attention economy

GAFA: Snap seeks to colonize the web one Tinder profile at a time

From camera-mounted sunglasses that failed to be welcomed in any social setting, to Bitmoji's creepy cartoon depictions of reality, it seems like Snapchat's parent company - Snap has tried it all to stay relevant. Especially, when Zuckerberg's army of clones - boasting an impressive 1 billion daily story users vs Snap's 186 million, threatens the story-based core social media model of the app,. Well, it seems Snap has yet to be snapped. At its recent partner summit, the social media company announced its launching StoryKit - a plan to allow apps like Tinder the ability to embed Snapchat stories into their app. The incentive being enhanced engagement and security for the partnering app, whilst Snap additionally benefit from the data they gather from users using their native camera. Quite the colonization strategy you might say. Then again, with the day-to-day data privacy-exploitation headlines streaming from Facebook HQ, it's a no-brainer that advertisers, content creators, and businesses alike are looking to alternatives such as Snap to save them from being victims in the Facebook apocalypse. 

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Source: Statista (Social Media Stories)INMA.org (Storywars)

BIG TECH: Apple's Credit Card, Google's Digital Gold, and IBM's Crypto Custody show the reckoning is here

After years of existential angst from finance executives about the big tech companies entering financial services, it is time to pay the piper. Excuses like regulatory cost and complexity, strategic disinterest, and complexity of products are incrementally falling away each and every day. Across every single vertical, something is nipping at the banker's ankles. The splashiest announcement came from Apple, which launched a credit card backed by Goldman Sachs (the storied mass retail financial firm!) and transacted over the MasterCard network. You can sign up for the card directly from your phone, which integrates it into Apple Wallet and Apple Pay, and provides a 2% cash back on all transactions made with ApplePay. There are no fees on the card other than an interest rate on credit.

For Apple, this financial product is one of a thousand features within their platform. It is no more or less important than music, video, news, email, or podcasts. The presence of credit makes customers more sticky within the ecosystem, offering 3% cash back on all Apple purchases. For Goldman, this is a leapfrog into the consumer market, riding a much better recognized and respected retail brand. Finance for the wealthy is just not cool anymore in the era of Bernie Sanders and Alexandria Ocasio-Cortez.

Meanwhile in India, Google and Facebook are battling with Paytm over payments. Facebook's rumored cryptocurrency will target sending remittance over WhatsApp. Google, on the other hand, is working on a service to add a savings account to money movement. This account will be backed by custodied gold, and may include expanded wealth management products -- from mutual funds to insurance -- in the future. None of this should be surprising, as Chinese tech companies have been providing mobile search bundled with online shopping, saving, investing and payments for the last five years. These Asian companies are moving into Europe and the US, sometimes by investing in neobanks or through acquisitions. Our American tech companies are moving into Asia.

Let's round out the whole thing with IBM, the OG of American tech companies. Several young firms like BitGo, Gemini, and Kingdom Trust have all built custody for crypto assets, including a notable recent announcement from Trustology about bringing custody to the iPhone. But IBM is now moving into the space, leveraging its expertise from working on enterprise blockchain projects via Hyperledger. What's important to understand is that financial products -- including their embedded capital, credit and investment risks -- are transforming from legal paper to software. And as that happens, it is technology companies that are best positioned to hold, analyze, report on, and safekeep our money. Among the incumbents, Goldman, JP Morgan, BBVA, Santander, DBS, BlackRock, Schwab, Fidelity, NASDAQ, ICE and several others get it. So many others think it is a false alarm. Which side are you on?

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Source: Apple Card (ForbesBBC), Coindesk (Trustology iPhoneIBM), Deal Street Asia (Google Gold)

BIG TECH: Subscribing to Unownable Assets with Google Stadia, Apple News, and Taxes

Microsoft, PlayStation and Nintendo split the console gaming market today, with a strong focus on devices and online services. Those companies make money either by selling a piece of proprietary hardware (i.e., the console), exclusive software (i.e., the video game around which they may have IP rights), or through a store that takes a cut of third party developer revenue. Google announced that they are entering the market with a disruptive and orthogonal strategy. The firm plans to use its massive cloud infrastructure and AI advantage to deliver streaming gaming services through a subscription model.

What does this mean? Machines far more powerful than a local console or PC will run sophisticated 3D rendering engines on cloud servers optimized for visual graphics. AIs that optimize data center use and compression will package information transfer in ways that other video game streaming start-ups were simply unable to deliver. On sufficiently fast broadband, millisecond responses between a controller in a living room and a cloud service become possible. While such infrastructure is not ubiquitous, you can see the projected growth of 5G and LTE networks below -- suggesting that Google's vision can be meaningful across a large part of the world. Engaging with a high-end virtual world on a mass-produced cheap tablet becomes a reality. 

Let's talk about subscription. Subscription is the solution for monetizing unownable assets. Such assets may be prohibitively expensive in the aggregate and worthless on the margin. Take for example Spotify, which manages to sell you all the music in the world for $10 per month. An individual cannot afford all the music in the world, and yet the marginal song is worth absolutely nothing. Or take the upcoming Apple News subscription service, which gets around the paywalls of sources like the WSJ for $10 per month as well. A reader can't afford the paywalls for every premier newspaper in the world, even though the value of the marginal article is a donut.

We think similarly about citizenship -- taxes are the subscription cost to membership in a sovereign body, with its social protections, foreign policy, and monetary base. An individual cannot afford those on the margin, nor could those "products" be financed in a case-by-case manner. Or look at the developments in wealth management and roboadvisors, where Assets under Management based pricing (% of total) is beating commission based models (per transaction). AUM fees are a subscription to unlimited rebalancing across thousands of companies, packaged in free-to-trade ETFs on custodian platforms. We go down this road to highlight the right path to follow: all financial services in the aggregate are an unownable asset, but worthless at the marginal product. Price accordingly.

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Source: Polygon (Google Stadia), 9to5Mac (WSJ and Apple), NY Times (Apple News)

BIG TECH: YouTube, Facebook and NVIDIA powering hyper-realistic human avatars

The digitization of the human animal continues unopposed, with symptoms all over. Chinese firm Megvii, maker of software Face++ that has catalyzed 5,000 arrests since 2016 by the Ministry of Public Security, is looking for an $800 million IPO. The other champion of public/private surveillance, Facebook, is working a virtual reality angle. The company is improving the technology used to model rendered avatars of human faces, which can then be displayed across virtual environments. Using multi-camera rigs and hours of facial movement footage, Facebook is building neural networks that learn how to translate realistic facial muscle movement into models. The Wired article linked below is worth exploring for the videos alone, and the uncannily realistic motion these animation possess.

One of our recurring points is that frontier technologies -- AI, AR/VR, blockchain, and IoT -- appear disparate now, but are intricately connected. Take for example the new feature from Google called YouTube Stories. Similar to SnapChat and Instagram, video creators can apply 3D augmented reality overlays to their faces. While this technology looks like virtual reality rendering, it is primarily a machine vision (i.e., AI) problem to anchor rendered objects to a human face realistically. To do this Google provides a developer library called ARCore, not to be confused with Apple's ARkit. Human video avatars can be further extended and customized with code -- the twenty first century version of personal branding.

Another take on the same issue comes from generative adversarial neural networks (GANs). We've discussed before how hyper-realistic images and videos can be faked by a model where one algorithm creates images and another accepts or rejects them as sufficiently realistic, with repeated evolutionary turns at this problem. Highlighted below is a recent software release from NVIDIA, where a drawing of simple shapes and lines is rendered by a GAN into what appears to be a hyper-realistic photo of a landscape. We can imagine a similar approach being applied to the output generated by Facebook's avatars, which still border on creepy, to ground the outcome in reality. Little details, like a reflection of a cloud on water, are hallucinated by GANs automatically, based on massive underlying visual data. Expect these digital worlds to become increasingly indistinguishable from reality, and to spend way more time living in them for the years to come.

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Source: SCMP (Face++), Wired (Facebook Avatars), NVIDIA (GAN drawing)

INSURTECH: Haven and Lyft make Insurance into a Feature, not a Product

In today's monolithic, financial incumbent world, manufacturing financial product is the highest honor. Picking investments, underwriting insurance, extending credit, powering payments -- these are the best-paid and most defensible careers in finance. Yet we are in a multi-decade transition that rotates the orientation of all industries away from manufacturing product that is "pushed" at consumers, to aggregating consumers that indicate the features to be built and "pulled" from a platform. Looking at the most powerful insurance companies, nearly all are organized as product-first corporations with extensive distribution and intermediation value-chains, protected by sticky rent-taking along the way. And on top of that, insurance companies get to run third party capital through massive, captive asset management businesses as a side-hustle.

Steve Jobs (and likely others) defined a key distinction that stuck with many entrepreneurs. Is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that the insurance product, historically standalone, is being transformed into a platform feature by non-insurance players. Take for example Lyft and Uber. Both firms have launched captive insurance units in Hawaii, which is a friendly, low-tax jurisdiction for such activity. While these ride-sharing companies have relationships with third party insurers, building insurance product as a feature of the transportation platform buttresses the business model with a lower cost alternative. 

Another example is Haven, the joint venture between Berkshire Hathaway, Amazon and JP Morgan. The venture has a not-for-profit structure and an explicit mission to reduce costs and improve healthcare outcomes for consumers. Let's put aside the point about America's failure to agree on a sane public solution for health insurance. Instead, notice that this medical finance product is being offered to the employees of the three companies in the joint venture. The first takeaway is that this is the core Amazon playbook: become your platform's first customer. The second takeaway is that this offering is a feature of being employed in these organizations, and nowhere else. Insurance is not a product to be bought separately, but something these companies are building for themselves out of necessity in their course of business.

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BIG TECH & BLOCKCHAIN: Samsung's big gamble on crypto and foldable phones

We're Americans worried for Americans. We just won't understand the future coming, and then the whole tilt of the world will shift. Take Samsung, dropping two known but very meaningful bits of information. The first is foldable phones. The only note we've made of these devices has been to compare them to pizza boxes -- most prototypes look preposterous, have issues with cameras, and are prohibitively expensive. And that's still true -- Samsung's foldable phone is pretty expanded, but bizarre when folded. But no more bizarre than cellphones from the 1980s! The other meaningful companies working on bendable screens and phones are all in Asia, because the manufacturing capability and hardware innovation for this stuff has been outsourced long ago. Huawei, Xiomi and others will all champion this form factor -- and Americans won't get it.

Second, Samsung also confirmed that the Galaxy S10 phone line will be crypto-native, allowing for private key storage. We think the absolute largest roadblock to economic activity using cryptocurrency is the barrier to entry in user experience (followed closely by financial instrument packaging and bank buy-in). Having a mobile experience that allows you to interact with the decentralized web and its applications without downloading or thinking about software management is massive. Players like HTC and Sirin are also in the game, but we point to Samsung Pay as a meaningful differentiator. There should be no difference -- from the customer view -- in using a credit card in Samsung Pay wallet, and using a self-custodied digital asset. Same use case, same ease of use. And if every merchant that takes Samsung Pay takes crypto, well, you get the idea.

Thereafter, dominant phone apps like Facebook can also step up, tokenizing aspects of their services for a global install base. Collectibles, financial instruments and health records quickly follow. We worry, again, that Americans -- who don't want to use QR codes and can't stop swiping their credit cards -- will simply shrug this off. Skepticism is the antidote to innovation. But there is also plenty to be skeptical about. In particular, for normal people, the endless security worries about everything from the physical device being stolen to your crypto assets being 51% attacked (looking at you ETC) are a legitimate black swan. Not dealing with that at the protocol level will mean the rise of walled gardens, yet again. Just consider how the wild anonymity of the early Internet in the 1990s faded into protected, authenticated, verified Instagram influencers. Yikes!

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Source: Samsung (foldable phones via HyperbeastBBC, crypto via CoinDesk), Coindesk (Zuckerberg on identity), MIT Tech Review (hacking ETC), Walled Gardens (social vs searchmobile web vs apps)

BIG TECH: When Attention Platforms please the Sovereign and not the User

Where would we be without some cautionary warnings about technology overlords and attention black holes? Since you asked, we'll give you some things to think about. The first is Absher, a web service from the Saudi government that helps men track the location of their female family members. As an all-around government services app, male users can pay parking tickets or renew a driver's license. They can also designate where a woman in their guardianship is allowed to travel -- a practice empowered by local law, culture and religion. The app will notify the man if the woman's passport is scanned at an airport or border check point with a convenient text message. The app has been downloaded over 1 million times on Android devices.

The other example is China's "Xi Study Strong Nation" app, which is the media voice of the Communist Party in a modern format. Users read articles and watch videos on the platform, earning points for such engagement -- say 0.1 points for each item. The app uses intelligence to process behavioral data so that it knows if the user is truly engaging, or just scrolling around. If you fire up the content in the evenings, however, the rewards for engagement double up. This way, readers are incented to exchange relaxation for Party reading. But why do any of this at all as a user, you ask? While we can only rely on the media sources available, those suggest that employment could be predicated on fulfilling a sufficient number of points (e.g., 40 a day) in order to remain in social and political standing. What starts out as a gamified learning experience quickly becomes a social prison. We hypothesize that data about propaganda consumption can also be tied into the country's social credit score, which determines everything from financial product & service access to potential for academic admission. No wonder Reddit's community is creeped out by the recent $300 million investment from Tencent.

It is dangerous to make cultural judgments from a place of ignorance -- and we are but a meek Fintech newsletter. Still, we can sharpen our mental model and draw generalizable conclusions from these cases. In the West, the tech platforms (Facebook, Google, Twitter) are in trouble for selling human attention to the highest bidder. But at least their core function is to use technology in order to increase a user's choice and self-actualization, or one's impression thereof. By sharing photos, shopping on Amazon, or searching for information, we are making personal and empowered decisions -- even if those decisions are within the speed-lanes prescribed to us by a corruptible AI-brained Newsfeed.

In these counter examples, a sovereign has penetrated the attention platform in order to redirect the attention and associated power to itself. These apps are not made to facilitate the choices of humans, but to make stronger the social human constructs of law, power, culture and religion. They extend not the open promise of creativity and self-fulfilment on the Internet, but rather cement into code the existing flawed beehive in which we operate. Putting sovereigns into software -- which unlike humans is ever-present and all-seeing -- is a bad call. In a round-about way, perhaps it is best to leave Facebook and Twitter and Netflix and Amazon alone. Allowing government control into these apps, even if just a bit, is a slippery slope way down the rabbit hole.

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Source: Business Insider (AbsherApple & Google), China Media Project (Little Red Phone), NY Times (Little Red App), Bloomberg (Reddit / Tencent), Netflix & GDPR

CRYPTO & VENTURE CAPITAL: The wild symptoms of paradigm change

Two extreme things just happened in the land of Crypto. The first concerns the Quadriga exchange, whose CEO has died while traveling in India -- while also being the only person with key access to $130 million of customer funds on various blockchains. This means the permanent loss of customer assets. Tactical comments like using multi-sig wallets or not trading on a subscale exchange are besides the point. The key takeaway is that this new-fangled crypto banking has a wildly unpalatable feature. The second extreme thing is Jack Dorsey, who loosely-speaking controls Twitter (millions in audience) and Square (millions in payments), participated in Bitcoin's "lighting torch". This is a process by which one Twitter user sends a few pennies worth of BTC to another user through the developing Lightning Network, facilitated by posting a lightning network invoice in a tweet (there's even a conspiracy theory that Twitter expanded its character limit to accommodate these invoices). So if Bitcoin is money, then it's moving like never before.

Let's pause for a moment to consider how innovations become reality. We recommend the following frameworks: (1) the book Why Greatness Cannot Be Planned: the Myth of the Objective and (2) Epsilon Theory's discussion about seeing change in the Zeitgeist, both linked below. Boiling things down, the book concludes that it is not objective maximization that gets us to great outcomes (i.e., let's develop a new money or a new artificial intelligence) but the search for novel, disagreeable, controversial outcomes. The more new or bizarre something seems, the more likely the discovery will open up a search space for entirely new directions. From that perspective, the examples of Crypto extremes above point to the most compelling stepping  stones to the future. That they are made through market evolution (from on-chain transactions to Lightning) and demonstrate some version of natural selection (exchanges without multisig wallets will die) is more promising than a corporate initiative into making practicable enterprise solutions to save cost.

On the Zeitgeist point, the essence is that an astute observer understands when the meta-game changes. We are certainly seeing this in politics, with the US pivoting away from a Bush vs. Clinton each trying to satisfy political donors, into a Trump vs. Ocasio-Cortez trying to satisfy their social media audiences and the machine learning algorithms that deliver information. More practically, we can see a zeitgeist shift in the role of technology. Whereas tech used to be the supporting Shield in financial services, today it is the aggressive Sword. This pivot is obvious when looking at Fintech's share of venture capital and comparing it to the share of the stock market in financial services companies. You can see below that what started out as 5% of venture and 23% of public equities has converged in the mid-teens. Once Fintechs started being built like Silicon Valley startups, the relative value shifted out of traditional financials into private capital. When we allow China and Ant Financial into the equation, private fintech venture is now over-indexed relative to the public markets. The soil in which things grow has become different. 

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Source: Twitter (original lightning torch thread), Epsilon Theory (Zeitgeist), Youtube (Why Greatness Cannot be Planned), Bloomberg, Pitchbook

2018 FINTECH PREDICTION IN REVIEW: Social Selling & Propaganda Bots

Here's what we said would matter in the past year year:

How can financial advisors, insurance agents, bank tellers and other human front office staff compete with bots? How can they compete with Kim Kardashian and kitten GIFs for attention? They can’t — at least not without some automated help. We think that 2018 will see a much fuller implementation of Social Selling, i.e., using social networks like LinkedIn to prospect for business, and that this channel will become plugged into roboadvisors, neobanks and insurtech startups. Further, social selling is all about content marketing by using writing, podcasts and video. To distribute these at scale, we expect the technology behind propaganda bots to find a way into the mainstream economy and become a more acceptable strategy. Call it demand generation.

We were strongly correct in thinking that the social media pipes of LinkedIn, Twitter and Facebook will be used for selling financial products; the claim that these tools will be supported by some of the shadier aspects of propaganda bot networks also came true in particular cases. The second largest crypto currency, Ripple, is associated with a large and active bot and sockpuppet network, which has supported the market value of XRP to be $15 billion, only behind Bitcoin, and in competition for second place with the far more functional Ethereum.

Various social influencers – like DJ Khaled (6 million followers on Instagram) – peddled digital assets during the ICO mania and have faced regulatory fines; Youtube similarly was filled with investment advice content from enthusiasts. We were wrong about the pace at which traditional businesses will do this in the short term, but are still convinced this is a longer term change that will happen with the generational shift in both sales and regulatory roles. People are spending 12 hours a day on media, increasingly on LinkedIn, Youtube, and Twitter, and marketers are well aware. And if you have a LinkedIn account, so are you. 

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Source: 2018 Keystone Predictions Deck, Twitter visualization of the XRP network by Geoff Goldberg, B2B Media Channels from State of Digital Marketing by Demand Wave

ARTIFICIAL INTELLIGENCE: Morgan Stanley, Yext and Chinese AI-first Apps.

A point is not enough. It takes two points to make a trend-line, at least in a two dimensional space. One of the muscles we try to flex often is to connect points in different sectors and themes to see the limits of the possible. Let's contrast the following: (1) Morgan Stanley partnering with Yext for financial advisor business pages, and (2) Andreessen Horowitz' commentary on Chinese consumer artificial intelligence applications on a path to capture the hearts of teenagers everywhere. Disparate, funky, and painfully obvious.

About ten years ago, "hyper-local" became a venture catchphrase. News would go from being general to local, video would go from main-stream to niche, and so on, contextualized by the GPS in our pockets. Yext is a company that won one of the battles for hyper-local content by building the retail knowledge graph that gets printed on Google Maps. Simply, if you see a business listing for a laundromat on your Maps app, likely the app provider is licensing local data from Yext. This data then scales up into pre-made business websites, analytics, and customer funnel conversion. Morgan Stanley inked a partnership with this scale content manager to give their 15,000 financial advisors a digital presence. Controlling and printing out that content at scale, with embedded compliance and into every Google/Apple phone, is hard and smart. And perhaps physical presence is the main value of a human advisor.

Now for Chinese AI. Unlike Americans, with their hand-wringing about privacy, choice, and human agency, Chinese apps don't care. The next generation version of Instagram and Snapchat is called TikTok, and the storied venture firm Andreessen celebrates them for taking away any human choice in what content a user would see. The algorithm is not a search support tool, it is the only and ultimate arbiter of where your attention goes. And it tends to make kids happy (unlike Youtube, which generally makes them into Twitter trolls). 

So let's mesh these things together. A financial services version of TikTok with a Yext overlay would be an app that is tied to the physical world, perhaps through Augmented Reality or just simple Maps, that would decide for you which financial provider to find. It would know that you still want to talk to a person for that emotional connection, and would find one that's closest geographically and a best-fit emotionally -- a two factor optimization problem for an AI. Yext financial advisor reviews, combined with a Morgan Stanley risk/behavioral client questionnaire could do this. Thus the TikTok aspect kicks in, with the human in the loop simply being a form of physical content marketing, gaming the algorithm with a meatspace presence. 

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Source: Finextra (Yext), Andreessen Horowitz (AI apps), FactorDaily (App downloads), 

ARTIFICIAL INTELLIGENCE: Facebook's Lasso clones Asia's TikTok to grab 500 million users

ByteDance is a $75 billion AI-powered Chinese attention gathering machine. Their marquee application TikTok -- a frankenstein formed from the combination of Vine-like videos and the acquisition of Musical.ly -- boasts 500 million users, and is currently ranked the #6 free app in China and #7 in the US. That position is ahead of Facebook (surely angering comic book supervillain Mark Zuckerberg), Snapchat and Messenger, having achieved this result in mere months since launch in the US market this past July.

TikTok engages teenagers with personalized content driven by ByteDance’s proprietary machine learning algorithms, emoji video commentary features, Snapchat-like augmented reality renders, and glitchy filters. Creators on the platform have the chance to make viral content, which is distributed at scale and mass-targeted at consumers by a machine. Using AI this way is a growing strength for Chinese companies. It is also a strength of recently beleaguered Facebook, which is fighting back by launching a clone called Lasso. The app features nearly identical gesture features, structures, endless content feeds, and hashtag groupings for browsing. The main differences lie in (1) video creation, where TikTok offers up to 60 second videos compared to Lasso’s 15 seconds, and (2) TikTok’s ability to customize content using filters, music, and lenses, which far outweigh the limited selection of Facebook's Lasso.
 
Two conclusions of note. First, Facebook has defended their turf before, and succeeded. For photos, it outright bought Instagram. For video stories, it failed at buying Snap but succeeded at building the feature into Instagram. For messaging, it bought Whatsapp and built Messenger. We wouldn't count it out in this case either. Second, these attention companies exist to deliver advertising and form consumer preference functions. In China, data about customer preferences already informs access to financial services, such as credit, payments and investing. In the US, increasingly Facebook is seen as a conduit for opinion manufacturing to the highest advertising bidder, with such data still a step away from being included in a financial underwriting decision. Yet as tech solutions and norms are exported between global jurisdictions, we expect that line to increasingly bend.

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Source: TikTok, Lasso, Slate on Facebook's Recent Allegations

PAYMENTS: American Express and Amazon help Amazon sell more products.

Ok, yes, we just talked about how the Amazon / Travelers partnership is primarily a way for Amazon to sell more of its IoT device and play kingmaker. But listen -- this is another great symptom that highlights why Amazon's entry into financial services isn't a threat to financial companies. It's a threat to e-commerce, the actual target of the platform. So in this example, American Express has partnered with Amazon to provide a credit card targeted at small businesses. It's a clever product which allows the small business to either (1) get cash back on purchases or (2) defer the interest on their card on that purchase. It's up to the small business, which may need the extra credit for a late-paying customer in one case, and the rewards the next.

Here's the magic. The cash back is 3% on all Amazon purchases (1-2% elsewhere), which means more shopping on the platform. But wait, there's more! If the card holder is an Amazon Prime customer, which is not a hard feat, they get 5% back. Similarly, the interest-free period is 60 days for regular holders, and 90 days for Prime holders. What this card does is make Amazon Prime shopping irresistible for a small business -- while driving Amazon's key metrics of Prime subscribers and retail volume. Sure, it's nice for AmEx. But all they get to do is sell a financial product that would apply in some retail channel anyway. Amazon gets to shift the flow of retail into its walled garden, and then monetize a sticky business customer over and over again! The cross-sell is bigger than the sell.

This is the monopoly moat of a platform, like Apple negotiating the record labels out of existence with the iTunes store by holding all the customers. Not only does Apple get the share of the music revenues, but it gets to sell all the iPods. Further, Amazon has done a remarkable job of handing out a financial feature to each big bank. JP Morgan has checking accounts, Bank of America has merchant lending, and so on. This distribution of seats at the table to the top financial incumbents is predictable -- both by power laws from the bank point of view, and by the stability of the capital base from the platform's view. At the same time, the net effect is that all these financial firms should want Amazon's share of commerce to keep increasing. 

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Source: MarketWatch (Cards), CNBC (Amazon Lending), Autonomous NEXT (Travelers), Statista, Amazon

INSURANCE: Monopoly gains to Amazon's platform from Travelers Insurance channel

Travelers, the home insurer, has partnered with Amazon to sell smart home and security devices. The company is getting its own digital storefront (amazon.com/Travelers) on the Amazon site, where channel customers can get SmartThings water sensors and motion detectors, Wyze cameras, as well as Amazon's Echo Dot. For Amazon, this is a proprietary hardware and marketplace sale. For Travelers, it is a home insurance sale, bundled with the telematics. Additionally, Travelers has integrated two skills into Amazon Alexa, rationalizing to some extent why you need all this technology to interact with your insurance policy.

This is a powerful symptom. On its face, it may look merely like a new marketing channel for a web-first demographic with a few gimmicks thrown in. Couldn't Walmart, Overstock, and the rest launch some product pages and cross-sell financial products? Here's the distinction: Amazon is a marketplace platform, whose value increases if it can grow two sides of its network: (1) manufacturers of stuff, and (2) retail customers. The manufacturers could make financial or physical objects, which don't matter. In order to win the platform game over traditional retailers, Amazon can throw in bleeding edge tech for free (or at cost). Walmart makes no phones, tablets or Artificial Intelligence-based assistants. Amazon does, and it has Big Tech leverage over all the aspiring startups in the space that want its consumer pipe.

Relative to other Internet companies, Amazon has the luxury of being post search intent. The Web is not a free-market endless bazaar, but a few walled gardens with monopoly-like attention ecosystems. Google sits in the pre-intent part of the funnel. People search "home insurance" into the box and get third party websites formatted according to their own logic. These results are driven by two markets: (1) bidding against keywords and (2) optimizing search engine results against a global, non-discriminating algorithm. Amazon is fundamentally different -- a king-maker that can select who wins business within its platform, and which has no need for an open web for Prime customers. This means insurance companies should race to claim their own custom channels on Amazon's version of the web (i.e., Amazon On Line?), which incidentally ends up selling Amazon hardware. This leads to a dynamic similar to that which Apple had on the music labels with iTunes and the iPhone. No competitors in sight.

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Source: Company Websites (AmazonTravelers), Media (DigInWSJ)

AUGMENTED REALITY: Government and Military Use Will Drive Magic Leap, HoloLens Adoption.

Last week, we spent a bunch of time talking about how consumer VR as a standalone platform is not turning out to be as good as iTunes, the iPhone, YouTube or the Web. One problem was the form factor, another problem was the lack of pirated content -- though games and adult content will slowly address this. This week, we want to point to IoT (Internet of Things) and Augmented Reality (AR). Do these themes have a reason for being and are they an opportunity for a major retooling of our interaction with technology? Here, we think the answer is a stronger Yes. But this is due to a surprising reason -- government and military use.

The Web was popularized through consumer use and now powers our digital selves. But it was brought to life and initial use as ARPANET in the 1960s through funding by the US Department of Defense. Imagine unlimited funding with life and death use cases by a nationally-embedded client base. This is also what the Chinese government is doing in relation to AI, blockchain and quantum computing, and get to the meat. First, Bloomberg reported that AR companies Magic Leap and Microsoft's HoloLens are bidding on a $500 million augmented reality Army project. The order is for 100,000 headsets which would run the Integrated Visual Augmentation System, overlaying intelligence on the physical world. These would be used for both training as well as in live combat. The manufacture of these types of devices would create an economic base on which consumer versions could be created, as well as condition a whole generation that using AR headsets is normal.

Another data point supporting this idea is the investment by local government entities (e.g., UK councils) in digital twins of their neighborhoods for urban planning. In particular, Liverpool is running a £3.5 million IoT program that combines the rollout of a 5G network with innovative health and social care services for residents. Of the 11 proofs of concept in place, examples include video connection between vulnerable people at home and their pharmacy, AR maps that bridge physical distance and combat social isolation, and sensors that monitor whether older adults are dehydrated. Similarly, earlier this year, Bournemouth was mapped into 3D, incorporating 30 different data sets, also as part of planning the 5G network. These live 3D maps, which could then be projected into the real world via AR devices, are a social good and should be part of centralized infrastructure. This in turn can further move the needle in consumer adoption and market maturity.

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Source: Magic Leap (BloombergNext RealityDaily Mail), UK Authority (LiverpoolBournemouth), Wikipedia (ARPANET

PAYMENTS: Mastercard League of Legends Sponsorship and the Censorship of Attention

Mastercard has thrown a sponsorship behind one of the most popular e-sport games, League of Legends. We think finance people should pay a little more attention to next-gen attention machines, and competitive video games are a black hole for user growth. As symptoms, we point to the $1 billion acquisition of Twitch by Amazon, or the $400 billion market cap of Tencent with an $18 billion revenue run-rate from its game division. Further, e-sports are growing massively as an audience aggregator, with over 300 million people globally. Some events (e.g., League of Legends finals) command 40 million concurrent viewers, larger than many traditional sporting events (e.g., 20 million for the NBA finals). Perhaps not surprisingly given the Tencent example, over 50% of that attention comes from Asia Pacific.

What does this sponsorship really mean? As far as we can tell, it's a combination of (1) banner branding during the games themselves, and (2) creation of rewards related to the video game in Mastercard's Priceless program. Rewards include behind the scenes access, preferred live stadium seating, and the chance to test-drive computers used by the "athletes" at the World Championships. To be eligible for these scarce experiences, users have to input their Mastercard information as a payment rail directly into the League of Legends game platform. What is there to purchase inside such a video game? Usually cosmetic upgrades and other microtransactions -- $1 billion worth of revenue for League of Legends.

Going back to the Asian fintechs: video games are a gateway to messaging, messaging is a gateway to payments, payments is a gateway to banking, savings, lending, and investments. In addition to those watching these games, there are also 200 million active players in these ecosystems, all of which could become a Mastercard user. Further, starting at the attention end locks people into a brand that they actually like, rather than tolerate. That's why entrepreneurs have been trying to "gamify" finance, not "financialize" games, though such financialization is now happening through tokenization and cryptocurrencies. The last bit we'll leave you with is that Chinese regulators think video games to be such an addictive and powerful vector, that they are working on laws that limits time spent and number of new titles released. A freeze on new release approvals has wiped out over $100 billion from Tencent's marketcap.

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Source: Mastercard (Press release), Newzoo (Esports market size), Statista (number of players), BI Intelligence (number of viewers), Fortune (Chinese Video Game regulations), Newzoo (Tencent revenue), PC Gamer (LOL revenue)

BIG DATA: The Beauty of Global Networks of Data Exhaust

As the human world becomes more digital, our connections and interactions are recorded and shared. We go from knowing 150 people and analyzing a few stories a week to 2 billion people sharing hundreds of millions of stories constantly. But humans still need to understand what's going on underneath. In this entry, we want to highlight how massive, machine scale systems are visualized through mathematical methods to tell new stories. These charts -- giant sprawling data webs like airplane traffic patterns etched onto the globe -- are the future of literacy in the machine age.

In the first example, we borrow two images from Google. The Google Cloud team created a service which grabs the entire Ethereum blockchain, backs it up on Cloud, and makes it easier to analyze. The first image shows the Crypto Kitty universe, with color attached to owner of the contract (kitty whales!) and size of the bubble ranking the quality of the asset. We can certainly imagine this done on regular old financial assets. The second visualization is for transactions: points are wallets and lines are asset movement. You can immediately seen wallet clustering, which shows entities that have more frequent transactions between each other closer together. In this way, one can ferret out exchange wallets or bots. Hey there Bitfinex!

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The second source is a ConsenSys write up on decentralized exchanges, and is truly a spectacular chart. Do yourself a favor and click to zoom in. The dataset comes from IDEX, EtherDelta, Bancor, 0x, OasisDex, Kyber Network, and Airswap Protocol -- today's decentralized exchanges. Each point is a trading pair, the width of the line is number of normalized trades, and the line colors signify the exchange used. You can immediately see the most popular trade contracts, as well as exchanges where trading hops through an intermediate token, rather than through ETH itself. We'd love to see this for traditional FX markets, or maybe all trading period!

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The last chart is from Geoff Golberg, who mapped out all Twitter accounts engaged in the Ripple XRP community with the purpose of identifying bots. And yep, the 40,000 point cloud has multiple bot armies across the world used to manufacture opinions and drive social engagement. It takes a robust mathematical approach to visualize this information, and a detailed article written by a human to infer the relationships and their activities within the data network. This is a flavor of future skillsets required to thrive in a machine world.

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Source: Google (Ethereum), ConsenSys (Decentralized Exchanges), Medium (XRP Bots)

FINTECH: Why Amazon beats Google for Insurance Aggregation

Just last week we discussed the industry's anxiety about Facebook reaching for the datasets of traditional banks. This week, it's Amazon again. The claim is that Amazon is considering setting up a comparison shopping site in the UK for insurance products. Given the recent rise of aggregator insurtechs like WeFox, as well as the web arbitrage of lead gen websites like GoCompare and Moneysupermarket, there seems to be a reasonably defined opportunity to mess with financial product distribution. In the US on the lending side, LendingTree and Credit Karma had carved out hundreds of millions of revenue intermediating such sales. 

So what's Amazon's game? Critics enjoy pointing out that Google had tried to do comparison shopping multiple times across financial verticals, and failed. Very little remains of their personal finance efforts. But this point betrays a misunderstanding. As a financial product manufacturer, like say insurance provider Admiral (who would love to be on the Amazon platform, thank you very much), you face a fat customer acquisition cost. Let's say this is $300-800 per client, from insurance, to mortgages to investment management. You will pay this to get the client. Right up the marketing funnel is the price comparison platform, which will get paid $50-100 per lead by the financial institution, which remember still has to close the lead at some conversion rate. Your job as a lead generator is to arbitrage the willingness to pay by the financier versus the search engine algorithm discovering an audience's interest in a financial product. So if you pay $5 to get traffic to your site, and then convert those effectively into leads to sell off, you make money. 

The search engine price comparison (e.g., Google), however, is competing with itself and the advertising spend of intermediaries. That revenue per user is the opportunity cost. If Google can monetize search intent through advertising to intermediaries better than through selling leads to manufacturers, then it should exit the leads business. And a bunch of techies probably don't know how to optimize for selling insurance. But Amazon is different. Amazon has no opportunity cost from advertising revenue in its platform, all the while facing much lower customer acquisition costs. Because the customer is already inside of Amazon.

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Source: Amazon Looking at Insurance (GuardianDigital Insurance), Images from Moneysupermarket and Google Shopping

SOCIAL MEDIA: 15,000 Scammer Twitter Botnet Exposed

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What's a botnet's favorite activity, when not trying to take down Minecraft servers using thousands of remotely controlled baby monitors? Some good crypto currency scamming on Twitter, of course! We loved a recent paper from Duo Labs that exposed the structure of the botnet running the "ETH Giveaway" scam which tricks people into sending a small amount of currency to an address for "verification" and never sends any money back (not unlike the famous Nigerian price).

The researchers sat on the Twitter API and pulled out data on 88 million public profiles and 576 million tweets. To classify accounts, they used 22 heuristics like posting frequency, content, unique sources, hashtags, account age and others. They trained a machine learning Random Forest model on the data set, using "verified" accounts as controls, and found a 15,000-entity botnet with a three-tiered hierarchical structure. Within this structure, there were (1) individual bots that would post spreading the scam messages, (2) hub accounts that many of the bots followed, and (3) amplification accounts which would like and otherwise engage with these messages. It's a beauty of growth hacking and attention economy manipulation.

Such creatures are inevitable in a digital-first world, no matter how much Twitter tries to fight "dehumanization". Over time, they will only get more sophisticated and invisible, as initiatives like Microsoft's TextWorld teach bots to carry a conversation with humans. Which is why we also have to use machine learning ruthlessly to weed these things out. Such is the responsibility of the attention platforms, like Google, Facebook and Twitter. At the same time, we must not cross the fine line between machine moderation and machine control (looking at you, China). Whoever gets to decide how closely to turn the dials on the algorithm controls the volume of millions of voices across the web.
 

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Source: Futurism (Twitter Bots), Duo Labs (Paper), Slate (Dehumanization on Twitter), Microsoft TextWorld

FINTECH: Facebook's Faustian Banking Bargain.

Here's a Trojan horse if we've ever seen one. You probably already know that Facebook would like to get its paws on some banking data. The social network giant approached several of the largest global banks -- JPMorgan Chase, Citigroup, Wells Fargo, and US Bancorp -- to get financial pipes that map onto its users. Such financial data would then be integrated into Facebook Messenger, and not sold to advertisers according to the company. Putting aside issues of Cambridge Analytica and other various public trust mistakes, Facebook is clearly asking the banks to disintermediate themselves by shifting the primary consumer interaction from bank apps to its Messenger. 

This is a particularly Faustian bargain. Facebook is already integrated into payments via Mastercard,  American Express, and PayPal. It is of course exploring blockchain, and effort led by the former president of PayPal. In a recent review of P2P payments providers, Facebook lagged behind Apple Pay, Venmo and Square, but was ahead of Zelle, the banks consortium. It is experimenting with Whatsapp as a payment rail in India. Looking at a report of recent patent filings for banks, in every category including transaction processing, mobile banking, e-commerce and payments, the tech companies (e.g., IBM, Google, Microsoft) hold more intellectual property than the banks. So giving Facebook customer financial data not only hands over the customer, but puts that customer into a far better technology platform. 

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Which gets us to the following -- why doesn't Facebook just buy the data with customer permission? In Europe, PSD2 has forced large banks to open up all their data via APIs. In the US, Yodlee (under Envestnet), ByAllAccounts (under Morningstar), Quovo, Plaid and many others offer account aggregation as a service across thousands of banks. These are stable, proven products used by many financial institutions. Oh wait -- Yodlee costs at minimum $0.40 per user per month. For 214 million American Facebook users, that would add up to about $1 billion of cost. We get it. Facebook wants to offer the Faustian bargain, and they want it for free.

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Source: Facebook Bank Request (VergePayments Source), Consumer Reports (P2P Payments), Cipher (IP Patents Data), Yodlee 

BLOCKCHAIN: Tron Buys BitTorrent for (Allegedly) $120 Million

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What do you do when your ICO raise nets you $70 million and then your token market cap flies to $2.3 billion without any software to back it up? We are of course talking about Chinese blockchain Tron, whose stated goal is to redesign distribution of entertainment and media content using decentralized technologies. Yes, the same Tron that has plagiarized the Ethereum and FileCoin white papers without citation, has copied Ethereum code without attribution, is using Delegated Proof-of-Stake while running one of the most centralized projects out there, and drew the ire of the usually serene Vitalik Buterin.

One thing you can do with $ billions of suddenly valuable magic beans is to buy a real property. And Tron has done exactly that by purchasing the original distributed P2P file-sharing company BitTorrent. The BitTorrent protocol took over the mantle of file sharing from Napster in the mid-2000s by slicing up media files into thousands of pieces and spreading them across a decentralized, indestructible swarm. Trackers like The Pirate Bay would point users to files that collated those pieces together (torrents), but no centralized servers existed to actually host these files. BitTorrent was a major innovation not just in piracy, but in moving large files across a growing Internet.

What this acquisition actually means from a product perspective, we do not know. BitTorrent Inc., the target, makes software that lets you search for torrents, and maintains the protocol. But we think (maybe wrongly) that even if this private company disappeared, nothing would happen to the existing activity on the network. BitTorrent doesn't really "own" its users, though it boasts over 100 million people using it. Still, Tron is getting development talent and a client that can maybe be re-purposed to ride the blockchain rails. Two parting thoughts -- (1) Kim DotCom, the ridiculous king pin behind piracy site MegaUpload had claimed to be launching a crypto-currency a few years back to power a new file-sharing paradigm, and Tron/BitTorrent looks a lot like that idea, and (2) imitation is the sincerest form of flattery, and has helped Chinese tech centers like Shenzhen move from technology knock-offs to fast execution and innovation.

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Source: Coindesk ($120MM Acquisition), Plagiarism (Coincentral, Medium from Digital Asset Research), CCN (Vitalik on Tron), Logic (On knock-offs in Shenzhen), Bitcoin Exchange Guide (Kim Dotcom)