Facebook is here to stay

An interesting thing about being plugged into the startup world is the frequency with which one sees “new ideas”. Many of them, alas, are just old ideas being rebranded or old ideas that the person proposing them is not aware of.

Facebook’s widely documented travails, with legislators inquiring into Facebook’s role in the 2016 US Presidential elections – and possibly more – on both sides of the Atlantic, mean there is once again a swell of entrepreneurs clamouring to make a “new Facebook”. Within just the last week, one tweeted he wanted to make a privacy-first, open source Facebook. Another in a closed founders’ group described a portfolio company, which is a combination of “Facebook and Gmail.. no spying, no ads, secure social platform, where you own the content and the network .. no fake users, ever”.

Which reminded me of another interesting thing about being an old hand on the web: we know what hasn’t worked, exactly why it didn’t work, and all that it may take to make it work.

Anyone remember Diaspora? It was founded on three principles: decentralisation, freedom, and privacy. But as social networks go, how many people do you know who use Diaspora? I admit I know none.

Then there was ‘Ello, which I am somehow still on, though yet to figure out how it adds any value to my life. May be I am in the minority. There are and have been others such as Path (uh!), Google+, MySpace, and Peach (ok, I admit ignorance).

Successful ones include Whatsapp, which is embroiled in its own version of “fake news” controversy (link may require registration) in the world’s largest democracy. Others are Slack, with its purpose built groups, and Quora, the knowledge community with over a 100 million users.

But none has yet matched Facebook’s near-total control of the conversations among the global user base of connected, mobile, literate people.

An early adopter, I was on SixDegrees.com somewhere around 1997. Many people discussing these networks have not heard about it though a Wikipedia page exists, as it should, for the super early mover in the social networking space. My observations through the years say that we all want privacy, no-ads, control over who sees our content, no fake names or bots, anonymity when we want to overshare or share stuff we should not be sharing, ability to join or leave groups, ability to engage safely, and the freedom to take our data when we leave. However few of us really know what it takes to build something like that. Fewer still know what it takes of us to ensure all of that on the platforms we use.

Let’s take the privacy and control pitch. Facebook has excellent, granular privacy controls. I should know. I operate my Facebook like a walled garden. To work it, however, you have to be alert to how your life is organised, make appropriate lists, and then be diligent about controlling who sees what out of your shared material. As I have written elsewhere, user motivation to figure out your product is a huge – and unhelpful – design assumption. The product and the UI need to be simple to use and easy to figure out.

Google+ made much noise about making privacy and control simpler and easier but Google really did not succeed at converting a sizeable chunk of its Gmail user base into Google+ users. This highlights the importance of switching costs and network effects in building a successful social network.

Then there is that bugbear of fake names, bots, and anonymity. Quora is by far and away my favourite community since 2010. It started off well. With a “real names” policy. That is how so many of us participate and write there with our real identities. Monitoring and policing real identities is a job and a half. There is a reporting feature, which active users, Top Writers, former moderators, and topic gnomes use heavily. It is difficult for users to keep on reporting if they keep seeing the reported users come back with changed names, or bots and sock puppets returning with a vengeance to vandalise content. It reduces the SNR on the website and can damage the culture of the community rapidly. It takes lots of people. Or machines. To keep bots, fake names, and anonymous usage under control. Oh, and real names mean nothing. On LinkedIn, people use real names and their employer names and yet there is open and inbox harassment, racist remarks, trashy comments on people’s posts.

Which brings me to the problem of “using the web while <insert minority type here>”. Did I say Quora is my favourite community on the web? But I am asocial as hell there. Others cannot comment on my content, nor can they message me. How did that come about? I was enticed to Quora by the purpose of sharing information and learning. At one point, there was a massive growth through influx of users, who did not understand or care about community policies, brought their own cultural artifacts and assumptions, and had a considerable impact on the experience in the community. I was quick and preemptive in battening down the hatches but others continue to suffer – Muslims, Jews, black people both Afro-Caribbean and African American, LGBTQIA persons, and women in general. This is a problem that no social network has licked yet though noises are often made in this regard.

In 2015, Facebook spent a reported $2.5Bn on capex including data centres and other infrastructure. LinkedIn is owned by Microsoft which has almost $90Bn in cash, Whatsapp is owned by deep-pocketed Facebook, Quora is a unicorn valuated at around $1.8Bn. The point is that even if the perfect product is created, and somehow users can be enticed to switch in huge numbers, creating and running a social network at scale is expensive business. One must not forget that users are used to “free”, so promises such as “no ads”, no data mining etc will lead to inevitable questions about the monetisation model.

All this can be summarised as “barriers to entry” in the social networking space.

And yet, every other day, there is an aspiration to create a new social network.

Back to Facebook then. With over 1 Bn users, Facebook is no longer a “social network”. Especially if information — fake or otherwise, and I am including Whatsapp’s challenges in this — is the stock-in-trade, Facebook fits the classical definition of “utilities” and, at the moment, it is also a natural monopoly. It is not a public utility. If, however, its externalities are anything to go by, including its impact on democracy and the information asymmetry created by its machine learning algorithms, it needs to be regulated. Those arguments have been made repeatedly over the last few years. One of my favourite commentators, danah boyd, wrote about it in 2010.

So how might Facebook be regulated? And will that reduce or increase the “barriers to entry” for new networks?

One of the best models of utilities regulation is the British one where regulation is seen as a second choice to a well functioning market. It focuses on consumer choice, competition, and forward-looking incentive regulation. Forward-looking what?

There lies the rub. None of us is paying for using Facebook. In fact, if pricing were introduced at this point, there will be an almighty uproar because, to many, it is like an “essential product” now.

If no consumer is paying to use Facebook, is it really a “market”?

As definitions go, we are in uncharted waters.

More importantly, how will regulating ensure or improve consumer choice or competition?

It is structural barriers, and consumer behaviour challenges, not Facebook, that prevent alternative social networks from achieving the same roaring success it has achieved.

In other words, unless regulators break Facebook up perhaps into consumer and business networks or force Facebook to shut down, or Facebook boldly starts charging fees, eroding its user base and reducing its own power, or an earth shattering paradigm emerges in economics and business regulation, Facebook is here to stay.

It may be forced to become more transparent, and build better governance like other listed entities. But it is here to stay.

 

Of diamonds and responsible eternities

Millennials, often described in media as hapless, poor and unfocused, reportedly dropped a cool $25 Billion on diamond jewellery in 2015. This indicator of current and future demand for sparklers notwithstanding, we are nearing the peak of natural diamond mining.

It raises the question as to why synthetic diamonds have not taken off.

After all, millennials as consumers are also focused on environmental consciousness and reportedly willing to pay a premium too. Further, laboratory-grown synthetic diamonds — not to be confused with diamond simulants, such as the non-precious cubic zirconia and the semi-precious white sapphire — are virtually indistinguishable from natural diamonds mined from the womb of the Earth in an energy intensive and ecologically intrusive process. The Gemological Institute of America now even certifies that the synthetic diamond you have just bought is real, authentic synthetic. Synthetic diamonds also come from a transparent supply chain with no human exploitation, which is an excellent reason to choose them.

Why then isn’t the world switching en masse to the more environmentally sensible option?

The answer lies in the deeper probing of what shapes our preferences. We don’t buy diamonds, diamonds are sold to us. There is hard nosed business behind shaping our desires even though the traditional reasoning behind engagement rings no longer holds water, and plenty of women can and do buy their own diamond rings.

The economics is simple enough. Synthetic diamonds sell at a considerable discount to real diamonds. Trade makes more money selling a real diamond than it does selling a synthetic one, even with a certificate. In turn, this means a consumer is likely to see many, many more real diamonds on offer than she will see synthetic ones. This shapes the consumer’s consideration set and undoubtedly influences what gets bought.

The value chain reason is more interesting. Making synthetic diamonds is a capital intensive business. The barriers to entry of a new player are significant. So unless the demand for synthetic diamonds is proven to exist, investment may not come pouring into the space. In a delicious but understandable irony and a strategic masterstroke, a De Beers group company owns a vast majority of patents in the manufacturing of synthetic diamonds. So while it is possible to manufacture synthetic diamonds, it may be darned hard to do so without committing patent violations. This is not trivial. From a consumer’s point of view, this changes nothing and everything at once. De Beers has invested in distribution as well as, since Frances Gerety’s virtually immortal “A diamond is forever” line in 1948, branding for diamonds. It would have been foolhardy and self-destructive, if De Beers did not try to hold on to those advantages.

The branding reason is, of course, the strongest.

Most diamond purchases are not rational purchases but rationalised, emotionally led buys. Feelings are notoriously difficult to dislodge and remarkably easy to hurt. For years, the intrinsically “forever” and “real” character of diamonds has been used as some kind of proof of eternal love and commitment. Would a synthetic diamond ring mean fewer flaws, more perfection but also fake, performative love on the cheap?

Here lies the opportunity.

The brand story for the category itself is ripe for change.

Millennials say they are willing to pay a premium for environmentally friendly products (though not always willing to make good on those intentions). If the positioning is right, synthetic diamonds need not be sold on the cheap. They could be positioned as the environmentally friendly, technologically advanced, ecologically savvy, energy conserving version of the gemstone for the new, tech-savvy generation, while their sparkle still remains celebratory.

Thanks to digital platforms, the engagement with millennials can be kept quite targeted and kept away from the prying eyes of the boomers or even Generation X, who may be confused by the messaging about synthetic diamonds or feel cheated.

Moves are afoot in the space already.

Until a few years ago, when I heard the word “diamonds”,  Dame Shirley Bassey’s booming “Diamonds are forever” rang in my ears. Mental concerts are a real thing, look them up.  The song is wall-to-wall marketing of the De Beers catchphrase of enviable longevity.

However nothing lasts forever, as the rock prophet Axl Rose reminds us.  Why then should sparklers bear this unfair burden of eternity and permanence?

Why not move the discourse from eternity and permanence to a more achievable and realistic exhortation to just “shine like a diamond”?

Move over Dame Shirley, Rihanna, the millennial maestra, is here.

 

Helmsmanship of a modern luxury organisation

Change is afoot in the luxury industry. Fewer than 5 weeks into 2017 and several luxury firms’ CEOs have left or are leaving. It is just days since we heard that Chloe Creative Director Clare Wright Keller in Richemont was to quit and while I was writing this piece, Riccardo Tisci’s departure from Givenchy was announced.

While LVMH issued a warning, Ralph Lauren maintains its earnings guidance, even though the share price dropped on the news that Stefan Larsson is leaving.

These creative and corporate developments are taking place against the backdrop of geopolitical uncertainty and also markets behaving exuberantly as if the stock market is somehow decoupled from the economic and political sentiment.

This may well be the year of reckoning for the luxury sector.

Luxury brands have too long dithered between their exclusive image and the effect of the democratic nature of the web. The digital consumer expects luxury brands to navigate the fine line between customising the experience for the consumer, because she is known to them but without becoming too familiar and intrusive. As various privacy related issues rear their head, and cultural expectations diverge, the problem becomes more challenging for luxury brands.

As “things” became more accessible, the pendulum swung towards exclusive “experiences” although this year is seeing the rise of the tangible, as Rebecca Robins, author of Meta-Luxury, says highlighting the resurgence of print books as well as millennials choosing Smythson and Moleskine notebooks to start their 2017.

The intangible and the physical however must both make money, retaining the interest and loyalty of customers across the demographic especially as millennials aren’t as broke as previously assumed.

When Larsson joined Ralph Lauren, its eponymous founder became chief creative officer stepping away from his CEO role, signalling the separation of creative from corporate, as it were. Differences over strategy is the given reason for Larsson’s departure.

Frankly this really isn’t the time for corporate and creative to cleave.

This is the time for corporate and creative to coalesce and pore collaboratively over the information contained both in the yottabytes of “big data” coming in from the many social media channels and consumer created content, as well as the “small data” that the brand’s heritage has yielded over the years.

This is the time for finding meaning in both of those and layering it with the essence of the luxury brand, to remain relevant in these times of change.

This is the time for the luxury sector — corporate and creative — to finally reckon with technology and find a new narrative of relevance that brings the sector in step with the times.

This is the time for creative and corporate leadership to reject Draytonesque kissing and parting, and choose Donne-like commitment to rejuvenate luxury’s relevance.

 

The real story in India’s demonetisation saga

“Who benefits if we all go cashless?”,  asked a friend* of mine. This is indeed the money question in India’s demonetisation saga with its moving goal posts. “I am not here for the enrichment of Visa, MasterCard etc.,” she added.

Apart from convenience and fraud protection, the economic case for an individual consumer is near impossible to make. Many problems solved by card issuers are those related to card usage, not arising from the transaction or commerce itself.

The benefits of consumers going cashless accrue variously to businesses, who can reduce the cost of cash handling; to various players in the payments ecosystem — card makers, technology providers, POS terminal makers, card issuers and acquirers, wallets, and schemes such as Visa, MasterCard and RuPay — who make a fraction of a basis point on each transaction; and to society at large, in aggregate and in the long run.

My friend* remains suspicious of ideas where consumers were required to participate without having any agency, since, she argues, we do have agency in using cash e.g. when hoarding cash as vulnerable women do.

This is a fair concern. But consumers accept the notion of a state-sanctioned currency as a widely accepted means of value exchange within a territory. Consumers make trade-offs to get things they desire while accepting certain loss of agency even if they do so holding their noses.

As it stands, the state has unfair power in determining whether the currency has the value it is supposed to have. It is a power imbalance where the consumer’s agency is considerably less than the state’s. Consumers begin first and foremost with the belief that the state won’t mess with them and their stash of wealth. This trust is essential to exercising the consumer’s agency in stashing away hoards of cash. Acts such as the overnight demonetisation and the cack-handed execution of it destroy trust. The cash hoards of those vulnerable women have been destroyed in value overnight. Their agency is hugely reliant on the state’s benevolence in this instance.

What happens when the state does mess with consumer trust such as by demonetisation or overnight devaluation of the currency?

This is where the conversation veers into virtual currencies such as Bitcoin that remove state as the holder of power and distribute power to the two or more parties transacting. It would be the subject of an altogether different essay on why we are happier trusting an algorithm than we are trusting elected representatives whom we can bring to account.

The chatter about the demonetisation of certain currency notes and going cashless — the latter being some ways off in India, given the lack of infrastructure needed to make cashless work — is just a sideshow.

The main game is data.

When the economy goes cashless, a lot of data will be generated and the aggregate economic case for society will begin to emerge. At the very least, there will be new money brought into the system with convenience reducing the friction in commercial transactions and money.

Professional — and armchair pro-am — economists have wondered a while how India’s GDP would change if the unorganised sector, including the vast cash economy of domestic and unskilled workers, quotidian daily purchases like cigarettes and paan etc were to be recorded formally. The probability of such aggregation will increase with more data collection, though it remains to be seen whether this newly counted GDP growth will weather, balance or exceed the drop in GDP predicted by many due to the demonetisation.

“Who benefits if we all go cashless?”.

The key beneficiary of India going cashless will be whoever can make sense of the gazillions of exabytes of data that these transactions will generate, and that will enable the study of deviation from patterns to identify funds that may fail ATL/AML scrutiny. In an ideal scenario, the money that otherwise goes unnoticed while transacting in cash will be noticed and people in possession of it brought into the tax net, netting more money into the state’s coffers.

Money in all this is still the distraction. The real story is data.

As consumers, this real story should worry Indians because Indian citizens have no guaranteed right to privacy and India has no data protection laws to speak of. Despite a massive universal ID programme, named Aadhar, the government appears to have very little appetite for change in this regard. The Government of India’s open government data platform was launched in 2012 but is rightly criticised for incomplete thinking. A consultation on it  was opened to the public in July 2016.

My advice to my friend and to those watching the demonetisation story in India is quite simple:

If you want agency, watch the main game of data — and what unfettered, unregulated  access to data might enable — not the sideshow — of moves towards cashless society.

If this be the only lesson of 2016, so be it.

Here’s to not fearing the anomie of 2016 and to rebuilding in 2017!

*(Thanks are due to my friend, whom I do not name, for asking the vital question that sparked the conversation on November the 27th and 28th, 2016, and for permitting me to use her words in this post.)

Pay for a good startup lawyer

This article is the eighth in the Startup Series on FirstPost’s Tech2 section and first appeared on Dec the 23rd, 2016.

I am aware this is controversial advice.

Especially since the last column said: “You pay for some things, you do not pay for some things; you should take your time to understand which is which.”

Especially since we all know free legal templates are available online, or a friend can send you their stuff, and you can take them and tweak them, and you are done. This is where I mention that I have seen startups in India working with documents that state their jurisdiction as England and Wales. They certainly found a template for free! But is it serving them and their purposes?

The ability to make sense of legal documents is not for everybody. The inability to make sense of legal documents could however be quite expensive. The advice of a competent, experienced startup lawyer is something founders would do well to pay for.

Here is why.

A good lawyer will not just write you legalese and lots of documentation but she will build you the scaffold for a future of success and high growth. It is something to plan for now, because let’s face it, when you are blazingly successful, you won’t have time to come back and re-do the paperwork assembled from a random assortment of templates.

One of the first decisions in a startup is about location and structure. A competent lawyer, equipped with adequate tax advice if necessary, will help set up the most optimal structure for future growth and in a location that works for you. “But I am incorporating in India,” you may say. Fair point, but a good lawyer, who understands the competing jurisdictions you could incorporate in, such as Singapore, will explain the options to you, thus helping you think more broadly and globally about your business right from the start. Tax is not the only consideration, of course. A location can often beat your default location on the entrepreneurial ecosystem, the ease of finding and hiring talent including from other countries, and most crucially, the ease of doing business.

With cofounders on board, you will need a watertight shareholding rights agreement everyone agrees to sign. A shareholding rights agreement outlines founder shares of equity, but more importantly, outlines important issues that may come up including cofounders wanting to leave, resolving matters in a going concern, potential conflicts arising and so on. I have lost count of how many founder conflicts could have just been avoided or resolved more easily, had someone thought of writing a sensible shareholding rights agreement up front.

As you build the business, you will need to think about several other contracts e.g. with service providers and partners. Service providers may send you their own contracts on which it would be wise to get legal eyes so you know what you are signing up to and what recourse is available to you if things don’t pan out as expected. Next come employees and their employment contracts, which for startups may be different from those offered by BigCo employers. A major difference, for instance, may be the inclusion of stock options in the employment contract, as well as termination clauses and what happens to unvested or unexercised options in different scenarios. Especially if your startup is a success, this is an important matter to not deal with in an amateurish manner.

Whether your website is transactional or not, it is an essential for business and brings responsibility. A good startup lawyer will help write the right policies governing the use of your website for the visitors, and policies disclosing how you will treat data you may collect on their visit, their interaction and their transactions with your business.

These considerations are common across startups. Some specific startups may need specialist advice.

For instance, if you are creating a startup in a regulated industry, such as FinTech, in which none of the founders has adequate deep experience, the importance of a lawyer with industry specialisation cannot be overstated. A competent lawyer can advise you on compliance and regulatory challenges arising from, say, your business model.

In case, you are creating a social enterprise or a non-profit, correct legal advice would save you much heartache. Can you set up a trading arm? Who can and cannot donate to your organisation? What tax benefits are and are not allowable? How do you ensure adequate transparency, disclosure and compliance?

And of course, if you are creating a startup with a patented product, you will have already dealt with a lawyer specialising in intellectual property, and the advice here would dovetail with your experience.

Ignorance of the law, in no jurisdiction, is an admissible excuse for violations or non-compliance. Ignorance is definitely an expensive indulgence should anyone, from your cofounders to your customers, bring about a lawsuit against your startup.

Be smart.