Great post. While people in the entertainment industry use email for creative expression, the most controversial exposures in the Sony hack were email comments that many people felt were inappropriate or insensitive (https://www.theguardian.com/film/2015/feb/12/sony-pictures-chief-amy-pascal-hack-interview). While Sony executives were undoubtedly exercising free speech, there is no protection from social judgment of that free speech. You posed a good question in wondering whether email can be a risk-free vehicle to express opinions privately. I would say that it is not. While there are many steps companies like Sony Pictures can take to improve cybersecurity, I think the unfortunate reality of the modern internet-connected world is that nothing is entirely private or secure. This article (https://www.technologyreview.com/s/518056/why-e-mail-cant-be-completely-private/) provides an excellent explanation: “. . . even if an e-mail service encrypts messages for secrecy . . . the e-mail headers and routing protocols reveal who the senders and receivers are, and that information can be valuable in its own right. And second, the passcodes used as keys to decrypt messages can be requested by the government (if held by the e-mail company) or simply stolen by sophisticated malware.”
At the retail level, the illicit market for controlled substances was barely disrupted by Silk Road. And while the platform undoubtedly connected sellers with buyers, it did not address the biggest problem in the narcotics supply chain: transportation and shipping between manufacturer, wholesaler, distributor and retail operator. There is large risk of interdiction between each of these steps, which, along with massive information asymmetry, creates a perpetual bullwhip effect that never goes away under pressure on the supply chain, leading to fluctuations in supply and price.
Digital innovation generally fails to have a notable effect on the core operations of drug cartels and retailers on the street, where law enforcement has the most difficult time fighting the drug problem. As we learned in Training Day, “it’s not what you know. It’s what you can prove.” And while encrypted communications and iPhones make it easier for people to do business on the street, law enforcement agencies typically lack the control of resources to proactively crack those communications at the street level (when they do, it’s after the fact; someone got caught already). Despite law enforcement agencies still invest significant sums of time and money in removing low-level offenders who are quickly replaced and cost taxpayers a massive sum to incarcerate. Attacking the supply chain and the communication systems of drug cartels can disrupt drug supply on a much larger scale, and that’s where technology can both best enable the drug trade and also efforts to reduce it. Once Silk Road metastasized to the federal level, for example, it was barely a match for the sophisticated technical capabilities of the U.S. national security and law enforcement apparatus. Take one of the major lessons from Training Day: “You gotta see the streets. You gotta feel it. You gotta smell it, you gotta taste the streets.” Ulbricht thought he could beat the government at its own game, on cyber streets, and failed. Imagine Alonzo Harris (RIP) asking Ulbricht, “do you wanna go to jail, or do you wanna go home?” He went to jail.
Consider this example. One day a man walks out of his house to go to work. He sees this snail on his porch. So he picks it up and chucks it over his roof, into the back yard. Snail bounces off a rock, cracks its shell, and lands in the grass. Snail lies there dying. But it doesn’t die. It eats some grass. Slowly heals. Grows a new shell. And after a while it can crawl again. One day the snail up and heads back to the front of the house. Finally, after a year, the little guy crawls back on the porch. Right then, the man walks out to go to work and sees this snail again. So he says to it, ‘What’s your problem?’
If Silk Road had figured that out, it’d have figured the supply chain out.
AirBnB’s platform connects lessors and lessees, but so does the internet and app platforms of hotels. With the upcoming Marriott-Starwood merger, the hotel megacompany will offer properties available in many locations that will reduce the attractiveness of AirBnB to customers looking to rent in areas with multiple hotels available.
I also agree that the vast majority of Starwood’s customers do not seek to “live like a local.” As you mentioned, one of the major attractions of hotel chains are the reliability and consistency of the experience, which reduces if not eliminates the risk a customer takes on when using AirBnB; although AirBnB has a series of quality control mechanisms that reduce the risk of a subpar or uncomfortable travel experience, but those risks are nonetheless higher than at a major hotel chain. Furthermore, as a platform that connects property lessors and lessees, AirBnB does not take the level of responsibility for customer experiences that hotel operators do, which limits the recourse a lessee may look to if a bad experience occurs.
For example, imagine a case of pets and fleas. I once slept in a hotel bed that happened to be infested with dog fleas, and the following day I was twitching like Tyrone Biggums as I itched myself nearly to death. The hotel company compensated me and handled the situation in a different way than I’ve experienced with bad stays on AirBnB, which would probably only refund the cost of my stay and say “sorry.” A residence on AirBnB is also far more likely to have had pets (and fleas) living within than a hotel.
AirBnB also fails to offer a major draw of hotels: loyalty programs and benefits. Business and frequent personal travelers often stay at the hotels in which they have loyalty program “status” and Starwood Preferred Guest is one of the most valuable and popular of those programs in the world.
Where I think hotel companies need to compete with AirBnB is in group personal travel. AirBnB, VRBO, and their competitors are the favorite choice of groups like HBS students looking to procure housing for vacations. Hotels do not make it easy to book travel in this way, and their platforms are not oriented for group bookings, instead favoring relationships with event planners and corporate travel agents. Considering that business travel represents only about 60% of the U.S. hotel industry (https://www.statista.com/topics/1102/hotels/), there is a lot of business out there that hotel companies are not currently capturing.
Great post, Lee. I agree that technology can disintermediate broker functions easily in some areas and less easily in others. I also agree with Max that there is a hollowing out of the middleman’s power in real estate, but there are limits to that effect. In the case of real estate transactions, governments and regulators are incentivized to protect the industry (and real estate agents’ jobs) by creating and maintaining licensing schemes that act as obstacles. Government may be slow to react to technology, but it protects real estate agents more than it did other professions disintermediated by technology, such as travel agents for personal travel.
As you know well, human brokers have also remained relevant in come cases by sharing their fees with other middlemen and even customers, lowering the cost of the broker in the digital age to something that housing seekers consider more reasonable. I think this is especially powerful when financial institutions create their own broker referral programs for members, which is on the rise. Dave wrote a post about USAA, which has a “MoversAdvantage” program that gives home buyers and sellers a cut of the real estate agent’s fee (basically the referral fee, most of which USAA passes on to its members). https://www.usaa.com/inet/pages/bank_m?akredirect=true
Thanks for repping my favorite bank, Dave. I agree with your points, and I’ve heard a lot about the how blockchain could revolutionize the legal industry (as you mentioned in your mortgage example). There are some challenges, however, that you might find interesting. First, blockchain sort of knows no boundaries in terms of the law, and jurisdictional differences that blockchain transcends would have to be overcome. Contract law and property law, for example, vary substantially in different US and international jurisdictions. Second, the law itself would have to “catch up” to the cyber world. Not only is cyberlaw still unsettled in many areas, new concepts or applications of concepts (such as the “four corners rule” in contract law) would have to be determined. Since the law tends to lag behind technology and society sometimes, I don’t know that we are there yet, but I’m optimistic that eventually we will be. Here’s an interesting article from the law firm DLA Piper if you’re interested: https://www.dlapiper.com/en/us/insights/publications/2016/07/global-financial-markets-insight-issue-10/can-blockchain-live-up-to-the-hype/
Hunter, do you think the Party is committed to these efforts while attempting to maintain the growth of its economy? As growth slows and energy demands increase, I wonder whether natural gas can replace, rather than complement, coal production. I also wonder whether geopolitical issues encourage the Party to invest in natural gas domestically when there are political and economic objectives that can be accomplished by focusing available resources on drilling in disputed waters. China has been plagued with environmental problems for years, and despite the talk, it does not seem like there has been much actual commitment to change. I hope so though! Thanks for your post.
Corey, I’m interested to hear your thoughts on how these issues apply to Boeing’s defense business, which is poised to grow as the U.S. and Western militaries start to replace aging airfleets. Most of the Air Force’s aircraft, for example, are 30+ years old, some some approaching 60 years old (https://www.planespotters.net/airline/USAF-United-States-Air-Force). Military aircraft tend to fly inefficient routes and burn a ton of fuel (much of which is dumped prior to landing to reduce weight). Additionally, the defense acquisitions process has undergone and will continue to undergo changes that shift some R&D costs to manufacturers in order to disincentivize cost overruns. That seems to emphasize your final conclusion to an even greater degree.
Aside from the aircraft weight reductions associated with carbon composite airframes like the 787, isn’t much of the energy efficiency and biofuel advancement squarely in the lane of the engine manufacturers like GE and Rolls Royce, or is that up to Boeing and Airbus to pioneer? My understanding was that most of the PIPs were largely about re-engining.
German engineering, especially in automotive industry, is among the best in the world. I’m curious about your thoughts on German manufacturers’ ability to duplicate and exceed Tesla’s engineering achievements, especially considering that the technology itself seems to be one of the most significant limiting factors across the industry. Do you think the Germans will catch up faster than Tesla was initially able to achieve the technological advances it has made so far? Will the Germans be able to surpass Tesla’s technology now that they’re “in the game”? Although German engineering is exceptional, considering the historical competitive advantage has been with combustion engines, it seems to me that the success of VW Group, Daimler, and BMW will depend on battery and electric motor innovation in Germany and less on automotive engineering, where they continue to be strong.
I agree that the airline industry will be affected by climate change. However, I’m a little skeptical of Delta’s interest in sustainable practices due to rising costs. As climate change affects coastal markets, Delta will adjust its route network to supply heavy demand routes. Additionally, all of the world’s airlines face similar climate change threats, and the worst offending countries are typically not party to international agreements on carbon footprint reduction (http://www.eesi.org/articles/view/nations-agree-to-curb-airline-carbon-emissions). I think the use of carbon offsets will slow the sustainability programs the airlines implement, and the increased costs they face will end up being passed on to the consumer. By passing on increased costs to the consumer, Delta will probably be able to protect its bottom line, especially considering the decreased competition in the U.S. airline industry following the airline M&A frenzy producing the top 4 airlines since 2008.
Great piece, Lee. Aces, as usual. Looking further into this issue, I think we should tease out the price elasticity of demand for luxury vehicles. While I agree that luxury goods are generally inelastic, I believe the price of a Tesla luxury vehicle is more elastic than other types of luxury goods for two reasons. First, in my opinion, luxury vehicles are the most aspirational luxury goods available (partially because of the easy financing available that is otherwise not for say, a Rolex or Prada), and I think most of us have known people at various points in our lives who aspire to own a really nice car, even if they’re eating ramen noodles every night to do it. Second, the basis of luxury good price inelasticity of demand is largely that those who have large disposable income are less likely to consider price as a factor because they have a large amount of income to dispose on a number of goods and services that a person might want. I think that makes sense when you’re talking about a purse. However, my instinct is that Tesla buyers are relatively well-informed consumers, and cars, unlike most other luxury goods, can be evaluated on a wealth of quantitative data (0-60 time, horsepower, torque, car magazine ratings, top speed, mpg, warranty, resale value, etc.) and price is a factor which a sophisticated consumer might measure the efficiency of his/her dollar when performance characteristics are otherwise similar. As a luxury sedan, Tesla Model S’s also have a “cool” factor that grandpa’s Audi A8, BMW 7-series, or Mercedes S550 does not. Price may be the straw that breaks the camel’s back in those otherwise tight races.
I agree with your analysis, but I think there is some room for a subsidy to work on an electric car, especially when compared against other luxury gas-guzzlers. The dollar amount, however, is another story. $7K may not move the needle enough to be relevant at a $100K MSRP versus a $50K MSRP, and anything larger may not be affordable to the taxpayer.