Isaac Asimov: The Last Question

Isaac Asimov, prolific science fiction author, said his favorite story he ever wrote was The Last Question.

What is the last question? It's about Entropy and how based on what science tells us the Universe as we know it will one day run out of energy. We know this because the stars that power our Universe will all, eventually, burn out.
What will Mankind do then?

This is a superb story about Asimov's vision of cosmology and it takes less than 15 minutes to read. It also has one of the best endings of all time.

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Consumer Privacy Online and the FTC

The issue of online privacy can be argued from the standpoints of two main camps: consumers and marketers. Which side are you on?

If you are a consumer, most likely you do not want marketers using their websites to gather personal data on your websurfing habits, purchasing patterns, and what you are most likely to click on. It's creepy.

If you are from the marketer camp, your argument will be that the more data you gather on your market and consumers, the better you are able to serve your market and consumers.

A recent report by the FTC promotes guidelines for online businesses to follow in how they respect the privacy of their consumers.

An excerpt from this report:

“Companies should adopt a ‘privacy by design’ approach by building privacy protections into their everyday business practices. Such protections include reasonable security for consumer data, limited collection and retention of such data, and reasonable procedures to promote data accuracy."

I love how the report uses the word "reasonable" over and over again. What is the definition of "reasonable" in this regard? Who sets the standard for "reasonableness"? The word "reasonable" is just like the word "normal". When you really think about it, there is no such thing. It is all subjective. For example what is a "normal teenager" nowadays? In a previous post, we see that a "normal teen" is one that sends an average of over 2,000 text messages a day. I do not consider that normal.

But I digress...

Back to the issue of online privacy, we can see that the FTC has adopted what I like to call "strategic ambiguity". The phrase is used often in military strategy and foreign policy, allowing policy-makers wiggle room for their decisions. This is just a nice way of saying that it lets them do what they want.

The FTC will use the "reasonableness" standard to persecute who they want to persecute and ignore who they want to ignore.

My opinion is that the consumer culture in America should be an Opt In culture and not an Opt Out culture. In other words, it should be assumed from the start that consumers do not want to be contacted by marketers, but if they do, they can Opt In to be part of the marketing data collection. This is not how it is now, where you have to check or uncheck a box saying that, "no, I do not want to be spammed."

The great thing about Opt In consumer culture is that it forces marketers to offer value up front and soft sell their product. Soft selling is offering value first that compels the consumer to seek out the product/service for themselves. Hard selling is all the SPAM you find in your inbox.

Hopefully the new FTC report will guide marketers away from hard selling and direct sales techniques. I've just had to call a telemarketing firm to stop calling me and threaten to sue them. These new guidelines should make marketers go back and refine their techniques.

Until next time...

JWUs Farrow Midterm Study Guide

Dear fellow IMBA students, I have prepared an exhausting but not "exhaustive" study guide for chapters 4-8 on the exam. I am meeting with Farrow this week to confirm what is relevant material and I will update the document accordingly and make it available on this blog.

Here is the link.

JWU's Farrow Mid Term Study Guide

Please if you download leave a quick thanks in the comments!

PS. If you have any free time (yeah right) please check out my favorite blog in the world, Four Hour Blog by my hero and mentor, Tim Ferriss.

Good luck on your exams!

Texting: An Insidious Threat To Society

Imagine walking with your gaze directly forward while walking through a crowded breezeway. Nearly everyone else you see has their eyes cast down focusing squarely on their hand-held device. Their somber faces are lit by an bluish light giving them an unnatural glow. Their fingers move quickly and deftly from built in routine. Their legs--they are barely aware of them as they cycle forward--carry them onto their next destination. It's a wonder how they can avoid crashing into each other with out looking up.

"Who walks without texting nowadays?"

A legitimate question, but a disturbing one. Indeed, who does?

Has it become acceptable to completely shut out your immediate surroundings? I feel like the words PAY ATTENTION should somehow be inserted into our daily consciousness.

Does it take the sensational to make us snap out of our absorption with distractions such as Facebook and text messaging? Studies on the Reticular Activating System show that there is a link between ADHD and the constant distractions that texting provides.

Your real friends are the ones you spend more time with in person than online or in a chat session.

Lets face it: Texting is a crutch for real interaction:



Particularly disturbing from this clip:
"Oh I don't have to, like, carry on a conversation, or, oh, I don't have to like, think of things to say..."

Looks like Aldous Huxley was right.

Decentralization: Using the power of groups and crowds in Internet Business

One of the distinct advantages of running an online business is the absence of brick and mortar. It's the advantage of location independence. Other significant advantages include the ability to outsource (brick and mortars can too) and crowdsource. Crowdsourcing is the use of the massive community spending hours of their lives on the Interwebs to perform some specific task. Instead of paying one employee to perform a task an anonymous "crowd" does it for you.



As we know, Wikipedia is the most famous example of crowdsourcing and how it works. The objective is to write "articles" on Wikipedia and the crowd will fill in the details and take care of the editing.

Another innovative use of crowdsourcing is the phenomenon of group discounts/coupons that are available to individuals of a certain number of consumers sign on to use that group deal. This model has marketing built into it: In order for the individual consumer to utilize the deep discount the group coupon offers, he/she needs to get other people to use it as well. Hence, close to free marketing for the ones offering the group coupon. The company responsible for this idea is Groupon.

Groupon works by negotiating a deep discount with a local firm in your city and offering that deep discount to individual consumers if there are enough consumers taking advantage of that deal. The firm trades lower prices for higher volume. Groupon takes a share of the discount revenue, and the consumer exchanges word of mouth marketing for lower prices.

Crowdsourcing and group coupons are two great examples of decentralization that are very successful on the internet.

In our next post, we will discuss how to apply the rules of decentralization to outsource your life, free up time, and cultivate location independence.

In the meantime, keep an eye out for great looking markets.

Framework For Marketing Cases

A recent interview I had unexpectedly changed from a standard behavioral interview, ("so, what's your greatest weakness?"), into a full-blown case interview.
I had to switch gears from trying to convince someone how awesome I was into actually having to use my brain-piece.

The case question was something that had to do with Lenovo wanting to open an authorized service center in El Salvador. My role was to determine if this would be a profitable business venture. My initial answer was terrible and I won't even reprint it here. After the carnage, the interviewer politely outlined the case framework that I should have used.

Among other things, I am a fan of acronyms. The case framework he provided goes from the macro environment to the micro environment is as follows:
PESTLE, PPPP, CCCC

Macro:

P...olitical
E..conomic
S..ocial
T..echnological
L..egal
E..nvironmental

Marketing:

P..roduct
P..rice
P..romotion
P..lacement

Micro

C..ustomer
C..ost
C..ompetition
C..apability

Net Present Value/Porter's 5 Forces.

So start from macro and go to marketing, then to micro and then finally do NPV or Porter's 5 Forces analysis depending on if its a profitability case (NPV) versus a market entry case (P5F). Going back to the Lenovo case, I should have begun by talking about/asking questions about the political environment in El Salvador, the economy, and other macro factors in that section, paying particular attention to the technological section: How many Lenovo computers were sold in El Salvador last year? How does it compare to the total number of computers sold and what is the market share? Who are the competitors and what are the barriers to entry?

Remember for all case interviews, its best if you turn the case question into a conversation: ASK QUESTIONS! No one expects you to know the political situation in El Salvador. (Unless you are interviewing in El Salvador)

Moving onto marketing, in this case the product is the authorized service center. So how much will the ASC cost? (Price) How are we going to let our El Salvadorean customers know about it (Promotion) and where exactly will it be located (Placement)? All of these are relevant questions you can ask the interviewer.

Moving on, we analyze the 4 C's looking at the individual needs of the customer. This is basically building a profile of who our final consumer will be and what it will cost us to provide service to them and how much revenue we might generate from them.

What's next? If we do a NPV analysis, we need to know how much money we will put down to build the ASC in the first place. This number we determined in the Price section. For NPV it will be defined as C₀. How much the initial investment is and cash flows generated by said investment in years 1-N should be given or ask the interviewer. Same goes for the discount rate, however some might ask you to determine the discount rate for yourself (how to do this described below).

NPV =   -C₀ + C₁/(1+R)¹ + C₂ /(1+R)² + C₃/(1+R)³ +.... + C_n/(1+R)ⁿ

Or if you want the fancier looking formula here it is:

C_t is the C₁, C₂, C₃...C_n. These are the expected cash flows from year one, year two, year 3...to year n.

R = Discount Rate. It's the rate of the opportunity cost of investing C₀ in an ASC instead of a well diversified stock portfolio or buying treasury bonds. How do you find the discount rate? This formula:

R = R_f + Beta(R_mp)

Where
R = Discount Rate
R_f = Risk free rate of return, or the current Treasury Bill rate
Beta = Riskiness of the venture (set by managers after considering PESTLE)
Rmp = Rate of market premium (rate of growth of a well diversified stock portfolio, traditionally 8-9%)

Back to the given numbers in the Lenovo ASC:
C₀ = Initial Investment = $2,000,000
C₁-C₅ = Cash flows from year 1-5 = $300,000 each year.
R = 5% + 1(9%) = 14% = 0.14

Back to the NPV formula:

NPV =  -$2,000,000 + $300,000/(1+0.14)¹ + $300,000/(1+0.14)² + $300,000/(1+0.14)³ + $300,000/(1+0.14)⁴ + $300,000/(1+0.14)⁵

NPV = -$2,000,000 + $263,157.89 + $230,840.25 + $202,491.45 + $177,624.08 + $155,810.60

NPV = -$970,076

Since the NPV for the Lenovo ASC is negative, the recommendation is to NOT build it. The reason is because Lenovo stands to lose almost a million dollars over the next 5 years should they choose the build the ASC instead of investing in treasury bills or a well diversified stock portfolio. And this calculation was done using a relatively conservative estimate of Beta, which assumes that the venture is less risky.

In any case where you have a negative net present value the recommendation will generally be to not build or invest, because you know you will end up losing money.

For use in analyzing cases this framework is very handy in drilling down from the macro to the micro and having some solid numbers to back up your decisions to build or not to build. If the case is determining whether or not to enter a market, simply use Porter's 5 forces instead of NPV analysis.

Now I only wish I could have sent this post to myself several weeks ago before my case interview...

Geo-Arbitrage: Taking Advantage of Foreign Markets

Over the past few weeks I have been running into the word "arbitrage" a lot. Has that ever happened to you? It goes like this: you see a word somewhere, it sticks in your mind, and all of a sudden you find yourself hearing or reading that word multiple times over the next few days or week. So I decided to look it up. Arbitrage is defined as:


"The practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices."


The first time I ran into this word it was in the context of trading financial instruments. "Arbitrage" in finance usually has to do with the simultaneous buying and selling of the same or related securities in different markets to take advantage of unequal prices, resulting in a profit.

A great example of this is purchasing $1,000,000 worth of mortgage-backed securities on the stock market (that are backed by the government should they default) that yield 6% annual interest, while simultaneously purchasing a loan from a bank for $1,000,000 at 5% annual interest using the securities as collateral. Doing this, you have just locked in a 1% mortgage-backed security arbitrage profit with literally zero exposure. How? The securities are backed by the government should they default and the loan you took out from the bank is not your money. The interest you have to pay on the loan money is less than the yield on the securities, resulting in a profit.

Pretty cool right?

How does arbitrage work when there is a "Geo-" in front of it? To make it simple (I am a fan of simplicity) we will say that geo-arbitrage is "earning dollars, spending pesos, and compensating in rupees."

Geo-arbitrage is taking advantage of the different costs of living, currency exchanges, and tax differences from country to country. Stashing your US dollar earnings in the tax-free haven of the Cayman islands is old-school geo-arbitrage. Setting up an online business based in the US and getting paid in dollars, while outsourcing your life to Your Man In India and paying them in rupees, while also living in Cape Town, South Africa and spending rands, is new school geo-arbitrage.

Technology and free-floating currencies are making the world a better place for people willing to be location independent and leverage unequal prices in different markets. All it takes is Lifestyle Design

So the next time you are at a cocktail party and need a cool buzzword to throw around to make you sound intellectual, give geo-arbitrage a try.

The future of marketing is way too personal

I remember in the movie Minority Report there was a scene where Tom Cruise was walking through the mall of the future. As he walked, devices scanned his irises and based on information obtained, generated advertisements that were geared specifically to the dashing protagonist. These advertisements took on the form of human looking avatars that "spoke" to him, telling him to buy XYZ product.

If iris scanning sounds too Orwellian to you to exist or if you think the technology is too advanced then check this out

Seems pretty fantastical right? Imagine marketers of the future having a database of information about you such as your dating history, the places you hang out, and a list of the most popular words you use to update your "future-version of Facebook" status.

I can hear you say, "how would they get this information?" Many people make all of this information readily available on their public social networking site. Most users of Facebook and Myspace do not ever edit their privacy settings so things such as relationship status, places people "check in", and the various wall posts on a person's profile page are readily available to whoever wishes to look.

Twitter adds another source for futurist marketers to mine data on their potential customers. People tend to talk about what they are interested in. What they are interested in most likely has an entire support industry of products and services behind it. When people update their Twitter page with what they are doing and where they are, over time that information can be tracked to find the words that are used the most. These most-used words become keywords that marketers can then use on various search engines to make their websites linked to the products they sell show up on the front page of Google, for example.

Using this readily provided information by individuals in a specific niche market the savvy futurist marketer can choose which way to tailor his or her marketing campaign to better leverage this personal information. The more relevant the advertising the better chance it has at producing a sale.

There is a point where market research begins to infringe upon privacy and become downright creepy. Iris scanning = creepy. Mining Facebook and other social networking sites for market data = creepy.

With the advances in technology allowing marketers to gain access to personal information and leverage that information for their campaigns it becomes more and more necessary for individuals to protect their privacy.