How Apple Pay innovates on top of the US payments stack

One of the difficulties of building innovative payment services in the US is that we're a nation that loves our credit cards. We may totally overvalue the random rewards and points and other benefits the credit card companies give us, but since the merchants often cover a lot of the cost of those benefits, we'll take all the rewards we can get, as financially irrational as that may be.

[Aside: Some cards have annual fees, and the credit card users that carry a balance each month subsidize other users who pay off their balance in full each month, but many credit card rewards would be acquired more cheaply just by paying for them directly. A free lunch remains a rare thing.]

This presents a cost problem for payment startups: if you build a payment service that leverages your users' credit cards, you have to pay companies like Mastercard, Visa, American Express, and so on their fees. But if you charge merchants an additional markup on top of this fee when one of your users pays with your service, merchants have very little incentive to accept your payment method.

You could just pass through the fee, but then you have to make your profit elsewhere. Or you could be bold and charge less than the credit card fees, but then your entire business is a loss leader. The more you sell, the more you lose. Ask Square how that model has worked out from a cash flow perspective. Paypal was able to reverse the bleeding by making it near impossible for its users to pay with a credit card instead of with an eCheck or any Paypal balance they might be carrying. I know this because I tried to switch to using a credit card when logged into Paypal once and ended up in this strange endless loop where I kept adding a credit card to use and then not being able to find it. I tried several more times in a row until I decided to just take a rock and hit myself in the head repeatedly because it was less painful and frustrating.

An echeck costs Paypal some negligible amount, I recall it being something like $0.01 from my time at Amazon, and using the Paypal balance costs Paypal nothing, of course. That means whatever Paypal charges the merchant on that transaction becomes profit. It's not easy to get all the way there, though. You have to encourage enough usage for users to want to give you their checking account information so they can withdraw any balances they might have. Once you have that, you can enable money to flow the other direction, as an eCheck, too.

Payments, as a multi-sided market, will always present entrepreneurs with this chicken-egg conundrum. To get merchant adoption, you need a huge number of consumers carrying your payment method, but to get consumers to want to use your payment method over their beloved credit cards, you need a ton of merchants to accept that payment method.

Which brings me to Apple Pay, which launched today. I didn't realize today was the public launch until I was at Whole Foods buying breakfast this morning and saw this at the checkout counter on the payment terminal:

I hadn't downloaded the iOS 8.1 update yet or added any credit cards to Apple Pay on my phone, so I didn't use it just then, but I went back later after I had added a credit card and tried it out, and it was painless. Held my phone up to the terminal, Apple Pay popped up on my screen and asked me to verify with Touch ID, and that was it.

There are many reasons to think Apple Pay might succeed where so many other alternative payment methods have failed.

First, Apple is building off of the existing credit card system rather than fighting customer inertia. As noted above, so many US consumers love their credit cards and the rewards they get from them. Apple Pay doesn't ask them to give that up.

Another thing about credit cards: most consumers find them easy to use, not that much of a hassle to bring out and use. To surpass them, an alternative has to be as easy or easier to use or magnitudes for the consumer or much cheaper for the merchant. Apple Pay fulfills the first of those requirements once you've added the cards to Apple Pay on your phone, something that can be done as easily as snapping a photo of the credit card. Touch ID has finally reached an acceptable level of reliability, so the overall user experience is simple and solid.

Perhaps most importantly, Apple Pay starts on day one with a good whack at both the chicken and the egg. On the merchant side, Apple managed to corral an impressive number of partners, from credit card companies (the big 3 of Visa, Mastercard, and American Express) to banks (all the biggest like Bank of America, Chase, Citi, Wells Fargo). On the merchant front, Apple Pay's marketing page claims over 220,000 stores which actually makes this the weakest link of these three groups but still a decent starting point for day 1. That will be the hardest nut to crack, but more on this point later.

On the consumer side, whether that's the chicken or the egg, Apple has a massive and growing installed base of iOS and iPhone users who can use this system. The only other technology company I can think of who could tackle this space is Amazon given their huge database of consumer credit cards, but they lack the device or app installed base to fulfill on a good user experience for enough users.

Apple Pay offers some additional benefits, like added privacy, something Apple has been touting across the board as one of their key consumer benefits, though I'm still not sold it's a huge selling point for most average consumers. Still, it's worth noting that Apple doesn't keep records of your transactions, and you don't have to hand over your credit card to some waiter or clerk who then has access to the card number, expiration, and security code. Again, I think this is of minor psychological comfort for the vast majority of consumers, but it's at least not a negative.

But more than anything, my excitement for Apple Pay stemmed from this post by Uber:

The beauty of Apple Pay is that it simplifies Uber’s signup process to a single tap. If you have an eligible credit card already added to Apple Pay, you don’t need to enter it again to ride with Uber. Instead, merely place your finger on the Touch ID sensor of your iPhone 6 or iPhone 6 Plus, and your Uber is on its way. No forms, no fuss. We’re calling this new Uber feature Ride Now, and it’s the product of a close collaboration between Uber and Apple over the past few months.

How it works:

  1. Open the Uber app and tap Ride Now.
  2. Tap Set Pickup Location, enter your destination, and confirm your request.
  3. Place your finger on Touch ID to confirm payment, and your Uber is en route!

The rest of the Uber experience remains exactly the same. A receipt for your ride, with the fare breakdown and trip route, is sent to the email you have for Apple Pay; riders rate their drivers at the end of each trip. Existing Uber users are unaffected and can continue using Uber as before.

Innovation in payments in the US has been difficult because of the entrenched incumbent stack, but Apple has just moved up the stack and innovated above it all. What they've done here is abstracted away the credit card number entirely. Extrapolate out into the rosiest future, and perhaps someday the only time you might have to remember your credit card number is when you get it in the mail and input it into Apple Pay. Who really cares what the number, expiration date, and security code are. If you can prove you are who you say you are with Touch ID, that's a more efficient way to prove your identity and grant authorization for the payment.

But we're a long ways away from that day, and for now, 220,000 stores is actually not close to a majority of merchants. The Uber example, though, demonstrates the near-term potential.

I long ago memorized all my credit card numbers and security codes just so I wouldn't have to deal with the hassle of pulling the cards out every time I had to punch the number in for an online transaction. Still, it's a hassle, especially on my phone, to have to either enter my credit card details or to go round trip to 1Password to remember my crazy long, random, difficult-to-memorize iTunes password.

Apple Pay reduces that pain by a lot. A whole lot.

Even if its near term impact is restricted to making payments in apps on my phone, that's a big deal, and perhaps sufficient incentive to me to actually upgrade to one of the new iPads with Touch ID.

When Amazon first received its 1-click patent, one of the first and only companies to license the patent was Apple. It paid off for both sides. For Amazon, Apple's license strengthened the patent, allowing them to enforce it against companies like Barnes & Noble (for the record, I don't believe in software patents like these, but that's a topic for another day). For Apple, the 1-click license allowed them to enable users to purchase songs off of iTunes with 1-click, one part of a superior experience that spanned iPods and the iTunes music store that catapulted them to the digital music throne. Can you imagine the painful it would have been to go through multiple steps to purchase each single?

What Apple has done with Apple Pay is extend 1-click purchasing to the mobile app world and many real world stores as well. Or maybe we should call it 1-touch purchasing.

Years later when we look back on WWDC 2014, I suspect Apple Pay will be the most important announcement by a wide margin.

Network transportation costs

Metcalfe's Law states that a value of a network is proportional to the square of the number of its nodes.  In an area where good soils, mines, and forests are randomly distributed, the number of nodes valuable to an industrial economy is proportional to the area encompassed.  The number of such nodes that can be economically accessed is an inverse square of the cost per mile of transportation.  Combine this  with Metcalfe's Law and we reach a dramatic but solid mathematical conclusion: the potential value of a land transportation network is the inverse fourth power of the cost of that transportation. A reduction in transportation costs in a trade network by a factor of two increases the potential value of that network by a factor of sixteen. While a power of exactly 4.0 will usually be too high, due to redundancies, this does show how the cost of transportation can have a radical nonlinear impact on the value of the trade networks it enables.  This formalizes Adam Smith's observations: the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

I learned that and more from this post on how critical horses were to the industrial revolution. Because Europe had horses to move natural resources while China relied on human porters, the 1800's saw Europe surge past China. Later, non-European countries like Japan just skipped the horses and went to steam engines to play another round of leapfrog.

We continue to see leapfrogging all over the world with a variety of technologies, like cellular technology (skipping landlines) and near field payments (hopping past credit cards). To take a more recent example, it would not surprise me if we first saw widespread deployment of drone delivery technology in countries other than the U.S., where regulations and solid alternatives exist. It's not surprising to hear that Amazon is looking to test drone delivery in India first.

Water is too cheap

Timely economics article given the current drought in California.

Such efforts may be more effective than simply exhorting people to conserve. In August, for example, cities and towns in California consumed much less water — 27 billion gallons less —than in August last year.

But the proliferation of limits on water use will not solve the problem because regulations do nothing to address the main driver of the nation’s wanton consumption of water: its price.

“Most water problems are readily addressed with innovation,” said David G. Victor of the University of California, San Diego. “Getting the water price right to signal scarcity is crucially important.”

The signals today are way off. Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing.

Alex Tabarrok points to this passage from the Microeconomics textbook from him and Tyler Cowen:

Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply. Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop that can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water.

Subsidies distort markets by weakening the ability of price signals to allocate scarce resources wisely. People freak out over surge pricing from Uber, but that's trying to do the same thing, in principle.

I extend the idea of subsidies to emotions, too. When someone really gorgeous expresses an idea, I think of that thought as having an aesthetic subsidy. When one grows unusually attached to something that's theirs (the endowment effect), I think of that as an ownership subsidy.

Subsidies disrupt markets, and they have a similar effect on your thinking.

Economic moral inversion

Alex Tabarrok with a thought-provoking post on the stark difference in evaluating actions based on intention versus outcome. The real world example: Evan Thornley, founder of LookSmart, admitted he hired more women because of the market inefficiency for their talents.

“Call me opportunistic; I thought I could get better people with less competition because we were willing to understand the skills and capabilities that many of these woman had,” Thornley said.

Thornley went on to say that by hiring women, he got better-qualified employees to whom he was able to give more responsibility. “And [they were] still often relatively cheap compared to what we would’ve had to pay someone less good of a different gender,” he concluded. To illustrate his point he showed a slide that said: “Women: Like Men, Only Cheaper.”

As you might expect, his comments were met with outrage. Tabarrok believes the outrage comes from judging Thornley on an intention-based heuristic. Looked at from an economist's consequentialist perspective, Tabarrok feels Thornley was judged too harshly.

If we judge actions by consequences, however, Thornley should be encouraged, perhaps even praised. Accepting for the sake of argument the truth of the story, it’s Thornley who has overcome prejudice (his or his society’s), recognized the truth of equality and taken entrepreneurial action to do well while doing good. It’s Thornley who is broadcasting the fact of equality to the world and encouraging others to do likewise. Most importantly, the consequence of Thornley’s actions are to increase the demand for women executives thereby increasing their wages.

Women’s wages aren’t pushed down by employers who hire women but by employers who don’t hire women. So why does Thornley get the blame? Instead of denouncing Thornley, whose actions push up the wages of women he hires and the wages of the women he does not hire, why not ask, How can we encourage employers not to overlook talented women and minorities?

For those wanting to break the bonds of discrimination whether they be women, blacks or Dalits, lower wages and a competitive market aren’t the cost of discrimination but the cure. It’s the lower wages that give employers an incentive to overcome prejudice, seek out talent, and experiment with new ways of doing business. And it is the self-interested pursuit of profit that is the surest means to increase the wages of the unjustly ignored and overlooked.

I'm sympathetic to both sides. On the one hand, a free market economy can be a natural corrective to many forms of discrimination when the discrimination happens to be economically inefficient.

On the other hand, let's not fit Thornley for a saint's cap. In this day and age, especially in the U.S., I don't perceive a huge societal retaliation threat for paying women equal pay for equal work. It's not as if Thornley was coming out against slavery in the Deep South when slavery was at its height. He clearly states that he believed the women were doing not just equal work but better work. So why not do the right thing and just pay them commensurate to their value as he saw it? I'm hesitant to laud someone for just being a smart business person, a rational economic actor.

Why infant mortality higher in U.S. than Europe?

The US has a substantial – and poorly understood – infant mortality disadvantage relative to peer countries. We combine comprehensive micro-data on births and infant deaths in the US from 2000 to 2005 with comparable data from Austria and Finland to investigate this disadvantage. Differential reporting of births near the threshold of viability can explain up to 40% of the US infant mortality disadvantage. Worse conditions at birth account for 75% of the remaining gap relative to Finland, but only 30% relative to Austria. Most striking, the US has similar neonatal mortality but a substantial disadvantage in postneonatal mortality. This postneonatal mortality disadvantage is driven almost exclusively by excess inequality in the US: infants born to white, college-educated, married US mothers have similar mortality to advantaged women in Europe. Our results suggest that high mortality in less advantaged groups in the postneonatal period is an important contributor to the US infant mortality disadvantage.

From this research paper (PDF).

The psychology of charitable donations

One of the better Planet Money episodes in recent memory: Why Raising Money for Ebola is Hard. Doctors Without Borders in Africa is overwhelmed with the latest outbreak. Donations would help, but they are at a trickle.

As Atul Gawande and many others have noted, containing Ebola in its current form is actually quite straightforward.

This relatively weak transmissibility makes the standard public-health technique of contact-tracing effective in halting the disease. Track down the people who’ve been in contact with a sick patient; measure their temperatures and check on them daily for twenty-one days; if any turn up with a fever or looking sick, put them into isolation. Once you get anywhere upward of seventy per cent of the contacts under such surveillance, the disease stops spreading.

Thiss podcast dissecting why so few people donate to help fight Ebola helps to unpack the donor psychology behind fundraising for disasters:

  • The Planet Money episode notes that 90% of donations for disaster relief occur within 90 days of the disaster. But that's contingent on the disaster being sudden, massive, and prominent in a short period of time. Sudden and dramatic disasters, like 9/11 or the Haiti earthquake, are ideal for spurring a massive influx of donations. But a disease that starts with one person and spreads slowly like Ebola can't concentrate world attention the same way, no matter how many people it spreads to over time. The bitter irony is that when this round of Ebola first broke out, donations would have had the greatest leverage because the disease could've been isolated contained much more easily then.

  • People react to visible evidence of severity. Slow building disasters like Ebola lull people into complacency. People have a finite store of charity, and Ebola hasn't generated any iconic horrific imagery to push donors over their emotional tipping point.

  • People don't understand exponential math that well. This outbreak of Ebola may have an R0 or “R-nought” of 1 or even as high as 2. That means it could spread at an accelerating rate. “Should the outbreak continue with recent trends, the case burden could gain an additional 77,181 to 277,124 cases by the end of 2014.” That's still not as intuitive to most people as the tens of thousands of people who died in Haiti the first day of the earthquake.

  • People don't like to contribute to preventative measures, they want their money to make things better immediately. For example, as noted in the podcast, it's almost impossible to raise money to head off a famine that everyone can see coming. People won't donate until people are actually starving.

  • Africa is far away from America and many other first-world countries. Disasters close to home draw more donations. Out of sight, out of mind. I suspect most Americans don't personally know anyone who has been killed by Ebola.

  • Given the irrational lumpiness of charitable donations for disasters noted above, when massive galvanizing disasters do occur, we should capitalize on the spike in charity and allow the organizations on the receiving end of that aid the freedom to hold back some of the funds to allocate to future disasters. Charities would operate more like insurance, or an endowment. The Red Cross tried this after 9/11, but donors erupted in outrage and the head of the Red Cross had to resign.

Not to be glib, but it almost feels like Ebola could benefit from a staged dramatic event to serve as a catalyst to mobilize world sympathy. Or Ebola needs its version of the Ice Bucket challenge, a meme which spurred a vast outpouring of donations for ALS without any precipitating disaster. 

Wisdom of the crowds doesn't seem to apply when it comes to allocation of charitable donations.

GiveWell doesn't have any article about the most worth charities combatting Ebola, but Vox linked to a list from the U.S. Agency for International Development. Among the list is Doctors Without Borders/Medecins Sans Frontieres (MSF), and they've posted a page on their efforts to combat Ebola. That's my choice. GiveWell says of MSF: “We have a positive view of MSF and have recommended them for disaster-relief donations in the past.”

The economics of priceless transactions

Taken together, you have a simple alternative to trading: the price of anything that affirms shared values is infinite, the price of anything else is zero or negative when the alternative is to debase or reverse a value.

Saint-saint transactions are not uncomputable though. You can order priceless values from greatest to smallest. You can do some simple, low-precision math with the infinities of pricelessness. Lives are priceless, but it is only acceptable for a mother to give her life to save  a young child, not the other way around. Often, one infinity is devalued in proportion to how corrupted it seems relative to another infinity of the same kind. So the adult life has been more corrupted by base trader considerations of adult circumstances. Therefore it must be sacrificed for the child’s life.

In general, the innocent are more priceless than the corrupt, the pure more priceless than the impure, the lofty more priceless than the base, the natural more priceless than the artificial. Some examples are harder to analyze. Soldiers giving their lives for their country are often viewed as superior, purer people giving their lives to protect inferior, more corrupt people.

To resolve this paradox, we agree to pretend that soldiers fight directly for the proclaimed values of a nation, rather than the lived values of its actual people. This is why soldiers’ families in movies are always archetypal, sometimes even cartoonish, models of perfect virtue. They are never the messed-up rolling train-wrecks that are the families of most real people. In theory, we are supposed to honor the lives of the fallen by striving harder to be worthy of their sacrifice. That of course means living more truly by the values they died for.
 

Excerpt from a fascinating post on the economics of priceless transactions. As the author notes, the rise of the internet has put a spotlight on the economics of free, but what of the opposite end of the spectrum?

Three things come to mind. One is that I recall my mother never split any bills when going out to meals with friends and family. Someone always picked up the tab only after a theatrical fight between Asian adults for the check when it landed on the table after a meal, almost a ceremony of sorts. It resembled some notion of what the author terms a saint-saint transaction with a price attached but treated as an afterthought. More important than the equitable division of the tab was affirming the friendship. Since the continuation of the relationship likely meant more meals in the future, the favor would be returned at the next meal in a the next stroke of a lifelong financial volley.

I picked up on this tradition, and after college, once I had enough income to start eating out on a more regular basis, I tried to carry it on when eating out with others. This worked well with some folks who shared that tradition, but I found the vast majority of Americans were more accustomed to splitting the check. This often led to a semi-awkward impedance mismatch after meals.

The second thing that comes to mind is that our online selves are often closer to idealized constructions of our identity than to our actual selves. This, to me, leads to the exhausting cycle of outrage on Twitter and other social networks. In 140 characters, we must express absolute outrage at every moral transgression from any public figures. After all, we live in an age where our online self, our construction of it, often reaches more people than our real selves. This makes our virtual identity critical, and after all, the cost of moral indignation online comes with little cost. Online, we are all saints.

Third is the internal struggle many NFL fans are caught up in right now. On the one hand, football fans love the sport, the cultural touchstone that is the secular religion of NFL Sunday. It is nearly impossible to dispute, however, the gladiatorial destruction the sport wreaks on its participants' bodies and minds. And, thanks to the elevator security footage of Ray Rice knocking his wife out cold with a vicious left hook, all the multitude of domestic violence cases over the years involving NFL players suddenly took on a tangible nature that's not as easy for fans of the sport to ignore.

What makes fans uncomfortable is that even if they elevate their love of the sport to an intangible and priceless stature, perhaps as some touchstone of American spirit, or some cultural bond between generations, they know that in a comparison of priceless values, the health and lives of players and the safety of their spouses and children must rank higher. It's not sacrifice if you aren't letting go of something you genuinely love.

I also loved this bit from the post:

When traders, rather than saints, control the narrative, the narrative logic is baser-than-thou. This is the logic of status-leveling humor rather than the logic of status-preserving solemnity. To understand why, consider the classic joke about prostitution:

Man: will you sleep with me for $1 million?
Woman: Okay
Man: will you sleep with me for $5?
Woman: WHAT! What kind of woman do you take me for?
Man: we’ve already established what kind of woman you are. Now we’re just haggling over the price.

In this joke, the initial offer of $1 million is actually fake-out code for “priceless.” The joke relies on treating it as an actual negotiable number later, instead of sticking to the fiction that it is a symbolic infinity. The trader here has an ulterior motive: exposing the hypocrisy of the woman’s position, thereby up-ending the presumed status relationship at the start.

The reason jokes like this work is that priceless actually is a number less than infinity in many practical situations. For something to be priceless, it is only necessary for it to be priced at a point where it can be compared with something else that is priceless.

In the prostitution example, an offer of $1 million is (if you’ll pardon the joke) big enough to be considered fuck-you money. This has a very specific valuation in the priceless economy: it is the price of liberty for the rest of your life. The woman is willing to do for $1 million what she is not willing to do for $5. Not because she has a rational pricing model in mind, but because at $1 million, she is wrestling with a high-minded internal values conflict (liberty versus purity). At $5, she’s thinking about paying for a sandwich. The joke works because it disrupts the original fiction that purity ought to be the more priceless value of the two. Indecent Proposal works as a tragedy for the opposite reason: the original fiction is ambiguous and the ending affirms values in the “right” order (watch the movie to understand why and at what cost).

This is why earnest discussions in the startup world about what your “number” might be, are deluded. Liberty means different things to different people. For some, it is a dollar and a mindset shift away. Others remain trapped even with hundreds of millions of dollars.
 

And, for those of you who come here just for technology related stories, an excerpt that veers closer:

Marketing represents a net return on investment if the irrationality it induces, via movement of the transaction into saintly regimes, increases margins sufficiently. You could measure the irrationality of a market (or equivalently, the hierarchical rationality of a reputation economy) by the amount spent on marketing, particularly in a saintly mode. A marketing-dominates-sales company is one that has carved out a defensible position: a regime behind a fixed boundary where a favorable values economy of pricelessness prevails.

This is what positioning means: drawing a boundary around a set of values that your customers will accept, that put you on top in most transactions.

As Exhibit A, I give you Apple during the reign of Steve Jobs at the top of the Apple reputation economy. That Apple at the time was primarily a reputation economy, and only secondarily a computing hardware market, is clear from the fact that there is a clear hierarchy in its market, with users at the bottom, genius-bar reps one level up, and an invisible secret church in the background with Jobs at the top. Now that he’s gone, the fate of the company depends on the ability of Tim Cook to play St. Peter well.

Some Peter Thiel miscellany

A few Peter Thiel related links.

First, some bits from his Reddit AMA today, one of my favorites to date (I bolded the questions for easier reading).

What do you think about NSA/Snowden and the impact on cloud, security, and general startups in the USA?

It is a much-needed debate.

BTW, I don't agree with the libertarian description of the NSA as "big brother." I think Snowden revealed something that looks more like the Keystone Kops and very little like James Bond.

The first thing an intelligence agency should do is counter-intelligence, and the NSA could not even figure out that there was something suspicious about an IT person downloading all those files. And once they knew Snowden had done this, they apparently still couldn't figure out what all he had taken...

It was inappropriate that the US was tapping Angela Merkel's cell phone. But I suspect that this was news to Obama as well. And more generally: the NSA has been hovering up all the data in the world, because it has no clue what it is doing. "Big data" really means "dumb data."

...

Why do you think more wealthy people don't fund anti-aging research? What do you think could be done to encourage them to do more?

Most people deal with aging by some strange combination of acceptance and denial. I think the psychological blocks to thinking about aging run very deep, and we need to think about it in order to really fight it.

...

So, unrelated question, but I'm just curious--- What was your reaction to THE SOCIAL NETWORK movie?

The zero-sum world it portrayed has nothing in common with the Silicon Valley I know, but I suspect it's a pretty accurate portrayal of the dysfunctional relationships that dominate Hollywood.

...

what is one thing you believe to be true that most do not?
Most people believe that capitalism and competition are synonyms, and I think they are opposites. A capitalist accumulates capital, and in a world of perfect competition all the capital gets competed away: The restaurant industry in SF is very competitive and very non-capitalistic (e.g., very hard way to make money), whereas Google is very capitalistic and has had no serious competition since 2002.
...

Hi Peter.. if you were not from United states, do you believe you could reach the same position as you are now?

One can never run this experiment twice, but...

I was born in Germany and my parents emigrated to the US when I was 1 year old. I think Germany and California are in some ways extreme opposites -- Germany is pessimistic and complacent, California is optimistic and desperate. I suspect my life would have turned out very differently had we stayed in Germany.

...

Peter, what's the worst investment you've ever made? What lessons did you learn from it?

Biggest mistake ever was not to do the Series B round at Facebook.

General lesson: Whenever a tech startup has a strong up round led by a top tier investor (Accel counts), it is generally still undervalued. The steeper the up round, the greater the undervaluation.

...

What is your view on bitcoin? will it replace the current financial system we have?

PayPal built a payment system but failed in its goal in creating a "new world currency" (our slogan from back in 2000). Bitcoin seems to have created a new currency (at least on the level of speculation), but the payment system is badly lacking.

I will become more bullish on Bitcoin when I see the payment volume of Bitcoin really increase.

...

Can you comment on how you think artificial intelligence may change society in the coming decades? And what you think we can do to increase the chance that these changes will be positive?

I think AI is still a fair ways off. But the economic questions (e.g., how will this impact our work?) are secondary to the political questions (e.g., will AI be friendly?).

The development of AI would be as momentous as the landing of extraterrestrials on this planet. If aliens landed, the first question would not be about the economy!

...

You've spoken a great deal about stagnation and a fair amount about what institutions and individuals might do tocombat it. What advice do you have for adapting to it? Short of becoming an entrepreneur, what does the prospect of technological stagnation mean for how average individuals should invest and plan their lives?

If our great expectations about the future are not realized, then we need to save way more than we are doing today. China (with 40% savings) is perhaps more "rational" than the US (with about 0% savings), at least in a world of general stagnation.

...

I have heard stories about you at PayPal not wanting to hire MBA's. And now we all know your stance on college. I have 2 questions.

Why did you refuse to hire MBA's?Do you think there needs to be a change in K-12 education to lessen the demand for college?

1 no absolute ban, just think most MBA's tend to be high extrovert/low conviction people -- a combination that in my experience leads towards extremely herd-like thinking and behavior 2 yes, I think K-12 should give people enough skills to be able to contribute towards our society -- it is failing because it does not even come close to this

...

How do you combine your libertarian politics and your Christian faith? Is there a contradiction you struggle with or do you see no conflict at all?

To think of Christ as a politician might be the easiest way to get him all wrong.

The theological claim that Christ is the "son of God" is also the anti-political claim that Augustus Caesar (the son of the divine Julius Caesar) is not the "son of God." So I think that Christ should be thought of as the first "political atheist," who did not believe that the existing political order is divinely ordained.

Now, I think that there is lot of resonance between political atheism and libertarianism, even if they are not strictly identical...

...

Did Anton Chigurh kill Carla Jean Moss at the end of No Country for Old Men?

Probably. But the real issue is that Chigurh did not overcome chance himself.

"No Country for Old Men" is the movie that chapter 6 of my book is directed against.

...

You mentioned in the Tim Ferriss Podcast that you think when startups fail it is simply a tragedy. Do you think anything can be taken out of it when the unfortunate does happen?

Unfortunately, not very much... Failure is typically so overdetermined that people never learn all the reasons for which they failed.

...

How important do you feel social responsibility is as a contributing factor to a companies success?

A sense of mission is critical, but I think the word "social" is problematically ambiguous: it can mean either (1) good for society, or (2) seen as good by society.

In the second meaning, it leads to me-too copycat companies. I think the field of social entrepreneurship is replete with these, and that this is one of the reasons these businesses have not been that successful to date.
 

Second, Dan Wang summarizes some of Peter Thiel's key responses from this debate with Marc Andreessen. On energy:

Look at the Forbes list of the 92 people who are worth ten billion dollars or more in 2012. Where do they make money? 11 of them made it in technology, and all 11 were in computers. You’ve heard of all of them: It’s Bill Gates, it’s Larry Ellison, Jeff Bezos, Mark Zuckerberg, on and on. There are 25 people who made it in mining natural resources. You probably haven’t heard their names. And these are basically cases of technological failure, because commodities are inelastic goods, and farmers make a fortune when there’s a famine. People will pay way more for food if there’s not enough. 25 people in the last 40 years made their fortunes because of the lack of innovation; 11 people made them because of innovation.

...

One of the smartest investors in the world is considered to be Warren Buffett. His single biggest investment is in the railroad industry, which I think is a bet against technological progress, both in transportation and energy. Most of what gets transported on railroads is coal, and Buffett is essentially betting that after the 21st century, we’ll look more like the 19th rather than the 20th century. We’ll go back to rail, and back to coal; we’re going to run out of oil, and clean-tech is going to fail.
 

On finance:

Think about what happens when someone in Silicon Valley builds a successful company and sells it. What do the founders do with that money? Under indefinite optimism, it unfolds like this:

  • Founder doesn’t know what to do with the money. Gives it to large bank.
  • Bank doesn’t know what to do with the money. Gives it to portfolio of institutional investors in order to diversify.
  • Institutional investors don’t know what to do with money. Give it to portfolio of stocks in order to diversify.
  • Companies are told that they are evaluated on whether they generate money. So they try to generate free cash flows. If and when they do, the money goes back to investor on the top. And so on.

What’s odd about this dynamic is that, at all stages, no one ever knows what to do with the money.
 

On the technologically-accelerating civilization:

How big is the tech industry? Is it enough to save all Western Civilization? Enough to save the United States? Enough to save the State of California? I think that it’s large enough to bail out the government workers’ unions in the city of San Francisco.
 

Finally, a link to Thiel's new book Zero to One which releases next week. It's a collection of a lot of what he taught in CS183 at Stanford. For a taste, revisit notes from the class as compiled by Blake Masters.