The Everything Play

It was a throwaway line in a post from last week:

Oil, its linkages, its by-products, and its enabling nature is what attracted Dhirubhai to oil as a business. It wasn’t just about oil itself – it was always about all of what oil allowed one to get into as a business. And it is the same now – it’s not about telecommunications and data. That just enables Reliance to get into – well, everything, really.

https://econforeverybody.com/2020/07/23/really-understanding-jio/

…but it deserves deeper analysis.

Software has eaten up the world

We’ll begin by taking a look at what is by now a very old essay, but it remains an eminently readable one: Why Software Is Eating the World,
by Marc Andreessen.

Here’s an excellent excerpt:

More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

https://a16z.com/2011/08/20/why-software-is-eating-the-world/

Remember, this was written in the year 2011. We’re talking Indian winning the World Cup, Obama as the President of the United States of America, and the biggest threat to the global economy was the worry that 2008 would somehow erupt all over again. Or something like that.

And to help you understand quite what this means in practice, let’s talk, um, boogers. It’s bad enough that we’re talking about them, I agree. Imagine having to eat them, and imagine they were not even yours!

When two Domino’s Pizza employees filmed a prank in the restaurant’s kitchen, they decided to post it online. In a few days, thanks to the power of social media, they ended up with felony charges, more than a million disgusted viewers, and a major company facing a public relations crisis.
In videos posted on YouTube and elsewhere this week, a Domino’s employee in Conover, N.C., prepared sandwiches for delivery while putting cheese up his nose, nasal mucus on the sandwiches, and violating other health-code standards while a fellow employee provided narration.

https://www.nytimes.com/2009/04/16/business/media/16dominos.html

As you might imagine, things weren’t looking good for Dominos. So what did they do?

BILL TAYLOR: So this is the part of the Domino’s story that struck me more than anything, when he simply declared for all to hear, we no longer think of ourselves as a pizza company. We think of ourselves as a technology company. I said, excuse me? Well, turns out, they’re headquartered in Ann Arbor, Michigan. They’ve got 800 people working in headquarters. Fully 400 of those, half of their headquarters employees, are engaged in software analytics and big data. They really– once they finally got the product right, they really are, from this point going forward, as much a technology company as they are a food company. And many of the initiatives have to do with making it as easy, as convenient, as kind of natural and impulsive almost to order Domino’s, much more so than any other pizza company.
So it began very early on with the Domino’s smartphone app. They then went to the capacity to order a Domino’s over text messaging. Now you can literally tweet an emoji of a pepperoni pizza, and a pepperoni pizza will appear at your doorstep within 30 minutes. You can order it through Facebook messaging. They’re simply saying to themselves, we understand that a big piece of our customer base are young people, millennials, or what have you. And he knows where those people are and where they’re spending their time, and that capacity while you’re on Facebook to simply go over to Messenger and pop in an order or while you’re sitting there, you know, tweeting out various things to also tweet out a Domino’s emoji, because you’ve pre-registered, it’s really a very powerful thing.

https://www.delltechnologies.com/en-us/perspectives/podcasts-trailblazers-s01-e03-fast-food-delivery/

They decided to become a software company. Yes, that’s right, Dominos is not a pizza company that uses software, it is a software firm that happens to deliver pizzas.

Dominos is one of the best examples I can think of that helps you understand what Andressen was getting at when he said software is eating the world. It was literally eating up a pizza (company, that is)!

Amazon and Jeff Bezos

As you may have heard, Amazon and it’s owner are doing fairly well:

Jeff Bezos added $13 billion to his net worth on Monday, the largest single-day jump for an individual since the Bloomberg Billionaires Index was created in 2012.
Amazon.com Inc. shares surged 7.9%, the most since December 2018 on rising optimism about web shopping trends, and are now up 73% this year.

https://www.bloomberg.com/news/articles/2020-07-20/jeff-bezos-adds-record-13-billion-in-single-day-to-his-fortune

Why are they doing so well? Because the global pandemic has accelerated what was already a very obvious trend: online shopping is here to stay.

Perhaps the single most dramatic example of this phenomenon of software eating a traditional business is the suicide of Borders and corresponding rise of Amazon. In 2001, Borders agreed to hand over its online business to Amazon under the theory that online book sales were non-strategic and unimportant.
Oops.
Today, the world’s largest bookseller, Amazon, is a software company — its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary. On top of that, while Borders was thrashing in the throes of impending bankruptcy, Amazon rearranged its web site to promote its Kindle digital books over physical books for the first time. Now even the books themselves are software.

https://a16z.com/2011/08/20/why-software-is-eating-the-world/

Like Dominos, Amazon is a software company that happens to sell books, and just about everything else you can imagine. The stock market is simply acknowledging in 2020 what Andreessen had predicted in 2011.

What does software allow one to do that one could not earlier?

Andreessen answer the question in his essay by pointing out two factors, the first of which I read as unlocking demand:

Over two billion people now use the broadband Internet, up from perhaps 50 million a decade ago, when I was at Netscape, the company I co-founded. In the next 10 years, I expect at least five billion people worldwide to own smartphones, giving every individual with such a phone instant access to the full power of the Internet, every moment of every day.

https://a16z.com/2011/08/20/why-software-is-eating-the-world/

And the second is the disintermediation of technology. That’s a big word, but it is simply explained: the elimination of the middle man.

Consider this post you’re reading right now. You’re reading it on your device (laptop/tablet/smartphone). Much more impressive is the fact that I was able to put up a website, set up an email subscription service, have a personalized email address – and all of this without paying anybody else a single penny to have all this done for me. Don’t get me wrong, I pay Google and WordPress money every month, but at my end, it was a one man show. No IT department, no IT consultant, nothing.

On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries — without the need to invest in new infrastructure and train new employees. In 2000, when my partner Ben Horowitz was CEO of the first cloud computing company, Loudcloud, the cost of a customer running a basic Internet application was approximately $150,000 a month. Running that same application today in Amazon’s cloud costs about $1,500 a month.

https://a16z.com/2011/08/20/why-software-is-eating-the-world/

So whether you want to write a blog (yours truly), order food (Zomato), buy groceries (Bigbasket), learn stuff online (Byju’s), get your leaky faucet fixed (Urban Company) – or anything else you can think of really – it is all enabled by the fact that everybody has a device that enables them to connect to the Internet, and the fact that building out a company is cheaper than ever before.

So Who Are The Winners?

Well, I find it pretty cool that I am able to write a blog that a lot of people choose to read daily, and the local pizza delivery place is quite happy that is is able to compete with somebody like Dominos. And hopefully you are happy that you get to read this post while chomping on a slice of pizza.

But the real winners? The intermediaries.

But wait, you might say. Didn’t the internet enable disintermediation? Well, no, not really. It replaced a lot of inefficient middlemen with a few super efficient ones.

If, in the pre-internet era, I wanted to write a series of essays that people could read, the barriers to entry were quite significant. They could be published as a book, or as a series in a newspaper, or in a magazine. But then would come the difficult job of publicizing the fact that I had written these essays. People would send in their comments (maybe via mail, maybe in conferences/book launches) and I would reply to them, but these would be available for everybody to see.

Today? Hit publish, and people who follow me on Twitter/LinkedIn/Facebook get to not only read the essay, but they also get to work as my marketing team, and they get to comment right away. Said comment can be replied to near instantaneously, and that conversation is also available for everybody to view and ponder on.

What allows this to happen? Well, I pay WordPress money to keep this blog up, and I pay Google so that I have a personalized email ID. Without these two companies (and their competition), this blog is well nigh impossible.

What the intermediaries have done is the following:

Earlier, a select group of people could get in touch with a select group of customers at very high costs. Today, anybody can get in touch with anybody at very low costs

A restaurant (let’s call it Vaishali) can get in touch with a potential customer (let’s call him Ashish) and online delivery of food can happen, even in times such as these. I get my upma and filter coffee, Vaishali gets its money, but in the long run, the real winner is Zomato.

A homeowner in Paris (let’s call her ABC) can get in touch with a potential traveler (let’s call him Ashish) and I and my family can stay in said homeowner’s apartment during our trip to France. The homeowner gets money for a home she isn’t currently occupying, I get a memorable holiday, but the real winner is Airbnb.

And so on.

Uber, Oyo, Swiggy, Urban Company – there’s no end to these examples, and these, as per Andreessen’s essay, are the real winners.

The coup de grace

What if these intermediaries were either owned by one entity? What if that entity, because it knew what you were doing in n separate transactions across n different platforms, could flawlessly predict what you needed next, on the n+1th platform? And could provide you that need at the lowest price possible?

Let’s go back to the beginning of this post:

Oil, its linkages, its by-products, and its enabling nature is what attracted Dhirubhai to oil as a business. It wasn’t just about oil itself – it was always about all of what oil allowed one to get into as a business. And it is the same now – it’s not about telecommunications and data. That just enables Reliance to get into – well, everything, really.

https://econforeverybody.com/2020/07/23/really-understanding-jio/

Notes on “Why Tech Didn’t Save Us From Covid-19”

The MIT Technology Review recently published an interesting, thought-provoking article with the title in quotes above. It was also a little bit one-sided, but we’ll get to that later.

  • The title itself brought to mind Peter Thiel’s quote about being promised flying cars, and being given 140 characters instead. You may want to make a snarky joke about whether 280 characters counts as progress or not, but the point is well taken. And indeed, reinforced by this quote from David Rotman’s article:
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    “In an age of artificial intelligence, genomic medicine, and self-driving cars, our most effective response to the outbreak has been mass quarantines, a public health technique borrowed from the Middle Ages.”
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  • The article then goes on to highlight at least three separate aspects of why tech has failed us: lesser government support for technology and innovation (particularly in the USA), a sclerotic bureaucracy, and policy-making that is not a) proactive enough b) good at managing risks effectively c) far too focused on short-term issues d) aware of the pitfalls of focusing solely on efficiency.
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    Let’s begin with the last of these points:
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  • ““The pandemic has shone a bright light on just how much US manufacturing capabilities have moved offshore,” says Erica Fuchs, a manufacturing expert at Carnegie Mellon University.”
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    I teach courses in international economics at the Gokhale Institute, and one of the fundamental insights that I think students need to walk away with is the concept of a non-zero sum game. Trade makes both parties better off, and therefore more trade is good, is literally the basic starting block of a course on trade. For an excellent summary of this idea, read this article by Paul Krugman, or watch this TED talk by Matt Ridley.
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    But two basic concepts from economics have come to haunt this rather neat idea. One is scale, and the other is the need to diversify. Both are very closely related.
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  • If, conventional theoretical thinking goes, a firm is able to scale up effectively, it will be able to produce more for cheaper. Yes, it is more complicated than that, but that’s the gist of the benefits of scale. Now, think of all countries as firms, and China is the obvious example of a country that scaled more rapidly than other countries, and was able to produce stuff cheaper than almost anywhere else. And that’s how China became the “manufacturing centre of the world”. The more you import from China, the more they scale (and effectively!). The more they scale, they cheaper they can make stuff. The cheaper stuff gets, the more you have an incentive to import from China. And once the loop is up and running, it becomes difficult to stop.
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  • And that’s a simple explanation for how the world ended up putting all of its eggs in one basket. We failed to diversify, because we focused on efficiency, without worrying about risk. What happens if an increasingly efficient global trading order suddenly breaks down? The price of efficiency is two fold: a) a lack of diversification b) not enough risk mitigation measures that allow one to fall back on domestic production. Which is where most of the world finds itself today. Readjusting global supply chains away from China is necessary, but it will not be easy. Especially because most countries will not want to pursue twin objectives: a) diversification away from China into other potential export powerhouses b) some production to be kept at home, especially in crucial sectors such as healthcare.
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    Scale, and a lack of diversification. There’s a lesson in there for us at the individual level as well, of course. A single minded pursuit of some goal (say money, or career growth) at the cost of other things isn’t necessarily a good idea.
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  • “Why couldn’t the US’s dominant tech industry and large biomedical sector provide these things? It’s tempting to simply blame the Trump administration’s inaction.”
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    The truth is always more complicated than you think, and beware simple explanations, but that being said, you might want to read The Fifth Risk. Here’s a slightly tangential review from The Guardian if you are feeling lazy, and a quote from that article follows:
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    “But we’re actually much more likely to die driving to the shops. The fifth risk is something impossible to conceive of in advance, or to prepare for directly. What matters is having a well-organised government in place to respond to these contingencies when they hit – exactly what the Trump administration has failed to do.”
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    No government, or Big Ol’ Central Planner is perfect, of course (and there’s a very readable book about that topic, or here’s a fascinating review of the same book), but Michael Lewis makes the claim that the Trump administration is rather less than perfect even by our less than exacting standards.
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  • “Any country’s capacity to invent and then deploy the technologies it needs is shaped by public funding and government policies. In the US, public investment in manufacturing, new materials, and vaccines and diagnostics has not been a priority, and there is almost no system of government direction, financial backing, or technical support for many critically important new technologies. Without it, the country was caught flat-footed.”
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    The book to read about this topic, if you ask me, is The Entrepreneurial State, by Mariana Mazzucato. Here’s the Wikipedia link about the book. Governments need to play, she says (and I suspect the author of this article would agree), a more active role in fostering the tech ecosystem in a country. Shades of Studwell, perhaps, but I have a counterargument here:
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  • “Incompetence and a sclerotic bureaucracy” is a phrase David Rotman uses early in the article when speaking about the Center for Disease Control in the USA. I find myself in complete agreement with the adjectives used. Why presume, then, that other government departments are likely any better? The truth, as always, lies somewhere in the middle. You can certainly make the case a la Michael Lewis, that the Trump administration took us to one end of the spectrum – but you should beware equally the other end of it!
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  • “Economists like to measure the impact of innovation in terms of productivity growth, particularly “total factor productivity”—the ability to get more output from the same inputs (such as labor and capital). Productivity growth is what makes advanced nations richer and more prosperous over the long run. For the US as well as most other rich countries, this measure of innovation has been dismal for nearly two decades.”
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    Well, yes, sure. And there is more than a grain of truth to the charge laid above, and not just for America. But keep in mind that measuring TFP is really and truly hard, and I am nowhere close to being convinced that we do a good job of it, even for a country like the USA, forget India. I am writing this post while sitting in my bed, using a laptop that allows me to keep multiple tabs (well over 50 right now) open in a modern browser, while being seamlessly connected to an overwhelming variety of news sources. All this while I listen to a Spotify playlist, and sip on excellent coffee that is made using home delivered Arabic beans. I’ll stop channeling my inner Keynes now, but most of this was not possible, especially at these prices, two decades ago.
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    Progress may not be fast enough for our tastes, sure – but it has been taking place. If you would like to read a book with a take contrarian to mine, try this on for size: The Rise and Fall of American Growth, by Robert Gordon.
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  • “The problem with letting private investment alone drive innovation is that the money is skewed toward the most lucrative markets.”
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    Churchill’s quote about democracy comes to mind!
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  • “In a widely circulated blog post, internet pioneer and Silicon Valley icon Marc Andreessen decried the US’s inability to “build” and produce needed supplies like masks, claiming that “we chose not to have the mechanisms, the factories, the systems to make these things.” The accusation resonated with many: the US, where manufacturing has deteriorated, seemed unable to churn out things like masks and ventilators, while countries with strong and innovative manufacturing sectors, such as China, Japan, Taiwan, and Germany, have fared far better.”
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    Here’s is Andreessen’s post, and also, this is your periodic reminder to read How Asia Works. China, Japan, Taiwan and Germany being up there isn’t a coincidence.
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  • ““The great lesson from the pandemic,” says Suzanne Berger, a political scientist at MIT and an expert on advanced manufacturing, is “how we traded resilience for low-cost and just-in-time production.””
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    Options are easy to teach, but difficult to grasp, and even more difficult to implement. See put, long.
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  • “…they are calling for an immediate ramp-up of public investment in technology, but also for a bigger government role in guiding the direction of technologists’ work. The key will be to spend at least some of the cash in the gigantic US fiscal stimulus bills not just on juicing the economy but on reviving innovation in neglected sectors like advanced manufacturing and boosting the development of promising areas like AI. “We’re going to be spending a great deal of money, so can we use this in a productive way? Without diminishing the enormous suffering that has happened, can we use this as a wake-up call?” asks Harvard’s Henderson.”
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    More participation from the government than is currently happening, but throw also into the mix a more venture-capital-ish approach, and don’t forget prizes! In fact, I found myself wishing midway through the article that the author had explored other options, rather than the government-or-markets binary.
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  • I hope I haven’t comes across as overly critical of the article, and my apologies if I have. That has certainly not been my objective. We rely far too much on the private sector now, that is true – and government can and should play a bigger role than is the case currently. But an extreme position, in either direction, always worries me a little!