Mark Sigal's Blog - The Network Garden

Thought Streams: Confidence Reset, Epicurious and Putin's Russia

We need a Confidence Reset. Good Interview with Obama (and his wife, Michelle) on ’60 Minutes.’  Here’s an excerpt (check out the video below):

"There's no doubt that we have not been able yet to reset the confidence in the financial markets and in the consumer markets and among businesses that allow the economy to move forward in a strong way," Obama said.  "And my job as president is going to be to make sure that we restore that confidence."

Rocking Party at my Pre-school Fundraiser.  Oxymoron, I know, but after dancing with my wife to Sweet Child O’ Mine (and many other classic songs), and hanging out with a bunch of nice parents and great teachers at some place called ‘The Log Cabin’ in the Presidio, definitely a good time.  No qualifiers necessary.

Now We’re Cooking: Epicurious.  I have been cooking a lot more lately, which has refreshed my memory about why I love Epicurious so much.  Start with great recipes (sources: Bon Appetit, Gourmet).  Make them search-able by food type, ingredient, etc. and filterable by many, many different combinations.  Cultivate deep user reviews and ratings, including answers to “Would you make again?” and you have something special.  For example, the notes from other people who actually cooked the recipe are invaluable since they include suggested refinements and detailed sentiments.  All of this is easy to save, print (with some, none or all notes) and send to phone.  I have made a LOT of meals across all of the food courses using this service, so I highly vouch for.  Case in point, I decided to make some vegetable soup the other day but I did not want to spend a lot of time making it.  I was able to filter on lentils, soup and quick & easy to find and make French Lentil Soup.  Quick, easy, YUM.

Need a Bigger Boat. Thomas Friedman comparing the financial crisis with a pivotal scene in Jaws: If you want to know where we are right now, rent the movie “Jaws.” We’re at that moment when Roy Scheider first sets eyes on the Great White Shark and comes back and says to the skipper, with eyes wide with fear: “You’re gonna need a bigger boat.”  Read the full article.

Putin Russian and the Financial Crisis.  In ‘Why Experience Matters: On Palin, Putin and Prudence,’ I expanded upon “Dead Soul,” the definitive assessment of Vladimir Putin in Vanity Fair (October). In essence, it documents how Putin’s Russia is an unseemly marriage of endemic corruption, Mafia-style criminality and 1984-like spy state tactics.  Well, Russia has not escaped the one-two punch of falling oil prices (a cornerstone of its wealth) and the global financial crisis (it’s stock market has fallen by 75 per cent since August).  Telegraph (UK) captures what’s going on.  Here’s an excerpt:

Until last week, Svetlana, a young mother of two, held decidedly middle-class ambitions. An executive at a construction company, she was hoping to save enough to send her children to school in Britain and buy a new flat in an upmarket part of Moscow. But then, without warning, she was made redundant along with about 70 colleagues. She received no severance pay and was instead forced to sign a letter saying she had voluntarily resigned.  "They said that if I didn't sign then I could look forward to burying my own children," Svetlana says. "What kind of country do we live in? I thought we were close to becoming a civilized nation, but I've been forced to realize that that is an illusion."

On Free Markets, Bailouts and Safety Nets: Rules of the Road Needed

Okay, so now that we have answered the Big Question, we need to collectively start focusing on a bunch of little questions…

On Creative Destruction 

Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth.

They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target.

The US became famous for this pattern of decay and new growth.

Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security.

But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity. (Excerpted from Bailout to Nowhere, David Brooks, NYT Op Ed.)

Bail Me Out, Please! 

In ‘How to Fix a Flat,’ Thomas Friedman listens quizzically to pleas for a bailout of the auto industry (and why it makes no sense):

They were interviewing Bob Nardelli, the CEO of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees.

It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation.  I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?”

A Question of Principles

David Brooks of The New York Times frames the road ahead  in 'Bailout to Nowhere': Going forward, the larger principle is over the nature of America’s political system.

Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests?

Or is the US going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

A Failure of Enforcement, Not Free Markets 

Put it all together, and you have to ask yourself, "What's the Moral of the Story?"

Steve Forbes in Forbes Magazine offers a pretty crystallized view of the WHAT and the WHY behind our systemic conundrum:

"Free markets need to have sensible rules of the road. For example, we're free to drive where we want, but we're supposed to adhere to speed limits and signal when turning.

When the housing market became truly chaotic in 2004-06, and bankers were doing things they had never done before, the Fed--as road cop--had the power to turn on its siren and pull those bankers over. Greenspan chose not to. That was a failure of enforcement, not free markets."

SIDEBAR: Forbes also argues for formally announcing that a strong dollar is now US policy (agreed), suspending mark-to-market rules (totally disagree – see Capitalism 2.0), having the SEC reinstate the uptick rule regarding short-selling and enforce the rule against "naked" short-selling.

I guess this is one of those moments when you have to embrace the credo that when you get to the fork in the road, take it.

Apple’s Mobile Gaming Gold Rush

Today’s Wall Street Journal has a good article on the state of the iPhone/iPod touch mobile gaming segment. 

Netting it out: the data points suggest that iPhone/iPod touch is emerging as a classic low-end disrupter to the dedicated handheld gaming segment.

First and foremost, the raw numbers show that iPhone and iPod touch owners have downloaded about 50 million games, representing about 25% of the 200 million TOTAL apps downloaded from the iPhone App Store to date.

This level of uptake so soon after the launch of the iPhone 2.0 Platform is a testament to a few things.  One is pure diversity of gaming options, with more than 2,000 iPhone games available, virtually all of which have been created by the third-party developer ecosystem that Apple is cultivating. 

Two is cost.  Simply put, a disproportionate number of the downloads are for free games, and virtually every game is priced under $10, placing them well under half the cost of the games available on dedicated gaming consoles.

Three is the seamlessness of the App Store distribution model. Enticing pricing is great, but when you couple it with the impulse buy friendlessness of App Store’s wireless browse, click, buy, download, use & enjoy model, you really have a winning combination.

Finally, the fact that the iPhone/iPod touch is not a dedicated gaming console, and as such, lacks optimized physical input controls and is technically less powerful (in the hardware sense) than its dedicated competitors, is arguably its greatest virtue. 

Why?  iPhone’s sweet spot are casual gamers, and the early data suggests that everyone at some point of the day/week/month has a casual moment for which gaming is the antidote. 

Plus, because gaming is just one of the tasks that consumers use their iPhone/iPod touch for, the device is never far from their clutches – and their (virtual) pocketbook.

I see this truth play out several times a day, EVERY DAY, when my three and six year old sons ask if they can use my iPod to…play games, listen to music, view our photo albums, watch YouTube videos, use their favorite drawing program, etc.

The Developer Case Even More Compelling
On the developer side, the data is even more heartening.  Even with Apple keeping 30% of the proceeds of software sales through App Store, Simon Jeffery, the U.S. president of Sega notes that, "Games sold via the App Store are the most profitable in terms of any of the formats we work on."

(SIDEBAR: Sega has sold 500,000 copies of its middling “Super Monkey Ball,” although it's worth noting that Apple has heavily promoted the game and that while Sega sold 300,000 copies in its first month of release, it has ‘only’ sold 200,000 copies over the last three months.)

Part of the key here is that the combination of Apple’s built-in App Store marketplace for game review, purchase and distribution, and a stellar development platform (see my post ‘iPhone 2.0 - Swinging for the Fences’) has lowered distribution costs and made it possible to profit on games that sell for just a few dollars or are supported by alternative monetization models, such as advertising.

Thus, devotees of Clayton Christensen’s classic book on new market/product innovation, "The Innovator’s Dilemma" are entitled to smirk a bit when they read about Sony’s assessment of the potential of the iPhone/iPod touch to emerge as a serious threat to the Sony PSP:

"Sony doesn't consider Apple as big a threat because gaming is secondary to its devices," said John Koller, director of hardware marketing for Sony's PSP, adding that "The consumer is using the mobile gaming on the iPhone and iPod Touch as a time waster."

Good So Far, What's Next?
I won’t spend any more cycles on Sony-think for the moment.  Instead, I would like to close by noting some of the less obvious aspects of this evolution in mobile gaming. 

One example is Apple's support of elastic pricing models within App Store such that developers can test demand for their products by changing product pricing as frequently as they like. 

In fact, many a developer I know has tested pricing models for days or weeks at a time – some have even created event-oriented pricing, such as tying a temporary discount to the presidential election. 

All of this empowers developers to let the data tell them what the right pricing model is, in the process providing them oodles of near real-time user and usage data.

(SIDEBAR: In some respects, this hearkens back to the way Google disrupted the online advertising market by making the process of creating, selling, buying, monitoring and managing ad inventory a more malleable, transparent and market-driven process than the incumbent approaches afforded.)

A logical extension of this approach is product hybridization in the form of the embracing 'free-mium' product segmentation models, where a pared down version of the game is free (or ad-supported), and a premium/paid version supports deluxe functions or provides greater customization/personalization options.

It is not hard to imagine this model evolving to the point where complimentary product/solution providers bundle downloads of iPhone games with their products, similar to the way Apple did deals with Pepsi to offer free iPod song downloads with the purchase of Pepsi products. 

Similarly, how hard would it be with certain types of games to offer custom-sponsored, custom branded versions of a given game, similar to the way that Hasbro has created different city and theme-centered variants of Monopoly?

On a completely different front, this model changes the nature of the traditional six-month product development 'develop,' 'release' and 'update' cycle. 

Why? Because the App Store model provides built-in hooks for automatically notifying users when application updates are available, and makes it one-click easy to grab and apply the update.

As a result, I have seen many a developer release frequent updates of their product seemingly so that they can realize the marketing potential of such updates; namely, to use update cycles as a periodic opportunity to connect with their customers and affirm their value proposition in the form of new features and enhancements.

So where is all of this headed?  History suggests that some smart developer or gaming house will leverage a variety of these elements to build a new kind of mobile gaming suite that fosters deep engagement and creates brand loyalty in the same way that Microsoft collapsed word processing, spreadsheet and presentation building tools together to create the 'Office' category killer.

How will such a game developer accomplish these lofty suite goals?  By aggregating scores and accomplishments across all of the games that you play from them; by connecting you with like-minded or similarly-skilled players; by supporting head-to-head challenges with prizes and other recognition systems; and by integrating with your favorite social networks, media, utility and locative services in a value-added fashion. 

Namely, by embedding richer mobile, social and connected attributes into the gaming fabric's DNA, a construct that is only in its infancy today.  That said, it bears reminding that the iPhone 2.0 Platform launched less than six months ago (on June 9), so logic suggests that this 'infant' will grow up fast.

Related Posts:

1. iPhone 2.0 - What it Means to be Mobile: a detailed summary of my experience to date with the iPhone 2.0 platform.
2. iPhone SDK - Mobile Reasons for Optimism: why the iPhone Universe is a big deal.
3. iPhone 2.0 - Swinging for the Fences: an analysis of the WWDC Keynote by Steve Jobs.
4. iPod touch: the first mainstream Wi-Fi mobile platform?

Marketing Patterns: It's Easier to Motivate than to Persuade

Seth Godin makes a great point in his post, ‘Marketing lessons from the US election.’ 

In it, he asserts that motivating the committed outperforms persuading the uncommitted.

In the case of the Obama campaign, the “committed” were blacks and college age voters that too often in past elections did not show up in numbers on Election Day. 

The genius of the Obama campaign is that by motivating these groups and tactically ensuring that they made it to the voting booth on Election Day, Obama managed to expand the electorate pie, a Herculean accomplishment that literally changed the equation.

Godin’s conclusion sums it up best: “Every marketer can learn from this. It's easier (far easier) to motivate the slightly motivated than it is to argue with those that either ignore you or are predisposed to not like you.”

Related Posts:

1. Social Media: It’s About Breadcrumbs and Conversations
2. Online Community Building: Three Critical Ingredients
3. The Serial Killer, Gustave and Creative Marketing
4. Are You Working with Chickens or Pigs?

Thought Streams – Privilege, Poverty and Overcoming Adversity

While I think that Malcolm Gladwell (of ‘Blink’ and ‘The Tipping Point’ fame) has a penchant for writing the end of his story and THEN finding the facts to support it, he is nonetheless an immensely enjoyable storyteller, specifically because he so fancies the frame and measure of good narrative. 

Hence, in the weekend reading bucket, read Gladwell’s “The Uses of Adversity” (online @ The New Yorker) with the same ‘willing suspension of disbelief’ that you mentally sign up for when you enter a movie theater; i.e., come to be entertained, just don’t over-think.

In the article, Gladwell prophesizes that sometimes being an underprivileged outsider trumps being the insider born with the silver spoon.  Similarly, he argues that there are times when being an outsider is precisely what makes you a good insider.

To support his argument, he tells the story of Sidney Weinberg, for 40 years the face of investor banking giant, Goldman Sachs.  As Gladwell details, the man who created what we know as Goldman Sachs was a poor, uneducated member of a despised minority, yet he rose to the top, becoming the trusted source of presidents, corporate heads and the generals of industry.

An underlying theme of the story is whether in these troubled times, we need more people who have been “cradled, nursed and reared in the stimulating school of poverty,” as Andrew Carnegie, the consummate self-made man, once put it. 

Put another way, does a life born into adversity better prepare one for handling turbulent times than pedigree, socio-economic status and connections? 

There is clearly not a binary answer to this one, but it’s a fun read nonetheless.

Read the full article HERE.

When Does it Get Easy? In the Box!

You must be thinking that these are tough times, unseasonably tough times, no less.  So when does it get easy?

I hearken back to my first mentor, a gentleman by the name of Sam Bachner, who I worked with at my first startup, CBM.

Sam had built a personal fortune well into the 'eight figures' range.  Yet, despite his good fortune, there was Sam working like a dog well into his sixties.

This prompted someone to ask him, "Sam when does it get easy?  You've worked hard, you've achieved great success, you could count your money and call it a day.  When does it get easy?"

Sam just smiled, and said, "In the box. When I am in the box it gets easy.  Until then, I work, live and fight for my daily bread."

Course Correction: What Obama's Victory Says About Us

“If there is anyone out there who still doubts that America is a place where all things are possible; who still wonders if the dream of our founders is alive in our time; who still questions the power of our democracy, tonight is your answer…It's the answer spoken by young and old, rich and poor, Democrat and Republican, black, white, Latino, Asian, Native American, gay, straight, disabled and not disabled - Americans who sent a message to the world that we have never been a collection of Red States and Blue States: we are, and always will be, the United States of America.” – President Elect, Obama

God bless America.

This is what makes America such an amazing place.  We took an ugly fork for the past eight years, and we are all paying our share of the price – lest we forget the lessons learned anytime soon.

But in America, the past is prolog.  It is not destiny.  What makes our country so great is its ready elasticity and ability to accommodate seemingly head-spinning change.

In four years, we have gone from the re-election of George W. Bush to the election of Barrack Obama.  From the scorched earth politics and division to a commitment to unity and global outreach.

This election was fought in 50 states, which ironically is a departure from recent times.  Most campaigns are constituency plays and chasing ‘winnable’ states with meaningful electorate counts.  We have elected a president that recognizes that not all of these good folks voted for him.

But unlike his predecessor, “THAT ONE,” as McCain euphemistically called Obama, reaches out versus squeezing out.  The headline is clear:  Hope (once again) Prevails over Fear.

How improbable that such an audacious vision should take hold in the face of a meltdown, no less (too see where our markets/economy is headed, read my post ‘Capitalism 2.0’).  We Americans should take great pride for being willing to hold such a vision as essential and true.

Slaying the Rove and Clinton Dragons
But it wasn’t easy or bloodless.  To be the king, you must slay the dragon, and our political system has many such dragons, and the one question that this long campaign has answered is whether Obama is mere orator and academic, or couples that goodness with the boxer’s intensity and ability to go for the knock out (read, 'Obama and the Dems').

By perennially exhibiting grace under pressure, by being reasoned, well-prepared and showing good temperament, Obama slowly, but surely, squeezed the life out of both McCain and Hillary Clinton. 

It was amazing to watch.  The way that they were out organized and out funded is impressive, but the way that they ultimately fell on their own swords, says as much about the failure of our current political system (which Clinton and McCain are offspring of) as it does about Obama’s own prowess.

For Clinton, it was stumbling out of the gate when the official story line was invincibility and quick victory.  For McCain, it was the campaign suspension ‘hail mary,’ which coupled with the Palin pairing, raised all sorts of questions about his judgment and temerity to lead.

Some Thoughts on the Road Ahead
Let me leave you with three thoughts.  One is that we have a tough road ahead.  Every day I see the old homeless lady in my upscale neighborhood I am reminded that the line between Capitalism 2.0 and ‘eating dog food’ is relatively thin.

Two, we as individuals must commit to “something” real, no matter how small the ambition committed to is.  We must own the outcome and become more compassionate and more engaged in the ambitions of others.  Change begins within.

We must find our own call to action, and I believe that this president is committed to harvesting our willingness to be enlisted.  His roots are as a community organizer, after all.

Three, CNN commentator, Alex Castellanos sagely compared Obama and McCain, and their respective campaign approaches to ‘The Cathedral and the Bazaar,’ Eric Raymond’s seminal piece on the yin-yang marketplace of open source versus closed architectures.

While chewing on how embracing such a credo might open up new market horizons, know this; the results prove out (as NYT’s David Brooks frames it) that the Obama election “marks the end of an economic era, a political era and a generational era all at once.”

In terms of where this leads us to (beyond Capitalism 2.0), it’s worth also noting that in an age of irrational financial markets, the concept of the ‘wisdom of crowds’ passed a litmus test in this election. 

Specifically, the prediction marketplace (Intrade is my source) did a pretty good job of pegging an Obama blowout in the 364-174 electoral vote range for two plus weeks running.

Even more amazing, other than Indiana and Missouri flip-flopping in the last week (from Blue to Red, and vice versa) the rest of the map in terms of which states voted in favor of whom, was completely accurate. 

If you haven’t read James Surowiecki’s ‘The Wisdom of Crowds’ you should as this is a long term trend that touches media, markets, communications and ideation.

So what’s next?  Happily, this is the beginning and not the end.  To frame this truth, in ‘Finishing Our Work,’ Thomas Friedman imagines all of the would-be McCain voters that flipped for Obama on voting day, wondering aloud why did they do it:

“Some did it because they sensed how inspired and hopeful their kids were about an Obama presidency, and they not only didn’t want to dash those hopes, they secretly wanted to share them. Others intuitively embraced Warren Buffett’s view that if you are rich and successful today, it is first and foremost because you were lucky enough to be born in America at this time — and never forget that. So, we need to get back to fixing our country — we need a president who can unify us for nation-building at home…There is just so much work to be done. The Civil War is over. Let reconstruction begin.”

Amen.  Only in America.

Related Posts:

1. Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade
2. The Politics of Hope over Fear: The underlying narratives of McCain v. Obama
3. Eating Dog Food: On Safety Nets
4. Obama and the Dems: The need for killer instincts in an election of change
5. Predictions, Markets and the Wisdom of Crowds: on Intrade and prediction markets

Have You Voted Yet?

Great quote by David Brooks, in today's NYT OpEd, 'A Date with Scarcity':

"Nov. 4, 2008, is a historic day because it marks the end of an economic era, a political era and a generational era all at once. Economically, it marks the end of the Long Boom, which began in 1983. Politically, it probably marks the end of conservative dominance, which began in 1980. Generationally, it marks the end of baby boomer supremacy, which began in 1968. For the past 16 years, baby boomers, who were formed by the tumult of the 1960s, occupied the White House. By Tuesday night, if the polls are to be believed, a member of a new generation will become president-elect. So today is not only a pivot, but a confluence of pivots."

Thought Streams – I'm Not Bush; What does JM see when he looks in the mirror?

“I'm Not Bush,” JM wails.

But what does that mean?

I think that we have to recognize that one essential truth of the past eight years is the importance of Prudence.

We must demand leadership that is well-organized and sweats the details.

It’s not too simplistic to say that Bush, independent of his other faults, didn’t sweat the details and we paid the price.

I believe that how each candidate has managed their campaign tells US a lot about how they will manage the country.

Politics aside, my take is that in this campaign, McCain has repeatedly shown that he hasn’t sweat the details. 

You see it in his message, his organization, how he carries himself and in his decision-making process.

So how would he be different than Bush?

Why do we want that?

In terms of living a credo, Obama is the Un-McCain.

That's a good thing.

RELATED POST: Crazy Wisdom as Rome Burns

Thought Streams – Tipping Points, Psychic Energy, LinkedIn Connections and more

Re-reading Malcolm Gladwell’s, ‘The Tipping Point,’ brought me back to some core truths that I believe in:

• Best advice of the past 18 months (by Ron Conway): “Give it to me pre-digested.” Why?  Like a lot of entrepreneurs, I often fall in love with the details and nuances behind my thoughts, but others are busy and shouldn’t have to 'work for it.' By pre-digesting the message, you strip down to the core essence for your target audience.  In the media business, the analog is, “Don’t bury the lead.”
• It’s about “Who, Then What.”  Period.  Picking the right team is the single most important decision you can make. Everything is subordinate to that, even strategy.  This is a construct from 'Good to Great,' and I have endured no small amount of pain when I have forgotten this fact.

• Nothing is free, especially when it comes to the decisions you make around team-building.  Hence, it is important to define and tap into people’s aspirations, and be clear on what a given decision path costs (in terms of lost alternatives, time, money).
• Eliminate Psychic Energy 'Vampires.'  No team member, no matter how skilled or how long tenured, should be allowed to cost the team and organization a disproportionate amount of psychic energy.  I have never for a minute regretted squeezing these psychic energy ‘vampires’ out of the business.
• Product design and product marketing should be designed from the ground up to be synergistic.  The reminder here was a great article by Gladwell on Ron Popeil of Ronco, the consummate pitchman and pioneer of the infomercial.
• Related to this is the importance of not confusing attributes with outcomes.  People hire your product or service to get a job done relative to their outcome goals and the constraints they face.  Don't confuse ingredients with the recipe or the dining experience.
• Now more than ever, I believe in the ‘Seed,’ ‘Select,’ and then ‘Amplify’ model espoused many years ago by the authors of 'Blur;' namely, plant a lot of low cost seeds, select the seedlings that sprout, discard the rest and then amplify your strategy around the winners.
• If you can’t measure it, then it must not matter.  Because you can’t improve what you don’t measure.
• Extrapolating on Gladwell’s theme of contagiousness, I would argue that the financial meltdown resulted from a kind of thought virus that spread globally to buyers and sellers, masking its virulence very well.  By contrast, Obama’s message of 'Change You Can Believe' in is a kind of positive virus – a meme – that has become a mantra driving people to aspire to a new kind of leadership.
• Rhetoric provides a narrative that sets the context for a given topic by breathing life into a metaphorical stage, defining its players and the schema that they operate within.  It’s the ultimate definition of the situation.
• True engagement and 'focused attention' is a primary bit of currency in the age of information-overload.  Measuring, monetizing and making engagement more efficient and more systematic feels like the big “what’s next” after impressions and clicks.
• Business networking is about maximizing your reachm whereas social networking is about connecting with like minds.  Therefore, be 'promiscuous' in accepting LinkedIn Connection requests, but be a 'prude' when it comes to accepting friends requests in services like Facebook, and design your online presence accordingly in each sandbox. 
• So much of the way that we think about risk and risk mitigation is predicated on the belief that game-changing calamities can be managed and avoided. But as Nassim Nicholas Taleb compellingly argues in “The Black Swan” and “Fooled by Randomness” it is specifically the game-changing event that is both impossible to predict and the greatest mover of the needle, so maybe more of our macro thought-process has to be about being ready for big delta events versus pretending that they can be prevented.  Arguably, on a personally level recognizing and executing on such game changing moments is inseparable from being slow and steady -- unless you have coupon clipper discipline.  It’s about embracing the paradox of being both the tortoise AND the hare.

Predictions, Markets and the Wisdom of Crowds

What do you get when you cross the so-called ‘wisdom of crowds’ with a marketplace that allows buyers and sellers to sell/trade in predictions (with real money)?

You have a Prediction Market that arguably provides the most unfiltered, intellectually honest, “skin in the game” motivated distillation of the market net perspective on topics such as:

• Who will win the next presidential election?
• Who will be the next American Idol?
• What the box office returns will be for a given movie?
• What is the likelihood of likelihood of a recession in 2009?
• How will the Dow perform?
• Where the next terrorist attack will occur?

Case in point, in tracking the presidential election, several times a day I go to Intrade, a leading prediction market, not only to get the current share value of a bet on McCain’s (un)likelihood to win the presidency, but also the market’s read on a state by state basis of the likelihood of Obama or McCain to win that particular state.

Needless to say, it’s been fascinating to watch traditional media cover, for example, McCain’s recent decision to stop advertising in Minnesota (basically, an acknowledgment that he will lose that state), when for the past few weeks, Intrade has shown a steady increase in the probability of McCain losing Minnesota (it’s gone for the high 60% probability to 90% probability).

In fact, for the past few weeks, the predictions have pointed to a blowout victory for Obama in the 364 to 174 electoral count range.

What is this data worth?  Well, it’s done shockingly well in predicting past congressional election outcomes and the recent flurry of (negative) market moves, and we’ll know soon enough how it performs relative to the presidential election, but most fundamentally, it’s a potent tool to help triangulate on outcomes and their likelihood to play out in the weeks and months ahead.

Here’s a video on Intrade from a 20/20 segment on prediction markets, and do check out the interactive election map HERE.

UPDATE 1: We'll find out soon enough how Intrade did in predicting Obama wins in swing states Missouri, Ohio, Pennsylvania, Virginia, Florida, North Carolina, Nevada, and a total blowout victory for Obama over McCain of 364 electoral votes to 174.

Related Posts:

1. The Choice: Three Weeks to Go
2. Obama and the Dems: Are they just wimps? On whether Obama is prepared to take off the gloves and go for the kill.
3. Why Experience Matters: On Palin, Putin and Prudence.
4. Rhetoric - Why it matters: Obama's acceptance speech and where free markets and government meet.
5. Base motivations: The Matter of McCain v. Obama.
6. The Politics of Fear and Division versus Unity and Hope: The underlying narratives in Obama v. McCain.

Death by Derivatives: On Economic Viruses and Financial WMDs

“Virus, virus, virus is the thread that keeps going through my head.”

What looked like a risk mitigated, readily levered investment to some of the greatest minds on Wall Street turned out to be (in the words of Warren Buffett), a financial weapon of mass destruction, a viral bio-hazard that infected global markets, in the process, killing the banks, hedge funds and insurance underwriters that hosted the virus.

It was infectious by virtue of the simple fact (supported by really complex math) that by being a manufactured ‘class of investment’ rather than an actual investment in tangible assets, once it passed the initial sniff test of the market (of credit agencies, secondary markets, etc.), it pretty much could expand friction-free across the globe. 

And expand it did, both on the BUY side and the SELL side (i.e., buyers of these instruments could be any bank, hedge fund or financial services firm anywhere on the planet – which explains why Iceland is on the cusp of bankruptcy for what until recently was thought to be an American crisis.  Similarly, bankers anywhere could replicate the model to create such instruments/viruses to sell/spread to the global marketplace).

No less important to this mess is the combination of the complexity of these instruments; deregulation's role in de-prioritizing transparency; and the fact that the instruments were created specifically so that the underwriter could quickly get the credit risk off its books.

What do you get when you retard analysis and globally diffuse responsibility for adherence to analytical and underwriting standards?  Experience suggests that you get a sharply under-performing asset class, the perfect storm of which is still unfolding. 

Awe, but the final lethal contagion was the premise that the risk was protected by an ‘insurance-like’ safety net, which now has not only proven to be untrue but as an unregulated segment, we can’t even say with real confidence what the exposure to our global economy really is.

An illusion of safety leading to promiscuous behavior, an easy to spread virus that is hard to ascertain its lethality and the doctor’s have no incentive to care for the patients.  It’s a recipe for an epidemic.

Along these lines, Jesse Eisinger of Conde Nast Portfolio Magazine has written an excellent article, ‘The $58 Trillion Elephant in the Room’ on the birth of the credit derivative market and the lessons learned in the process of its roll-out.  (Side note: Portfolio also provides an interactive timeline, ‘Death by Derivatives’ on the evolution of the derivatives industry). 

It’s akin to reading about scientists creating, then unwittingly unleashing, a lethal virus on the planet, and it does a good job of showing the interplay of the afore-mentioned variables at work. 

Here is an Excerpt:

"Bistro had tied the world together, taking credit risk from the banks and passing it on to anyone who wanted it. For years, proponents of credit derivatives, including then-Federal Reserve chairman Alan Greenspan and current chair Ben Bernanke, had celebrated the way they spread risk. Everyone might share a little bit of risk, but no firm would collapse from it. Yet in this credit crisis, everyone has become infected…The initial slice, the equity layer that Morgan retained as a cushion against trouble, was so thin that it couldn’t weather even one default from one of the bigger companies in the bundle. That ultimately happened, wiping the slice out entirely. The investors who were one notch up, in what’s called the mezzanine layer, lost money as well. Even the buyers of the top-rated tranches, which were thought to be rock solid, had to endure bumpy periods before they got their money back.  During that first major deal, the credit-rating agencies, which were supposed to be impartial, were already deeply enmeshed in the give-and-take of the process. A former Morgan banker who helped create Bistro recalls that Standard & Poor’s was giving the bank a tough time. The rating firm would run the deal through its models, and “each time, it came up with disastrous results. We did some tinkering and all of a sudden, it could rate the deal,” the banker says. The pattern was set. The rating agencies would become integral to the creation of the structures…One major problem was that banks had the ability to substitute loans in and out of the structure, as long as the loans had the same credit rating. This allowed managers to scour their books for a loan that looked shaky but still retained a good credit rating and swap it in for a healthier one. The tranche’s credit rating would remain the same, making the whole deal look better on paper than it actually was."

Also, 60 Minutes did a segment last night on the very same topic called, ‘The Bet that Blew Up Wall Street.’  Check that out HERE.

Taken together, these stories help frame the Capitalism 2.0 meme that I believe will emerge out of this mess; namely, if we know socialism is not the answer and now we know that pure, unfettered free market capitalism isn’t the answer, somewhere between the 'invisible hand' and the 'guided hand' is the answer. 

Related Posts:

1. Engine Failure - When Financial Markets Fail: an analysis of the current financial crisis.
2. Black Swans and Bank Runs: on why this crisis was predictable.
3. Financial Tsunamis: connecting the dots in the sub-prime mess.
4. Capitalism 2.0: lessons from Japan's lost decade, and where do we go from here.

Ringing Up Apple’s Earnings Call

So now we know.  Apple is first and foremost…a phone company!  It’s mind-boggling to think about it this way, but the numbers are jaw-droppingly clear. 

When you strip out the accounting mechanics required by GAAP, the iPhone represented 39% of Apple’s quarterly revenues, and Apple sold more phones than RIM (makers of BlackBerry) in the last quarter (6.9 million units versus 6.1 million). 

Measured by revenue, Apple is now the third-largest mobile phone supplier in the world, behind only Nokia and Samsung. And they are just getting started, with the iPhone having been in the market for only 15 months.

Other tidbits of note from the call:

1. Steve Jobs was on the Earnings Call: Jobs almost never participates in these calls, but in crisis times investors look for vision/leadership, and recently, Jobs has been more physically present in Apple events of all kinds, perhaps in recognition of recent fears and rumor-mongering on his health.  Plus, he had a story to share on deeper analysis of their numbers (see ‘Metrics Matter’ below). The bottom line is he sounded healthy, conveyed his usual fiery intensity, confidence in Apple’s future and was very much on top of his game.
2. Metrics Matter: we are obviously in a crappy economic environment, where jittery investors shoot first and ask questions later (e.g., Apple stock has dropped 43.8% in the past 60 days), so it was interesting to see Apple provide transparency to its non-GAAP financial results, inasmuch as they are an incredibly secretive company.  But metrics matter, especially in an environment where, once things settle out, the wheat will be separated from the chaff.  Hence, here was Steve Jobs framing the analysis of Apple’s quarter in deservedly glowing terms, “As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion. Adjusted net income that is more than double our reported income — if this isn’t stunning, I don’t know what is, all due to the incredible success of the iPhone 3G.  But even more remarkable is this — measured by revenues, Apple has become the world’s third-largest mobile phone supplier. I know this sounds crazy, but it’s true — as measured in revenues, not units, Apple has become the third largest mobile phone supplier. Let’s look at the ranking — Nokia is clearly number one at 12.7 billion; Samsung number two at 5.9 billion; Apple is number three at 4.6 billion; Sony Ericsson, number four at 4.2; LG, number five at 3.4 billion; Motorola, number six at 3.2; and RIM number seven at 2.1. Pretty amazing.”
3. Cash is King, and Apple has a lot of it:  In the most recent quarter, Apple added another $3.7 billion in cash to its coffers, so it now has $24.5 billion “safely in the bank, and zero debt.”   During the call, Jobs spoke of “extraordinary opportunities” for companies in a time of economic downturn “with the cash to take advantage of them, like Apple does.”   While this seems to suggest an accelerated M&A play, Jobs was non-descript, and specifically pushed back on a question about whether Apple would exercise a stock buyback program.
4. Apple’s Crystal Ball wrt the Economy is Cloudy:  If there is any cause for pause, it’s the simple fact that Jobs, COO Tim Cook, and CFO Peter Oppenheimer were quick to note that they are not economists, and as such, their forward view on earnings was not only very conservative but the best that they could do was to provide a range of revenue/earnings projections for the quarter ahead.  This suggests that Apple does not exist in a vacuum relative to the larger economic slowdown. They are prepared for both the short term and the long term, and as detailed in my many posts (see below), they are without peer in terms of roadmap/differentiation, but they are still subject to the rising/falling tide at home and abroad.  They called it straight, IMHO.
5. Apple TV remains a Hobby:  Those of us looking for Apple to pursue a more formidable assault on the digital living room (see my post, 'Apple, TV and the Smart, Connected Living Room'), were told to expect no big surprises in 2009. (Not that Apple would share a substantive change in strategy in a call like this anyway.)

Netting it out: In just 15 months, Apple has become a dominant force in the mobile phone space, generating more revenue from iPhone sales than from either the Mac or iPod.  And it’s not like Mac or iPod sales are down.  Quite the contrary.  As compared to the year-ago quarter, the Mac is up 21% in terms of units sold, and up 17% in terms of revenue, and the iPod is up 8% and 3%, respectively, so all three legs of their strategy are working. 

Moreover, in terms of the momentum of the iPhone Platform, bear in mind that the iPod touch is put on the books as an iPod, not an iPhone (even though it runs the same software), so the real momentum behind the platform is even greater than the numbers spotlight. 

A final anecdote on this last point is that with zero encouragement, my kids -- especially my three year old -- have taken to my iPod touch like fish to water, with my three year old playing games, listening to music, viewing photos and even using YouTube on a daily basis.  Recently, my six year old has started asking about downloading games (from the App Store).  Unscientific, but it bodes very well for Apple.

UPDATE 1: Andy M. Zaky of Bullish Cross has written an excellent post on AppleInsider called, 'Apple radically more undervalued than others tech heavyweights' that assesses Apple's stock price relative to Google, RIMM and Amazon on metrics like trailing P/E, EPS Growth, Total Cash and Price to Cash.  When you net it out, either Apple is grossly undervalued or its peers are grossly overvalued.  Click on the chart below to see what I mean but read his analysis, which is quite crisp.

Related Links:

1. 65 Million Reasons to be Bullish on Apple: analysis of the 'Let's Rock' event where iPod line refresh and iTunes 8.0 were announced.
2. Holy Shit! Apple's Halo Effect: how Apple has turned gravity into its friend.
3. iPhone 2.0 - What it Means to be Mobile: a detailed summary of my experience to date with the iPhone 2.0 platform.
4. The Chess Masters - Google versus Apple: why partners Apple and Google are without peers, and (seemingly) destined to become frien-emies.
5. iPhone SDK - Mobile Reasons for Optimism: why the iPhone Universe is a big deal.
6. iPhone 2.0 - Swinging for the Fences: an analysis of the WWDC Keynote by Steve Jobs.
7. iPod touch: the first mainstream Wi-Fi mobile platform?

Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade

I remember in my youth a moment in time when Japan was the ‘rising sun,’ an economic freight train, whose momentum was unstoppable; they were destined for global market domination. Then, poof, Japan imploded (its bubble burst in 1990), and has never fully recovered.  What happened?

Most fundamentally, after the bubble burst, a too-proud nation and an intellectually dishonest banking industry refused to write-down a toxic stink pile of non-performing loans (NPLs) to their real-world valuations in a bubble burst-impaired environment – a construct known as Mark-to-Market accounting. 

Instead, they kept the NPLs on the banks’ balance sheets at artificially high valuation levels, and the net effect is that it took Japan a decade to unwind an illusion, restore trust between banks, and restart a stalled lending engine (few of us realize that banks, financial institutions and Wall Street live on short-term ‘intra-bank’ loans,’ and when this lubricant is removed from our financial engine, the engine seizes).

But, what if the Japanese government had forced banks to clean up their balance sheets in months instead of years, stanching the inevitable bleeding with massive infusions of capital into the banks themselves?  Japan arguably would not have lost the last 18 years of global growth to China. (Andy Kessler has some EXCELLENT analysis on this topic – read it here).

The TED Spread, and What’s a LIBOR?
As referenced above, our financial industry is dependent on the willingness of banks and Wall Street to lend money to one another.  The rates that banks charge each other is known as LIBOR, or the London Interbank Offered Rate. 

In less volatile times, the spread between LIBOR and three-month treasury bills (i.e., a largely non-volatile investment path) is typically less than one half of one percent (<1/2%).  This spread is known as the TED Spread, and last week, it reached an unfathomable spread of 4.56% - i.e., 10X the typical TED Spread level (see chart below of five-year TED Spread).

In other words, banks last week were saying that they consider the risk of lending to one another sufficiently high that they were jacking risk premium levels into the stratosphere, which in addition to much more stringent underwriting requirements being in place, effectively means that lenders don’t want to be in the lending business right now, which trickles down to big business, small business and consumers, the crushing impact of which I covered in my post, ‘Engine Failure: When Financial Markets Fail.’

What’s a Fed to Do?
The Fed is forced to play a three dimensional chess game right now. One the one hand, history suggests that in times of financial crisis, governments can and must prevent long-lasting damage to their economies by preventing bank runs (this is a core purpose of FDIC-backing of deposits) and signaling their willingness to maintain a position as lender of last resort (to ensure liquidity and protect against fears of bank failures).

On the other, as alluded to the lesson’s of Japan’s lost decade, proactive, rapid cleanup and transparency of banks’ balance sheets is critical to restoring confidence in the system. 

This task, however, is complicated by so-called Mark-to-Market Accounting rules, which requires financial institutions to reflect the real value of the loans and other securities on their books, and adjust their capitalization levels accordingly (upward) when the value of such assets fails. 

Needless to say, in a TED Spread environment like we have now, this means that banks and Wall Street firms get hit with sudden liquidity crises exactly at the moment when such liquidity is prohibitively expensive (or flat out unavailable).  And this doesn’t even speak to the parasitic opportunities for short sellers to prey on such vulnerable institutions.

The Fed’s Three Dimensional Chess Game
Many have argued that the perilous environment that we are in is specifically the reason that the Fed should suspend Mark-to-Market accounting rules, but happily, the Fed appears to be going a different path and wisely continuing MTM accounting.

They accurately recognize that in post-bubble scenarios, restoration of trust is most integral.  In this context, mark-to-market accelerates the inevitable write-down of bad loans, in the process, defining what the fiscal ‘floor’ looks like (since these values are reflective of the current horrific market conditions, not the market once values stabilize).

For the truly sick and exposed institutions, it is effectively a death sentence.  But for the nominally sick institutions, it is a form of chemotherapy that wipes out cancerous cells without killing the patient.

The key added dimension to this approach is the Fed’s use of direct capital injections into financial institutions to enable them to simultaneously achieve capitalization levels accorded by mark-to-market AND re-price toxic loans to market prices. 

A wrinkle in this is that the Fed is lending to institutions whether they need it (AIG) or not (Bank of America). This avoids signaling to the market which institutions are unhealthy (and thus needing capital), thereby preventing a vicious cycle from propagating.

Net-net: the Fed is front-loading the pain in a manner that should (hopefully) clean up the industry’s balance sheets, restore confidence and re-start the lending machine that the global economy depends on.

Is this the right thing to do? As Andy Kessler, suggests, “Probably not…But it's the only thing to do at this stage.” 

Is it Capitalism or Socialism?  More like Capitalism 2.0.

Related Posts:

1. Engine Failure - When Financial Markets Fail: an analysis of the current financial crisis.
2. Black Swans and Bank Runs: on why this crisis was predictable.
3. Financial Tsunamis: connecting the dots in the sub-prime mess.
4. Oil, Vinegar and Volatility: on the history of volatility in the market, and missed opportunities to move away from foreign oil dependence.
5. How Speculative Markets Crush Amateur Investors: why amateur investors fail to grasp that what goes up inevitability comes (crashing) down.

Crazy Wisdom as Rome Burns

There is a Buddhist axiom about Crazy Wisdom.  When you are standing on the edge and staring into the abyss, the pain, confusion and fear that surrounds you can actually be the catalyst for clarity and understanding to emerge.

Discipline and directness take the place of devil-may-care, willy-nilly-ness, and a new set of muscles manifest; Suddenly, you are able to ‘carve’ new paths and reach heights that heretofore were unattainable.

I believe that now is a time for Crazy Wisdom – when Rome is seemingly burning, when the stakes that we hold most dear seem most tenuous, and when the road ahead is cloudy and as confusing as it has ever been.

Time to develop a clear personal narrative of who you are, what your unfair advantages are, what you have to offer and what you require/are looking for in return.

Time to commit to practicing consistency, clarity and grace under pressure.

Time to concentrate, breath deep, relax and then faithfully walk through the fire to get to the other side.

(Side note: watching Obama and McCain the other night in the third debate was akin to viewing the yin-yang picture of consistency, clarity and grace under pressure, as contrasted by the NOT example. There is much worth emulating in Obama's deeply reasoned approach.)

Related Links:

1. Read Crazy Wisdom (the book): I have been a practitioner of Tibetan Buddhism for ~15 years, and consider my virtual guru to be the late, great teacher, Chogyam Trungpa. This book is part of a series of books taken from seminars, and the structure is very powerful.  Each chapter starts with an explanation of the concept by Trungpa himself so you get the "official" explanation of the construct being covered. Then, in the next section you have questions (from the seminar audience) and answers (from Trungpa) on the concepts presented so you get another dimension of understanding. And of course, as the reader, you make your own analysis. I have found such an approach to be a great way to triangulate on informationally rich concepts. Be forewarned, though. These are serious, conceptually dense readings that take dedication, concentration and a 'one chapter at a time' mental investment to meaningfully get through.
2. Hold a Picture in your Pocket:  Cognitive dissonance and manifesting change.
3. On Intellectual Honesty:  See things as they really are; act on that knowledge.
4. On Life as Art Poetic Truths & Getting Rich: Read the poem at the bottom of the post - it's a classic from the book referenced in the post.