I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Friday, May 31, 2019

The Safe Haven of Regulation

Big tech has historically been lightly regulated. True, both IBM and Microsoft were subject to regulation in 1956 and 2001, respectively, to limit their monopolistic powers. But neither suffered dents in their financial returns as a result (attorney fees notwithstanding), and the tech industry innovated in ways that made their respective monopolistic states very short lived. Today's cash-gushing tech companies such as Oracle, SAP, and ironically the most valuable of them all, Microsoft, are all utility providers that enjoy light regulation. The light-touch regulation party will not end for them any time soon.

Facebook is not big tech, it is big media. Facebook enjoys - for now, anyway - the status of being a lightly regulated cash gushing media utility. Although it has become ubiquitous, it makes money in ways that national regulators of media are still years away from catching up with. That regulatory lag means Facebook is effectively regulated by national and trans-national governmental bodies such as the US Congress, UK Parliament, and European Commission. That has been a boon to Facebook as national legislatures have many more things to concern themselves with than a media outlet.

While the threat of regulation creates uncertainty, the bigger challenge facing Facebook isn't regulation but the threat of being both a tool and political beach ball for many, many more election cycles to come. To the average citizen of any country, it may stand to reason that the nature of media outlet that Facebook has become needs codified regulation spanning everything from what gets published to who has decision and economic rights over user data. But to the political classes, Facebook is heads-I-win-tails-I-win. If people are easily manipulated through Facebook in the actions they take from how they vote to how they immunize their offspring, Facebook is a channel to be exploited. If there is evidence that political opponents have used disreputable tactics to manipulate people through Facebook for their own purposes, Facebook is a convenient punching bag. The downside risk to Facebook is that while it may enjoy light formal regulation for some time to come, it will be continuously on trial in the court of public opinion. That isn't a fun problem for marketing to solve, or for their lobbyists to navigate. Investors get tired of this.

Facebook are evidently considering going into the payments business. By entering into payments, Facebook would be choosing to become a regulated business. Facebook would be regulated by bodies such as the US Fed and the UK's Payment Systems Regulator and their equivalents in every jurisdiction where they offer payment services. That introduces technical jargon that is more specific than political jargon, which is easier for the regulated to succeed under. Where there is regulation by rule the burden is on the regulator to prove non-compliance, whereas today Facebook is regulated by principle, and as a result must argue it is neither out of compliance with societal norms nor complicit in acts by those who use it in ways that are.

Entering into payments is a logical first step into the four functions of finance that John Kay identifies in Other People's Money: facilitate payments, match lenders with borrowers, manage personal finances across lifetimes and generations, and manage risks associated with everyday life. Once in payments, it isn't difficult to imagine Facebook creating a credit function to provide microloans that facilitate purchases. Over a span of a few years, it isn't difficult to imagine Facebook leveraging their trove of data to offer algorithmic solutions to manage personal finance and manage risks. Financial services would offer a lot of growth runway: WeChat derives 60% of its revenue from payments and only 30% from advertising, and payment processors like PayPal and Square write a lot of loans to merchants.

It will not be easy to change from being an unregulated to regulated company (it's a bad idea to break things where people's money is concerned), costs will go up (compliance isn't cheap), and the potential for bad headlines - money laundering, robbed wallets - will only increase. But these are comparatively benign problems for a company with a product that has been used in the commission of numerous felonies.

Facebook has largely escaped regulation to date. However, its enormous size and influence, its economic power, and its existence as a lightly-regulated multi-jurisdictional entity all suggest that regulation is coming. The regulatory lag between old media (print and television) and social media make it clear that governments are not prepared for the task. By redefining its business as a commerce platform rather than a media platform, Facebook would be able to choose its regulators rather than wait for legislatures to pick one - or worse still, create one - for them. It would then have the pick of mature regulators, agencies that are less likely to be politically charged than an upstart chartered specifically for the purpose of regulating social media. A mature regulatory agency would also bring an imprimatur that carries weight with consumers and politicians worldwide.

As a move designed to defend their greatest asset - data - regulating key aspects of the business under the auspices of financial services would be pretty shrewd indeed.