Collaboration and the “Sharing Economy”: What does that mean?

5 August

As I wrote back in my May blog Internet 3.0 Collaboration in Commerce, Communities and Networks, we are transitioning to a new era of collaboration. The industry buzz word is “sharing economy” but this is a little too altruistic a moniker for my liking.  If an elephant was taken down by 1 million ants there would indeed be sharing… of the carcass!

Indeed the implications of collaboration and reduced Transaction Cost Economics (TCE) are much broader than “sharing”. As Uber demonstrates, existing industries will be taken apart and re-assembled through external orchestrators.  How can companies deal with the “unstructured complexity” of new market based orchestration, open APIs with unstructured requests for their data across thousands of new partners? This is our focus at Commerce Signals.

Market-Hierarchy-Model

I’m currently reading the works of 2 Nobel prize winners in economics: Oliver Williamson (2009) and his mentor Ronald Coase (1991). Both were focused on the factors governing the “nature of a firm”. (particularly Transaction Cost Economics). Here are a few of the books I’m reading (for those interested):

There is no way to summarize the work of 2 Nobel prize winners in a blog, but I would like to focus on one element: Transaction Cost Economics (TCE).

Transaction Cost Economics (TCE) dictates the structure of a company

 

Ronald Coase, used a TCE framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. From this Williamson Paper

Ronald Coase posed the problem more sharply in his classic 1937 paper, “The Nature of the Firm.” He, like others, observed that the production of final goods and services involved a succession of early stage processing and assembly activities. But whereas others took the boundary of the firm as a parameter and examined the efficacy with which markets mediated exchange in intermediate and final goods markets, Coase held that the boundary of the firm was a decision variable for which an economic assessment was needed. What is it that determines when a firm decides to integrate and when instead it relies on the market?

Today, our network, and services, are evolving in a way that supports new mechanics for transacting: Authentication, reputation, coordination, contracts, risk, discovery, trust, …etc. Uber is the best example of this. We all agree that Uber’s success is reallocating the “assets” of production in a more efficient form.

As stated in my blog, the boundaries of [established] organizations will be changing as a result of changes in TCE and common facilities to construct agreements and partner outside of their organization. Modularity is the key technical term describing how business must structure boundaries (specifiability, measureability, predictability). What services do you want to make available? The answer to this question is NOT a technical problem, but a business one. Amazon is one of the clear leaders in modularity. The rules in which modules operate are “platforms” (technically) and “markets” (from a business perspective). After if everyone built their “API” in a different technology with no common directory it would be useless. For those interested, CommerceSignals is this neutral directory, never looking at the data.. but switching it as directed.

Collaboration what does it mean?

I guess it depends on your point of view (the elephant or the ant).  Look at the Google Buy Now Button (see my Blog). Google gets everything I’m saying in this blog (guess they listen well). Google Buy Now is a Partnership Platform (see blog on Google’s Strategy) for advertisers and physical retailers. Local retailer uploads store inventory, google helps them get customers to buy.. and ships the goods to the customer’s door twice a day with an Uber like delivery services (shopping express).  With all of these services Google will be in a position to guarantee sales.. For example if I’m a local specialty retailer Google could propose: I will drive $100k in sales for $1500… This is a MUCH bigger deal than Uber.

Who do you work with? Are you the lead? Are you the follower? Who decides? Who sets the rules? My favorite collaboration story at Commerce Signals is from the Chief Marketing Officer of a National Movie Theater chain. Brent said “Tom I’m the anchor tenant at 500 locations, I’m surrounded by 10-15 restaurants and 20-40 retailers in each of them, when I win they win. It is my community that competes with my competitor’s community, yet I have no facilities for collaboration. My data just falls into the trash can, how can you help us”?

For example every Fortune 100 company wants a “big data team”.  These companies have internal plans based upon internal data driven by internal teams.  While I agree that determining what products and consumers are profitable is a key area for everyone, the REAL VALUE to be unlocked is at the intersection of your data with something else. Afterall what company can compete with Google, Amazon and Facebook in consumer insight!?

One of the MOST SIGNIFICANT developments in last 5 years is that there is now a broad recognition that collaboration is necessary. For example Bank’s spent over $400M (EACH) trying to make CLOs work, MNOs spent $600M trying to make payments work, .. I could go on. Commerce is about markets. Markets are about connections. We are moving from an era where every Fortune 50 built their own closed market (where no one showed up) to a model where at 2 or more work together (Closed to semi open to …??open). The early battle in this shift to collaboration is Google, Amazon and FB (GAF) vs Everyone Else. What ONE COMPANY could possibly compete against GAF?

Collaboration is more than just advertising and demand how do you work with specialists? What parts of your organization are not best in class? When should you have your own internal team, vs an external one? When should you build and when should you buy? Technically we see this dynamic in great companies like Salesforce and Amazon Web Services. Uber and Google Buy Button have given us business led examples.  The challenge for existing enterprises to adapt is tremendous. From a management perspective how do you manage a collection of suppliers vs a hierarchy of employees? If you have challenges managing internal compliance, how do you do it across many external organizations? How do you specify the “unit of work” to be performed and how do you measure it? What is a 1099 employee? In which country/State?

This is where trust, reputation, markets and the strategies of (distributed) modularity come to play.

My Fortune 100 recommendations (from previous blog)

Action plan

1) List out your most valuable consumer insights

2) List your top growth opportunities

3) List the top sources of new revenue from existing customers

4) Where are your greatest threats?

5) What are you not acting on?

6) Who can act on them more effectively?

7) How can you partner one time?

8) How can you enable 100 companies to run with the opportunity?

9) What needs to be measured?

If you don’t take action.. the swarm will …

 

Tilting the Networks… a MASSIVE Change

4 July 2015

Payments make up far more than 70% of my personal portfolio.  This investment strategy has been a great bet. Take a look at the 5 yr investment performance of Visa and MA. 333% growth in MA and 247% for Visa.  5yr return payment stocks

From Mar 9 2015 Seeking Alpha

5087541-14257348899867501-Market-Pinnacle

With this exposure, I keep close track on structural changes in the industry, which I outlined in my January blog Structural Changes in Payments:

  1. Risk and Identity
  2. Data/Commerce Value
  3. Consumer Behavior/Trust/Acceptance
  4. Issuance/Customer Acquisition/HCE
  5. Regulatory/Rates/Rules (Fees)
  6. Mobile/Payment in the OS

Will these structural changes… is my current V/MA at risk? Is there something else I should be moving toward? No way!  I think Visa and Mastercard are start ups that have just begun realizing the value of their network as they EXPAND NODES and SERVICES Let me try to explain why am I such a bull on these  payment stocks.

Network Tilt – Toward Merchants

As most of you know, V and MA were started as Bank consortiums (see Wikipedia and MA History). Rules (and rates) were thus defined by banks for both credit and debit (see this blog for debit history). As a former Banker I never fully understood the Retail view of Visa and Mastercard. For example, Walmart pays an estimated $1.3B in interchange. Most merchants would admit that the benefit from electronic payments and ubiquitious acceptance. Even Mike Cook says that “no one complains about the network fee side of card costs… it is the issuer side that everyone has a problem with”. In other words Visa and MasterCard earn their fees (it is the issuer reward schemes that drive merchants bonkers).

As stated previously Payments, in their simplest form, are a brokering business which manages value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. My view is that Card issuing banks, have lost the neutrality of their “brokering” role by creating a card rewards system that incents card use (paid by the merchant). However, this ideal “neutral” world is NOT the nirvana that we should seek, as no one would invest and we would be stuck with cash.

Complexity in payments is driven by the quest for control and margin of the various participants, NOT by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes them work. As I’ve stated before, no engineer would design a payment system to operate the way we do today (see Push Payments). Thus there is beauty in this chaos! The V/MA model created incentives for 1000s of banks to invest in payments, and I doubt if we will ever see any other companies that could repeat this feat.

Both Visa and Mastercard realize that their future rests in leveraging their neutrality, thus “tilting” away from their prior “bank centric” model into something that is MUCH MORE merchant friendly. Bank issuers certainly WANT to be in this role, for example the largest US Visa issuer JPM has created a unique off VisaNet transaction routing (see blog) and is building a new data business (ChaseNet) to compete here. The bank efforts are completely stunted as there is no path for obtaining critical mass is a closed network that requires both merchant and consumer consent.  American Express is the clear leader here, but their network is also stunted through its focus in T&E, affluent and business travelers.

Visa and Mastercard win when consumers and merchants transact.  Encouraging use by consumers, and acceptance by merchants, is top priorityThe future of the networks is COMMERCE. This may seem like a logical statement, but historically Visa and Mastercard acted as extensions of the large issuers. Look for both networks to create new teams to rebuild relationships with merchants.. they know they have work to do.Visa-AmEx-Are-up-MasterCard-Discover-Are-Down-3 (1)

What is “Tilt”?

  • Phase 1 – Rules and Facilities to Enable Competition
  • Phase 2 – Merchant Friendly Services / Merchant Rules Setting
  • Phase 3 – Competing with Banks (V/MA Opening up to non Banks)

The First Phase of tilting involves creating network rules and facilities that are favorable to the merchant and/or take away control from issuers (to enable issuer competition). 2015 winners include

#1 VDEP (Data protection and $0 wallet fees)

#2 Visa/MA Token Facilities

#3 ApplePay requiring debit card enablement

#4 Mastercard’s new Merchant Insight Service

Payment industry is very heterogeneous and highly tiered. Large merchants like Walmart, Target and Kroger are able to support strategy teams that can negotiate very competitive payment rates with issuers and acquirers. Similarly the large banks can build multi billion dollar fraud and square pricingauthorization infrastructure. My rule of thumb is that the bottom third of any acquirers merchant accounts (SMBs) result is approximately 60% of their earnings (hence the success of Square).  As an example, try to find the cost of payment acceptance at Chase Paymentech, now do the same at Square or Paypal.

Tokenization and EMV have taken away issuer advantages (control points), enabling smaller issuers (competition). They have also enabled competition in eCommerce and POS acquiring (bringing down merchant costs). Take a look at this must read article from paymnts.com 13Nov14. “Tokenization has opened up this whole world for us to be able to use digital devices to be a meaningful part of the payments flow in a way that (those payments) wouldn’t have in the past,” – Scharf at BAML Banking & Financial Services Conferenceglobal digital snap

On this last point, Visa and MA are growing from 1.9B cards to their “network” into mobile, creating services that will be critical to deliver payments and authentication/authorization in the channel that is capturing consumer time like none other.

Phase 2 – Merchant Friendly services. The number one Retailer issue is “who are my customers?” As I outlined 3 years ago in Payment Enabled CRM, payment networks are well placed to solve this (given consumer consent). These articles provide an overview of 2 new services coming out.

  • 4 June 2015 – Loyalty360. Visa Commerce Network. From Michael Lemberger (Visa VP Offers and Loyalty Solutions) “creating strong connections across commerce is an important piece of the payment ecosystem. As such, Visa also is developing and employing innovative loyalty platforms for merchants to engage with their customers in meaningful and compelling ways”
  • Mastercard Market Insights. [Report] analyzes extensive purchasing data to provide insights into restaurant level econometrics and trends, such as changes in sales, average ticket prices, and customer frequency across fast-casual, casual and family dining restaurants

Phase 3 – Competing with Banks. Banks tend to believe that everything V and MA do is “theirs”. The predominant view was best captured by a former head of strategy “we built these companies once, and we can do it again”.  Thus the definition of competition is rather squishy as banks believe that they own everything. Today every Visa “member” must be a bank. We are starting to see consumer direct services and merchant direct services (Mastercard MoneySend/Omney, CYBS/Visa Checkout, Mastercard Local Market Insights, …). This is MORE THAN ANYTHING turns Issuers apoplectic.

From an investor view I believe that Visa is much more cautious in remaining neutral, whereas Mastercard is much more aggressive in delivering new services. For example few know that Mastercard holds money transfer licenses, or may have purchased a processor (Omney). A key objective of MA may be to create a commercial payments business with debit cards as the key “down line” for disbursements. See http://apps.mastercard.com/#!/app_details/omney#top

The real battle will be on DATA. Issuers strongly feel that they have 100% ownership of payment data. Yet Visa/MA data also belongs to the merchants (for the restrictive and squishy purpose of loyalty and redemption). JPM felt so strongly about this rule that is specifically took its data out of VisaNet purview as part of the 2012 deal. Every payment player is chasing after ADS and Amex in their capabilities to become a “super charged marketing scheme”.

Mastercard has a BIG win by becoming the payment network behind the ApplePay private label enablement (as I discussed on twitter). Take a look at the private label graph above (relative to total number of cards). Private label is a super charged loyalty scheme that I’m keeping a very close (investor) eye on. I believe this may be the first REAL driver of Merchant Friendly “tilt”  that delivers substantial revenue. It is also a reason why I believe ADS will be aggressively chased as an acquisition target.

Revenue/EBIT

Visa and Mastercard are trading at roughly 30x earnings. Today they take less than $0.02 per transaction. Incremental revenue on existing volume through tokenization (see MA Digital Enablement Fees),  and new retailer friendly data services should add at least 10%-15% in near term depending on “wallet” success and merchant adoption. The future for V/MA profitability rests in their ability to balance the merchant Tilt with neutrality, and “stepping on Big bank toes”. As if this growth opportunity were not enough…

Global electronic payment growth is still positioned at 25%+ CAGR. The best industry payment report (IMHO) is from Cap Gemini https://www.worldpaymentsreport.com/ a must read for anyone. Globally electronic payments are in their infancy. Roughly 90% of the world’s electronic transactions happen in the top 10 markets (< 10% of the world’s population). What happens when the other 7B people on the planet get a card (with their phone)? The global growth opportunity for V/MA is 35% CAGR in just about any economic environment and independent of local market payment schemes (ie CUP, Rupay, ELO, …). The payments world continues to look for the “next Brazil” (BTW it is NOT RUSSIA), but it is everywhere. Paypal is another network that capitalizes on this global growth trend (in an eCommerce segment that is growing even faster than the “payment market”).  The emerging markets I like best? China, Columbia, Peru, Ghana, Nigeria, Tanzania, Pakistan, Philippines, Indonesia…  The markets I stay away from? Europe (see SEPA Blog).

Have a great 4th of July…. And go buy V/MA.

Teams and Network Dynamics

5 Sept 2013

Payments are not top of mind today, so for those that don’t want to hear my management ruminations, it may be best to skip this blog.

Was reading last week’s WSJ on Google’s 20% time, and  Wired on same topic. General theme is that the official 20% time is still in place, but Google is tightening use. How great a problem is this? You have employees that want to help grow your business in new areas!! Create new products! Find an outlet for their creative talents WITHIN THEIR COMPANY! I saw much of the same DESIRE within my international teams …. However it’s very hard to start a garden within an “Iron Works”..

My time at Google last year was a very rich experience, the collegial environment of brilliant engineers took me back to my NASA days. Everyone seemed fresh out of school with great ideas operating within a company that worked actively to cultivate them (people AND ideas). One moment really sticks out, I went to Charlie’s Café on a Thursday night (Google’s main eatery), where I saw the best and brightest of every nation all eating together with their wives and small children. How fantastic is it that we can have a Company attract this talent.. which sees no limitations in using it: from global internet via hot air balloons, new eye-ware, to driverless cars, to phones, …etc.

Google however has its limitations… with perhaps the largest concentration of brilliant engineers of any company… HOW do you align them and keep them focused?  The challenge is akin to tasking a group of 10,000 Navy Seals..  From a network perspective, Navy seals operate in a highly functional point-point network. With each point having equal capability, and some specialization.. This is a HIGHLY effective team arrangement when the team is aligned against an objective within its capability.Network Clusters and nodes

Thus, there is a reason that Navy Seals operate in platoons no larger than 8 men..  it’s an n square problem. In a highly functional unit, each person knows the others in the group and their corresponding objectives/roles.  Team of this structure have performance which is greater than the sum of the parts, because of their connection.

In a software world we have many phases to the “war” of a new product release: design, market, sell, price, build, test, release, deliver, operate, support, compete, enhance,…  Few teams are capable, or desire, to have a role in all phases… After all the Navy seals are not interested in holding the ground they take (.. slug fests and holding ground is the Army’s job). The Army is thus configured in a hierarchical command and control structure, as are most Fortune 50 organizations. Command and Control places the intelligence in the center, thus maximizing consistency regardless of which nodes exist within the network (replace-ability). Neither the Army or the Navy Seals have the resource flexibility to allow every element to adapt mission (from medic to pilot) rather they plan and operate toward objectives.

In Fortune 50 companies we have dedicated groups for each of these lifecycle functions, each team operating across projects (Corporate IT). This structure provides tremendous advantage when the battle requires capacity (ie manpower) which can operate consistently (holding ground), but obviously ill-suited for something they have never done before (ie moon launch, brain surgery).

Mentoring/coaching/training are normally done within a function. Thus paths for career growth are typically biased toward specialization.  This is a KEY reason so few experienced Fortune 50 people make their way into the start up world (ie think M1A1 Brigade Tank Commander). Start ups have a much greater need for players that can assume many roles AND understand/support/contribute to other functions like sales..  ask your corporate IT team when they last met a business person of any sort.

Start up multi role  talent is part of what makes Silicon Valley so unique.. it is the nexus for experienced multi role utility employees.. and not just any kind of employees, but employees that are willing to share personal risk (in exchange for equity upside).  The Valley itself is a social network of networks where the currency is Reputation and connection.

This brings us back to the Google 20% time. What I like best about this is that it helps grow employees networking skills.. A Googler has an idea and tries to get other Googlers to participate… across the organization. This is tremendous process which cultivates much more mature initiatives than a solo “visionary” approach. It’s a great way for people to expand their professional network, learn what else is going on in the company and refine concepts to market ready products.

The problems with this approach are that Googlers start to spend more than 20% of their time (or mental energy) on their new “network”… loosing focus on their assigned activity. Managers thus set more aggressive timelines to encourage more focus..  after all it’s hard to be part of 2 families…

Start up structure

What team structure should a startup assume? Everyone wants a Navy seal team, but having a rock star in every position can be both expensive and problematic. A common VC discussion is: How many Google engineers do you want in a start up? Answer is between 0-1.

Why wouldn’t you want a start up with 100% ex Googlers? Start ups have to be laser focused on getting a product out the door, agreeing on “good enough” requirements, and assuming many, many ugly roles (like operations and customer support).  For Googlers, it’s like moving from a palatial engineers nirvana to a scrap yard. Some make the transition..

Thus taking people from the Army, or taking them from the Navy seals can be challenging.. what do you want?

One of my most memorable conversations on this topic was with Ted Schlein of KPCB, and former president of the NVCA.  He said that 60% of his job was HR… getting the right people into the right teams. As an investor you can’t have top notch talent in every position, but you must have highly key people that must be highly capable coaches to develop their bench and extend their skillset.

Great Coaches

Most investor time is spent focusing on the leader/founder. What makes them tick? What is their burning desire? What people are they associated with? What are their life experiences? How do they learn? How mature is their awareness of the environment? How do they interact with people? How do they learn? Do they know how to listen? What are their strengths/weaknesses? Personal appetite for risk?

My belief is that too little investor time has been focused on functional leaders under the CEO… at least from the perspective of coaching. …. A great coach knows how to identify and cultivate talent. In a sports team, coaches are a paid position.. a specialized function. Managers should be able to assume this role… but some fall into the trap of command and control.. vs enhancing capability and assisting w/ network formation.

Can’t Coach “Network” or Teamwork

You can’t coach network..  In sports we see this within superstar teams that don’t “gel”. If you were a startup CEO, what would you rather have:

  1. Team that works well within one another, and has known each other for 10 yrs
  2. A super star?

My answer: on the engineering side, I want network.. on the sales side I want Super Star (goalie).

Start up networks of engineering talent demonstrate the problem of bringing in a single Google engineer… they must “gel” with people of very different experiences and approaches to engineering. The key traits I look for in employees where network is required? Humility, ability to communicate, and playing one team sport in your life.

Perhaps I should take all new employee prospects out to the soccer field.. let them compete against a bunch of existing employees that have a plan and know each other’s capabilities.  See how they work together as a team..