Imagine you are the product manager in Samsung or LG’s appliance division and you have decided to sell refrigerators at a discount because “the real money will come later,” by “monetizing” the stream of data that will be generated by all the new sensors included in the design.
But what if the ability to collect proprietary data gets legally and ethically complicated, a few years down the line? Say the government imposes a limit on data collection from durable goods that are not replaced in 5 years, deeming these to be “natural monopolies”—for example, products with high switching costs for consumers, such as home appliances, smart home devices (e.g Nest thermostat), TVs, or cars—and therefore subject to US anti-trust laws?
A sustainable market for big data has yet to be defined
Business decisions about “big data” applications are not simply engineering or technology decisions. They are have philosophical, legal, and moral implications.
Markets, and the business models they support, are defined and sustained both by technology horizons as well the social, economic and political agendas of a certain moment in time. Understanding these contextual factors are equally important in figuring out how to position yourself on the winning side of data-enabled businesses.
The challenge for companies is that nascent markets built today around big data are going to change radically. We are now at a point in development similar to where internet business models were roughly 12 years ago. Since then, we have seen much back and forth about appropriate norms and rules regarding privacy and net neutrality, as well as dramatic shifts in how the public views and trusts some of the leading, innovative internet companies (i.e. is Google the “do no evil” company, or the “evil monopoly?”)
In a similar way, the fundamental decisions about what is fair have not yet been determined. And they may shift around a lot over the next five, ten, even twenty years. Some of the most important market-determining questions—like those in the financial services and appliance examples—haven’t yet even been clearly posed.
How do we connect the social and political context to today’s business decisions?
Why is this important? Because as with other newly emerging markets, the definition of the playing field will determine what is or is not a real opportunity, and which parts of a big data business will be the most advantaged and protectable. Anyone who is not thinking about this as part of their strategy may be left behind in some of the largest opportunities, or find themselves over-invested in fantasy, million-dollar businesses. This is a critical time for firms deciding which of their potential data-intensive business ideas to pursue, and in what form.
But while enabling technology may be “exponential” and future sources of customer value to be unlocked “boundless,” budgets and time are not. When everything can look at first glance like a billion-dollar opportunity, these can be hard choices to make.
Having a point of view on the broader context will help organizations evaluate these choices more clearly, and with more complete criteria. Such criteria include:
• Which applications and use cases offer the most sustained value to your company? For example, for a digital health company, how will your bottom line be affected if new rules for wearable computing are introduced that define wearables as medical devices? Compliance costs could make many business models unprofitable.
• What data will be most valuable, and which is worth owning versus buying? It may be much cheaper for others to collect and organize data than for you to create your own proprietary system.
• What kinds of data use will cross the lines of socially accepted behavior? The now famous Target pregnancy offer case shows there will be situations where you should not preemptively market to someone. But what if you do it based on other kinds of attributes—like having been admitted to Harvard? A robust strategy will need to understand the distinct reputational risks and returns for every kind of sale and try to position around the positive-attribute marketing versus the negative in many situations. But this requires human judgment.
Sure, in theory, hospital emergency rooms would run more efficiently with real time pricing—just like Uber does. But a decision such as this requires applying additional choice criteria about what kind of value capture the market will allow. The social, economic and political guide-rails that will ultimately shape where pools of value can be created are evolving just as dramatically as the technology.
Follow Matt and Steve on Twitter at @MattRanen. We welcome your comments at email@example.com.
There has been a lot of hype lately about the coming wave of capabilities enabled by the Internet of Things (IoT). Through products as diverse as the Apple Watch, Google Nest, and any number of “connected-car” features offered by major auto makers, we are beginning to link together our most valuable possessions—our homes, our vehicles and even our own bodies. Each product comes with a new wave of “smart” applications designed to study our habits and get to know us better than ourselves; each will help us offload the complications of daily life.
The promise of a “smart” life, an IoT life, is usually couched in broad language about a utopian future where everything works “optimally” and “in balance.” But as any reader of Orwell might point out, these are subjective terms. What is optimal?
Defining how things are “supposed” to work
When did we decide exactly how things are supposed to work? Whose values and needs will be most represented in an optimized world? Those of the engineers who are coding it? The product manager who is defining the features? Certainly, for the moment, it’s not the end user.
A smart traffic management system, for example, will make decisions for drivers: prioritizing lanes, setting speeds, timing light changes, etc. These decisions will make traffic more efficient, in theory. But the traffic management system will also have to decide whether right of way goes to the parent with screaming kids in the back who is running late for school, or to the trucker with perishables in back.
In an ideal traffic system, is the goal that everyone move at the same speed? Should decision-making algorithms try to optimize fuel efficiency by speeding up slow movers? Or should they limit pollution by letting electric cars use the fastest lanes? One possible tradeoff of efficiency will play straight into the classic US tension between fairness and an individual’s right to take risks for higher rewards: in this case, to drive faster and get there sooner.
Smart systems are stumbling on values and policy questions
In Jan. 2015, the city of Los Angeles stepped in to ban parking apps like MonkeyParking and Haystack, which allow drivers to auction off the parking spots they occupy, creating an optimized market for parking supply and demand that put drivers who most wanted certain parking spots (and could pay) directly in touch with those who had them. But many in the Los Angeles City Council objected to what Councilman Mike Bonin described as “pimping out a parking spot in the city of LA—taking something which is a public good, something that all of us own, and privatizing for a period of time.”
Within the next three to five years, a similar tension is likely to play out in home delivery services. As a key piece in fulfilling the promise of online commerce, delivery growth rates are expected to rise and include more food delivery and other types of services. Amazon, Google, and Wal-Mart are already competing with UPS, FedEx, and the US Postal Service, as well as crowdsourced-based startups such as Deliv and Postmates.
Smart delivery platforms will have to prioritize. With food delivery, will it be the customers who pay the most or those in most need of better nutrition who get the first drop-off? Is it okay for UberFresh to optimize profits over need? In another part of its business, the recent furor over Uber’s surge pricing is a good example of the public demanding a voice in what, on the surface, is simply an automatically optimizing mechanism.
Who gets to have a say?
We have already seen one optimization battle play out in the net neutrality debate. In Feb. 2015, the United States’ Federal Communications Commission ruled that all Internet traffic is equal. This is not the most efficient approach; some applications don’t really need the same speed as others, just like an Instagram photo needs less than a realtime, remote surgery protocol. But we’ve decided to sacrifice priorities like need and profit for the sake of protecting other values: an “open” internet, unrestricted access, and unrestricted speech. The same decisions will need to be made when it comes to the IoT.
As automated systems mechanisms control more of our everyday lives, governments and markets want to know—and influence—decision-making algorithms, even if those algorithms belong to privately-run businesses. In an Oct. 2013 paper published in the Boston College Law Review, Kate Crawford (Microsoft Research) and Jason Schultz (NYU School of Law) argue that consumers deserve to understand the data and decision-making processes used by analytics systems to make recommendations and perform other types of optimization.
Public intervention in optimization practices is not new. We have always had to make choices and trade-offs in community or national policy decisions. What is different this time, however, is the specificity of choice that is exposed by the technology: day-to-day choices that have historically remained hidden, embedded in social norms, like letting the hurried guy pass you. Other choices have been historically been made by experts and regulatory bodies specifically tasked with designing and running things on our behalf, like public utilities commissions.
What this means for developers
“Code is never found; it is only ever made, and only ever made by us,” once wrote Lawrence Lessig, law professor and director of the Edmond J. Safra Center for Ethics at Harvard University. Although he was discussing the structure of digital space (such as virtual worlds), the same is true of our integrated physical and digital platforms. With this in mind, the companies currently developing, deploying and using smart, big data, and algorithmic platforms would be wise to do a few things:
- Be explicit about the values that are being optimized in these solutions during development and regularly test these against the market or societal sentiment.
- Build in the flexibility today that will allow for substantial revision of the core algorithms in the future, as society changes. Yes, even if this does cost more; optionality comes at real time and resource cost.
- Take pride in the shared values embedded in the code. It’s what defines and differentiates a community and keeps society together for the long haul.
Just as we now have very specific parameters for building codes, it should not surprise us to eventually demand oversight on smart software code. And when we do, we will have to agree, as human stakeholders, on what we mean by “optimized” lives.
Public debates about policy often focus on trying to explain why a particular approach will make the ‘whole system’ work better. Consider Obamacare: it’s supposed to insure the uninsured, improve the quality of care, and ‘bend the cost curve’ to reduce the costs. Or Education reform: the online MOOC is supposed to radically reduce the costs of education while scaling the very best teachers by orders of magnitude. It’s become almost a necessity of public debate—at least in the US—to assert that a big idea reform proposal is a ‘win-win.’ And to stand in opposition to this best-of-all possible worlds means you are either too dumb to understand or simply dishonest.
Would that it were so. This kind of thinking can be popular on the surface and it certainly makes for ‘provocative’ op-eds that garner lots of hits on newspaper websites. But it doesn’t serve the public interest, isn’t good for business-government relations, and is not a good way to work with other stakeholders that will have to be involved. Ironically, it gets in the way of both the technical and social innovation it is trying to foster.
Here’s why. Almost every big public policy debate is ultimately an argument about the aspirations and visions we have and how we want our society to ‘look’. Implicit in this is a decision about the tradeoffs we are willing to make to get there and the effective winners and losers of policy decisions. The win-win discourse tries to push what are in fact deep disagreements about this into the background where no one has to look too closely.
We get the motivation. It’s certainly comforting and easier to claim that everyone can have better, cheaper healthcare distributed more fairly and no one will lose anything in the process. But look beneath the hood and the supposed cost savings in the short and medium term depend heavily on cutting Medicare reimbursements to doctors. And that doesn’t happen: every year, like clockwork, Congress postpones those cuts. So we don’t actually face the trade-offs, but rather, push them off into some unspecified future.
Or elsewhere, in the current debate over Internet traffic rules: it’s much easier to assert that net neutrality makes the Internet better on all dimensions—more open, more free, more secure, speedier, and more fair to newcomers—until someone points out that they didn’t have sufficient bandwidth to get the SuperBowl on their iPad, watch the opening episode of Game of Thrones without disruption, or get high quality FaceTime streaming with their grandma, even though they paid for this. If only we could have our broadband cake and eat it too.
It takes courage on the part of business leaders and public policy makers to put these kinds of trade-offs in the foreground. But here’s the twist — we think this would actually be very good news for innovation. Figuring out how to compensate or reduce the pain to losers is actually one of the most significant drivers of innovation because it forces real choices from which new value springs. If Comcast is simply evil and Google is simply good, then it feels like a win-win to force Comcast into being a dumb pipe for Google content. But dumb pipe companies won’t (indeed, can’t) invest very much in new infrastructure and new services. So a better solution might also include incentives or requirements for the ‘good’ companies to deliver their content and services with radically greater efficiency: using 1/10 or 1/100 of today’s bandwidth—which in turn would open up the remainder for new applications from brand new content innovators.
Putting trade-offs in the foreground doesn’t offer the cheap thrill of demonizing certain companies in the ecosystem — the health insurers, the broadband providers, the for-profit education companies, and so on. But it’s more honest and ultimately better for innovation and growth. And it may actually lead to a more stable profit margin over the long run for those companies who are wise enough to not create a desperate, and possibly angry, set of losers later on.
If you are the CEO of a major American or European based multinational you have a difficult question on your plate right now. Are you going to the St. Petersburg Forum in late May this year? If it were Switzerland and this were the World Economic Forum annual meeting, the decision would pretty much make itself (unless you are just bored of Davos). But this is Vladimir Putin’s show, the Russians’ answer to what they see as the ‘Western-centrism’ of the World Economic Forum.
You’ve probably gone to St. Petersburg the last few years without much worry. Like Davos, it’s a good place to network, share perspectives, and talk informally with government officials. At St. Petersburg it’s often been about alternative perspectives, a map of the world that puts a big resource-centric ‘emerging’ economy right at its center rather than (as seen from Davos) at its periphery. That’s a useful intellectual and strategic exercise… and St. Petersburg is a great backdrop for it.
But this year is different. This week is the one year anniversary of the Edward Snowden story breaking. Then there was Crimea. And now, Eastern Ukraine. In the background looms Syria. If it were only one of these four things where Putin had stuck his fingers in Washington’s eye, people would be talking about St. Petersburg as a useful opportunity for another chance at a ‘reset’. But not this time, not with all four on the table.
In the last two weeks, top executives from companies like Alcoa, Goldman Sachs, Pepsi, and ConocoPhilips have taken phone calls from the White House asking them not to attend St. Petersburg this year. Nobody is telling them they cannot go — and it’s not illegal under current US sanctions. But is it worth saying no right now to people as close to the President as Valerie Jarrett or John Podesta or possibly John Kerry, for the sake of a few days in Russia? Is it worth a photo-op handshake between you and Mr. Putin that shows up on the front page of the New York Times?
Hard question. Russia is not a place that you just write off. It’s a large emerging market and an energy superpower. It’s a place where lots of money is being made and can be made so long as you are in the good graces of the Kremlin. Mr. Putin will surely take attendance at the meeting. Does anyone doubt the inevitability of subtle (or not so subtle) retaliation against the no-shows? Even more frustrating, how will it feel to cede the playing field to other companies who do go — including companies from some of our allies, like Germany, that are less severe in their judgements of Putin?
We’re not giving big bold advice here about whether anyone in particular should go or not go to St. Petersburg. The general point is simply to recognize that this type of decision, with these kinds of stakes and higher, is set to become a much more common dilemma for global corporations going forward than it has been for the last decade or more.
The global business environment has always been embedded within a global political environment, that used to go by the phrase ‘geopolitics’. Every decade or so, a pundit arises to proclaim that the interconnection between the two is over and that economy will henceforth dominate politics on the global stage. This pundit usually ignores history (an expensive error) and imagines that he or she is the first person to ever make this argument.
It usually doesn’t take long for the pundit to be proven painfully wrong. This time around it’s Putin’s turn to put reality up front. It’s not that the Kremlin ignores or doesn’t get the interests of global capitalism. Rather, the Kremlin competes in that game by doing everything it can to limit American freedom of action in the world and moving determinedly to increase Russian influence by wielding political and military power, not market power, because that’s what Russia has.
Russian geopolitical strategy in one phrase, is to put more sand in the gears — increase the friction — at any place and any time where life can be made more difficult for Barack Obama and US-based multinationals. This isn’t stupid, retrograde, anachronistic, or self-defeating. It’s basic strategy, blocking and tackling in a geopolitical sense.
Why? Because friction differentially benefits the less efficient, less global, and less powerful players in the game. It differentially hurts the players at the technological and economic horizons. And thus on a relative basis, it’s good for Russia.
There’s going to be more of it coming in the next few years. And not only from Russia, since the logic applies to many other emerging market governments and multinationals as well. As a result, CEOs of American based global companies are very quickly going to find themselves in a real bind.
No one wants to have to ‘choose sides’ in an argument like this, but the argument is not going to go away. This is going to require very thoughtful and subtle corporate diplomacy. The single most important question a CEO can ask right now is this: what do I need from governments, going forward, to limit the friction that my business will encounter at geopolitical flash-points? A little foresight and advanced planning may help.
When business leaders talk about the ‘race for talent,’ you naturally want to know more about where the contestants in that race are going to come from, and exactly how they are training for the race. The answer, at least in the US, has for a very long time belonged to the higher education sector.
But there’s a significant disconnect here. Come June (graduation season) and then again come September (tuition check writing season), you can pick up any major newspaper and get even odds on finding an article or editorial that asks if a college education is worth the time and cost. If the race for talent were quite so intense, would anyone wonder about the value of college?
Today it’s absolutely fair to wonder. College education is one of the largest expenditures and investments that most people make in the course of their lives, with the possible exception of their primary real estate. These days, of course, a decent college education can cost a lot more than a decent apartment in most cities. And don’t forget the four (or more) years of opportunity cost, when the student is being a student and not something else that could earn him or her a salary.
And yet for a long time, at least in the United States, ‘is college worth it’ wasn’t even a question, or at least not a question you would pose in polite conversation. The economics of higher education seemed definitive: the more schooling you had, the more the labor market valued you and the more money you made over the course of your life (the only exception to that rule being non-professional PhD degrees). For most of the post-World War II period (and it’s still true today) a college degree was one of the best guarantees against unemployment during labor market downturns. And all of this, without even mentioning the inherent value of learning and socialization that happens during those four ‘wonderful’ years. Even electrical engineering students take a philosophy or art history course now and again, and human beings are indeed much more than simply labor market inputs. College was supposed to make them better at both.
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Matt Ranen: LABOR MARKETS, HIGHER EDUCATION, AND THE RACE FOR TALENT