Blog

Our thoughts

PopCorn – civil rights vs copyright beyond downloading
150 150 Justin Jenk

Innovation and new ideas are often met with violent reactions from those who feel most threatened. Book-burning springs to mind as does prosecuting downloaders.

The recent and ongoing persecution, for that is an apt word, of PopCorn Time (PCT) is merely the latest manifestation of the debate with regard to the legality of downloading (particularly of films and music) as the BBC sets out. PCT is an app that allows for much improved downloading and streaming of material (especially films, videos, TV series, music, etc) based on the well-established BitTorrent computer protocol.

Evidence suggests that music piracy actually increases Entertainment Industry revenues. At its essence the current debate speaks to protection of copyright-holders versus the accessibility of copyrighted material to the public. The debate, though, extends far beyond this narrow confine. The debate exposes the divide between civil rights and copyright in a continuing struggle for society utility as explained in Justin Jenk‘s post. “Pochoclin” (as the PCT icon is known as) is a digital David in a valley full of confused Goliaths of governments and corporations. Downloading is the modern day’s equivalent to Prohibition, Drug Use, even Emancipation. While fundamental issues with regard to the Internet are involved, the current struggles seem unnecessary and unproductive in light of historical precedents. There is a basis for mutually beneficial accommodation between copyright-holders and the free spirits of the Internet that would benefit consumer-citizens.

Downloading – legal? illegal? Downloading has become a badge of an individual’s digital rights – like the vote! No-one is condoning illegal actions but the combination of: historical precedents; continuing technological developments, emerging digital practices as well as the actions of citizens reveal that the current spate of legal battles by copyright-holders and governments seems sadly misplaced, unnecessary and a wasteful use of resources. There is scope for productive accommodation that meets the needs of all parties. Interestingly given the nature of file-sharing, peer-to-peer (P2P) networks, streaming and downloading activities; the actions of governments reveal a more sinister encroachment of individual liberties engendered by cyber-security and use of Big Data. Citizens need to remain vigilant to protect their rights – often taken for granted.

Illegal downloading may be the issue of dissent for the current generations of Millennials and Generation Z . Just as alcohol and Prohibition was for our great-and grandparents and drug use (especially marijuana) was for our grandparents/parents as downloading seems to be for the Millenials. In the two historic both cases, outmoded overreactions by the authorities and vested (commercial) interests saw a wave of ossified regulations and laws that tried unsuccessfully to curb the natural tendencies, desires and actions of the populace. These inappropriate restrictions eventually gave way to more sensible licensing and codes of use.

Sadly the current thrust of legal battles by the Entertainment Industry (especially film and music) as well as several governments and regulators are ignoring precedents and best practices. It also reveals how the ‘copyright industry’ has promoted and had enacted laws that benefit itself with little regard for consumers. For the ‘record’, it is currently illegal in numerous jurisdictions to download or have stored on one’s computer copyrighted material that one does not have the right of access, usually through purchase. Use of material, hosting and or even possession of the means to download is deemed illegal. The concept of “collaborative liability” has been used to shut down many a site with punitive damages. Even downloading an app, such as PCT, poses a risk to a user.

Odd as bullet manufacturers are not indicted for gun-related crimes.

The whole concept of “open source” and “sharing”, so beloved of the proponents of the Internet, is being challenged by the legal actions of (narrowly defined) copyright-holders. However, these web champions forget that the Internet was at its inception a US military asset; gifted initially, in part, to the world of academia, then commerce and latterly to the general public.

There is a confusing mix of reactions at a national, EU and international level to PCT. The recent suspension of PCT’s domain by EURid, the UK blocking order (first time ever) and the Swedish Government making use of the software illegal (also a first) all echo the rampant steps of the US regulator and MPAA (Motion Picture Association of America) to increase the prosecution of companies and individuals. Despite these sanctions, “illegal” downloading is on the increase. Confusion abounds as the Dutch authorities have protected the right of downloading. Furthermore, the current EU directive clearly states that downloading for private use is not illegal.

PCT the latest skirmish in a broader war In its current form PCT is just twelve months old. The legal actions against PCT speak to the success and popularity of this application.To date it has over 4 million installs in six major markets: with 400,000 average users and 15,000 new installs every day. Stunning figures for a start-up and certainly one without any central organisation, nor any marketing and advertising efforts. In the Netherlands, PCT has achieved dramatic penetration: 1.3 million installs in a nation of 16 million. In corporate terms, PCT has a stronger following than Netflix, Amazon and Hulu.

So what is the issue that PCT has touched off? In short PCT is an improved ‘wheel’ in the world of downloading; offering a better service than that of the Entertainment Industry and dedicated ISPs, such Netflix. To add insult to injury PCT is offered for free – without fees or advertising. PCT has been made available in the spirit of “we just did it for the love of this project”. PCT has been dubbed “Netflix for pirates”. That is a catchy moniker but does not do justice the quality of the PCT offering: it offers faster and better quality downloading and streaming of material video in a more elegant, simpler and faster form. The Entertainment Industry cry foul for lost royalties, Netflix for unfair competition: so there is money at stake.

Technology promoting rights but it is not all about the money. Technology is the well-spring of change, choice and doing things better. One needs to step into the technology of Peer-to-Peer (P2P) file sharing and the BitTorrent protocol to appreciate the technical brilliance of it; which explains the resilience of the downloading practice and the legal challenges it engenders.

BitTorrent remains the most productive way that allows P2P file-sharing, distribution of data, especially for large files. The Internet prodigy, Bram Cohen (in the same league as Steve Jobs, Steve Wozniack, Bill Gates and Elon Musk) developed the BitTorrent protocol in 2001.

BitTorrent is the main protocol facilitating P2P file sharing. File-sharing, especially amongst P2P networks, is an accepted and essential function of the Internet that allows for productive streaming and downloading of media files. To put this activity into perspective there are over 150 million registered and active BitTorrent users. Globally, BitTorrent traffic is the third largest category (after web browsing and real-time entertainment), with its share accounting for about 15% and for half of all the bandwidth dedicated to file-sharing on the internet.

Any transmitting/receiving computer must have a Torrent client installed (such as: μTorrent, Vuze or Cohen’s own BitTorrent). The protocol works by disaggregating and segmenting files into unique identifiable pieces in such a manner that they can be transmitted and reassembled seamlessly. The low density distribution is achieved by a sending/receiving computer joining a “swarming” – allowing for the simultaneous transmission/receipt of data. While material is “scraped” from the Internet, a well as from an original “seeder” computer, the number of peers is unlimited as all subsequent computers are inadvertent sources of files. The nature of the protocol with its ‘rarest-first’ approach, in conjunction with a cryptographic hashtag, allows for data integrity, authenticity and instantaneous access amongst peers. BitTorrent trackers are the repositories of algorithmic based list of files available on seeders; The Pirate Bay being the most famous and popular tracker with (25 million members).

BitTorrent does not provide for user anonymity. Despite the successful prosecution by the Swedish authorities in 2009, the number of Pirate Bay users has increased. Throttling has had an effect limiting BitTorrent traffic, but there are active workarounds available. The design aspects of BitTorrent are accepted and fundamental characteristics of the Internet that we all take for granted.

The beauty of the PCT client is that the complexity of BitTorrent search engines, trackers, clients, seeds, decompression, playback, and storage is reduced to a single click. The developed and distributed nature of the BitTorrent protocol (or any successor to it) in combination with VPN-networks will make the service virtually impervious to law enforcement.  That is the fear of current copyright-holders and hope of the Internet activists.

Copyright debate now in the mainstream Copyright is an arcane and archaic legal construct. Its application by the Entertainment Industry with regard to digital media has brought copyright’s shortcomings under increasing public scrutiny and criticism. It is an accepted fact that copyright is monopolistic: curtailing consumer access to information and material; as well as damaging – through overpricing, curbing competition, limiting distribution and stifling creative development. These are all well document and proven examples of monopolistic abuse.

The actions of the Entertainment Industry, such as Comcast (itself the subject of ongoing legal challenges), lobbying aggressively for new protective laws; prosecuting individual and corporate “pirates” as well as the questionable reimbursement and treatment of artists further reflect on the biased nature of copyright. These actions undermine the hoped for adherence to the concept of ‘net neutrality’.

There is broader issue that the Copyright Community is promoting its own interest at the expence of consumers. The Entertainment Industry claims that non-payment and “piracy” infringes copyright; that illegal downloading is robbing it and its artists of copyright enshrined revenues, especially royalties. The Entertainment Industry does not discuss how these royalties are shared between corporations and artists. In short, the artists invariably get very little: there is an important difference between the master and artist licences. Historical averages suggest that 10% of net revenues percolate down to an artist. Yet many artists are receiving as little as $0.004 per play. Put another way: for an income of $16,000 an artist would need over 4 million plays. Data from i-Tunes reveal that for each stream download $0.091 (“less than a dime”) is earned by the artist. Spotify’s records reveal that the average stream song generates a royalty of $0.007; yet a global music star can generate over $3.0 million in royalties a year. At the next level, Netflix maintain piracy, and especially PCT, is the main reason for its own lacklustre performance. It does not advertise the enormous royalty fees it needs to pay to the Entertainment Industry; charges that are not recoverable commercially from consumers.

Hence a dynamic is established that promotes and encourages downloading. In a recent survey of US consumers 40% acknowledged that it was incorrect to download material, yet 78% felt it was illegal to steal a DVD/CD from a store. PCT’s counter-claim is that it is merely a better facilitator of established (yet cumbersome) practices. An improved front-end to a 15 year old practice; a better fix of current service problems that copyright holders are unwilling to embrace. In PCT’s case is organizing and providing access for pre-existing material and files stored on servers, computers and PCs through automated, open-source systems and processes. PCT, as do many citizens and consumers, fully acknowledge the right of copyright-holders to be reimbursed. Also, PCT state that they wish to facilitate access to material, unreasonably held by the Entertainment Industry. PCT and many citizens consider that this restriction stifles sharing and the creative process that reflects and reinforces an essential, yet assumed characteristic of the Internet.

Copyright-holders’ legal pursuit of individuals has been pernicious. Fines have ranged from US$220,000 up to $675,000 for a university student (equivalent to $21,000 per song) as well as criminal convictions, yet one mother had the charges dropped against her with expenses reimbursed due to the excess zeal of the prosecuting companies. To date the draconian legal prosecutions have seen BitTorrent’s share of Internet band reduced, especially in the US from over 30% in 2008 to fewer than 9%; it is 16% in Europe. However, “illegal downloading” remains active: with a third of Americans admitting to having done it at least once and an estimated 18 million active at any given moment. The position is more extreme in Spain, where 84% of digital material is illegally downloaded. While copyright damages are often discussed the inefficient costs of the downloading protocols used by the legal ISPs, such as #64 encoding, are not. This inefficiency is magnified as the percentage of Internet users with paid services is consuming a huge and disproportionate share of the total bandwidth capacity.

The question remains why are such inefficiencies tolerated and who pays? It should be stressed that the data shows that music piracy actually increases overall revenues; a small but positive correlation. It may be an ‘urban myth’ to believe that downloading is economically and morally damaging.

Precedents reveal that current approach to prohibit digital downloading may be misguided. As with alcohol in the 1930s and drugs in the 1970s; the authorities, particularly in the US, have taken a sledge hammer to the walnut of downloading; as it has done in the past for certain other social ills.

Over a one-third of American Internet users admit to having “illegally downloaded” and there have been 10 million convictions during the period 1972-2012. It is a proven fact that it is impossible for governments to enforce laws that are inconsistent with expressed human behaviour. Go far enough back in history and there is a long line of examples that speak to the futility of authorities and vested interest trying to stop a good idea – namely one that has large social acceptance.

The lessons from the imposition and eventual repeal of Prohibition offer interesting insights with regard to how the Entertainment Industry and Government may choose to react in the future. Civil disobedience is the result.  For example; at a grander level, the ending of slavery, female emancipation, post-colonial independence movements, the ending of segregation in the US and Apartheid in South Africa as well as the demise of the Soviet Union all are examples and evidence of this natural tendency forcing changes to nonsensical practices and laws. At a more personal level the failed attempts at Prohibition and the ‘war on drugs’ have proven to be ineffective in curbing consumption and a colossal waste of resources (yet vested interests have benefited) in the name of a questionable cause.

“Compliance Theory” states that Society’s members will follow laws and regulations if they believe the laws are just and legitimate. Thus lawmakers have a choice: laws can be enacted that accommodate Society’s views and practices or; tailored to change Society’s norms. Prosecutions appear to being having little impact on illegal downloading behaviours. The recent banning of The Pirate Bay in the Netherlands actually saw an increase in the rise of illegal download (people and material): from an estimate 15.7% to 18.4 in six months. While recorded BitTorrent traffic is reduced this reduction in share is a matter of both the successful legal actions by the Entertainment Industry and some governments as well as the effects technical modifications that allowing the activity to become invisible. In addition, there are broader issues worth defending that downloading touches upon. It reflects a desire to protect individual rights. This desire and concern is being played out in various arenas. Such as the use of: Big Data, Digital Privacy and Cyber-Security. The precedents established through downloading will influence and echo in these arenas. The current basis of copyright law suggests that the needs of social utility could better met as well as for the copyright-holders and artists.

Routes forwards. It is only a matter of time before the authorities relent in the face of overwhelming civil disobedience or the actors-of-vested-interest age and disappear from positions of power. It would be better, safer and more rewarding for all to reach an accommodation.

Steps should be taken to encourage recalcitrants to fast forward and extract their value on the way. For example Comcast has championed the status quo. Yet a person, such as Mr. Len Blavatnick (the Russo-American oligarch owner of EMI, Harvard MBA and founder of the Blavatnik School of Government at Oxford University) would be an ideal champion to bridge the current unnecessary chasm. His past actions with TNK-BP Russia provide clues to his possible approach. For its part, PCT itself somewhat fractious with rival offerings; and would need to consider how to bring the gap from its side.

It is assumed that all parties are interested in the growth and development of the Media industry; especially harnessing the creative, distributive and accessibility aspects that the Internet offers. There are three strands that provide the basis for a productive route forwards. Some are partially in place, others more speculative but a combination seems most promising.

1.       Legal. Within this strand there are an additional three broad areas of accommodation. A levy could be imposed on recording devices. Alternatively there could be a blanket licence on use. Finally access could be legalized by expanding the fair use concept and definition of non-commercial/personal. It seems inevitable that current copyrights will be defended, but on a different basis than the currently.

2.       Technology. PCT represents a natural innovative step. The current team of devolved programmers have added significant improvements to the BitTorrent protocol. Already BitTorrent, with its lower costs, higher redundancy and resistance to flash crowds is superior protocol.  It is not inconceivable that the next step will be to render the service impervious to current law enforcement. The Entertainment Industry would be better served to co-opt, absorb or adopt such a technological advantage.

3.       Business. PCT is just the latest evidence that ‘disruptive innovation’ is alive and well. The example of Uber in the taxi industry shows how technology and a more appropriate digital business have led to a disintegration of outmoded monopolies. Classic proven strategies would suggest that the Entertainment Industry embrace those technologies as well as adopt practices that: improve quality, time and cost. Cartels are often broken, with detrimental effects, if they do not reform themselves. It is not a difficult step to reach commercial terms to open up existing catalogues, alter distribution as well as utilise productive services. These steps would provide for creative growth as well as increased revenues, lower costs and capital for mutual benefit

Game over for the Internet pirates? Not at all!  As history reveals, individuals will, at great personal risk and cost, champion causes that society will benefit from. Challenger san incumbent will comingle into a new mainstream. The current frameworks are unsustainable medium term, so better to get to a dynamic accommodation sooner than later for all concerned.

*   *   *

Raktas has been involved in assisting parties in the Entertainment Industry, Developer and Legal profession to develop their businesses. Feel free to contact us at Raktas or check out related posts at justinjenk.com

Raktas – we offer solutions where decision-makers face complex issues with regard to capturing value from growth and restructuring opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

 

The economics of Whistleblowing – it doesn’t pay!
150 150 Justin Jenk

The economics of Whistleblowing seem clear – they do not pay, especially not for the Whistleblower and do not deter deceptive behaviour by corporations nor organisations.

Whistleblowers have always played a role in society. Whistleblowers are individuals revealing information or “deceptions” (be it corruption, malfeasance, fraud, incompetence, etc) in the belief of righting some moral or ethical wrong that members of a broader group or society would rather wish remained secret. Corruption alone accounts for $2.6 trillion a year, according to the World Economic Forum <https://www.weforum.org/agenda/2015/11/corruption-the-hidden-tax-on-global-growth>. Government waste is an even a higher figure. Malfeasance, in all its forms, is a larger figure still.

Motivations

Whistleblowers, by their actions, are revealing deception and seeking to hold those responsible individuals and organizations to account. Whistleblowers are not driven by self-interest nor self-benefit. They are driven by a different (some might say higher) level of morality and ethics, even if naive. A whistleblower is seeking to: clear his/her conscience, perform an act of social good or punish the perpetrators – they are not seeking personal nor economic gains. Whistleblowers wish to ‘tell their (moral/ethical) story’.

Society’s pariahs or heroes?

There are a number of dynamics at play.

Interestingly; society, policy-makers and individual citizens surrounding Whistleblowers all seem to be morally torn.

It is a “social norm” that deception, corruption and malfeasance are tolerated by a group. The Whistleblower’s immediate community or organization feel threated by his/her actions. Whistleblowers are perceived as betraying notions of ‘trust’ and straying outside the bounds of established hierarchies. Whistleblowers get sidelined or sacked! Despite the lip-service paid by politicians, shareholders and management; Whistleblowers are often ostracized, or worse. It is sobering to note that only four EU countries have laws protecting Whistleblowers, despite the rhetoric to the contrary.

Yet polls repeatedly show that well over 75% of respondents applaud whistleblowers’ actions. The nomination of Edward Snowden for the Nobel Peace Prize is an example. The public’s growing apathy for the ‘ruling classes and elites’ is being fueled by disgust and disdain for the banking community, corporates, regulators and politicians. This disdain is compounded by intrusions of privacy as well as threats to a consumer’s rights and safety.  This feeling is helping to ameliorate the conditions for whistleblowers, but they remain tough as the ‘FT’ reports <http://www.ft.com/cms/s/2/ce216134-e6c7-11e3-9a20-00144feabdc0.html>.

So why in 2006 was Paul Moore <http://www.thisismoney.co.uk/money/news/article-3328465/HBoS-whistleblower-Paul-Moore-WOULDN-T-won-t-stop-former-directors-money-taken-away-them.html>, the head of group risk at HBOS, sacked by senior management as well as ignored by the regulator and authorities when he warned them of the bank’s perilous practice and state? In 2009, HBOS/Lloyds was Britain’s largest bank failure before RBS. Moore’s professional and personal lives were ruined by his genuine act of concern. By 2016 the HBOS/Lloyds bail-out had wiped out shareholders equity and cost the UK taxpayer at least £20 billion; yet official sanction remains ‘work-in progress’.  Deception is not the preserve of the private sector – Britain’s NHS is rife with it as well as thwarting Whistleblowing attempts <http://www.telegraph.co.uk/news/2016/04/04/nhs-whistle-blower-investigator-in-freedom-to-speak-up-role/>

The need for whistleblowing and its occurrence is widespread across government services and agencies, the military, charities as well as financial institutions and companies. Investigative journalists could not survive without the whistleblowing dynamic. The shocking fact is that these public clarion ‘calls to action’ represent probably less than 5% of the questionable events and activities that are occuring!  Therein lie the morale and ethical dilemmas, such as: where is the line between Professional Responsibility and Public Duty?

Economic gains are unclear and asymmetric

Whistleblowing is not revealing enough “deception”. Nor are whistleblowers being adequately compensated for the risks they undertake.

From a purely economic perspective the benefits of whistleblowing are questionable and asymmetric at best; usually the whistleblower doesn’t benefit. Even if in receipt of compensation or so-called “bounties”.

Most of the value is in fines, levied by government authorities on banks and corporations, a form of tax. For example, in 2014 the US Government levied $5.7 billion in False Claim Act (FCA) penalties. This pool of fines is the single largest concentration of Whistleblowing economic effects. In that scheme the Whistleblowing bounties equaled $435 million. Studies by Transparency International <http://www.transparency.org.uk/> and ResearchGate <https://www.researchgate.net/publication/316897276_Whistleblowing_-_it_doesn%27t_pay_the_economics_of_whistleblowing> suggest that at a minimum, whistleblowers might be responsible for saving billions of dollars and thousands of lives every year. Personally, Whistleblowers do not benefit but they are often: ostracized, threatened and victimized as well as finding themselves fired, sued, blacklisted, arrested or, in extreme cases, assaulted even killed.

The Whistleblower effects, as measured by fines and bounties, are miniscule compared to the scale of corruption. If the $2.5 trillion is translated into relative time terms; over a period of 80,000 years ($2.5 trillion) the FAC fines are equivalent to 177 years and Whistleblower bounties to just over 14 years.

Going forwards

So should Whistleblowing be encouraged and protected? The evidence would suggest: ‘yes’ and ‘yes’. Transparency would seem to be in everyone’s benefit but precedents suggest that this truism is not the reality. Ask the likes of: Karen Silkwood, Paul Moore, Michael Woodford, Herve Falciani, Mordechai Vanunu, Bradley Chelsea Manning <http://documentaryheaven.com/wikileaks-the-forgotten-man/>, Edward Snowden <http://www.theguardian.com/film/2015/feb/23/edward-snowden-documentary-citizenfour-wins-oscar> and many others<X> can attest!

It would seem that genuine Whistleblowers deserve our individual and civic support; not disdain nor disinterest.

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.io

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.io

BrExit economics – the right choice?  Economics, Governance and History
150 150 Justin Jenk

The economics an “exit” of Britain (BrExit) from the European Union (EU) seem to be compelling and may well determine what has always been an emotional and nationalistic debate, fueled by a combination of intrusive and incompetent EU governance. This Spring 2016 period has seen the notion of a BrExit disparaged by the ‘elites’. As with the recent Scottish referendum, despite the fervor, cool-headed logic convinced Scottish voters; that may well be the case on 23 June 2016.

The arguments <http://www.bizjournals.com/washington/video/AwczZwMTE6bIhPdCIP0_UEBPJofpDmu8?page=2> to remain (“BreRemain”) make sense but are not compelling. They do not offset the economic advantages of a BrExit.

Beyond the economics, there is the deep-seated resentment of the EU. It has become too political as it drives towards an increasingly federalist super-state.

It is interesting how ‘big business’ is spending money to support the BreRemain campaign. One global bank has already spent £75 million <http://uk.reuters.com/article/us-britain-europe-brexit-companies-idUKKCN0V027B £75> – good use of shareholders and taxpayers funds? Very few consultancies, such as McKinsey <http://www.msn.com/en-us/movies/oscars/mckinseys-barton-economic-volatility-here-to-stay/vi-BBplI8T> or Accenture <www.accenture.com> are willing to express a view – perhaps so as not to jeopardise client relationships.

The pros and cons have been well set out in a recent research paper at ResearchGate <https://www.researchgate.net/publication/298409053_BrExit_economics_-_the_right_choice_Economics_Governance_and_History>; a view echoed by other analysts, such as Capital Economics <http://www.thetimes.co.uk/tto/business/economics/article4692947.ece>. In short:

  • Britain will never adopt the Euro
  • Without the Euro, Britain will never be able to remain at the EU’ “top table” as an equal with Germany
  • The costs of membership are not productive and increasing
  • Exits costs are overstated
  • There are a number of viable alternatives for Britain instead of its current EU membership
  • The EU is losing its influence globally, stifling even the diminished state of Britain
  • Finally, throughout its history Britain has never really supported any European project.

As Boris Johnstone recently described matters<http://www.telegraph.co.uk/news/newstopics/eureferendum/12184958/EU-referendum-Boris-Johnson-outlines-case-for-Brexit-on-Andrew-Marr-Show-live-updates.html>, Britain feels like a: “prisoner escaping jail”; as the EU’s federalist development has never sat well with Britain’s perspective, needs nor history.

On 23rd June Britons may well choose to vote to escape, as the economics are inescapable and the arguments compelling.

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com

 

 

Scandal with TTIP – treaty to induce panic
150 150 Justin Jenk

Transatlantic Trade and Investment Partnership is the official name.  The secret, bilateral TTIP negotiations between the EU and US have now reached a critical stage this October 2015. Without being alarmist, individual citizens are at risk.

https://www.youtube.com/watch?v=Y4OQeekSD6s.

The issues and risks of TTIP go beyond economics to reshape citizens’ rights and consumer choice.

The side-show of the Greek Euro Crisis and more the important wheezing Chinese stock-market dragon have masked a development which will have much more far-reaching effects and threatens to roll back many liberties Europeans have become accustomed to. This latest saga is brought to you by the same people who delivered the: NAFTA; the Fed Bubble; sub-prime financing; the Credit Crunch, Sovereign Crisis and Austerity!  TTIP is one of a raft of jumbo trade agreements being discussed which also include CETA, TISA and TPT.

Ostensibly TTIP is focused on reducing regulatory barriers to trade: an excellent idea in theory.  Essentially, TTIP is streamlining policies, laws, and regulations to more closely follow existing US standards as well as transfer accountability and maintenance standards from sovereign governments to corporations. Negotiations are being held in secret, and any information is only being disseminated by use of Freedom of Information provisions.

The dangers are in the detail. http://www.theguardian.com/membership/2015/feb/18/guardian-live-what-is-ttip-and-how-does-it-affect-us

The TTIP covers six main areas.

  1. Food and Environmental safety. Past restrictions on so-called “Frankenstein foods” in the EU could be removed. The EU’s REACH regulations are far stricter, with 1,200 substances banned, compared to only 12 in the US. Big Pharma also seems set to benefit from the same thinking as does the Oil&Gas industry. “Fracking”, with its unknown net effects, is an example.
  2. Banking. While these have been strengthened on both sides of the Atlantic; with the American ones being more onerous, they do allow the banks much greater control. This relaxation would be a roll-back for the current raft of European restrictions recently deemed vital to protect economies and society.
  3. Privatization of national institutions (such as Britain’s NHS, Swedish schools) could face privatization from US as well as EU private investors. The track record in Sweden has been less than impressive to date
  4. Employment. There is likely to be a net loss on the EU side given the above and if the experience from NAFTA is any guide.
  5. Privacy. It is highly likely that the contentious Anti-Counterfeiting Trade Agreement (ACTA) will be, defeated by the European Parliament in 2012, will be resurrected. It would mark a relaxation of European data privacy laws.
  6. Democracy. Much discussed by the Greeks, the TTIP seeks to introduce Investor-State Dispute Settlements (ISDS). This mechanism allows for corporations to sue governments for loss or financial distress. ISDS allows for enterprises to dictate policy to government. ISDS already exists in bilateral agreements but are hotly disputed; such as the Vattenfall case in Germany. More fundamentally, proposals for new laws are to be pre-screened before government agencies can develop them. It is imagined that this mechanism will be administered by a, Regulatory Cooperation Council – with a remit to protect trade, rather than welfare.

Strangely, academic comment has been muted; from the likes of Harvard

http://www.harvard.edu/, LSE

http://www.lse.ac.uk/publicEvents/events/2015/02/20150212t1830vHKT.aspx, and Stockholm School of Economics. Others have been more animated, Researchgate  https://www.researchgate.net/publication/282662296_Transatlantic_Trade_and_Investment_Partnership_TTIP_-_treaty_to_induce_panic_Key_considerations  and elsewhere  http://www.bruegel.org/nc/events/event-detail/event/447-should-the-us-and-eu-be-negotiating-a-free-trade-agreement/.

Even the vox populi of You Tube is muted  https://www.youtube.com/watch?v=AAp6cD5i8O0

TTIP promoters and proponents speak of an €119 billion annual windfall to be shared equally, €545 per European capita, from the successful conclusion of TTIP. Yet NAFTA, a precedent agreement, has not delivered the promised nor balancing effects its drafters imagined. 20 years on US consumers have seen a 65% increase in food costs; approximately 3 million jobs have been lost and there is a backlog of over US$ 12 billion in “investor-state” legal disputes.  One could argue the mismatch between design & delivery that is symptomatic of such agreements is well evidenced for the EU and certainly the Eurozone – certainly from current experiences.

The TTIP negotiations may fail for unforseen geopolitical reasons but bad ideas with such momentum have a tendency to become a reality.

In short, while trade liberalization is a critical element of a healthy economy it needs to be done for the right reasons, in the correct manner with appropriate metrics. Get engaged!

 

Managing Risk for Reward
150 150 Justin Jenk

Risk, like a coin, is two-sided.  On one side it is source of businesses growth: overcoming a challenge in a time-cost-quality manner or at least being able to charge a premium to mitigate it. On the other side if not properly managed it can have catastrophic consequences and generate enormous economic costs. Yet there is a fundamental aspect with Risk that needs to be addressed and is often ignored – the human element; the coin needs to be made and then tossed.

It has become apparent that the current set of risk management tools, techniques, process and systems are inadequate to manage unintended consequences. Risk is caused by deviations from the expected norm – in large part caused by intentional human actions.

For example: most plane crashes are due to human error (59%); most bank failures are embedded in poor credit decisions for real estate (assessment and provisioning) – made by people; indebtedness is often self-induced, made by people; most complaints in the health service are centred around treatment or planning failures – doctors (29%) and their administrators (35%); corporate failures are invariably associated with insufficient governance and managerial oversight of inadequate systems (e.g. BP Deepwater Horizon). The risks associated with behavioural ethics in high-stakes positions (ie pilots, doctors, lawyers, government ministers, etc) is poorly understood.

This growing realization in academic research is that ethically aware people act immorally – for reasons of self-interest. The field of “behavioral ethics” is one of the fastest growing in academia.

The work of Professor Francesca Gino and her colleagues at Harvard Business School focuses on an observed pattern of behaviour of self –serving justifications. People consciously ‘do wrong’ within a framework of morality. This behaviour of following intentional unethical acts is motivated to serve own and group interests. An essentially quality is pre-event justification in numerous forms. In addition, research by Professor Cecilia Moore of London Business School and colleagues have focused on why corporate executives and employees engage in costly unethical behaviours: such as the LIBOR rigging scandal or obviously risk filled credit approvals for mortgages. They have developed a framework of:  “Approach, Ability and Aftermath” to assess the psychological process that affect behaviour at work.

Raktas’ work with financial institutions, particularly the failure of risk and credit assessment processes, which led to the resulting management of bank resolution programmes and legacy assets, demonstrates the importance of this insight to behavioural ethics. The management of legacy assets in Spain is a case in point.

An examination of the financial industry reveals the dynamics and costs of poor risk management. Banking is essentially a regulated utility that has been allowed to garner excess profits, prospering on the abuse of “moral hazard”. Inadequate risk management facilitated the debt/sovereign crisis. To date the ongoing rescue of British banks has cost at least £30,000 per citizen (more than the average annual UK salary). The post-crisis regulatory response of more legislation seems inadequate. The appropriateness and efficacy of Basle III is questioned by many, also the Bank of England has estimated that it will require the creation of 70,000 new jobs in Europe. These are curative attempts, of questionable utility, to manage risk. In the credit/sovereign crisis this failure of risk management was exacerbated by a combination of factors in the form of: greed; managerial failures; inept governance, ineffective regulatory oversight and political indifference – despite sufficient policies, laws and regulations being in place.

At an extreme level, Greece misled the Eurozone authorities in 2001 with regard to its adoption of the Euro, leading today’s crisis situation and €317 billion sovereign debt that the country is incapable of servicing.

Many banks and companies are well run; there are a dozen states that have never defaulted – but that is the flip side of the coin. There are important cross-overs between financial services, health care, utilities, and government services. The internet with the digital or crypto aspects and the use of Big Data fall into similar category – except here speed, access and transparency raise issues with regard to privacy and trust with their impact on risk management

Unless these dynamics are understood those managers responsible for risk will see their efforts compromised and be reactive at best. It is too easy for behaviour based risk systems to get caught in nebulous catechisms of ‘do good’. There are a number of practical aspects to consider that will help existing frameworks and tools. Some expert-practitioners cite the following steps as being useful.

  • Transparent and frequent discussion to develop an awareness and sensitivity to the challenges.
  • Clear, timely and commensurate linkage between reward, desired behaviours and sanction unacceptable ones.
  • Organizational context that fosters discussion and diversity.
  • Emphasis on personal health and balance work/home life.
  • Physical interventions (such as stage managing settings – mirrors, group dynamics, placing one’s name on documents, public explanations, etc.).

Therefore risk management starts with the individuals involved (the customer as well as provider), then work its way through process, in the organization monitored by regulator and society.

Raktas stands ready to assist decision-makers and their organisations manage risk to secure value.

 

About Raktas

Raktas provides solutions for growth and restructuring. There is always a solution, even in complex and resource constrained situations. We work with decision-makers and their teams to realize their goals using IQ, EQ and PI. We offer the capability and support to make positive, value–adding changes for professionals and enterprises. Be it as a: consultant, interim manager, senior advisor or angel investor.  Expertise is combined with analytics, creativity, teamwork and energy. Our experience is derived from years of successful implementation across the full spectrum of industries in over 60 countries world-wide, as well as an excellent employment record and academic pedigree. Solutions start with asking the right question – call us. Feel free to read other entries here at raktas.ee or at justinjenk.com

©justinjenk

_____________________________________________________________

Justin Jenk is the founder and Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to capturing value from growth and restructuring opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

Taxi wars: Uber on top
150 150 Justin Jenk

The taxi wars are ongoing, with the battlefields expanding to Europe and Asia. Unless there is a huge legal ‘push- back’ by regulators; the mobile app based new entrant, Uber, seems set to win. Its colossal valuation is predicated on that outcome. The taxi war and Uber’s successes are a compelling case study and prove Nobel Prize winner Coase’s Theorem, as researched by Justin Jenk.

The use of mobile apps in the taxi industry is a text book example of success at many levels. The elements include: implementing disruptive technology; reshaping a whole industry; designing a user experience from the consumer’s perspective in a regulated industry; building a business with digital elements (and the smartphone at its core); creating credible digital brands as well as generating value across the business system. While Uber is the catalysts of this disruption its competitors and incumbents have benefited; but most of all consumers (user-passenger-riders). The mobile app taxi service now meets the requirements of a successful digital company: delivering functional emotional and social needs in one offering in a growing and viable manner.

 

Ossified taxi industry

The current taxi services found in most countries and cities are: regulated; monopolistic; hierarchical and ossified. They are based on licensed taxis charging metered tariffs with street hail/cash payments. It is an industry of city markets subject to entrenched player, local policies and politics. The taxi industry has resisted change. Over the last decades, some incumbents have slowly tried to bolt-on digital services, such as credit card payments and telephone bookings, but the effects have remained incremental. In Sweden, the authorities went as far as liberalizing fares to provide a stimulus for change. While the monopoly was broken (i.e. Taxi Stockholm) and capacity increased complaints of poor quality have sky-rocketed due to the practices of “pirate” operators. Taxi Stockholm and Taxi 020 merely upgraded their booking systems and passively followed functional improvements (e.g. credit card payments and automated booking systems).

 

Uber has reinvented the taxi experience and delivers

Uber is in the process of reshaping the industry and creating value for its stakeholders. It has done so by addressing rider’s Key Buying Factors (KBFs) and completely re-imagining the whole experience of a taxi journey, based on the much criticized San Francisco taxi market. Uber has solved a universal problem of all taxi customers (e.g. hailing, payment, journey comfort and per/post waiting time) in a customer driven, regulatory savvy and asset-light manner. Uber has made the taxi journey a seamless and enjoyable experience, reducing overall journey times as well as average fares (vs metered alternatives), adding in the occasional “wow” factor that generates word-of-mouth referrals, social ratings and loyalty – leading to increased rides and revenues. Uber has then scaled its offering for share positions as well as local market efficiencies; then expanded to other cities. Currently, Uber is rolling out its offering to 200 cities in 45 countries.

 

New York City  –  a battlefield

An assessment of the New York City taxi market provides insights to the changes underway and best practices. If Uber is the “Darth Vader” of the industry, then Hailo is the “plumber’s mate” and Lyft is one’s “BFF”. Uber’s strategy can be described as “lifestyle”. Its app is best in class (always in the top 5). It is a 2 button intuitive app allowing for seamless and efficient booking, tracking, pickup, payment and rating (both passenger and driver!) with a better quality taxi ride at competitive and variable prices. Uber has adapted ‘off the shelf’ technology that allows riders to match their requirements with independent, but Uber vetted, drivers and allows for easy payment. A rider feels a ‘cut above the rest’. This feeling is reinforced by ‘surprise & delight’ events (such as X-boxes in the taxis, or kittens on National Kitten Day, or free ice creams). The strong word-of-mouth and rating system has got celebrity endorsements. Hailo, by contrast has approached the problem from the licensed driver’s end. It seeks to make it easier for riders to hail licensed, metered cabs yet at standard metered fares. This “wholesale” approach has not proven attractive with NYC’s 40,000 cabbies. Lyft, with its “sharing” strategy, has tapped into the social and open-source culture of the digital age. It empowers riders by networking with any participating driver. Service levels are above those of incumbents. Lyft has the added cache of meeting numerous social issues. Yet Uber, with its firm grasps of digital marketing, out performs and out-manouvers mobile app competitors and incumbents on many levels. As with any local market, Uber matches prices and service through a combination of “surge pricing” and regular fares of its UberBlack as well as a lower, UberX, service. In addition it promotes trial and loyalty with free rides and cash inducement for referrals of new passengers as well as poaching/switching of rival drivers. Hailo, the London spawned competitor, has been forced to exit the NYC market; given the lack of appeal amongst drivers, a me-too consumer experience and in the face of “astronomic” communications costs. In just four years Uber now has an equal share of market to the incumbent metered yellow cab fleet.

 

Uber taps into the winning fundamentals: (Nobel prize theory, Best marketing  and Harvard Business School practices)

Nobel Prize winner Coase’s dream of social utility at minimal costs may well become a reality in the Big Apple’s taxi market. The essential skill of Uber has been to deliver a superlative customers service(based on a two touch, best in class mobile app, real-time booking tracking and responsiveness, productive payments), in association with improved journey comfort, an asset/investment light business model, ‘pull-through’ consumer communication and managing the regulatory jungle to meet the competitive threat. Incumbents, as is often the case with entrenched players in a regulated market, have not tried to adapt nor adopt their practices to provide a better customer service but rather sought legal redress. Uber’s undoubted achievements do not necessarily mean that it will be successful everywhere or forever. Regulatory issues remain unresolved as well as safety as well as insurance implications for riders. An important element of Uber’s advantage would be removed if the regulators in any given jurisdiction choose to level the playing field. Also the dot.com boom was characterized by nascent transformations that were unsustainable.  Yet Uber has set a new standard and continues to redefine its chosen business segments with accruing benefits. Uber’ recent claim to provide one million new jobs is entirely keeping with its wow communications. In Washington DC its entry was tactical, providing employment for underutilized drivers. Yet other city forays (i.e. into Canada) remain mired in regulatory challenges. Using Ryanair’s tactics it negotiates with city authorities before entry. Taking its cue from the master marketeer, Coca Colas, Uber is now targeting critical car logistics “moments” for its step-out growth. It sees itself as delivery & logistics service in car-restricted “occasions” (such as night clubs, school pick-ups, events, holidays). Uber has cleared at least two of the three characteristics of “disruptive innovation” as defined by Harvard Business School’s Professor Christensen.

  1. Uber has created a clear margin advantage (by a combination of growth revenue costs and investment levels.
  2. Uber has created a sustainable business system advantage that other are finding difficult to match.
  3. Yet is the momentum such that it will force “asymmetry of choice”; and see an exit of players and consolidation of capacity?  Or will regulators change the rules of Uber’s success and reform local markets?

 

Valuations are Uber

The Uber story is amazing. Currently, the estimated post-money valuation of US$40 billion may seem the latest example of a quintessential bubble – another tulip in the making! Yet one needs to reflect on matters with its customer-oriented growth. While Uber was founded in Spring 2009 it launched in June 2010 in San Francisco. By January 2011 it only had 6,000 users who had made 20,000 trips. Uber is now present in 130 cities worldwide and aiming at 200. Its brand was owner-created but has gone through three iterations to its current sleek black and silver exclusive look with a reinforcing USP. The cache of summoning a car & chauffeur one would like to have, but the 98% can’t, is compelling; fueling word-of-mouth and social likes. The success of Uber has been an improved service and better than expected fulfillment with an unrivalled ‘surprise & delight’ parallel campaign to drive consumer loyalty and referral. The company’s growth, success and performance have seen multiple funding rounds in the billions (e.g. Google Ventures). Uber is aiming for gross revenues of US$ 10 billion medium term. With its 80:20 share model, is on track to generate revenues of US$2.0 billion medium term, based on five established city markets. So while a US$ 40 billion valuation seems outrageous when you boil down all the numbers and ratios it is in line with other successful IPOs. Harvard seems convinced. Is that a self-fulfilling prophecy or just the nature of the market? Uber’s challenge will be to ride the wave and explore step-outs. Even with only ‘owning’ five large markets Uber has been a success. Hubris may be its biggest threat! Still early days, watch this space!

 

About Raktas

Raktas provides solutions for growth and restructuring. There is always a solution, even in complex and resource constrained situations. We work with decision-makers and their teams to realize their goals using IQ, EQ and PI. We offer the capability and support to make positive, value–adding changes for professionals and enterprises. Be it as a: consultant, interim manager, senior advisor or angel investor.  Expertise is combined with analytics, creativity, teamwork and energy. Our experience is derived from years of successful implementation across the full spectrum of industries in over 60 countries world-wide, as well as an excellent employment record and academic pedigree. Solutions start with asking the right question – call us. Feel free to read other entries here at raktas.ee or at justinjenk.com

©justinjenk

_____________________________________________________________

Justin Jenk is the founder and Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to capturing value from growth and restructuring opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

Fintech: destiny’s child eaten by its own revolution
150 150 Justin Jenk

It is a well proven mantra: a revolution consumes it owns; even in the digital world of Financial Technology.

 

Successful child?

Monitise (MONI), despite some notable successes during its 11 years of existence, may well be laid-low by not heeding business basics suggested by practitioners. Management through its actions has now put the company at risk and now needs to act: the only viable route left to them might be a sale of the business to an incumbent or service provider. Raktas has advised companies over the years. Any assessment is dependent upon one`s perspective, expectations and timing. This case study provides a synthetic assessment of the company and lessons learned for current and future participants.

Monitise, the AIM listed, early child of the FinTech revolution, offers consumers mobile banking, payments and commerce services. Monitise’s success was based on spotting a gaping hole in banking services; and then developing a reliable service, utilising in-house as well as external expertise. As of 2014 it had revenues of UK£ 116 million with over 350 partner banks, 24 million users, and US$ 50 billion of payments with a worldwide staff of 750 FTEs. While revenues have increased, so have losses (to UK£ -59mn and negative cash flow to UK£ -36mn) with a massive capital expenditure programme that has not delivered a margin-enhancing set of offerings. The departure of industry investors last year, such as Visa, marked a signalling event for the company and its prospects.

 

Rise and Fall

Timing is all in success. A casual reader would think an IPO price in 2007 of UK£ 5p compared to today’s UK£ 25p is not bad for an early innovator. At its peak the market capitalisation was over UK£ 2 billion; it is now UK£ 530 million. Yet this simple timeline hides a much more dramatic series of milestones and developments. Monitise was founded in 2003 by two individuals: Alisdair Lukies, a professional rugby player with start-up experience and; Steve Atkinson, a technologist from Vodafone .They were one of the first teams to realise the importance of mobile telephony for customer services in banking (in a pre-smart phone, 2G era). They sought to provide mobile banking services, in partnership with incumbent banks. The partnership with Link ATM was critical. It allowed Monitise to arrange for a working relationship and initial merger with Morse, the technology company, in 2003. Morse provided the initial UK£ 4mn in investments and incubated Monitise. It allowed Monitise to develop a business. The major breakthrough was a contract with UK’s First Direct in 2006. In 2007, Monitise reorganised it ownership and listed on AIM at UK£ 5p a share. The Debt and Sovereign crisis of 2008 slowed down the momentum: as its partner banks’, service partners’ and customers’ appetite for change was much reduced. Regardless, Monitise persevered: from 2009 revenues have grown 17-fold to today’s UK£ 116 million.

The share price dipped as low as UK£ 2.25p in 2009 (from a UK£ 25p peak in 2008) and reached new heights at UK£ 80p in April 2014. As of February 2015 it is hovering around the UK£ 20p level.

 

Clear successes

Monitise has been successful on various fronts. It must be seen in the context of the hugely complex and competitive world of retail banking as well as the rapidly emerging digital world in banking.

It has been an innovative and pioneering enterprise. The two founders spotted an opportunity early an acted upon it. In addition, the founders were skilful in shaping and arranging both productive financing and operational partnerships. The company managed to build a service offering that worked. From this base they gave substance to the vision and secured partnership from the likes of Visa, IBM and others (e.g.  Vodafone, Virgin Money, Telefonica, Santander, RBS and MasterCard). Despite the losses it has been spectacularly successful at fund-raising, over UK£ 304mn in several rounds since 2007. Lukies insists Monitise is building infrastructure for the future and short-term profits are a distraction. That dynamic in itself begs several questions. Regardless, these successes brought credibility as well as demand. Time and “Digital Darwinism” (as McKinsey likes to term it) has seen the rise of many competitors: apart from giants PayPal, the likes of iZettle, Square and FIS.

Monitise has continued with first-mover zeal to expand internationally, acquire competitors (such as Clairmail in 2012 to access the US market and Grapple in 2013 to provide in-house technical development) as well as broaden its product scope their scope. Monitise has also entered into white-label supply. While its mPOS offering was shelved (at great cost) the eventual launch of Santander’s “SmartBank” (in September 2014) is a white-label service from Monitise – highly regarded and successful, with 50,000 active users. The management team has been filled with industry experts. All credible and positive actions, but within them were the seeds of destruction.

 

Seeds of own destruction

What has not worked for Monitise its failure to attend to fundamental aspects of economic viability. Monitise remains more vision than business.

While it has developed a distinctive user proposition that appeals to banks, payment institutions and their customers Monitise has not created a Unique Selling Proposition. The company has not created any barriers to entry in a market full of enormous incumbent players and me-too new entrants. It has not managed it partners- who were able to place the costs and risks of developments on the company rather than having them shared appropriately. For them Monitise was classic outcome of “buy vs build” strategy (common, but often ignored in the technology space): defraying risk at reduced cost. They lacked the innovative capacity and Monitise was a cheap, low risk venture. This dynamic has become most apparent with the Visa relationship. While an essential element in the story and credibility of Monitise, Visa was not required to invest capital and has made a very sizable return from its share investment in Monitise. This behaviour is another classic strategic tactic found in many ‘bricks&mortar’ industries. In fact Visa’s decision to dispose of its holdings in Monitise in September 2014 (and indication that it may no longer use Monitise) was the harbinger of its share collapse. The recent decision to outsource 75 staff to IBM’s Professional Services is another sign of disaffection and loss of control.

Monitise has diversified into new areas that are capital and costs burns rather than margin generators. Even in the case of Santander’s SmartBank, Monitise has not reaped the requisite margins from the cooperation. Monitise has not built a brand equity that allows it to command independence with consumers nor pricing power in the market or negotiating power with its partners. Finally, Monitise has not been able to develop a compelling pull through brand; not even a variation on “Intel inside”. Monitise does not have that critical brand equity; the “the future of money is frictionless” moniker and trademark aren’t sufficient. While Monitise has UK£ 85mn in “cash” on its books; this has become a magnet of weakness, as it has not built credibility with shareholders and partners that it knows how to manage capital investment programmes. Its new London office is a red flag.

Monitise has become a target through its fundamental weakness.

Were these outcomes intended? No, but they were clearly signposted and ignored. The ultimate weakness is perhaps a management team and corporate governance that became subjective and never shook off the entrepreneur’s fervent belief in his/her own views and abilities.

 

Balance would have had a positive impact

Our Monitise journey has been a fantastic one. In the spirit of constructive commentary we would draw the following conclusions (directed at attending to the weaknesses, rather than extolling the successes – which are acknowledged). More balance might have seen Monitise in a stronger, independent position than its current weakened and threatened state

  • First-mover is not always appropriate strategy (especially if one is a small, underfinanced player in a dynamic and rapidly changing market).
  • Build true brand equity; not just a personality based, Cinderella story.
  • Founders need to remain objective. Management needs to be held to account.
  • Understand the phase one is in: don’t confuse start-up with being dynamic.
  • Focus is critical. Do one thing really well first, then expand.
  • Performance does matter. Net free cash flow needs to be delivered within the medium term (aka 3 years) by balancing revenue growth, managing costs and productive capex.
  • The enterprise cannot be the sole source of investment capital.
  • Partnerships, especially with industry incumbents are twin-edged swords and can easily become asymmetric.
  • Responsible decisions are as much about expanding horizons as ensuring critical boundaries are not crossed.
  • Today and Yesterday do mater even in a sector focused on Tomorrow.

Well done Monitise, sad that you strayed from the path.

 

About Raktas

Raktas provides solutions for growth and restructuring. There is always a solution, even in complex and resource constrained situations. We work with decision-makers and their teams to realize their goals using IQ, EQ and PI.

We offer the capability and support to make positive, value–adding changes for professionals and enterprises. Be it as a: consultant, interim manager, senior advisor or angel investor.  Expertise is combined with analytics, creativity, teamwork and energy. Our experience is derived from years of successful implementation across the full spectrum of industries in over 60 countries world-wide, as well as an excellent employment record and academic pedigree.

Solutions start with asking the right question – call us.

 

Feel free to read other entries here at raktas.ee or at justinjenk.com

©justinjenk
_____________________________________________________________
Justin Jenk is the Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to captruing value from growth and restructruing opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

Winning app design for business success
150 150 Justin Jenk

Currently there are over two million mobile apps available at the Apple store. In the last five years over 100 billion apps have been downloaded. These figures reflect our digital world. Smart phones have 80% penetration and we spend an average of over 14 hours a day on our screens. As written elsewhere, there is less than a 0.07% chance of an app being a commercial success. The challenge with any design is to provide an app that encourages trial-repeat-referral behaviour which will build volumes, loyalty, revenues and valuations.

In our work with clients we find success is a function of understanding the contextual limits as well as essential design parameters. With Yahoo!, Marissa Meyer described these as “fast, responsive and beautiful”. Our formula was: 2-5-1-8. Applying this formula has allowed us to steer teams (entrepreneurs, developers, marketers and owners) and there apps to business success.

There are several contextual considerations.

Share of behaviour. Develop an elegant solution to a big need. It needs to form a seamless part of the user’s daily routines. It need not be a “42” solution but meet a need within a crowded daily schedule (eg Skyscanner for flights, Uber for taxis services). Dating service shave a different dynamic and usage pattern than food delivery.

The business model. This shapes demand and the competitive dynamics.

“For free” is a mirage, which many startups still pursue – every business needs a means to generate revenues to cover costs and time expended. According oin industry sources over 76% of app revenues are derived form instore purchases. Apps need to be diesgined to entice download and use, woth payment being made for in-the-experience usage.

There are four essential business models: (i) Gaming – such as Candy Crush; (ii) E-commerce – PayPal, Square, Amazon etc; (iii) Consumer Audiences/Advertising – Snapchat, Instagram; (iv) Enterprise services – DropBox, FireEye etc.

Crowded screen real estate. Any smartphone only has certain amount of homepage space for apps. The average smartphone user has 24 apps on her/his device, of which less than half are used on a daily basis. Will the app fit beside one’s social media icons of Facebook, Twitter, Gmail, Instagram etc.

Understand the timing and dynamics. An app needs to be business focused. App designs and their businesses fall into three broad categories. Those that fail (the vast majority); a small percentage that make it to sustainable and profitable performance level and; the micro-portion of mega billion dollar apps

It is difficult to generalize about volumes but an app that can’t garner at least a few thousand new users on launch date, that can’t grow to tens of thousands within two months and hundreds of thousands within six months has weaknesses. A winning app has a Day One pick-up of at least 10,000 new users! Then one has a notion that it may be a real ‘winner.  “Stickiness” is important; users come and go; the net has to be an addition. A winning billion dollar app has 50 million monthly average users with a 50% retention rate. A successful app has long gestation period.

It takes at least two years to get an app from concept to commercial launch. Even then the success rate is low. Statistics show that it can take seven years and three failed attempts to get a truly winning concept. King’s “Candy Crush” was born on its 13th attempt after four years. It is not sufficient to be listed on the Apple App Store. You can’t push a noodle, one needs users to pull your noodle through to build volumes and generate revenues to cover the enterprises own costs, including the 30% commission charged by Apple or Google Play!

Get the right team and financing in place.

To date, many of the successful apps have been driven by individual entrepreneurs. Corporates have understood the essential vital qualities of apps for commerce and their value; yet they are poorly placed to develop winning apps. Corporates can support a dedicated team. At its core the team is an entrepreneur with the concept and passion but able to understands the value of working with others and business disciplines. Fail fast requires guts, but is an essential aspect of success.

In a world of QE easy money there is an ocean of financing available and that is driving tenuous valuations. Budget and finance a ‘proof of concept’ including a proto team for the first three to twelve months. Then decide to “proceed” or “fail”. Again estimates vary but precedents reveal the total sum to develop a robust gamma app is between €70-250,000 for development, testing, market trials, critical capabilities and overheads (if sweat equity is included). Anything more is waste. Once one moves from a gamma version to a beta then the subsequent financing can be justified to get to a commercially viable alpha funded. The myriad angels, accelerators, funds and crowdfunding sites are available. However, the large number of, but not discussed, failures of crowdfunding are a warning. For corporates the ‘buy’ vs ‘build’ needs to be clearly articulated.

With those contextual aspects decided and in place one can delve into the key design principles of a commercially successful mobile app design

  • 2: Two-tap: Once the app is up and running it should not take more than two taps do anything the app offers.
  • 5: Five points: On any page there must be less than five points of difference between font, font size, colour range and contrasts, size, depth, typography, media etc. More than five points and the page becomes cluttered and busy; detracting from the reader’s attention and use. Compare the cleanliness of Apple’s home page
  • 1: One button: This one push should cover almost all the requirements of the user. The green button on a photocopier is often used as an example. Flickr’s button follows the classic lead the now old i-pod or ancient green button of any photocopier.
  • 8: Eight other elements need to be considered.
    • Function over Form
    • Performance
    • Simple
    • Match App and Site
    • Engage the design team early
    • Build for core users
    • Optimize and balance design for performance
    • Connectivity to other devices and apps

So for eaxmple, if one compares competing apps against context and the 2-5-1-8 principles; say for digital taxi services, such as Hailo and Uber, the latter wins through every time.

These 2-5-1-8 design principles are intuitive, yet they remain strangely absent from many past and currently being developed apps; let alone sites. The wasted time, money, and emotions are not worth the effort. No need to re-invent the wheel, just make it better! That will improve UI and CX to build user volumes, repeats, referrals and revenues.

We at Raktas have had the opportunity and pleasure in working with entrepreneurs, financiers and their teams to refine concepts and launch web based businesses. Contact us!

Feel free to read other entries here at raktas.ee or at justinjenk.com

©justinjenk
_____________________________________________________________
Justin Jenk is the Managing Partner of Raktas – we offer solutions where decision-makers face complex issues with regard to captruing value from growth and restructruing opportunities. Justin is a business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

Venture Development – from rainbows to riches?
560 420 Justin Jenk

The dazzle of the rainbow does not always lead to the glint of gold.

Venture Development  (or Venturing) is an extremely risky activity for the entrepreneur or investor (be it a graduate, manager or professional). There are better odds to be had from gambling. Despite the facts, individuals and investors continue to put their financial and personal capital at risk. Getting the economics rigth is a challnge. There are some aspects to consider that may improve the odds in search of that 10x bagger or billion dollar listing.

For clarity ventures are defined as being “startups” on their way to some form of exit by the original investors. Thus ventures encompass seed and early stage enterprises; funded by Friends & Family, Angels as well as Venture Capitalists, VC firms/funds.

Venturing, like other fads and bubbles, is cyclical. Venturing’s popularity is due to a confluence of forces. The story of being a successful entrepreneur, backed by shrewd and supportive investors, makes for a compelling romantic narrative: riches at the end of the rainbow. The facts suggest it is misleading one. Many ventures fail and their performance are below market alternatives. For the very few, it is rewarding. The current wave of ventruying is being generated by the: continuing economic recession; the surplus of funds available for investment – seeking above QE market returns (2%) as well as continuing technology advancements (particularly digital and related to smartphones). Hope springs eternal; fueled by regular media coverage of those successful 20-somethings.

One needs to see through the marketing hype of the VC industry, ocean of easy money and institutional investors seeking alternative investments to calibrate the varying perspectives, motivations and rewards to embrace an appropriate mindset and approach that creates value from ventures. Anecdotes make great press and promote the myth; yet the plural of anecdote is not data.

There is a great deal of data available, but little information. Much of it remains ‘hidden’ due to confidentiality and the privately held nature of ventures. Also, as with  any good sales effort, the industry wants to talk up the successes and ignore the failures. Various studies, such as those from Kaufmann and Harvard, have been conducted.  The discernible facts are sobering, the dynamics are scandalous.The US based data is the most comprehensive (during the period 2000-2012).

  • In 2012, USD 27 billion was invested in 3,720 recorded ventures. Yet there were only 49 IPOs and 449 transaction (M&A).
  • The average startup received a total investment of US$ 7 million and had a 10 year duration75%  of ventures never return cash to their investors
  • Over 50% of ventures lose all their money.
  • The top 10% generated over 60% of the value. The exit value was a 4-5x return on invested capital.
  • The bottom half had negative returns or less than 0.5x
  • The average return was 2x.
  • The probability of realizing a one billion dollar app is 0.07%

The data suggest some interesting take-aways.  The amount of capital was not a differentiator of success (the amount invested being similar between average and top performing ventures). Also, while “fail fast” is a mantra, it is not widely practices: failures continue to be funded for too long. As to sectors, “biotechnology” rather than “technology” had better performance.

Too often wishful thinking, an exciting idea and poor valuation metrics cloud investor decisions and common sense. Newly minted graduates are turning to ventures, as employment opportunities elsewhere are scare; despite the risks. More seasoned individuals and institutions may not be taking a sufficiently hard look at ‘too good to be true/easy money’ opportunities.

Some importnat questions need to be asked.

From the ‘get-go’, does the concept really satisfy a genuine need? A good idea is more than just packaging, knowing the right people and VC firms. The average period from inception to exits is seven years. The product offering of the past successesful ventures tends to go through many iterations and several false starts. For example Pinterest went through 300 iterations before its final form, according to McKinsey. Billion dollar app entrepreneur and MIT graduate, George Berkowski, underscored the point. For example in the mobile app world, the business case for being one of the 26 apps one has on a smartphone, and used regularly, must be compelling. There are over 2.5 million apps currently available. The difference between success and failure is: ‘must have’ vs ‘nice to have’. For example, in the online dating industry, the recent example of the ‘failure’ of Cupid compared to the continuing successes of Tinder (and the more traditional Match.com) reveals this must/nice difference.

The behavioral conclusion amongst users (ie consumers) will become manifestly and rapidly apparent in the early stages. The successful venture must build not only the user base but also the frequency of use. Then a non-threatening pricing model can be applied. Too often ‘Series B and C’ financing rounds go to funding a damp squid. Again the data shows that less than 60% of ventures reach their targets after their first ‘A’ series of financing.

One of the observations from the Tech bubble was that valuations and metrics were inappropriate. That lesson has not been learned by today’s investors. Growth and positive cash flow remain the hallmarks of the successful 5x ventures. Questionable metrics, such as ROI and IRR, continue to be applied to capture future risk; relying on a single point discount rate. How is this discount rate calculated in a world of QE money? To strengthen this metric a common VC compensating method is to apply probability theory to an IRR return (so-called “adjusted present value”): a 12% IRR, with a 50%  probablity transforms into a 24% APV. That metric seems inappropriate for many reasons. The billion dollar valuations (IPOs and acquisitions) are based on defensive plays to buy lists of 50 million active monthly users. It is a matter of staking-out territory rather capturing revenues.

As to costs there are some unpleasant truths.  Strip away those costs (and efficacy) related to: build-out; marketing and communications which leaves VC related fees as a major drain on cash flow and returns for all investors. The data suggests that the Limited Partner model of 2/20 is asymmetric and self-serving. VC partners only risk about 1% of their own capital in any fund. Their fees are paid regardless of performance. Also the medium /long term tenor of most fund means that there is little direct accountability for performance. Fees have little to do with interest and lending rates.The VC industry argues differently. Yet many entrepreneurs are unwilling tochallenge the LP model and negotiate more appropriate terms & conditions, for fear of “ruining the relationship”. The fact remains that capital is available and the strength of the relationship can only be gauged by above average returns. Other VC myths that need to be examined are: the impact of mentoring, the value of VC network and the innovative and risk-taking nature of the investors.

It is important to consider that VC funding is not the main source of startup finance. In the US, less than 1% of firms utilized VC funding. Interestingly the face amount has collapsed since its heyday in 2001, from US$ 39 to US$ 19 billion in 2012. VC funds have been a channel for institutional investors to find alternative investments. In reality, a large portion of entrepreneurial funding for ventures comes from business angels. In the US for 2012, Angels invested US$ 22 billion in 65,000 ventures (compared to VCs into 37,000 ventures). The third source is crowd-funding; which is growing rapidly tripling since 2011. As one commentator describes crowd-funding, it is the “democratization of investing”. Kickstarter (a sector broker) reported it had over US$ 320 million being invested in 18,000 ventures. The critical but unreported role is of Friends & Family funding. It provides that initial capital, albeit in small amounts (say US$ 50,000),  to take an idea from paper to initial incorporation and prototyping/proof of concept.

Venture Development is an important funnel. For the cynical it provides a steady stream of fee income for VC funds; for institutional investors a seemingly attractive alternative investment. For banks and corporations a possible source of success but certainly a low budget/high profile recruiting tool and Corporate Social Responsibility initiative.

Despite all these caveats, the base economics suggest that the tiny number of VC startups that succeed do provide extraordinary returns (in relative and absolute terms). This return are manifested at a primary level to the investors and venture as well as at an secondary level to them market, economy and society (viz Facebook). Successes are to be celebrated and encouraged. For example, Ms. Hayley Parsons has entered the pantheon of venture stars. She recently sold her remaining 50% stake in gocompare.com for UK£ 44 million; creating a viable enterprise in Wales as well as receiving an OBE and Ferrari in the process. Parsons started the firm from her kitchen table eight years ago, having been rejected by her then employer, Admiral Group. She was funded by an angel.

The message is: try, but wisely.

Actual and would-be entrepreneurs as well as individual and institutional investors may find the following practical points of use. They are worth bearing in mind to avoid unnecessary (or prolonged) investments as well as improve the odds for success. The points apply to any venture; in the app/web world, the allure is greater and the pace is quicker. Knowing how to swim before entering the pool would seem wise.

  1. Ensure that the Unique Selling Proposition is unique. Too often ventures rely on well packaged concepts and services that don’t actually provide for a need.
  2. Brand equity: this comes from a combination clever name, personality, actual adoption and productive promotion.
  3. Be wary of “J – curve” growth; blow-torch the assumptions.
  4. Understand and nurture the team. Be clear and enforce roles, responsibilities and accountability all around. The entrepreneur should be doing the heavy lifting but if she/he is unable take the necessary actions.
  5. Use 360ᵒ enterprise models, Public Market Equivalents as well as Impact analysis and scenario modelling to keep the operating plan credible.
  6. Clarify and monitor the operational metrics: growing the number of users and increasing the frequency of use.
  7. Once demand is proven ensure that the applied pricing strategy is supporting revenue growth. One price point is “free” (for trial)  but it needs to be anchored elsewhere for revenues
  8. Manage Top and Bottom line sto  preserve funds for dividend and investments
  9. Keep tight control on cash burn and investment
  10. As entrepreneur/enterprise negotiate from a position of equality with Investors – the entrepreneur is their platform for success.
  11. Develop and stick to milestones – acting decisively. In the app world weeks matters; three years is an eternity, yet seven year gestations (idea to exit) is the average.
  12. Keep dialogues and communications based on objective facts and robust assumptions.
  13. Do review, challenge, adapt and if needed: “fail fast”.

Rainbows, like many ventures, are an optical illusion; the road to riches is based on hard graft and grind as well as good fortune.

Gaze, but don’t stumble.

Feel free to contact us at Raktas or check out related posts at justinjenk.com

©justinjenk

___________________________________________________________________________________________

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se

China’s dragon enters Europe’s managerie
194 259 Justin Jenk

The surge in inward investments from China into Europe is beneficial development. It reflects two complementary forces that represent the market economy functioning at its optimal. In 2013 there was over €434 billion China/EU bilateral trade. Forecasts are for the combined trade to reach €1 trillion by 2020. For the first time in history China’s outward investments exceed it sinward investments. The Chinese investors have broadened and deepened their targets – looking for profits, leading brand and share positions, technology as well as entry points into fortress Europe. It is a scandal how this positive dynamic is being impinged by local regulation, poor quality advice and xenophobia. Chinese investors are trading their hard currency for insider positions in Europe.

The stock of Chinese investments in Europe has grown dramatically from €6.1 billion to over €27 billion (in less than seven years). The two forces have been the source of this wave of investment activity: (i) relatively cheap assets in Europe caused by the sovereign debt crisis matched by a; (ii) softening of investment opportunities in China itself, as domestic growth slows to single digits. Cheap credit and ta incentive sasre helping to push overseas investments. The economics of becoming an insider are compelling.

The bulk of the investments to date have been in the UK as well as in the infrastructure and real estate sectors. Other EU countries risk missing out.  The sector focus is likely to shift to other sectors: such as technology related and consumer goods. In the UK digital and IT related sector investments are growing quickly. Financial services will remain an attractive target but beset by classic non-tariff barriers, national agendas and deep-seated prejudices.

The Chinese purchasers are a combination of State-Owned Enterprises, Sovereign Wealth Funds as well as private enterprises. The balance has shifted with the latter now representing over 30% in value (up from 4% five years ago) and over 60% in number of transactions (359/573). Also the average size of targets has increased: from under €50m  five years agon to over €500m today. Also purchasers are shifting from minority stakes to seeking oiut majority ones. The recent Hebei acqusition of Duferco is an example. Bright Food’s acquisition of Weetabix andrumoured subsequent IPO shows how quickly Chniese acquiriers are mirroring theei western counterparts

This positive development though is bringing into sharp relief obvious legal and cultural problems> These include: immigration and visa restrictions, labour laws, business practices and corporate styles. All surmountable, but it seems many participants wish to reinvent the wheel. Good advisors can make all the difference from finding and securing a transcation: the big banks are not the only advisors to retain: better seasoned and well-networkled professionals.

Chinese investors are arbitraging opportunities across the EU, seeking “soft entry” and lower valuations in peripheral EU states. The UK remains a magnet for historical reasons as well as stability and the perceived all-round quality. One can already see the hypocritical nature of EU and national policy at play with regard to visas. There is a bidding war at work for “golden visas”. For example, in Spain a €500,000 property investment is required for a 5-year residence visa. Yet, for the same EU rights, a Chinese immigrant can shop around for between €220-250,000 in Malta, Hungary, Cyprus and Greece! Britain has recently decided to join into this price war and contemplating relaxation of its visa requirements. Britain’s continuing EU membership may well be a deciding factor for the estimated wave of €100 billion Chinese investments expected over the next three years. Yet other EU countries face a risk of losing out; even in Britain is tech-saviness is luring investments away from Sweden; such as for apps and other digital enterprises.

The power of migrants is amply shown again and again. For example the Don Pin food distribution company in Spain. The founder arrived in Spain from China, penniless and not speaking a word of Spanish. By 2008 he and his Chinese partner raised a family loan of €20,000 for a truck. Within a year the company had a turnover of €220,000. Today it has sales of €60 million, 35 delivery vans and 110 FTEs. For every €1,000 a Chinese makes, 50% is saved. The combination of hard-work, frugality and a vibrant network are the hallmarks of success.

That economic success is deep-rooted at home in China. It has over 2.4 million “millionaire households”, second only to the US and over 152 billionaires. Chinese investors are trading the paddi fields of Sichuan for the playing fields of Eton. Already more than two-thirds of these millionaires have left China. Their children are being raised as global citizens in various European states.

There are clear areas of mutual benefit to be derived by cooperation. Far too often misunderstandings and unnecessary bureaucracy, especially at a local level, can impede if not prevent a favorable transaction. Chinese inevstors are being hampered somewhat by the poor quality of advice they receive and farmeworks they are using to assess opportuntiies.

Raktas has been involved in shaping and assisting Chinese investors make inward investments In Europe.

Feel free to contact us at Raktas or check out related posts at justinjenk.com

©Justin Jenk

____________________________________________________________________

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se