Until we do, though the numbers may show a "jobs boom", there will be little gains in the real economy to match.
McJobs, after all, are no path to prosperity - just a path to the acceleration of decline.
A Mini-Case Study in The New Economics of Advantage
"Pfizer, the world’s largest drug maker, said Wednesday that it paid about $20 million to 4,500 doctors and other medical professionals for consulting and speaking on its behalf in the last six months of 2009, its first public accounting of payments to the people who decide which drugs to recommend.
Pfizer also paid $15.3 million to 250 academic medical centers and other research groups for clinical trials in the same period."
Interesting. So why is Pfizer acting so constructively? Because, well, the costs of not acting constructively just went up radically:
"A spokeswoman for Pfizer, Kristen E. Neese, said most of the disclosures were required by an integrity agreement that the company signed in August to settle a federal investigation into the illegal promotion of drugs for off-label uses."
There are a couple of very interesting points to note.
Pharma players "invest" in "relationships" with doctors to control their key distribution channels. And these numbers suggest, under the rules of industrial era capitalism, just what a great investment that was. For a few tens of millions, Pfizer reaped marginal returns roughly numbering in the hundreds of millions.
But that was yesterday. The costs of giving side payments to doctors just went up radically, now that regulators are on the offensive. Regulators are on the offensive, of course, because pharma is failing to create meaningful, authentic, thick value in the first place. Let's put that in strategic terms: the opportunity cost of creating thin value, today, is leaving yourself open to fiercer, more frequent, and more intense attack.
And that puts pharma on the back foot. The dominant business design has been based not on making radically more effective drugs - but on marketing yesterday's drugs more effectively; discovering new segments and markets, gaining exclusive access to them, and building patent thickets to deter rivals from entering them. That game's over. And it's not entirely clear what pharma's going to do about it. Now, for example, that Pfizer's disclosing it's numbers, the incentives for doctors to bid up the price of their (ahem) services are significantly enhanced.
The lesson? Simple. The price of protecting yesterday is creating tomorrow. Yesterday, pharma was built on an extractive advantage. Tomorrow, it must be built on a creative advantage.