Creative Destruction 7 Act Play: Summary
Photo from Flick, from Leon Botha
We started this series 6 months ago with this post. It is also worth reading this post about the scale of change, what we are calling the 7 Factor Perfect Storm.
Since then we have covered 11 markets:
You can see the Index to all the posts here.
This is the final post where we summarize what we have learned.
Photo from Flick, from Leon Botha
We started this series 6 months ago with this post. It is also worth reading this post about the scale of change, what we are calling the 7 Factor Perfect Storm.
Since then we have covered 11 markets:
You can see the Index to all the posts here.
This is the final post where we summarize what we have learned.
The 11 Markets We Covered
1 Financial Services
2 B2B Media
3 Scientific Technical Medical (STM) Publishing
4 Legal Publishing & Services
5 Educational Publishing & Services
6 Online Advertising
7 Ecommerce
8 Market Research
9 Accounting
10 Healthcare
11 Enterprise Software
4 Big Cross-Cutting Themes
Creative destruction changes market categories. Existing markets merge and new ones are created.
After looking at all these 11 markets through the lens of disruptive technology, we have created 4 big themes that cut across existing market categories:
1. Big Open Data Publishing.
2. Consumers Take Control Over Their Finances.
3. Inter-Company Semantic Standards Change The Business Services Game.
4. Patients Take Charge Of Their Healthcare And That Becomes The Killer App For The Personal Data Locker.
# 1: Big Open Data Publishing
This is like the open source wave in the software industry. You can assume that most data will be free and you make money either indirectly (advertising and ecommerce) or via value added services.
This theme is core to 3 markets:
1.Scientific Technical Medical (STM) Publishing
2 Legal Publishing
3 Educational Publishing
Big Open Data Publishing is different from most publishing where brevity is key. This is not 140 character tweeting for people with ADD. In these markets, you have attention. The key is to have the right data, the right facts.
There are 4 common threads in these markets:
1. The printed book is not the natural format. Novels and other stories are ideal for reading front to back in “lean back” mode. These big data markets are more suitable to “lean forward” media where you extract data and explore by linking and drilling down.
2. All three of these markets are under major cost pressure.
3. Yet despite the fact that digital data offers a better experience AND a lower cost, prices in these markets have been rising. These are markets dominated by a few big publishers. This cannot be sustainable and when digital economics kick in, prices may plummet.
4. These are all markets that matter to a wider community. So it is likely that we will see more government regulation driving for lower costs and more open access.
The market that matters to the most people is Educational Publishing. When we wrote our first post on Education we saw a market that should be disrupted, everybody wanted it disrupted, but where the amount of actual change was very small. This is an environment that entrepreneurs love. In fact two of the greatest technology entrepreneurs – Bill Gates and Scott McNealey have recently weighed in. Bill Gates said “In Five Years The Best Education Will Come From The Web“. And Scott McNealey has started promoting Curriki, an open source text book initiative that was started at Sun and had been languishing when we first looked at this market.
These 3 core Big Open Data Publishing markets are big:
1.Scientific Technical Medical (STM) Publishing & Research = $100 billion (of which $12 billion is publishing)
2 Legal = $166 billion
3 Education = $543 billion
Big Open Data Publishing is also important (but not necessarily core) to 3 other markets that we looked at:
1. B2B Media. All the markets covered by B2B Media are churning out Big Open Data but needing the curation that has always been B2B Media’s core competency.
2. Online Advertising. Yes, Google is a Big Open Data Publisher that monetizes indirectly!
3. Ecommerce. Making sense of masses of openly available data on behalf of shoppers is a big business.
4. Market Research. Traditional survey style market research is not growing, but the ability to make sense out of the masses of data that the web churns out every minute can be the new mission of the market research business.
# 2: Consumers Take Control Over Their Finances
During September and October 2008, the financial markets had their meltdown moment. It was scary as hell for anybody who was even remotely close to the action. As a catalyst of the Great Recession, it has impacted us all. But that is all history, right? The stock market is up and everything is back to normal? Wrong. Politicians will regulate the markets so we can get back to normal? Wrong. What is happening under the surface is a much bigger wave, driven by the Internet that is fundamentally shifting the economics and power structures of the financial services business.
In the olden days an Executive Summary had the luxury of a whole page to get to the point. In the post-Twitter attention deficit age, we have to summarize in 140 characters. Here is the Twit Summary:
The function of financial markets – matching investable capital with users of capital – is ideally suited to the Internet & that changes everything
The matching function is digital. So the cost of matching approaches zero. The price of matching today is a long way from zero. That creates a lot of danger for incumbents and big opportunities for start-ups.
On the surface it looks like “Wall Street” (short –hand for “the current financial services industry”) is back to normal. In that model, we would be in Act 1 or maybe Act 2. Our theory is that we are not back to normal and that the 2008 meltdown was actually Act 5 playing out. If that is true, the opportunities for startups are phenomenal.
The biggest opportunities are consumer related. In B2B ie corporate banking we are likely to see more incremental change.
These opportunities apply to 5 big cash cows of the consumer financial services business:
1. Mortgage Loans.
2. Credit Card Fees to consumers.
3. Lending to small business.
4. International trade finance.
5. Investment Management.
In each of these markets, consumers need to take control of finances that have been battered by the real estate crash and great recession. The Internet offers consumers more ways to do this. Some ventures have already done well in this area, such as Mint. The combination of social media, peer to peer and big open data is disrupting all these markets.
We make 10 predictions within the next few years:
1. The wealthy are the first to move into P2P Lending for Mortgages. Within families, investors will cut out the bank/middleman and lend directly to trusted family members, using low cost services that manage the paperwork and payment processing. The external paperwork agency is critical to taking the emotion out of the picture and enabling the lender to get the mortgage interest tax write off. The family effectively keeps the 3% spread within the family, giving a better deal to both the lender and the borrower.
2. The wealthy will also be the first to move into other P2P Lending. Their loans will be backed by other collateral or cash flows where the cash is invested in diversified pools. This is driven search for yield and the realization that even the most low risk investments (eg sovereign debt) are not risk free. Given the problems in the Mortgage Backed Securities market, these pooled assets will need a lot of data transparency and effective marketing to gain credibility.
3. One of the P2P Lending startups will break away from the pack and become viewed as the “Skype of P2P Lending”. They will either raise a very large round or do an IPO or get acquired for a large premium. This branding event will legitimize the market and create more momentum. Scale is critical to the P2P Lending market. The pools of assets have to be large enough to act as real risk diversification. The credibility of scale is also critical as P2P is inherently viewed as weird, or flaky or risky.
4. At least one major traditional financial institution will offer a form of P2P Lending. But in their attempt not to cannibalize their existing cash flows, the service will not be as competitive as pure play P2P Lending. This will further legitimize P2P Lending.
5. Regulation and market pressure will enable new P2P players to enter the credit card market. The data layer will become both transparent (in aggregate) and private (for individual data). This will be enabled by technology and enforced by regulation. This new competition will dramatically reduce fees and interest rates but will also be quicker to reduce credit to those who have weak financial resources.
6. There will be lots of Government pressure to increase lending to small business. This will legitimize and grow receivables exchanges and other models for cash low lending.
7. All public companies will report to the SEC using XBRL. Probability: 100%. The SEC is telling them they have to do this. We can even put a definite time line on this: by the end of 2012.
8. New investment analysis tools will come to market that are as easy as using a spreadsheet that allow the automated creating of comparables across market sectors. This will replace most manual labor. Probability: 90%. We can already see some crude early attempts but given that XBRL reporting is 100% certainty, the market opportunity for this is very big; so the tools will come.
9. All major global markets will follow the SEC mandate (if they have not already done that; some are ahead of the US). So these comparables can be across geographic markets and exchanges. Probability: 90%.
10. One of the new social media investing ventures breaks out into the mainstream with a model that somehow reconciles the needs of a) low fees b) safety against scams c) better upside potential than a passive index. Probability 50%. This is a tough nut to crack but the prize is huge so it will probably happen.
# 3: Inter-Company Semantic Standards Change The Business Services Game
Semantic standards within a company are slightly useful to reduce the cost of data integration. Semantic standards across companies that are accepted within a market are game-changing.
Think of stock quotes. The fact that GOOG is the accepted symbol for Google’s stock makes the stock market possible. XBRL is taking that to the next level, so that we can compare say “cash in bank” for GOOG and MSFT using commonly accepted semantic standards for “cash in bank”.
We can also see this playing out in BioPharma with the BioRDF standard.
These standards will dramatically reduce the cost of doing transactions as orders can flow in and out of different business systems automatically. This will change the markets for enterprise software and outsourcing services and lead to a new form of business entity that we call “Business As A Service“.
This will have the biggest impact on markets such as:
• enterprise software
• accounting services
• legal services
• outsourcing services
• supply chain management
# 4: Patients Take Charge Of Their Healthcare And That Becomes The Killer App For The Personal Data Locker
The concept of the “personal data locker“, data about ourselves that is controlled by the individual (not by social networks or search engines), is very appealing to techies. But most people don’t care. The tools are there and the standards are emerging, but the mainstream motivation has been lacking. The one area where mainstream consumer do care relates to healthcare;see this post for more details.
In healthcare, this is called the “electronic medical record” and it is becoming increasingly accepted that it should be controlled by the individual patient/consumer (not by hospitals or insurers).
This is being accelerated by regulation, as healthcare is a big political issue.
This will have dramatic impact on the massive healthcare industry (about 15% of GDP in America and growing). Beyond that, it will make consumers more comfortable with the idea of controlling their own data and more cognizant of the risks of not controlling their own data. That will usher in the personal data locker and that will change many other markets.
4 Different Ways To Play These Opportunities
1. StartUp. In each of these markets, there are many multi-$ billion startups yet to be created. The VC, Angel and Super Angel funding environment is good. Yes, we are in a recession and a bear market, but that is a better time to start than the late stages of a boom/bull market that collapses just as you are getting started. There has possibly never been a better time to be an entrepreneur.
2. Restructure From Within. If you run a big established company facing this creative destruction you have the classic Innovator’s Dilemma; do you risk accelerating the destruction of your existing cash cows by aggressively going after the new market? There are only a limited number of playbooks that CEOs can reach for:
• Keep squeezing the cash cows and let your successor manage the problem. The stock market tends to reward this behavior as cash cows continue producing for a long time. This is the Act 2 – Denial. Investors accept this until it is too late and then we see Act 5 Blow Up.
• Make a big transformative acquisition, buying the biggest of the new wave. The horror story example of this is Time Warner “merging” with AOL, but it can work.
• Make small incremental changes that do not transform the business but that cost a lot of money and legitimize the startup competitors. This is the default management approach, it feels sensible, but the result is usually simply slow decline.
• Create your own startup “skunkworks”. This can work if a) it is done early in a market and b) the internal startup really can attack the legacy cash cows without constraint. That is rarely done well.
3. Restructure From Without. This is how the best hedge funds and private equity funds work. They see a public company facing disruptive change (probably around Act 5 when valuations are already low) and they buy the business and create new value. This is when change tends to be radical as that is the only way to extract value.
4. Invest. There are 4 ways you can invest around the theme of creative destruction depending on your investable capital and appetite for risk:
• buy stock in a public company that is well-positioned for this disruptive change. The problem is that there are very few public companies such as this and they tend to be very highly valued. You cannot find bargains but investors have done well riding a big wave of change on a single company that is “always overvalued”.
• short stock in a public company that is badly-positioned for this disruptive change (ie the big incumbents facing the innovator’s dilemma and not doing it well). Shorting is only for the brave and requires real market experience. Also shorting has to be a short-term tactic and creative destruction timelines are longer – timing is everything.
• buy stock in a public company that has been devastated by disruptive change (ie after Act 5) when the valuation is incredibly cheap and the new CEO has a strategy to create some value. This contrarian play is possibly the one that is most open to ordinary investors.
• invest as an angel in startups. This is only for the wealthy.
———————————————————————–
CONVERT BREAKS: __default__
The 11 Markets We Covered
1 Financial Services
2 B2B Media
3 Scientific Technical Medical (STM) Publishing
4 Legal Publishing & Services
5 Educational Publishing & Services
6 Online Advertising
7 Ecommerce
8 Market Research
9 Accounting
10 Healthcare
11 Enterprise Software
4 Big Cross-Cutting Themes
Creative destruction changes market categories. Existing markets merge and new ones are created.
After looking at all these 11 markets through the lens of disruptive technology, we have created 4 big themes that cut across existing market categories:
1. Big Open Data Publishing.
2. Consumers Take Control Over Their Finances.
3. Inter-Company Semantic Standards Change The Business Services Game.
4. Patients Take Charge Of Their Healthcare And That Becomes The Killer App For The Personal Data Locker.
# 1: Big Open Data Publishing
This is like the open source wave in the software industry. You can assume that most data will be free and you make money either indirectly (advertising and ecommerce) or via value added services.
This theme is core to 3 markets:
1.Scientific Technical Medical (STM) Publishing
2 Legal Publishing
3 Educational Publishing
Big Open Data Publishing is different from most publishing where brevity is key. This is not 140 character tweeting for people with ADD. In these markets, you have attention. The key is to have the right data, the right facts.
There are 4 common threads in these markets:
1. The printed book is not the natural format. Novels and other stories are ideal for reading front to back in “lean back” mode. These big data markets are more suitable to “lean forward” media where you extract data and explore by linking and drilling down.
2. All three of these markets are under major cost pressure.
3. Yet despite the fact that digital data offers a better experience AND a lower cost, prices in these markets have been rising. These are markets dominated by a few big publishers. This cannot be sustainable and when digital economics kick in, prices may plummet.
4. These are all markets that matter to a wider community. So it is likely that we will see more government regulation driving for lower costs and more open access.
The market that matters to the most people is Educational Publishing. When we wrote our first post on Education we saw a market that should be disrupted, everybody wanted it disrupted, but where the amount of actual change was very small. This is an environment that entrepreneurs love. In fact two of the greatest technology entrepreneurs – Bill Gates and Scott McNealey have recently weighed in. Bill Gates said “In Five Years The Best Education Will Come From The Web“. And Scott McNealey has started promoting Curriki, an open source text book initiative that was started at Sun and had been languishing when we first looked at this market.
These 3 core Big Open Data Publishing markets are big:
1.Scientific Technical Medical (STM) Publishing & Research = $100 billion (of which $12 billion is publishing)
2 Legal = $166 billion
3 Education = $543 billion
Big Open Data Publishing is also important (but not necessarily core) to 3 other markets that we looked at:
1. B2B Media. All the markets covered by B2B Media are churning out Big Open Data but needing the curation that has always been B2B Media’s core competency.
2. Online Advertising. Yes, Google is a Big Open Data Publisher that monetizes indirectly!
3. Ecommerce. Making sense of masses of openly available data on behalf of shoppers is a big business.
4. Market Research. Traditional survey style market research is not growing, but the ability to make sense out of the masses of data that the web churns out every minute can be the new mission of the market research business.
# 2: Consumers Take Control Over Their Finances
During September and October 2008, the financial markets had their meltdown moment. It was scary as hell for anybody who was even remotely close to the action. As a catalyst of the Great Recession, it has impacted us all. But that is all history, right? The stock market is up and everything is back to normal? Wrong. Politicians will regulate the markets so we can get back to normal? Wrong. What is happening under the surface is a much bigger wave, driven by the Internet that is fundamentally shifting the economics and power structures of the financial services business.
In the olden days an Executive Summary had the luxury of a whole page to get to the point. In the post-Twitter attention deficit age, we have to summarize in 140 characters. Here is the Twit Summary:
The function of financial markets – matching investable capital with users of capital – is ideally suited to the Internet & that changes everything
The matching function is digital. So the cost of matching approaches zero. The price of matching today is a long way from zero. That creates a lot of danger for incumbents and big opportunities for start-ups.
On the surface it looks like “Wall Street” (short –hand for “the current financial services industry”) is back to normal. In that model, we would be in Act 1 or maybe Act 2. Our theory is that we are not back to normal and that the 2008 meltdown was actually Act 5 playing out. If that is true, the opportunities for startups are phenomenal.
The biggest opportunities are consumer related. In B2B ie corporate banking we are likely to see more incremental change.
These opportunities apply to 5 big cash cows of the consumer financial services business:
1. Mortgage Loans.
2. Credit Card Fees to consumers.
3. Lending to small business.
4. International trade finance.
5. Investment Management.
In each of these markets, consumers need to take control of finances that have been battered by the real estate crash and great recession. The Internet offers consumers more ways to do this. Some ventures have already done well in this area, such as Mint. The combination of social media, peer to peer and big open data is disrupting all these markets.
We make 10 predictions within the next few years:
1. The wealthy are the first to move into P2P Lending for Mortgages. Within families, investors will cut out the bank/middleman and lend directly to trusted family members, using low cost services that manage the paperwork and payment processing. The external paperwork agency is critical to taking the emotion out of the picture and enabling the lender to get the mortgage interest tax write off. The family effectively keeps the 3% spread within the family, giving a better deal to both the lender and the borrower.
2. The wealthy will also be the first to move into other P2P Lending. Their loans will be backed by other collateral or cash flows where the cash is invested in diversified pools. This is driven search for yield and the realization that even the most low risk investments (eg sovereign debt) are not risk free. Given the problems in the Mortgage Backed Securities market, these pooled assets will need a lot of data transparency and effective marketing to gain credibility.
3. One of the P2P Lending startups will break away from the pack and become viewed as the “Skype of P2P Lending”. They will either raise a very large round or do an IPO or get acquired for a large premium. This branding event will legitimize the market and create more momentum. Scale is critical to the P2P Lending market. The pools of assets have to be large enough to act as real risk diversification. The credibility of scale is also critical as P2P is inherently viewed as weird, or flaky or risky.
4. At least one major traditional financial institution will offer a form of P2P Lending. But in their attempt not to cannibalize their existing cash flows, the service will not be as competitive as pure play P2P Lending. This will further legitimize P2P Lending.
5. Regulation and market pressure will enable new P2P players to enter the credit card market. The data layer will become both transparent (in aggregate) and private (for individual data). This will be enabled by technology and enforced by regulation. This new competition will dramatically reduce fees and interest rates but will also be quicker to reduce credit to those who have weak financial resources.
6. There will be lots of Government pressure to increase lending to small business. This will legitimize and grow receivables exchanges and other models for cash low lending.
7. All public companies will report to the SEC using XBRL. Probability: 100%. The SEC is telling them they have to do this. We can even put a definite time line on this: by the end of 2012.
8. New investment analysis tools will come to market that are as easy as using a spreadsheet that allow the automated creating of comparables across market sectors. This will replace most manual labor. Probability: 90%. We can already see some crude early attempts but given that XBRL reporting is 100% certainty, the market opportunity for this is very big; so the tools will come.
9. All major global markets will follow the SEC mandate (if they have not already done that; some are ahead of the US). So these comparables can be across geographic markets and exchanges. Probability: 90%.
10. One of the new social media investing ventures breaks out into the mainstream with a model that somehow reconciles the needs of a) low fees b) safety against scams c) better upside potential than a passive index. Probability 50%. This is a tough nut to crack but the prize is huge so it will probably happen.
# 3: Inter-Company Semantic Standards Change The Business Services Game
Semantic standards within a company are slightly useful to reduce the cost of data integration. Semantic standards across companies that are accepted within a market are game-changing.
Think of stock quotes. The fact that GOOG is the accepted symbol for Google’s stock makes the stock market possible. XBRL is taking that to the next level, so that we can compare say “cash in bank” for GOOG and MSFT using commonly accepted semantic standards for “cash in bank”.
We can also see this playing out in BioPharma with the BioRDF standard.
These standards will dramatically reduce the cost of doing transactions as orders can flow in and out of different business systems automatically. This will change the markets for enterprise software and outsourcing services and lead to a new form of business entity that we call “Business As A Service“.
This will have the biggest impact on markets such as:
• enterprise software
• accounting services
• legal services
• outsourcing services
• supply chain management
# 4: Patients Take Charge Of Their Healthcare And That Becomes The Killer App For The Personal Data Locker
The concept of the “personal data locker“, data about ourselves that is controlled by the individual (not by social networks or search engines), is very appealing to techies. But most people don’t care. The tools are there and the standards are emerging, but the mainstream motivation has been lacking. The one area where mainstream consumer do care relates to healthcare;see this post for more details.
In healthcare, this is called the “electronic medical record” and it is becoming increasingly accepted that it should be controlled by the individual patient/consumer (not by hospitals or insurers).
This is being accelerated by regulation, as healthcare is a big political issue.
This will have dramatic impact on the massive healthcare industry (about 15% of GDP in America and growing). Beyond that, it will make consumers more comfortable with the idea of controlling their own data and more cognizant of the risks of not controlling their own data. That will usher in the personal data locker and that will change many other markets.
4 Different Ways To Play These Opportunities
1. StartUp. In each of these markets, there are many multi-$ billion startups yet to be created. The VC, Angel and Super Angel funding environment is good. Yes, we are in a recession and a bear market, but that is a better time to start than the late stages of a boom/bull market that collapses just as you are getting started. There has possibly never been a better time to be an entrepreneur.
2. Restructure From Within. If you run a big established company facing this creative destruction you have the classic Innovator’s Dilemma; do you risk accelerating the destruction of your existing cash cows by aggressively going after the new market? There are only a limited number of playbooks that CEOs can reach for:
• Keep squeezing the cash cows and let your successor manage the problem. The stock market tends to reward this behavior as cash cows continue producing for a long time. This is the Act 2 – Denial. Investors accept this until it is too late and then we see Act 5 Blow Up.
• Make a big transformative acquisition, buying the biggest of the new wave. The horror story example of this is Time Warner “merging” with AOL, but it can work.
• Make small incremental changes that do not transform the business but that cost a lot of money and legitimize the startup competitors. This is the default management approach, it feels sensible, but the result is usually simply slow decline.
• Create your own startup “skunkworks”. This can work if a) it is done early in a market and b) the internal startup really can attack the legacy cash cows without constraint. That is rarely done well.
3. Restructure From Without. This is how the best hedge funds and private equity funds work. They see a public company facing disruptive change (probably around Act 5 when valuations are already low) and they buy the business and create new value. This is when change tends to be radical as that is the only way to extract value.
4. Invest. There are 4 ways you can invest around the theme of creative destruction depending on your investable capital and appetite for risk:
• buy stock in a public company that is well-positioned for this disruptive change. The problem is that there are very few public companies such as this and they tend to be very highly valued. You cannot find bargains but investors have done well riding a big wave of change on a single company that is “always overvalued”.
• short stock in a public company that is badly-positioned for this disruptive change (ie the big incumbents facing the innovator’s dilemma and not doing it well). Shorting is only for the brave and requires real market experience. Also shorting has to be a short-term tactic and creative destruction timelines are longer – timing is everything.
• buy stock in a public company that has been devastated by disruptive change (ie after Act 5) when the valuation is incredibly cheap and the new CEO has a strategy to create some value. This contrarian play is possibly the one that is most open to ordinary investors.
• invest as an angel in startups. This is only for the wealthy.
———————————————————————–
• Don’t forget to propose your startup for our Semantic Web Impact Awards. The deadline is Sept. 15.
The 
Eric Franzon
VP Community
Jennifer Zaino
Contributor
Angela Guess Contributor
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