An insider’s warning for the tech industry; Silicon Valley is being warned that it is making the same mistake as bankers

April 22, 2013 4:43 pm

An insider’s warning for the tech industry

By Ravi Mattu

Ten minutes into our conversation, Jaron Lanier has a problem. In the echoey restaurant where we are meeting, the sound of the one other diner is unnerving this pioneer of the internet world. “This space might not work . . . .” he says. “Sometimes I have trouble talking when it’s this loud.”

That Mr Lanier, a bear of a man with long dreadlocks and a scraggly beard, finds it difficult to make his voice heard in an almost empty space is surprising. In recent years the computer scientist has spent a lot of time publicly raising awkward questions of his peers and the internet-connected business world they – and he – created.

In the 1980s, Mr Lanier helped come up with the technology behind virtual reality and is often credited with coining the term. He is a serial entrepreneur and since 2006 has had a role at Microsoft Research (he does not speak on the company’s behalf).He is also deep thinker and writer on how technology is changing our lives. In his latest book, Who Owns the Future? , he has launched a broadside against the way many technology entrepreneurs do business.

Mr Lanier became interested in business models partly because of his closeness to both Google and Facebook, two companies that “do entirely different things” but have been forced into a “zero-sum” competition. He puts this down to the ill-fated, idealistic notion born in the early days of the web that content should be free.

The first problem with this framework, he says, is that it forces companies and entrepreneurs to see just one business plan: “master manipulation”. The easiest way for a business to make money when content is free is through advertising, which means companies are always driven to have the biggest user base to sell to advertisers. Instead of working together to build bigger overall markets in a way that would be mutually beneficial, Google and Facebook – which have “different competencies, different technologies” – compete to milk the “value out of people rather than engaging them”.

The second problem is that the model leads businesses to rely too heavily on having the fastest computers, able to analyse data more quickly than anyone else. He says this will lead to two long-term challenges. Computation deludes managers into thinking that risk can be pushed away from the business on to the shoulders of consumers who are actually unable to bear it when a crisis hits. It will also necessitate increased automation of processes, leading to a loss of meaningful, well-paid jobs. In other words, the business model is eradicating the very high-value consumers on whom it depends for its valuable data.

Mr Lanier points to the financial crisis as a “cautionary tale” for Silicon Valley. He does not believe that most bankers intentionally set out to harm people, but computation meant it was inevitable. As banks developed faster ways of processing information, they came up with too-cheap-to-believe mortgages because computers said they were viable and financiers fell “prey to the illusion that they could optimise their investment without the risk”. We now know that these loans were not sustainable: when the crisis hit, the individuals who took them out, thinking they had got a great deal, were unable to withstand the risks placed on them. “What [technology companies are] doing is exactly the same thing. We’re creating a business plan based on having superior computation, being able to calculate away the risks to others.”

Even if Mr Lanier is right, his warning may be too early to change the behaviour of his Silicon Valley peers, many of whom are focused on finding new markets in which to extend the dominant model. As Ebay’s chief executive John Donahoe told the Financial Times: “There are 2bn internet users today. That’s forecast to double in the next three years and a significant proportion of those internet users are in the Brics and emerging markets.”

This view points to another management lesson of the financial crisis. Just as the bankers did not see problems with their model when they were still making a lot of money, so the technology entrepreneurs and their backers will not switch direction until circumstances force them to do so. And with so much of those new markets – and the data they contain – yet to be connected, that might not happen any time soon.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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