Category Archives: hypereconomics

…Into Vertical Specializations…

Fly into an airport in Australia or the United States, and you’ll see a number of well-dressed men loitering near the luggage carousels. Some of them will approach you, offering you a ride to wherever you need to go. Given that this isn’t strictly legal, most often they wait for you to approach them and open negotiations. After you’ve agreed a price, they lead you out to the parking lot, where a newish black limousine (generally a Lincoln Town Car) awaits. You pop in, and head out. Although neither the airport authorities nor taxi drivers care for this practice, it is widespread. Wherever passengers congregate, you will find drivers.

Informal and only quasi-legal, this transaction carries some risks. The driver might not be insured – what if there’s an accident? Pick the wrong driver, and problems could follow. These fears (which very rarely eventuate) have become the ammunition in a terror campaign by taxi companies as they fight to keep these ‘unlicensed’ drivers away from a reliable and profitable stream of passengers. Yet these limousine drivers do work for legitimate agencies; it’s quite easy to make a call and book a pickup. Once there’s a booking, the transaction has become wholly legal, and no taxi company can do a thing to block it.

The booking serves as a legal fig-leaf. You could be staring at a driver – conveniently holding a sign with a phone number printed on it – call the number on your mobile, and get the driver’s services, right there on the spot. That would be perfectly legal, even though the real-world differences between making the call and a personal approach are barely more than semantic.

Toward the end of 2010, a group of San Francisco-based entrepreneurs recognized the potential of an on-the-fly connection between limousine drivers and passengers. Rather than establishing a centralized switchboard and dispatching center, they developed two applications for Apple’s iPhone. One app uses the handset’s onboard GPS capability to automatically locate a passenger, transmitting those coordinates to any drivers who have marked themselves as available to carry passengers. Limousine drivers run another app, allowing them to review and accept pickup requests.

With little more than two smartphone apps, this firm – Uber – has created a powerful new competitor in taxi markets across North America. Limousine drivers use Uber to add jobs to their schedule, filling their downtime and doubling their income. Some drivers cannily run the passenger app as well, so they can see all the other limousines around them, avoiding areas oversupplied by available cars. Passengers, no longer at the mercy of undependable taxi companies, have flocked to the service, even though Uber charges a 40% premium over an equivalent taxi fare.

Uber did all this without building a fleet of vehicles. Capitalization requirements were minimal. Uber takes an existing resource – limousine drivers – and deploys that resource with the efficiencies available because everyone is directly connected. Aggregating connected drivers creates a virtual fleet. Aggregating passengers creates market demand. Marrying the two creates a new market, and a business model that has no expensive infrastructure, no overhead, and very low scaling costs. Bringing Uber to another city is almost as simple as distributing the two smartphone apps to drivers and passengers.

Working within a transportation framework, Uber found it easy to aggregate drivers and passengers into a marketplace; Zaarly and AirTasker, which aggregate generic labour for generic tasks, have found it much tougher going – because they lack Uber’s specificity. This doesn’t meant that either company will fail, simply that they need to be all things to all people. This has bad and good aspects. It can be bad, because trying to create so many markets means that the same approach must be taken with all of them. The AirTasker app could get you someone willing to drive you around town – but it’s not well suited for it. It’s not well-suited for anything in particular, and that’s its essential weakness.

Yet going wide creates unique opportunities. Careful analysis of the kinds of labour sought can lead to insights which can form the frameworks for new vertical specializations. If a lot of people want their dry cleaning dropped off or picked up, that means there’s room for a service to fulfil that need – a service that both Zaarly and AirTasker could easily offer. It would be as simple as writing a custom app.

If these hyperbusinesses develop the correct listening and analysis skills, they will become ‘app factories’, spinning out a continuing series of apps, each with its own framework creating its own market. Every task that is sufficiently common that it can benefit from this type of app-based-aggregation will find a home in its own market.

This process is not limited to labour aggregation. It extends across the entire business ecosystem. Just as employers and labourers can aggregate and create a market, the same can now happen with buyers and sellers. eBay became a success because it provided connected market aggregation, but eBay suffers from the same breadth-over-depth issues as Zaarly and AirTasker, and has not taken the opportunity to create vertical specializations. That’s the reason eBay has lost the craft crowd to Etsy, a business that could have been theirs, had they been watching their users. Horizontal hyperbusinesses are difficult and often unrewarding, unless they’re regularly harvested for vertical opportunities.

eBay could be ten thousand verticals, each with its own app, its own marketplace, its own highly loyal buyers and sellers. Instead – by its own actions – it will be progressively locked out of every vertical, as competitors leap into the gap created by the auction site’s diffidence. The future is vertical, because markets are everywhere, buyers and sellers are everywhere, and they all want a framework that enables them to connect and do business.

Everything we buy and sell in large quantities – cars, light bulbs, even things like electricity and petrol – will spin into its own vertical specialization, as the thousands-to-billions who want to trade find a framework that allows them to form a market. The economy as a whole is becoming an ‘app economy’.

Facebook: Trillion Dollar Baby

This morning, the market capitalization of Facebook dipped to USD $55 billion, down about 40% from its opening day highs. This has caused many to wonder if Facebook has been a victim of its own hype. Some analysts claim that Facebook will be gone in just a few years, following in the footsteps of the social media companies it overwhelmed, like Friendster and MySpace. Money invested today, it’s commonly agreed, is money wasted, thrown down a hole full of excitement but lacking all substance.

Poppycock.

One does not expect vision from business analysts or technology pundits, but this is ridiculous, even for them. The short-sighted nature of these observations tells us that no one, anywhere, has grasped the true value of social networks and social graphs. Social graphs detail human relations: the bonds of blood, friendship, school, profession, and shared interest. Beneath the specifics of every connection in any graph we will always find a deeper and more meaningful bond: trust. Our social graph details who we trust, and who trusts us.

Trust is the foundation for all commerce. We will not trade with an individual or organization considered untrustworthy, and will preferentially trade with those businesses where we have the deepest relationships – the strongest bonds of trust. Trust between strangers is not instantaneous. It is earned and remembered. Once established, that trust becomes the foundation for a range of activities, everything from romance to finance.

Facebook has a network of nine hundred million social graphs; with an average of thirty-five connections in each graph, there are over thirty billion trust relationships within their service. These trust relationships are continually reinforced by sharing: pokes, posts, timelines, photos and videos. Within the context of these trust relationships, it should be just as easy to share money as to share anything else.

This is the cornerstone insight, the subtle but profound shift in how Facebook operates (and thinks of itself) which will see it transformed from an underperforming advertising business into a behemoth of financial services. This is the transition that turns Facebook into a trillion dollar company.

This is, admittedly, a very big claim: can Facebook grow to 20x its current valuation? Inevitably, either Facebook will fill the role outlined in the next paragraphs, or some competitor will. There are too many opportunities open to Facebook, as it becomes a global force in the 21st century economy.

ONE: FACEBANK

Facebook will take a billion dollars from offering and buy a medium-sized bank. Why? Because the purchase of a bank instantly gives Facebook all of the licenses needed to operate in financial markets. Facebook will give each of its members an account, so this ‘Facebank’ will immediately have over nine hundred million members, making it the largest retail bank on Earth.

The possibilities for ‘social banking’ remain mostly unexplored. Although finance is most often thought of as intensely private (no one except your partner knows how much money you have in your accounts), finance has always been highly social and participatory. A social bank allows people to pool financial resources to achieve specific goals.

For example, families could gather resources to save to send a newlywed couple on their honeymoon, help them with the downpayment on a house, or send their child to university. All of these activities are technically possible today, but each are so friction-filled that in a practical sense they rarely ever happen. At the most recent LAUNCH conference, startup TrustEgg pitched a three-step web form which allowed a parent to set up a trust fund for their children, a process that normally takes a fair bit of work (and the expense of a lawyer) reduced to a frictionless and accessible operation.

That’s the kind of service that a Facebank will be able to offer to its billion members, plus an almost unfathomable range of other sorts financial services: families making loans to one another, or submitting remittances internationally; friends offering loans to friends, and even more sophisticated ‘microfinance’ transactions, where a large group of connected individuals each provide a small amount to help someone in need; groups pooling funds to go on a holiday, make a big purchase, etc. None of this happens now – or happens only informally, outside the financial system – because there is no structure in place which brings trust relationships and financial tools into the same environment. Facebank does this uniquely well.

Facebank will have the additional side effect of acting as a strong driver for Facebook membership, because Facebook members will enjoy an access to capital and financial flows that will be inaccessible – or prohibitively friction-filled – to anyone not using the service. Family members already belong to Facebook to effortlessly share pictures and stories; when people can share money just as easily, Facebook becomes impossibly alluring.

Does this get Facebook to a trillion dollars? On its own, perhaps not. The largest bank in the world with the broadest range of services – many of them created by members for members, in a huge upswing in financial innovation, as creating new financial services becomes no more complicated than creating a Facebook app – will be worth perhaps three hundred billion on its own. Facebook/Facebank will grow to encompass at least two billion members (three billion if India joins in). Valuing each of these member clients at a hundred dollars seems almost too low, an understating of the potential for social banking.

But we’ve only just gotten started.

TWO: FACEBAY

Trust is the bedrock of commerce; the strength of eBay springs from its ability to translate the ratings from its tens of millions of users (both buyers and sellers) into trust metrics (zero to five stars) which allow individuals who do not know one another to transact business with a reasonable expectation that they will not be defrauded. It took eBay some time to build that trust network – and they have done surprisingly little with it, even though it is their most valuable asset.

Facebook starts off with a bigger trust network already in place; this means there is no barrier to offering eBay like services, a ‘Facebay’ that turns Facebook into a global swap meet. Every Facebook profile could easily have within it list of things that a member wants to sell (or even just offload, gratis). This would be searchable by anyone on Facebook, creating a connected marketplace of buyers and sellers, supported by the trust provided by the social graph. Friends will trade with friends, family members with family members, interest groups with interest groups. All of that trading will feel safe and secure from the launch of Facebay, and the commerce framework provided by Facebank means that transactions can all be completed within the service.

Again, the network effect of Facebook’s huge size comes into play here. With a billion people or more trading everything, everywhere, Facebay becomes a legitimate alternative not just to eBay (which will be consigned to specialty markets beyond the reach of Facebay) but to nearly all online stores of any description. Every business that wants to reach a billion customers will present themselves through Facebay. Facebay quickly becomes the leading retail outlet globally, outpacing Amazon (which lacks a social framework), WalMart, Tesco, and everyone else.

With two or three billion individuals, each with their own storefronts within their profiles, the commercial potential of Facebay is difficult to overstate. Once again, at least several hundred billion dollars, and perhaps as much as a trillion, as the full dimensions of a truly global retail enterprise reveal themselves. It is possible (with just a dystopian squint) that Facebook could become both banker and retailer to the majority of the people on the planet. That would make Facebook a multi-trillion dollar business.

THREE: FACESTARTER

Finally, Facebook has the potential to become the investing platform of the 21st century. With the emergence of ‘crowdfunding’ platforms such as Kickstarter, and the recent passage of the USA’s JOBS act – making it possible for large numbers of individuals to pool resources to fund startup ventures – it has never been easier to find the capitalization required to start a business.

There has been an expectation that the startups to be crowdfunded will be primarily in the technology sector, but it seems more likely 80% of the businesses will instead be small, local, and non-technical – pizza parlors, not smartphone apps. Since the connections within an individual’s social graph tend to have a local flavor, every resident of a community already has the connections within that community necessary to secure funding for their business. While that connection has always existed, it has never been explicit, nor contained in a framework that allows for a frictionless connection between business and investor. These connections are becoming increasingly easy to create – witness the success of AngelList in lowering the barrier to startup funding – and, with ‘Facestarter’ crowdfunding business investment via Facebook will become almost effortless.

Although Facestarter may be the least profitable of the new enterprises to be explored by Facebook, it is undoubtedly the most important, because Facestarter is where Facebook will be able to have the greatest positive impact on the lives of its members and their communities. Most businesses are small businesses, and most people are employed in small businesses. The easier it becomes to form a small business – because capital is available on demand, from the Facebook community and its connections – the more rapidly communities suffering through The Great Recession will be able to recover. Facestarter could be the ingredient that ignites the boom that will follow the present economic difficulties.

As these businesses form, they will naturally turn to Facebank for all of their banking needs, and in this way Facebank moves seamlessly from retail banking into commercial banking, capturing all but the biggest accounts and the biggest businesses. Facebook becomes a commercial infrastructure, connected to every part of the global economy, at every point. This is why Facebook is worth a trillion dollars, or even more, and why today’s valuation will seem, in retrospect, a laughable misunderstanding of the true value of the social graph.

It must be admitted that all of this is provisional. Facebook has not purchased a bank, and they might choose to remain an advertising-driven business, trying to hang on as CPMs plummet. But they now have the time and the capital to engage in a long, deep think about what business they’re really in. That business is trust, and all else flows from that. If Facebook doesn’t see this, and act upon it, a competitor will.

DISCLAIMER: I own no shares in any company, do not trade in any share markets, do not give financial advice, and don’t even have a Facebook account.