October 18, 2011

"Venture capital is a hit business", writes Luke Johnson (*). I love his column for the sincerity of its unalloyed boosterism. It so greatly enhances its inherent irony. The more it wants capitalists to be loved, the more it highlights how the same strive to bite the invisible hand which feeds them. The more forceful its advice, the more careful its reader must become.

Do not take me wrong. There is plenty of truth in what it has to say, starting with the fact that innovation is indeed all about "scarce triumphs amid many failures or also-rans". And so what is more natural than "targeting money and assistance towards opportunities that offer enormous upside"?

The pitfall is that his column implies the opportunity upside is measured by the size and growth rate of the market addressed by the venture. If only! He seems to forget to factor in the probability of success. Even if it is hard to estimate, it is foolish to ignore its variability. I doubt Luke Johnson would back a company which promises to turn today's water into the fuel of tomorrow. Selling water from the Thames as water is the better bet.

Still there is no denying the pull of "the possibility [of] backing a venture that one day will be huge". Perhaps I can help him there.

Our Information Age is young enough for its markets to measure up to Luke Johnson's expectations. Richard Waters is not exaggerating when he speaks of "the titanic power struggle that has been taking shape between the giants of consumer technology" (**). An epic scale it is, truly.

What is amazing though is the speed of the action. "In the hazy past of half a decade ago", Steve Lohr used similar terms to describe the fight between Google and Microsoft. Today Richard Waters mentions neither. Instead he weighs the "250m people [who] have bought Apple's mobile devices" against the "350m people who access Facebook from a mobile device", correctly commending Facebook for playing "a long game".

"The concomitant rise of mobile and social has become the defining force for the tech, media and communications worlds". Hence the rivalry between the champions of innovation in each domain, corralling consumers into their walled gardens, "gatekeepers [bent on] taking their cut".

Do not be dazzled by the duel du jour. As the Lex Column shrewdly reckons (***), "despite appearances, [...] Facebook is taking a run at the $32bn in revenue, and rich margins, that Google made selling advertising" in the past year. That is indeed Facebook's deeper, smarter strategy.

Choked by Google's brilliant business model, Microsoft may have allowed itself to slip from dominant hit to bit player, in search, mobile and social. Google is not yet ready to be so displaced, "providing evidence that it can follow users whenever they search the Web". Per Claire Cain Miller's report, "[Google] mobile was on track to generate more than $2.5 billion in revenue in the coming year and grew 2.5 times in the past year" (****). Pretenders beware. Given a staying power Richard Waters fully appreciates, the leader needs only unbridled imitation, from Android to Google +1.

Besides the dominant force which powers our Information Age is neither mobile nor social. It is the producers' need to reach out to consumers. As the latter fear drowning under a data deluge, most of it dubious, they cannot but turn to recommendation mechanisms.

Google's recommendations tap the most opportune time, when consumers search for answers. The "rise of mobile and social" is important in so far as it empowers two other forms of recommendations, as we need local guidance once on the move and are ever susceptible to social pressure.

There is however a slight problem with current monetization schemes. Too eager to be of service, blind to the difference in nature between human recommenders and recommendation engines, all three companies have chosen to press their users for their personal data. Apple tracks your moves, Facebook your friends and Google your questions. All three follow your purchases in their own ways.

From this perspective, Facebook and Apple are in the more awkward position. As Tim Bradshaw and Joseph Menn noted, the new iPhone features Siri, a "virtual assistant", whose "robotic voice can guide [Americans] to the nearest coffee shop" (*****). Unfortunately for Apple, users will quickly notice if advertisers bribe their assistant, just as they tend to notice when Facebook repurposes their friends' tastes behind their back.

Not only Google can more cleanly separate paid-for messages from genuine data, its base business does not even require it to spy on its users.

Still the temptation is so heady, Google cannot control itself. Under cover of delivering recommendations, leader and pretenders are in the personal data aggregation business, entrapping both their users and themselves. The more they succeed, the less they align with the dominant force of the age.

Read Lucy Kellaway (******). "So long as we can cling to the idea that we are masters of our gadgets then all is well.[...] Last week proved [...] the gadget was indisputably in control of me". "Control means everything". Indeed, the more Google, Facebook and Apple assert theirs over users, today's little people, the more they invite a new contender.

For producers do not want recommendation mechanisms to take control over the users either, as this tends to squeeze their own margins to the sole benefit of such intermediaries. If an engine lets them reach out to consumers while bypassing data aggregators, they will be sure to notice.

Imagine then, dear Luke Johnson, a company which would provide consumers with a personal platform to manage and use their own data so as to interact with producers in total privacy as a matter of fact rather than a promise, which would encourage users to volunteer data, which would compensate data suppliers for contributing their observations on user behavior and specialized experts for contributing their knowledge on how to infer new information from raw data, which on this platform would enable multiple independent sources to recommend producers to consumers.

Wouldn't it be huge? Certainly, but feasible? I leave it to what you call your "instinct" to be the judge but I modestly think so and can show you why.

As you wrote, "whole sectors can be revolutionized by one star company". Let us reenact 1789 and free consumers from Big Data tyrants.

Philippe Coueignoux

• (*) ........... We need a Darwinian approach to start-ups, by Luke Johnson (Financial Times) - Oct 12, 2011
• (**) ......... Facebook's app looks set to split Apples's digital reign, by Richard Waters (Financial Times) - Oct 13, 2011
• (***) ....... Facebook, by the Lex Column (Financial Times) - Oct 12, 2011
• (****) ..... Strong Ad Revenue Lifts Google's Profit 26%, by Claire Cain Miller (New York Times) - Oct 14, 2011
• (*****) ... Glitches hit launch of latest iPhone, by Tim Bradshaw and Joseph Menn (Financial Times) - Oct 15, 2011
• (******) . The Blackberry blackout left me happily unlinked, by Lucy Kellaway (Financial Times) - Oct 17, 2011