That's why they call it Gawker

While it is de rigueur among observers of Silicon Valley’s Game of Thrones to dismiss questions of profitability as short-sighted hand-wringing, the detailed documents obtained by Gawker demonstrate conclusively for the first time that Uber has been financing its astronomic growth by taking staggering losses.
 
This unaudited revenue and expense breakdown for 2013 and 2014 shows that, though Uber’s net revenue has grown substantially, the company lost more than $56 million in 2013. By the first half of 2014 alone, that number had leapt to more than $160 million. 
 
Another document, laying out quarterly profits and losses in 2012 and part of 2013, shows the same dynamic: healthy growth in revenue coupled with steadily deepening losses. In 2012, Uber’s losses totaled $20.4 million; from the first quarter of 2012 until mid-2013, quarterly losses more than doubled from $3.5 million to $8.1 million.
 

Juicy get by Gawker on Uber's financials, but the financial analysis is about the quality you'd expect. The original version of the article included this line:

“Net revenue” typically refers to the money you have left after the cost of doing business—profit.
 

Yikes. I give lots of tech journalists grief for not knowing the subjects they're covering, but I'd venture to say most anyone with the a basic finance or econ course under their belts knows the difference between net revenue and profit. This hilariously defiant correction was later added:

Correction: Although net revenue is sometimes used as a synonym for profit, in accounting terms it means simply gross revenue minus the cost of sales. Two sentences that confused this meaning have been removed.
 

If I were an investor, I think I'd be ecstatic to see these internal financials. In a commodity market where the last company standing will be incredibly valuable, Uber is subsidizing a price war that favors the company with the scale advantage (i.e., Uber). Try calling an Uber Pool and compare it to calling a Lyft Line and you'll get a sense of how much thicker the Uber market is, on both the driver and rider side.

The subsidized pricing in a variety of cities are a worthwhile customer acquisition cost for what might be a lifetime rider. The last time I was in Los Angeles, riding Uber all over town was so cheap it fell into the category of no-brainer, and I contemplated not renting a car next time in town. I was in New York City recently and whereas a year ago a lot of Manhattanites still took cabs most of the time, now most of them are Uber converts. Once the introductory rates and subsidies go away, I suspect most of them will still be customers. That's when the profits come.

And yes, someday one of Uber's chief costs, the drivers, may be replaced by driverless cars, adding to their gross margins, and also their profits.

No moral judgments here, just some impressed gawking at Uber's flawless execution. That wouldn't have made for a Gawker-worthy story, but that should've been the headline.

Wife bonuses

And then there were the wife bonuses.
 
I was thunderstruck when I heard mention of a “bonus” over coffee. Later I overheard someone who didn’t work say she would buy a table at an event once her bonus was set. A woman with a business degree but no job mentioned waiting for her “year-end” to shop for clothing. Further probing revealed that the annual wife bonus was not an uncommon practice in this tribe.
 
A wife bonus, I was told, might be hammered out in a pre-nup or post-nup, and distributed on the basis of not only how well her husband’s fund had done but her own performance — how well she managed the home budget, whether the kids got into a “good” school — the same way their husbands were rewarded at investment banks. In turn these bonuses were a ticket to a modicum of financial independence and participation in a social sphere where you don’t just go to lunch, you buy a $10,000 table at the benefit luncheon a friend is hosting.
 
Women who didn’t get them joked about possible sexual performance metrics. Women who received them usually retreated, demurring when pressed to discuss it further, proof to an anthropologist that a topic is taboo, culturally loaded and dense with meaning.
 

Finally got around to reading this piece in the NYTimes on Upper East Side moms. Is this real?

The author wrote the piece to promote her new memoir titled, no joke, Primates of Park Avenue.

An Upper East Side wife penned this response with about as virally-optimized a title as even the greatest minds in the Buzzfeed labs could concoct: I get a wife bonus and I deserve it, so STFU. 2015 is shaping up to be the year every one tried to break the internet.

Al came out in favor of the idea of the wife bonus almost as soon as we moved to Australia. He’s got a very politically incorrect sense of humor and joked it was to reward me for being a “good little wife,” which made me laugh out loud. Seriously, though, we settled on the exact terms: When he received his bonus every year at the end of April, we’d each take a fifth after tax and bank the rest.
 
I’m exceptionally lucky to have a husband who values how important a job it is to stay home and take care of a child, as well as understanding how difficult it is to leave friends, family and career prospects behind to further his career. He was actually pleased to have a tangible way to recognize the contribution that I also make to the success of our lives.
 
The wife bonus gives me not only financial freedom, but freedom from guilt too. We have a joint account, and before we started the system, I was reluctant to spend our money on myself, even though my husband insisted he was happy for me to. Now that I have a quantifiable amount to treat myself with, I don’t feel guilty doing so.
 
The five-figure amount has pretty much stayed the same despite the economy. Last year, I bought a Prada handbag and Burberry raincoat for about $1,500 each. I tend to wait until I’m back home in London to spend my bonus because I can leave Lala with a member of the family and go on a week-long splurge to upscale stores like Selfridges. My favorite labels include Bottega Veneta, Chanel, Prada, Smythson, Erdem and Stella McCartney.
 

I will leave aside any personal judgment here and just observe that the furor reflects the evolving conception of marriage. Whereas once they were largely seen as economic arrangements, now we expect more from marriage, from our spouses. They must fulfill us in every way. I can't tell what the model of hedonic marriage has to say about wife bonuses, perhaps an economist out there has an analysis.

If the couples observed here just had shared bank accounts and the money flowed the same way otherwise, we wouldn't have any such furor. The framing is everything here.

Negative interest rates

It’s not unusual for interest rates to be negative in the sense of being lower than the rate of inflation. If the Federal Reserve pushes interest rates below inflation to stimulate growth, it becomes cheaper to borrow and buy something now than to wait to make the purchase. If you wait, inflation could make prices go up by more than what you owe on the loan. You can also think of it as inflation reducing the effective amount you owe.
 
What is rarer is for interest rates to go negative on a nominal basis—i.e., even before accounting for inflation. The theory was always that if you tried to impose a negative nominal rate, people would just take their money from the bank and store cash in a private vault or under a mattress to escape the penalty of paying interest on their own money. When the Federal Reserve slashed the federal funds rate in 2008 to combat the worst financial crisis since the Great Depression, it stopped cutting at zero to 0.25 percent, which it assumed to be the absolute floor, the zero lower bound. It turned to buying bonds (“quantitative easing”) to lower long-term rates and give the economy more juice.
 
...
 
Now comes the interesting part. There are signs of an innovation war over negative interest rates. There’s a surge of creativity around ways to drive interest rates deeper into negative territory, possibly by abolishing cash or making it depreciable. And there’s a countersurge around how to prevent rates from going more deeply negative, by making cash even more central and useful than it is now. As this new world takes shape, cash becomes pivotal.
 

Fascinating. It's understandable why banks would want to move to a cashless society, but it might not be a bad idea. The mindset shift required might take a generation or two to overcome, cultural inertia being such a powerful force. What usually wipes the slate clean, as morbid as it may be, is simply the dying off of the previous generation.

Heist movies would be a lot less fun minus Brinks armored trucks and giant vaults filled with cash. I'm fine with a cashless society, but I may be more trusting of government than the average citizen. Those less trusting in government might be more inclined to have a virtual currency like Bitcoin replace cash, but virtual currencies come with technological opacity for the average person that carries its own trust issues.

Like chemotherapy, negative interest rates are a harsh medicine. It’s disorienting when people are paid to borrow and charged to save. “Over time, market disequilibria are dangerous,” G+ Economics Chief Economist Lena Komileva wrote to clients on April 21. Which side of the debate you fall on probably comes down to how much you trust government. On one side, there’s an argument to be made that cash has become what John Maynard Keynes once called gold: a barbarous relic. It thwarts monetary policy and makes life easy for criminals and tax evaders: Seventy-eight percent of the value of American currency is in $100 bills. On the other side, if you’re afraid that central banks are in a war against savers, or that the government will try to control your financial affairs, cash is your best defense. Taking it away “is a prescription for revolution,” Cecchetti says. The longer rates break on through to the other side, the more pressing these questions become.

The rise of the intangible corporation

Justin Fox quotes Oxford business professor Colin Mayer riffing off of the seven age of man from Shakespeare's As You Like It.

At first the merchant trading company established by royal charter to undertake voyages of discovery and promote commerce around the world. 
 
Then the public corporation created by Acts of Parliament to engage in major public works and the building of canals and railways. 
 
Then with the freedom of incorporation in the 19th century, the private corporation -- the seedbed of the industrial revolution and the manufacturing corporation.
 
Next comes the service firm and the rise of the financial institution.
 
The fifth age is the transnational corporation putting a girdle around the world and running rings around national governments.
 
Last scene of all that ends this strange eventful history is the mindful corporation -- sans machines, sans man, sans money, sans everything.
 

Mayer uses WhatsApp as his canonical example of a company with no assets and very few employees and yet a huge market cap (given its $22 billion purchase by Facebook), but just a short while before that Silicon Valley was all abuzz about Instagram for the same reason, albeit a lower price in relative terms.

Just wait until VR goes mainstream. The most valued bricks and mortar and real estate of today are digital. It's a lot cheaper than the real thing, and a whole lot less regulated, too. Tech companies do love their degrees of freedom.

Universal banks losing out to specialists?

Although it dislikes the term, JPMorgan is a prime example of a universal bank. Others – Citigroup, Bank of America Merrill Lynch, Barclays, Deutsche Bank – also combine retail and investment banking but JPMorgan is the most prominent. 
 
And universal banks have been, to put it politely, a disappointment. JPMorgan produced a return on equity of 9.4 per cent last year. That is barely adequate but it is the best of a bad bunch. None of the others made it past 5 per cent. And last year was not out of the ordinary. Those five universal banks together have managed an average return on equity of 5 per cent over the past five years. There is always an excuse – fines, new rules, restructuring charges, tough conditions in one market or another – but these are all part and parcel of universal banking. 
 
Compare that with the specialists. Look at Wells Fargo, which is predominantly in the retail sector, with a 12 per cent five-year average ROE. Or even Goldman, a pure investment bank, with 11 per cent. 
 
The universal banking model is broken, a fact some banks have realised. UBS and RBS have moved. Others – Deutsche and Barclays, for example – have been less radical so far and need to go further. The US universal banks are the most wedded to the model, promising better returns in the future. But shares in almost all of them trade at a discount to specialists. The message from investors is clear.
 

Paywalled piece from The Financial Times, via The Browser (which, if you're into more than just technology news, is a great, short, curated daily list of links to interesting reading online; another artisanal service I happily subscribe to).

How does that legendary Jim Barksdale quote go? “There are only two ways to make money in business: One is to bundle; the other is unbundle.”

Certainly feels like times are ripe for an internet only financial services play. Our arcane financial system has held up longer in its current form than I expected. I know there have been a few, though I have not tried any of them, but this article is more evidence that a horizontal (or specialized) attack might be fruitful. I'd probably start by trying to actually own the customer's money/wealth/assets, then branch out into figuring out ways to sell them financial products for those (e.g. insurance, credit cards). Customer acquisition is such a bear, though, that it might be easier for a trusted and well-known company like an Amazon to tackle.

Conversation with Adam Curtis

Jon Ronson interviewed Adam Curtis over email. Good stuff.

On social networks as echo chambers (a common lament about the internet):

But I do really agree with you about Twitter domestically. Twitter – and other social media – passes lots of information around. But it tends to be the kind of information that people know that others in that particular network will like and approve of. So what you get is a kind of mutual grooming. One person sends on information that they know others will respond to in accepted ways. And then, in return, those others will like the person who gave them that piece of information.

So information becomes a currency through which you buy friends and become accepted into the system. That makes it very difficult for bits of information that challenge the accepted views to get into the system. They tend to get squeezed out.

I think the thing that proves my point dramatically are the waves of shaming that wash through social media – the thing you have spotted and describe so well in your book. It's what happens when someone says something, or does something, that disturbs the agreed protocols of the system. The other parts react furiously and try to eject that destabilising fragment and regain stability.

...

I have this perverse theory that, in about ten years, sections of the internet will have become like the American inner cities of the 1980s. Like a John Carpenter film – where, among the ruins, there are fierce warrior gangs, all with their own complex codes and rules – and all shouting at each other. And everyone else will have fled to the suburbs of the internet, where you can move on and change the world. I think those suburbs are going to be the exciting, dynamic future of the internet. But to build them I think it will be necessary to leave the warrior trolls behind. And to move beyond the tech-utopianism that simply says that passing information around a network is a new form of democracy. That is naive, because it ignores the realities of power.

On the failings of modern journalism:

The thing that fascinates me about modern journalism is that people started turning away from it before the rise of the internet. Or, at least, in my experience that's what happened. Which has made me a bit distrustful of all that "blame the internet" rhetoric about the death of newspapers.

I think there was a much deeper reason. It's that journalists began to find the changes that were happening in the world very difficult to describe in ways that grabbed their readers' imagination.

It's intimately related to what has happened to politics, because journalism and politics are so inextricably linked. I describe in the film how, as politicians were faced with growing chaos and complexity from the 1980s onwards, they handed power to other institutions. Above all to finance, but also to computer and managerial systems.

But the politicians still wanted to change the world – and retain their status. So in response they reinvented other parts of the world they thought they could control into incredibly simplistic fables of good versus evil. I think Tony Blair is the clearest example of this – a man who handed power in domestic policy making over to focus groups, and then decided to go and invade Iraq.

And I think this process led journalism to face the same problem. They discovered that the new motors of power – finance and the technical systems that run it, algorithms that try and read the past to manage the future, managerial systems based on risk and "measured outcomes" – are not just obscure and boring. They are almost impossible to turn into gripping narratives. I mean, I find them a nightmare to make films about, because there is nothing visual, just people in modern offices doing keystrokes on computers.

Where I'm often most frustrated with modern journalism is in its coverage of areas it does not understand well, technology being one of them. I'm not saying you have to be a programmer to be a tech journalist or a filmmaker to be a movie critic, but not having domain knowledge limits the scope of your critique. One more layman's point of view isn't all that useful at the margins, and as with things like the last financial crisis, the lack of understanding from the financial press removed what we think of as one of the watchdogs of democracy, the fourth estate.

The one saving grace of the internet is that many technology domain experts can chime in. Still, for many reasons, most do not. They may be too busy, or they may bite their tongue for competitive or political reasons (technology is a heavily connected industry).

Given technology's growing political, economic, and cultural power, a vigilant and independent check is needed. A Gawker or Valleywag picks off just the most egregious and obvious of moral failings, but much of that is distraction from far more complex and significant issues.

Multiple testing

One of the potential pitfalls that arises now that it's easier and easier to test hundreds of variables to try to find correlations is the problem of multiple comparisons or multiple testing

The term "comparisons" in multiple comparisons typically refers to comparisons of two groups, such as a treatment group and a control group. "Multiple comparisons" arise when a statistical analysis encompasses a number of formal comparisons, with the presumption that attention will focus on the strongest differences among all comparisons that are made. Failure to compensate for multiple comparisons can have important real-world consequences, as illustrated by the following examples.

  • Suppose the treatment is a new way of teaching writing to students, and the control is the standard way of teaching writing. Students in the two groups can be compared in terms of grammar, spelling, organization, content, and so on. As more attributes are compared, it becomes more likely that the treatment and control groups will appear to differ on at least one attribute by random chance alone.
  • Suppose we consider the efficacy of a drug in terms of the reduction of any one of a number of disease symptoms. As more symptoms are considered, it becomes more likely that the drug will appear to be an improvement over existing drugs in terms of at least one symptom.
  • Suppose we consider the safety of a drug in terms of the occurrences of different types of side effects. As more types of side effects are considered, it becomes more likely that the new drug will appear to be less safe than existing drugs in terms of at least one side effect.

In all three examples, as the number of comparisons increases, it becomes more likely that the groups being compared will appear to differ in terms of at least one attribute. Our confidence that a result will generalize to independent data should generally be weaker if it is observed as part of an analysis that involves multiple comparisons, rather than an analysis that involves only a single comparison.

For example, if one test is performed at the 5% level, there is only a 5% chance of incorrectly rejecting the null hypothesis if the null hypothesis is true. However, for 100 tests where all null hypotheses are true, the expected number of incorrect rejections is 5. If the tests are independent, the probability of at least one incorrect rejection is 99.4%. These errors are called false positives or Type I errors.

A recent NBER paper argues that this problem invalidates most finance papers claiming to have found some formula for investing success. The abstract:

Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.

Gaze deeply enough into the noise and you'll see some pattern.

[via Vox]

RELATED: Spurious correlations

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.