Sector news and commentary « discourse and notes

There are three ways to fit a square peg into a round hole. The peg may be circled, or the hole may be squared, or both the peg and the hole may be reshaped in some other way to fit with one another. A fourth tactic, that of brute force, whereby the peg is plowed through with a heavy hammer, is in actuality the same as any of the three listed alternatives, from which there is no escaping. Though none of this is news, I bring it all up now because of developments in venture capital and the startup scene.

To clarify the analogy before proceeding to developments, the conceptual misfit is this: Startups are high-risk undertakings (perhaps the highest-risk there is) and these have been financed within a highly illiquid asset class. A volatile operation is thus supported by rigid funding parameters. The issue is not only one of duration – as has been discussed in this space before – but also capital efficiency. That is to say, funds should flow to their most optimal uses in an environment where those best able to assess and mitigate risk most efficiently price it. In an environment in which the nature of the risk is fluid, the funding mechanism should ideally be liquid.

The puzzling over inconsistent venture returns in the past two decades of digitally fueled innovation can (to a large extent) be put to rest when the environment is framed in this fashion. The only time when the segment (as a whole) produced returns commensurate with its risk was the time when market liquidity – rightly or wrongly – supported the concept. That the support happened to be in a late-90s bubble is only pertinent to present discussion in that the bubble’s rupture caused liquidity to disappear. But liquidity does not only happen in bubbles, and is not always necessarily financial. We are beginning now to observe certain trends which bode well for the venture investing climate. In addition to financial liquidity enhanced by new markets and new information mechanisms, we now begin to also see operating fluidity, which is just as interesting.

As the round hole, in other words, is getting squarer with improved liquidity in a previously illiquid market, the peg that passes through is becoming rounder through a mechanism commonly known – and increasingly accepted – as the pivot. For those uninitiated in entrepreneurial lingo, to pivot is to change the direction or even the very nature of one’s business undertaking, sometimes (but not necessarily) leveraging technology or other assets created to that point. Because of the relatively low cost of building a web-enabled technology platform nowadays, and because of the relatively high density of ideas and inspiration sources, one may change course, as it were and almost literally, on a dime.

The effect of the phenomenon – observed all throughout the continuum from the earliest seedlings to the highest-profile sensations and back – is that in essence the liquidity of a venture investment is now determined as much by external as internal dynamics. When the business you buy today becomes another business entirely next month, it is as if you only owned the first business for a month before exchanging your investment for another. This, to repeat the point, is a new form of financial liquidity, and it may be in some ways as real as the more conventional kind of selling the position outright. (Cash does not change hands, true enough, but the optionality is extended, maybe enhanced, and cash is at least in theory an accounting entry only – it gets used, it is spent, converted or invested, it rarely just is.)

All else equal, the depicted landscape should serve to improve venture returns or, at the very least, the opportunity to achieve these. But all is never equal, and all is also a function of what is priced into valuations and how far ahead of or behind fairness these might move. As fairness is mainly a matter of interpretation, perception, and academic study, the market – which contains all of that and more – will give its guidance surely enough. Until then, we bear witness to a changing equilibrium of uses and sources that now complement one another with something that approaches elegance.

A fellow once wrote this: “We are what we pretend to be, so we must be careful about what we pretend to be.” He was a clever fellow, prolific, argumentative, a blogger in his way, (but who isn’t?). He died, alas, before this medium really took off, and anyway, he was probably more of the typewriter variety. So it goes. The cited wisdom could be applied to many a context, some of which may have been imagined by the author, but for some reason it currently makes me think of the media sector, which nowadays comprises many things, (more below).

I am thinking that media, as a general category of industry, is uniquely positioned to report upon and conduct its own assessment. A sector populated (and even defined) by carriers of the message – bloggers, analysts, researchers, marketers, advertisers, publicists, podcasters, broadcasters, journalists, tweeters – can shape the message and define itself with few checks and balances. Any such controls would necessarily also come from within, from other carriers of the message. The situation is a little bit analogous to, for instance, Michael Jordan calling his own fouls. Some secretly suspect that this happened all the time. So too with media: A sector that gets to call its own game. What luck.

But not really. One could argue, in fact, that this is a misfortune. To illustrate, let’s take a scenario of a different type from that of an arbitrary calling of shots. Take for example, software code. Putting aside qualitative aspects like programming efficiency and elegance, in a very fundamental way the code either works or doesn’t. This is a binary condition that cuts to the truth of the case very precisely, so that a syntax error could throw the whole thing off. In one way of looking at it, and as painful as such a process may appear, this binary precision is its very beauty and is the trait that gives it lasting value. On the other hand, when one gets to define one’s own reality freely, that is where true anxiety lies. (The concept of anxiety and freedom is not new, “we are what we pretend to be, so we must be careful about what we pretend to be.”)

Now, media is a vast universe and getting vaster. Not only is this true in the sense of new technologies and modes that have entered the domain and continue to enter – mobility, interactivity, data and its assortment of branches, security, artificial intelligence, and others – but also in terms of enriched applications. As has been contemplated in previous articles here, the segment also comprises capital markets – perhaps this was always so (the example one likes to use is Bloomberg, media or financial technology company?), but now maybe more obviously than ever – and this is where the notion of self-reporting takes on a more than philosophical turn. We see, for instance, Facebook preparing for an IPO and we assess the opportunity on the basis of opinions and analysis often disseminated through… Facebook.

The circularity is wonderful, and so is the snowball effect that sometimes perpetuates. In certain instances the snowball becomes a bubble that pops, and sometimes it grows like any rolling snowball. Sometimes, as well, observers get swept up by the rolling mass and cycle through it actively, perpetuating whatever fashion the sector’s trend-setters-cum-trend-reporters lead. When in rare instances an industry observer is able to step out of the cycle and look upon the scene with a fresh and distant perspective – such as, for example, Peter Thiel in his current lecture series – the experience is refreshing to the point of being almost hypnotic. (Perhaps this is so because of the nearly mathematical logic and clarity of Thiel’s overviews, and the feeling one gets that maybe he isn’t even “talking his book.”)

But precisely because of expediency and improved efficiencies enabled by the technologies now residing in the media domain - mobility, interactivity, data and its assortment of branches, security, artificial intelligence, and others – we should not have to rely on rare instances of individual vision. Because of digital technology and its binary sophistication, in short, because of coding, we should be able to diminish the anxiety of the free flow. In other words, the opportunity exists, in capital markets and in media – which have become increasingly synonymous - for information flow to be optimized, scrubbed clean, and made useful. That, ultimately, will be the dominant and lasting value-proposition of our evolving field, and it is the direction in which the sector is heading.

Absorption and expression are associated by more than sequence and causality, these are in some ways synonymous. The act of reading and the act of writing are interlinked, just as looking and showing are part of the same inclination. Taking a picture forces us to concentrate on its subject, and it’s debatable whether photography is analogous to reading or to writing, or to both in different ways. The value (for many) in jotting down ideas – for instance, in a blog post – is in the act of learning. It’s in the process of gathering one’s thoughts and sharing these in a concise and logical flow that hopefully resembles truth; just as the process of taking a picture, in the same way, is like an act of seeing. This isn’t as easy as it sounds, it shouldn’t be taken for granted. We look around us all the time, and we occasionally see.

The value of social media, in this way of thinking, is partly educational. The merest tweet forces its author to think. The most trivial Instagram snapshot forces its photographer to see. Even the falsest Facebook profile is the result of creativity. The self-expression at the core of such activities – within reason, naturally, and not all in the same way or to the same degree – is a mental exercise of measurable value. A trivial tweet may be a missed opportunity, as would be a careless photograph, but neither of these actions is as wasteful as reading or seeing the result superficially. In other words, beauty is in the eye of its creator, and that is a whole other can of worms…

Like many scribblings around this time, this too leads to the new iPad and its retina display. I haven’t seen it yet, but I feel as though I have. So much has been written about the wonder of its pixels, I look for pixels everywhere. I’m typing now and as the letters appear on my screen I feel a little bit jilted that the shapes don’t burst with flash. I look down at the keyboard and I think, how much better the plastic would appear if made of many tiny lightbulbs to accentuate it. Don’t get me started about my chair, that piece of wooden garbage could really use a pixel makeover. I sure would like to see it in high-def, with cracks and all, would make the sitting experience a new thrill each time, might even make the wood somehow softer. If I had a new iPad with its retina display, I don’t think I would ever look away.

This is an exaggeration, as was the prior sequence about the educational merits of a trivial tweet, but in exaggeration some random truth here and there is prone to surface. I don’t know what that truth is quite yet, but I’m nagged by the thought that the iPad’s visual extravaganza and social media are at polar ends of the same continuum – where the former is almost escapist, while the latter is concentrated reality – and that’s probably an exaggeration also. This is all strictly relative, and it’s certainly not a contest of one versus the other. The two obviously coexist, and maybe enhance one another in ways. But this duality of escapism and reality, of bright pixels for all and creativity for the individual, could merit additional reflection. I stumbled upon the notion while messing around on my keyboard and staring at a screen that seems almost analog to me now.

This is the era where everybody creates… Here are two venture-backed companies, united only by investor portfolio. One is a 3D-printing platform and the other a digital sound network: one is physical and the other is virtual. These have paired in the introduction of a new consumer offer: Submit a digital sound sequence – the segment of a song, for instance – and see this converted to a practical object, say an iPhone case. Consider the levels of creativity taking place: The creation of sound by an artist, the selection of sound by a consumer, the design of an individual object, its unique production by a machine, and finally, the creative combination of two companies that are only related by investor portfolio. The chain is tied neatly together in commerce, and perhaps one other portfolio company could creatively serve as an outlet.

The instinct for self-expression that is the creative instinct is the defining aspect of social networks. Whether we share our interests and activities on one, our professional profile on another, our news stream on still a third, or our pictures and our songs and our objects of desire, these are all aspects of ourselves and the social networking activity is our calling out. It used to be an exclusive circle, where entry was permitted only to the starving artists, but this has been democratized and now the starvation is widespread. This is to say, whereas media was once a dissemination of messages from few to many, it is now a network (many to many) and the value of individual content is as a result diminished: Supply and demand, fragmentation, commoditization, and so on. This is the era where everybody creates…

There are two parallel tracks contained in the broader movement. On one hand, the medium is the new star;Â and on the other hand advertising is displaced by direct commerce. The two hands are closely related, and it couldn’t happen any other way. See how one begets the other: If media was conceived as a platform for merchants to sell their wares, in which creative content was only incidental – to attract attention – and advertising was the true message and scope, then the fragmented cheapening of content leads to a fragmented cheapening of advertising, while the social networks become core to (a more effective) direct exchange. Groupon, you know, didn’t happen out of nowhere. Foursquare, like any network, is also self-expression. In networks, buyers and sellers converge, and, arguably, content and advertising are one. This is the era where everybody creates…

When Patti Smith improvised those lyricsÂ in the middle ofÂ coveringÂ the classic Byrds tune, she was promoting records and she was anticipating social commerce as a form of self-expression and sales. She was also describing a quality – so you wanna be a rock’n'roll star,Â perhaps more characteristic to our era than others – of individual ambition for stardom. This makes us the perfect promotional device, and it makes social media both a cause and effect in an era where everybody creates. Recognize my face? They call me broken glass… That’s because… of the sound… of my voice. I love that, I’m going to get an iPhone case to look just like the song fragment, and I will send messages and pictures from my gadget and tell everyone all about myself.

A buyer is offered two items: an armchair and a formula. The armchair is used for sitting, storage, cushion, obstruction, place-holding and decor. The formula may be applied to some of these things. It might never be useful at all. It may be used destructively, but that isn’t fully established. There will be experimental uses, retroactive uses, multidimensional uses, limited and unlimited uses, and so on, and one day the formula may even become an object with cushions and other practical nicknacks. Maybe one day the formula will turn into the most valuable armchair in the world. Whereas the actual armchair, the one that is offered, will never be that, or if it is, its price reflects this special status.

In digital media – and all media is digital now, even the media that isn’t – there are many formulas and few armchairs. Even the armchairs are formulaic on inspection, which is to say, these may turn into something else before long, or may become extinct. Without putting too fine a point on the notion, in this volatile and transformative segment most value is option value. That’s an exaggeration, but we are speaking relatively. Take Google, for instance: Is it farfetched to consider that its search mechanism may not be favored by the world in perpetuity? Is it possible even that search as we know it will change in a matter of years? Can we say with precision that Google will always be a search platform foremost? Google, in this manner of speaking, is more formula than armchair, its ample cushions notwithstanding.

And that’s Google, one of the world’s dominant. Think of the wannabes, Twitter for instance. But that isn’t even the best example, that one is sitting pretty, all things considered. Think of the startups trying to goÂ where Twitter is, and maybe someday Google (in its prime). And think of the poor buyers and investors as they look into this hodgepodge of formulas and no armchairs. When I say poor, I don’t mean this in the literal sense, there is more dough in the petty-cash box than there are hashtagged tweets out of Austin. And that is a lot, that’s enough to buy every platform in attendance at #SXSW plus every idea dreamed up there in moments of enthusiasm, at a premium to satisfy every liquidation preference several times over. They call it cash hoarding, you know, for a reason.

But when somebody evaluates a formula for purchase, the evaluation can’t be like when we are buying furniture. One can’t sit on a formula, bounce into positions, unzip a cushion or two. When buying formulas, it’s the idea that matters, the way that it fits in the context of others, the ways in which context evolves with time. There is strategy to consider, there is changing circumstance, there is competitive response and new competition, all manner of predictable and unpredictable variations. When price is heavily predicated on option value, evaluation is hard for the buyer, hard for the investor, and hard for everyone in between. Armchairs are easy, is what I’m saying, but armchairs are a thing of the past.

These observations, like so many others, are traceable back to capital and its behavior. When volatility is high, so is option value, but costs are best held in check: Thus, note the cost control emphasis in the new business paradigm. When the landscape is fluid, so is opportunity: Note the expanding entrepreneurship motif in the broader economy. When the environment is constantly transformed, it is best to monitor and study, and to treat investment with greater discipline and care: Note, thus, the previously mentioned cash hoarding; note also theÂ diminished average acquisition-size in key digital and technology sectors. When traveling as though on waves in choppy water, it’s best to know how to adapt and maneuver, how to avoid riding a single wave down to the ocean bottom.

In short, the most efficient capital in present circumstance may be intellectual capital. This requires work, and it is never-ending. The armchair metaphor was picked here for a reason: It’s best these days not to sit around much; one may find oneself relaxing on a formula, thinking it might be a cushion.

The title refers to a very long story, don’t ask. It’s doubtful that when Schopenhauer penciled in his treatise he was anticipating Pinterest, although I can’t vouch for anyone’s anticipations, least of all Schopenhauer’s. Regardless of all that, the author was so prescient that the only way to have Â described social media more precisely would have been to draft up a chapter on Facebook. In fairness, will has been a fixture in the world since forever, but representationÂ has sure come up fast, and there could not have been so strong a hint of its potential in 19th century Germany. Let’s give credit where it is due: Schopenhauer understood his market. Like Zuckerberg, he had his finger on the pulse.

This post, however, is not about Schopenhauer, not per se, but rather about data and commerce, some aspects of security, and the association these all have to advertising (with media as go-between). At one time there was something of a ritual, a game of sorts, in which the merchant-pursuer courted the consumer-pursued while the latter hid modestly behind a curtain, listening to pebbles tossed against the glass from below. Blip, yoo-hoo, show yourself, look at the merchandise I hold. Occasionally the curtain might stir, signaling impatience, or maybe that the message was heard, and maybe – but this was more than the pebble-tosser could hope – that the merchandise was being studied. There was a mystery to the affair, and the will of the consumer was revealed only in measures. That was before representation really took off.

The consumer-pursued,Â in a reversal of roles, is now turning to pursuer. The curtain is pulled wide and the presence that was previously mysterious and delicate is chucking blunt objects back at the merchant. No hints and giggles, no side glances, but a loud show of interest, whack, I want this and that and I want my friends to want these also. The world as will and representation, like I said, and Schopenhauer couldn’t have scripted the scene more clearly.

Again, this leads us to consider data and measurement, the safeguarding of consumer information, and the association these have to commerce (with media as go-between).Â In the days of modesty, when the consumer-pursued played games with merchant-pursuers, the role of data would have been to draw down hints of what went on behind those stirring curtains, and security (among other things) closed windows and wrapped curtains tight up there behind the glass. (The past tense, incidentally, is used for effect – these days are kind of still present – but Pinterest may be providing us with clues of what could lie ahead.) If we extrapolate out to a futuristic era in which the windows are swung open and the rocks fly down with fervent precision to let merchants know precisely what’s expected and when, then the roles of pursuer and pursued may not be the only reversals we will witness. The supporting cast – data, and that which would keep merchants from getting it – may also be reconfigured.

When the consumer doesn’t want to hide, when buyer chases vendor without hesitation, then maybe data turns into a tool for shoppers. When representation is less a process for advertising but a demonstration of consumer will, the veils too may change from one side to the other. The Pinterest phenomenon is fascinating to observe, and the platform’s popularity – taken with continuedÂ growth in check-ins and similar expressions of consumer preference – might be studied in relation to data and security trends. While rules of engagement may very well be absolute, the direction of these – such as, for instance, the path that leads from will out to its sequence of representations – is often relative, and might even change course every so often.

Match-funding was the subject here in the previous entry. The idea was proposed that the matching of an asset’s life-expectancy with a funding source of similar duration is as applicable in technology investing as in, say, inventory finance or plant and equipment. It was suggested, however, that different technology types have different life-expectancy, while institutional funding sources for these – at least in the early stages – are fairly uniform in their term. For purposes of this discussion, technology refers to digital media and related software, hardware, applications and services; and funding sources are venture capital and its derivatives. The issue is one of technology obsolescence, innovation and evolution that happens at different rates, more or less rapid, and the mismatch this might cause for funding sources based on standard multi-year horizons.

This was all heading in the direction of explaining low venture capital returns in the past decade (as a general category) in terms of more than over-supply of capital – a quantitative discussion – by also introducing qualitative aspects.Â Increasingly as I consider these themes, I arrive at one of two places. Given that long-term hold-periods are most appropriate for long-term assets (match-funded), in digital media this lends itself best to networks and network-related businesses. As discussed in previous postsÂ here and there,Â these have shown great resiliency, even as circumstances changed (and continue to). These businesses have been the ecosystem in which new modes may or may not thrive, while networks themselves survive (in one way or another) the technical transformation. Perhaps not surprisingly, the venture funds with the top returns have been those highly weighted in these categories (thus match-funded).

Conversely, shorter-lived technologies should be matched up with shorter-duration capital. Perhaps this is a function of exit timing, but not all exits are the same. Businesses most likely to be independent – and in a fast-paced innovation environment this also means those most likely to transform and readapt with time – make more appropriate IPO candidates (or candidates for other secondary market exits). The others should be sold to a portfolio aggregator – which is to say, a strategic acquirer that is best suited to combine and diversify platforms – realizing that certain technologies will withstand the test of time for longer periods than others and accepting the risk in a portfolio system. Such acquirers, given their size and resources, will also be best suited to evolve with changing technology trends, and the acquired platform might thus be best positioned to optimize its value.

Regardless of the profile and alternative, however – and the complexity of issues and options far exceeds the summary presented – the idea of matching asset life-expectancy in technology with its proper financing model is an idea that warrants much further consideration. It isn’t clear that the startup ecosystem is as evolved in this regard as its more mature corporate finance counterparts, but the basic tenets of corporate finance apply to startups as much as mature companies. This is especially the case in an environment in which the distinction between one and the other is blurry at best, and arbitrary at least. As I wrapped up the prior post: Not all early-stage businesses are equally early, not all mid-stage ventures are equally in the middle, and not all exits are mature. By the same token, not all multi-year commitments are equally appropriate.

All the innovation in the world doesn’t change fundamental corporate finance. We may not value some assets the way we once did, we may not always have revenue to compare or cash flow to multiply, but assets are still governed by asset rules. We just have to look at it that way, which is to say, we have to remember that we are dealing with assets. For instance, assets have finite lives – it’s only a question of how finite – and between now and then assets depreciate, amortize, or deplete. Further, assets are funded with liabilities, and it is best for the two sides to overlap. Back in the day when corporate finance precepts were based on a greater vocabulary than Series A and IPO, there was the notion of match-funding. This had to do with the term of liabilities (not to be taken literally as debt only, but any financing) as corresponding with the life of a given asset. The two went hand in hand back then, and theoretically still do. We only have to look at it that way.

To transport these old-fashioned concepts from the era of leveraged buyouts and inventory cycles and working capital management to the new era of innovation and Series A rounds, we should begin by thinking of apps and technology solutions and websites as the new inventory and working capital and so on. Like inventory, like property and plant and equipment, like accounts receivable, the new apps and sites and technology solutions are assets with finite lives. For instance: the mainframe, the disk, or the walkman, or for that matter the physical book, the TV network, the web portal. In some cases the asset manager, as it were, has been able to reinvent or introduce new assets – IBM being an example – and in other cases this is less so. (Because of technical obsolescence in particular, such assets have typically been funded with equity, the murkiest and least rigid of the liability classes, where liquidity is a matter of secondary sale rather than repayment.)

From this synopsis, which is limited although extensive enough to get us going, we derive several themes: Different types of technology solutions and apps and sites have different (expected) lives; some owners and operators are able to extend the lives of some assets, and others are not; some owners and operators manage a better portfolio than others, knowing how (and when) to acquire, exit, reinvent, transform and such things for which Apple is a good case study; and the match-funding of assets is, at least theoretically, based on a liquid equity profile that is as long- or short-lived as a given situation warrants. From these ideal roots to the reality of actual branches – characterized by frenzied innovation, funded privately and not necessarily efficiently – there are a few disconnects and rough patches worth noting. Here are some, just to get going:

Entrepreneurs and their funding sources alike often talk about differences between products, features and businesses – in the context of startups and the prospects of these – but not so much about life expectancy. In this regard, there are substantial differences in profile. Some technologies – security software, for example, which gets hacked over or otherwise rendered old fairly quickly – might have a limited term to maturity, as it were, while a network asset – even MySpace or Aol’s dial-up service – is likely to linger around and sustain repeated beatings. It isn’t that these networks will survive into perpetuity – we see now that cable systems are even at risk of cord cutting – but there is a resilience to networks that mere technologies don’t possess. And in between, there are variations, permutations, and combinations, which can cause (expected) lives to vary along an extensive continuum.

… While on the other side of the ledger, at least in the early stages of development – from birth to infancy and into adolescence at the very least – the funding of these assets is, as a rule, uniform in term. The sequence is usually one of seed finance to a variety of venture capital series, all (or most) of which are private and marked by uneven liquidity options. Institutional participants in these financings typically strive for five- to ten-year capital commitments, and this is a general rule of (financial) asset-class that doesn’t seem to differentiate between (operating) asset-life profiles, as noted.Â In short, there is an absence of match-funding, or if there is some of it, this is in many cases haphazard and not necessarily ruled by fundamental corporate finance analysis.

A lot has been said about sub-standard returns in venture capital in the past several years, especially as the effect of the late-90s bubble has been processed out of the ten-year calculation. The discussion has for the most part honed in on issues of amount and an excess of capital supply. Correctly, this is an angle driven by ever-diminishing startup costs in the technology segment. But in the past decade another phenomenon has emerged, which is a quickening of maturation cycles for these businesses. It is no longer standard fare that maturation is a multi-year process, and by extension neither is life-expectancy insulated by such a cushion. As life terms have been exposed, in a manner of speaking, and are now a purer function of technology type, as discussed, we should begin to see the funding discourse also evolve. Match-funding – which is a qualitative trait – should start to play a much more prominent part alongside quantity in the financing analysis. Not all assets are equally young or old, and not all should be financed or un-financed in the same way.

Necessity, inertia and fickleness are points along the same continuum of consumption. We talk about network effect when we talk about some of these points, and there is the notion of switching cost when we talk about some others. These may be separate points, but these are also related. If network effect is a positive attribute – a quality based on value offered – then switching cost is defensive and almost negative: One is reason to stay, the other one not to leave. When options are plentiful and often interchangeable, the distinction between these is vague and maybe inconsequential. By the same token, a vendor in a plentiful and increasingly undifferentiated market has to consider these yings and yangs with increased care.

In the four spheres of media – social, information, entertainment and transactional – we look to Facebook, Google, Apple and Amazon respectively for illustration. That Facebook benefits from network effectÂ is essentially a given, and after years of building one’s user profile and accumulating associations, a subscriber’s cost to discontinue use is almost frighteningly real. The other three have networks of their own, and switching cost strategies that go hand in glove, although perhaps less obviously. These often have to do with hardware and software combination, or with the blending of other seemingly disparate codependencies: payment systems, messaging tools, email protocols, recommendation engines, file storage, device integration, retail outlets, and other imaginative ways of building consumer dependence in an otherwise commoditized environment.

An iTunes library, for example, is something you wouldn’t want to lose, and when access to this is consolidated across multiple devices – iPhone, iPad, iPod, MacBook – you probably don’t want to lose these either. You probably want to upgrade, in fact, and visit the Apple store on occasion to keep up with the latest. This is network effect also, in a sense, and now that iMessages are being rolled out across the spectrum of products, the network is no longer merely proverbial. Seen in this context, Amazon’s aggressive moveÂ into hardware and integrated softwareÂ and eBooks and now also a store outlet is almost a perfect replica. In this context, again, Gmail and Wallet and (coming soon) Drive and all the other apps and paraphernalia in the Android ecosystem are a collection of hooks to grab us back. A time may come when a more popular search experience is introduced elsewhere, and then these hooks could really prove their mettle.

As we consider these and related sector trends – strategies pursued and behavior observed – the thought occurs that social networks are not the only networks in new media realms. The thought also occurs that old networks – the telephone and cable systems – are losing some of their fabled cachet. This leads us to consider: In an environment of media innovation on one hand and technical commoditization on the other, network effect requires constant nurturing, and switching costs have always to be multiplied.

I am thinking about nuance, about the space between the digits. If 1s and 0s make up our communication systems, I am thinking about the messages that get lost. It’s a complex subject, extending beyond the isolated confines of programming. The binary simplicity of code has its parallels in other modern systems and perceptions, and maybe a program can solve the circular causality. Take, for instance, the term social graph, used to describe the totality of our interactions. Take, for instance, LOL, an expression of humorous appreciation. Take big data, a way of collecting information about whole groups of individuals. Or take even high-frequency trading, the dominant driver of capital markets volume, often associated with programmed interpretation of news headlines. These are examples of depth reduced by formula, color translated by algorithm, even if only as a form of expression.

This reduction is a necessary step in technological evolution, which in the last century (and the last decade even), has made huge strides. But there is a risk, I think, in premature celebration and basking in the glow of what is still an intermediate step. If our digital solutions end here, if our communication mechanisms stop at the current 1s and 0s and simplistic LOLs, this will have been an underachievement. The next goal, at least to my way of thinking, should be to capture the space between the digits, the nuance; and when this occurs – when the grandeur of analog is recaptured by digital – the truer potential of technology should be one step closer to realization. (Artificial intelligence, as a general field, is possibly the forefront in this effort, and it is indeed a very large field and work-in-progress. Siri itself would undoubtedly confess to that, in its monotone.)

To ellaborate the point, and what got me thinking about these digital subjects recently, let’s sample three different Bob Dylan releases of Idiot Wind. Each is the same melody, with more or less the same lyrics, telling the same story (“Someone’s got it in for me, they’re printing stories in the press…”) in the same key with the same chords. And yet, each is an entirely different song because the author’s voice is different in each of them. There is the Blood on the Tracks official-release version, marked by anger, defiance, and occasional sarcasm; there is the outtake in the Bootleg Series, on which the voice is toned down and the song becomes a melancholy, often heart-wrenching, reflection; and there is the live rendition on Hard Rain, care-free, liberated, almost jubilant. The same song, three different songs… and what galaxies of meaning there are surely in each trifle of an LOL.

The point here, again, is not to pick on text messaging or emoticons or social graphs and big data and high-frequency trading, but only to illustrate the diminishing and constraining quality of these methods that underly much of our communication and digital technology. To continue with the analogy, these are often like song lyrics read in the manner of text, in isolation, without melody, tonality, and the singer’s interpretation. From the perspective of the audience, these are like mere boos or cheers, 1s and 0s, the only possible reaction.

Nor is the point to pick on technology and its many gifts – that have caused such advances in science, economies and human progress. The commentary, rather, is in relation to the distance that must still be traveled before we can rest (if even then). And on some level, I suppose, it’s also a call that we shouldn’t settle, content to reside in some demographic definition, some trading algorithm, some social graph. These are all intermediate stages towards a goal, means to other means to others, and so on, rather than a discrete conclusion. Anyway, I was thinking about these things the other day as I was listening to Bob Dylan.

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