Phorm Town Meeting

By the end of Phorm's "2nd Town Hall Meeting" it became obvious that the company is still trying to launch a product with both hands tied behind its back.

It's structure means that Phorm's online behavioural advertising service will only be successful if internet service providers implement it, then successfully market it to individual users, advertisers and web site owners. At that point, the company says, advertisers will experience less wastage in advertising spend, content owners will find it easier to monetise content, web site owners can charge more for space, and end-users will see more relevant ads as they browse.

Exactly what this means in commercial terms is naturally unclear. And Phorm rightly points out that it would be wrong for it to release the details of ISPs' trials or take-up incentives likely to be offered to ISPs' customers, at least until the ISPs are good.. and... ready..... to...... launch....... After 7 years of development, Phorm says it has learned to be patient - a revolution in the internet space.

It seems fairly pointless to have public meetings to talk about offering "choice" when you have no product in the market and the meat of your proposition is under wraps for commercial or regulatory reasons. Nevertheless, Phorm chose the opportunity to engage in further damage limitation on the privacy front and to set the commercial context for its service with a rundown on the online advertisting market.

All the legal points have been made on the privacy front, and don't bear repeating here - though I'll summarise them at the SCL's Information Governance conference. Phorm seems to think they've all gone away, or will be made to go away by launch. Network opt-out was mentioned. Network opt-in is preferred, as is a way to block the service altogether, so that I don't need to store either their opt-in or opt-out cookies. Having to choose whether to store Phorm's opt-in or opt-out cookies is only a choice about how you use Phorm's service, not a choice between using its service and not. Phorm says the current cookie practices are less transparent than its own service will be. From a user standpoint this doesn't deal with the point that I can choose not to go to certain sites, and to clear their cookies selectively, but I can't as readily avoid Phorm's service - or choose to use it on some sites and not others - if it's being run at the ISP level. That "choice" doesn't feel very personalised at all, and personalisation is at the heart of how the web is developing. Phorm asks why the likes of [Google and Facebook] don't have "town meetings" to explain their privacy policies and settings, but I can't think of a venue big enough - and of course they do constantly explain and respond to privacy queries from their massive, global communities in a very public way, online, where everyone can participate.

Phorm also appears to be creating some kind of moral panic by saying that it is part of the solution to preserving the humble newspaper - not to mention journalistic integrity. Shock, horror: journalists are apparently being asked to insert certain keywords in their stories to help attract the right traffic to their newspaper's online ads. Apparently, if Phorm were implemented and used by [everybody] content publishers would not [have to] do this. But the newspapers I read from time to time don't seem all that averse to coupling themes and stories with advertising in their offline manifestations, so it's hardly the end of the world as we know it. And I don't see how newspapers can escape people's desire to see their content unbundled any more than the record companies could. Their challenge is to keep innovating, as Eric Schmidt told US newspapers yesterday. Phorm suggests that the major ad service operators (Google, Facebook et al) aren't entitled to their current or growing flows of advertising revenues. The market will no doubt decide, but this suggestion ignores how those companies finance their own core businesses, which millions and millions of people clearly find very compelling - apparently more so than limited bundles of "news". It also ignores the importance of search and online communities for newspapers' content, not to mention ad deals.

Ulimately, comparisons with Google and Facebook highlight the fact that Phorm is not a bottom-up phenomenon. It's something that will only happen if big telecoms providers say so, and that collides with the Web 2.0 ethos. This, coupled with the Orwellian privacy issues - whether real or perceived - makes Phorm's marketing job very much harder.

Pay Less, Diversify More, Be Contrarian

Just finished John Kay's "The Long and the Short of It". Lots of decent, straightforward explanations as to why retail investors should "pay less, diversify more, and be contrarian," without pushing some kind of snake oil that allegedly delivers the same financial result.

In fact, he says, "You are on your own". That's not a great outcome after a decade of New Labour fiddling that was supposed to result in "treating customers fairly".

In essence, Mr Kay explains that financial markets have a mind of their own, unrelated to fundamental value. Financial models that purport to predict performance over time may be illuminating but they are not true... "frequent small gains [are] punctuated by occasional very large losses." He calls these occasional events "Taleb distributions," on the basis that Nassim Nicolas Taleb explained this problem fully in his book Fooled by Randomness (and again more recently in The Black Swan). Not only are faulty financial models accepted as being more than illuminating, but also the urge amongst financial services firms to compete on relative performance moves their markets "too far, too fast" for most of the participants to realise they should take the profits and check out. To call a halt puts one's job at risk. "It is better to be conventionally wrong, than to be unconventionally right." So, while it pays to understand the "mind of the market", your purpose in doing so as a retail investor is to do the opposite of what "the market" is suggesting.

Interestingly, Mr Kay's recommended regulatory response to the credit bubble is to "firewall the utility from the casino, by giving absolute priority to retail depositors...in the event of the failure of a deposit-taking institution." He says:

"The additional rules which will be introduced as a consequence [of 'more effective' regulation] will be irrelevent to the next bubble, just as the Basle I and II capital requirements imposed on banks - the subject of so much regulatory and academic debate over the last two decades - were irrelevant to the credit bubble."

The more one is diversified, the less regulation should matter. Right? Well, that's easier said than achieved, given the marketing might devoted to cross-sell in retail financial services.

Maybe the financial regulators should simply dedicate themselves and their budgets to pushing the line:

"You are on your own. Pay less. Diversify More. Be Contrarian."

But there won't be very many international meetings or compliance jobs in that...

Beware Pleas Based on Moral Panic

William Patry made this excellent point in tonight's SCL Annual Lecture, specifically in connection with proposals to extend further the term of copyright: political appeals based on  moral panic are most often made where there is asymmetry in the information available: criminal law and copyright law being key examples. There is no evidence from the other side - the alleged perpetrator - unlike in cases where two sets of industry players are pitted against one another, which usually produces hard evidence pointing in each direction (e.g. competition law disputes). So the way is clear for, say, the security agencies or copyright owners to appeal for protection merely because it is "right and just" rather than to protect against any proven harm.

Such pleas may ultimately be futile, of course. Attempts by the music industry to deny access to music downloads neither prevented the rise of Napster and iTunes, nor prevented the steady demise of EMI. As I've also mentioned before, the root cause of music industry disruption is consumer dissatisfaction, not copyright violation.

William Patry's suggestion is to insist on an empirical approach to the issue of whether or not the copyright regime works, rather than a continued assumption that it's a property right that deserves protection at any cost. Only then will a proportionate response emerge. I share the view that in all regulatory matters - like business process issues - one must first define the problem and ascertain its scale before deciding whether or not to devote precious state resources to resolving it. At that point, legislators should insist on finding the root causes and implementing the best solutions to tackle them.

Attempts at providing empirical evidence on these issues in the file-sharing context, for example, have been pathetic. Claims that music providers will lose £1bn in CD sales over the next 5 years are disingenuous when their digital sales are increasing at the rate of 28% a year. And where is the evidence that extending the term of copyright will result in more copyright works that will yield satisfactory incomes for creators? Is it not possible that shortening the copyright term would result in a far greater volume of sales for more artists at lower prices to consumers?

The people should be told before any further extension to copyright is granted.

The Danger of Over-Inflating While Underwater

A scuba instructor once told me the tragic story of a diver who tried to salvage an outboard motor at the bottom of a lake. Struggling to raise the motor, our man decided to fully inflate his buoyancy jacket for extra lift. All went well until he lost his grip on the motor, transforming himself into the human version of a Polaris missile. A fatal case of the bends ensued.

Of course, Messrs Bernanke, King et al. are also struggling manfully to lift something heavy that is deep underwater. For extra lift, they are also pumping lots and lots of air into the economic buoyancy control devices, and even appearing on TV to talk things up. The obvious concerns are (a) the amount of air being pumped in, (b) when to stop pumping and (c) how fast they can get the air out again when the economy turns to prevent it going ballistic.

The AIG saga seems instructive on this last concern. The $170bn in government aid is said to have been used to boost the "collateral" (or reserves) that secured AIG's insurance obligations on dodgy credit-default swaps (CDS's). And about $105bn has since been paid out to insured banks (on the full face value of the CDS's - hey presto, no loss!). In turn, the banks have used the money to shore up their own "reserves" rather than lend it - much as they're doing with the bailout money they receive directly, more of which is being printed as we speak.

There is no single definition of the term "reserves". To a large extent, what's prudent or required today may be deemed overkill next quarter and released to revenue and used in the ordinary course again. Given the care they took on the way into this mess, my bet is that as the economy turns the banks and insurers will release the reserves and provisions they made in a panic over the lack of liquidity way too quickly for central bankers to get the surplus air out of the economic buoyancy jacket. See picture for the consequences...

That's not to say there's any practicable solution at the global level, or that individually any of those banks or insurers will be wrong to release the reserves in question. It's just the system we have. It ain't perfect, as Lord Turner has just explained [stable door creaks and slams shut].

So, on a personal basis, one might at least consider that a tracker mortgage with an interest rate cap, or even a fixed rate mortgage, is a prudent option right now.

PS: Earlier in May, I went with a fixed rate mortgage, as the tracker with cap options started getting too expensive at the level of the cap.

PS: 28 May '09, FT Alphaville notes: "Wednesday saw a frantic steepening of the Treasuries curve... The fact is there is a growing perception in the market that further down the line, a messy quantitative easing-exit strategy might see the Fed forced to raise rates quite fiercely." I guess John Kay would say there is an opportunity to bet against the market, here. However, perception seems to be everything, so if the Fed is persuaded the market is looking for a rate hike, it may well deliver, and other central banks may have no alternative but to follow.

PPS: 10 June 09: Interactive Investor summarises the "flamewar" between Keynesian and Monetarist economists over the implications of rising bond yields.

Let's hear this post from Merv King himself:

Sending Money Home More Easily

Hardly a month of the 21st century has passed without some breathless announcement of soaring growth projections in the mobile space.

Two of the more compelling financial use-cases for mobile phones are remittance (domestic and cross-border) and retail purchase. Everything else is nice-to-have if your phone will do either of those things.

Some would add "mobile banking" as a primary use-case, but it only seems to involve accessing the same old banking services via a different device/network. That's about as compelling as filling your socks with custard before putting them on each morning. You may as well use telephone banking. At any rate, "banking" isn't really part of any other activity we engage in, unlike "sending money home" or "shopping". "Banking" is an admin task, like sorting your paper clips or arranging your pens in order of length. Investing is much more fun, but doesn't seem to be sufficiently frequent to design mobile apps around it.

Of course, the retail use-case is fascinating, but it has to be so tightly integrated with the overall product location and purchasing experience that it's almost impossible to talk about except on a retailer by retailer basis.

So that leaves remittance as the use-case with general significance. I've followed it since 1999, when I left the comfort of a City law firm to join the board of earthport plc. I left in June 2001, 5 months after it floated on AIM, by which time the dotcom bust had reduced the pace of e-commerce integration efforts to a crawl and it didn't need an inhouse legal team. But it's a tribute to human nature that subsequent management teams have been able to keep earthport alive to take advantage of the current wave of development.

To give you an idea of why persistence is worthwhile, the GSMA has concluded that the remittance market in 2006 comprised some 200 million migrant workers in EU, US, UAE etc, who each sent home US$2k-5k a year in $200 increments to about 800m recipients. Some 32 countries accounted for only $100bn of an estimated $270bn of traceable funds (add to that about $185bn non-traceable). And that market was served mainly by Banks, post offices, niche MSBs (55%), Western Union (25%), Eurogiro (11%), MoneyGram(6%) and Vigo (3%).

But migrant workers queue up, debit card or cash in hand, to pay giant fees to send money home.

I'll spare you a discussion of the hype and plight of the 30+ providers out there, and merely point to three news items that suggest real progress towards more useful remittance services:

• Over 5 million Kenyans have infuriated the banking establishment in Kenya by signing up for M-PESA for USD 765m in local remittances.
  


• In January, earthport, an e-wallet payment service provider, saw the expansion of its relationship with Standard Chartered globally.
  


• On 12 March, Luup, an e-wallet payment service provider, announced a relationship with Deutsche Bank for Europe, Middle East and Asia.
  

Of course, several years back, the GSMA also allied itself with Western Union "to ensure faster development of Mobile Wallets suitable for implementation by Mobile Network Operators. ... initially targeting 30-40 Mobile Network Operators in markets where there is a high demand for remittances services to become early adopters of mobile wallets.” Indeed, I took the picture for this post from the announcement of Western Union's deal with Orascom, an emerging markets telco, in October 2008.

This news flow reveals that the incumbents in the remittance market have finally admitted they need new payment processing platforms to service the market effectively. And (alas, too late for my lapsed earthport options) m-wallets, or server-based solutions are the weapons of choice, rather than device-based solutions. The announcements also underline the importance of having a trusted local brand at each end of the remittance. In fact, it's easy to see that the trust level may be more important at the recipient end - where users may be less confident with technology. Finally, both ends of the remittance are highly fragmented and often based remotely, making the mobile phone the ideal touch point for payer and payee.

Hopefully we'll see M-PESA's "infuriating" success repeated by others across borders before too long.