Category Archives: Economics

When Piracy is Easy, How Do You Compete?

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Popcorn Time is something that I’ve been hearing about for a while now but I’ve never really looked into. Effectively it’s a tool that gives you an easy to use User Interface to find Torrents for your favorite TV shows and movies. Torrents, by the way are a type of file and download methodology. Effectively you get tiny bits and pieces from a large number of different users across the internet. This makes it harder to track the individual files, prevents it from easily being removed from the web, and helps manage internet usage across the multiple users. In the days of Kazaa, you directly downloaded from a single peer, now you’re downloading from multiple users, so if one goes offline or reduces the bandwidth they are sending the file to you it has minimal impact.

Torrents are what’s called “piracy” and are on the pirate bay and any number of other sites that share those files. Since they do not have to follow strict contracting like Netflix, Comcast, Hulu, HBO, and other streaming services you have access to the movies you want whenever you want them. For instance, Netflix recently lost access to the Avengers, probably because of the cost of keeping in their library and Disney trying to create artificial scarcity of the legal product. You can find extremely high quality torrents out there to watch it if you can’t get it for free. In fact I’m sure it’s on Popcorn Time right now.

Because of these difference and the historic complexity and risks of downloading a torrent, Netflix had positioned itself as a way to prevent piracy. Now this might not be the case, as Netflix is beginning to see Popcorn Time as a legitimate threat to their business model. I’m not surprised that Netflix sees risk here and I think that this is a good thing for Netflix. It means they are expecting their business to be disrupted and that they can take proactive steps to address it.

What can they do to keep their business afloat and continue to fight piracy? Well, since they are essentially seen as a cash cow on two fronts – ISPs and Content producers (MPAA and TV companies), they need to clearly articulate the amount of piracy that was reduced once the content was put onto Netflix and then show the increase in piracy after the content was pulled from Netflix for contractual reason. If Netflix can’t afford to keep it on their network, then with an easy to use app like Popcorn Time, the content will be pirated, which means that any revenue artificial scarcity was hoping to drive or to be extracted from Netflix at an elevated price goes out the window and the content will still be consumed.

In some cases piracy will happen regardless, but if the trend continues were people are switching back and forth between cord cutting and going back to cable because of rising costs of apps, then apps like Popcorn Time will become more popular because they can completely replace Hulu, Amazon Prime Videos, HBO Go, Netflix, etc.. You could be a cord cutter with this and pay for one app to get your live sports and be good to go. Content producers will begin to lose out again, because they are trying to squeeze the companies that provide easy, relatively cheap access to their content. I’d rather not go back to that, but if my costs keep rising because the companies I choose to support can’t afford the content that I want, then I’d have no choice.

The Innovation machine – This is a “how to” guide for Innovation management

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As many of my blog readers know I’m an innovation reading junky. I’ve read many of the books on how to manage, from a individual’s perspective, creating an innovation or even at a high level how to run an innovation project. However, this if the first book that looks at things in a very systematic manner utilizing a lot of case studies. The Innovation Machine by Rolf-Christian Wentz is a fantastic introduction into a series of case studies of the most innovative companies in the world.

Books like the Innovator’s Dilemma are a lot more prescriptive in what a business should do or how a given business has been disrupted. Typically they focus on the smaller entrants that enter a market and beat the incumbents. The Innovation Machine on the other hand looks at the incumbents and analyzes what the organization did culturally to enable innovation. I believe books like Innovator’s Method and the Lean Startup address a different need: how to take an innovative idea to market. This book touches on those things, but looks at how the whole organization can enable those Lean startups within the organization and use it’s size to maximize the results.

The Innovation Machine also touches on the portfolio management aspect as well as some of the best ways to fund projects, staff projects (2 is best, a small room is next, anything else is doomed to fail), and finally how to integrate the project teams back into the larger business as a whole. No book that I’ve read has really discussed how to do this. All these topics are covered with clear case studies of some of the most innovative companies. He includes discussions of Google, Toyota, GE, P&G, SC Johnson, BMW, Microsoft, Whirlpool, and a litany of others. The stories are referenced as he details the concepts that were leveraged by the companies in his case study.

I believe that this book is a must read for a CEO or a leader that values innovation. Especially since he calls out the massive differences between managing Incremental Innovation and Disruptive Innovation – he gives very clear practical examples and methods for managing them separately. I believe these are powerful and will help me identify projects I work on more easily as disruptive or incremental.

Researchers Have “Solved” Poker and What it Could Mean

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Today, Chezz pointed me to a really interesting article. Apparently have figured out how to pretty much guarantee a win in “Heads Up Limit Hold ‘Em” Poker. This is the poker equivalent to beating chess masters head to head, like what Deep Blue did in the 90’s and what Watson did more recently on Jeopardy! The difference between these instances though is all players in the game have the same basic information. In chess all the information to inform any move and future moves are available with a glance at the board. In Jeopardy! it’s a little different because it’s knowledge based, but to create the question to the answer, it’s what you know, but the answer is there for everyone at the same time.

In poker, it’s different because you, initially, know only 2 cards out of the 52 in the deck, as the play continues you know more. So you’re dealing with imperfect information about what action to take. This is important, because that’s what you need to do as a player is address that uncertainty. In this program the researchers developed a great learning tool that was able to determine the best course of play and with the experience the researchers gave the program they effectively created an unbeatable computer.

However, the game is limited to a 1 vs. 1 situation with a limit to how much the players are able to bet in any given situation. Those limits are based on multiples of the opening bid. These limits, I’m sure, will eventually be generalized to handle any number of players and then any number of betting options, such as no limit.

Once this happens, I think that these learning systems will have or could have a dramatic impact on a great deal of things. First, trading is essentially poker and the companies that will likely leverage this first will be the companies that deal in high frequency trading. This will make the computers act very differently than they are now and with these new learning algorithms built into them, it could dramatically reshape our stock markets (more than they have been to this point). Second, these systems would be used to “help” with negotiations in any number of situations. I’m thinking initially diplomatic situations where there are a great deal of stakes on the table, which most of them are known, but the information is incomplete. In these cases a computer can greatly augment the capabilities of the diplomat that wouldn’t have been possible in the past, which could either increase the likelihood of a war or reduce it depending on what the goals of the computer are. What does “winning” mean in those cases. So setting those clear boundaries will be important, but that’s why having a person there to augment the machine is crucial as they would provide that feedback over the course of the negotiations.

Finally, this one is by far the largest stretch, but it might be more possible to plan or react to a great deal of the actions of economic entities. This means that governments could leverage these applications to help determine the best determine where to invest as well as where to buy to help truly manage the economy. The central bank could change dramatically.

None of these situations are going to happen overnight. Most likely we’re 2-3 years from multiplayer with no limit hold ’em and 5 years for more monetizable uses for this application. Rest assured these algorithms will be used in a business at some point. Watson and Deep Blue have been repurposed to make IBM money. Expect something similar and I think that these are all very realistic applications that these researcher could pursue. What do you think?

Where I See The Sharing Economy Going: AirBnB

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In my last post I talked about where I thought the sharing economy was going to be going. I wrote that I felt that Uber would grow up a little bit and change how they manage working with cities. This prediction has already born fruit in that Uber is taking a 3 month hiatus from Portland to allow the city to create new rules governing how the city licenses Uber and ridesharing. I think that this is an instance where both the city and Uber were acting like adults. Uber forced the issue, a bit like thugs, the city sued, so both flexed their muscle a bit then both backed down and came to the table to figure things out. We’ll see what happens in April whenever the city has completed its rule making to see how Uber responds.

AirBnB behaves in a similar fashion, moving into cities and pretty much breaking how things operate. The legacy industry wants the city to shut down the ability for people to rent out rooms from companies like AirBnB, while the cities want to collect more taxes from this newly created revenue source, and of course people want extra money from their unused rooms/spaces. So pretty much Lose-Win-Win. However, recent data argues that the hotels aren’t losing out on much of anything. Which means that AirBnB might be catering to a wholly different demographic than what typical hotels do, which might be the couch surfing crowd.

AirBnB already has plans to test turning people’s kitchens into restaurants. Which offers a pretty interesting opportunity for all those folks that you always have felt that should make a restaurant, but can’t afford to. I think that this has the unique opportunity to allow more people to eventually start food trucks and then move into a full restaurant after some time and enough demand. However, this venture has even more potential legal issues than renting or replacing cabs. This is because, there are a lot of people that are pretty much slobs and have cockroaches. It doesn’t even have to be your fault that you have them. When I lived in Pittsburgh we had tons of baby cockroaches because our neighbors next door, where we shared a wall, were dirty filthy slobs that didn’t take care of things. Personally, I found it pretty disgusting to be dealing with the roaches, so we had our land lord clean it. However, if you didn’t live there you wouldn’t know about it. My guess is that for this to be successful AirBnB will have to work with local governments to figure out the best way to address these concerns, they are valid after all. I believe that what should happen is that AirBnB either creates its own agency to do the policing or partners to enable policing of homes that want to sign up for this. AirBnB will likely have to develop some sort of background check and methodology for ensuring safety and quality at their “restaurants.”

Once AirBnB conquers the kitchen, it’s likely that they could move into Uber’s space, because after bedrooms and kitchens there’s cars. Other options could be to rent out a home or a space to host parties, where the home owners could act as cooks, wait staff, and/or a combination of both – this could depend on the price and the offer made by the home owners. AirBnB could of course move into more conventional hotelier, however, this drives down their profit margins and makes them liable for a lot more activities. I don’t see this happening in the near future, unless they begin to put the competition out of order. Another space could be managing office spaces or shared spaces, similarly to what a lot of hotels do now.

I think that AirBnB has a lot of options to innovate without pushing up against local governments, however they will still have to figure out how to manage their restaurant idea first. I think they will work with that out with a pilot city first, figure out what works for them (probably NYC), then they can more likely quickly expand into other markets with that approach. I think they will also very likely work with the governments beforehand. I’m imagining that a city like Portland might be a second or third market for them to move into since it’s great for food trucks and already has a great relationship with AirBnB.

I think that AirBnB is going to have an easier time with local governments than Uber because it has a better reputation and seems to have been working with the governments from the start. I’m interested in seeing where they go in the next few years.

Where I See The Sharing Economy Going

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I’ve been beating up pretty harshly on Uber and in some of my past posts I’ve done something similarly to other members of the sharing economy. This is because there’s an attitude of entitlement in some of their behavior, that being said the incumbents pretty much the exact same way and have worked to institute laws to protect themselves. In some cases the laws that are preventing Uber and AirBnB from effectively entering new markets were put in place to protect customers FROM the incumbents. Which means that Uber needs to work to ensure that their drivers meet those same requirements, which I think is a good thing.

So that being said, where will these companies end up in the next few years. Now this, of course, is pure conjecture, but I think it’s somewhat informed. Based on the types of lawsuits we’re seeing from cities like Portland, countries like France and Spain, we’re likely going to see that Uber is going to have to work more with the governments before moving in. These lawsuits are expensive and too many of them will drain the startup’s coffers where it might negatively impact their ability to do business. So instead of just forcing themselves into a given city they will work with community leaders to effect change of policy. They will start to institute their own rules that will lead to inspections of the cars at random intervals, they will begin to add a great deal more of measures that the riders will be able to rate the drivers on. All of these will be analyzed using BIG DATA and will be used to help show that Uber meets the requirements of various governments.

As these companies mature they will begin to look more like incumbents and start to drive policy creation through lobbying while striving to use their data to support their lobbying efforts. They will start to work prevent other competitors moving into their spaces, leverage their monopolies to move into other spaces and generally mature as an organization. Through these missteps they will create internal policies focusing on how to manage their data and implement processes to prevent data abuse in the future. These startups will need to clearly become data stewards as they mature, because they live and breathe data.

I think it’s likely that Uber is going to begin experimenting more and more with other modes of transportation, for example they are partnering with Carpooling to help bring that service to the US for long distance ride sharing. With the amount of money that Uber has in the bank, it’s likely that they’ll look to acquire this company if the partnership is successful. I could see them getting into RV sharing and then potentially trying to compete head on with AirBnB – that last one is a bit of a stretch, but with a huge pocket full of cash they will definitely be able to take a great deal of risks to experiment in new markets once they have operations in major cities across the world. I’d be willing to guess they’ll continue to use the US as an experimental test bed and while deploying more mature offerings across the world.

In my next post I’ll dig into where I think AirBnB will go with their business.