Exponential Issue 26

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Exponential
The business & strategy press summarized and analyzed
The real stakes of
regulation roulette?
::
October 11 th , 2015
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In this issue:
• Blurred Lines: When the drive for growth
goes too far
• Will big data make the underbanked a
bankable asset?
• Do eSports really have much game?
• The Global Round Up
• 5 Business Must Reads in 30 seconds.
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The global round-up
Better burgers
As all-day breakfast launches in
McDonald's American outlets, its
Canadian counterpart has
announced that it is transforming
the way it does business.
Franchises in the Great White
North will be introducing selfservice
kiosks and table delivery
and hiring 15000 staff in the
process. A CAN 6.99 burger will be
added to the menu, configurable
with 30 different options including
5 types of cheese.
waklingsf via
flickr
Colombian peace
The potential peace agreement
reached last month between
Colombia's government and FARC
rebels would conservatively add 1.5
per cent to Colombia's GDP
"forever", according to Colombian
President Juan Manuel Santos.
There is a six month deadline to
finalise the deal thrashed out in
September. The terms have been
criticised as too lenient on the
FARC, with members of the Council
of the Americas in New York gasping
as Santos said that "of course" FARC
leader Rodrigo Londono should be
able to run for president.
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Chinese changes
Chinese manufacturing has
contracted for the second month
running according to official
government statistics. Private data on
small and medium sized firms show a
slightly steeper decline. The Chinese
economy is due to grow 7% this year,
its slowest rate for 25 years, but there
are doubts over whether this figure
will be reached.
NFL in London
British Chancellor George
Osborne said he is doing
everything he can to bring an NFL
team to London permanently, so
that the UK’s largest city can
reinforce its reputation as "the
global sporting capital". He
exchanged a Rugby World Cup
2015 ball and a NFL gold
Superbowl 50 ball with the owners
of the Miami Dolphins and New
York Jets ahead of an NFL game at
Wembley on Sunday.
Modi and the tech business
Indian PM Narendra Modi
impressed tech company bosses on
his recent trip to Silicon Valley.
Microsoft and Google announced
new ventures in India while
Foxconn is soon to start
manufacturing there for Apple. For
all the bonhomie, there are few
signs that Indians based in the US -
the nation's wealthiest ethnic group
with a $88,000 median household
income - want to repatriate.
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Blurred Lines: When the
drive for growth goes too far
• Volkswagen has lost 30% of its value since the emissions scandal with
estimates of the total cost for the firm range between $35-54 billion
• HSBC set aside $1.14 billion for legal settlements over money laundering and
tax evasion revelations, yet saw a $1.3 billion increase in profits
Self-defeating mechanisms
::
Estimates put the total cost of VW’s “dieselgate” range from
$35-$54 billion. Their attempts to cheat emission tests have
caused uproar with VW losing almost 30% of its market value
and its CEO was forced to resign. There may be industry-wide
effects as Kia and Hyundai have also faced punitive measures
in recent history for similar practices. However, just how far
VW’s dishonesty will back-fire remains to be seen. Looking at
other recent corporate errors such as those of HSBC and BP it
seems that when the smoke subsides, the only thing that is clear
is that fortunes can go either way.
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Running red lights
VW is playing a dangerous game of Red Light/Green Light,
suggests the FT. While regulators may long turn a blind eye,
“sooner or later one company goes too far”. It’s also dangerous to
second guess the final damage: fines may be altered and VW may
or may not be protected by swift action and its perceived
reliability. Five years on, the 2010 Deepwater Horizon spill is still
bruising for BP. The oil giant was hit with the biggest
environmental fine in US history at $18.7bn. A $6.3bn loss last
quarter was linked to the disaster. But Forbes argues that BP is
relatively insulated from the harm done to its public image by the
Horizon spill: “mental images [of the catastrophe] will not cause
the consumer to drive past a BP station on principle”.
Steamrollering the problem
For different firms, “playing on the edge” involves different risks
and rewards. In the first half of 2015, HSBC set aside $1.14 billion
for legal settlements over tax evasion and money laundering
revelations involving its Swiss private bank. However, growth in
Asia drove a $1.3 billion increase in first half profits compared to
the same period in 2014. The world’s local bank has plenty of
customers indifferent to a drama in other territories. Uber
challenges licensing regulations in many of its territories, but, in
the words of one Australian journalist, its “value-add” comes
from “telling regulators where to go and getting away with it”.
Operating in spite of an official ban currently pays for Uber in
Queensland and Cape Town, the firm enjoys an overall valuation
of $51 billion: the most of any venture-backed private company.
What the brains think…
Companies need to relate enterprise reputation matters to
strategic outcomes, suggests Deloitte. “It is crucial that each
employee is aware of his or role within the institution, as a
powerful brand ambassador”. "Our whole government was
founded on rule breaking back in the mid-1700s.” says Chicagobased
employment lawyer Charles A Krugel. "But” Krugel adds, it
is imperative not to “hurt other people”. Professor Robert Reich
suggests when it comes to corporate fines, "the penalty-risk
calculus rarely comes close" to discouraging illegal behaviour. It
therefore makes more sense to punish individuals instead.
Key Reading
• FT: Volkswagen's
deception is a
warning to every
company
• BBC: HSBC's pretax
profit up 10% in
first half of this year
• Forbes: The domino
effect of VW's
emissions scandal
• Deloitte: What
"reputation risk"
means to
companies today
• McKinsey: Beyond
corporate social
responsibility
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Will big data make the
underbanked a bankable asset?
• FDIC estimates that a third of all Americans are unbanked or “underbanked”
• 20% of the US population is “non-scorable” for credit
Many Americans lack basic banking services
:
The Federal Deposit Insurance Corporation estimates that
roughly a third of all Americans – 106 million people – are
either unbanked or “underbanked”, often enjoying little or no
overdraft facility. 12 million residents of the world’s richest
country take out payday loans on at least an annual basis. While
Green Dot has reached out to serve the “underbanked” group
with prepaid MasterCards, the three major credit bureaux rate
20 per cent of the US population as non-scorable. “There is a
snap judgment that ‘lower income’ is synonymous with ‘too
risky,’” says Professor Gregory B Fairchild of University of
Virginia’s Darden School of Business.
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Small purchases and the “big inference”
Fairchild argues that a solution to the crisis is possible and points
to enterprises that bring together new technology and big data.
ZestFinance runs an underwriting model that picks up on
thousands of potential credit variables from applicants’ complete
footprint and detectable behaviour. Founder Douglas Merrill,
former CIO of Google, thinks this "big inference" method could be
applied to all credit card users and will soon be everywhere. Other
start-ups in this space include LendUp, which takes a similar
approach, DriverUp, a direct-to-investor automobile financing
platform, and SoFi, which helps recent graduates with loan
refinancing. These firms are driven by both social mission and
business instinct: revenue from interest and fees from
underbanked customers is estimated at $78 billion a year.
Turning subprime into prime
ZestFinance has recently entered China and launched a US
venture aimed at customs who are only narrowly subprime. A
major focus is on selling its model to other lenders. It has critics
who are concerned that it still has a high %APR. Others say it’s
impossible to test the proprietary algorithms, and worry about an
opaque trade in customers’ data sets. Big financial institutions
are trying to reach the same market. American Express has a
mobile banking service called Bluebird; JP Morgan is creating a
Financial Solutions Lab. Alternative credit scoring could be a
means of avoiding another subprime bubble. But how much has
changed when VC Arjan Schütte suggests that what banks are
really seeking from start-ups is a way to make “heretofore
subprime customers into prime”?
What the brains think…
A KPMG survey of US bankers in 2014 recorded a big annual
increase (from 12 to 23%) in the those who viewed the
underbanked as the segment with the greatest growth potential.
Aite Senior Analyst, Ron Shevlin would like to see an end to the
term “underbanked” altogether. “The misuse and misconceptions
… isn’t doing the industry any good. The term conjures the image
of someone pushing a stolen grocery shopping cart with all their
earthly possessions around town. And that the growing number of
them is some kind of epidemic plaguing the nation.”
Key Reading
• Forbes: Banking the
Unbanked: A How To
• LA Business
Journal:Big Score for
Borrowers?
• CNBC: Silicon
Valley's rich want to
bank America's poor
• KPMG: Banking
Oulook 2014. An
Industry at Pivot
Point
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Exponential the Skillbridge Magazine
Do eSports really have
much game?
• eSport’s global revenues are projected to reach $451 million in 2017
• Amazon acquired specialist gaming videos channel Twitch.tv last year for
$970 million.
Glued to the screen
:
2.4 billion hours of eSports videos – competitive video gaming
in a formal or informal setting – were consumed in 2013, almost
double the 2012 figure, aided by the advance of streaming
technology and rising popularity in the US. eSport’s global
revenues, $194 million last year, are projected to reach $451
million from 145 million fans in 2017 at a $1 increase in
revenue per person to $3.20 (consultants NewZoo now reckon
it will be higher). Meanwhile leading YouTube video
gamer/performer Felix Kjellberg, aka PewDiePie, has 37
million subscribers and reportedly made $7.4 million last year.
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Big game country
The appeal of watching others play online is said to reflect the
desire to "be the hero" and feel part of a community. Teens are
drawn to the candid humor and outrageousness of gamers like
PewDiePie and KSI, to the extent they are more popular with them
than mainstream celebs, according to a Variety survey. Businesses
like Red Bull, Samsung and Intel are agreeing sponsorship deals.
Advertising in video games is tricky but advertising in online video
straightforward. Games publishers have invested in eSports and
recouped this through fans’ spending on the games. Fans are more
likely to be a higher income bracket and shop more frequently than
the general population. Amazon acquired specialist gaming videos
channel Twitch.tv last year for $970 million.
Gamer boys and Mad Men
Newzoo calculates eSports as being as popular as ice hockey or
swimming. The US government is granting visas to professionals
to come to play in the US and Robert Morris University is offering
video games scholarships. The $600-625,000 winnings of top
players such as Danil "Dendi" Ishutin are still a way off the $10-14
million salaries of top hockey players or Ryan Lochte's $3 million
total worth. PewDiePie's $7.4 million earnings from ads sell him
short, argues a piece in Fortune, pointing to the fact that CBS
earned triple what he did for an audience half the size during The
Big Bang Theory. This reflects the economy of YouTube whereby
the site takes 45% of ad revenue earned from videos. Now 18 year
old Jake Flositz is trying to persuade YouTuber gamers to join an
App, Beachfront, as a more direct way to reach their fans.
What the brains think…
Peter Warman, consultancy NewZoo’s CEO thinks it’s only a
matter of time before eSports represent competition for sponsors
with major sports leagues. “As the eSports market matures, its
revenue mix will closer resemble that of traditional sports, which
saw 57% of revenues come from sponsorships and selling media
rights in 2014,” he says. “ESports... already generates more video
content and viewing minutes than the NFL. The amount of
content is endless, as consumers love to create and share
experiences". ESports betting is already likely to be a $100
million industry, before many betting firms have seriously
recognised its potential.
Key Reading
• Fortune: Watching
other people play
video games could
soon be a billion
dollar industry
• Forbes: PewDiePie
doesn't make
anywhere close to
what he should be
making
• Variety:YouTube
stars more popular
than mainstream
celebs among US
teams
• New Zoo: The
Esports economy
will generate at
least $465 million
by 2017
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Woof woof! A new app
targets dirty dogs
BBC: Japan city launches App to tackle dog mess
The authorities in the Japanese city of Izumisano are
trying to clean up the streets by asking residents to
upload pictures of dog mess they encounter to a new
App. Comments are invited alongside the submissions
and the location is marked with the help of GPS
technology on an online map, which guides the patrol
routes of the city's dedicated dog mess cleaning team.
The App follows a series of failed initiatives from fines
to a tax on dog owners; so far people have preferred to
use it to report potholes and pavement cracks.
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Winners and Losers
Good Week For: The US auto industry
While scandal shakes VW, GM, Fiat Chrysler and Ford
recorded double digit sales increases in September over
the same month in 2014, putting the auto industry overall
on course for its best year since 2000. September sales
were boosted by low interest rates, cheap gasoline prices
and the timing of the Labor Day weekend.
Bad Week For: Wang Jing
Telecoms billionaire Wang Jing has seen his net worth fall
84% from $10.2 to $1.1 billion since June. A backer of the
$75.9 billion Nicaraguan canal project, He owns 35% of
Beijing Xinwei Telecom Technology Group Co which has
seen a 57% drop this year. His losing streak has been even
more dramatic than Ivan Glasenberg’s as Glencore CEO.
Good Week For: Peppa Pig
Creators of the hit UK cartoon series Mark Baker, Neville
Astley and Phil Davies are making a further 52 episodes
as part of a $212 million buyout by co-owners
Entertainment One. The company aims to double global
sales to $2 billion in 5 years.
Bad Week For: The Credit market
On Tuesday a BofA report diagnosed “the start of a long, slow,
painful unwind” in the junk bond market, and HP had to offer
an extra 50 basis points on its latest offering compared to
similarly rated corporate debt, costing it around $75 million
extra a year. The spreads on corporate debt are nearing levels
usually seen in recessions, a DB analyst observes.
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The Briefing
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Five key reads
aiigle_dore via flickr
Reuters: Glencore's Glasenberg, once the hunter, now the
hunted
A tie-up between Glencore and Rio Tinto would seem to be off
after Glencore stock collapsed 80% in the last 14 months and the
share price of Rio Tinto fell by 35% in the same period. Glencore
itself is vulnerable, with the prospect of its equity value declining
effectively to zero. Recent big mergers in the sector do not paint a
promising picture - Rio Tinto's purchase of Alcan has been called
the worst mining deal ever while Glencore's own merger with
Xstrata failed to protect it in lean times. It would take a brave
board to approve a deal in the middle of a trough for mining and
commodity prices. Cherry-picking the choicest parts of Glencore
may make more sense.
Bloomberg: "Unlimited Vacation" is code for "No Vacation”
Accountants Grant Thornton is planning to offer its employees
unlimited vacation days, seemingly to encourage a culture of
personal responsibility at the firm and woo high-flyers from more
conventionally-minded rivals. But how much of a perk is this?
High-status, fulfilling “superjobs” at businesses like Grant
Thornton are performed by driven people who feel deeply
commitment to their work and probably don’t take all their
vacation anyway: the author never has done voluntarily since
leaving business school. Far more useful, she suggests, that
companies take after The Economist and insist staff take their
mandatory vacations without feel like a slacker, even if this means
taking most of December off.
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The Briefing
FT: Computer algorithm created to encode human memories
Researchers at at the University of Southern California and Wake
Forest Baptist Medical Centre have developed an implant that
enables a disabled brain to encode memories. A computer
algorithm imitates the brain's electrical signalling to convert
short-term into long-term memories, meaning that damaged or
diseased parts of the brain can now be bypassed. Researchers hope
that the prosthesis, which is now being tested on humans, may help
both soldiers with brain injuries and sufferers from
neurodegenerative diseases.
Economist: Naked capitalism
The porn industry is experiencing an accelerated version of the
upheaval experienced in different sectors of the media. The
emergence of the "tubes“ - aggregators of mainly free video
content like YouTube directing traffic to pay sites - has led to an
industry-wide demise. As the number of adult pages has
exploded, there has been a precipitous fall in the number of US
porn studios, and significant reductions in performers' pay and
worldwide porn revenues. Pay-for-porn producers are trying to
free themselves from the tubes' vampiric embrace by innovating
with live performances on cam, niche specialisms and celebrity
sex tapes. VR porn experiences are also on the horizon.
WSJ: When do viewers commit to TV shows? Netflix reveals
data
Netflix has examined viewing patterns for the first season of 25
of the most popular shows in its catalog, including its own
original series such as Orange is the New Black, in order to
pinpoint when viewers become hooked. The clincher moment
varies from show to show - it took only two episodes for Breaking
Bad, but eight for How I Met Your Mother to win a loyal
following who stuck around for the rest of the season. Netflix's
chief content officer Ted Sarandos used the data to back up the
company's approach of giving viewers access to a whole season's
worth of shows at a time. It also tracks statistics on viewer
attrition but has not publicised those findings.
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h
The Interview
This week’s interviewee is Sangeet Paul Chaudhury.
Sangeet is the author of Amazon bestseller Platform Scale
(http://platformscalebook.com/), the co-chair of the MIT
Platform Strategy Summit, and the founder of Platform
Thinking Labs, a C-level advisory firm that advises on digital
transformation and platform strategy.
What are the main tenets of
“Platform Scale”?
The basic argument of
“Platform Scale” is that
business models are
fundamentally changing in a
newly networked and
connected age. In the
industrial world, businesses
used to work in a very linear
and physical fashion. Firms
aggregated resources to
create value and then moved
goods to retail outlets, where
again demand would be
aggregated. The new
paradigm involves directly
connecting producers and
consumers through platforms
and allowing them to interact
with each other. We’ve seen
the shift in media with
Youtube, in transportation
with Uber and in
accommodation with AirBnB.
Even century-old firms are
moving toward platformbased
models.
Can you give us any examples
of older firms adapting to
“platform thinking”?
A great example is John
Deere, which has traditionally
been in the business of selling
tractors. With the launch of
its new website, it’s
essentially become a platform
for agriculture. Another
example is McCormick foods
which makes spices. Its just
launched a platform-based
service called Flavor Print
which allows customers to
interact and build profiles
with other like-minded
customers who can swap
recipes and talk about food.
Which sectors are the most
liable to adopting platform
models?
As a rule of thumb, the more
dependent a sector is on
information as a source of
value, the more liable it is to
be disrupted. A second and
related factor is the extent to
which a sector depends on
powerful gatekeepers to
facilitate flows of
information.
Let’s take a few examples.
Media is one of the first
industries that got disrupted
because it is a very
information intensive
industry. The end value is
content and content is, of
course, information. The
second industry which is
highly liable to disruption is
retail, which traditionally had
powerful gatekeepers. In the
first phase, Amazon disrupted
Borders and Netflix disrupted
Blockbuster. We’re now
moving into an interesting
second phase where
traditional retailers such as
Walgreens are building
platforms to engage enable
users to engage more with
each other and the firm itself.
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A third industry that we’ve
seen disrupted hin a big way is
the telecoms industry. This
is because the launch of the
iPhone and Android
platforms and their app
stores effectively turned the
phone into an extendable
computer. In the past,
telecom companies and
handset manufacturers had
to repackage phones and put
them on the market.
I believe that there are two
broad sets of disruption
which are waiting to happen.
One set of industries is those
that are information
intensive but which have
high transaction failure
costs. Banking and
healthcare can both be put
into this category. If
connections between users
and consumers fail in these
industries there are high
costs. If we get better at
creating trust mechanisms
and services for facilitating
open transactions, these
problems could be overcome.
The rise of Bitcoin and peerto-peer
lending are good
examples of what might
happen in these industries.
The second main model
which I believe is going to
play out is going to effect
resource-intensive
industries such as oil, gas
and mining. When you look
hard at these industries you
find that even they are
dependent on information.
Information is needed to
register changes in value,
where to look for resources
and how to efficiently
monitor operations. Open
platforms may allow new
entrants with lower levels of
initial capital investment.
How does a company prove
the value of platform
thinking, especially in an era
of “quarterly capitalism”?
Firstly, platforms can
complement a firm’s main
business. If you’re a retail
company, you can use
platforms to create
“stickiness” among your
users – making them come
back more often and to buy
more products. The second
form of value stems from a
much bigger transformation
which will happen at a
market-level as opposed to
the level of an individual
firm. Some companies will
be successful at building
platforms for whole
industries. For example,
General Electric is moving
heavily in this direction.
When you are creating a
market platform, things
don’t work out instantly. You
have to wait to ensure that all
the key stakeholders come
on board.
How did you start thinking
about platforms – were there
any epiphany moments?
My main interest before
platforms was in
understanding the reasons
for start-up failure. I started
realizing that there were a
set of changes which were
happening which were
impacting everybody. At one
point, I was in discussions
with a VC firm regarding a
position with their Asia fund.
They wanted me to manage
one of their funds and they
asked me to put all my
thinking on to a single slide.
Because of that constraint, I
started to crystallize my
thinking about the shift from
pipes to platforms.
Have any books been
especially influential on you?
Among my favourite books I
would point to The Cluetrain
Manifesto and The Power of
Pull.
Sangeet is the author of Platform Scale (http://platformscalebook.com/),
the co-chair of the MIT Platform Strategy Summit, and the founder of
Platform Thinking Labs, a C-level advisory firms that advises firms on
digital transformation and platform strategy.
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We heart h charts
Trane de Vore via flickr
New American century
Top influencers in social media have unexpected power
The US's nominal share of world GDP
has shrunk from 32% in 2001 to 23%
today. But the US retains overwhelming
dominance in the cloud computing and
the social media industries and its
investment banks and asset managers
have increased their share of world
activity in recent years.
Source: The Economist
An uncertain outlook
While more CFOs are reporting an
optimistic than a negative outlook about
their own company's prospects,
expectations are at their lowest since the
last quarter of 2012.
Source: Deloitte
Ale and hearty
Germans consume almost 50 per cent more
beer than Americans and Brits, their nearest
drinking rivals among the major economies.
The Chinese are drinking more beer than the
French and the Italians.
Source: LinkedIn
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