Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience

The New York Times reports,

The fall of Mr. Ben Ali marked the first time that widespread street demonstrations had overthrown an Arab leader. And even before the last clouds of tear gas had drifted away from the capital’s cafe-lined Bourguiba Boulevard, people throughout the Arab world had begun debating whether Tunisia’s uprising could prove to be a model, threatening other autocratic rulers in the region….

Because the protests came together largely through informal online networks, their success has also raised questions about whether a new opposition movement has formed that could challenge whatever new government takes shape. (emphasis mine)

This represents another validation of our prediction when I wrote,

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Aside from the first People Power at an Arab nation where the changes in the political order appear to be significantly influenced by the rapidly diffusing adaption to connectivity based technology platforms, the Tunisian experience suggests that People Power as a political concept as presciently advanced by the founder of modern political philosophy in France, Etienne de la Boetie, will become more accepted from the grassroots levels or become more widespread globally as more people will learn about their inherent power over governments.

To quote Etienne de la Boetie in the Politics of Obedience

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself, cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it.

In short, people power and the web would make a mighty combination over the tyranny of governments.

So governments will try to fight these via the introduction of regulations and control of the web which would limit the democratization of information.

As one of the five things we should worry about in 2011 Cato’s Dan Mitchell rightly observers, (bold emphasis mine)

The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.

Creative Destruction: 20 Things That Have Gone Obsolete From Last Decade

Below is a showcase of capitalism’s creative destruction-a hallmark of progress and innovation.

From Huffington Post: (hat tip Prof Mark Perry)

The last ten years have brought us a windfall of new gadgets and gizmos, and with them, a new way of life.

Since 2000, we've gained iPods and iPads, Travelocity and Twitter, Facebook and Foursquare, BlackBerry smartphones and Android devices, Xboxes and Wiis, among many other new services, sites, and electronics. We're now poking, tweeting, Googling, and Skyping.

See slide here

What this means:

Jobs had been created (in new flourishing industries) and lost (on obsolete sectors).

While changes do not affect everyone similarly, the net result is a positive or a net gain for consumers (and the society) as seen in:

-increased conveniences brought about by better quality of products and services

-greater access and selection

-heightened productivity

-enhanced wellbeing

-added purchasing power (via growth deflation-more supplies)

Overall, real wealth has increased (despite government’s inflationism)

The Power of Slow Change: Transition To The Information Age Economy

Society evolves. Along with it the industry.

I have been saying that old paradigms always gives way to a new order. Nothing is ever static.

And in the context of the industry, where agriculture gave way to industry, today the transition to the information age seems to be deepening as we move away from the paradigm of the industrial era.

Even the stock market seems to be saying so.

The following charts are from Bespoke Invest

One would notice that the technology sector in the US has mostly led, or if not placed a very close second (except 2002) during the US mortgage bubble days, based on the market cap industry weightings since 1998.

The sustaining dominance of the technology sector has been echoing on such transition where the rapid advances in technology translates to more dispersion of knowledge, specialization and a more roundabout production process—all of which would only be sustained under free market conditions—a dynamic which globalization appears to have accommodated.

Of course, not the everybody benefits from any changes. The important thing is the NET benefit from creative destruction.

We should see more of this dynamic percolate across the world.

Quote of the Day on Self Learning And Death of Credentials

Says Richard Kaalgard at Forbes Magazine (Hat tip: Professor Arnold Kling)

“Self-learning rules. We are at the beginning of the Death of Credentials. The ROI for 95% of college educations will be negative.”

That’s just one of the insightful “10 cheap revolution” or “creative destruction” rules cited by Mr. Kaalgard in today's transition to the information age.

This has been one of my themes wherein I noted that online learning has the potential to pop the inflating bubble at the Philippine Education System.

And also, if self learning and death of credentialism determines the jobs or career of tomorrow, then what good is it to extend the domestic education cycle?

Technology And The Growing Dysfunctionality Of The Political Institutions Of The Old Order

In the book Revolutionary Wealth, Alvin and Heidi Toffler writes,

``It becomes clear that what America world [strikethrough mine] confronts today is not simply a runaway acceleration of change but a significant mismatch between the demands of the fast growing new economy and the inertial new institutional structure of the old society. Can a hyperspeed, twenty-first century info-biological economy continue to advance? Or will society’s slow paced, malfunctioning obsolete institutions grind to a halt? Bureaucracy, clogged courts, legislative myopia, regulatory gridlock and pathological incrementalism cannot but take their toll. Something it would appear, will have to give. Few problems will prove more challenging than the growing dysfunctionality of so many related but desynchronized institutions." [bold emphasis added]

Some recent examples where such conflict applies (hat tip David Boaz)

From the Washington Post, (bold emphasis mine)

A satellite TV station co-owned by Rupert Murdoch is pulling in Iranian viewers with sizzling soaps and sitcoms but has incensed the Islamic republic's clerics and state television executives.

Unlike dozens of other foreign-based satellite channels here, Farsi1 broadcasts popular Korean, Colombian and U.S. shows and also dubs them in Iran's national language, Farsi, rather than using subtitles, making them more broadly accessible. Its popularity has soared since its launch in August...

Satellite receivers are illegal in Iran but widely available. Officials acknowledge that they jam many foreign channels using radio waves, but Farsi1, which operates out of the Hong Kong-based headquarters of Star TV, a subsidiary of Murdoch's News Corp., is still on the air in Tehran.

Viewers are increasingly deserting the six channels operated by Iranian state television, with its political, ideological and religious constraints, for Farsi1's more daring fare, including the U.S. series "Prison Break," "24" and "Dharma and Greg."

From the Wall Street Journal,

A move by Pakistan to begin monitoring for anti-Islamic content on major websites—including those run by Google Inc. and Yahoo Inc.—is the latest sign that censorship looms as a threat to Internet companies in a number of countries.

The Pakistan announcement on Friday came a day after a communications minister in Turkey, which has blocked thousands of sites including Google's YouTube, said the video site was "waging a battle against the Turkish Republic" and suggested that the situation could change if Google were to register and pay taxes.

Authorities in Pakistan on Friday said they would start monitoring major Internet search engines, including Google and Microsoft Corp.'s Bing.com, as well as the e-commerce giant Amazon.com Inc. The move follows an action last month against social-networking site Facebook Inc., which Pakistan blocked for several weeks after it hosted a page in which users could post pictures of the Prophet Muhammad. The portrayal of Muhammad is forbidden by Islam, and the ban was lifted when the site removed the page...

Earlier this year Turkey's communications ministry extended the ban to other Google sites, a move that appeared to be triggered by a separate tax battle with the U.S. giant. As a result, Turks suddenly lost direct access to GoogleMaps and other sites, as well as to YouTube. However, many ordinary users have been able to circumvent the closures.

The opposition People's Republican Party, usually a fierce defender of Ataturk's honor, on Thursday attacked the government in parliament for creating what one parliament member called a "culture of censorship" in the country, including Internet censorship.

Some of Turkey's top leaders have sought to distance themselves from the Internet closures. President Abdullah Gul earlier this month sent out a public message through his account on micro-blogging site Twitter.com, saying he "cannot approve of Turkey being in the category of countries that bans YouTube [and] prevents access to Google."

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Mary Meeker on Web 2.0: Bet On Mobile And Social Networking Trends

GIGAOM.com showcases the projections of “Queen of the Net” or Morgan Stanley's Internet guru Mary Meeker.

All the following quotes from GIGAOM.com

Ms. Meeker first predicts the major dynamic:

"Two overwhelming trends that will affect consumers, the hardware/infrastructure industry and the commercial potential of the web: mobile and social networking."

Next is the evolution of the technology cycle from the Desktop to Mobile.


"The Morgan Stanley analyst says that the world is currently in the midst of the fifth major technology cycle of the past half a century. The previous four were the mainframe era of the 1950s and 60s, the mini-computer era of the 1970s and the desktop Internet era of the 80s. The current cycle is the era of the mobile Internet, she says — predicting that within the next five years “more users will connect to the Internet over mobile devices than desktop PCs.”

In addition, internet take up will increasingly migrate to the mobile spectrum.

"Meeker says that mobile Internet usage is ramping up substantially faster than desktop Internet usage did, a view she and her team arrived at by comparing the adoption rates of iPhone/iPod touch to that of AOL and Netscape in the early 1990s"

And in terms of application, connectivity is now largely driven real time via social networking platforms as email is gradually being dislodged as the main instrument of communication.

"On the social networking side, Meeker’s report notes that social network use is bigger than email in terms of both aggregate numbers of users and time spent, and is still growing rapidly. Social networking passed email in terms of time spent in 2007, hitting about 100 billion"

Another feature of the rapid adaption of technology would be the "creative destruction" as toll carriers lose ground on the increasing use of data.

"But that mobile boom will take its toll on carriers, Meeker says, because mobile Internet use is all about data."

As you can see the next set of "industrial" wreckage (and job losses) is already becoming palpable, as people (consumers) speedily migrate to new technologies to 'enhance' their web 2.0 based lifestyles.

This also means business models will likewise be changing, where those attuned to these changes are likely to benefit, while those who can't cope up with the swiftly altering consumer demand are likely to perish.

This only implies a deepening transition to web based businesses as new industries are likely to be created.

"One of the implications of mobile access is a growth in ecommerce, says Meeker, featuring things such as location-based services, time-based offers, mobile coupons, push notifications, etc. In China, the success of social network Tencent proves that virtual goods can be a big business, she says — virtual goods sales accounted for $2.2 billion worth of the company’s revenue in 2009 and $24 in annual revenue per user. Online commerce and paid services made up 32 percent of mobile revenue in Japan in 2008, up from just 14 percent in 2000. Meeker’s report suggests that the rest of the world — which is still below the 14 percent-mark — could see much the same trajectory over the next 10 years.

Finally Ms. Meeker gives us where the revenue side is likely to emanate;

"Meeker says that users are more willing to pay for content on mobile devices than they are on desktops for a number of reasons, including:

* Easy-to-Use/Secure Payment Systems — embedded systems like carrier billing and iTunes allow real-time payment

* Small Price Tags -– most content and subscriptions carry sub-$5 price tags

* Walled Gardens Reduce Piracy -– content exists in proprietary environments, difficult to get pirated content onto mobile devices

* Established Store Fronts -– carrier decks and iTunes store allow easy discovery and purchase

* Personalization -– more important on mobiles than desktops

Read Ms. Meeker's presentation via GIGAOM.com

Ms. Meeker appears to be validating what we think as a massive shift in the wealth creating process, which had been predicted by Alvin and Heidi Toffler in Revolutionary Wealth,

The Tofflers: "Several forces have been converging to drive the acceleration needle of the gauge. The 1980s and '90s saw a global shift towards liberal economies and hypercompetition. Combine that with the eighteen-month doubling rate of semi-conductor chip power and you get near-instantaneous financial transactions. (Currency traders can find out about a trade within two hundred milliseconds of its completion.) Put differently, behind all these pressures is the historic move to a wealth system whose chief raw material-knowledge-can now move at nearly real-time speed. We live at a pace so hyper that the old law that "time is money" needs revision. Every interval of time is now worth more money than the last one because in principle if not practice, more wealth can be created during it."

Is The Newspaper Industry Dead? Probably Not If It Is For Free

We talked about the potential fate of the newspapers in the advent of the internet [see Creative Destruction: Newspaper Industry Headed For The Dinosaur Age?], where traditional newspapers represent as the "old industrial age economy", which currently suffers from "creative destruction" from the transition to news based on the web or the "information economy'.




Nevertheless, this interesting commentary and picture from the Wall Street Journal Blog,

``If Ben Bernanke drops newspapers from a helicopter, will it save the beleaguered publishing industry?

``Probably not. But the plucky Hong Kong newspaper The Standard is using a cartoon drawing of such a fantastical occurrence to brag about the paper’s circulation, now above 200,000.

``In a so-called house ad (called that because the house, the newspaper, couldn’t sell the page to a paying advertiser), Chairman Bernanke tosses copies of the Standard from a red helicopter over Hong Kong’s skyline. The headline on the paper “WORST LIKELY OVER.”

Free newspaper will probably not end for as long as the other sources of revenues outside subscription -particularly advertisements- will be able to cover the costs of maintaining these prints, overhead and distribution.

However, competition from the web and the TV for ads will be tight as to render the sustenance of free news as suspect.

Importantly, the diminishing role of newspaper is likely to reconfigure the flow of information which is likely to impact the distribution of power held by the mainstream via mainstream news.

As Professor Gary North projects (bold emphasis mine),

``Printed daily newspapers are doomed. On-line daily paid-subscription newspapers are also doomed. Conclusion: the Establishment is about to lose one of its three major instruments for shaping public opinion: newspapers, the TV networks, and the tax-funded schools...

``The era of Establishment control over the flow of ideas is ending. That era rested on the high cost of entry. Now anyone can enter. The mammoths are in the par pits, with their huge buildings, huge staffs, and huge debts."

So creative destruction in media is likely to also affect the distribution of political power.

Creative Destruction: Composition Of The Top 25 Global Companies Over The Decade

This should be a sequel to our March post A Tectonic Shift In The Global Banking Industry!

But this time, our BEFORE (1999) and TODAY chart, covers the 25 largest global companies in terms of market capitalization.

From Wall Street Journal

Some highlights shown above:

-technology companies dominated the top 25 in 1999

-only 8 of the top 25 during the 1999 remains on the list (the chart enumerates the companies removed from the roster)

-total market cap of the group shrank by 20% in the decade

-China has four of the top 25, in 1999 China has none.

-Iconic CEOs of 1999: Bill Gates of Microsoft, Jack Welch of General Electric, and Carla Fiorina of Hewlett Packard

-Iconic CEOs of 2009: Eric Schmidt of Google, Ratan Tata of the Tata Group (India) and Steve Jobs of Apple

How a shift of this magnitude impact markets?

Economist William Easterly writes, (bold highlights mine)

``One reaction is that free markets are very scary if you were an employee or shareholder of one of the 1999 companies that crashed. OK this kind of destruction scares ALL of us.

``Another reaction is that creative destruction is one of the triumphs of the market. The consumer is king: in 2009, the consumer wants iPhones in their Xmas stocking and not whatever Worldcom had been pretending to be producing. The radical uncertainty of how to please consumers is an argument FOR free markets:

``It is because every individual knows so little and… because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it. (Friedrich Hayek)

Creative Destruction: Electronic Payments Over Cash And Checks

Creative destruction appears to be taking hold even in terms of the means to conduct payment.

In the United Kingdom, electronic payments appear to be getting the better of checks 'cheques', where the latter may be reckoned as passe.

According to Mint.com (bold highlights mine),

``This week, the British banks governing the UK Payments Council decided to phase out their check clearing system by October 2018. In effect, they set an expiration date for the use of paper checks (or “cheques” as they prefer). In a statement, the group’s chief, Paul Smee, noted: “There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement.”

``Like letters of credit, demands for payment and bills of exchange, bank drafts can trace their history to Roman times, when checks were known as “praescriptiones.” Paper drafts analogous to today’s checks were in use in the Islamic world in the 9th century and as early as the 12th century Templars honored pilgrims’ checks from one chapter house to the next. In England, clearing houses have had responsibility for settling checks since the early 1800s (before that they were often cashed in coffee houses).

``Bankers complain that many British retailers don’t accept checks anymore, that young people don’t even have checkbooks, and that it’s costing them as much as a pound (about $1.63 today) to process every check. But the decision certainly has its critics—especially advocates for the elderly and small business owners. On one hand, a generation uncomfortable with electronics will be forced to risk carrying and handling more cash. On the other, mom and pop stores have one more disadvantage against giant competitors (some of whom are starting to act as banks themselves). The move will also put the “unbanked”, who have to pay fees to cash checks but also lack access to accounts capable of electronic payments.

``The cost of cash keeps going up while the cost of using credit cards and electronic payments keeps going down. More retailers accept credit cards than checks these days. But while US banks also worry about the costs of handling cash and checks, they aren’t likely to echo the UK decision any time soon. Yes, paper checks are increasingly rare in high-tech countries—whether advanced Scandinavian nations or developing/modernizing regions such as Africa—but the US doesn’t rate as high-tech when it comes to personal finance (present company excepted of course). It has lagged dramatically in the modernization of its financial traditions, such as implementing electronic payments, even compared to Britain."

In other words, technology has been bringing about the intensifying diffusion of the electronic mode of payment as primary means to conduct transactions with reduced reliance on the traditional cash and checks.

The caveat here is that facilitating payments via electronics can translate to more debts and could function as faster conduit for the expansion of circulation or bank credit (inflation).

Nevertheless in a cash society as the Philippines, where 40% of the economy is considered informal and where the penetration level of mobile phones is far greater than people with bank accounts, the likely primary mode of electronic payment that could take shape would be that of mobile banking.

According to CGAP, ``To root the global market sizing in real world data, CGAP, GSMA and McKinsey analyzed, unbanked consumers in the Philippines, where two of the global leaders in m-banking operate (Smart, and Globe). One half (1.6 million) of active mobile banking users in the Philippines are unbanked. Furthermore, 26 percent of active users have incomes below $5 per day. On average, unbanked mobile money users spent $1.9 more per month than peers who do not. This is a considerable gain for mobile operators who saw average revenues per user (ARPU) as low as $4.04 in the 4th quarter of 2008, according to Wireless Intelligence...

``Mobile money reaches a base of financially active people. In the Philippines, more than half of the people interviewed for the study reported using at least one financial product. This mirrors findings in other countries showing the poor to be active money managers. Savings is the most common financial product in the Philippines, with low-income mobile money users and nonusers reporting that they save an average of $34. Informal mechanisms for saving dominate the market.

``Ninety-eight percent of unbanked Filipinos receive their income in cash, and overwhelmingly use informal saving instruments, such as keeping their money at home in a safe hiding place, giving money to a friend or family to hold, or joining a saving club. CGAP and GSMA estimate low-income Filipinos save an estimated $450 million in informal, actively managed with frequent deposits and withdrawals."

In other words, market in spite of government interventions has always been looking for the best interests of consumers. In this case by facilitating an easier mode of conducting transactions via electronics, be it through mobile banking, credit and debit cards or others.

And if markets are always looking for a way satisfy consumers, the recent onrush to gold has likewise brought about a new form of Automated Teller Machines (ATM)- gold ATMs in Germany.

According to the Financial Times (last June)

``Germans, long attracted to the safety of solid gold, will soon be able to sate their appetite for the yellow metal as easily as buying a chocolate bar after plans were announced yesterday to install gold vending machines in airports and railway stations across the country.

``The venture by TG-Gold-Super-Markt, a company based near Stuttgart, aims to build on soaring retail interest in gold since the financial crisis shook confidence in other investments.

``"German investors have always preferred to hold a lot of personal wealth in gold, for historical reasons," said Thomas Geissler, the owner of the company. "They have twice lost everything."

``He hopes to install "Gold to go" machines in 500 locations in German-speaking countries this year."

It's a curiosity how gold can be fused with today's rapid technology and market based innovation trends.

Creative Destruction: Newspaper Industry Headed For The Dinosaur Age?

When one or several companies of an industry are in the red financially, the losses may be attributed to the developments within the companies themselves.

However, when losses are evident on an industry scale, then the core dynamics of the industry may be in question.

This predicament currently applies to America's newspaper industry, whose survival seems threatened by the growing use of the internet for acquiring news.

Yet developments in the US could be an ominous sign for the world.

According to the Economist, ``MORE bad news for America's newspaper industry. In the six months to the end of September, daily circulation fell by 10.1% to 30.4m compared with the same period in 2008. All of the top 20 papers have seen their circulation plunge, with the exception of the Wall Street Journal. The Journal now has the biggest circulation in the country, surpassing USA Today, which suffered an enormous 17.5% drop in readership over the same period. Paying readers are now turning to the internet to get the news free." (bold highlights mine)

First, in terms of internet penetration level rates, North America appears to be the leader.

The chart above is from internetworldstats.com. In other words, perhaps the best measure for the evolving shift in the way news is being acquired would be from the world's most connected.

Next, the trend towards the internet as a source for information appears to be validated by survey.


The chart above courtesy of Pew Research.

According to a Pew report issued last December, ``Currently, 40% say they get most of their news about national and international issues from the internet, up from just 24% in September 2007. For the first time in a Pew survey, more people say they rely mostly on the internet for news than cite newspapers (35%). Television continues to be cited most frequently as a main source for national and international news, at 70%." (emphasis added)

So empirical evidence connects the cost- financial losses and the flagging usage trend of the of the news industry- to the beneficiary- the burgeoning use of the internet as a source of news.

Why this appears to be so?

Mr. Scott Bradner of Network world gives a clue, ``The three most important observations to me are that power is shifting from institutions (like newspapers) to individual journalists; that people increasingly want news "on demand" rather than scheduled, like the evening news; and that there has been a raise in importance of "minute-by-minute judgment in political journalism." These trends greatly benefit the Internet and Internet-based journalists. The latter two trends also benefit the full-time cable news channels, but only when the cable is available. And, in the office, cable is not generally available." (bold emphasis mine)

In other words, the conspicuous shift marks of a market based redistribution of power and wealth to the industry that satisfies the consumer most.

Bottom line: This seems to be a manifestation of Joseph Schumpeter's "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one" or in short, the process known as "creative destruction" at work. This phenomenon largely emanates from the competitive nature brought about by capitalism.

A Bet On Free Education 2: University Bubble, Democratizing Education Via Creative Destruction

Our sequel to A Bet On Free Education

This time Washington Monthly says that next generation of online education will "could be great for students—and catastrophic for universities."

In other words, the University Bubble (with their soaring tuition fees see:Black Swan Problem: Deflation? Not In Ivy League Schools) seem set to implode.

This will be a powerful global phenomenon, but will be met by stiff resistance.

Some excerpts from the wonderful article entitled "College for $99 a month" (all bold highlights mine, green heading-mine)

Online Education Towards A Critical Mass...

``To anyone who has watched the recent transformation of other information-based industries, the implications of all this are glaringly clear. Colleges charge students exorbitant sums partly because they can, but partly because they have to. Traditional universities are complex and expensive, providing a range of services from scientific research and graduate training to mass entertainment via loosely affiliated professional sports franchises. To fund these things, universities tap numerous streams of revenue: tuition, government funding, research grants, alumni and charitable donations. But the biggest cash cow is lower-division undergraduate education. Because introductory courses are cheap to offer, they’re enormously profitable. The math is simple: Add standard tuition rates and any government subsidies, and multiply that by several hundred freshmen in a big lecture hall. Subtract the cost of paying a beleaguered adjunct lecturer or graduate student to teach the course. There’s a lot left over. That money is used to subsidize everything else.

``But this arrangement, however beneficial to society as a whole, is not a particularly good deal for the freshman gutting through an excruciating fifty minutes in the back of a lecture hall. Given the choice between paying many thousands of dollars to a traditional university for the lecture and paying a few hundred to a company like StraighterLine for a service that is more convenient and responsive to their needs, a lot of students are likely to opt for the latter—and the university will have thousands of dollars less to pay for libraries, basketball teams, classical Chinese poetry experts, and everything else.

``What happens when the number of students making that choice reaches a critical mass? Consider the fate of the newspaper industry over the last five years. Like universities, newspapers relied on financial cross-subsidization to stay afloat, using fat profits from local advertising and classifieds to prop up money-losing news bureaus. This worked perfectly well until two things happened: the Internet made opinion and news content from around the world available for nothing, and the free online classified clearinghouse Craigslist obliterated newspapers’ bedrock revenue source, the want ads. Suddenly, people didn’t need to buy a newspaper to read news, and the papers’ ability to subsidize expensive reporting with ad revenue was crippled. The result: plummeting newspaper profits leading to a tidal wave of layoffs and bankruptcies, and the shuttering of bureaus in Washington and abroad....

Disruptive Innovation Versus Traditional Forces...

``By itself, the loss of profitable freshman courses would be devastating. And in the long run, Web-based higher education may not stop there. Companies like StraighterLine have the hallmarks of what Harvard Business School Professor Clayton Christensen and entrepreneur Michael Horn describe as “disruptive innovation.” Such services tend to start small and cheap, targeting a sector of the market that established players don’t care much about—like tutoring in introductory courses. “This allows them to take root in simple undemanding applications,” Christensen and Horn write. “Little by little, the disruption predictably improves… And at some point, disruptive innovations become good enough to handle more complicated problems and take over, and the once-leading companies with old-line products go out of business.”

``The pattern has played out in industries ranging from transistors to compact cars. When Japanese companies like Honda first began selling small, fuel-efficient cars in America, the vehicles were markedly inferior to the chrome- festooned behemoths rolling off the assembly lines of invincible Detroit giants like Ford and General Motors. But they were also inexpensive—and, when gas prices skyrocketed in the 1970s, suddenly more attractive as well. Japanese cars gradually improved while American companies lapsed into complacency, and the rest is history.

``Econ 101 for $99 is online, today. 201 and 301 will come. It’s no surprise, then, that as soon as Burck Smith tried to buck the system, the system began to push back.

``The biggest obstacle Smith faced in launching StraighterLine was a process called accreditation. Over time, colleges and universities have built sturdy walls and deep moats around their academic city-states. Students will only pay for courses that lead to college credits and universally recognized degrees. Credits and degrees can only be granted by—and students paying for college with federal grants and loans can only attend—institutions that are officially recognized by federally approved accreditors. And the most prestigious accreditors will only recognize institutions: organizations with academic departments, highly credentialed faculty, bureaucrats, libraries, and all the other pricey accoutrements of the modern university. These things make higher education more expensive, and they’re not necessary if all you want to do is offer standard introductory courses online. To compete, Smith needed StraighterLine courses to be as inexpensive as they could be...

Democratizing Education Equals A Progressive Society...

``There’s a psychological barrier as well. Most people are so invested in the idea of education-by-institution that it’s hard to imagine another way. There’s also a sense that for-profit schools are a little sleazy (and some of them are). Because Web-based higher education is still relatively new, and the market lacks information that allows students to compare introductory courses at one institution to another, consumers tend to see all online courses in the same bad light. “The public isn’t good at discriminating,” says Larry Gould. “They read ‘online course’ and they think ‘low quality,’ even when it’s not true.”

``But neither the regulatory nor the psychological obstacles match the evolving new reality. Consumers will become more sophisticated, not less. The accreditation wall will crumble, as most artificial barriers do. All it takes is for one generation of college students to see online courses as no more or less legitimate than any other—and a whole lot cheaper in the bargain—for the consensus of consumer taste to rapidly change. The odds of this happening quickly are greatly enhanced by the endless spiral of steep annual tuition hikes, which are forcing more students to go deep into debt to pay for college while driving low-income students out altogether. If Burck Smith doesn’t bring extremely cheap college courses to the masses, somebody else will.

``Which means the day is coming—sooner than many people think—when a great deal of money is going to abruptly melt out of the higher education system, just as it has in scores of other industries that traffic in information that is now far cheaper and more easily accessible than it has ever been before. Much of that money will end up in the pockets of students in the form of lower prices, a boon and a necessity in a time when higher education is the key to prosperity. Colleges will specialize where they have comparative advantage, rather than trying to be all things to all people. A lot of silly, too-expensive things—vainglorious building projects, money-sucking sports programs, tenured professors who contribute little in the way of teaching or research—will fade from memory, and won’t be missed."

Read the rest here.

Creative Destruction is coming to the world's educational arena.

Social Media Gains Acceptance From Older Users

An interesting observation from the Forrester on the demographics of social networking usage.

They reckon that most of the recent growth has emanated from the elder generation.

From Researchrecap on the Forrester study (bold emphasis theirs)

``Social media can no longer be dismissed as a quirky habit of young adults."

``Social technologies continue to grow substantially in 2009. Now more than four in five US online adults use social media at least once a month, and half participate in social networks like Facebook. While young people continue to march toward almost universal adoption of social applications, the most rapid growth occurred among consumers 35 and older.

``Adults younger than 35 approached universal social participation. As we noted last year, adults ages 18 to 24 and those ages 25 to 34 adopt social media similarly. Only three percent of 18- to 24-year-olds and 10% of 25- to 34-year-olds are socially Inactive. What’s more, a staggering 89% of the younger crowd are Spectators, while nearly as many are Joiners. And almost half create content, far higher than any other age group. Adults ages 25 to 34 also grew their participation across all categories — especially in social networks.

``Adults ages 35 to 54 rapidly adopted Joiner activities. Much of the growth in social networks today comes from people older than 34. Compared with last year, this group grew its participation by more than 60%, and now more than half of adults ages 35 to 44 are in social networks. Adults ages 45 to 54 grew their Joiner behavior nearly as much, but still lag behind the 35- to 44-year-olds; 38% of those ages 45 to 54 use social network sites regularly. These consumers also increased their Creator activities to the point where one in five produce social content.

``Adults 55 and older started to share and connect with each other online. Seventy percent of online adults ages 55 and older tell us they tap social tools at least once a month; 26% use social networks and 12% create social content.

A graphic on the technology ladder

Empirical experience suggests that this could be true even outside the US. And this likewise suggest that many traditional activities (radio, tv) could be replaced by social media networks bearing the same features.

Amazing innovation from free markets that has increasingly been advancing our standards of living.

Creative Destruction: Reinventing Models and Forced Entrepeneurship

Every crisis leads to a transformation.

Industries affected by malinvestments or bubbles are destroyed while new enterprises emerges or innovative business paradigms takeover. That's why crisis can always be seen as windows of opportunities as previously discussed in Entrepreneurship During Recessions: Booming Industries, Recession Babies, Reasons to Start and 999 Business Ideas.

People will always toil to look for opportunities in order to survive. And one of the options would be to put up a business. Take for example this article from the New York Times which focuses on "forced" entrepreneurship today (bold highlight mine),

``Economists say that when the economy takes a dive, it is common for people to turn to their inner entrepreneur to try to make their own work. But they say that it takes months for that mentality to sink in, and that this is about the time in the economic cycle when it really starts to happen — when the formerly employed realize that traditional job searches are not working, and that they are running out of time and money.

``Mark V. Cannice, executive director of the entrepreneurship program at the University of San Francisco, calls the phenomenon “forced entrepreneurship.”

``“If there is a silver lining, the large-scale downsizing from major companies will release a lot of new entrepreneurial talent and ideas — scientists, engineers, business folks now looking to do other things,” Mr. Cannice said. “It’s a Darwinian unleashing of talent into the entrepreneurial ecosystem.”

``Even in prosperous times, entrepreneurs have a daunting failure rate. But those who succeed could play a big role in turning the economy around because tiny companies are actually big employers. In 2008, 3.8 million companies had fewer than 10 workers, and they employed 12.4 million people, or roughly 11 percent of the private sector work force, according to the Bureau of Labor Statistics.

``Economists say there are some peculiarities to this wave of downturn start-ups. Chiefly, the Internet has given people an extraordinary tool not just to market their ideas but also to find business partners and suppliers, and to do all kinds of functions on the cheap: keeping the books, interacting with customers, even turning a small idea into a big idea.

``The goal for many entrepreneurs nowadays is not to create a company that will someday make billions but to come up with an idea that will produce revenue quickly, said Jerome S. Engel, director for the center for entrepreneurship at the Berkeley Haas School of Business. Mr. Engel said many people will focus on serving immediate needs for individuals and businesses."

As a saying go, Necessity is the mother of innovation (invention).

And as we earlier mentioned, crisis also induces change in business models.

For instance, we see accelerating signs of transitioning from the old print "newspaper" media model to one of the "online" paradigm.

Again from the New York Times (bold highlight mine),

``The Seattle Post-Intelligencer will produce its last printed edition on Tuesday and become an Internet-only news source, the Hearst Corporation said on Monday, making it by far the largest American newspaper to take that leap.

``But The P-I, as it is called, will resemble a local Huffington Post more than a traditional newspaper, with a news staff of about 20 people rather than the 165 it had, and a site with mostly commentary, advice and links to other news sites, along with some original reporting.

``Other newspapers have closed and many more are threatened. But the transition to an all-digital product for The P-I will be especially closely watched in an industry that is fast losing revenue and is casting around for a new economic model.

``For one thing, the closing may end up putting greater pressure on the surviving and financially struggling Seattle Times, because of the end of a joint operating agreement between the two papers. It may even bring closer the day when Seattle has no local paper at all.

``And the way The P-I is changing might hint at a path for future newspaper closings. To some extent, in shifting its business model, it will enter a new realm of competition. It will compete not just with the print-and-ink Times, but also with an established local news Web site, Crosscut.com, a much smaller nonprofit organization that focuses on the Northwest. The move shows how some newspapers, in the future, may not vanish but move the battle from print to the digital arena."

And this appears to be a firming trend...

chart courtesy of Pew's State of the Media

Cable and online have drawn most of audience traffic at the 'expense' of traditional media.

According to Pew Research, ``Only two platforms clearly grew: the Internet, where the gains seemed more structural, and cable, where they were more event-specific."

In short, real time or "on demand" news or opinion is on the rise, or in the fitting words of the research company, ``People increasingly want the news they want when they want it".

Of course, aside from the shift in viewership traffic preference, the other very important trigger has been no less than the flow of revenues. Ad spending has essentially shifted to cable and online. Put differently, it is basically a "follow the money" dictum.

The dramatic surge in online viewership hasn't not translated to strong flows of ad spending, though. The Pew Research suggests an explanation- strong competition. ``Even while online ad spending grew about 14% through the first three quarters of the year, most of it benefited Google and other search providers. Revenue from the sale of banners and other display ads that news websites depend on increased just 4%, and estimates are that it declined by the fourth quarter. One reason: the infinitely expanding universe of blogs and websites has forced them to cut their rates to compete for advertisers. The cost to reach 1,000 viewers fell by half in 2008 alone, to an estimated average of 26 cents."

But not all countries are incurring a decline in print media as we pointed out in Global Posttraumatic Stress Disorder (PTSD): The After Lehman Syndrome. But that is a topic for another day.

Nonetheless the last word from Internet analyst Clay Shirky who is quoted by the Research Recap, ``That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing.”

Why An Increasingly Asset Friendly Environment Should Benefit The Phisix

``There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it.”- Jeremy Grantham Reinvesting When Terrified

The risk environment seems to be tilting towards an increasingly cash hostile-asset friendly environment from which the local stock market would likely benefit from.

Here are six reasons why:

1. Extremely Depressed Mainstream Sentiment.

After a 55% drop in the Phisix from its peak in October of 2008, the public still sees the equity market as highly “risky” in the “traditional” economic sense (more below).

You can just see this overwhelming dire sentiment in news headlines or TV news shows or from the viewpoints of media’s favorite talking heads. This runs starkly opposite to the dominant sentiment when the Philippine benchmark was at 3,800 when there was a cheery consensus (except for us).

In other words, overtly depressed mainstream sentiment (or sentiment extremities) conveys of nascent signs of a possible inflection point.

2. Creative Destruction

After a staggering $50 trillion loss of global financial assets from which one fifth or $9.6 trillion has been ascribed by the Asian Development Bank to Asia (msnbc.com), a recognition of global recession and the collapse in global trade, investment and financing or deglobalization, such colossal downsizing of financial assets and the massive retrenchment in the global macroeconomic structure, for us, signifies as “creative destruction” which may have reached a near culmination of the process in many parts of the world. Possibly with the exception of the US and parts of Europe.

3. Perspective Shift from the Macro to Micro environment

Despite the latest globalization trends, since the world isn’t “entirely” integrated, where much of the external linkages have been only from the aspects of labor (remittances), trade, finance and investments, the significant market attention on the macroeconomic framework during this adverse adjustment period is likely to shift weight towards to the micro landscape [see Fruits From Creative Destruction: An Asian and Emerging Market Decoupling?], thereby possibly leading to more signs of “divergences” or “decoupling”.

4. Policy Incentives Are Directed Towards Aggressive Risk Taking

Of course, we have to admit that the healing process from today’s major drastic economic shakeup will translate to a time consuming effort or that resource or capital reallocation essentially takes quite a time.

But this doesn’t mean markets can’t progress especially when global policymakers have been working feverishly to impel incentives favorable to risk taking.

One, global central bankers have been squeezing down interest rates nearly to zero…

From Morgan Stanley’s Joachim Fels and Manoj Pradhan (bold highlights mine) ``. Within the G10, official interest rates are virtually zero in the US (0-0.25%) and Japan (0.1%) and just 0.5% in the UK, Canada and Switzerland.

``In the euro area, the refi rate still stands at 1.5% after last week’s cut, but the effective overnight interest rate (EONIA) between banks trades close to the 0.5% floor set by the ECB’s deposit rate. Thus, the GDP-weighted G10 policy rate now has a zero handle. The weighted G10 policy rate is likely to drop further as we expect more rate cuts in the euro area, Japan, Australia, New Zealand, Sweden, Norway and Switzerland in the next few days, weeks or months.”

Next, they’ve also been monetizing debt or printing money…

Again from Fels and Pradhan ``several major central banks including the Fed, the ECB, the Bank of Japan and the Bank of England are engaged in various forms of quantitative easing, which has led to an explosion of excess reserves held by banks with these central banks. The explosion of bank reserves has pumped up the monetary base – consisting of cash in circulation plus bank reserves held at the central bank – in these four countries, as we have illustrated. In the US, the monetary base has more than doubled over the past year, while it is up by 40% in the euro area and 30% in the UK over the same period. The monetary base is also called ‘high-powered’ money, because our fractional reserve banking system allows banks to create many times the dollar amount of deposits from the monetary base through lending to, or acquiring assets from, non-banks.”

It is not much different here in the Philippines see figure 1.

Figure 1: Danske Emerging Market Briefer: Philippine Negative Interest Rates

At least in terms of the interest rate regime, the Philippine overnight borrowing rate has been fixed presently below the (CPI) inflation level by the Bangko Sentral ng Pilipinas (BSP), which makes the domestic interest rate environment essentially negative- net losses for savings compels the public to stretch for yields, which makes the marketplace conducive for speculation.

Furthermore, since the Philippine economy has negligible exposure to leverage, where the underlying risks from the evolving crisis has so far been “marginal” and limited to the external nexus, policies have been mainly directed at the interest rate and fiscal “safety nets”. In other words, no Quantitative Easing required, which should be a strong case for the Peso.

Table 1: IMF: Distribution Share of Global Stimulus Package

Finally global governments have been applying huge-but according to IMF and other ‘Keynesian’ economists-inadequate-doses of fiscal stimulus programs (see table 1) in an attempt to offset growing slack in the global economy.

Figure 2: Ivyglobal: Size of Global Bond Market

With over 75% of the global debt markets, see figure 2, held by the overleveraged economies in the US and Europe, this means that these coordinated measures appears to have been also targeted at “reducing the real debt levels” mostly held by the private sector.

So to rephrase, despite the repeated promulgated goals by global governments to induce “normalization” of credit flows by various ways to replace lost ‘demand’ mostly via government spending, the combined actions of lowering of interest rates, coordinated “various forms of quantitative easing” and massive infusion of fiscal stimulus can also be construed as inflating away debt levels.

What does this imply?

The gradual metastasizing of the risk environment from one characterized by economic recession to one where global currency values are being deliberately debased seems to be intensifying. This increases the opportunity costs of holding cash. And the effects are likely to be felt first in parts of the global asset markets. But there isn’t going to be a revival of the securitization-financial structured-shadow finance markets, the source of the bubble bust though.

5. Signs of Improving Trends in the Marketplace.

We may have begun to witness signs of selective recovery in several asset markets.

There has been significant progress in the technical pictures of primary commodity markets such as oil, copper, gold and the Reuters-CRB index or in the general commodity markets. Importantly the advances in the commodity markets have equally been reflected on Baltic Dry index, a cargo freight weighted index, and several key credit markets.

Moreover, there was an explosive upside action in most of the global equity markets last week.

Figure 3 stockcharts.com: Oversold Bounce

While this huge bounce appears to have been mainly a function of severely oversold conditions, see figure 3, it is important to note that Emerging markets (EEM), at the topmost window, have led the bounce earlier relative to major markets in Asia (DJP2-ex-Japan), European (Stoxx 50) and the US S&P 500.

From the technical perspective since the US S&P 500 have widely departed from its 50-day moving averages, hence, like an overextended rubber, snapped back vigorously.

We are skeptical yet of the US and key European markets as having hit the milestone “bottom”. Material progress in the technical picture, which requires some additional time to reveal on its maturity, plus signs of some economic improvement could serve as key indicators for a turnaround. Besides, the mayhem in the financial sector hasn’t been resolved. But for now, these markets appear to be working off overstretched conditions.

Nonetheless, the oversold bounce, which could probably last 1-2 months, could likely help boost general market sentiment even temporarily. And the progress in general sentiment could function as the necessary fulcrum for an extended and substantial improvement of the technical picture of the relative outperformers, mostly found among Emerging Market bourses, enough to cushion them into the next possible wave of decline.

For instance, the Philippine Phisix, which appears to be in a bottoming process, could be jolted out of its consolidation phase and segue into the early stage of the advance phase of its market cycle.

It could possibly do a Taiwan, whose key bellwether the Taiex index, a surprising outperformer, which appears to have broken out of the consolidation phase on the back of a fantastic 3-week run, even prior to last week’s general recovery in the global equity markets. The Taiex is up by about 17% from its lows last November and is up 6.6% over the year with the gist of gains coming from last week’s 5.24% romp.

6. Phisix: Learning From Market Cycles

In our July 2008 edition, the Phisix: Learning From the Lessons of Financial History, we identified the scalability of the typical bear market cycle for the Philippines.

Since the activities of today’s domestic bear market cycle reflects on principally the global contagion effects from last October deleveraging or “forcible selling” process more than economically prompted, we seem to have accurately read the dynamics where an easing of foreign based deleveraging motion will cease to hemorrhage asset values in the Philippine markets.

And indeed as the share of foreign trade has contracted and where net foreign selling has materially diminished, [see Phisix: Braving The Global Storm So Far], the Phisix appears to have been in consolidation or appears to have been reinforcing this bottom formation dynamics for about 5 months now.

Besides, with the Phisix having to touch losses of 55% late last year, it is has nearly reached its conventional bear market range of retracement of 60-66%. To consider, this bear market hasn’t been “internally” (domestic or regional) generated but instead from contamination overseas. Hence, its recovery will likely be fortified on signs of the more participation from the region’s bourses and from signs of improvements in the national economies in the region.

Together with some developments in the corporate world, the windows for risk taking either for the long term or for the short-term outlook seem to have opened. It is time to take advantage of it by nibbling on the market either by trading or taking long positions or both.