Dialogue with Sviatoslav Rosov for CFA Institute Magazine


Why is an expert on disruptive technology “worried” about financial innovation?


Excerpt from “Chaos Is Hard to Predict”

Does technical innovation always end in displacement/ replacement?
The professions being challenged include physicians, lawyers, consultants, and analysts. Algorithms and sensors could conceivably displace some subset. However, it’s not a certainty. One way to fend off automation displacement is to redefine and change the scope of the profession.

The classic example is from the birth of the Industrial Revolution. As machines replaced certain tasks, new jobs were created which required higher skills and hence edu- cation, leading to universal matriculation and eventually the popularity of higher education. Professionals need to “invent” new jobs for themselves as a means to keep disruption at bay.

Read more: CFA Institute Magazine.


The Next 40

In Apple’s first 40 years it shipped 1,591,092,250 computers[1].

This shipment total is higher than any other computer company in its first 40 years. Actually there are no other PC makers that are 40 years old. One computer maker (IBM) is older but they only sold PCs for 24 years and what they still sell they don’t sell in high numbers.

That does not make it the top seller in a given year. Looking at only the Mac, Apple’s traditional form factor personal computer, Apple has only returned to the top 5 last year. Only if including the iPad it was the top computer vendor in 2011 and including iPhone, it was first in 2009.

Screen Shot 2016-03-28 at 11.36.56 AM

After having a 40 year run and after selling more computers than all American and Japanese computer companies put together, how should we think about the next 40 years?

First, clearly Apple shifted from being a “computer company”. It has already changed its name to exclude the word “Computer” but that has been interpreted as saying that it sells devices (which happen to also be computers.) The word “computer” is already archaic. We stopped using computers to compute in the 40s. We used them to make decisions, keep track of things, speed things up and then to communicate and then to entertain.

Devices, it seems, are what customers mainly use to do, well, everything. Computing has grown to encompass most activities we engage in. So is Apple then a device maker?

  1. including Apple II, Mac, iPhone, iPad and iPod touch; excluding Apple Watch, Apple TV and other iPods. Includes Q1 shipments estimated at 63,597,000 Macs, iPhones and iPads []

Significant Digits #3 


The latest episode of Significant Digits is available for download.

In One Infinite we loop you in on the last show at the Loop. We expand on the small numbers and condense the big numbers.

Asymcar #29

Horace and Jim begin with the industry’s rhetorical bubble. We consider the auto eco-system’s atmospherics on auto companions and quickly revert back to the reality of today’s manufacturing practices and industry lead times.

Source: Asymcar #29

Priorities in a time of plenty

How Apple is managed is one of its enduring mysteries. The idea that a company with $235 billion in sales is managed with a single P/L[1]  is fascinating in many ways. Not least of which is how it allocates resources. The fundamental question of which great idea gets to be funded and which great idea gets to be ignored is the core of every manager’s dilemma. The Apple problem is at scale  when each decision’s consequences are so momentous. In the case of Apple there are so few projects that reach the market and their impact is so great that one wonders how they can be sure they are doing the right thing.

Conventionally, product development is filtered through a sieve of  metrics, market sizing and impact on top/bottom income lines. These “financial” measures of success are considered prudent and optimized for return on equity (also known as the maximization of shareholder returns).

But this can be a toxic formula. The financial optimization algorithm always prioritizes the known over the unknown since the known can be measured and is assigned a quantum of value while the unknown is “discounted” with a steep hurdle rate, and assigned a near zero net present value. Thus the financial algorithm leads to promoting efficiency at the expense of creation. Efficiency may be the right priority when times are difficult and resources are scarce but creativity is the right priority in a time of plenty. And abundance is what being big is all about.

To allow for some creation large firms create divisions. Some divisions are tasked with “core products” which are measured by a set of firm metrics and some are tasked with “emerging products” which are given a set of loose metrics. This leads to obvious resentment and war between divisions when resources need allocating.

Ominously, the core divisions tend to always win. At the root of divisional power struggles are measurements–the roots of financial metrics. Managers fight with data. “You can’t manage what you can’t measure” they’re taught. But if you have something that can be easily measured and something that is difficult to measure, won’t the easily-measured be managed and the hard-to-measure be ignored?

There is a general principle at work here: Managing by measurement is fraught with the pitfall of measuring the wrong thing. Making sure that you’re measuring the right thing becomes the value-adding role of the manager. A role that is increasingly being neglected.

The mass phenomenon of measuring the wrong thing because it’s the easiest to measure is called “financialization”. Financialization is the process by which finance and finances (rather than creation) determine company, individual and society’s priorities. It comes about from an abundance of data that leads to fixation on what is observable to the detriment of awareness of hazards or obstacles or alternatives. This phenomenon is more likely when the speed of change increases and decision cycles shorten.

Financialization is creeping into all aspects of society and the extent to which it infects companies is the extent to which they suffer from early mortality.

So is Apple avoiding financialization? How can anyone avoid the tyranny of mis-optimization?

The unified P/L might be a clue. It obviates the need for divisional rivalry and power-based or financial politics. Without divisional P/L, management can be organized functionally with the obvious benefit of de-politicization. The singular P/L does create another problem however: the absence of an alternative resource allocation algorithm centralizes the decision. By centralizing decisions at the highest level, few decisions can be taken and that means each decision has to be right more often. We swap a distributed but financialized process for a central but capricious one.

So how is the central decision process made fair? What guides the allocation process?

  1. Profit and Loss statement is an income statement usually applied for a subset of a larger company which allows subdivisions to be managed individually. []

SUBSCRIBE: The future of online services

Some say that advertising keeps the internet lights on. Advertising is a great business model for services but it has limits. There are only so many ad budgets to go around.  What will fuel an internet that outgrows all the ad money in the world?

This is the topic that Ben Bajarin and I will explore in our next event: SUBSCRIBE: The Future of Online Services. 

We will explore:

  • How will the online services business models evolve?
  • How will VR affect entertainment and communications?
  • How will AI affect shopping?
  • How will blockchain affect economics?
  • How will hardware affect software and services and vice versa?
  • How will  users, usage, and capital connect?

Join us to learn more about the internet economy by studying the economics of the internet.

SUBSCRIBE is a 1/2-day event taking place on both coasts. Register at:

The first 20 registrants receive an early-bird discount.

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Asymcar #28 Meaningful

We await the Lamborghini SUV.

Source: Asymcar #28

The Critical Path #166: Glance

Horace and special guest Ben Bajarin of Creative Strategies discuss the Glance conference. They investigate the job of the Watch and touch on the changing responsibilities amongst the upper ranks at Apple.

Source: The Critical Path #166

The Critical Path #165: Audio Port

Horace and Anders discuss the iPhone analog audio port, the lightning port’s use by Apple Pencil and Apple’s viewpoint on privacy and the environment. Horace rounds the episode out with a definition of disruption.

Source: 5by5 | The Critical Path #165: Audio Port

Significant Contribution

In my quoting of the “Cook Doctrine” I cited the primary criteria for Apple to enter a new market:

We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.

These criteria, often repeated, were certainly in force when Apple chose to enter the watch market. Apple has sought and achieved a significant market share and did so while owning and controlling the primary technologies behind the product.

I now turn to the significant contribution criterion to study the possibility of Apple’s entry into the car industry.[1]

The significance test shifts the speculation from whether Apple would build a car, to how many cars is could build. Making a few cars is easy (see first commandment of The Entrant’s Guide to the Automotive Industry). Making lots of cars is hard and hence significance in the automotive market (as in watches and phones) means achieving some degree of adoption, a higher degree of usage and a very high degree of profitability.

So what does being significant in the car business mean? Does it mean becoming the next Tesla? The next BYD or the next VW? How quickly?

Fortunately, we have something to compare an Apple entry to. Apple has made a “significant” market entry in phones and others have made entries in cars. If we contrast the rate of growth of Tesla, EVs, and Hybrids[2] to the rate of growth of iPhones in their respective US markets, we obtain a test of significance:

Screen Shot 2016-01-04 at 12.38.39 PM

The graph shows the percent of sales for the alternative car technologies (and Tesla) vs. the percent of US phone users using iPhones (comScore). Here are the conclusions:

  1. Control of the primary technologies behind the product is a topic for another post. []
  2. Of which Toyota has 70% to 80% share []