TRANSPARENT BUNDLES by Seth Goldstein

Transparent Bundles from Wall Street to Web 2.0

I am slowly starting to settle into a routine here in California.  The past few months have been filled with new beginnings- a new school for the kids, a new job and commute for Tina, new grocery stores and restaurants and little league fields.  The Taxi cab-hailing hustle of Manhattan has given way to hustling my bike to the top of Mt Tam. Ideas don't change at the same pace as activities, however, and I find myself thinking through the same issues about transparency that stimulated this blog in the first place.  Back then I was focused on soft dollars and the opacity of financial markets not media markets:

...soft dollars and bundled commissions are the vig that generates much of the wealth among the brokerage industry in New York, which in turn lubricates expense accounts at lunch time and grand Park Avenue co-ops and East Hampton beachfronts. Is it not ironic that New York has a mayor whose namesake company benefits more from monthly soft dollar payments than perhaps any other financial institution. In a way, Bloomberg has taken the notion of value-added brokerage services to the peak of civic duty. Our city itself reflects the residual value of opacity in financial markets. And so the question comes back to what happens to the brokerage industry when transparency become of more value to investors than opacity?

Three years later, soft dollar pratices are as opaque as ever.  The SEC has catered to the rich interests of hedge fund and stock brokerage lobbyists and enabled both sides to continue their practice of doing business with eachother in a very gray market.  Even the most sophisticated individuals outside of the financial services industry have little sense of what is really going on, in terms of the ways in which large institutional investors and large banks and brokers profit from closed data practices.

This is not that different from the dynamics of the online advertising environment- there are large institutional advertisers doing business with large media companies and advertising networks.  Despite the pre-text of openness and transparency, the online media market works hard to obscure the discovery of price by the very individuals producing it; namely the people who are using the medium, searching for things, clicking on ads, and conducting commercial transactions.  The web user, like the individual  investor, has resigned himself to letting larger interests capture, aggregate, and monetize his data behavior.  He has been led to believe that this is simply part of the bargain of having such "low" transaction costs for trading stocks or searching for information.

If I had to draw a continuous line through all of my disparate activities over the past ten years, this would be it:  identifying and interpreting the direct economic value of an individual data actor.  We may never in our lifetime see a day when a person develops an acute, vested interest in the value of his data; the spread between the value of a handful of clicks and that of a mass of aggregate behavior is significant.

Although it may be hard to keep track of the progression of Media Futures, we are stuck between the end of Alchemy and the beginning of Arbitrage.  This is where the creativity stops and the money kicks in; not that surprising against the backdrop of so much M&A activity (DoubleClick, RightMedia, StumbleUpon, etc.)

In May 2005, I made this transition in the first Media Futures series.  It was etymological in nature and only hinted at the real activities that I was engaged with as an entrepreneur, as I handed over the reins of Majestic Research to a new CEO in order to focus on creating Root Markets.  Flash forward two years and I am at a similar juncture; this time moving from Root in NY to AttentionSoft in SF. The transition from Alchemy to Arbitrage that I want to describe this time will be more personal, now that the philosophical ground work has been established.  I want to trace the evolution of a central idea- transparency- through the founding of a new investment research process in 2002 all the way through the creation of a new consumer data platform in 2007.

As always, thanks for staying tuned.

Wall Street 2.0?

 

Tom Glocer,  CEO of Reuters, stands in front of  Media Futures at the Open Data Conference in NY

And so, what does exhibitionism have to do with Wall Street? How does the voyueristic behavior of 20-somethings relate to the commission decisions of hedge fund masters of the universe? Traditionally, very little. Or at least we weren't aware of these connections.  Now, however, the advent of personal surveillance technologies has begun to popularize processes that up until now have been unavailable to individuals.

This resonates with a comment that Reuters CEO Tom Glocer made at the Open Data Conference.  It was the night before the conference, over dinner, that Glocer gave his perspective on the evolution of "open data" in the context of financial services. 

He told a story about the transformation of individual data points into market data.  Surprisingly, he didn't start with a traditional financial services firm, like Reuters, but rather with an individual Schwab customer. This retail trader, by virtue of her decision as to what to buy or sell and at what price, is the most granular actor in the price discovery machine.  As Glocer told the story, the online retail investor was the proverbial butterfly flapping its wings in Hawaii causing hurricanes in China.  Her only action was to trade a stock in her 401K account online; but unbeknownst to her, Schwab took this trading data, along with that of all of the other individual retail investors, and established a higher level trend.  This process reverberated up through larger institutional brokers like Goldman Sachs and ultimately exchanges like the NYSE.   At each step up in aggregation and abstraction, significant economic value was extracted.  Although this individual's behavior is too volatile in and of itself to offer much in the way of trend analysis, this does not mean that her behavior is worthless.

This is the foundation of Wall Street 2.0:  the individual data producer is beginning to wake up to the economic value she is creating. This economic value had in the past been appropriated by those aggregating up the data from above.   Our electronic behavior, whether it be querying a search engine, clicking on an ad, checking out a stock, or trading a share, is generating value for other people that are in a position to aggregate and sell this information to institutions, who in turn transform it into some other form that ends up getting sold back to individuals.   Alchemy... to... Arbitrage.  This is nothing new.  What is new, however, is the extent to which our behavioral trails are no longer hidden, but are instead now available to us via various modes of personal Attention services, also known as myware.   This is the window that Open Data flows through:

Open data is to media what open source is to technology. Open data is an approach to content creation that explicitly recognizes the value of implicit user data. The internet is the first medium to give a voice to the attention that people pay to it. Successful open data companies listen for and amplify the rich data that their audiences produce.

Spying on Transparency

1 Year of Attention

Exactly one year ago to the day, on October 4 2005, I wrote a joint post about the launch of ATX, the Attention Extension, which was the first open source clickstream recorder for the Firefox browser.  This was the culmination of a month of heavy lifting to produce the code and create the environment within which it would find an audience of the right people.  We were on our way to Web 2.0 conference, where we had a slot in the afternoon to host the first AttentionTrust board meeting, open to the public. 

Little has changed since then. 

And yet everything has changed.

365 Days: the People

I turned IAG, the Internet Arbitrage Group, into Root Markets and raised capital from a number of investors including Lewis Ranieri, The New York Times, Deutsche Bank and most recently, the Chicago Board of Trade.  I also began work on a clickstream Vault, which was set up as the first approved commercial service for ATX.  We released the Vault application to users last November, and since then have added a number of additional features such as the ability to exchange clickstream information with trusted people, evaluate your influence, and syndicate your clickstream through blogs.  The Vaults now have more than 50 million clicks under management on behalf of users.

Stan James, along with support from Mike Frumin, Tony Lieuallen and others, developed the code for ATX, followed his passion.  He moved to Boulder to turn his vision for Outfoxed into the business of Lijit Networks, with Brad Feld and I as his investors and board members and Todd Vernon as his operating CEO

Steve Gillmor claimed victory in the War for Attention and resigned from the board of AttentionTrust to focus his energies on collaborating with Robert Anderson on the architecture and implementation of GestureBank.

365 Days: the Companies

In addition to the narrative of the people involved with AttentionTrust over the past 12 months, there is an equally compelling story about the steps and missteps of companies impacted by the emerging Attention Economy.  Here is my brief history of key events over the past 12 months:

December 2005:  Del.icio.us sells its users’ tags to Yahoo! for $$$

March 2006:  O’Reilly ETech Attention Economy Conference

April 2006:  PC Forum Conference, Users in Control

July 2006:  Netscape pays Diggers for their gestures

August 2006:  Ray Ozzie say of Windows Live “we will monitor” our users

August 2006:  AOL Search Breach

September 2006:  HP Pretext Scandal

September 2006:  Facebook “Redesign” Fiasco

October 2006:    ?

AttentionGate, August 2006:  Defendant #1, AOL Search

In August, AOL Search broke the thin glass that separated Thelma Arnold’s personal search history from the rest of the world:  “Those Are My Searches”

From NY Times August 9:

Buried in a list of 20 million Web search queries collected by AOL and recently released on the Internet is user No. 4417749. The number was assigned by the company to protect the searcher's anonymity, but it was not much of a shield.

No. 4417749 conducted hundreds of searches over a three-month period on topics ranging from ''numb fingers'' to ''60 single men'' to ''dog that urinates on everything.''

And search by search, click by click, the identity of AOL user No. 4417749 became easier to discern. There are queries for ''landscapers in Lilburn, Ga,'' several people with the last name Arnold and ''homes sold in shadow lake subdivision Gwinnett County Georgia.''

It did not take much investigating to follow that data trail to Thelma Arnold, a 62-year-old widow who lives in Lilburn, Ga., frequently researches her friends' medical ailments and loves her three dogs. ''Those are my searches,'' she said, after a reporter read part of the list to her

From NY Times August 22:

Nearly 20 million discrete search queries, representing the personal Internet hunting habits of more than 650,000 AOL customers gathered over a three-month period last spring, were posted by a company researcher, Abdur Chowdhury, on a publicly accessible Web site late last month.

No user names were attached to the query data, which was intended for use by search engine researchers in academia. But word of the data - which provided an intimate, sometimes disturbing look into what Americans search for on the Web - spread through the blog circuit and immediately began raising questions about the sort of privacy consumers were entitled to when they used search engines.

Within moments, amateur SQL hacks around the world had downloaded the 500mb .tar file and begun to extrapolate from the large pool of data thousands of unique individual streams of identity.  Insofar as it is unique and can express its lookingforness (ie search history) freely, an anonymous ID is imminently identifiable.  The expansion of social media across more and more online behavior means that it is increasingly likely that each one of your gestures will find a public outlet for expression.  The distinction between sanctioned and unsanctioned, public and private, open and closed will continue to erode because new forms of passive data expression increase every day.  This is the drama of anonymity, which is now a form of content in its own right.

This is precisely why we need to recognize and support the integration of Gesture Bank into AttentionTrust, which Steve Gillmor and Robert Anderson have gifted to our organization.  Thank you Steve.  Thank you Robert.  I am not sure anybody fully appreciates how important this will be to our future as free digital citizens. 

Attention the Media

Michael Goldhaber constantly reminds us that there is only so much Attention that we can pay.  And we have yet to promise all of our future Attention away.  Our future media commitments remain up for grabs, depending upon a variety of factors that have yet to be determined.  Because our choices as to what we pay Attention in the future remain contingent, there are great media territories still to be colonized.  This is why, with breathtaking speed, media and technology companies are competing in an arms race to conquer the Attention of their users.  The noble aims of Google, YouTube, MySpace, Facebook and others are all based upon free market social media capitalism.  It assumes that people have free choice in the media technologies that they use.

In 2000, Josh Harris, the founder of Jupiter and Pseudo, pursued self surveillance as a form of media to its logical extreme.  His “weliveinpublic.org” was an open view into his  SoHo loft, with live cameras embedded in virtually every surface.  He and his girlfriend moved in, turned on the record button, and in a matter of months she had left him, and he was rumored to have purchased an abandoned apple orchard in upstate New York.  Right up to the end of his experiment; however, Josh kept pointing me to an animation that he created and was most proud of.  It featured an imaginary, 2nd Life -like landscape filled with dancing people who had TV’s instead of heads, and the TV’s were broadcasting their faces.  As these TV-headed people pranced around, they called out to the audience:  “let us show you how we show you how to live.”

Strange things happen when physical gestures turn into electronic signals.   Signals can be exchanged and valued, prompting intricate auction mechanisms that allow people to "trade" media.  The logic of trading is not governed by traditional media and advertising structures, but rather by the mercurial but ultimately efficient market dynamic.  But the broader “you” is missing in this transaction, outside of the fixed number of data fields that you fill out to indicate your interest in a commercial relationship. This is some strange math:  entirely focused on optimizing your response and yet structurally uninterested in anything you might have to say outside of narrowly defined response parameters.  Within these new markets enabled by Internet arbitrageurs and data brokers, there are billions of micro markets where a query or a unique user path comes into contact with one of more targeted advertisements. A tension emerges between the mission of the user who intends to find or do something and the sponsor of the link who, like a mercenary bounty hunter, is trying to lure the user into a proprietary commercial environment.

In 2000 I was at the TED conference in Monterey and had the opportunity to hear John Doerr of Kleiner Perkins talk about his experience working with entrepreneurs.  He said that there were two types, mercenaries and missionaries:

What distinguishes companies led by mercenaries from those led by missionaries? While the two might seem similar at first glance, they are in fact very different, Doerr points out. "Mercenaries are driven by paranoia; missionaries are driven by passion," he says. "Mercenaries think opportunistically; missionaries think strategically. Mercenaries go for the sprint; missionaries go for the marathon. Mercenaries focus on their competitors and financial statements; missionaries focus on their customers and value statements. Mercenaries are bosses of wolf packs; missionaries are mentors or coaches of teams. Mercenaries worry about entitlements; missionaries are obsessed with making a contribution. Mercenaries are motivated by the lust for making money; missionaries, while recognizing the importance of money, are fundamentally driven by the desire to make meaning."

This description has stayed with me over the years and has has become a core mental architecture.  Reflecting on this, I went back to my original post entitled Media Futures: from Theory to Practice from November of last year announcing the launch of ROOT as a lead exchange:

One final observation: the Internet business path is about to split.  One direction leads to an open approach to data, governed by the principles of transparency and publicity.  The other direction leads to a closed approach to data, focused on privacy and opacity: the black box.  Both directions have legitimate and consistent end-user benefits and economic rationales.  The danger is getting stuck in the middle:  (1) looking to increase your edge but not locking up the information it is based on; or (2) promoting your open-ness but not sharing data back to the system.

I believe this is even more the case now than when I wrote it last year.  There is no middle ground between the black box and the transparent bundle.  Most users are simply apathetic about the value of their attention data.  This apathy needs to stop.  Now.

There are too many parties out there who do not respect the four principles of AttentionTrust.  These folks, pardon my Algerian,  can go f--k their Attention-colonist selves.

Dear Mr. Search Engine, I regret to inform you that my search history is no longer your solution for a cleaner India...

Dear Mr. Behavioral Network, I regret to inform you that my clickstream is no longer your solution for civilizing the new world...

From now on, I will tell you and all of the companies behind you who are bidding for your inventory (aka my attention),  when and under what circumstances I am willing to expose myself.  My commitment to the principles of AttentionTrust threatens the practices and behaviors of any body who profits in-between me and those who desire my Attention. 

As users in control, we have a responsibility to lead the industry with vision, to grab the mercenaries by the scruffs of their necks and force them to recognize the missionary values we operate upon.

The more they take, the more we give
The more they steal, the more we share
The more they lie, the more we tell the truth
The more they spy, the more transparent we become

Media Futures, Part 1/5: AUTOMATA

Self Operating Machines

The most exciting new Internet companies are focused on lead generation, behavioral targeting, co-registration paths (aka coreg) and domain name brokerage.

I seem to stumble every day across some new firm propping itself up on the shoulders of Google, Yahoo! or others to take advantage of a current wrinkle in an otherwise perfectly efficient landscape.  The fact is, however, that these wrinkles never seem to disappear.  These advertising mechanisms emerged alongside of the pure media companies, starting with Doubleclick back in 1996, and followed by other advertising networks such as Flycast, Overture and Advertising.com, each firm iterating on the prior model to gain some head room from the imminent internal advertising service offerings of the pure media companies.

Although these advertising technologies have focused on targeting the behavior of consumers, they have also tended to ignore the role of consumers in the production process of the media that they consume.  This is why these networks tend to dynamically balloon in terms of sales growth.  They capitalize on a behavioral blindspot, where the supply of inventory versus the demands of advertising value are disjointed.  As consumers become smart about these artificial mechanisms (banners, keywords, freeipods) their effectiveness drops and they look to get acquired by larger media entities.

The elusive goal of internet media (and the advertising that drives its value) has been to keep up with changing consumer preferences as the technologies of communication continue to evolve.  The adoption of a new means of using the Internet (whether it be ecommerce, webmail, search engines, or shortly blog readers) creates enormous economic value for the donors incredibly quickly. 

The latest shift in online consumption has been the institutionalization of amateur publishing tools.  The unique attribute of RSS is how simply it enables individual publishers of data to connect with individual subscribers to such data.  RSS tools like typepad, flickr, adsense and del.icio.us have made it easy for individuals to syndicate their preferences, memories and desires.  RSS tracking tools like feedburner make it easy for individuals to track who is paying attention.  At the site you are on, I am streaming my Flickr photos, am recommending books as an Amazon associate and am promoting a Google ad-sense ad.

Not unlike dial-up authentication protocols (remember the classic AOL logon "hand-shake"),  the interaction between RSS feeds and their readers is a structured negotiation:  do you, John Q. Public, agree to take the whole feed, nothing but the feed, until you delete it?  I do. Click.   

When you aggregate all of these individual reading and writing agents, it looks more like a landscape of cellular automata than a tradition publishing model.  This would seem to be the essence of social media (props to my wife and guide Tina Sharkey for coining this years ago and registering the domain) and social computing, two memes that seem to be growing in influence.  When individual decisions such as applying certain tags to pages or photos achieve a broad social consensus, then it as if these tags begin to self replicate which is the essence of automatic behavior.

There is a good word to describe this, which comes out of physics, namely Excitable Media.  as per Wikipedia:

Cellular automata provide a simple model to aid the understanding of excitable media. Each cell of the automaton is made to represent some section of the medium (for example, a patch of trees in a forest, or stress in heart tissue). Each cell can be in one of the three following states:

Quiescent or excitable -- the cell is unexcited, and can be excited. In the forest fire example, this corresponds to the trees being unburnt.

Excited -- the cell is excited. The trees are on fire.

Refractory -- the cell has recently been excited and has not yet been through the refractory period. A patch of land where the trees have burnt and the vegetation has yet to regrow.

The concept of cellular automata is useful as a metaphor for next generation Internet content, which is similarly dynamic, member-generated, and excitable.  In the next post, I will focus on algorithms, as they transform the automatic social media into business rules and procedures. 

Web Platform as Equity Analyst

Last month I held a workshop with the elegant, imaginative programmer Steve Steinberg of GGH at Web 2.0.  The conference was at times a best-hits convention of the SF Internet scene circa 1999, but in other important ways a series of discussions about the evolution of the Web as a platform.  Instead of large sites connected by single links, as the web may have looked 10 years ago, now we have niche pages and targeted offers connected through elaborate search algorithms, RSS feeds, and affiliate marketing networks. 

The conversation with Steve started as follows:

It is easy to confuse the Internet as a medium of distribution with the Internet as a computational platform. Nowhere is this confusion more pronounced than in the use of the Internet by investors.

Usually, investors think of Yahoo! Finance or Ameritrade. No doubt the Internet has emerged as a useful source of information and a convenient brokerage interface, but do these uses qualify as platform applications?

Beneath the user functionality of the web hums a constant drone of data processing. This is the under-web of click-streams, item listings, user queries, and other flora and fauna of network behavior.  This is the web tone for investors: filled with important data insights usually lost in the noise of random traffic.

The challenge is how to interpret the Internet platform for financial gain. In so far as there is no “Bloomberg” for analyzing Internet and other electronic transaction patterns, investors today are faced with myriad tools, techniques and sources of information that require significant manual effort to correlate.

The typical search box is a limited tool for investors, since understanding what metrics one is looking for is almost as important as the metrics themselves. Most publicly-traded companies (for instance the majority of those in health care, technology, retail and financial services) serve different customers differently and so understanding such companies require monitors across the full length of the supply and demand chain.

We proceeded to lay out a number of examples of how the Web could be searched, scraped, bot-ted, mined, and grokked for unique information on publicly traded equities.  We touched on the dangerous temptation to trust data simply because it’s data (when in fact as we all know data carries with it many of the same assumptions and biases of anecdotal water cooler observations).  We also focused on the gray area separating legitimate data discovery from the act of stumbling across (or better yet, browsing into) material non public information in an otherwise public network such as the Web.

The combination of insider information restrictions and Regulation Fair Disclosure has become the impetus for equity research to continually reinvent itself.  As the SEC has written in the case of Reg FD:

"Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to [certain enumerated persons], the issuer shall make public disclosure of that information... simultaneously, in the case of an intentional disclosure; and... promptly, in the case of a non-intentional disclosure."

The Emergence of a Packet Switched Research Model?

Insofar as such information is disclosed by a person (ie the CFO) to another person (ie an analyst at a Brokerage or at a fund) then the steps required are simple enough:  issue a press release immediately to everybody via the web.  It is decidedly more complex when such information is disclosed in bits and pieces, asynchronously through a “network of experts” composed of employees and consultants inside and outside of the company in question, issued to a buzzing audience of analysts and portfolio managers pushing and prodding at various aspects of the company’s performance.  If the CFO’s wink to the Sell Side analyst at the 17^th hole was the equivalent of dedicated circuit switch, then the current instance of buy-side analyst communities polling networks of industry and sell-side experts suggests the emergence of a packet switched research model.

Perhaps the full obsolescence of Reg FD as we know it emerges when research shifts its register from people to data entirely—when companies become fully transparent (cf. Bill Gross’s latest invention Snap), or else their transparency is enabled by others (cf. Majestic Research’s analysis of Ebay as well as other examples of Internet-based economic research).  At such moment, the entire notion of a privileged perspective dissolves—there is no longer an edge in trying to "game" the quarter-- and the investor is forced to develop a new strategy for evaluating the equity. 

Otherwise, the index funds may integrate the public data themselves and force a number of highly paid fund managers to leave for the summer house in January.