No More Winner Takes All

Over the last year, I’ve been in a number of discussions where the concept of Winner Takes All was raised, and it’s now starting to annoy me. In a Winner Takes All market, there is a dominant competitor who takes a very large share of the profits. An example at the moment is the mobile phone manufacturing market, where it seems Apple is the winner who is taking all (or, at least, most). However, there may be a widespread view that any market relating to the Internet is Winner Takes All, and that would be a problem.

Winner Takes All is typically put forward to justify either betting big (eg. intentionally making multi-year losses in order to get the scale of users/customers needed to be dominant in a market) or not doing anything (eg. because only one can win anything, and the likelihood is that it won’t be you). In other words, Winner Takes All markets are for only the bravest of the brave. But if anything relating to the Internet is Winner Takes All, then unless you’re pretty special, you should stay off the Internet. Or so the thinking goes.

You might expect that I disagree – and you’d be right. Let me break down why.

Firstly, there are mature businesses on the Internet that have multiple big players, and yet not a single winner. Web mail is a good example, with the biggest services (from Microsoft, Yahoo and Google) having similar sized user-bases.

Global Web Mail Unique Visits (ComScore May 2012)
Service Users
Microsoft Hotmail 325 million
Yahoo Mail 298 million
Google GMail 289 million

And while one counter-example is enough to disprove a hypothesis, here’s another one to show the first wasn’t merely an exception. Desktop web browser share is largely split between three big players (Microsoft, Mozilla and Google). Another one is Internet-connected game consoles. I’d say this myth is busted.

A response to the above is granting that not every market relating to the Internet is applicable to Winner Takes All, but that there are some important ones that are. For example, Internet services with “network effects” (those where the more users that adopt it, the more value they are to those users) are in such a market, and Facebook’s dominance in social networking illustrates this.

While this watered-down Winner Takes All view appears more reasonable, there are two lines of evidence that discount it also. The first is the historical record of all the previous social networking services where it appeared there was a winner, but then they lost to a subsequent service that rapidly took over. Back in 2007, MySpace was considered dominant over Facebook, and before MySpace were other services like GeoCities which, according to Wikipedia, in 1999 was the third most visited site on the Internet. If a winner can be displaced so quickly, can they really be said to have “won”?

The second line of evidence is the active competition still occurring in the social networking market. There are both alternative services such as Twitter, LinkedIn and Yammer, and also similar services operating in specific (yet still sizeable) markets such as Qzone, Renren or Sina Weibo in the Chinese language market. If a service isn’t dominant everywhere, can they really be said to have taken it “all”?

But wait, I hear someone say. Cyworld was dominant in the South Korea language market, and yet now Facebook has displaced Cyworld over the course of a year. Doesn’t this show that the same could happen in China and Facebook is operating in a Winner Takes All market? Well, yes it could happen in China, but no, all this shows is that Facebook is a good competitor. There’s no need to explain away Facebook’s appeal through claiming their rise in South Korea was an inevitable consequence of the market structure.

So, I don’t find Winner Takes All convincing, but the danger is that some people believe it and choose not to attempt to launch valuable Internet-based ideas. We users of the Internet would end up deprived of those services as a result. But, it seems the good news is that plenty of people do not believe in the pessimistic world view of Winner Takes All and are happily putting their products and services on the Internet.

Thoughts on a Tech Bubble

I have been trying to get to grips with the meaning of investment “bubbles” for a couple of years now (for instance in this blog post about tulip mania). I first started to look into this during the local property boom when I was also studying finance. However, there’s increasing talk online of whether we are now in some sort of tech bubble, akin to what happened around the years 1999-2000 and resulted in the dot-com crash.

I wouldn’t say that I have a mature position yet on bubbles, but I think I know enough to say that we’re not in a tech bubble. At least, not yet.

One problem with a test for a bubble is that it is difficult to know for sure that you’re in one until after they’re over. For one sure sign of a bubble is that it ends in a crash – the bubble pops. At this point, prices of the investments in question drop quickly, and many people lose a fortune.

Other signs of a bubble, such as speculative investors (people investing because they expect prices to go up due to investor behavior not necessarily due to increase in underlying worth) or dodgy investments are present in most markets most of the time, and shouldn’t be a concern of themselves. You would hope that in a market there are a variety of positions being taken on investments for a variety of reasons, and that new investments can be introduced into a market if there is a demand for them.

Also, many markets are naturally cyclical, with regular booms following busts over time. Just because a market is hot doesn’t mean it’s in a bubble, although it probably means prices are higher than otherwise warranted, in which case you’re unlikely to pick up a bargain. But people investing for the long-term with diversification across different markets can typically ride-out a cyclical decline.

That said, the first reason I don’t believe we are in a tech bubble is that currently a decline in the value of tech start-ups wouldn’t result in the average punter losing a fortune, because the average punter is not able to invest in tech start-ups. We’re not in a situation, like back in 2000, where an ordinary investor can invest in the latest crazy tech stock on the NASDAQ. It is really VCs and Angels who are taking the risks right now. So, we can’t yet experience the sort of widespread disaster that characterizes a crash.

The other reason I don’t think even the keen anticipation for the Facebook IPO could make this a bubble is that a bubble is a description of a market and not a single investment. You can’t really talk of a 13 Pearl St Essendon bubble or an Enron bubble (even while their stock did crash and wipe many people out). We would need to see average people investing in a variety of new tech companies for there to be a bubble in the tech market.

But there may be signs that this could yet occur. Services like Kickstarter and IndieGoGo have sprung up that allow everyday people to pledge or commit money to a cause, which might be to bring a product or service to market. If causes start to take on more investment characteristics, this begins to look like a means for early stage investment in tech companies.

If I start to hear about people extending the mortgages on their homes to put funds into Kickstarter projects, I will be worried that we’re in a bubble, but I’m not worried yet.

Why some scientists diverge from the mainstream

A while ago, a friend sent me a link to an article by Richard Lindzen as an example of a respectable scientist who sits on the “skeptical” side of the fence in the global warming debate. At the time, I noted that Lindzen was also known as a skeptic of the link between smoking and lung cancer, but aside from thinking it was an interesting coincidence that he fell twice into the skeptical camp on such emotional topics, didn’t ponder it much more.

However,  recently I listened to a lecture by Naomi Oreskes (presumably connected with her recent book) where she provided a possible explanation of the link between the two views that also can explain why a respectable scientist is willing to diverge so far from the mainstream position.

We don’t hear debates about whether the sun-goes-around-the-earth or the earth-goes-around-the-sun any more. There isn’t disagreement on whether driving a car is dangerous, or whether excessive sun-baking increases the chance of skin cancer.

But when it comes to climate science, there is a very visible debate. If there was a clear split in the climate science community, that would be one explanation. Although, all major national science academies fall in the climate change believer camp, and in an essay in Science, Oreskes found that of 928 randomly selected abstracts on climate change, exactly none argued against the idea of human-influenced global warming. (Other similar studies can be found listed here.)

I’m not interested in discussing here who is right or wrong, but noting that the respectable scientists who are arguing a skeptical position regarding climate change are a small group indeed. It’s not a bad thing for science that they exist, as educated debate improves our body of knowledge, and such a debate needs people on both sides. However, it must be a tough job for the individuals involved. It’s natural to wonder why they would do it.

Due to the politicisation of the field, and the implications for certain industries depending on resulting policies, I’m not surprised that scientists who argue against climate change are effectively given a megaphone. On the other hand, I would be surprised if this was a sufficient reason for respectable scientists to adopt positions that they didn’t believe.

Oreskes proposes that the reason is: many scientists in the skeptical camp are fierce believers of capitalism and the free market. Hence they will naturally assume that any argument leading to a conclusion of greater industry regulation must be wrong, and will look very hard for the flaws in it.

An example of such a scientist, according to Oreskes, is Fred Singer.  Not only is he a climate change skeptic today, but in the past has been skeptical of the link between (second hand) cigarette smoke and cancer.  In the case of second hand smoking, he was arguing against the US EPA‘s desire to regulate smoking.

So, perhaps this applies to Lindzen as well. In that case, his skeptical views on both the dangers of smoking and climate change are not co-incidental at all.

Of course, if scientists all agreed on everything, then we wouldn’t need scientists. But I find it interesting to understand what might motivate scientists to disagree when it must seem like the whole scientific community is in agreement against them.

A Modest Proposal

Tony Abbott
Image via Wikipedia

Dear Tony Abbott,

Your new climate change policy for the Liberal Party is certainly interesting: a 5% reduction in national emission levels from those of the year 2000 by the year 2020, but without implementing an energy trading scheme or carbon tax. Although it doesn’t sound like you’ve quite settled how you’ll achieve this yet, you are looking at options such more regulations and new government subsidies. You are clearly open to options which the Labor Party is traditionally closed to.

However, as someone who might be willing to take on radical yet reasonable policy positions, I would like you to consider a simple measure that will cost the government nothing, yet easily achieve your target. Pass a law that makes it illegal to eat meat.

The United Nations’ Food and Agriculture Organisation 2006 report “Livestock’s Long Shadow” found that 18% of global greenhouse gas emissions come from the livestock sector, which is more than the emissions from all the cars in the world. We have been looking for emission savings in all the wrong places.

Having Australia become the first country to go vegetarian would demonstrate global leadership and really show those United Nations guys that we can do without their pesky energy trading scheme. If China can introduce a one child policy, then surely we can introduce a one food policy. Almost a third of Indian people are vegetarian, which is like if seventeen entire Australias were vegetarian. The global thinking is consistent: I have been assured by a very knowing fellow in London (author of the Stern Review on the Economics of Climate Change) that people ought to go vegetarian for the climate’s sake.

According to the Australian Government’s Department of Climate Change, “Tracking to Kyoto and 2020” report, our emission levels in the year 2000 were 553 million tonnes of CO2-equivalent gasses. A 5% reduction is a reduction of 27.7 million tonnes. Vegetarianism will easily achieve this.

As the Garnaut Climate Change Review notes, “Australia’s per capita emissions arising from agriculture are more than six times the world average, more than four times the OECD average” and the Agriculture, Forestry & Fishing industry is the largest industrial contributor to emissions, accounting for 29.3% of industrial emissions. Garnaut attributes 123.7 million tonnes of emissions to beef cattle alone.

Meat & Livestock Australia estimates that “50.7kg of red meat was available for consumption by each person in Australia in 2006-07” while a Japanese study estimates that each kilo of beef “generates the equivalent of 36.4 kilograms of carbon dioxide”. At a population of 20 million, that is an equivalent of about 37 million tonnes of greenhouse gas from meat eating.

Even more dramatically, an analysis by the Vegetarian Network Victoria forecasts Australia becoming completely carbon neutral within 3-5 decades of adopting vegetarianism if land currently used by cattle was reforested. Ask the Labor Party if their tax is able to achieve that.

There is also the opportunity to snooker your colleague Mr Turnbull, who seems to be positioning himself as a sort of Australian Al Gore. By adopting vegetarianism, you can occupy the highest of moral ground, while also being against taxation and climate change. High ground is the safest position to be in these troubled times.

Your role-model and mentor John Howard took strong measures in 1996 to ban all the dangerous guns (thank goodness we got to keep the safe guns). This type of bold leadership is what we need in the climate crisis of 2009.

Yours faithfully,


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Objects, Transactions and Value

This is a topic that I’ve been mulling over in my head for a little while now, but hang in there with me as I stumble through it, because the conclusions aren’t fully formed.

I’ve noticed that often the concept of the value of something is linked to its price. If someone is willing to pay $50 for an object, then it is considered that they value it as worth $50. If we add up all purchases across a country, it is equal to that country’s GDP, a measure of the value created by that country in that year.

However, the aspect of valuing things doesn’t sit well with me. When I buy something, I don’t feel that the more I pay, the more value I’m getting. In fact, the reverse is generally true, and I imagine most people feel the same. Also, I think different people may place different values on an object, even if they pay exactly the same price for it. It seems that price doesn’t explain value, at least not completely.

Another explanation that has occurred to me is that value is not tied to an object but to a transaction. Clearly a transaction (between a willing buyer and seller at arms-length, etc.) will go ahead only if it generates value for both parties. Otherwise there’s clearly no point. And there are obvious cases when a transaction won’t go ahead: when the price is too much for the buyer, or if the price is not enough for the seller. So, this gives us a framework to identify how much value is being created.

Value of a transactionExcuse my poor excuse for an illustration. Hopefully you can see that ‘A’ is the difference between the price of a transaction and the most the buyer would’ve spent, and ‘B’ is the difference between the price and the least the buyer would’ve accepted. So, in this interpretation, the value of the transaction to the buyer is A, then value of the transaction to the seller is B, and the overall value created by the transaction is A + B.

Out of A and B, it is probably B that is the best understood. In some way it corresponds to the seller’s profit, or perhaps risk-adjusted profit. But not always, since the seller may be willing to make a loss in order to recover some money for their stock. So, in this version of value, based on the fact that a transaction will occur only if both parties see some value in it, a technical loss (sale price less than nominal cost) must still be value positive.

The value A is not easily described since most people don’t explicitly calculate the most they would be willing to pay for their milk, eggs, petrol etc. and are even less likely to tell you about it. However, one exception is in auctions. (Hopefully) most potential buyers at an auction have figured out the most they would be willing to pay. Although, their upper limit may be more influenced by the amount of money at their disposal than by the benefit they will gain through possessing the item. (It may turn out to be impossible to accurately estimate A in most situations.)

As mentioned before, the overall value created from each transaction is A+B, which is also the difference between the most the buyer would pay and the least the seller would take. This number is independent of the price chosen for the transaction, and is clearly “better” the more the expectations of the buyer and seller diverge.

It would be interesting to see what figure we’d get if we added up the A+B numbers for all the transactions that occurred in a country for a year, and compared it to the GDP. I think it would provide a more accurate representation of the economic value created.

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