Sunday, September 23, 2018

Agrawal et al., Prediction Machines

Prediction Machines: The Simple Economics of Artificial Intelligence (Harvard Business Review Press, 2018) by Ajay Agrawal, Joshua Gans, and Avi Goldfarb, all chaired professors at the University of Toronto’s Rotman School of Management, is an excellent introduction to the opportunities and limitations of AI. Their thesis is that, as things now stand, AI is becoming an ever cheaper community that lowers the cost of prediction and will change how businesses operate. But it cannot replace judgment, so human beings will not be sitting around as unproductive idlers.

One of the goals of enhanced prediction is to replace satisficing with more optimal solutions. For instance, airport lounges are “imperfect solutions to uncertainty” and “will be undermined by better prediction.” With traffic apps and apps tracking flight delays, the traveler has new options such as “unless there is a traffic problem, leave later and go directly to the gate” or “if there is flight delay, leave later.”

The authors explore various ways in which artificial intelligence enhances decision-making, especially in the business context, but in the end (at least so far) it cannot replace human beings. We have data that machines don’t, from our senses to data that we opt to keep private. Moreover, prediction machines are often stymied by rare events that are difficult to predict because of a lack of data, “including presidential elections and earthquakes.” (Not that human beings and their statistical models did such a great job with the last presidential election.)

The authors speculate about which countries might have an advantage in developing AI. So far the United States is the world leader in terms of both research and commercial application. But “the trend lines are changing.” The future of AI may be “made in China,” as the New York Times suggested. First, China is spending billions on AI. Second, it has more people—and therefore more data (the new oil). Third, China doesn’t regulate privacy, so easy data access is another advantage. And, I would add, a trade war focused on twentieth-century manufacturing is unlikely to derail China’s efforts to gain an advantage in the twenty-first century.

Wednesday, September 12, 2018

McLean, Saudi America

Bethany McLean, the well-known financial journalist (she co-authored The Smartest Guys in the Room and All the Devils Are Here and wrote Shaky Ground), has turned her attention to shale oil and gas in Saudi America: The Truth About Fracking and How It’s Changing the World (Columbia Global Reports, 2018). In this 140-page piece she doesn’t address environmental concerns about fracking. Instead, her focus is on assessing the “breathless predictions about America’s future as an oil and gas colossus,” which, she argues, “has more to do with Wall Street than with geopolitics or geology.”

Central to her story is “America’s most reckless billionaire,” as Forbes once described the late Aubrey McClendon, the founder of Chesapeake Energy. He was a “flag waver for natural gas” and fracking, arguing that, with fracking, gas production was no longer wildcatting but manufacturing. He went all in, creating a vast web of debt for Chesapeake as well as himself personally. As gas prices dropped, so did Chesapeake’s stock , but he remained a true believer and doubled down, announcing deal after deal. “But the economics weren’t working anywhere,” and McClendon found himself in financial and legal hell. At the age of 56 he was killed when his car collided with a concrete wall at high speed. The state medical examiner ruled his death an accident.

As the economy has rebounded after the great recession, so has fracking, thanks in large measure to technology. Production at the Permian Basin increased from just shy of one million barrels of oil a day in 2010 to over 2.5 million barrels a day in 2017. The International Energy Agency predicts that, within a few years, output will be more than four million barrels a day. And the break-even cost has plunged from around $70 in 2008 to less than $50 today, some saying as low as $25, or even $15. But these break-even figures do not take into account the cyclical nature of service costs. As the price of oil rises and demand for services (such as renting rigs, hiring crews, purchasing sand) increases, so do the costs. One analysis claims that almost half of the reduction in break-even costs was due to a temporary plunge in service costs.

Wall Street has been supporting the comeback of shale, to the tune of about $70 billion in capital in 2015 and $60 billion in debt in 2017. “Wall Street’s willingness to fund money-losing shale operators is, in turn, a reflection of ultra-low interest rates.” Because, despite higher oil prices, most shale operators are still losing money; in the first quarter of 2018 only five companies generated more cash than they spent.

What is the future of the shale revolution? It’s hard to say. Shale wells deplete, global alliances shift, renewables are becoming less expensive. The administration’s push to allow drilling in previously prohibited areas might create an oversupply and crater prices. “If this comes about at a time of rising interest rates and the end of the era of cheap capital, we may soon begin talking about how the Trump Administration killed the shale revolution.” Or not. Basically, we don’t have a clue about what’s coming next.

Sunday, September 9, 2018

Zeng, Smart Business

Ming Zeng’s Smart Business: What Alibaba’s Success Reveals about the Future of Strategy (Harvard Business Review Press, 2018) is a thought-provoking book. Written by the chief strategy officer at the Alibaba Group, it challenges traditional business models and offers an alternative based on data intelligence and network coordination.

As with all books about China, I’m always stunned by the magnitude of the numbers. For instance, on Single’s Day on November 11, 2017, Alibaba processed 1.5 billion transactions, totaling about $25 billion. At its peak during that day, Alibaba’s technology platforms processed 325,000 orders and 256,000 payments every second. By comparison, Visa’s stated capacity at about that time was 65,000 payments per second globally.

Zeng dispels the common notion that Alibaba is the Amazon of China. “Unlike Amazon, Alibaba is not even a retailer in the traditional sense—we don’t source or keep stock, and logistics services are carried out by third-party service providers. Instead, Alibaba is what you get if you take every function associated with retail and coordinate them online into a sprawling, data-driven network of sellers, marketers, service providers, logistics companies, and manufacturers. … Alibaba’s mandate is to apply cutting-edge technologies—from machine learning to the mobile internet and cloud computing—to revolutionize how business is done.”

The business model that Zeng describes stands in sharp contrast to that of traditional business. It’s a C2B model that demands constant innovation. And a lot of work for all of its participants. But, as the title says, it’s “smart,” and the rewards are sometimes staggering.


As I pondered Zeng’s thesis, a couple of obvious questions came to mind. First, is this a model that, with modifications, can extend beyond the digital retail space? Second, is it essentially a monopolistic framework? My best guesses: yes, and probably. And so, I believe that everyone who wants to make a mark in the business world should read Zeng’s book. They might want government regulators to skip it.

Thursday, September 6, 2018

Hennessy, Leading Matters

John Hennessy, a computer scientist and one of the founders of MIPS Computer Systems, whom Marc Andreessen called “the godfather of Silicon Valley,” was president of Stanford University from 2000 to 2016. He is now, in his “retirement,” chairman of Alphabet, Google’s parent company, and director of the Knight-Hennessy Scholars Program. So when Hennessy reflects on his professional life, as he does in Leading Matters: Lessons from My Journey (Stanford University Press, 2018), people who are either already in or aspire to leadership roles would do well to pay attention.

Though an engineer, Hennessy looks at leadership through a “soft” lens. In fact, he writes that “as you climb to higher leadership positions, the role of facts and data decreases. Sure, facts form a set of boundaries that you must account for, but your task is to find solutions to complex problems, despite limitations imposed by facts and figures. … [Y]ou must develop your ability to bring people together, to inspire them, to mentor them, and to lead them into the direction of your vision.”

For him, what matters are humility, authenticity and trust, leadership as service, empathy, courage, collaboration and teamwork, innovation, intellectual curiosity, and storytelling. He describes, chapter by chapter, how he honed these character traits and skills through the many challenges he faced as the top academic administrator at a world-class university.

The book has a wonderful coda of books Hennessy has learned from: biographies of leaders and innovators, books on history, science, and leadership, and fiction.

Wednesday, September 5, 2018

Kocienda, Creative Selection

Ken Kocienda was the principal engineer of iPhone software at Apple, so he writes with authority in Creative Selection: Inside Apple’s Design Process During the Golden Age of Steve Jobs (St. Martin’s Press, 2018). I should say up front that I have never owned an Apple product and that I got my first smart phone only last year. I’m not normally a slow adopter, but I simply never felt the need for a mobile phone since (1) I’m rarely mobile and (2) I almost never use a phone of any sort. And so, that I found Kocienda’s book fascinating is a real tribute.

Kocienda had the unenviable job of creating a touchscreen keyboard for what became the iPhone. The BlackBerry, first released in 1999, had a physical keyboard with little chiclet keys beneath the screen, but this of necessity reduced the phone’s screen size. Apple was determined to have a software keyboard, where “plastic keys would give way to pixels.” But early efforts didn’t go well. Thumb-typing produced nothing intelligible, “not just wrong words but babble.” Engineers tried having bigger keys, “ganging up multiple letters on each key as they did on flip phone keypads and developing various means to choose the correct letters: sliding, double taps, long presses, and others.” But the user had to think about every letter, and even Apple engineers often got lost in the middle of typing a word.

Kocienda took another stab at this problem, using a big-key QWERTY keyboard with multiple letters per key “but that offloaded the decision of picking the letters to the computer.” This, of course, required the creation of a huge dictionary. But it didn’t do the job. It failed in ways both humorous and frustrating. And so, smaller, single-letter keys were reintroduced. With the assistance of touchscreen keyboard autocorrection (and a great deal more work on Kocienda’s part), “junky key presses produced perfect typing,” well, at least some of the time. Kocienda has an amusing article in Wired, published to coincide with his book’s publication date, “I Invented the iPhone’s Autocorrect. Sorry about That, and You’re Welcome.”

Although Kocienda structures his book in terms of seven elements of innovation (inspiration, collaboration, craft, diligence, decisiveness, taste, and empathy), what makes it a good read is nothing abstract. It’s his account of the actual process of creating a winning product.