Why Great Products Do Only One Thing

And why one feature is better than two or three.

Uber did not allow you to pre-book a taxi. Amazon started out by selling books only. Google was just a search engine. McDonald’s got rid of cutlery. And somehow we still believe that for a product to be successful it must do many things.

There are usually two cases — new products trying to convince the market that they are worth it and companies with established products that offer more than needed.

A big mistake new companies do is trying to offer everything their competitors have, believing this way they will attract more interest and gain customers. And on the other side, established companies which believe that more products and resources spent will always result in better results. So I would like to show you why offering too much is a psychological problem and how new products can nail it by focusing on one thing they are good at.

For new products you have to change behaviour first

As we might know, humans are creatures of habits. And if we already have well-established patterns, and most of the times we do, it will be hard for a new company to convince us that we must buy their “innovative product” or make a switch to something else.

We can call a product "innovation" when it changes people's habits. For example, the iPhone is an innovation. So for your product to become a habit, it has to do a straightforward thing but do it great. Why? Because it is much easier to adopt a new technology if the learning curve is low and the reward is high for what it does.

The temptation is always there for manufacturers to add functionality to things — since conventional logic suggests that more must be better. What takes real genius is to leave things out — Rory Sutherland

Back in 2006, McDonald’s saw its growth stall. The fast-food chain decided that the problem was its limited menu, so it tried out many new items and ended up doubling the offerings. But sales hardly budged. Finally, in 2016, it took a new track. It went back to basics, dropped most of those additional items, and instead extended its popular breakfast offerings. Sales finally jumped, with same-store revenue up 6% in 2017, and the stock rose by 40% — 

Tiffani Bova, HBR

The learning curve must be low

To change a behaviour, it easier done if the learning curve of your product is low. As I wrote in a previous article — 10 Small Design Mistakes We Still Make — if we find something that does the job, and does it great, we will almost never make a switch to another service or product, even if it is a little bit better. Why? It’s in our nature to stay with the familiar and we don’t like taking risks of learning something only to realise it is not something we needed.

Once a person nails down the use of your product, they will rarely switch to something else.

How to make the learning curve lower? User metaphors.

People learn faster when an app’s interface and actions are metaphors for familiar experiences. The experiences may come from the digital or real world. Metaphors work well in because people interact with the screen. They move views out of the way to expose content beneath. They drag and swipe content. People toggle switches, move sliders, and scroll through picker values.

Always try to learn what other apps are your core customers using on a daily basis. This will allow to design similar experiences and remove any friction or create uncomfortable learning situations.

Choice overload

Another reason why many products fail or companies can’t get new users is because they offer too many options — features, services or products. And by overwhelming your users with too much stuff, people will always choose to stick with what works currently for them or choose not to buy anything else. This process is called overchoice or choice overload.

Choice overload is a cognitive process in which people have a difficult time making a decision when faced with many options — Wikipedia

The phenomenon of overchoice occurs when many similar choices are available. Making a decision becomes overwhelming due to the many potential outcomes and risks that may result from making the wrong choice. Having too many approximately equally good options is mentally draining because each option must be weighed against alternatives to select the best one. This can be easily seen and experienced when you buy, literally, anything for your house (dishwasher, microwave, washing machine, vacuum, etc.) 

When Nike called Apple

You can fit all Apple’s products on a table, and it still surpassed Google as the most valuable company on the planet. How is that possible? They had a well-established philosophy that almost never changed — get rid of crappy stuff. Moreover, that philosophy helped Nike to become one of the greatest brands alongside Apple too. When Mark Parker became the CEO of Nike, he had a phone call with Steve Jobs and asked him:

“Do you have any advice?” Parker asked Jobs. “Well, just one thing,” said Jobs. “Nike makes some of the best products in the world. Products that you lust after. But you also make a lot of crap. Just get rid of the crappy stuff and focus on the good stuff.” Jobs paused and Parker filled the quiet with a chuckle. But Jobs didn’t laugh. He was serious. “He was absolutely right,” said Parker. “We had to edit.” — Source: Forbes.

How Apple does it

Apple doesn’t invent a new product or product category. Almost all the time, all of Apple’s products have been recreations of existing products. Apple did not invent the MP3 player (Walkman), the smartphone (Ericsson R380), the tablet (Microsoft). Instead, Apple reinvented all of them and made them better.

Our goals are very simple — to design and make better products. If we can’t make something that is better, we won’t do it — Jonathan Ive, Chief Design Officer of Apple

When you do one thing but great, you add an extra drop of confidence and loyalty into your customer’s heart. This way, when you launch every year a better product, it becomes harder for the customer to make a switch because you earned their trust in doing one but a great thing.

Good is the enemy of great. And that is one of the key reasons why we have so little that becomes great. We don’t have great schools, principally because we have good schools. We don’t have great government, principally because we have good government. Few people attain great lives, in large part because it is just so easy to settle for a good life― Jim Collins

Minimise the decision-making process

Another reason why Apple is so successful is that it has only one product in its category. It minimises the decision-making process for the consumer by making things simple.

Apple doesn’t have five iPhone models to choose from. It has only one — this year’s latest version. What about additional choice? Very simple — big or small. In case you don’t have the budget you can always buy the previous models with the same thinking model. And while this may seem to limit the company’s potential, given the number of smartphones available on the market, the truth is the reverse.

Time’s magazine did a consumer research for over 30 years, in which consumers constantly tell them that while choice is nice, in reality, people want the process of choosing a tech product to be simple and not complicated.

How Walkman did it

Akio Morita, with his business partner Masaru Ibuka, founded Sony in 1946. Large magnetic tape recorders were the company’s first area of focus, later followed by the first pocket radio. But perhaps his most significant moment of genius involved the creation of the Sony Walkman, the ancestor of the iPod.

In market research, the Walkman aroused very little interest and quite a lot of hostility. ‘Why would I want to walk about with music playing in my head?’ was a typical response. Morita ignored this.

How was the idea of Walkman born?

The request for the Walkman had initially come from the 70-year-old Ibuka, the honorary chairman of Sony at that time. Ibuka wanted a small device that would allow him to listen to a full-length opera on his many flights between Tokyo and the US.

Morita asked Sony’s engineers to work on the idea, and they succeeded in achieving what he had briefed them to create — a miniature stereo cassette-player. But they also had managed to include a recording function in the Walkman. However, Morita told them to remove it.

Now, why would you remove a feature that costs an insignificant amount of resources and adds a trivial amount to the final price? Sony’s engineers recommended going with a microphone and recorder because it would add value to the final product. This also means more ways to use the Walkman for.

But Morita argued that a recorder would only confuse the end consumer. “For what is this device? Dictation? Should I record live music? Should I take interviews with it? Should I record my vinyl?”

By narrowing the perceived uses of the device, Sony ensured that the device could do only one thing: listen to music. This way it would be easier for people to adopt a new behaviour, since there was only one thing to adopt. This way you can also understand why the iPods became so popular too.

How others do it

On the other side, giving examples of big brands like Apple, Sony and McDonald’s is easy when they are already prominent and successful, but there are also small companies that started with one feature only and are doing great. A company I admire, Bonsai — a tool for freelancers to send proposals & invoices, contracts, track expenses and projects — is a perfect example.

How did the company start? When they launched for the first time on Product Hunt I remember only one thing they promised — send beautiful and bullet proof contracts. Because of that, many people were attracted to the product. Not too many companies offered the ability to send designer like contracts. Also, it was a core problem that most freelancers were and are struggling with.

So what about them now? With time and patience they have become an all in one solution for freelancers. Starting small and perfecting a feature allowed this company to grow into what they are now today. And you can see that it was easy for early adopters to use the tool because the learning curve was low — only one feature. And once people got used to the product, it became easier to adopt other features too and make the switch entirely.

The philosophy of simplicity

This philosophy of keeping it simple is applied not only to a product’s features, or how many products your company sells. This type of thinking applies to everything. From the way you do business to they way you think. It’s not that you decide one day to cut down useless features of your product to only one and suddenly the sales will skyrocket. To achieve that type of simplicity, you have to know what is or are the biggest needs of your customers and not deviate from your goal with useless noise.

Growth is best achieved by making things simpler for your customer rather than for you — Tiffani Bova

Turns Out, Alibaba Founder Jack Ma Is A Member Of Xi Jinping's Communist Party

• Jack Ma, the founder of Chinese tech giant Alibaba, is among the world's richest people but he has now emerged as a member of another club: China's 89-million-strong Communist Party
• The billionaire's Communist bona fides were revealed by the People's Daily, the party's official mouthpiece, in an article praising contributors to China's development

Jack Ma, the founder of Chinese tech giant Alibaba, is among the world's richest people but he has now emerged as a member of another club: China's 89-million-strong Communist Party. The billionaire's Communist bona fides were revealed by the People's Daily, the party's official mouthpiece, in an article praising contributors to China's development.

He is not the first nor likely the last Chinese super-rich capitalist to join the party, which counts property titan Xu Jiayin and Wanda Group founder Wang Jianlin among its billionaire members. But Ma's membership had not been known until now as China's richest man had previously suggested that he preferred to stay out of politics.

In Monday's article, the People's Daily said Ma was a party member who has played an important role in pushing China's Belt and Road global trade infrastructure initiative -- a pet project of President Xi Jinping.

He has also been honoured as one of the "outstanding builders of socialism with Chinese characteristics in Zhejiang Province," where Alibaba is based, the daily said.

Joining the party can be helpful to private businessmen and women in the country as they navigate a complicated business environment where the state-led economy dominates many industries and private business can be unwelcome.

Xi has renewed a push to expand the Communist Party's influence in private business, requiring any company with more than three party members to set up a party cell, or lacking numbers, join with nearby firms. Three in four private companies already host party organisations.

"We must do a good job in the education and management of party members and guide them to play an active role," Xi told officials in Shanghai earlier this month, noting the increase in private employment and new types of employment.

Xi is pushing to further intertwine the party and business, with the latest rewrite to the rules for party organisations published Sunday by official news agency Xinhua. In private companies party cells should "guide and supervise the enterprise to strictly abide by national laws and regulations," the draft order says, according to Xinhua.

Ma did not reveal his Communist Party membership in paperwork filed for Alibaba's 2014 initial public offering on the New York Stock Exchange. It is not known if Ma was a member at the time.

A spokeswoman for Alibaba declined to comment. Ma -- who announced in September that he would step down as head of Alibaba next year -- has previously indicated he preferred to keep the Chinese state at arm's length.

"My philosophy is to be in love with the government, but never marry them," he said at the World Economic Forum in Davos in 2007.

But party members must hold up their right fist and recite an oath upon joining.

"Be loyal to the party, work actively, fight for communism all one's life, always be prepared to sacrifice everything for the party and people, and never betray the party," they recite

The FDA turns its attention to menthol cigarettes

Concerned about their appeal to children, the FDA wants to ban minty smokes.

The fight against smoking is, by his own admission, deeply personal for Scott Gottlieb, head of the Food and Drug Administration (fda), an American regulatory agency. Having worked as a doctor and survived cancer, he has seen its effects up close and is determined to get Americans to quit tobacco. On November 15th he announced widely expected measures to restrict the sale of flavoured vaping products. More surprising was a proposed ban on menthol cigarettes.

The minty smokes represent 35% of the American tobacco market. In only a few other countries, such as Hong Kong, Singapore and Thailand, are they as popular. Even as overall rates of smoking in America have been declining recently, consumers’ preference for menthol cigarettes has increased slightly. The fda laid out no time frame for its potential ban but its announcement sent big tobacco companies’ share prices plummeting nonetheless. British American Tobacco (bat), the second-largest non-state producer, was worst hit. It owns rj Reynolds, which makes Newports, America’s biggest-selling brand of menthols. Around 55% of Reynolds’s sales in America are menthol cigarettes, according to Wells Fargo, a bank. bat’s shares have fallen by 20% since talk of a ban began. Canada’s federal government banned the menthol variety last year.

In America mint-flavoured cigarettes are particularly popular with two groups: black smokers and young ones. Over 80% of African-American smokers puff on menthol cigarettes, according to national drugs surveys. That is a result of marketing by tobacco companies. Philip Morris, one of the biggest, commissioned research in 1953 that showed that although only 2% of white Americans preferred Kools, a brand of menthol smokes, 5% of black Americans did. This slight difference was then seized upon by advertisers and exploited. Elston Howard, a black baseball player, became a spokesman for Kools. “Papa’s got a brand new bag”, a hit by James Brown, was used to advertise Newports in the late 1970s. Tobacco companies became sponsors of such events as the “Kool Jazz Festival”.

Just over half of all smokers aged between 12 and 17 also plump for menthols, compared with less than a third of those over 35. For young people, the appeal of such cigarettes is explained by menthol’s capacity to mask the flavour of smoke and soothe the irritation that novice smokers often experience. As such, the fda sees them as a dangerously appealing route into smoking. Previous research by the regulator have shown that although there is little evidence to show that menthol cigarettes are more or less toxic than any other kind, smokers appear to be more heavily addicted to them and less likely to give them up.

The agency’s proposals will prompt a fierce pushback from the industry, reckons Dennis Henigan of the Campaign for Tobacco-Free Kids in Washington, dc. He expects that tobacco companies will challenge the argument that menthol cigarettes pose a distinct public-health risk. bat argues that “the science today does not support treating them differently from other cigarettes”. Tobacco companies may also argue that a ban will lead to a boom in illicit sales. The counter-argument is that it is far-fetched to think that any illegal trade would be so extensive as to undercut the public-health gains. Producing mentholated cigarettes illegally on such a scale without being detected would be hard.

Analysts, however, are sceptical that the ban will be enacted any time soon. The tobacco firms’ arguments are convincing, many reckon. The scale of their legal challenge could prevent it. Such a move would go much further than previous efforts to deter Americans from smoking. Cigarette packets do carry written warnings about the dangers of smoking but a law from 2009 mandating graphic health warnings has not yet been implemented.

Still, the pressure on tobacco companies is unlikely to ease. Mr Gottlieb wants to reduce the amount of nicotine permitted in cigarettes, cutting it to non-addictive levels. In future the big firms plan to rely increasingly on new products such as iqos, a “heat-not-burn” smokeless device produced by Philip Morris International but not yet authorised for sale in America. The firm hopes it will become the first tobacco product the fda allows to be advertised as less harmful than cigarettes. But if such innovations do not reduce the number of young people smoking, Mr Gottlieb has made it clear that he will not hesitate to take more aggressive steps.

The turbulent journey of India's Jet Airways

Jet Airways Ltd JET.NS , the biggest full-service carrier in India, has been under dark clouds for the past few months.

While intense pricing competition, weak rupee and rising fuel costs have hurt Indian airlines like IndiGo owned by InterGlobe Aviation Ltd INGL.NS and SpiceJet Ltd SPJT.BO , Jet Airways is in a league of its own.

Saddled with a debt of about 80.52 billion rupees ($1.14 billion) as of Sept. 30, Jet is desperately searching for a deal that could help mitigate its severe liquidity crunch. The airline has a market capitalisation of 35.03 billion rupees as of last close.

The Tata conglomerate is now likely to be the potential white knight for the debt-laden company, but no proposal has been made yet. Here's how the story unfolded:

May 3 – Jet shares fall 12.3 percent after InterGlobe Aviation reported a slump in net profit for March-quarter a day earlier 23 - Jet posts first quarterly loss in at least 12 quarters, says it has a negative net worth that 'may create uncertainties' 1 – Media report says Jet asked employees to take an up to 25 percent cut in salaries as a part of a cost cutting measure 3 – Jet denies report that it cannot fly beyond 60 days, and dismisses conjecture of stake sale 9 – Airline defers board meet for first-quarter results Aug 11 – After State Bank of India SBI.NS chairman says Jet's loan is on the bank's watch list, Jet says it is regular in payment obligations to all banks 13 – Airline reaffirms that it is considering various options to meet its funding requirements 15 – Report says U.S. private equity firm Blackstone (NYSE:BX) Group LP BX.N is in talks to buy a stake in Jet's frequent-flier loyalty programme JetPrivilege 20 - Sources tell Reuters that private equity firm TPG Capital is considering investing in Jet, but is not close to finalising a deal 27 – Jet posts loss for the June-quarter, says it will inject funds and cut costs by more than 20 billion rupees in two years 4 – Government plans relief package for airlines 6 – Jet says it paid salaries to 84 percent of its employees after reports emerge that pilots warned 'non-cooperation' over salary default 20 – Income Tax department conducts survey at Jet's premises Over two dozen passengers on a Jet flight are treated for minor injuries after the plane loses cabin pressure 4 – Rating agency ICRA (NS:ICRA) downgrades https://www.icra.in/Rationale/ShowRationaleReport/?Id=73861 the company's long term loans and NCDs, citing impact of steep increase in jet fuel prices, rupee depreciation, delay in implementation of liquidity initiatives

Oct 18 – Report says Indian conglomerate Tata Group is in talks to buy stake in Jet. Jet calls report "speculative" 30 - U.S.-based Delta Air Lines Inc (NYSE:DAL) DAL.N expresses interest to buy Jet stake from promoter Naresh Goyal and Etihad Airways 5 – Report says Tata aims to buy the 51 percent stake in the airline owned by Naresh Goyal, and Etihad Airways' 24 percent stake, and merge Jet with Vistara 12 – Jet posts third straight quarterly loss, chief executive officer Vinay Dube expresses confidence in overcoming current challenges 13 – Tata Sons begins due diligence to buy Jet, reports say Jet executive says company is in talks with multiple parties for a stake sale in its loyalty program, and equity infusion in the airline 15 – Shares surge nearly 25 percent following reports that the debt-laden airline was nearing a rescue deal with Tata Sons; another report says the Indian government asked Tata to explore buying Jet 16 – Tata Sons says discussions on Jet is preliminary and no proposal has been made 20 – Tata Sons may go slow on Jet deal after some directors from Tata's board expressed concerns, according to media reports Nov 21 - The airline says news on Naresh Goyal, Etihad discussing merger of JetPrivilege with Jet Airways is speculative

Nov 22 - Independent director Ranjan Mathai resigns, citing rising pressure from other commitments 26 - Report says Naresh Goyal may hand over Jet Airways ops to Etihad Airways ($1 = 70.4550 Indian rupees)

Upheaval in the chemicals industry

A consumer and regulatory backlash threatens old business models

AMERICAN JURIES are well known for the generosity of their awards in civil cases. In 2002 a Californian jury fined Philip Morris, a tobacco company, a whopping $28bn for causing a heavy smoker’s cancer, only for the amount to be slashed to $28m by a judge on appeal. So Bayer, a German chemicals giant, told shareholders not to worry when a Californian jury in August ruled that Monsanto, an American firm it bought two months before, had to pay $289m to Dewayne Johnson, a former school caretaker. Mr Johnson alleged that Roundup, a glyphosate-based weedkiller, had caused his terminal cancer. The jury made a judgment based on “junk science”, Monsanto said. It would surely be overturned on appeal.

Last month a judge reaffirmed the verdict; the damages were trimmed, but to a still-hefty $78.5m. With Bayer’s admission on November 13th that the number of similar lawsuits had reached 9,300, it is clear that the bill for compensation could reach tens of billions of dollars.

Bayer still denies any link between Roundup and cancer. Its boss, Werner Baumann, says it will defend the cases “with all means”. But Mr Johnson’s lawyer, Robert F. Kennedy Jr, is sure that he will keep winning. “We’re going to win enough of these to be a problem for Monsanto and a poison pill for Bayer.” Monsanto makes 70% of its operating profits from Roundup-related products. Bayer has lost over €27bn ($31bn) in market value since the first ruling.

The verdicts have spread disquiet through the sector. Other big pesticide-makers, such as BASF of Germany and DowDuPont of America, have been hit almost as hard as Bayer (see chart), despite being less reliant on glyphosate. Investors are increasingly nervous of a backlash against chemicals products, both in agrichemicals, an industry with annual sales of $380bn, and in petrochemicals, which is worth around $800bn.

The past two decades increasingly look like a golden era. Between 2000 and 2015, listed chemical firms produced total returns to shareholders of 300%, three times higher than firms across all sectors. Surging consumption in China helped demand for their products rise faster than GDP growth. Several rounds of mergers have reduced price competition in the industry, particularly in agrichemicals. Falling trade barriers let firms move production to low-cost places.

These trends have reversed, notes Florian Budde of McKinsey, a consultancy. Demand from China is likely to slow, because consumers are buying fancier goods, such as posher cars, as well as services, both of which require less plastic. State-owned Chinese enterprises are muscling onto the global stage, encouraged by the government’s emphasis on self-sufficiency in chemicals, which exerts downward pressure on prices. Last year ChemChina bought Syngenta, a Swiss agrichemicals firm, for $43bn, for example. It is now grabbing market share from the Western giants in Africa and Latin America. Trade wars between America and China will hit the industry’s global supply chains, lifting costs.

But the sense that something deeper is wrong also troubles the industry. For the first time since the advent of industrial chemicals in the 19th century, bosses are worried about the long-term prospects of some of their best-selling wares, from the pesticides farmers spray on crops to the plastics used in millions of products.

The glyphosate saga symbolises one of these worries—a regulatory crackdown. Since the World Health Organisation declared in 2015 that the compound was “probably carcinogenic”, regulatory pressure on its use has increased. Last year President Emmanuel Macron promised to ban it in France by 2021. Germany also announced plans to limit its use earlier this month. Health Canada, a regulator, is reviewing its approval because of claims from environmental groups that Monsanto secretly influenced the scientific studies it used (Monsanto has denied any such thing). Many firms are bracing themselves for the European Union to decide not to renew its licence for glyphosate after 2022. Also in regulators’ sights are hormone-disrupting chemicals such as bisphenol A, found in many plastic household items.

Regulators are not the only source of concern. Consumers in many places are showing themselves ready to pay more for food involving little or no use of pesticides. Farmers in turn are switching to “precision” methods, entailing more targeted use of chemicals or robots to do weeding. Bayer executives fear this shift could hit demand for its pesticides by as much as 20-30% over the next decade, says Markus Mayer, an analyst at Baader Bank, an investment bank near Munich.

Precision farming “will change how we think about farming”, says Sam Watson Jones of the Small Robot Company, a British startup. It is developing three small autonomous robots—called Tom, Dick and Harry—which will only feed and spray the specific plants that need it rather than dusting an entire field with chemicals from a tractor or plane. He claims that his company’s system will cut chemical use, and carbon emissions, by up to 95%.

Agrichemical salespeople are not alone in anticipating disruption. The petrochemicals industry is experiencing a backlash against single-use plastics, a key source of demand for its product. Spencer Dale, chief economist of BP, an oil giant, has estimated that more regulation of plastic could lower global demand for petrochemicals by around a sixth by 2040. China’s crackdown on waste will have a particularly big impact on demand for plastic. In January it banned imports of plastic rubbish from other countries; it is tightening up compliance with its rules and taxes on plastic bags.

Chemicals bosses are well aware of these pressures. Responding to them may be easiest in agrichemicals. Here at least, digitisation has scope to answer consumers’ concerns about indiscriminate use of chemicals, and also to generate a new stream of profits. Many firms are racing to offer digital-farming tools, which can provide advice to farmers using big data, satellite pictures and weather information.

The market leader in this field in America is Monsanto-Bayer’s FieldView platform, produced by a subsidiary called Climate; in Europe it is BASF’s Xarvio app. Some of Bayer’s executives think that, however much grief Roundup causes, its purchase of Monsanto was worthwhile just to get its hands on Climate’s technology, which farmers already pay to use on 60m acres of fields in America. When regulation of glyphosate hits in Europe, Bayer can potentially replace revenues from chemicals with revenues from data, says Mike Stern, the company’s head of digital farming.

But there are still doubts over whether digital husbandry can make up for the revenues that are at risk. Five years after Monsanto bought Climate for nearly $1bn, it still produces only a tiny slice of overall revenues. Mr Stern says that this is because, like any young tech firm, it is focusing on market share rather than profit. But it is also possible that tractor-makers, such as John Deere of America, turn out to be better at selling digital tools for precision farming than chemical firms, says Oliver Lofink of PAConsulting.

“This case is way bigger than me,” said Mr Johnson, who is dying of non-Hodgkin lymphoma, after the first verdict came in. He wasn’t wrong.

Catastrophic loss

https://www.zerohedge.com/news/2018-11-18/optionsellerscom-goes-dark-after-catastrophic-loss-event-natgas-short-squeeze

The next capitalist revolution

Market power lies behind many economic ills. Time to restore competition.

Capitalism has suffered a series of mighty blows to its reputation over the past decade. The sense of a system rigged to benefit the owners of capital at the expense of workers is profound. In 2016 a survey found that more than half of young Americans no longer support capitalism. This loss of faith is dangerous, but is also warranted. Today’s capitalism does have a real problem, just not the one that protectionists and populists like to talk about. Life has become far too comfortable for some firms in the old economy, while, in the new economy, tech firms have rapidly built market power. A revolution is indeed needed—one that unleashes competition, forcing down abnormally high profits today and ensuring that innovation can thrive tomorrow.

Countries have acted to fuel competition before. At the start of the 20th century America broke up monopolies in railways and energy. After the second world war West Germany put the creation of competitive markets at the centre of its nation-building project. The establishment of the European single market, a project championed by Margaret Thatcher, prised open stale domestic markets to dynamic foreign firms. Ronald Reagan fostered competition across much of the American economy.

A similar transformation is needed today. Since 1997 market concentration has risen in two-thirds of American industries. A tenth of the economy is made up of industries in which four firms control more than two-thirds of the market. In a healthy economy you would expect profits to be competed down, but the free cashflow of companies is 76% above its 50-year average, relative to gdp. In Europe the trend is similar, if less extreme. The average market share of the biggest four firms in each industry has risen by three percentage points since 2000. On both continents, dominant firms have become harder to dislodge.

Incumbents scoff at the idea that they have it easy. However consolidated markets become domestically, they argue, globalisation keeps heating the furnace of competition. But in industries that are less exposed to trade, firms are making huge returns. We calculate the global pool of abnormal profits to be $660bn, more than two-thirds of which is made in America, one-third of that in technology firms (see Special report).

Not all these rents are obvious. Google and Facebook provide popular services at no cost to consumers. But through their grip on advertising, they subtly push up the costs of other firms. Several old-economy industries with high prices and fat profits lurk beneath the surface of commerce: credit cards, pharmaceutical distribution and credit-checking. When the public deals with oligopolists more directly, the problem is clearer. America’s sheltered airlines charge more than European peers and deliver worse service. Cable-tv firms are notorious for high prices: the average pay-tv customer in America is estimated to spend 44% more today than in 2011. In some cases public ire opens the door to newcomers, such as Netflix. Too often, however, it does not. Stockmarkets value even consumer-friendly entrants such as Netflix and Amazon as if they too will become monopolies.

Rising market power helps solve several economic puzzles. Despite low interest rates, firms have reinvested a stingy share of their bumper profits. This could be because barriers to competition keep out even well-funded newcomers. Next, since the turn of the millennium, and particularly in America, labour’s share of gdp has been falling. Monopolistic prices may have allowed powerful firms to eat away at the purchasing power of wages. The labour share has fallen fastest in industries with growing concentration. A third puzzle is that the number of new entrants has been falling and productivity growth has been weak. This may also be explained by a lack of competitive pressure to innovate.

Some argue that the solution to capital’s excesses is to beef up labour. Elizabeth Warren, a possible American presidential candidate, wants to put more workers on boards. Britain’s Labour Party promises compulsory employee share-ownership. And almost everyone on the left wants to reinvigorate the declining power of unions (see Briefing). There is a role for trade unions in a modern economy. But a return to 1960s-style capitalism, in which bloated oligopolies earn fat margins but dole cash out to workers under the threat of strikes is something to be avoided. Tolerating abnormal profits so long as they are distributed in a way that satisfies those with power is a recipe for cronyism. Favoured insiders might do well—witness the gap between coddled workers and neglected outsiders in Italy. But an economy composed of cosy incumbents will eventually see a collapse in innovation and hence a stagnation in living standards.

Far better to get rid of rents themselves. Market power should be attacked in three ways. First, data and intellectual-property regimes should be used to fuel innovation, not protect incumbents. That means liberating individual users of tech services to take their information elsewhere. It also entails requiring big platforms to license anonymised bulk data to rivals. Patents should be rarer, shorter and easier to challenge in court.

Second, governments should tear down barriers to entry, such as non-compete clauses, occupational licensing requirements and complex regulations written by industry lobbyists. More than 20% of American workers must hold licences in order to do their jobs, up from just 5% in 1950.

Third, antitrust laws must be made fit for the 21st century. There is nothing wrong with trustbusters’ remit to promote consumer welfare. But regulators need to pay more attention to the overall competitive health of markets and to returns on capital. America’s regulators should have more powers, as Britain’s do, to investigate markets that are becoming dysfunctional. Big tech firms should find it much harder to neutralise potential long-term rivals, as Facebook did when it acquired Instagram in 2012 and WhatsApp in 2014.

These changes will not solve every ill. But if they drove profits in America to historically normal levels, and private-sector workers got the benefits, real wages would rise by 6%. Consumers would have greater choice. Productivity would rise. That might not halt the rise of populism. But a competition revolution would do much to restore the public’s faith in capitalism.

Stock exchanges find novel uses for blockchain

Australia, Singapore and Switzerland are among those experimenting with cryptotechnology

technology underlying bitcoin and other cryptocurrencies, was designed with an ideological aim: to sidestep central authorities and governments. But many people have become intrigued by its practical uses, such as updating back-office processes. And few institutions have shown more interest in such applications than financial exchanges.

Although stock trades are often made in milliseconds by algorithms, completing them involves co-ordinating payment and delivery among a mess of databases and then reconciling the records. In big financial centres trades take two full days to settle. Some stock exchanges wonder whether blockchain’s distributed, tamper-proof ledgers and immutable and transparent transaction records could speed up and simplify the process.

Exchanges from America and Australia to Switzerland and Singapore are studying the concept. Australia’s stock exchange, the asx, has moved furthest towards using blockchain to replace its main clearing and settlement platform. It has been testing technology from Digital Asset, an American firm, and will go live in mid-2021. And on November 11th sgx, Singapore’s stock exchange, and the Monetary Authority of Singapore (mas), its central bank, announced a prototype using blockchain for delivery, payment and settlement of assets.

These projects are strikingly unlike the vision of blockchain enthusiasts. asx’s, for example, uses ledgers but remains quite centralised. A single counterparty, asx itself, must approve participants (which removes the need for energy-intensive verification and updating of records, as with bitcoin). Though open to all, only some banks and brokers will opt for direct access. Everyone else must trade through them. In contrast to the complete transparency of the bitcoin ledger, market participants will not have access to the whole dataset (for legal reasons, but also so they do not have to give away their positions). And settlement will not be in real time.

Why, then, bother? Kelly Mathieson of Digital Asset says her firm’s purpose-built programming language, daml, which enables financial contracts to be automated, will make further innovation easy. The tedious processes of reconciliation, she says, will be drastically simplified.

As soon as next year investors will be able to see the result of another, smaller experiment. six, the owner of the Swiss stock exchange, will launch a separate digital platform for trading assets, such as stocks and bonds, in “tokenised” form—that is, in a format blockchain can handle. Tokenising will eliminate minimum trade sizes, says Thomas Zeeb of six. It will also make a much wider range of assets tradable. Mr Zeeb has already been approached by a museum that wants to tokenise its art collection, as a novel source of funding. Investors would gain exposure to the value of the art going up or down through such tokens, which they could trade.

All these projects have, or plan to obtain, official blessing; after all, exchanges are highly regulated. But the Singaporean project shows the value of seeking more than a nod of approval. mas’s involvement meant the prototype did not limit itself to stock trading or settlement, but also looked at digital currency issued by the central bank. Quite a turnaround for a technology designed to circumvent governments.

The Intrinsic Value Of Gold-Backed Cryptos

A long time ago in a galaxy far, far away we wrote a series of articles arguing that bitcoin is not money and is not sound. Bitcoin was skyrocketing at the time, as we wrote most of them between July 30 and Oct 1 last year.

Back in those halcyon days, volatility was deemed to be a feature. That is, volatility in the upward direction was loved by everyone who said that bitcoin is money, in their desire to make money. In the first instance of the word, the term money refers to bitcoin. In the second, it refers to the dollar. The same problem we see with gold:

1. bitcoin is money
2. bitcoin is going up
3. buy bitcoin now
4. sell bitcoin later at a higher price
5. to make money

From what we remember from a logic class in the philosophy department back in university (in the halcyon days long before the halcyon days of bitcoin skyrocketing), there may be a fallacy or two in here that have Latin names.

Anyways, in our bitcoin articles, we were careful not to get into the game of setting price targets. We didn’t know (and no one else did either, as it turned out) where the price would go. Other than, we did say that bitcoin has no firm bid and its price will drop when the speculators turn. Bitcoin had just hit $3000 when our series began. We were careful to say that the price could go a lot higher, and we made no prediction as to how high or when it would turn.

We added one more article on December 10. That turned out to be days before the top, though we didn’t know it at the time. Neither did those presuming to give you financial advice, telling you to buy it. We didn’t call the top (the article was an argument that gold is money because its marginal utility does not decline).

In today’s article, we are not just trying to say “we told you so.” We have a point to make. We want to revisit bitcoin in light of an interesting development.

The Ultimate Stablecoin

This week, bitcoin fell hard. It closed last week around $6,400. And this week, it was around $5,400. This is $1,000 in a week, or about another 15 percent. That is on top of the epic drop from its high near $20,000 set about 11 months ago.

When bitcoin was rising, its volatility was a feature. But once it began falling, then this feature became a bug. Probably for this reason, there has been the rise of so called stablecoins. Tether, the most prominent, is tied to the pseudo-stable dollar.

And, though they are generating much less buzz (for now), there is a better class of stable crypto currencies, which are redeemable in gold (e.g. Digix Gold) or even gold legal tender coins (e.g. Quintric). We like to think we helped kick off the concept with our piece in April 2013, where we said:

“The time may not be right yet, but we would love to see a similar technology to provide a gold-redeemable cryptographic based currency. “BitGold” would not be based on the labor theory of value (i.e. “mining” to generate new coins), the quantity theory of money (i.e. absolute cap on the quantity of coins). It would not be plagued by a ridiculous bid-ask spread. In short, it would behave as dollar bills did before the advent of the Fed. Arbitrage would set the value of BitGold…”

We like to think of things in terms of preferences. We ask the question what would happen in the following scenario. Suppose investors can buy one of two different bonds from the same issuer, each subject to the same credit risk, and the same maturity. The only difference is that one promised to pay $120,000 in 2028, but the other promised 100 ounces of gold. Given this simple choice, we are confident that many will choose the gold.

Similarly, if savers had a choice between the irredeemable bitcoin and a gold-redeemable coin, assuming equality utility, security, indelibility, etc., which would they choose? And now with bitcoin falling, it’s obvious.

There’s just one little problem with gold redeemable crypto currencies.

Making Gold Cryptocurrencies Work

There is a cost to store and administer the gold. So there are three conventional ways that an issuer can cover this cost. One is simple enough. Charge for storage. Digix, for example, charges 60bps per annum. That works for the company, but of course to the saver it’s negative interest. Saving becomes a Sisyphean task (as we wrote about the Swiss franc) when there is a constant drip-drip-draining away of your savings. No one would choose to pay 60bps per year unless they are expecting big capital gains (in dollars).

The Second is to charge for transactions. Digix also levies a 0.13 percent fee on all transfers. That may not seem like a lot, but it is a form of friction that will inhibit circulation. And there is another problem with it, at least for those companies who rely on it. We’ll get to that in our discussion of the third method of charging.

Issuers can charge a markup when people buy the gold in their system, and a markdown when they sell. This is subject to the same problem as the transaction fee.

The issuer is betting that transaction volume will be at least a certain percentage of total gold in storage. This is because they are paying the cost of the latter, by charging fees on the former. It is a bet on a low stocks-to-flows ratio (or high flows-to-stocks, if you prefer). We don’t really like a business model that is based on making such bets.

So does that leave us with negative interest on gold deposits?? No, and to see why we need to look at gold currency back in the time of the classical gold standard of the 19^th century. And we need to think of this from the point of view of the banks.

Bank notes were convenient: not subject to wear and easier to carry compared to gold coins, and available in more convenient denominations. But why would banks offer this service? How did they make money from it?

Banks did not issue notes only to put gold into a warehouse, incurring costs to store, insure, and administer it. They had no way to charge for storage. If the bank issued a $20 bill, it had to promise to redeem it for one ounce of gold (it was actually 0.9675oz but we want to keep this simple), whether the next day or the next decade.

And obviously they had no way to charge for transactions. The bank did not know or control if you paid that bill to Andy who paid it to Bob, who gave it to his son Charlie, who paid it to Donny, who gave it to Erica, etc.

Of the conventional options, that would leave only charging for deposit and withdrawal. That is, you bring in more than a dollar’s worth of gold to get a dollar-redeemable bill. And/or when you redeem, you get less than a dollar’s worth of gold. The banks could have tried this, but no one would have agreed to it.

Also, if you want circulation, you can’t impose such frictional costs. Think of it as a bid-ask spread, when you give up your gold to get paper, you get a bit less paper than the gold you gave(!) And vice versa, when you give up your paper to get back your gold, you give up more paper to get the same gold.

Money must be the most marketable commodity. The wider the spread, the less marketable. Historically, we know there was no spread on gold-redeemable currency.

To understand how the banks could offer this service for free, we need to introduce a paradigm shift. Paradigm shifts can be explained easily (e.g. at Keith’s last company, DiamondWare, the technology was called “3D voice”). But to really get your arms around it, takes effort and time.

Banks issue notes to raise capital.

Gold stored in a vault has no utility, as Warren Buffet pointedly reminds us. No bank issued notes to put gold into a vault.

Banks issued notes to raise capital to invest in an asset that paid a yield. In the 19^th century, financial instruments were denominated in gold and paid their yields in gold. Whereas today, nearly everything is denominated in dollars and pays a dollar yield. Even the gold forward curve is a dollar yield on dollars, which happens to use gold (i.e. start with dollars, buy gold and sell gold forward, pocketing the basis spread).

The business model of note issuance was simple, and clear. Banks took gold, issued a note, and invested the gold. They paid nothing on the notes, but earned something on the assets they bought (i.e. bills of exchange). This was a simple, boring, and safe business.

Today, there is no bills market. Alas, like so much else, it was destroyed in the wake of the Great War (disclosure: Monetary Metals is developing a market for yield on gold). But there is a more fundamental problem.

Did we mention the paradigm shift that’s necessary? Did we say it’s hard for people to get their arms around? Today, many think of gold in terms of rising price (or hoped-for rising price), of a gold account in terms of spending at higher prices (i.e. free money). And, of course, all Right Thinking People are against that fractional reserve bankster scam...

That leaves them paying for storage, depositing, withdrawing, and transacting. Which is great if the purpose is for speculation. Or else, it leaves the issuer taking the risk of low transaction volumes, which is not good for anyone.

A yield is the foundation of the gold standard, if gold is to circulate. It enables zero spread, zero storage costs, and zero transaction costs. And it does not put the issuer at risk, based on assumptions that may or may not be true.

Gold was back then, and still is now, the best backing and best thing which people can redeem their currency for. Back then, currency was paper because that was what was possible with 19^th century technology.

Today, not only will people not be carrying around gold coins (on the rope belt they are not wearing to tie the sack cloth robe they don’t walk around the streets in). They won’t be carrying pieces of paper either. Nor likely even old school credit cards. It will be an app on the phone.

Crypto currency is a great fit for such an app. Crypto backed by gold is a better stable coin than crypto backed by dollars. And crypto backed gold is the ideal, because it will be a free service for users.

Supply and Demand Fundamentals

The prices of the metals rose, gold +$11 and silver +$0.25.

The question on everyone’s mind (including ours) is: what will cause a change in the gold price trend, or what will make gold go up in a large and durable way? And that leads to another way of looking at this question.

Price is set at the margin.

We have covered several times Warren Buffet’s pointed (and disingenuous) comment that gold has no utility. It just sits, and there is a cost for it to sit. And an opportunity cost.

So why do people buy something which has no utility and no return? One, which we discuss a lot, is speculation. They buy whatever’s going up, in an attempt to cash in on the rise. So let’s not dwell on this.

A second reason is fear of counterparty default. Third, is gold is a non-expiring hedge for monetary collapse and/or a currency regime change. This is a broader version of simple counterparty default.

Right now, General Electric is in the news. Its investment grade rated bonds are trading like junk bonds. This is like an echo from the past. Bear Sterns retained its investment-grade rating until just before its demise.

GE has about $115 billion in debt. If it defaults, that could put fear into a lot of investors. They will certainly buy Treasury bonds (which are defined as risk free). Will they buy gold, which is the only financial asset which is truly free of default risk? Maybe.

However, in addition to GE we know that a significant fraction of bonds out there are issued by so-called zombie corporations, whose profits are less than interest expense. Rising interest rates can only have increased the percentage, though the increased cost kicks in with a lag (as each bond matures and must roll). In addition to the problem of rising default risk from these companies, there is the risk if enough hits at once, that the credit market they depend on, goes no bidagain as it did in 2008.

Of course, if their bonds are impaired then their equities are worthless. Stocks will be crashing in this scenario.

We raise the issue of price being set at the margin to make a point. In this scenario, the marginal buyer of gold will not be the speculator. It will be the mainstream investor who is desperate to protect himself from a financial system going mad again.

When will this happen? Watch for news of GE and other major debtors sinking deeper into trouble.

As to systemic default risk, i.e. monetary collapse, it’s early yet. There are some peripheral currencies like the bolivar and lira that could go away soon. But their troubles are widely known, and visible far in advance. We would not expect their demise to have much impact on the world’s monetary order (though of course it is horrific for the people who live in Venezuela and Turkey).

Other currencies are also in trouble—we have written a lot about the franc. It is impossible to predict the timing of such a thing, though our gut feeling is that it is still a ways out.

As to the de-dollarization, loss-of-reserve-status, end-of-petrodollar, gold-backed-yuan, SDR-to-replace-USD ideas, we say: rubbish. The dollar will get stronger from here, if not in terms of gold then as measured by other currencies. Panicky people in Istanbul do not think “let me buy Brazilian reals, Russian rubles, Indian rupees, and Chinese yuan" because someone coined the glib term “BRICs”. They do not think “I will buy me some Saudi riyal because, petro.”

They buy USD.

So we end on a conclusion we have reiterated many times. When gold goes to $10,000 it is not gold going up. It is the dollar going down.

It is inevitable that the dollar will go down. Keith just gave a talk at an Austrian economics conference in Madrid “There Is No Extinguisher of Debt” (paper to be published soon). The collapse of the dollar is baked into the mathematics.

People could buy gold today at an 88 percent discount from that price. But do yourself a favor. Watch any politician on TV. Watch a Republican promise to “grow our way out of the debt”. Or watch a Democrat promise a free university education to everyone. Watch even many libertarians promote a Universal Basic Income(!)

If you think they don’t understand, you are right. But the vast majority of voters support these politicians. The voters, too, don’t understand. And the investors too.

Buying gold is a non-expiring hedge. But only people who perceive a need to hedge, will buy the hedge. The rest may think that stocks are a bargain here, being down almost 7 percent from the high last month. So far in this incredible boom following the crisis, every time people who bought the dip were rewarded.

Are we getting close to the point where it won’t be? If GE is any indication, if GE will have a contagion effect (remember that word?) then the answer is likely yes.

Now let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.

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Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). It fell this week.

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Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.

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A drop in the dollar (i.e. rise in the price of gold) and we see the scarcity of gold (i.e. cobasis) drop. There was buying of futures and some physical metal.

The Monetary Metals Gold Fundamental Price rose $9, $1,314 to $1,323.

Now let’s look at silver.

(Click to enlarge)

Keep in mind the approaching First Notice Day of the December contract. So after the big spike up in the cobasis last Friday, this week it’s down with the price of the dollar, measured in silver (i.e. rising silver price).