Author Archives: ghotchkiss

A New Way to Determine Corporate Value

Last week, I talked about the trend of “hyper” expectations and corporate valuations. Peter Fader, a marketing professor at the Wharton School, commented, “This is why we need to replace the guesswork of tech valuation with the more rigorous, valid, and operational notion of “customer-based corporate valuation.”

I had a chance to look at Professor Fader’s paper. Essentially, he proposes a new model for the valuation of subscription-based businesses based on a calculation of customer lifetime value that uses publicly available information. While interesting in it’s own right, there is a fundamental shift of thinking here that I believe should be explored further.

There are a few standard equations that are used to calculate the value of a firm. If the firm is public, essentially its value is determined by its share price. And that share price is determined by activity in the market – the activity of shareholders. And that activity is dependent on analysts who pass judgment on companies based on projected return to shareholders. At every turn, our entire system of business finance is very heavily weighted towards ownership, which makes sense in a market-based economy. Buyers and sellers determine value.

But what Fader et al are proposing brings another essential stakeholder into the equation – the customer. It’s amazing to me that all the valuation equations we use to determine the value of a corporation don’t involve any direct measure of that corporation’s customer. Sure, we include things like profit, revenue, free cash flow and none of these things would exist without customers, but we never actually attempt to determine the value of a customer. Fader starts the process with the estimation of that value. That simple paradigmatic shift yields a very different view of the world.

For example, if we are to determine the value of a company through the lifetime value of its customers; we have to look at that company in a much different way than the typical financial analyst. We have to look at things like customer loyalty, brand affinity and the likelihood that a company will gain new market share through the disruption of markets. Last week, I used Amazon as an example. Here is a company that has been tremendously disruptive. It has essentially created a new marketplace and, in the process, upended retail as we know it. One would expect this to be taken into account when trying to determine the value of Amazon.

The problem is that things like customer loyalty and brand affinity are emotions. Emotions are not things that are easily quantified. It’s much easier to measure things like quarterly earnings and discounted free cash flow. Most of these things depend on using the past to predict the future. They also rely on the firm’s ability to prognosticate. Typically, all the heavy lifting of factoring in the fuzziness of things like future customer value is left to the company. If a company misses its projections, it is penalized by the analysts, resulting in a decrease of share price.

Ultimately, the gap between how we have historically determined the value of companies and how we might in the future comes down to a matter of our ability to determine what may come to pass. We strive for perfect predictability. We want to place our bets based on solid information and analysis. But, in a disruptive marketplace, this desire for predictability may ultimately sink us. Customers will always determine the value of a company and in a marketplace where transactional and switching costs are both plunging, those customers have the ability to switch buying behaviors instantly. The old saying, “No one ever got fired for buying IBM” has not been true for at least three decades.

Like it or not, if we want to get a true picture of the value of a company, we’re going to have to use some guesswork. And, most importantly, we’re going to have to make sure we include customers in whatever equation we’re using.

 

Living in the Age of “Hyper”

Amazon is a disappointment.

In the fourth quarter of 2015, it made a measly $482 million profit on sales of $35.7 billion. That’s a 22% gain in revenue from a year ago, and over a 100% gain in profit. In that year, Amazon also doubled its market value to over $300 billion.

Bunch of deadbeats…

Last week, Amazon’s share price took a beating in after hours trading, dropping 15%

Serves you right, slackers…

And this all happened because despite Amazon’s healthy performance, it “didn’t meet analyst’s expectations.”

Maybe it’s time to look at those expectations.

Amazon is what those analysts call a “growth” stock. If you compare it against the rest of the Fortune 500, it might even be called a “hyper-growth” stock. It’s doubling of market value outperformed other growth stocks like Apple, which has had it’s own history of disappointment. We expect great things from anything prefaced with “hyper.

You all know what hyper means. It means “above” – as in “above” normal. In terms of growth of revenue and market value, Amazon would certainly qualify. It’s in the top few percent of all companies of the Fortune 500 in both categories.

But we expect more. We expect “hyper” performance. And it you don’t measure up, you disappoint us. It’s like kicking your kid out of the house when they come home with a straight A report card in grade 10 because they didn’t qualify for early admission to Harvard.

Here’s the thing about “hyper.” Not everything can be “hyper.” Something needs to be the opposite of hyper. Do you know what the opposite of “hyper” is? It’s “hypo.” Everyone knows what hyper means, but I bet it’s been a long time since you used “hypo” in a sentence.

hypo hyper

That’s because we’re fixated on “hyper”. But the way we use “hyper” makes it an outlier. It’s a statistical anomaly on the far right of the normal distribution curve. It doesn’t represent reality. But we think it does. We expect everything to measure up to some unrealistic measure of performance. When we start a business, we expect to be as successful as Google. When we look at our bank account, we expect it to be as big as Kanye West’s. When we buy a stock, we want it to outperform every other stock in the market.

We have over-hyped “hyper.”

This tendency is starting to impact other aspects of our lives. As we quantify more of who we are, we tend to measure ourselves against the “hyper” end of the yardstick. It’s becoming a real problem. Even our friendships are now quantified, thanks to Facebook, Twitter and Instagram. The result is that it’s now almost impossible to measure up to expectations.

We, like Amazon, are disappointing. The difference is that Amazon disappoints analysts. We disappoint ourselves.

This can be a real bummer. Tom Magliozzi, co-host of NPR’s Car Talk show, summarized the problem in five words:

“Happiness Equals Reality Minus Expectations.”

If our expectations keep moving to the “hyper” end of the scale, it will never match up to reality. We’ll never be happy. According to this blog post by Tim Urban, it’s a big problem for Generation Y. And Tim should know. He’s a 31-year-old Harvard grad who owns a couple of tutoring businesses and has started a blog that grew virally to over 300,000 subscribers.

Slacker.

 

 

 

 

The “Get It” Gap

Netflix and Chill…

It sounds innocent enough – a night of curling up on the couch in a Snuggie with no plan other than some Orange is the New Black and Häagen Dazs binging. And that’s how it started out. Innocent. Then those damned kids got hold of it, and its present meaning ended up in a place quite removed from its origin.

Unfortunately, my wife didn’t know that when she used the phrase in a Facebook post for her gift basket company. That is, until one of our daughters walked in the door and before her bags hit the floor yelled from the entryway, “Mom, you have to change your post – right now!”

“What post?”

“The Netflix and Chill one…”

“Why?”

“Unless your basket contains lubricants and condoms, I don’t think your post means what you think it means”

But how is a middle-aged parent to know? The subversion of this particular phrase has just happened in the last year. It takes me the better part of a year to remember that it’s no longer 2015 when I sign a check. There’s no way a middle-aged brain could possibly keep up with the ongoing bastardization of the English language. The threshold for “getting it” keeps getting higher, driven by the acceleration of memes through social media.

getitgapParents were never intended to “get it.” That’s the whole point. Kids want to speak their own language and have their own cultural reference points. We were no different when we were kids. Neither were our parents.

And kids always “get it.” It’s like a rite of passage. Memes propagate through social networks and when you’re 18, your social network is the most important thing in your life. New memes spread like wildfire and part of belonging to this culture depends on “getting it.” The faster things spread, the more likely it is that you can increase the “Get It” gap between you and your parents. It’s a control thing. If the parents call all the shots about everything in your life, at least you can have this one thing to call your own.

As you start to gain control, the Gap becomes less important. Our daughters are now becoming adults, so they now act as “Get It” translators and, in cases like the one above, Urban Slang enforcement officers. When we transgress, they attempt to bridge the gap.

As you get older, the “stuff” of life gets in the way of continuing to “get it.” Buying a house, getting a job and changing diapers leaves little time left over to Snapchat about Scumbag Steve or tweet “Hell yea finna get crunk!” to your Hommie gee funk-a-nator on a Friday night.

The danger comes when parents unilaterally try to cross over the gap and attempt to tap into the zeitgeist of urban slang. This is always doomed to failure. There are no exceptions. It’s like tiptoeing through a minefield with snowshoes on.

At the very least, run it past your kids before you post anything. Better yet – look it up in Urban Dictionary. Kids can’t be trusted.

“Hotchkiss – Ouuuttt!” (Mic drop here)

We’re Informed. But Are We Thoughtful?

I’m a bit of a jerk when I write. I lock myself behind closed doors in my home office. In the summer, I retreat to the most remote reaches of the back yard. The reason? I don’t want to be interrupted with human contact. If I am interrupted, I stare daggers through the interrupter and answer in short, clipped sentences. The house has to be silent. If conditions are less than ideal, my irritation is palpable. My family knows this. The warning signal is “Dad is writing.” This can be roughly translated as “Dad is currently an asshole.” The more I try to be thoughtful, the bigger the ass I am.

I suspect Henry David Thoreau was the same.  He went even further than my own backyard exile. He camped out alone for two years in Ralph Waldo Emersen’s cabin on Walden Pond. He said things like,

“I never found a companion that was so companionable as solitude.”

But Thoreau but was also a pretty thoughtful guy, who advised us that,

“As a single footstep will not make a path on the earth, so a single thought will not make a pathway in the mind. To make a deep physical path, we walk again and again. To make a deep mental path, we must think over and over the kind of thoughts we wish to dominate our lives.”

But, I ask, how can we be thoughtful when we are constantly distracted by information? Our mental lives are full of single footsteps. Even if we intend to cover the same path more than once, there are a thousand beeps, alerts, messages, prompts, pokes and flags that are beckoning us to start down a new path, in a different direction. We probably cover more ground, but I suspect we barely disturb the fallen leaves on the paths we take.

I happen to do all my reading on a tablet. I do this for three reasons; first, I always have my entire library with me and I usually have four books on the go at the same time (currently 1491, Reclaiming Conversation, Flash Boys and 50 Places to Bike Before You Die) – secondly, I like to read before I go to sleep and I don’t need to keep a light on that keeps my wife awake – and thirdly, I like to highlight passages and make notes. But there’s a trade-off I’ve had to make. I don’t read as thoughtfully as I used to. I can’t “escape” with a book anymore. I am often tempted to check email, play a quick game of 2048 or search for something on Google. Maybe the fact that my attention is always divided amongst four books is part of the problem. Or maybe it’s that I’m more attention deficit than I used to be.

There is a big difference between being informed and being thoughtful. And our connected world definitely puts the bias on the importance of information. Being connected is all about being informed. But being thoughtful requires us to remove distraction. It’s the deep paths that Thoreau was referring too. And it requires a very different mindset. Our brains are a single-purpose engine. We can either be informed or be thoughtful. We can’t be both at the same time.

090313-RatMaze

At the University of California, San Francisco, Mattiass Karlsson and Loren Frank found that rats need two very different types of cognitive activity when mastering a maze. First, when they explore a maze, certain parts of their brain are active as they’re being “informed” about their new environment. But they don’t master the maze unless they’re allowed downtime to consolidate the information into new persistent memories. Different parts of the brain are engaged, including the hippocampus. They need time to be thoughtful and create a “deep path.”

In this instance, we’re not all that different than rats. In his research, MIT’s Alex “Sandy” Pentland found that effective teams tend to cycle through two very different phases: First, they explore, gathering new information. Then, just like the thoughtful rats, they engage as a group, taking that information, digesting it and synthesizing it for future execution. Pentland found that while both are necessary, they don’t exist at the same time,

“Exploration and engagement, while both good, don’t easily coexist, because they require that the energy of team members be put to two different uses. Energy is a finite resource.”

Ironically, research is increasingly showing that are previous definitions of cognitive activity may have been off-the mark. We always assumed that “mind-wandering” or “day-dreaming” was a non-productive activity. But we’re finding out that it’s an essential part of being thoughtful. We’re actually not “wandering.” It’s just the brain’s way of synthesizing and consolidating information. We’re wearing deeper paths in the by-ways of our mind. But a constant flow of new information, delivered through digital channels, keeps us from synthesizing the information we already have. Our brain is too busy being informed to be able to make the switch to thoughtfulness. We don’t have enough cognitive energy to do both.

What price might we pay for being “informed” at the expense of being “thoughtful?” It appears that it might be significant. Technology distraction in the classroom could lower grades by close to 20 percent. And you don’t even have to be the one using the device. Just having an open screen in the vicinity might distract you enough to drop your report card from a “B” to a “C.”

Having read this, you now have two choices. You could click off to the next bit of information. Or, you could stare into space for a few minutes and be lost in your thoughts.

Chose wisely.

Nobel Intentions, Ignoble Consequences

It was 20 years ago that I discovered the Internet. According to the International Telecommunication Union, that put me in select company. There were only 77 million users of the Internet by the end of 1996. That represented a little more than 1% of the world’s population. 66% of those were in the US, due likely to access restrictions in other areas. I know I logged on to the Web as soon as I could. I had actually been online with Compuserve for a few years prior to that, but it was in 1996 that the first ISP opened in the Canadian city I live in. I was one of the first to set up an account.

Three years later I changed my business to focus exclusively on online marketing. We became one of the fastest growing companies in Canada. Eleven years after start up (or, more accurately, realignment) we sold that company.

Things moved rather quickly after I first went online. At least, I thought they did. But compared to the growth of other start ups – say, Google for instance – I was a very little fish in a very big pond.

The Nobel Survey

In 2001, Cisco conducted a survey of past Nobel Prize winners. By then, Internet usage had mushroomed. Half a billion people – almost 9% of the world’s population – were online. The Internet appeared to be a real thing. The question asked was, “Where will the Internet take us over the next 20 years?

The Laureates were mostly optimistic in their replies. Here’s a quick summary

  • 87% said the Internet would improve education.
  • 93% felt it would provide greater access to libraries, information and teachers.
  • 74% saw the coming of virtual classrooms by 2020.
  • 82% said it would accelerate innovation
  • 83% felt it would improve productivity
  • 72% believed it would improve quality of life and provide more economic opportunity to people in less developed countries
  • 93% saw it improving communications with people in other countries
  • 76% predicted a breaking down of borders

On the negative side, 65% feared it would violate personal privacy, 51% saw it increasing alienation and 44% felt it would lead to greater political or economic inequity.

15 Years later…

I think you could safely put a check beside every single box on the Nobel Laureate wish list. In fact, as optimistic as these predictions seemed just 15 years ago, they seem conservative in hindsight. Online classrooms have been a reality for a few years and education is undergoing a massive reformation. In 2011, 10 years after the survey was conducted, McKinsey estimated that 10% of GDP growth in developed countries was directly attributable to the Internet. And the fact that almost half the world now has Internet access speaks to the role it plays in communication across cultures.

But none of the laureates predicted a gut punch to the cab drivers of the world. No one foresaw the short-sheeting of the traditional hospitality industry. And there was not a peep of new forms of investment predation that would be measured in microseconds.

The Biggest Can of WD-40 Ever

All the benefits of the Internet – and all the negative consequences – come from the same common factor: the elimination of friction. Economist Ronald Coase rightly identified friction – or, in his terminology, “transactional costs” – as the reason corporations exist. Until very recently, geographic distance introduced friction into pretty much every aspect of our society. It took physical resources to overcome friction. Physical resources required capital. Capital could most efficiently be raised and controlled by corporations.

The Internet enabled a new type of connection. It was agnostic to physical distance. But, more importantly, it was a peer-to-peer connection. There was no hierarchy to the Internet. Hierarchies depend on friction. As soon as that friction is removed, the hierarchies begin to fall apart. They are no longer required.

All the good things that were predicted in 2001 came from a removal of friction. But so did all the bad. In the case, the word “regulation” can be often be substituted for “friction.” Regulation is just another form of hierarchal control.

I’ve been “online” for 20 years now. It certainly accelerated every aspect of my life; most positively, some negatively. But one thing’s for certain. Going backwards is not an option.

Luddites Unite…

Throw off the shackles of technology. Rediscover the true zen of analog pleasures!

The Hotchkisses had a tech-free Christmas holiday – mostly. The most popular activity around our home this year was adult coloring. Whodathunkit?

There were no electronic gadgets, wired home entertainment devices or addictive apps exchanged. No personal tech, no connected platforms, no internet of things (with one exception). There were small appliances, real books printed on real paper, various articles of clothing – including designer socks – and board games.

As I mentioned, I did give one techie gift, but with a totally practical intention. I gave everyone Tiles to keep track of the crap we keep losing with irritating regularity. Other than that, we were surprisingly low tech this year.

Look, I’m the last person in the world that could be considered a digital counter-revolutionary. I love tech. I eat, breathe and revel in stuff that causes my wife’s eyes to repeatedly roll. But this year – nada. Not once did I sit down with a Chinglish manual that told me “When the unit not work, press “C” and hold on until you hear (you should loose your hands after you hear each sound) “

This wasn’t part of any pre-ordained plan. We didn’t get together and decide to boycott tech this holiday. We were just technology fatigued.

Maybe it’s because technology is ceasing to be fun. Sometimes, it’s a real pain in the ass. It nags us. It causes us to fixate on stupid things. It beeps and blinks and points out our shortcomings. It can lull us into catatonic states for hours on end. And this year, we just said “Enough!” If I’m going to be catatonic, it’s going to be at the working end of a pencil crayon, trying to stay within the lines.

Even our holiday movie choice was anti-tech, in a weird kind of way. We, along with the rest of the world, went to see Star Wars, the Force Awakens. Yes, it’s a sci-fi movive, but no one is going to see this movie for its special effects or CGI gimcrackery. Like the best space opera entries, we want to get reacquainted with people in the story. The Force’s appeal is that it is a long-awaited (32 years!) family reunion. We want to see if Luke Skywalker got bald and fat, despite the force stirring within him.

I doubt that this is part of any sustained move away from tech. We are tech-dependent. But maybe that’s the point. It used to be that tech gadgets separated us from the herd. It made us look coolly nerdish and cutting edge. But when the whole world is wearing an iWatch, the way to assert your independence is to use a pocket watch. Or maybe a sundial.

And you know what else we discovered? Turning away from tech usually means you turn towards people. We played board games together – actual board games, with cards and dice and boards that were made of pasteboard, not integrated circuits. We were in the same room together. We actually talked to each other. It was a form of communication that – for once – didn’t involve keyboards, emojis or hashtags.

I know this was a fleeting anomaly. We’re already back to our regular tech-dependent habits, our hands nervously seeking the nearest connected device whenever we have a millisecond to spare.

But for a brief, disconnected moment, it was nice.

Why I’m (Cautiously) Optimistic About 2016

This will be my last column before the Christmas break. As such, I thought it was appropriate to end on a positive note.

It’s easy to believe the world is a stupid, cold and cruel place. We’ve been told as much by our leaders. On many days in our very recent memory, it’s hard to argue that the world isn’t going to hell in a hand basket.

But all things are relative. And if we look at statistics alone, there’s a very good case to be made that, despite all the false steps we make, we’re actually heading in the right direction.

Take myself, for example. I was born in 1961. For some reason, here in North America, we tend to think of the 60’s as some sort of Golden Age. We wax nostalgic for a simpler, gentler, more virtuous time. There’s even a psychological name for it. It’s called rosy retrospection.

But the empirical evidence suggests otherwise.

For example, the average global life expectancy in 1961 was 55 years. Today, it’s 71 years. In North America, we’ve added 10 years to our life expectancy (from 68 to 78) in the last 5 decades. The biggest gains have been made in India, China, Brazil and South Korea.

Not only are we living longer. We’re living better. The Human Development Index is a measure of quality of life compiled by the United Nations. In 1961, the HDI for the countries of the OECD (the most developed countries in the world) was 0.48. In the poorest part of the world, Sub-Saharan Africa, it was 0.11. Today, the HDI for developed countries is 0.88. It’s 0.51 in Sub Saharan Africa. The empirical quality of life for the average Somalian is higher today than it would have been if you had lived in some of the richest countries in the world in 1961.

Almost everyone has more rights now than they did in 1961. This is certainly true for women, ethnic minorities and those of alternative sexual orientations. When I was born, only one third of the world’s population lived under some form of democracy. Today, that number is close to 50%. We have a long way to go, but we’ve also come a long way.

We have violence, but fewer people die of violent confrontations now than in any time in human history. Casualties due to warfare are way down, dropping from 250 deaths per million people in the 50’s to less than 10 per million in 2012. And while homicide rates per capita are a little higher than in 1961 (when they were at the lowest point in 40 years), they’ve been in decline since 1991 and getting close to where they were then.

The Fallen of World War II from Neil Halloran on Vimeo.

We have hunger, but we’re winning. In the 60’s, for every 100,000 people on the planet, 500 died of famine. In the last decade, that dropped to 3 deaths in 100,000.

And our standard of living, along with our level of productivity, measured in normalized dollars, is over three times what it was 54 years ago.

Even the environment is trending in the right direction. Our air quality is better in major North American cities than it was in the 60’s. The EPA estimates there’s been a 63% decline in aggregate emissions of six common pollutants in the last three decades.

The world is a volatile place now. It was also a volatile place in 1961. The US sponsored the Bay of Pigs invasion. East Germany put up the Berlin Wall. Millions died in China during the Great Leap forward. And the USSR test detonated a 50-megaton bomb – the largest explosion in human history. We were one year away from the Cuban Missile crisis. And two years away from JFK’s assassination.

My point, if it still seems to be vague, is that as flawed as we are, there is a strong statistical case to be made that we live in a better world than our parents and grandparents did. There is also reason to believe that our children will be smarter, kinder and more ethical than we are.

Humans fail forward. That’s our nature.  We screw things up, but we eventually fix them. We tear things apart so we can build them better the next time. If we look forward, we see that the world will never be perfect, but if we look behind us, we see we’re in a much better place than where we came from.

Welcome to the World of Wicked Problems

The World is becoming a wicked place. And not in the way you think (although that may be the case as well).

I’m referring to the explosion of wicked problems. Wicked problems are thorny, complex, dynamic problems that defy black and white solutions. These are questions that can’t be answered by yes or no – the answer always seems to be maybe. There is no linear path to solve them. You just keep going in loops, hopefully getting closer to answer but never quite arriving at one. Usually, the optimal solution to a wicked problem is “good enough – for now.”

I believe the ability to deal with wicked problems will be the single biggest factor in separating winners from losers in the future. Dealing with wicked problems requires a different tool set than the one we’ve always used in the past. It requires open, nimble minds. It requires the ability to break complexity into components that can yield individual insights, then synthesizing those insights together into a workable process. Most importantly, however, it requires a willingness to start all over again when that process is finally put in place. And you have to do that with a totally open mind; jettisoning any baggage you might be carrying from the past iteration. In short, it requires an approach I’ve referred to in the past as Bayesian Strategy.

A world full of wicked problems also requires a new kind of leadership. In the past, we wanted leaders who had all the answers. But in a world of wicked problems, there are no answers. In this world, we need leaders who understand the value of adaptability and iteration. Open minds are critical. Beliefs take a back seat to curiosity and imagination.

I’ve had a recent history of taking beliefs to task. Beliefs are cognitive short cuts we use to avoid thinking. In a fairly stable and predictable world, beliefs served a purpose. They are the intellectual equivalent of habits. If the same actions (or thoughts) always yield the same results, why bother with rational analysis? It’s a waste of energy. If we can predict what the end looks like, stopping to rationalize looks an awful lot like wavering or being indecisive.

But predictability is becoming increasingly rare. With wicked problems, we need to be willing to tear apart our view of the world and test it for validity. We need to unpack our beliefs and be willing to sacrifice them if empirical evidence shows them to be false. We need to introduce scientific rigor into our thought process.

This comes down to the difference between complexity and complication. Sending a man to the moon and sequencing the human genome were both complicated problems. Currently, climate change would fall into the same bucket. In each case, there was a lot to be done, but we knew what we had to do. We just needed to marshall the resources to do it. We could predict what the end would look like. This was a world where we needed unwavering leadership and a belief in a commonly understood end-state. To be successful, we just had to get sh*t done.

Creating a sustainable future for advertising and publishing are both complex problems. This makes them wicked. And they’re not alone. Wicked problems are emerging everywhere: educational reform, transportation infrastructures, global economic dynamics, national security, even the future of democracy. In each area, technology and its gravitational pull on society are dealing a handful of wild cards into the deck. We have no idea what success might look like. We are trying to find answers in a whirling, emergent environment, where rules are constantly in flux.

Here, we have to take a different approach. It’s not a straight line. It’s an endless loop.

A New Definition of Order

The first time you see the University of Texas – Austin’s AIM traffic management simulator in action, you can’t believe it would work. It shows the intersection of two 12 lane, heavily trafficked roads. There are no traffic lights, no stop signs, none of the traffic control systems we’re familiar with. Yet, traffic zips through with an efficiency that’s astounding. It appears to be total chaos, but no cars have to wait more than a few seconds to get through the intersection and there’s nary a collision in site. Not even a minor fender bender.

Oh, one more thing. The model depends on there being no humans to screw things up. All the vehicles are driverless. In fact, if just one of the vehicles had a human behind the wheel, the whole system would slow dramatically. The probability of an accident would also soar.

The thing about the simulation is that there is no order – or, at least – there is no order that is apparent to the human eye. The programmers at the U of T seem to recognize this with a tongue in cheek nod to our need for rationality. This particular video clip is called “insanity.” There are other simulation videos available at the project’s website, including ones where humans drive cars at intersections controlled by stoplights. These seem much saner and controlled. They’re also much less efficient. And likely more dangerous. No simulation that includes a human factor comes even close to matching the efficiency of the 100% autonomous option.

The AIM simulation is complex, but it isn’t complicated. It’s actually quite simple. As cars approach the intersection, they signal to a central “manager” if they want to turn or go straight ahead. The manager predicts whether the vehicles path will intersect another vehicle’s predicted path. If it does, it delays the vehicle slightly until the path is clear. That’s it.

The complexity comes in trying to coordinate hundreds of these paths at any given moment. The advantage the automated solution has is that it is in communication with all the vehicles. What appears chaotic to us is actually highly connected and coordinated. It’s fluid and organic. It has a lot in common with things like beehives, ant colonies and even the rhythms of our own bodies. It may not be orderly in our rational sense, but it is natural.

Humans don’t deal very well with complexity. We can’t keep track of more than a dozen or so variables at any one time. We categorize and “chunk” data into easily managed sets that don’t overwhelm our working memory. We always try to simplify things down by imposing order. We use heuristics when things get too complex. We make gut calls and guesses. Most of the time, it works pretty well, but this system gets bogged down quickly. If we pulled the family SUV into the intersection shown in the AIM simulation, we’d probably jam on the brakes and have a minor mental meltdown as driverless cars zipped by us.

Artificial intelligence, on the other hand, loves complexity. It can juggle amounts of disparate data that humans could never dream of managing. This is not to say that computers are more powerful than humans. It’s just that they’re better at different things. It’s referred to as Moravec’s Paradox: It’s relatively easy to program a computer to do what a human finds hard, but it’s really difficult to get it to do what humans find easy. Tracking the trajectories and coordinating the flow of hundreds of autonomous cars would fall into the first category. Understanding emotions would fall into the second category.

This matters because, increasingly, technology is creating a world that is more dynamic, fluid and organic. Order, from our human perspective, will yield to efficiency. And the fact is that – in data rich environments – machines will be much better at this than humans.   Just like our perspectives on driving, our notions of order and efficiency will have to change.

 

This Message Brought to You by … Nobody

People talk about the digital revolution. I think it’s an apocalypse”
George Nimeh – What If There Was No Advertising? – TEDx Vienna 2015

 

A bigger part of my world is becoming ad-free. My TV viewing is probably 80% ad-free now. Same with my music listening. Together, that costs me about $20 per month. It’s a price I don’t mind paying.

But what if we push that to its logical extreme? What if we made the entire world ad-free? Various publications and ad-tech providers have posited that scenario. It’s actually interesting to see the two very different worlds that are conjectured, depending on what side of the church you happen to be sitting on. When that view comes from those in the ad biz, a WWA (World Without Advertising) is a post apocalyptic hell with ex-copywriters (of which I’m one) walking around as jobless zombies and the citizens of the world being squeezed penniless by exploding subscription rates. Our very society would crumble around our ears. And, for some reason, a WWA is always colored in various shades of desaturated grey, like Moscow circa 1982 or Apple’s Big Brother ad.

But those from outside our industry take a less alarming view of a WWA. This, they say, might actually work. It could be sustainable. It would probably be a more pleasant place.

adspendingLet’s do a smell test of the economics. According to eMarketer, the total ad-spend in the US for this year is $189 billion. That works out to just shy of $600 per year for each American, or $1550 for the average household. If we look at annual expenditures for the typical American family, that would put it somewhere between clothing and vehicle insurance. It would represent 2.8% of their total expenditures. A little steep, perhaps, but not out of the question.

Okay, you say. That’s fine for a rich country like the US. But what about the rest of the world? Glad you asked. The projected advertising spend worldwide – again according to eMarketer – is $592 billion, or about $84 for every single person on the planet. The average global income is about $10,000 per year. So, globally, eliminating advertising would take about 0.84% of your income. In other words, if you worked until January 3rd, you’d get to enjoy the rest of the year ad free!

So let’s say we agree that this is a price we’re willing to spend. What would an America without advertising look like? How would we support content providers, for example? Paying a few one-off subscriptions, like Netflix and Spotify, is not that big a deal, but if you multiply that by every potential content outlet, it quickly becomes unmanageable.

This could easily be managed by the converging technologies of personalization engines, digital content delivery, micro-payments and online payment solutions like ApplePay. Let’s imagine we have a digital wallet where we keep our content consumption budget. The wallet is a smart wallet, in that it knows our personal tastes and preferences. Each time we access content, it automatically pays the producer for it and tracks our budget to ensure we’re staying within preset guidelines. The ecosystem of this content marketplace would be complex, true, but the technology exists. And it can’t be any more complex than the current advertising marketplace.

A WWA would be a less cluttered and interruptive place. But would it also be a better place? Defendants of the ad biz generally say that advertising nets out as a plus for our society. It creates awareness of new products, builds appreciation for creativity and generally adds to our collective well-being.

I’m not so sure. I’ve mentioned before that I suspect advertising may be inherently evil. I know it persuades us to buy stuff we may desire, but certainly don’t need. I have no idea what our society would be like without advertising, but I have a hard time imagining we’d be worse off than we are now.

The biggest problem, I think, is the naiveté of this hypothetically ad-free world. Content will still have to be produced. And if the legitimized ad channel is removed, I suspect things will simply go underground. Content producers will be offered kickbacks to work commercial content into supposedly objective channels. Perhaps I’m just being cynical, but I’d be willing to place a fairly large bet on the bendability of the morals of the marketing community.

Ultimately, it comes down to sustainability. Let’s not forget that about a third of all Americans are using ad blockers, and that percentage is rising rapidly. When I test the ideological waters of the people whose opinions I trust, there is no good news for the current advertising ecosystem. We all agree that advertising is in bad shape. It’s just the severity of the prognosis that differs – ranging from a chronic but gradual debilitating condition to the land of walking dead. A world without advertising may be tough to imagine, but a world that continues to prop up the existing model is even more unlikely.