Productivity, Tech and Business

Factors of Production: The Age of Knowledge

We are living through disconcerting times. Negative interest rates for bonds while hedge funds, venture capital firms and big technology players return double digits. Stagnating wages for the middle class, at the same time as engineers are hired with six-figure salaries just out of school, and companies claim they can’t find workers to fill positions. Polarization in land values, with San Francisco, London or Hong Kong becoming really expensive, while most areas lose value. What is happening? Is this just a phase?

I will argue this is the new normal, and we need to adapt to it. Knowledge has become a key factor of production and it heavily affects the returns of Capital, Labor and Land. This has been a long time in the making. Peter Drucker already used the term knowledge worker sixty years ago in The Landmarks of Tomorrow (1959) and knowledge economy fifty years ago in The Age of Discontinuity (1969). As Carlota Perez claims in her Technology Revolutions and Financial Capital, the full maturation of both ideas has taken half a century.

Let’s explore how each factor of production has been affected and what are the returns and dynamics of Knowledge itself. Along the way, we will mention Attention, a new type of Labor that is emerging as a factor of production.

Capital: so abundant as to be free

We are facing an apparent contradiction. Bond yields have gone negative for almost half of all bonds issued. My own country, Spain, and our neighbour, Portugal, have almost zero rates for its 10-year bonds. Ten years ago they were facing default and intervention. Danish banks have started offering negative interest mortgages and charging for deposits. At the same time, returns to Capital are higher than ever since the 1920s and they have compressed returns to Labor to all-time lows. Some VCs, PEs and hedge funds create outsize returns for their investors. The large tech monopolies (Amazon, Microsoft, Google, Facebook and Apple) have all averaged huge total returns that have made them the most valuable companies ever. New software unicorns are minted every week.

To reconcile both extremes we have to differentiate based on how much Knowledge is injected with the Capital.

  • Plain Capital. Most Capital is deployed requiring little or no Knowledge. Anyone can buy a German bond, invest in a mortgage backed by a good property or deposit cash in a bank that is insured by the government. It has no risk, so it requires no Knowledge. There is more Capital without Knowledge than we can employ, so the new normal is negative interest rates for relatively riskless Capital.
  • Knowledge Capital. Some Capital is deployed requiring a very high amount of Knowledge to make it productive. Venture Capital investing, advanced Hedge Fund strategies, high Knowledge companies or successful Private Equity investing, all require high stocks of Knowledge. Thus they can earn very high returns. At the same time, they have very high dispersion. Some Knowledge is right and other is wrong. The challenge is how to differentiate, “good Knowledge” (e.g. Warren Buffet) from “bad Knowledge” (e.g. Bernie Madoff) from the outside and be able to pick the winners.

This new world in which Plain Capital by itself earns negative returns and Knowledge Capital can earn outsized returns breeds inequality. Silicon Valley VCs, New York hedge funds and London PEs can all make a killing. Large pools of capital, like wealthy individuals, family offices or endowments, have access to Knowledge Capital investment opportunities. But the average saver is mostly limited to Plain Capital or to trying to pick Knowledge Capital from limited sources. At the same time, it challenges our financial system which is based on positive interest rates for Plain Capital.

Labor: Knowledge winners and Plain losers

In the Labor front, we are facing a similar situation to Capital. On the one side, life is tough for Labor. Labor share of GDP has been dropping precipitously. Most workers are seeing their jobs automated, shifted off-shore or face so much competition that their wages are deflating. On the other hand, we have a very tight Labor market with firms claiming they have millions of unfilled specialist jobs and that the war for talent is more intense than ever. Engineers and data scientists in Silicon Valley command astronomical starting salaries while clerks and factory workers everywhere are facing wage deflation.

Again, to understand this phenomenon we need to look at the impact of Knowledge on Labor. We will explore the different types of Labor based on how much value they add:

  • Attention Labor. A new type of Labor is starting to emerge. Attention is very important for companies like advertisers or software developers. It is used to generate revenue by selling advertisement of products and services, and also to generate information that improves products or feeds AI algorithms. Attention Labor is still very low value at an individual level (maybe in the hundreds of dollars per year in the developed world), however, it has become very important in aggregate. The free Attention Labor Facebook or Google collect from the usage of their products is what constitutes a very important component of their competitive advantage. We pay Facebook, Google, TV channels, and other “free” services with almost 12 hours of media consumption and smartphone use per day, our Attention Labor.
  • Plain Labor. Most Labor requires very little widely available Knowledge. Jobs that require high school level or even basic university-level skills are in this category. Inmigration and the ability to globalize work has made Plain Labor widely available at very low prices. The educated billions of China and India have competed away wages from the developed world, and Africa stands ready to step in whenever Asia is exhausted. If globalization was not enough, we are seeing the rise of the Digital Worker that automates the work of Plain Labor. Under these twin pressures, the wages for Plain Labor are plummeting creating inequality and social disruption. Plain Labor can expect their children to have less economic opportunity than they did if they live in the developed world.
  • Knowledge Labor. Some Labor is combined with substantial Knowledge. Thus it manages to keep its value and its scarcity allows it to command substantial wages. These are the software engineers, surgeons, M&A bankers, salespeople, coaches, consultants, product managers, data scientists, blockchain experts and many others. They represent the millions of jobs that companies cannot recruit for. However, the advantage is fleeting, these workers are only as valuable as the scarcity of their Knowledge. If the Knowledge becomes widespread (think Excel) or if it becomes embedded in technology (think the London map and cab drivers) they become Plain Labor. So Knowledge Labor manages to capture substantial returns but lives in continuous uncertainty and need for renewal. This renewal might partly come from education, but on-the-job learning is the most important component. So workers face a catch-22 situation as they need to be part of Knowledge Labor in order to develop the skills required to be part of it. At the same time, they are forced to work long hours to keep the Knowledge advantage they have painstakingly built.
  • Knowledge Capital Labor. Finally, at the top of the pyramid, we have the people whose Labor infuses Capital with Knowledge. These are the hedge fund managers, private equity partners, startup CEOs, financial derivatives traders and technology executives. They can have such a disproportionate effect on the return on Capital given negative interest rates that they are rewarded for their work at a level never seen before. That is why we see the 0.1% capture an ever-increasing share of income. They are in a privileged position, but not completely immune to automation (think trading rooms substituted by algorithmic trading) or to obsolescence (think Blackberry or Nokia executives). It is a difficult club to join, with the catch-22 situation being even more extreme than with Knowledge Work. The only way to demonstrate relevant Knowledge is by managing Capital, and to manage Capital you need to demonstrate relevant Knowledge or have the Capital available. Getting and staying in the club can be gruelling. Knowledge Capital Labor has a lot of very wealthy members, that work extremely hard to keep their advantage and reputation.

This split of Labor into four different categories, two of them very difficult to enter, is stratifying society at a rapid pace. This increasing inequity is causing substantial tension in all societies, and especially in advanced democracies.

Land: from fertile fields to favourable school districts

Land continues to be valuable for some traditional uses like agriculture or resource extraction. However, a new use has emerged. Some areas, like San Francisco or London, have become Knowledge hubs. They allow people to access better Knowledge and better high-value Labor opportunities. Consequently, these areas have become extremely valuable, as the economic consequences of living in them are momentous. The Knowledge Hub effect can be found in many cities beyond San Francisco or London, even if in most it is to a lesser degree.

This has been a boon to the owners of that Land, which used to be significantly less valuable. They can extract a significant share of the economic value created by the Knowledge hubs in terms of rents. The extra income that Knowledge Labor and even Plain Labor can capture in San Francisco or London mostly goes to pay Land owners directly through rent and indirectly through rent embedded in the prices of services and products.

The death of distance might come one day and undo this effect. But for now, technology has brought an unprecedented windfall for Land owners in Knowledge hubs. It is also concentrating Labor that wants to develop the required Knowledge to play in the two upper categories in special hotspots around the world. Again, this is feeding stratification and inequity and it is creating significant tension between nation-states and regions as Knowledge hubs “hollow up” the rest of the regions.

Knowledge: implicit, explicit and mutable

Knowledge takes many different forms that we are still trying to understand. For sure a large part of it is implicit in the brains of the Knowledge Workers that use it. There is also implicit Knowledge in the processes and culture of organizations. The Apple Way or the Netflix Values or Google’s Knowledge of how modern computing works have demonstrated their capability to generate returns. This implicit Knowledge is turning the balance sheet of most companies increasingly immaterial, with property, plant and equipment representing a diminishing proportion of a company’s assets. There has been explicit Knowledge for more than a century already in the form of patents and copyright-protected content, which allow their owners to earn licensing fees. At the same time, digital technology is allowing Knowledge to be made explicit and codified at a faster rate. Any software product, like Windows, Google search or Salesforce.com, is very valuable Knowledge rendered explicit. Machine Learning models and datasets also represent codified Knowledge, which will be increasingly valuable as AI comes of age.

The other thing we know about Knowledge is that it is mutable and can be rendered obsolete or commonplace very quickly. Digital maps and navigation have substantially lowered the value of the London taxi drivers Knowledge of the city’s complex web of streets. Nokia had extremely valuable Knowledge instantiated in its phones, that was rendered obsolete by the iPhone in less than five years. Traders and Hedge Fund managers have been forced to evolve their algorithms based on human decision making to fully programmed ones that require different skills.

What is clear is that Knowledge is the key production factor in today’s world. It not only creates returns for itself but also heavily skews the returns of the traditional factors of production.

Conclusions

Giving this context, populism is no surprise. The majority of people don’t have access to Knowledge and are capturing a shrinking portion of the pie both from their work and savings. Trends only lead to further stratification. Knowledge Capital favours large pools of Capital, penalizing heavily the returns of small savers. Knowledge Labor and Knowledge Capital Labor are self-reinforcing making it very difficult to join them. Trying to restrict immigration or technology seems the only solution to protect the value of Plain Labor. This has brought radical options like Brexit or the Mexico Wall to mainstream acceptance. Trying to restrict capital flow to protect Plain Capital is more difficult to address because governments are dependent on low interest rates to finance their huge debt piles.

On the other side, Knowledge Capital Labor, and to a lesser extent Knowledge Labor, are very happy with the economic outcomes of the current situation. They see it as a fair consequence of their own Knowledge they work hard to develop and maintain. Becoming a millionaire or even a billionaire is now within the realm of possibility for some regardless of initial wealth. Solutions like the Universal Basic Income and free access to services are a way to secure a minimum return to Plain Labor and Attention Labor. However, they don’t address the deeper problem of meaning, and the human need to meaningful Labor.

At the same time, incredibly we are living in a time of crisis, with problems like climate change, ecological degradation, poverty and a renewed threat of conflict, maybe even nuclear conflict. Living in a world with an abundance of Capital, Labor and Land and not solving the world’s pressing problems seems incredibly stupid. We need to get our act together and mobilize our incredible resources to ensure a sustainable Earth, and maybe even reach beyond Earth. If not, we might see our stocks of Capital, Labor, Land and Knowledge quickly diminish and go back to the starting point very quickly.

Blockchain, Digital Governance, Tech and Business

Libra: Facebook’s promising attempt to create the Internet of Value

Facebook’s Project Libra was made public yesterday. It carefully addresses all the main flaws of current cryptocurrencies like Bitcoin and Ethereum by starting with a less decentralized model. It begins with transactions and will extend to also deliver the store of value and smart contract use cases. Facebook has also proactively addressed the dominance and privacy concerns lately associated with it. Libra could allow Facebook to add full and extensible financial services capabilities to its properties, creating an “Internet of Value” which Facebook will steer.

What is Libra?

Project Libra’s whitepaper was published yesterday (June 18th) causing a significant splash. Libra is a foundation backed by ~25 high profile organizations (from Visa to Uber) which will put out a decentralized database for transacting on programmable financial assets. The starting point is financial transactions through Libra coin, a stable coin fully backed by a basket of currencies and treasuries. The end game is fully programmable decentralized digital assets through the Libra decentralized database and the Jump programming language. The testnet “Libra Core” is already out for testing, and the live service will be operational in 2020.

So Facebook has put out another cryptocurrency into a crowded market of thousands of cryptocurrencies without significant adoption. Is it different to the others? Can Libra work where countless others have failed?

Can Libra become the crypto killer app?

After substantial hype in 2017, cryptocurrencies failed to live to their transformative potential in 2018 and 2019. The “Internet of Value” is not taking off even if crypto prices as on the rise again. A host of problems have plagued the key cryptocurrencies, with no solution in sight. First, lack of adoption because of missing use cases and a daunting UX for non-technical users. Second, high volatility making crypto mainly a speculative domain, increasingly regulated by the likes of the SEC. Third, the environmental and energy cost of proof-of-work. Fourth, lack of legitimacy and support by large institutions. Finally, complex governance that has prevented Bitcoin and Ethereum from adapting to user needs like transaction volume and fast transaction finality.

Libra’s design choices carefully address each of these problems making it a promising attempt at driving crypto mass adoption and creating the Internet of Value:

  • Adoption. Facebook is focusing first on the everyday problem of payments, with fancier use cases as future extensions. It is hiding the complexity of crypto by integrating the functionality in its own apps, and those of other Libra Founding members. It is also jumpstarting adoption by going for a huge global audience of users in those apps.
  • Volatility and financial security status. Libra is a fully backed stable coin based on a basket of currencies and treasuries. This will be potentially more stable than any of the current fiat currencies, providing a global and safe store of value. At the same time, this minimizes the risk of the SEC considering Libra a financial security, as there is no expectation of Libra appreciation, even if the project’s adoption is massive.
  • Energy cost. Facebook has chosen a less decentralized consensus protocol based on a limited number of validators. This eliminates energy consumption as an issue. While it might be ideologically less appealing to crypto fans, the Founding members are credible institutions that should instil trust in mass market audiences. Over time it will evolve to proof of stake as Ethereum is doing, satisfying decentralization without incurring excessive energy consumption.
  • Legitimacy. The combination of a stable coin that eliminates speculation and the highly reputable founding members creates instant legitimacy. The way the system works it should be easy for Facebook to continue to extend Libra’s validator base as the downside of not participating is significant especially with FOMO (fear of missing out), while the cost is limited.
  • Governance. Libra’s roadmap already incorporates all enhancements that Bitcoin and Ethereum wish they could incorporate, with a well thought out technical design that seems state-of-the-art. It starts with 1000 transactions per second in the main chain and 10-second finality, ready for real-world usage and easily extensible. At the same time governance through a set of business-oriented entities will ensure it quickly aligns to user needs

Overall Facebook has done a thorough job at addressing current crypto pitfalls credibly, to create a potential killer app for crypto adoption. In order to do this, it has reduced the decentralized ideological purity of other crypto attempts, something that governments and the mass market will probably see in a positive or neutral light. Only time will tell, but Libra could take to the mass market the key use cases of Bitcoin, Ethereum and other top cryptocurrencies creating the decentralized “Internet of Value”.

However, Facebook is under a lot of pressure lately. Will governments allow Facebook to take over financial services and access that data? Will Facebook’s reputation allow it to launch this effort?

Will Facebook be allowed to carry out Libra?

Facebook is currently under significant public scrutiny both in terms of its market dominance and due to privacy concerns. Libra’s design addresses both issues proactively, while at the same time creating some opportunity for defending the integration of the top Facebook properties.

In terms of market dominance, while Libra has been conceived and driven by Facebook it is a Swiss foundation with a broad set of founding institutions. It cannot be said that it is under Facebook’s control or part of Facebook. In a way, Facebook has proactively open sourced Libra with many credible partners to avoid any concern of market dominance. Thus the financial infrastructure it creates is open for anyone to use

In terms of privacy, all of Libra’s transactions will be based on public key cryptography making users anonymous except for the validator that offers the user the interface. Thus, Facebook will not have any privileged access to Libra transaction information beyond that of any of the other founding members. On top of that, Facebook has committed not to use the information from the financial transactions in which it acts as an interface for advertising purposes.

On top of this, Facebook’s wallet Calibra, could potentially be the glue that makes Whatsapp, Facebook and Instagram difficult to untangle. Or at least keeps them connected even in a break-up scenario.

So Facebook is trying to create the decentralized “Internet of Value” crypto enthusiasts have talked about, and has open sourced it to make it politically viable. Can Facebook make money out of this?

How can Facebook profit from Libra?

Tencent’s WeChat and Alibaba represent clear evolution models for Facebook. The Chinese internet giants have been allowed by regulation to take over more and more of the financial services sector in China through technology. Facebook could find a large profit pool to finance its new privacy-oriented social and communication networks vision in this model.

With Libra Facebook is trying to create an open-sourced Internet of Value that anyone can access. Facebook will not be able to make money from the underlying infrastructure. However, the Internet of Value it has designed is uniquely suited for its own properties. Whatsapp, Messenger, Facebook and Instagram are all uniquely suited to integrate financial services and profit from it. The relatively high entry barrier to participation (~10 million USD according to the press) will limit the number of startups that can enter, at least initially. Giving Facebook a headstart that will be difficult to recoup. The other founding members, while credible institutions don’t have the deep pockets, technical expertise and unrivalled user reach that Facebook has.

So Facebook is attempting to create an open sourced financial piping for the Internet of Value. If history is any guide it should be able to profit from it by building over-the-top applications on top, much as it has done with internet connectivity. This time it has the added advantage of having shaped the ecosystem from the start, probably designing it to maximize its potential to profit and alignment with its vision and values.

Libra could be one of those industry shaping moments like Android was. Of course, it can also become Google + or Apple Newton just to name a few failed attempts at making a dent on the universe. However, one can’t fail to be impressed by the thoughtfulness and comprehensiveness of Facebook’s Libra which brings together strategy, technology and finance to create something potentially transformative for the world and lucrative for Facebook. At the same time, we were already worried by the Big Tech firm dominance and Blockchain was the magic sword that was going to slay the dragons. If Facebook’s attempt to repurpose the sword works the dragons might get even bigger and more powerful.

Blockchain, Tech and Business

Blockchain needs its Netscape

The next step for the massification of blockchain is something that allows anyone to interact with it easily. Netscape Navigator was that something for the PC internet. The iPhone was that something for the mobile internet. There is enough money in the system for it to be developed, although it is unclear if it will take months or years. When it happens it should be easily visible and trigger another crypto run.

Cryptocurrencies have fallen precipitously this year. Still, the Blockchain soldiers on. Enterprise application of Blockchain is spreading. Analyst coverage is expanding. Technology investment and development is growing. Cryptocurrency trading is vibrant. Applications are being created

There is no way for a normal human to interact with the Blockchain beyond speculation

However, there is a large gap in the ecosystem. There is no way for a normal human to interact with the Blockchain beyond speculation. It is challenging even for geeky humans. I am pretty sophisticated and have tried chrome extensions and other options. The passphrases, the clunkiness, the financial risk, the lack of support… it is still too much.

This situation is not new. The internet in 1994 or mobile data in 2007 was exactly the same. Difficult even for geeks, although the potential was obviously there. The internet was solved by HTML(1989), Netscape Navigator (December 1994) and Google (1998). The combination of the three turned “the internet” into “the world wide web”. Mobile data was solved by the iPhone (2007) and the Appstore (2008). It turned “mobile data” into “the smartphone”. The world wide web and the smartphone triggered momentous transformations

When this interface is created we can expect massive adoption and the rise of at scale public Blockchain applications

Blockchain needs an interface that makes it accessible beyond hardcore technologists. When this interface is created we can expect massive adoption and the rise of at scale public Blockchain applications. It can also trigger another cryptocurrency run for the winning chains.

How will the interface work and look? Difficult to say. What is clear based on history is that it needs to be appealing for an early majority audience. It needs to be accessible enough to make a non-techy technology enthusiast interact with the blockchain easily. It also needs to have services available to make the interaction worthwhile.

5-10 billions should be enough to achieve the breakthrough

There have been 5-10 billions of capital poured into Blockchain already. Probably close to 2 billion from VC and more than ~30 billion from ICOs according to Coinschedule.com (~100 million pre-2017, 6.5 billion in 2017, 21 billion in 2018). The ICO totals are probably very overstated given the 90% drop in crypto values, but we can still place it at somewhere from 3 to 6 billion. This doesn’t even consider enterprise investment which is growing.

That amount of capital should be enough to catalyse the breakthrough the industry needs. It might take months or years, but when it happens it should quickly become obvious to everyone. So watch out and prepare for the ride when the rocket ship takes off again. I am very curious to meet the next Marc Benioff or Steve Jobs (hopefully a woman this time).

Tech and Business, Telco

Predictions 2019

Following the great Fred Wilson from USV, I have tried to put together my 2019 predictions. They cover both the macro and the telco specific. I have tried to be specific so the predictions can be wrong. I am an optimist by nature, but my predictions have a negative tone. I think it will get worse before we wake up and put our act together. My predictions are biased towards tech. Other topics like climate change or biotech are very important but I don’t know enough to predict

Macro predictions

1. Populism continues its run and causes a serious event

3-4 countries will join the swelling populist ranks, electing a populist president or prime minister. Almost all major countries will have at least one populist party or candidate. People are stressed, afraid and distrustful of politicians, and will become more so in 2019. Populism is the natural (if often misguided) human response to stress and uncertainty.

We will have a serious at-scale event triggered by populism in one of the top 10 developed countries. By an event, I mean something that challenges our notion of the liberal cosmopolitan safe world we live in (in the developed world). We have had “virtual” events (e.g. Trump election, Brexit), small events (e.g. two children dying in American custody in immigration, CFO Huawei detention and Canadian detainees as retaliation) and at-scale events in the fringe (e.g. Venezuela collapse, Sirian war and the Russian invasion of Ukraine).

2. The economy, stock markets and trade wobble but make it through 2019

The economy and stock markets will end the year with a mild negative but will have swung quite a bit during the year. Going into significantly more negative territory but rallying back. Trade tensions and structural imbalances continue to be there but are not capable of causing a collapse. The trade situation between the US and China and more globally deteriorates slightly but doesn’t flare up radically

3. Big Techs start to receive the monetary penalties of popular distrust

The hate and fear towards the large tech firms from the US and China continue to increase across the world. It now moves from inquiries and protestations to real-world economic consequences. Most probably taxes, but also restrictions, fines and regulation. Popular distrust will also start to weigh on Big Tech employees.

4. Blockchain finds its Netscape Navigator, but cryptocurrencies are flat

Blockchain finds its application that makes it accessible to the public. Much like Netscape Navigator brought the internet to non-geeks, Blockchain requires a similar open democratizer. It will appear and start to gain traction in 2019. However, it will not be clear enough to create another crypto-craze in 2019 (wait until 2020 for that). What it will be I can’t imagine, but enough money and talent have flowed in for it to happen. The enterprise blockchain world will continue advancing slowly but surely.

5. AI and digitalization continue their march, Luddites strike

AI and digitalization will continue to take over parcels of the economy, silently but surely. We will see how new jobs that weren’t potentially automatable could be automated. At the same time, the real work of automation in businesses and organizations will continue pressuring middle-class incomes. We will see angry violent action against AI-enabled labor-saving devices, most probably against autonomous cars/Uber. Some visible organization will claim the Luddite name with pride.

Telco predictions

6. The heir to the smartphone won’t appear in 2019

We won’t see the next interface appear at scale yet. Mixed reality, voice-assistants and other candidates will continue to improve and amaze. However, no Steve Jobs will imagine the vehicle of their mass adoption yet, mainly because technology is still not ready. Smartphones will become more powerful and more commoditized. Folding devices will go the way of the 3D TV.

7. 5G be much ado about nothing in 2019

Without a device to really use its capabilities, 5G will be little more than 4G+. This won’t stop vendors, governments, pundits and telcos that have launched it from extolling its virtues. Adoption data and economic consequences will still not prove or disprove the investments of early adopters like Verizon, the Koreans or Telstra. 4.5/4.9G and fiber deployment will provide most of the real improvements in connectivity in 2019.

8. Regulators and governments will consider telcos as local tech champions

Populist and nationalist governments will realize that telcos are among the biggest tech companies in their countries, and the only ones really under some measure of control. Governments and regulators will start to support telcos as “national tech champions”. Allowing greater leeway in terms of consolidation and commercials, but at the same time requiring a stronger contribution to the national tech strategy. In this, they will follow what has already happened in the US with net neutrality and 5G.

9. AI, Digitization, virtualization and legacy switch-offs will accelerate.

Technology will continue to transform the way telcos operate, reducing costs and improving customer service. Real spend savings will combine with customer experience improvements to create an increasing space for differentiation for those that are able to execute. This will not come out of a single technology, but rather the implementation of hundreds of small transformations that will improve operations. Simplicity will be mandatory, so telcos will accelerate legacy switch-offs in terms of network (e.g. copper, 2G, 3G, transport) and IT stacks.

10. The sector will continue to do better in the stock markets

The opportunities and defensive qualities of the sector in a time of uncertainty will make the sector increasingly attractive. However, stock market and geographical volatility will also impact it during the year.

Tech and Business, Telco

Embedded Connectivity: The next wave of telco growth

Telcos have transformed their business once every decade since the 80s: fixed voice, mobile voice, fixed data, mobile data. Fixed and mobile data for homes, offices and individuals will continue to be required in ever greater quantity, but will be difficult to monetize further (see Connectivity Explosion). The next wave for the 2020s seems embedded connectivity for everything. Embedded connectivity holds substantial promise but requires a rethink of many traditional telco orthodoxies.

A sector in continuous revolution over half a century

Telco might be a 100-year old sector but Moore’s law has allowed a continuous transformation of the products it offers during the last four decades:

  • The 80s were the last decade fully devoted to fixed voice in the home and the business premises. It was also a decade of transformation, with voice lines being fully automated and digitalized, finally eliminating human operators in calls. I am old enough to have seen some of the last human operators routing calls in a small village of northern Spain when I was a young boy.
  • The 90s were the decade of mobile voice for the individual. First in the car and briefcase, moving gradually to pockets. While early analog systems launched in the 1980s (1979 was NTT in Japan, the earliest system), it was only the decade of the 1990s with 2G that really saw the explosion of mobile phones. Deploying mobile telephony at scale was a huge undertaking which required creating new companies, often owned by the former fixed monopolies but independent from them.
  • The 2000s saw the resurgence of fixed, through fixed data for internet connections. In the late 90s no one expected fixed and cable players to be able to capture much value from the internet revolution. Up to 2001 ISPs like America Online or mobile players with 3G seemed to be a much more attractive investment. However, the open internet based on a standard TCP/IP and HTML broke down walled gardens and was powered into broadband by ADSL and cable (DOCSIS). This gave back value to fixed operators who gradually transformed their business from voice to data, and over the next decade from copper to fiber
  • The 2010s saw the promise of mobile data finally materialize through the smartphone. The mobile data promise of 3G didn’t materialize, except in Japan where i-Mode created a walled mobile internet one decade ahead of the rest of the world. This lead to a crisis for mobile players in the 2000s, with voice penetration already saturating which was somewhat alleviated by SMS and blackberries. It was only in 2008 when Steve Jobs and his iPhone saved the industry and provided a way to leverage mobile data fully. The smartphone came to its own with the deployment of 4G and created a mobile internet which has quickly overtaken the fixed one in time spent. It is dominated by the two smartphone OS duopolists, Apple and Google, who have created a “semiwalled garden”

All these developments were always unexpected and full of uncertainty. Today they might look like sure things, but at the time they were uncertain strategic bets. Mobile telephony was a niche proposition. According to a mythical consulting study mobile phones had a ceiling of 3 million subscribers globally (they got it at least three orders of magnitude wrong). Fixed data came out of the internet, something that seemed reserved for tech geeks in the 1990s and only came to the fore in the internet boom. Even in the internet boom it was ISPs and browsers that where expected to capture most of the value, not telcos. Mobile data took a decade longer than expected in coming, and was created almost singlehandedly by an industry outsider with an iconic device that a decade later has created the first trillion dollar company.

The candidates for the next wave

There are many candidates for the “Next Big Thing” beyond the smartphone in terms of the next user interface: Augmented Reality, Virtual Reality, Artificial Intelligence, Blockchain… As covered in Connectivity Explosion all these technologies will indeed require exponentially more connectivity with significantly enhanced performance, which telco technology is perfectly ready to provide.

However, as we are already seeing over the last five years, regulation and the ultra competition it engenders will not allow to capture increasing revenues in the individual mobile connection or the home/office fixed connection. Users will get increasingly better performance that will cover the needs for these “Next Big Things” at similar prices. The telco sector will continue to provide its 99,5% price-performance discount as it has done decade after decade (only semiconductors and hardware have managed a similar feat). This will slightly shrink the weight of communications on household expenditure and business expenditure, as traditional connectivity revenues grow slower than GDP.

The next wave will take us beyond individual and home connections, to connect everything else in the world. This phase has been called “Internet of Things” or “Internet of Everything”, embedded connectivity seems more precise. It has to do with embedding connectivity in everything in the physical world, so intelligence and interactivity expands from digital to physical. This explosion has the potential to be as transformative and significant as fixed data or mobile data.

The 2020s and embedded connectivity

This new wave of embedded connectivity has already started haltingly with M2M and IoT. However, it is not growing at a pace at which it looks poised to transform the industry yet. It is like fixed data before the internet craze really got on, or mobile data before the iPhone. Something that looks like an attractive niche rather than a transformative wave of growth. Telco valuations are suffering from this, as the previous waves of growth have already saturated and the new one is not ready to take off.

Embedded connectivity also seems to require a rethinking of the model at several levels. First, connections will be numbered in the billions and trillions, so current ARPU levels are completely out of questions, we need to move from “connection scarcity” to “connection abundance”. Moreover, it is just too complex for the customer to pay a monthly fee for each object, so we can expect one-offs that are embedded in the initial purchase price or in a subscription related to other services. Finally, customers don’t want connectivity, they want intelligence, so connectivity will become a component in a larger value proposition sold by another business to a third party, an “Intel Inside” B2B2X model.

The last part of the 2010s is proving a very tough period for telcos, as the new wave still needs to take off. As usual, financial markets can not see beyond what is already in the P&L and this has lead to extremely low valuations, similar to fixed assets before the ADSL boom. We can expect the cycle to reverse as embedded connectivity kicks into high gear during the 2020s, but it is difficult to forecast if we will have a specific event that triggers the change (like the iPhone or the internet boom) or if we will see a steady growth beyond all previous expectations (like with mobile voice in the 90s).

Tech and Business, Telco

Connectivity Explosion

After two decades of increasing use connectivity continues to explode for the home/office, for the individual, and now for inanimate objects. New technologies being deployed like AR/VR, AI, cloud, Blockchain and IoT only promise increased connectivity needs and requirements. 5G, Fiber, Edge Computing and softwarization present a clear path to fulfilling these exploding needs over the next decade. Prepare for a world in which everything is connected at ultra-high bandwidth, securily, automagically and with ultra low latency: it will have its advantages, but we will also have to fight Orwellian nightmares.

Connectivity continues to explode

It has been already almost two decades since the internet boom and bust. Quaint 48kbps and 56kbps modems that loaded the initial text versions of Yahoo! have been replaced by homes connected at hundreds of megabits per second (x10.000 from 1997) and smartphones routinely reaching tens of megabits (x1.000). Load times of minutes have given way to trying to reduce hundreds of milliseconds of a web page or app load. Progress has been staggering and cost has plummeted. The cost per Mbps for consumers is at least 99,98% lower in an internet connection comparing the late nineties with today.

We can expect this explosion to continue. All projections of connectivity use point towards continued exponential growth. Taking Cisco for the 2016-2021 period, it is projecting a tripling of internet data, at least a doubling of speeds, more than three connections per capita and close to two thirds of the world connected.

We can imagine this predictions being fulfilled just with streaming video and file sharing. However, customer needs will go even forward. New emerging technologies have increased needs and requirements for connectivity:

  • VR/AR represents an order of magnitude increase in content size compared with video, and it has interactivity making connectivity make or break. The amount of data that needs to be send bidirectionally for AR and VR will strain even today’s connections. And latency will need to be reduced below 100ms to avoid degraded user experience and motion sickness.
  • AI requires great quantities of data, including live video and audio feeds as well as huge datasets to be effective. Integrating AI seamlessly in customers lives also requires extremely low latency so the lag between command and response is not perceptible. Connectivity and data security becomes critical in a context in which we are continuously monitored and commands can control the real world.
  • Cloud is increasingly distributing computing and storage, requiring connectivity to tie it back together in a way in which the distributed nature of the system is invisible to both human and machines. Connectivity needs and requirements (i.e. latency, security) to make apparently simple tasks, like editing a document remotely, work seamlessly are still significantly greater than what we have today.
  • Blockchain’s key problem at this point is scalability, and scalability has to do with network performance. A blockchain is a distributed system and as such requires the network to make it work effectively. To run our most critical trust infrastructure on the blockchain would require extreme bandwidths together with low latency and first rate security.
  • Finally, IoT, the connection of all things to the internet, is itself a tremendous connectivity challenge. Not so much in terms of bandwidth, but in terms of latency, power consumption, architectures that allow millions of connected things, and the security to protect us from cybercriminals.

Overall, the connectivity explosion for the next decade will not only mean much greater speeds and capacities, but will also provide lower latency, lower power consumption, greater security, and greater scalability in number of connections.

Telco technology is ready for the challenge

Given this extreme wave of connectivity needs coming, is telco technology ready to cope with them? The answer is a clear yes. The industry has pulled together to create technologies and standards with significant runway in terms of performance and flexibility to meet the challenge.

Fiber will underpin all connectivity. While it hasn’t been widely appreciated yet, fiber deployments taking place across the world are equivalent to the paved roads that allowed our automobile-based economy. We are moving from copper, equivalent to earth roads, to fiber, equivalent to paved roads, and we are doing it quickly and efficiently. Some countries like Japan, Korea or Spain are almost finished in their transition. Fiber infrastructure has the potential to take us very far, with GPON technology already capable of several orders of magnitude of improvement of our average speeds with negligible latency and much lower power consumption and line faults.

5G is built on fiber and softwarization. 5G is the latest industry buzzword and it represents the next standard for mobile communications. This standard is already built with fiber and softwarization in mind. Beyond gigabit speeds we can expect 5G to deliver millisecond latency, much greater flexibility in network architecture, and another level of security through network slicing. While speed and latency in 5G will be evolutionary with 4G, 4,5G and 4,9G, its architectural flexibility and the security provided by network slicing provide a paradigm jump similar to fiber.

Edge computing will optimize latency, bandwidth and data security. Increasing bandwidth, reducing latency and improving security and privacy in the last mile access with fiber and 5G won’t be enough for many applications. The datacenter needs to be closer to the customer, both for performance and data security. Fiber, softwarization and improved datacenter technology is making it possible to deploy “mini-datacenters” in telecom infrastructure or even at the customer’s home or office to make this real.

Softwarization will make the network liquid. Finally, the telco network is being digitized, with specialized hardware losing importance to edge computing and network software. Once the network is softwarized it becomes much more flexible, as happens in all transition from atoms to bits. This is the silent transformation that makes all the other technologies so powerful.

In summary, technology is ready. The only risk some countries might face is making the deployments economically unfeasible through regulation. A natural monopoly like telecommunications needs and benefits from regulation. However, some regulators, especially in the EU, have shortsightedly prioritized short term consumer price reduction (making the 99,98% cost per Mbps reduction a 99,985% reduction) vs. industrial policy for innovation and creation of the infrastructure for the long term economic growth and leadership. The EU hasn’t created any of the Big Techs, has almost managed to destroy its technological lead in mobile with Nokia overthrown in handsets, and the equipment providers are under siege from China and Korea’s much more long term focused industrial policy.

How will the next wave of connectivity change your life and your business?

Picture a world in which connectivity is so ubiquitous, powerful and secure that it can basically transfer all information (including live 360 video) instantly. Private secure connections can be created and decommissioned in milliseconds, completely through software. Processing and storage capacity in the edge allows to perform most computation and storage really close to where the information is being generated, without having to surrender ownership of the data.

A physical store might have even greater data granularity than ecommerce, understanding and analyzing continuous video feeds without compromising user privacy. A doctor might be able to experience a patient fully even if she is hundreds of kilometers away and call on a specialist for support if needed, without sensitive health data being in danger. A teacher might be able to take students into an immersive trip into whatever is being studied, with students attending physically or virtually and having real-time personalization adequate to their level of understanding. This is only some of what we can imagine now, but as the internet and the smartphone revolutions showed our current imagination is a poor guide to what could happen.

Of course, there are also dystopian scenarios already being deployed and many others that can be imagined. China’s social credit system with complete monitoring and censorship of citizen’s actions in the digital and physical world will only be further empowered through the new wave of connectivity. This kind of 1984-like monitoring is in conflict with western values like privacy and freedom. And we shouldn’t only fear state actors, the last months have put companies like Facebook or Google on the spotlight for similar reasons.

So prepare to take advantage of the instant ubiquitous connectivity, but also prepare to fight against whatever intrusions it starts to allow on our hard won rights. As Bill Gates famously said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

Tech and Business

A New TMT Hypersector

During the first internet boom, 20 years ago, there was ample talk about the convergence of Telco, Media and Technology (TMT). Now, the last months have completed this convergence, creating an scenario that would have been difficult to imagine back then.

First, eight new technology giants have emerged, threatening to take over the world. They started in Digital Advertising (Google, Facebook, Tencent, Baidu), Digital Commerce(Amazon and Alibaba), or managed to transform their way from traditional PC software and hardware (Microsoft and Apple). Now those eight companies have grown into unstoppable behemoths that dominate the top 10 most valuable company list and are worth over 3 Trillion dollars. They have expanded to take over adjacent industries like media and IT infrastructure, they took control of the smartphone age, they buy up companies that threaten their dominance and they are betting hard on AI as the new paradigm to continue their dominance.

Media has finally, and painfully, converged with Telco and Technology. Print media was decimated and has mostly moved to digital, with even the largest properties struggling to hold their relevance. Pay TV is progressively integrating into telco (Liberty into Vodafone, Direct TV into ATT) or content (Sky in Fox). New content majors have emerged, Netflix already more valuable than any other media company and Disney completing its transition to a full range media giant. Traditional majors are being bought up by telco (Universal by Comcast, Warner by AT&T), tech players (Columbia by Sony), with Fox up for grabs between Comcast and Disney, and Viacom embroiled in a corporate dispute about its future.

IT infrastructure and hardware is being taken over by cloud, which has been taken over by Amazon, Microsoft, Google and Alibaba. This is putting great pressure on traditional blue chips like IBM or HP, which could be quietly moving to irrelevance. Only the technology giants seem to have the scale, skill and daring to conquer this new world. The cloud dominance of only a few companies could eventually have knock-on effects on other industries like hardware or chips.

Business Software is in full transformation with the traditional players (SAP and Oracle) having been able to buy their way into the new world world of Software as a Service. The price they have paid is to dilute their shareholders by buying innovation, in a similar way to pharma companies, and to admit three new players into their oligopoly. Salesforce, Microsoft and Adobe, have improved their position and now have joined SAP and Oracle as key providers to many large and small companies. Beyond the new Big 5, there has been an amazing explosion of innovation with tens of thousands of SaaS companies creating new software, which is only comparable to biotech innovation in the pharma sector.

Telco keeps its place in the world as the gateway to the new connected world. A couple of years ago, connectivity seemed under fire, with Google Fiber or Facebook Aquila apparently focused on eliminating telcos from the equation. However, the Big Techs realized that telco was about perspiration and territoriality, while they are about inspiration and global scale. In consequence, they have abandoned their connectivity projects and moved to work with the telcos (e.g. Facebook with TIP and Google with RCS).

Device manufacturers lost their position and a new set regained it again. The pre-smartphone ecosystem was almost completely wiped out, with Apple and Samsung becoming the only profitable games in town. Only recently, did the Chinese players (Huawei, Xiaomi, 1plus1,…) manage to recreate a competitive ecosystem on the Android part of the equation.

Internet services have been captured mostly by the Big Techs, either directly or through acquisitions, and some independent unicorns. Messaging and communication with Whatsapp and Skype. Social networks with Facebook, Linkedin and the new wave (e.g. Instagram, Snapchat). Only some specific verticals like transport (e.g. Uber, Lyft) or lodging (e.g. AirBnB) have been large and independent enough to create their own ecosystems

The new TMT Hypersector is very different from what could have been expected 20 years ago in the eve of the dotcom boom and crash, or even 10 years ago at the start of the smartphone revolution. We can only guess how the next ten years will evolve for each of the subdomains and for the dominance and balance of power among players.