Ben & David wrap up 2016 with a review of the top tech themes we discussed on the show this year, and look forward to which themes we think will be relevant in the coming year. Can our hosts predict the future? Tune-in in 2018 to find out!
Note: we apologize for the less-than-amazing audio quality on this one. We're still working on tuning our remote recording setup!
Topics covered include:
The Carve Out(s):
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
David: …ideas to fix Twitter. Jack Dorsey says Twitter is “thinking a lot about an edit tweet button.”
Ben: Oh, God. Like the things that are innovation in Twitter now…
David: Yeah. Sad.
Ben: Welcome to Episode of 29, the podcast where we talk about technology acquisitions and IPOs. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. This is a very different episode for us than usual. We decided to do a yearend review and probably more importantly than that, talk about what lies ahead in 2017. So David and I were thinking, we have talked a lot of tech themes in a very sort of rambling and unstructured way over the course of the show. We went back and actually pulled out what were the tech themes that we identified from each episode. We kind of basically have a little tally going of which ones we thought were the most important and we’re going to kind of talk about those and then get into the themes that we think are going to be pretty dominant in 2017 or at least some make freewheeling predictions on that.
David: Yeah. You get what you pay for here, so no guarantee we’ll be right. But yeah, a couple of notes. So Ben and I are recording this on December 30 right at the tail end of 2016 and we’re borrowing some editing heroics. It will probably be up for you guys already into 2017. But as we came to the end of the year, we thought especially this being our first full year of doing Acquired, we wanted to look back and run some data on our own content and see what the biggest themes of our show have been.
So, Ben and I were chatting just before we started. We recorded 23 regular episodes, like I said, includes specials. But 23 full episodes in 2016. This is our 24th. It was really fun to go through and pull out the themes. A lot of repeats.
David: With that, should we announce the Acquired 2016 Theme of the Year?
Ben: We should. The frequent listeners of this show I’m sure can guess what this one is going to be or at least who the originator of this theory was.
David: Yeah. I’m shocked, shocked!
Ben: Yeah. So discussed in six different episodes is Aggregation Theory of Ben Thompson of Stratechery. This of course talks about building superior user experiences as the winning strategy in an infinitely accessible zero-cost distribution world aka the internet. This was discussed on Acompli, Snapchat, Jet, Android, Skype, and Marvel. So I think for us it says a lot about the power of the theory that once you see it, you can’t unsee it. Once you realize that “oh, this is a predominant factor in making these companies successful,” every company we analyze we’re like, “Oh, I see what they’re doing here.”
David: Obviously, a big hat tip as well as we’re doing the show to Ben Thompson and all of his work. I think it's interesting how much we’ve talked about it and also reading Ben’s work throughout the year, he first published the post on Aggregation Theory last year in 2015. But how much it keeps coming up in his past work too and how he keeps refining this concept and adding onto it. But the core of it, I think that insight that in this world where the cost of distribution of zero and in digital marketplaces, your accessible market is the entire world. That it is really the superior customer experiences that are going to beat everything else because you can have sort of perfect competition amongst the whole world and so the best will rise to the top.
It’s totally informed my work and I’m sure, Ben, yours too, in companies that we work with, when I’m meeting with startups trying to decide which to invest in and which I think might be successful and won’t be, it’s been hugely influential not just on this show but in my everyday work too.
Ben: Yeah, absolutely. Moving on to things that were discussed four times throughout the year, and I think listeners, what we’re going to do here for the structure of the show is move through these fairly quickly to kind of just establish a baseline of where we come from and then really spend the bulk on 2017 themes. Also, we have sort of an extended Carve Out section to kind of talk about the best things that we’ve bought, read, listened to, or paid attention to this year.
So that said, going back to the 2016 themes, the ever-so-dominant network effects. In Virgin America episode, PayPal, LinkedIn, and Adobe. This one for me was such a dominant theme that I gave this talk at a product conference called Industry earlier this year. I had two ideas for talks going. I was working on both of them. David and I were recording, I forget which episode it was but it suddenly dawned on me that like, “Oh my God, this talk has to be about network effects.”
It was actually pretty interesting because it was conference for, like, product managers and people that have some amount of product management in their role. It was really interesting to take sort of a venture lens to a product audience and talk about building network effects and virality and dependencies on the rest of your user base into the core product and rather than thinking about it as kind of an afterthought.
David: Yeah. Ben, is your talk on YouTube?
Ben: It’s not yet. It’s not. They’re going to start releasing the talks I think pretty soon here. But we’ll definitely let the Acquired audience know when they can check that out.
David: Yeah. I got the privilege of seeing Ben’s slides and hearing a first draft of the talk. It was great, so we’ll be sure to share that with you, guys.
And yeah, on this one, one of the things I learned doing the show this year and thought about is how rare like true strong form network effects are and talking about it on these episodes. We spend a lot of time on LinkedIn and when we graded that episode, talking about how that is one of the very few really, really strong form network effects out there. It’s striking to me that all the companies we covered, some have varying degrees to them but only a few – Facebook, Snapchat, LinkedIn – have the strong form effect.
Ben: It’s really interesting thinking about the strength of the sort of like relationship between the nodes of the network and how that can be super variable. You can have a product that has network effects that are just not core to the product itself and that ends up not scaling and becoming as powerful of a sort of a force of your business as the incredibly strong one. So a couple examples I’m thinking of are, I use My Fitness Pal when I’m tracking what I eat. There are sort of two components to it. There’s utility to actually provide me the ability to track how much of each macronutrient I’m eating, how many calories have I eaten today, what should I be getting more of, the actual catalogue of food that has all the nutrition data associated with that.
Then I can make friends on that, and that’s kind of important. It’s interesting for sort of encouragement and/or accountability or anything like that. But an app like that is so much more utility than it is network. Then you have apps that are sort of a crossover. Like you look at Instagram at first and there is incredible utility to the fact that you can put filters on photos and sure, you could share it out to the small network that was Instagram, but ultimately, there was a powerful utility there regardless of network. Now that was an amazing product that actually did grow into incredibly powerful network effects.
Then you get into things on the other side of the spectrum that have no utility and are pure network effects like the telephone. I mean, if you have a communication network, the only purpose of it is to talk to other people on the networks or on the network. When you think about how entrenched that technology became and how long the telephone has been the de facto means of communication, it’s pretty clear that like the more core your network effect is to the product itself, the more power or, I guess, staying power that technology has.
David: It’s interesting too. Maybe a better distinction because I was just going through the list again. Network effects played a large role in many of these companies we’ve talked about. But there’s the strong form single platform network effects that Facebook, that LinkedIn has, that Snapchat has. Then there’s the two-sided network effect that marketplace since had of which we’ve spent a lot of time on this show between Amazon and Skype – well, Skype is also a strong form, single platform network effect. But YouTube, where you have supply and demand getting matched. And that can also be a strong network effect but it’s so much harder to get going because you have to bring both these sides together. Whereas the single platform, strong form effect where it’s literally been you being on Facebook makes Facebook more valuable to me. Whereas you buying stuff from Amazon only indirectly makes Amazon more valuable to me.
Ben: Right. I agree.
David: There are so, so few companies that can achieve this scale in that single platform and then once you do, just the defensibility is pretty much unbreakable.
Ben: It’s funny. I was reading a thing. It was reflections of Obama on his presidency. He was talking about – actually, I think this quote was from one of his aides, but talking about how important the telephone was to the Obama administration and how amazing it was that that’s the way that he speaks to other world leaders and how that’s pretty much unchanged over the last, I don’t know, however many decades. But we have all this new technology and he was notoriously a BlackBerry addict. The phone is ubiquitous. Especially for landline, it’s pretty high quality, secure. It’s one of those…
David: That’s the classic case of like two world leaders. The value of the telephone is solely in the fact that other world leaders are available via the telephone.
Ben: Yeah, exactly.
David: Great. Let’s move on. Our next them that we also discussed four times this year was what I like to call “start small” but is focusing at the outset on solving a specific problem for a specific customer base. Not trying to be everything to everyone at the startup phase. You could also think about this as targeting niche markets and then growing from there. We talked about this on the Virgin America episode, with Alaska obviously targeting the Seattle market and Virgin targeting the California market. We talked about it on Snapchat, with Snapchat really tailoring their product after some wandering in the woods for a while to high schoolers in Orange County. And with Trulia. And also with Amazon. Amazon was just books until long after the IPO. Several of those companies, Amazon obviously and potentially Snapchat too have gone on to become huge companies that do lots of things that have many different products and target diverse user bases. But they all started with that core solving a very specific problem for a very specific audience.
Ben: Yeah. And relating this to network effects like we just mentioned. What’s not in this list but easily could be is Facebook. You think about the issue of the cold start problem. Like if they launched Facebook to the world, it would have been no fun because let’s even say there’s 10 people in every city on it. I mean, you’re just not going to know anyone. Maybe one person. And by launching university by university and focusing on just Harvard first, you take advantage of those preexisting networks to make sure that there’s density among your customer base.
David: You can do the Paul Graham “Things That Don’t Scale” to get those nodes on the small niche network and then grow from there. Actually, I think in our – well, let’s jump to the third theme that we discussed four times this year. I think that three of these kind of form a trinity that if you are working with startups, starting a startup, or working in technology generally. You could do far worse than to keep these three things of mind. The third one is growth culture. What we mean by that is the discipline of growth within startups and technology. And it really started with PayPal and that was the first episode where we discussed it of using real data from the marketplace and from usage of your product to iterate what you’re doing and to iterate your product towards the signal of how people are using that data. So we talked about that on PayPal, Snapchat, NeXT, and the Amazon IPO.
But I think the interplay of these three things, one, keeping in mind the power of network effects, but the problem with that is that they’re very hard to achieve because you need a lot of scale. Then companies that have achieved them have huge defensibility. So, how do you attack that? You start small with a very specific niche that’s underserved and by whatever solutions that are in the marketplace today target them and then you use the discipline of growth to be honest with yourself about what’s working, what are people using and you take it one step at a time.
Ben: I’ll tell you in looking at growth culture and thinking about the way PayPal did it when they released a product that wasn’t really resonating and then they found where are people using this product and it turned out, “Oh, wow,” like an incredible amount of transactions are actually happening.
David: On eBay.
Ben: Because of eBay sales, yeah. Or you look at like –
David: I mean, the initial product was for Palm Pilots, right?
Ben: Right, right. You look at like Twitch and they realize that it’s a general purpose thing but “wow, people are really using this thing around gaming so let’s focus on that.” We’ve totally discovered that with PSL and Madrona Labs companies where it’s so important to get in market with something and just be like a player in that space to have something to talk to partners and customers to and ways to get actual data back from the way that people are using your thing. And it’s just funny how companies either narrow or move to an adjacent market and it’s so important to get in the space, have a product in market, be able to learn and then you’ll find what the real opportunity is from there because there’s varying degrees of how similar it is to your original idea that ends up working, but it’s never exactly that and you need customer data to know.
David: We didn’t plan it this way but as we’ve been talking about these themes, I almost see it as like this kind of trinity of the themes that we talked about four times throughout the year being how you – sort of the playbook of when you’re actually building and running a startup, what you work on. Then the meta theme is Aggregation Theory on top of that because the output of if you do these three things is you’ll create a superior customer experience. That really is the goal of starting small, solving a specific problem better than anyone else for a specific customer, and then growing from there and then network effects layering on top of that and making the product even better in providing defensibility. Those together, you get Aggregation Theory.
Ben: You can do a lot worse than using these as your checklist when starting or pitching or refining an idea as like am I going to be able to create a successful company or at least convince other people that my company could be successful. This sure feels like a decent place to start.
David: Yeah. Unfortunately, nobody has yet invented a magic button to translate theory into practice in the technology world. That’s what makes it fun.
Ben: Yup, yup. All right. Moving on to things we’ve discussed three times. The flywheel is a big one with Lucasfilm, Marvel, and the Amazon IPO episode. I look at a flywheel as sort of a very specific type of network effect where any increase in one piece of your business adds momentum and grows an additional part of your business; Amazon and Disney of course being classic examples of this. Disney with movies that feed into theme parks, that feed into TV shows, that feed into merchandise. Then Amazon with the ability to create a better experience through lower cost, building more customer trust, driving more traffic and then their ability to continue and grow in scale from there.
David: Amazon is definitely a two-sided network effect or I guess now with AWS, all of the different businesses that Amazon has multi-sided, but for them, the flywheel is about adding to one side of the network effect and then that pushing the other side. Disney and the companies they’ve acquired in their flywheel, don’t know how much it’s about a network effect, but it almost makes me think more of like economies of scale in sort of old world businesses. But I guess you could argue to the extent that people come, that consumers come to see content. That the more consumers they have coming to see Disney content, the more they can channel those consumers into other Disney content and then so you could think about it as kind of a content consumer network effect. But it's not as strong, I don’t think.
Ben: Yeah. It’s a good point. It’s funny in thinking about the best way to define flywheels or potentially if you’re in an existing business to see flywheel opportunities in the business. I think a good way to define it might be what does your existing asset of business line customer capabilities, all those things, allow you to do that is an unfair advantage, that people starting from a cold start wouldn’t be able to do. So that’s sort of criteria one.
Then criteria two is does the existence of that new thing that you do feedback and grow your original business. Disney – somebody trying to create a caricature like a toy business doesn’t have Disney’s IP, so they’re fall on their face. So criteria one is like, “Boy, you can really bootstrap a merchandise business.” And then criteria two is of course more people are going to go want to see the movies and visit the parks if they have the toys.
David: This makes me think about Airbnb and what they’re doing now with launching experiences and blending both of the lodging and experiences into trips. Lots of people have tried to solve the kind of destination services and travel for a long time but Airbnb has a complete unfair advantage in that they have travelers who are coming and using their site to book lodging and especially travelers who are oftentimes looking for experiences at the destinations they’re going to. And so they can feed that into the experiences product and then as that product matures and potentially someday people will be coming to Airbnb specifically for experiences, then they can funnel those people into booking lodging. You could paint what they’re trying to do now in a flywheel.
Ben: Yeah. Good point.
David: All right. Next one that we also discussed three times this year was this idea that as a particular technology generation matures, and we saw this with the PC generation, with the mobile generation and potentially with future technology generations to come, maybe we’ll talk about this in 2017 themes. But the basis of competition moves up the stack throughout the generation and can start at the hardware level and then moves up to the operating system level and then to the application layer level, and then eventually like we’re seeing now in mobile and on the web into the service layer level which is cross application. So we talked about this in the Acompli episode, in the Android episode where I think you can see it most clearly. And in the Push Pop Press episode which became Facebook Instant Articles.
Ben: I really like this one. We talked about it was like not exactly the same but in that episode about Writely and Google Docs, we’re talking about as productivity moved toward the cloud from desktop software, there’s a low-end disruption thing that happened where Google decided that they were going to create not as good tools for the professional but very good for people that wanted to do sort of lightweight editing in their browser. Then that begun a total arms race of wow, there is a service in cloud-based productivity market here and you don’t necessarily discover those things without somebody building an inferior product further up the stack first.
David: Which is a great transition to our last 3-point theme or 3x theme for 2016 which was business model based disruption which we talked about on the Writely and Google Docs episode, and on the Waze episode, and on the Android episode. But anytime it you’re an incumbent in an area and somebody pops up, they can offer the same product as you and make money via a different business model, then you should be very, very worried. This is classic Clayton Christensen here.
Ben: It very much falls into the same sort of fear as the Jeff Bezos quote “your margin is my opportunity” and in this method it’s more like “your business model is my opportunity” because if you’re able to leverage something like how Waze was able to crowdsource all the data, suddenly it's like, “Hey, I got this huge asset that cost you money for free and now I get to decide what to do with that.”
David: Yup. Amazon is one of the best in the world at this, and actually this is part of one of my Carve Outs coming up. Not Amazon Video. My Carve Out is not Amazon Video but you see it happening there. Netflix is a great, great company and valued very highly right now. But Amazon Video has improved so much throughout 2016 and it’s free with Prime. You have to pay 8 bucks a month or whatever it is for Netflix now. It’s a different business model.
Ben: It is. It is. All right. We’ve got some things that are discussed twice and once throughout the course of the year, but we’re going to put those in the show notes. So if you’re curious about other tech themes that were prevalent in 2016, at least through our lens, those will be in the show notes and we’re going to move on to talk about some themes that we think are going to be key in 2017. So, David, do you want to start this off with one of your –
David: Yeah, I will. I’m laughing and I’m sure long-time listeners of this show will be laughing as well. But the first one I wanted to talk about is I think Aggregation Theory is going to continue to be critically important. One of, if not the clearest lens through which to view opportunities and challenges and disruption that’s happening not only in tech going into 2017 but I think in the world broadly too and society. I mean, Ben Thompson has had some great posts, really great posts in the back half of the year here talking about how you can apply that lens, the Aggregation Theory lens looking at politics and obviously the US presidential election in 2016, the media as well. To me personally, I actually see it becoming more important in 2017 and thinking about sort of beyond just the traditional IT sector of tech, consumer technology and enterprise software technology. But what does it look like when the dynamics of Aggregation Theory and both opportunities and implications of internet dynamics get trained on all industries. We’re seeing it with driving right now which if I’m not getting the facts wrong which is entirely possible, but I could be, I believe driving jobs are either the number one or certainly top 5 category of jobs in the US.
Ben: It’s like 2 or 3 million jobs are directly related to the logistics industry, so kind of trucking, coordinating trucking…
David: Then you have, I don’t know how many Uber drivers there are. If you add up Uber and Lyft and taxi drivers, that’s another huge amount of people. All of a sudden you’re going to have a superior customer experience through self-driving technology that’s going to come onboard in the next few years. I think everybody in some form or fashion is going to have to come to grips with the implications of what this means.
Ben: Yeah. That’s pretty interesting. Well, this segues nicely into one of mine and I think I was going to talk about three things that I think will happen in 2017 and three things that I think will begin to happen but are really 2018, 2019 and 2020 themes. But this totally gets into one of mine which is autonomous vehicles start to make people more serious about universal basic income.
I was having this discussion with a friend recently where let’s start with this hypothetical world that is we can basically produce in a very sci-fi way our basic means of living for free. We create technology that is efficient enough that let’s say that we can have farms that have all autonomous equipment that are powered by solar rays of renewable free energy and can deliver all these ingredients to people basically free of charge. So we have clean water, clean food entirely for free and maybe it's even possible that transportation is there too.
Then there’s things like shelter, other basic things that you need to live that aren’t free but we’re going to start trending toward this world where we could provide those things for everyone. But the thing that will happen much sooner than that is that we’ll be able to provide these things with very little jobs. If you look at like the Industrial Revolution, the argument that everyone always makes is well, technology eliminates jobs but it also creates new jobs.
I think in this era of autonomous vehicles, autonomous machines and leveraging machine learning, the difference is that you don’t create as many jobs as you eliminate. That might be okay in the extreme long run where we do have a societal structure in place that we take care of everyone that doesn’t have a job because like nobody needs to work. Let’s imagine a world where everybody gets to live without working and then we need some ways to distribute that wealth out to people.
David: We also need something for people to do when they’re not working.
Ben: Yeah. Boy, that’s an organization problem –
David: That’s what VR is for.
Ben: – of figuring out what to do with your time or we don’t work. But I think there’s an immediate pressing problem which is companies will get extremely wealthy by having really fat profit margins on being able to achieve great value for tons and tons of people through Aggregation Theory and those people will be completely served, but it will be the same price that we’ve been paying for things except that lots of people don’t have jobs. There is going to be this kind of scary valley where we eliminate the jobs long before we have any sort of like support redistribution system.
David: A couple of thoughts. I think what we’re talking about is a consequence of Aggregation Theory where if you believe it, that we’re entering a world across all industries now where a superior customer experience becomes a winner-take-all business. That means there is a winner and lots of losers. As opposed to where you have equilibrium in other industries and how such as the auto industry where there are 10-20; or the airline industry, 10-20 firms. They’re all employing lots of people and maybe they are not as profitable as firms as a winner-take-all business. But they are at least providing jobs. So, this is definitely as far as I know, nobody has solved what this means, how to deal with this on a societal level. But what you’re saying after that reminds me of there is a great… I believe this was in Wired. I’m going to find this article. I’ll link to it in the show notes.
Right before the election, Obama gave a few interviews where he talked a lot about tech and sort of mused on what he saw as the biggest challenges for the world and for America going forward now and called on the tech industry to respond to them. The first one was inequality. And this piece they had six well-known figures from the tech industry sort of respond to each of these things, the challenges that Obama called out. I believe, yes it was Tim O'Reilly, the founder of O’Reilly Media answered the inequality topic and he said exactly what you’re talking about, Ben, which is that Silicon Valley often forgets that it takes consumer circles and people with jobs who have disposable income to then spend money on Silicon Valley products and technology. So you’re always kind of eating your own tail in the economy and to the extent that we put more people out of jobs as an industry, then there’s going to be far less consumption of our own products as an industry.
Ben: Yeah. It’s kind of funny thinking about it. If not as much funny, it’s sort of haunting.
David: Yeah. It’s ironic but not in a happy way.
Ben: I guess technology is this interesting sword that has to be responsively wielded. We’ve talked about this in the past that the purpose of technology is to make things easier so that it requires less effort from people and when you run that to its extreme, it’s that you need less people to do the jobs that create the value for people, for the consumers of those things.
David: This is one of the themes that we talked about a year ago.
Ben: In the Facebook IPO.
David: Yeah, that technology is a lever. It doesn’t mean technology is like an Excalibur. It’s not like it’s a sword for good. It magnifies what is going on whether that’s good or evil or indifferent. It just magnifies the consequences.
Ben: So in having this ability to create incredible automation and incredible value without human input, I don’t think we’ve necessarily figured out what a societal structure is in a world where technology is so powerful. I think a lot of the things that we take for granted in a society that is a democratic republic and it has a capitalist economy function pretty well in a world where Aggregation Theory and automation is not so powerful, but I think we could be forced to do some serious rethinking in the coming decade as these new harsh realities come to light and think about like, “Boy, if we just…” Pure capitalism may not actually work anymore. I think I’m venturing into dangerous territory there.
David: Well, we’re going to have call my wife Jenny onto the show as a guest expert for this as she’s a PhD in humanities and thinks a lot about this. But, I think channeling her, she would say we have been in a late capitalist world for a long time, I mean at least since the end of World War II. This is kind of the hallmark of late capitalism which is that you have rapidly increasing wealth and equality. Then the theory is that it ends in a communist or socialist revolution. We’ll see. Not predicting that that will necessarily happen.
Ben: Right, right.
David: But that’s the direction that, you know, if you look at like Europe, that political economies there have been moving towards over the last 20 years or so. But it’s also a world where innovation is encouraged as much as it is in a purely capitalist society.
Ben: Maybe. I think then you start diving into what are human motives besides economic one like if you look at the reason – Daniel Pink has done a bunch of research on this, like what makes people happy in their jobs. It’s not really money. It’s autonomy, mastery, and purpose above once you hit a certain dollar amount of sustaining yourself. If you think about that on one hand and you look at sort of like the things that motivate people in general – money, power, love – there’s a lot of like very core human things that we often wrap up with how much money someone makes and people often define themselves by their job, and their value in the world is so tied to that. I think we might start seeing – and maybe not in 2017, maybe not for a while – once we get to a kind of a post scarcity society is a place where we start defining ourselves and doing things by difference measurements.
David: Actually, I’m glad that you brought that up is because I’m catching myself sort of falling into a trap that I think a lot of people and a lot of economists have for a long time, I’ve been reading a bunch of economists lately and realizing that classical and traditional macroeconomics is kind of like voodoo and not effective voodoo. It’s really deeply flawed and one of the assumptions that is really flawed is that every individual is (A) a rational actor, (B) has perfect information, and (C) is motivated by money and wealth. All three of those things have been proven to be just not true.
Ben: Are you reading Kahneman right now?
David: I have not yet started reading The Undoing Project, but it’s on my list. I’ve been reading Tyler Cowen’s blog, A Marginal Revolution, and lot of the links and work that he links to and posts there, and he’s sort of one of the poster children for the new breed of economists that reject a lot of these classical assumptions.
Ben: That’s cool. I’ll have to check that out.
David: Yeah. Shall we move on to –? One that I wanted to bring up on a sort of looking more on the bright side notable on this, that we talked about on the Facebook IPO episode is I’m hopeful that 2017 sees, at least starts to see the beginning of the end of this “stay private longer” theme, and startups, private technology companies delaying their IPOs indefinitely. It sure looks like we’re going to see a Snap Inc. IPO in the first half, maybe even the first quarter of 2017. I’m really, really excited and hopeful to see what that does for the market. Lots of questions to be answered both about the company and what valuation they end up getting both with pricing and how the stock trades afterwards. But I hope that – I’m encouraged by their “courage”, word of 2016, for even doing this.
Ben: Thank you, Phil Schiller.
David: Yeah. Thank you, Phil Schiller. I hope we see more companies that are building long-term sustainable businesses get the courage to go public.
Ben: Yeah. It’s not clear to me if it’s like courage, like they’re taking some big risk necessarily that being private wouldn’t make them. Or that they’re doing it out of some sense of – it’s probably just overwhelmingly the right thing for them to do so they’re doing it. But regardless of motivation, it sure seems like it’s better for everyone to have companies IPO-ing at or before the 5-year mark and somewhere between like 3 and 6 years rather than waiting to 10 because it’s just – we talked about this on the Facebook episode but it lets the American public get in on the growth and wealth that it has created from late-stage American innovation.
David: Also, I think this is something that, don’t get me wrong, Wall Street has its own set of issues and the focus on short-term earnings results can be a bad thing for companies of all types. But I think going public, it forces a level of accountability and being forced to see the real picture and reflection of your business that I think in the long term will be good for companies. Like we talked about on the Facebook episode. I really think, not being the time but doing all the research and talking through the story, I think Facebook going public forced the company to recognize how big a problem they had in mobile and to move at work speed to fix it.
Ben: Yeah, that’s a great point. All right. I’ve got another couple that go together.
David: Do it.
Ben: The first one is the commoditization of basic machine learning. Let me just create a disclaimer that says I am not a machine learning practitioner or data scientist nor do I have formal education on the topic. I’m a curious person in tech. So I’ve been doing as much reading as I possibly can and talking to some people that are a lot smarter than I am in these things and trying to understand what does the landscape look like. What’s become really apparent is that a lot of these things are 50- to 70-year-old technologies or I guess really like math papers that only now are coming to fruition and actually being applied because number one, we have the hardware to do so not only with just cheap CPUs and GPUs but with actual like Google creating tensor processing units that are more effective at doing this sort of math quickly and efficiently that you need to do for machine learning.
David: Plus, you have access to elastically scalable clouds.
David: You don’t have to build tons of data centers. You can use S3 to store all your data.
Ben: Yup. So, a variety of factors contributing to this. There are tens or hundreds of defined machine learning methodologies and I think something that is pretty interesting is there’s less than five that are actually used right now by a lot of people and have actually had a lot of research on them, a lot of time and practice. It’s interesting that like relative to a decade ago when there was still lots of green space of this is an emerging feel that’s been researched for a while but not commercialized, we don’t know which things work best. Now there’s like a fairly understood scope and scale and understanding of what they can be used for the few basic types or few most used types. What we’ve seen is the platformization of those. If you have machine learning tasks to do at your company that are not like wildly different than something somebody else is doing or don’t require any sort of like new research or actual mathematicians to be hammering on a methodology that’s not well understood yet, these are often available from Google, from Amazon, from Microsoft as cloud services that are built on tensor flow at Google or any of the other platforms at these other companies.
What you see is like companies that might be 30-40 people don’t really need to build out a data science, a machine learning practice in a company. They just need to find a way to create really clean data and then feed it into these sort of like off-the-shelf systems that the big companies created.
David: That makes me really excited as an investor because it’s going to enable so many more companies and so many more industries to take advantage of these tools. I think this will be one of the enabling factors that further pushes Aggregation Theory out into the world beyond the traditional borders of the “tech industry” that we talked about earlier.
Ben: That brings up the second point that I have is the reason that these larger companies are incentivized to make these things available is that the value, once you hit a certain kind of scale and understanding and saturation of these things, the value isn’t the algorithm themselves. The value is all about the data. So these companies with large sets of data – Google, Facebook, Microsoft, Amazon, etc. – can solve problems that startups just can’t. There’s a total flywheel effect of once they have just incredible critical masses of data and have the machine learning algorithms and practices built in-house to really be competent at turning that data into new products and new services, they’re just able to be the best at things that startups have no chance at.
So it's a category of machine learning problems that like you’re saying, David, are very exciting as an investor to new startups because they can use these off-the-shelf tools. But there’s a whole other category of things that the big tech companies with lots of data can do that no one else can.
David: I’m going to agree with you with a caveat on this one and more to come on my front in 2017 on this idea. But my view at least right now on this question is I think the key to the data is its data and how your customers and your domain and people who could be your customers. And the interaction between those customers and what your product is. So yes, I agree that if you have multiple companies doing the same thing, the company that has the most data and the most robust and rich data is going to be able to create this most superior customer experience via Aggregation Theory which we have talked about ad nauseum. But to the extent you’re doing something slightly different, I don’t think it pivots very well. That gives me some hope for opportunities for startups.
Ben: I think there’s this category of things. So, I see you, I think there’s definitely a category of things around personalization where all those points are like spot on. Anything that requires lots of information about you to bootstrap from, for example like showing you the photos of your best memories of the last five years when you were in motion. Queries like that. But Google has the most photos of cats. So anything that relies on a very accurate cat recognizer, you’re not going to beat Google at that. I think about these companies have the largest datasets of like a lot of things. I think you’re right that outside of the domain of things that these companies capture, like you can imagine flow meters on plumbing, none of these big tech companies have the data on flow meters on plumbing. But anything that’s like photo related or conversation related, or data sets that people create in interactions with themselves and the world, it is really locked up there.
I think there’s probably interesting opportunities to try and go find data sets elsewhere and figure out what value can be created from those that those companies don’t have.
David: I think that’s right. I guess the perspective I’m coming at it from is if you think about all the activities in our economy and in our lives, there is an infinite spectrum of products and services that can be built that are very different. I guess excitement I come at it from is that you think about Google and the things you were saying, understanding cats. And I do think machine vision is going to be perhaps the biggest category of machine learning, value creation in the coming years.
A company that I work with, that were investors in Madrona is a company called Booster Fuels and they deliver gas to your car. You wouldn’t think that that would be driven by machine learning but actually turns out that the route that trucks take to deliver gas is hugely important and the more efficient you get at that, the better your vision that your product will be and the better your business will be. Google can’t do that.
Ben: Or at least they don’t have an unfair advantage in doing that.
David: They don’t have an unfair advantage in doing that, yeah. Even Uber doesn’t have an unfair advantage of doing that. I think there’s a big sea out there to fish in.
Ben: Cool. Yeah, I see you there.
David: All right. Last one that I had, more fun one for me to at least end on, is I think 2017 is – I’m going back to the niche, sort of a theme we didn’t talk about in the preamble that is what do native “experiences” look like in new mediums. I think 2017 could be a really interesting year for VR and the whole VR/AR industry. I think we’ll get a lot more signal this year on whether VR and AR is going to be a mainstream industry anytime soon or a large niche industry or none of the above. I’m hopeful that by this time next year we’ll have a lot more information on that front and to the extent that it either becomes mainstream or a large niche industry. I’m really excited to see what native “experiences” look like in the VR world.
Ben: Yeah. Me too. Because it’s funny. It’s like you remember the first Steve Jobs demo with the iPhone when he pulls up the New York Times and there’s no such thing as a mobile optimized site yet, and he double taps to zoom in on all the articles, and you look at like a desktop rendered version of the Times. It’s like, what is the equivalent there? What are the native VR experiences that are… right now like we’re so excited like, “Oh, my God. We’re playing a similar video game but in VR.”
David: And a lot of the games you’re seeing in VR right now are those “Oh man, this game that we’ve always known and love would be so cool if we could do it in VR,” like Minecraft or whatever. I think this is just where the creativity of entrepreneurs is going to come out. It will be things that you and I haven’t imagined yet. And having done a lot of VR experiences myself, I would imagine a lot of our listeners either haven’t done many or haven’t done any yet. It’s very much a leading-edge niche technology right now, but you can see so much potential in the immersiveness of the experience. It’s like the anti-mobile in a lot of ways.
Ben: Yeah. Right now it’s a largely tethered experience that you certainly can’t move around much outside of a very controlled environment.
David: The best VR experiences right now would still have lots of problems with them but whereas opposed on a mobile phone where you’re getting 16,000 notifications every minute and jumping between contacts all the time, you really do start to forget that you’re in a simulation and just get totally immersed in what you’re doing.
Ben: Yeah. Well, David I would argue I’m frequently completely immersed in my phone and not paying attention to what’s around me.
David: It’s all a question of what context you’re thinking about.
Ben: Well hey, I’ve got one more and it’s more of question.
David: Yeah, do it.
Ben: I’m curious what you think. Because for how political we could get on this show, we stay pretty far away from it even though we sort of discuss societal issues. I just want to think through we’ve been in this era of rising abundance of both information and physical products over the last several decades. I was trying to figure out like is it possible that we start moving into an era of scarcity of physical products where in years past it’s been incredibly inexpensive to manufacture overseas. That’s the reason why we can get an iPhone for $600 when it’s this incredible magical device. With a combination of a rising middle class in China, additional countries where a lot of this very inexpensive manufacturing is getting done, becoming more of a developed nation.
Then also, it’s hard to predict what’s going to happen but all indications lead toward we may have a little bit more restrictions and tariffs on trade to encourage things to be built in America under the Trump administration. I’m curious, even if that doesn’t come to fruition, do you think that we start to shift back toward an era where goods are more expensive and we have less physical goods?
David: I don’t know. I hadn’t quite thought about that. It’s really hard to imagine that just from a consumer perspective. Which does make me wonder if it happened, what would the political reaction be. I mean, let’s assume that if more barriers to trade get enacted, that a consequence of that is that the price of physical goods go up significantly and less people are able to afford them, like how would people vote in reaction to that. I don’t know. You can’t buy your big screen anymore. Yeah, I don’t know. At the same time, we also live in this moment where one of the books I read this year was one of the top-selling books in 2016 was The Life-Changing Magic of Tidying Up, the Japanese art of decluttering, all about removing physical things that there’s too much. Many people have too many physical things in their life and you need to remove them. So if prices go up, will it solve that? I don’t know.
Ben: I can’t tell if there’s a cultural – I’m trying to decide if I live too much in a bubble but it sure seems like there’s a trend toward owning less things just to try and be more minimalist and especially with the shift toward more people being in urban environments and having smaller spaces that we may just start to see this from a cultural desire perspective, too.
David: Yeah. No question. I think one thing that seems very clear to me that you mentioned is urbanization regardless of what happens with globalization and trade, I think urbanization is going to continue be a very, very powerful force throughout the rest of this decade and likely into the next. For a whole variety of reasons, so many people in this country and around the world are migrating to cities and the migration to cities what I think is happening, is going to force a lot of this change. The big mansions in the suburbs aren’t what a lot of people aspire to anymore.
Ben: That’s a great point.
David: Let alone the fancy cars that you drive to get back and forth.
Ben: Yeah. No kidding. With that, do you want to move on to Carve Outs?
David: Yeah. So for Carve Outs for this episode since it’s the end of the year, we thought that we would each do a Carve Out across a whole bunch of basically all the categories that we talked about throughout the year. So we have books, articles, podcasts, music, TV and movies, and the apps. Should we start with books?
Ben: Yeah. Let’s do it. I’ve got one that I’m re-reading now and I don’t think I’ve done it as a Carve Out before. But it’s one of these books that I probably should read every year and I’m just reading for the second time now. It’s called On Writing Well. It is a kind of a spiritual supplement to EB White’s “The Elements of Style” and it’s a really great, very enjoyable to read book that harps on the importance of writing in plain English, using one word when you can instead of 2 or 3 or 10, eliminating kind of colloquial phrases that are not adding anything to the piece and really decluttering your writing and having clarity of thought. One of the things I want to get better at in 2017 is just being a better writer and writing with more clarity and purpose and being more piffy. It’s just a phenomenal guide to doing exactly that.
David: I had that recommended to me several times over the years. I’ve never read it. I got to get that and read it. Very few things that we can invest in that will do more for our communication and then learning to be a better writer. Something I definitely, definitely need to keep working on.
Okay. For my book for the Carve Out, I actually broke it into two. I did nonfiction and fiction. So for nonfiction, The Creative Habit by Twyla Tharp which was a book that I actually got a long time ago and had been meaning to read and started, never finished. I finally picked it back up again and finished it this year. Really great. Twyla is an American choreographer and dancer. It’s a really creative work itself but a lot of great advice for how to think creatively and structure your life if you are someone from an entrepreneur to an executive to an actual artist who needs to think creatively in your work.
My fiction for the year is actually a whole multiple series of books but I finally read the entire Isaac Asimov cannon. Not all the books that he wrote, but the Robot series, the Empire series, and the Foundation series which are all separate series but later in his life he wrote other books to fill in the gaps and tie them altogether. Really fun and also a great read as we head into this world, as we’ve been talking about on this episode of artificial intelligence and robotics potentially coming along with that. A lot of his work has been an inspiration to actual innovators and inventors throughout the years. So highly, highly recommended, all of the series that he’s written.
Ben: Awesome. Actually, that kind of leads into my article, yeah. It’s Religion for the Nonreligious which is a Wait But Why column.
David: Oh yeah, so good.
Ben: Yeah, really great like talks about level one thinking which is more like instinctual, level two thinking which is more empathetic, level three thinking which is like thinking about the whole universe as we know it and being just floored by our place in it, and then level four thinking which is we don’t even know what we don’t know. It’s kind of interesting way to tie everything together but from “Why am I acting so silly right now?” all the way to “What are the bounds of the known universe?”
David: Yeah. Such a great blog, Wait But Why. My article is a piece in the New York Times that came out a few weeks ago about the alleged activities by Russian hackers in hacking the DNC and the RNC and then their use of that information to try and influence the outcome of the US elections. It’s a really great long reporting piece and they sort of deliberately make the analogy in the beginning of the piece between Watergate and the physical hacking of the DNC headquarters for information during Watergate to the digital hacking now. But why I thought it was super cool is they make the argument in the piece that if Russia did in fact do this, that this is actually moving beyond espionage into trying to influence outcomes of elections in another country is a warlike act.
It made me think a lot. Regardless of what you think about this particular situation about disruption and evolving technology as regards to war too, this might be the way or at least one of the ways that war is conducted now as opposed to tanks and planes and bombs. Super interesting to think about disruption at that level too and also relevant to what we’re talking about earlier in this show.
Ben: Wow, yeah. Totally ties it together. Speaking of being all over the place, my podcast recommendation is the episode of The Ezra Klein show with Patrick Collison, the cofounder and CEO of Stripe. Fascinating on a lot of levels. It truly is all over the place in a lot of the best ways that you would hope. Super intellectual on technology, politics, philosophy, and I highly recommend checking it out.
David: That is so funny because The Ezra Klein Show was my podcast as well. Fortunately, I had two episodes to recommend. One was that that show with Patrick Collision which is a great, great episode. The other one I think is the one that Ezra did immediately following that episode. Either immediately or two episodes later with Ta-Nehisi Coates. Completely different type of person and different world. Coates is an author and a journalist. But also very, very great episode and worth listening to.
Ben: I agree.
Ben: Music? So we’ve been riding this really highbrow intellectual train so I’m going to bring it back down and declare 2016 the year of Justin Bieber. His album of mega hits technically came out in November of 2016 but boy do they have staying power and stayed snappy and hot and released fresh singles all year, so I unapologetically, “Go, Justin Bieber!”
David: That’s great. I’m also unapologetically going to go back to I think I mentioned this an episode or two ago. Jenny and I went to a Stevie Nicks concert this year. It was so good. I’ve been a huge Fleetwood Mac fan for a long, long time. But in 2016, I have discovered Stevie Nicks’ solo career too even beyond Edge of Seventeen and the famous hits. She really is an amazing artist. Both her own solo albums and her collaborations especially with Tom Petty & The Heartbreakers. Also, Prince. I didn’t know until I went to her show that Prince played the guitar on her hit “Stand Back”. They had a really close relationship. That’s my music for 2016.
Ben: Awesome. So my TV or movie is Westworld, the HBO show. I mentioned that as my Carve Out a few episodes ago but that was the piece of entertainment of 2016 for me. It was so thought provoking, worth watching twice, worth listening to podcast about, worth talking to your friend about and reading the subreddit and diving in. It is JJ Abrams and Jonathan Nolan at their absolute best.
David: I’m going to bring it down even further here. I haven’t gotten into any of the heavy grade television that’s being produced these days. But my video content of the year was Rogue One. So good, if you haven’t seen it yet. I know it’s gotten somewhat mixed reviews but I thought it was just fantastic. Ben and I saw together on opening night. It was a blast. I’ve seen it once more since then and I would totally go see it again.
Ben: The force is with me and I am with the force, David. Moving on to app. My app of the year is one I just started using which is ReachNow, the car sharing program by BMW. It behaves very similar to Car2Go if you’ve used that. But you get a car that’s not a smart car so you can take 4 or 5 passengers. It’s enjoyable to drive. You can go on highways. Costs about the same amount and it’s a really great renting and drop-off experience.
David: Interesting. I tried ReachNow when they first launched in Seattle earlier in the year and I stopped using it because I remember the price as being way more expensive than Car2Go. Have they gotten better?
Ben: I think they’re same. Right now, they’re waiving signup fees which is like $39 I think that they’ll probably start at some point. But it’s 40 cents a mile and I think that’s pretty comparable. I remember when I stopped using Car2Go like 3 or 4 years ago, it was 33 cents a mile and I think has gone up since then.
David: Interesting. Yeah, great in concept. For the same price as a smart car, you could drive a BMW. I’d take a BMW.
Ben: Sorry, not a mile. Per minute. I think it’s actually kind of part of their plan for eventually building a self-driving fleet. I think they’re kind of data collecting vehicles.
David: Getting the data for machine learning, yeah. My app also plays into a bunch of themes we’ve talked about on this show and throughout the year, and a company, is Amazon Music. I discovered this in 2016 and as perhaps evidenced by my music Carve Out and Stevie Nicks, I don’t spend a lot of time staying up on new music and the Amazon Prime music is free with Prime and is pretty great especially for free. So, talking about business model disruption, the Amazon, if you are not already a Spotify or Pandora or other paid music or Apple Music subscriber and it’s not something that’s so important to you to have an absolute full catalogue, free with Amazon Prime, the music app is pretty great.
Ben: I’d be curious, listeners, if you are a music lover and have tried out Amazon MP3. I would love to get your review. If you want to reach out to us in the Slack, go to Acquired.fm. You can see the Slack where all the conversations are happening. Yeah, I’d love to hear about it from music lovers.
David: Yeah. I also have a request too for anyone out there on going back to books, I love reading sci-fi but I’m super curious, I haven’t read a lot of current science fiction and I would love to hear, read, and learn about what people are imagining about the future today and especially women science fiction authors which I’ve read embarrassingly little. So if you have any good recommendations for current sci-fi especially by women authors, hit me up in the Slack.
Ben: Awesome. Well, listeners we hope you had a great 2016 and ring in the 2017 with however you choose to ring it in. It’s probably a week or so in right now but we hope you had a great year. If you’ve been listening to this show for a long time or even if you’re brand new and enjoy the episode, we would love a review on iTunes and to share it with your friends and colleagues or anyone that you think would be interested on Twitter or just an email or word of mouth. So thank you so much for being a listener and have a great year.
David: Happy 2017! We’ll talk to you soon.
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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