What is digital currency?

At its core, digital currency is a type of currency that only exists electronically. It is not traded as coins or paper but rather as electronic exchanges on computers and computer networks.

Since the early 1990s, a wide mix of libertarian and cypherpunk thinkers have been trying to figure out a way to make an electronic version of cash, complete with its anonymity and liquidity features available. While the anonymity part had, for the most part, been resolved by the early 1990s (cryptographer David Chaum, who founded Digicash, the pioneer in the field, had research papers on those aspects as early as the late 1980s and had implemented the core basis of an anonymous currency by the very early 1990s), the challenge for digital currency has been one of transaction volume.

With some small changes, systems that were originally planned for all-digital currencies were eventually adapted to support existing legacy currencies like dollars and euros, leading to the rise of companies like Paypal, with a centralized clearing system not dissimilar to those in more traditional payment systems like Honk Kong’s Felica–based Octopus smart card payment system, which is probably the most successful implementation of a store-and-forward payment system in the world.

Similarly, in the US and Europe, recent deployment of store-value cards and NFC technologies have established a potential infrastructure for building out a possible way to eliminate physical cash over the long run. Over the last decade, the rise of internet payments, electronic deposits, and electronic debits has lowered the reliance individuals and corporations have had on paper checks, leading to a substantial drop in the amount of business done around check-related product lines. It is assumed by many in the financial industry that checks are on their last legs.

So what about cash?

Cash has a very long history and seems to have gone from one technological revolution to the other without being drastically impacted. In fact, a history of cash seems to point to cash being closer to a concept that can attach itself like a remora to the latest technology. So while coins used to be the only way to transact cash prior to the invention of the printing press, cash eventually came through the first information revolution stronger as currency became something printed on bills and thus became easier to carry around.

With the advent of the telegraph system, cash started being delivered more as a concept, using a store and forward approach whereas one could go to a telegraph office and send a promissory note over the air. The sender would pay the telegraph operator and the telegraph operator would then work out credits and debits between the different offices, only moving physical cash when actually needed. The same concept basically moved from telegraph to telephone to fax machines to the internet and now to mobile phones. Different modes of distributions but fundamentally the same concept.

The introduction prepaid cards (also known as stored-value cards) in the last decade has made it possible to move cash into a fairly anonymous plastic container that can then be used to make payments wherever the currency it has been filled with is accepted. With players like Visa and Mastercard in the game, it is easy to find networks that support such offerings.

Back to the Euro crisis

For countries in the Euro-zone, there is now a choice: either agree to a more centralized management of their economy from the European Union or decide to strike out on their own.

The former would lead those countries to become more like states in the United States, where they have some level of autonomy but also must ensure alignment with a larger federal entity. The net result, in the long run, for the countries that decide to go down that route, is that they will help forge a United States of Europe, with closer cooperation and eventually a concept similar to federation making its way through that union (I’d put the probability of this happening as fairly high within the next 25 years)

The latter is a more interesting case, from a technological standpoint, because it would mean figuring out how to fill the gap and this is where a digital currency makes sense. If you look at the USA, which came of age in a time when paper currency had become common-place, the vast majority of the cash being trafficked is through bills in denominations as low as $1 (there are $1 coins but they are not very commonly used.) By comparisons, Euros and other European currencies do not have a bill for a single unit of currency and still hang on to coins for that purpose: this is due to the psychological concept of money of more tangible and since the lower end of currency is handled more often, people may want to feel it in their hands.

So what if a country that decided on building (or rebuilding) a currency from the ground up were to do so in today’s day and age?

First of all, we are dealing with a world where electronic payment systems have become more common, with ATM and credit card readers reaching near ubiquity in everyday commerce. At the same time, we are dealing with a world where mobile phones are becoming something that everyone carries. Looking at those factors, is it too much of a leap to imagine a world where a currency could be added and subtracted from phones or pre-paid cards. Why would one need physical cash in today’s world? Are there use cases where the legal transfer of money from an individual to a company and vice-versa could not exist in an all-electronic world?

I’d warrant that no. There is no reason why cash needs to remain a physical component. For starters, the government could distribute e-wallets to any of its constituents relatively cheaply (today, the cost of a pre-paid card with no value on it would be measure in cents in the US) through bank networks. Some ATM might have to be retrofitted reloading of cards but that would be about it (they can already read the cards today). And with just such a move, a whole country would have moved from a physical currency to a digital one.

So the question now remains as to which country will be bold enough to make that first move. To go electronic would probably be substantially cheaper than any other alternatives a country would have to consider if it decides to create or relaunch a currency… and that’s why this option should be the top on the implemetation table for countries that are leaning in that direction.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title From Euro to e-uro. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Privately held companies numbers

For this exercise, I focused on the three largest privately held social media properties. This was largely to ensure that the companies I’m comparing are closer to maturity (and thus somewhat more similar to publicly traded ones) than other companies one could look at.

I’ve also decided to focus on the same numbers as I did in the previous post to ensure some level of consistency. The data was pulled from public sources.

Looking at this data, it may be clear that we are dealing with 3 companies at different levels of revenue maturity.

If the revenue projects for Facebook are correct, the business may be at a point where it is extracting more value per user across a wider base of users than some publicly traded companies (or companies that have filed to go public). This could make for an exciting IPO when the company does decide to go public.

Twitter and Foursquare, on the other hand, are still working on a model that is early in terms of revenue generations. The two companies are still working on figuring out how to turn their products into money-generating offerings and have yet to really turn on their revenue engines.

Comparing to publicly traded companies

The data becomes a lot more interesting when you put it next to similar data for publicly held (or soon to IPO) companies:

What is most interesting here is is that publicly held companies seem to put a higher premium on per user valuation and average revenue per user.

The later is easy to expect (one would assume that, as a company matures, it is able to attract a higher amount of dollars per user) but the user valuation is interesting, at least to me, because I would have expected it to be more constant from one funding event to another. It seems that private investors see a lower lifetime value on a user that public ones (in facts, the number almost doubles from private to public markets).

When I first ran the numbers, I thought I would end up with a higher valuation on the front end (lower revenue but still strong valuations) but it seems that private investors smartly look to other factors than just users. However, the data may also serve as a note of caution to investors in public companies: focus on the revenue and a company’s ability on deriving good revenue from its user base and spend less time thinking about the overall number of users.

After all, which might be better to you: a company that get $10 per user on 10 million users or one that gets $1 per user on 99 million users?

I know which one I’d bet on. What about you?

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title User worth: Public vs. Private. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Looking at the basics

As frequent readers of TNL.net know, I have to a tendency to try to run some numbers before passing judgement. Oftentimes, I discover that my hunch are correct but, almost as often, I find some interesting and surprising nugget of information in the data. Ultimately, though, it’s a question of gathering the information, something that too few people seem willing to spend time on.

So for this IPO, I decided to investigate how some fundamentals may be working either for or against the success of the LinkedIn IPO. My instinct was telling me that the fundamentals may be different now but I needed the data to assert which way things went. A lot of searching through both the web (and, as I mentioned last week, getting historical data can be hard on the web) and through paper record (books and magazines I still keep in my library), I was able to come up with the following chart:

One of the things that become apparent at first glance is that we are talking about totally different scales of business. Netscape was a company operating at a loss ($8 million) with very small revenue (not even a million dollars) when it went public. By comparison, LinkedIn seems to be a relatively healthy business with profits of $15 million on almost a quarter billion in revenue. On the other hand, that business paled in comparison to Google, which was generating profits of a quarter billion dollars on revenues of $1.4 billion in the run-up to its IPO.

Adding to the challenge in comparing them was the fact that they were all looking to raise different amounts so I decided to play “what if” with the different stocks.

What if LinkedIn had launched as Netscape?

I decided to normalize the data based on a revenue, assuming that LinkedIn would try to get a market capitalization equivalent to that of Netscape based on revenue:

So, already here, we see some fundamental differences. Netscape would not even be allowed to go public today based on the paltry revenue they were generating at the time of their IPO and LinkedIn would turn into the largest corporation in the world if the same logic had been applied to its revenue stream.

What if LinkedIn had launched as Google?

But the irrational exuberance around the Netscape IPO should not serve as a way to give LinkedIn a clean pass. In order to do so, I decided to compare the company to Google at the time of its IPO. People who were around then will remember that the Google IPO happened at a time when internet stocks were mostly out of favor but Google was garnering a very strong following. In a lot of ways, Google had the media presence of a Netscape in its time but with real revenue and earnings.

As price to earning ratio are a valuable way to evaluate companies, I decided to base my comparisons between LinkedIn and Google on it. So here goes:

The difference largely comes down to the number of shares outstanding but ultimately, it looks like LinkedIn P/E ratio are not that wild and while IPO Opening day are too small a data set to really make wild generalization, it seems that the LinkedIn IPO was one that basked largely in relatively rational behavior.

Conclusion

If the LinkedIn IPO is an example of what this boom cycle is going to look like, we may be in luck as the markets seem to be acting a much more rational, profit-focused manner than they have in the past. My read is that there may even be some level of conservatism to the way markets are approaching internet stocks and a healthy skepticism that will benefit real companies by weeding out the ones which wouldn’t make the cut under normal conditions.

Update: Some of my calculations were wrong and, thanks to many commenters, I finally have the P/E numbers corrected. Based on the new number, the conclusion can be vastly different as the P/E ratio for LinkedIn today seems to be much higher than it was for a company like Google. Can LinkedIn be 5 times as successful as Google has been since its IPO? I don’t know. Is there some inflation due to a more optimistic market outlook? Absolutely.

At the end of the day, it looks like LinkedIn is overpriced, when compared to Google, and underpriced, when compared to Netscape. What that means in terms of investment strategy is something I’ll leave to people smarter than me to figure out.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Is LinkedIn the new Netscape or the new Google?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

But this year is also a little different. Kubler-Ross no longer applies as most of us have cycled through all the stages by now. But, with the passage of time, it is possible to start getting an historical perspective and draw parallels to other times. Doing so might remind of us of Georges Santayana’s edict:

Those who do not study history are condemned to repeat it.

Cruel month

September does not seem kind on New York. While most of us will spend time remember the events that, for my generation, marked the end of innocence and forced us to grow up, there have been other disasters both past and recent that have befallen Gotham.

A few generations ago, on September 16, 1920, one of the deadliest acts of terrorism on American soil targeted Wall Street: 38 people died and 400 were injured on that day, thanks in part to the poor timing of the perpetrators, who detonated their explosives shortly before the lunch hour. In the next 24 hours, in an act of defiance to the terrorists of the time, the bodies were removed, the street was cleaned up, and the stock market reopened the next day, kicking off an era of continued speculation known as the roaring twenties, a run that would end a bit over 9 years later.

The crash of 1929, which is often seen as the start of the great depression, did not actually happen in September but it is interesting to note that the beginning of the decline started in September with the stock market reaching its peak on September 3rd, 1929, followed by a 17% decline for that month. In other words, the speculative bubble brought on by increasingly complex financial instruments (margin positions came of age in the 1920s) for the time and speculation in the real estate market (the 1920s also marked the age of the skyscrapers, with such towers as the 40 Wall Street and the Chrysler building rising above the city).

Last year, in the first weeks of September, a bubble brought together by increasingly complex financial instruments (Credit Default Swaps) and increasing speculation around the real estate market, similarly brought the world economy to the brink of financial disaster. In those short weeks, the US government had to bail out Fannie Mae, Freddie Mac and AIG; Lehman Brothers went under, eventually bought out in bankruptcy court by Barclay’s. Wachovia, Merryl Lynch, and Washington Mutual all ended up being gobbled up by other banks; Goldman Sachs and Morgan Stanley changed their legal status to allow them better government protection; Similar economic activity quickly spread to the rest of the world, almost pushing some countries to go bankrupt (eg. Iceland).

The still on-going economic destruction arising out of that catastrophic month will continue to have a toll not necessarily calculated in human lives lost on a single day, as we did on 9/11, but it is very possible that the toll it will take on all our lives (and potentially on some lives lost) will be a strong and as long.

Parallels?

After the towers fell, on 9/11, and after the world had managed to cripple his operation, Osama Bin Laden swore to bring the US to its knees economically. And yet, it was the recklessness of our own people that almost became the tool of our own demise.

To say that 9/11 scarred us is to ignore a deeper, and somewhat more uncomfortable truth: much like the terrorist attack of 1920, the attack of 2001 did not stop us from becoming agents of our own financial demise. And while many of us will still grieve today and remember the friends and family members we have lost, the rest of the nation will look to this as an aberration, asking people why they have not moved on yet.

The answer, sadly, is that we, New Yorkers, we, the survivors of 9/11, we, the ones who lived through those horrible events and can still tell their tales, have yet to receive what we were promised. Sure, one will point to the fact that there is, finally, after 8 long years, a foundation for new buildings at ground zero, the truth is that there is still a hole in our skyline and a hole in our hearts.

We may or may not have liked the towers before 9/11 but we are still missing them. And so, as a sign of healing, the nation had promised us that it would never forget and that it would build new towers, maybe even higher and more magnificent, as a defiant sign that America does not give, America does not give-up and that terrorists may tear down our buildings but they could not tear down our optimism nor could they destroy our ability at turning adversity into triumph. The new towers rising above ground zero were supposed to be our phoenix, rising ever more beautifully out of the horrors of that day.

8 long years later, we are still waiting.

Scraping the sky

In the olden days, things were different: 90 percent the New York subway system was built, using private funds, in 4 years; the Woolworth Tower: 3 years; the Chrysler Building and 40 Wall Street: 2 years; and let’s not the city icon, which was built after the wall street crash.

Between its excavation starting on January 22, 1930 and ribbon cutting ceremony on May 1, 1931, the iconic Empire State Building was built in a mere 13 months, helping lift the spirits of New Yorkers as it showed that financial crashes may devastate us but that we, New Yorkers, we, symbols of American power, can still build amazing thing amazingly quickly. In a way, the Empire State helped lift the spirit of an earlier generation when it needed it most and that is what I would have liked to see happen at ground zero.

Sure, many people will say that the rules are different now, that workers’ protection and union powers slows things down. The argument might hold water if it weren’t for what happened over the rest of New York: The Time-Warner center was built in under 3 years. Same for the New York Times building; The Bank of America tower: 5 years, injuring more people in the process than were injured during the Empire State Building’s construction.

3 major skyscrapers since 9/11/2001, none of which is at ground zero. So why can’t we get a single tower over ground zero?

In 1931, a shinning beacon of hope rose above the city when the city needed it most. After eight years, WE are still waiting for ours.

In Memoriam

Carlos Dominguez, Mark Ellis, Melissa Vincent, Michael DiPasquale, Cynthia Giugliano, Jeremy Glick, David Halderman, Steve Weinberg, Gerard Jean Baptiste, Tom McCann, David Vera.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Waiting. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Balancing the budget

Balancing the budget, or at least lowering the growth of the current deficit, may be a way to signal a change in our national priorities. Doing so would not only appeal to fiscal conservatives but also work as an example to everyone in the country that the days of financing through debt are over. Sending such a strong signal would ensure larger support for some of the programs that are truly needed in terms of restoring the country’s infrastructure and ensuring that every American has access to education and healthcare resources.

The first item would probably be a repeal of the tax cuts enacted in 2001 and 2003. Such financial leger de main didn’t make sense then and it still doesn’t. Repealing those cuts would put anywhere from US$200 to US$300 billions back into the government coffers, which goes some way towards solving the budget deficit gap.

An order asking for a two percent across the board cut for all 2009 discretionary spendings would add about $240 billion in funds, helping handle the rest of the deficit (except for TARP)  and allowing the country to get closer to a balanced budget. The total budget would still represent an increase from the 2008 budget, just not as large a one. Making the cuts mandatory across the board would ensure that the pain is evenly spread and not based on any ideological directives.

Retiring the debt?

Another big question that could be considered would be around what to do with our national debt. Before TARP, interest on the national debt for 2009 were considered to be around US$260 billion. To put this in context, it’s more than what we spend on Medicaid yearly (US$215 billion); or 63 percent of what we spend on Medicare (US$409 billion); or 40 percent of what we spend on social security (US$644 billion); or a bit over 8 percent of the national budget… and that’s just the interest.

Not only that but today, for every US$100 the US government currently spends, it borrows US$14. That’s pretty scary because that money doesn’t come for free and that means that our interest payments will continue to increase over time.

So one could ask whether retiring some of that debt through accelerated payment might be a way to help create a surplus in the future. Since the debt will be crushing on future generations, why not take the hit now and find ways to use some of today’s entitlements as ways to offset those extra payment. For example, if we were to pull out of Iraq, we probably would end up with US$50 to US$100 billion in spendings that are no longer necessary. Assuming we had balanced the budget by other means, could we look at investing that money into retiring our national debt. The premise is the same as that of repaying a little more on your mortgage every month: if you did that, you might shaves years of interest on the back end. In the case of the country, that could means trillions of dollars that could be reinvesting in the country.

Encouraging Investment

Our current infrastructure is crumbling. Whether it is roads, bridges, railroads, or the electric grid, we are dealing wht a 20th century architecture that is not suited for our 21st century needs. For example, one of the biggest holdups in getting cleaner energy in the country is that the electric grid is not built in a fashion that would allow routing energy from low population areas to heavily populated one. Rebuilding the grid to solve that problem would cost about US$60 billion over several years. But here’s an interesting tidbit: that rebuilding could be done by the private enterprises that currently run the grid. The challenge would be in getting different states to agree to play together on setting common rules for building it out, coupled with some possible tax cuts to offset the initial investment costs. Something similar to the tax abatment on internet retail could be put in place around energy to stimulate, for somewhere around 4–5 years, the investment into new infrastructures through some form of private-public partnership.

Also in the public private partnership side would be the creation of a national service program allowing students to go to college for free in exchange for doing national service. The program would take the form of up to 4 years of college tuition paid for in exchange for up to 6 years of working for the country (The program would be sliced in one year increments, with tuition for one year being paid in exchange for 18 months of service). That service could take the shape of work as a government employee either at the state or federal level. Initially, the program would only be available for education through public universities. Private universities who are match the difference between the cost of a public offering and their own cost would later be added to the program, which might help curtail the rise in the cost of education. Service would be compulsory for anyone who has taken a government grant but there would be an opt-out clause that would allow someone to repay the loan in full, with interest, in their first year out of college, allowing them to join the private sector after that.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Federal Budget 2010. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

So without further ado, here are my prepared remarks:

————————————

Good afternoon,

I know many of you are probably wondering why a history of currency would be on the program at a Web 2.0 conference. So let me first dispel a few concerns you may have:

• History can be a useful indicator of what may happen in the future. Under a historical lens, Web 2.0 is pretty easy to predict as the natural descendent of community organizing and lowered cost of communication and mediation.
• Web 2.0 will impact currencies and that will probably be the biggest thing historians of the future may remember about Web 2.0

So, in the next few minutes, I’m going to take you on a trip through roughly 60 centuries of history (just the highlights, I promise) and will show you how each major shift in the evolution of currency reflects what we consider pillars of the Web 2.0.

Having done so, I will attempt to take you through the next 25 years and project how Web 2.0 may fundamentally redefine how we think of currency, and present some of the challenges and opportunities this historical change may present.

So here we go…

About 4000–5000 BC, the basis of most trading was something called barter. Barter is simple to understand, really. At its most basic level, it goes something like this:  “I have fish and you have some chickens. How many chickens will you trade me for my fish?”

The other guys says he will give me 5 chickens for my 10 fish and, if I feel it’s a fair trade, we make the exchange.

So that’s all good but one can’t live off fish and chicken alone. And eventually, I go back to the guy and he tells me he’s not interested in fish but if I can find a cow to sell him, he’d be willing to exchange 50 chickens for it. So now, I’m out looking for someone who will give me a cow in exchange of some fish.

That may work for a couple of goods but you can see how inefficient an approach it is.

Back then, people started realizing the same thing and so there was a move to find some way to simplify things. Communities started gathering around some goods that they would agree were useful as a basis for trade: grain, honey, rice, etc…

And, through these actions, the concept of money was born… and with it, the basis for what defines a currency was established:

• It provides a standard measure of value for goods and services
• It serves as a medium of exchange
• It serves as a method of storing value

Let me get into those points in more details before we move on.

A currency provides a standard measure of value for good and services. If I go back to my example of chickens and fish, I can look at currency as a go-between. By establishing that a fish is worth 1 pound of grain and a chicken is worth 5 pounds of grain, I can then extend the model to a cow is worth 100 pounds of grain and a house is worth 1 ton of grain. From this data, I can infer that a house is worth more than a cow, which is worth more than a chicken and so on…

However, none of this can happen if there isn’t an agreement amongst everyone that a particular currency has value. You could call that a certain wisdom of the crowds and that’s where currency starts overlapping with web 2.0. We’re going to get to more details about that later.

The second point is that a currency serves as a medium of exchange. Because everyone agrees that grain is a great way to make those comparisons, I don’t have to go around and try to make conversions from one item to another. I trade the item against grain and then can use the grain to “buy” something else. In that sense, I can exchange any good for grain and grain can be exchanged against any other goods.

Once again, this only works if people agree on it as a medium of exchange. And that, in turn, represents a form of metadata about a trade. Sort of like if people were to tag an item with the same term. And once again, we get to a position where it overlaps web 2.0 as the crowd is now working together to establish value and therefore define markets.

And because currency is metadata, it can also serve as a way to store value for future use. For example, if I fish, there’s only so long I can keep my fish before it spoils. By selling it immediately (ie. Trading it for its currency equivalent), I can avoid that spoilage and store its value for future use. So, in a sense, currency serves as a storage medium.

But the fact that it works as a storage medium can be both an advantage and a disadvantage. As storage for value, the currency itself become valuable. And when something is valuable, well, some people try to acquire it through means other than production. From here, we end up with theft, pillage, war, etc… And from all this carnage, we get to the point where people try to find ways to protect their currency (and, almost as often, their lives).

In around 3000 BC, in ancient Egypt, some people come to the insight that, by storing their currency together and agreeing to share the cost for an army to protect that currency (which, at the time, is grain), they may be protecting themselves from loss. Along the banks of the Nile, granaries start to appear and they become a place for storing currency: people come in with the grain they received as a form of payment for whatever it is that they sold. And the first accountants appear, keeping track of what amount of currency people have in their accounts.

Everybody is happy and celebrates as they have discovered a fantastic way to store their currency and keep people from threatening them. Across Egypt, people pat each others on the back until, well, until the first currency crisis.

Around 2200 BC, severe drought made grain more scarce. The result was that disbursements (taking grain out) started to move at a higher rates than deposits (putting grain in). And some people found themselves in a situation where they had spent all the grain they had and had a hard time producing anything they could sell. In this case, the value of the currency (grain) increased because the currency became more scarce.

Eventually, the problem affected the top of the economic food chain, aka. The pharaoh and, as a result, local people started opting out of pharaoh rule and attempting to take control of their own currency. When all was said and done, about 200 to 300 years later, grain was abandoned as a currency as it was considered that a currency that can be eaten is a currency that can have a problem. So metals, which could be turned into tools, which themselves could be melted again to turn them back to metals, started emerging as the dominant form of currency.

This is important because it finally moves currency to something that is more abstract. Metal may be a commodity that, without any work, could be considered of little value but, as an abstract construct of value, it works. And for the next few centuries, that’s the case.

Some interesting alterations in terms of the ways money is stored and carried happen during that era. For example, in a number of countries like China and Sweden initially, people realize that metal may not be the most portable of currency for large transaction and so places where currency is stored (now called banks, because, initially they were sitting on river banks) start issuing the equivalent of paper receipt for storage and people start trading those receipt. Here, we see the emergence of two key components of a more modern system:

• First, the concept of representative money, where a piece of paper can be redeemed for a certain amount of metal, therefore representing that metal.
• Second, the emergence of paper as money, creating another layer of abstraction in the transactions.

With the move to paper, currency becomes sort of an I.O.U., representing a certain value but not possessed of that value in itself. This shift, called the shift to representative currency, is important because it establishes currency as an even more abstract concept. The piece of paper you receive is basically a receipt that can be redeemed for some equivalent amount of metal but it isn’t the metal in itself. So here, we see currency basically becoming free-floating metadata, asserting worth without necessarily showing it.

The problem is that the distance from a bank where the paper note can be redeemed becomes a factor in terms of exchanging the banknote.

Enter John Law.

Law is an interesting character: he’s a Scottish economist who, at age 23, shoots a man, is tried and found guilty of murder. He’s thrown in jail, manages to escape and lands in France. While there, he gambles a lot and comes upon two major observations:

• People have taken to trading the paper bills as if they were coins
• Paper is divorced from the metal it represents

From there, he deducts that whoever could control the flow of paper bills could start issuing more IOUs than they have metal for.

With this, he comes up with the concept of a reserve bank, assuming that he could have a bank with only 75 of the cash reserve needed to cover the IOUs it had issued. But there’s a problem with that: in order to control the flow of paper bills, he needs support from a government. And initially, most people think it’s a crazy idea and won’t go for it. But Law convinces some more junior people that it’s a good idea and, eventually, one of his patrons hits the jackpot: Philip D’Orleans rises to power and quickly realizes that he’s running a country where the government has a substantial deficit. So he puts Law in charge of creating a national bank and law sets out to create the first government controlled reserve bank, issuing more paper than it has metal currency for.

It’s a pretty radical idea. Law is dealing with a society where everyone agrees that what you see is what you get as far as currency goes but then he leverages the agreement that paper is a representation of what you get and, after having taken over control of the currency flow, he turns that into what you see is what you get if no one rushes the bank.

Because with his second insight, John Law creates the concept of fractional reserve banking, which basically means that the bank, at any given time, only holds a fraction of its obligation.

But fractional reserves can be a little scary: they work well as long as people trust that the bank can repay them. And most of the time that’s not an issue because while a person needs to pick up their gold or silver or whatever other metal the currency is traded against, another person probably doesn’t need his or hers. So it balances itself out in some sort of common good.

Where the system can fail is when everyone decides to take their metal out at the same time: remember, the bank doesn’t have enough metal in its safe to cover all the currency it’s distributed. That problem is actually an echo chamber problem.

A run on a bank, the situation I’m talking about, generally begins with a whisper: somebody has heard that the bank is having problem and concludes that money you’ve deposited there is no longer safe. That whisper starts spreading and, thanks to an echo chamber type of effect, people worry that their money is no longer safe in this bank. Since they don’t want to lose that money, they run to the bank and withdraw all their money from the bank. Problem is, they are not alone and quickly tens of thousands or more people start doing the same. Because of that massive onslaught, the bank no longer can meet its financial obligation and actually does fail.

This happened in the 1920s with the great depression and it’s happening now (that’s why the government is busy bailing out a number of financial institutions.

But let’s return to history. In the 1940s, after World War II, the Bretton Woods accord established some global rules for currency exchange against gold. But most of the reconstruction of Europe ended up being backed by US dollars to the point where the US held somewhere around 65 percent of the global gold reserves. In 1960, an economist called Robert Triffin figured out a problem with what had happened: there were more dollars in the marketplace than there was gold to back it up. In the early 60s, an ounce of gold was worth about four to five dollars more in London than it was in New York.

Due to many political and economic events throughout the 60s, the possibility of a run on gold and a run on the dollar started increasing and on March 17, 1968, the possibility became reality, creating a substantial money crisis. The whole financial system teetered on the edge of collapse during that era and eventually, the Bretton Woods accord was abandoned. On August 15, 1971, US president Richard Nixon announced that the US would no longer convert dollars to gold. In fact, he added the US would not convert dollars to anything.

That announcement is appropriately called the “Nixon Shock” because with it, Nixon puts an end to the concept of a representative currency established by John Law. In its place is now the concept of a Fiat currency, a currency that is traded not because it has a guaranteed value but because the government says that this currency MUST be accepted as a form of payment.

And so currencies now float, not based on a physical value but based on what people think that value ought to be: today, dollars, euros, pounds, and yens have a particular value not because it is set against actual goods but because people believe that the government that backs those currencies will continue to do so in the future.

So let’s go back to our fundamentals of currencies: they have to be an agreement and that’s where we get to web 2.0 and its impact on currency.

Which gets us to more recent times. During web 1.0, a number of companies starting thinking that the internet, because it was global in nature, needed a global type of currency. So technologies like Digicash, Cybercash, Ecash, Flooz, Beenz, appeared in an attempt to mirror cash and create new currencies.

But they had many problems. First of all, the different systems were hard to use, often requiring software to be installed on the users’ machine. That limited participation and, if you remember one of the fundamental rules of currency creation is that users generally agree on using a common currency.
The second part was that the systems actually went too far in trying to emulate cash. So, just as you need to go to an ATM to get cash today, most of the system used the concept of a purse that was to be refilled from a different area. But why go to an ATM to withdraw cash when you’re on the Internet? Why not say, “I have money in my account, refill my wallet if it’s empty. ”

The third, and probably most important part, was that once spent, the currencies were transferred back into some real world currencies like the dollar or pound sterling (and no euros because this is all happening before the euro became a consumer currency.) That was the biggest mistake because currencies weren’t really traded.

The dotcom bubble crashed and, along with it, most of the virtual currencies that had been introduced. It wasn’t a very big deal because people didn’t hold much money in those currencies.

Meanwhile, a parallel development having absolutely nothing to do with currency creation took form across the internet: because of its global outreach, the net was a perfect place for people to play games together. At any given time of day or night, there was always someone interested in a game of chess or backgammon or something else. Some games went beyond the basic board games and leveraged the concept of role playing games that had been so attractive to so many computer geeks.

And over the years, as computers became more powerful, the quality of the graphics improved. And as the games improved, new point systems were created for each quest allowing to trade work (game-related achievements) for goods (better weapons, magic potions, housing, etc..)

Those points took various forms. So games like World of Warcraft or Lord of the Rings online, which are set in a medieval-like type of environment, turned to gold as their achievement point systems. Linden Lab, with created Second Life, created the Linden Dollar, and so on and so forth.

But then… then something really unexpected by most of the game makers happened: people started exchanging those virtual currencies for real world ones. Looking back now, it seems to make total sense: the challenge, for a lot of those games, is that it takes a lot of time to acquire virtual currency.

Here, in the developed world, time tends to be at a premium. Most of us are multitasking constantly because we just don’t have enough time to do everything that we would like to. But because we spend a lot of time working or doing other things, we don’t have much time to play games. On the other hand, we tend to have more disposable income than people in underdeveloped countries.

For example, in 2005, the average annual salary (and let me make this clear, I’m talking average annual salary) for a Vietnamese worker was 1200 dollars. That’s 1200 dollars a year. That same year, in the Guangdong province of China, that number was $2,778.

Some of those people are in their early 20s and when they get out of work, they go out and spend some of their money to play video games. At some point, a few entrepreneurs around southeast Asia realized that if they paid ANYTHING to those players, they might be able to get past some of the more boring tasks and resell the accounts to people with little free time. A new economic model was born and all of a sudden, World of Warcraft gold started getting traded against US dollars and euros.

Students of currency history could have predicted this. Remember, currency is a social agreement on the value of something and here, those virtual currencies became an agreement on a value of time.

While initially the phenomenon was one of supply arising from southeast Asia to meet North American and European demand, it eventually went around full circle. When China decided to start requiring that people register their work occupation as “virtual workers” for people dealing with that type of trade, over 750,000 people applied in the first quarter. That’s three quarters of a million people in China alone claiming to make the majority of their living from creating goods they sell against virtual money.

And Asia is where it actually gets very interesting because frictions between the government and virtual currencies are becoming more common.

Meet Tencent. Cute little penguin, right? Well, that little penguin is currently at war with the Chinese government. It started relatively innocuously. Tencent provides an IM system and offered a virtual currency, the QQcoin, to be used so one could upgrade their online avatar (an avatar is basically what your online character looks like) and allow for people to give gifts to other avatars. Not a big problem until a few other web sites started accepted QQcoins as payment for services, and eventually for goods. In May 2007, the Chinese authorities started issuing warnings about the QQcoin. By November 2007, they were blaming it for impacting the Yuan, the national currency.

That industry, which people have called the virtual world economy, real money trade, or RMT, currently represents anywhere between 2 and 4 billion US dollars of transaction flow a year. That’s up from inexistent less than 5 years ago.

So let’s keep that number in our minds and move to the next set of influences Web 2.0 is having on currency. As you know, Web 2.0 in increasingly about giving power to the user and increasing peer to peer relationships.

I talked earlier about the virtual currencies that popped up during the web 1.0 phase. There was one company which, at that time, came up with the idea of moving currency from one Palm device to another. For those of you in the audience who may not remember that time, Palm devices where the spiritual grandfathers of the iphone or most smartphones today. Well, the Palm thing didn’t work out for them, so they figured they’d start moving money via email. Oh, and they renamed the company around the name of the product: Paypal.

I think everyone here knows the rest of the story. Paypal has become a leader in moving money on a person to person basis with something as simple as an email address in terms of identification. That simplified transactions and many people around the world are actually using paypal today to move money from one currency to another.

And while many may snicker at the idea that moving money from something as ridiculous as the Palm, well, it was just a question of timing and marketplace. Currently, in Kenya, M-PESA is doing the equivalent of 10 million US dollars in daily person to person transaction on mobile.phones. That 3.6 billion dollars a year.

That’s real currency right now but why does it have to be a real one? After all, it’s just virtual money as it moves from an electronic device to another.

Meanwhile, marketplaces like prosper.com and zopa have started allow users to make loans to each other via a web interface. It’s called peer-to-peer lending, basically, people lending money to other people, or as most of those companies claim, they’re Ebay for money.

According to the online banking report, it will be a US$9 billion a year business by 2017.

That’s real currency right now but why does it have to be a real one? After all, it’s just virtual money as it moves from an electronic device to another.

So if we take the trends we’ve just explored:

• Virtual currencies have grown to be traded as if they were real currencies
• People are moving money from one person to another via the internet or mobile devices

We may be able to come up with the conclusion that where this is going, in the long run, is an area where exchanges could be set up either online or on mobile devices to use virtual currencies are real currencies.

And if we assume that this first step is possible, then it’s not too far away from the next step, which is an explosion in the number of currency offerings we may see in this world.

What we’re seeing here is the first shot in what I think is the next evolutionary step in the history of currency and it’s an evolution that could either be a transitional phase without major disruption or a massive change in the way people are interfacing with currency: this could be our generation’s Nixon Shock.

The issues around this new world are significant.

The first issue is around who is controlling those currencies. For most of history, currency was under the control of the currency issuer. But in the last couple of centuries, there’s been an increasing trend towards government control of currency.

How will government react when their own currency is challenged? And will their reaction matter? After all, the Chinese governments actions to date, as far as the QQ is concerned haven’t stopped trading.

What will happen in terms of tax collections? Will government have to start accepting currencies beyond their own as agreed form of payments? And if they accept other forms of currency, will they have to accept other government-run currencies as form of payment?

How will criminal behavior be dealt with? Today, criminal elements can be tracked because whenever they have to deal with some currencies, they have to eventually deal with banks. And because banks are regulated, criminal behavior can be intercepted. What happens when those money flows move outside of the financial institution control? Shouldn’t governments think about regulating those institutions as money transfer operations ?

What happens when the number of currency explodes? Sure, computer systems can do the conversion without problems but how will WE assess the worth of a currency?

And, as currency initially proliferate, there will eventually be a move towards an agreed upon set of new currencies because remember that currency is ultimately, about an agreement value by all of us. But when some of those currencies die, what will happen to the people holding them? Will the dead currencies be converted to emergent ones? And what happens if the dead currencies are ones that were controlled by governments? Will they fight for survival?

I unfortunately don’t have any of the answer to those questions but if there is one thing I know, it is that where questions exist, opportunities abound.

And with that said, I would now like to open up the floor for discussion.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Coins to QQ at Web 2.0. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The potential merger has long been rumored and there are many reasons for which it could actually make a lot of sense for both companies. A question, though, remains as to who the winners and losers are in that deal. Topline, it’s clear that Microsoft and Yahoo benefit from this and clear that it doesn’t benefit Google. But who else?

Let’s look at the deal and try to figure it outs

Winners

OpenID: Only a few days ago, Yahoo announced support for OpenID, a system that allows users to use their yahoo credentials as a way to login to other services. Surprisingly, this was the goal of Microsoft Passport (now knows as Windows Live ID), almost a decade ago. A pairing between Microsoft and Yahoo could represent a major win for OpenID, especially if the partnership extends Yahoo’s commitment to Windows. One could see OpenID being incorporated with Active Directory in the future, leaving any non-openID provider in a lurch.

AT&T: Yahoo has a partnership with AT&T for IPTV. Combine that with the recent acquisition of Maven Networks, the IPTV efforts Microsoft has taken, and its relationship with MSNBC and there’s added strength provided to AT&T’s foray into the television space.

AOL: Many people would put AOL in the loser category but I think this partnership makes it a potential acquisition target for Google now, which means that Time-Warner could try to get a premium and spin-off a property they’ve had a hard time managing.

Losers

Advertising Agencies: It was only a few weeks ago that I joined GroupM. At the time, my feeling was that someone needed to build a counter-balance to Google’s power in the online space and, since any online pairing seemed unlikely, large ad buyers were the only ones that could provide that counter-balance. Now that Microsoft and Yahoo are providing that counter-balance, advertisers are going to be squeezed not by one but two giants. With two players representing more than 75 percent of all possible ad buys, the online companies will dictate terms to ad agencies and not the other way around. That window of opportunity appears to be closing for ad agencies.

However, a large enough online ad buyer could, if they standardized their platform and streamlined it to make single aggregated buys (for example, tell Google or Microsoft/Yahoo! that you will buy XX% percent of their ad inventory next quarter if they discount the rates by YY% compared to the competition) but ad agencies do not yet have enough streamlined data to be able to build risk models around such large scale purchases.

Ask.com:  Unfortunately, IAC does not have any major partnership with the larger players in the market. It’s fight to stay in the search game appears to be an uphill struggle from now on. There doesn’t seem to be that many strategic options relating to the changing dynamics of their portion of the market.

News Corp.: A combined Yahoo/Microsoft partnership would own roughly 40 percent of the overall market for finance-related online news (according to Hitwise, Yahoo finance is just shy of 30% of the market and MSN money represents a bit over 10% ). This will have an impact on the likes of MarketWatch and the Wall Street Journal online. Furthermore, the coupling of Microsoft’s desktop money client with Yahoo’s strength in the online finance news space will be hard to defeat.

Any email provider: Microsoft/Yahoo will have almost 80 percent of the webmail market (Gmail comes in second with 6 percent). This means that any company that is trying to provide this as a standalone service will have to follow whatever direction the new entity takes.

Web 2.0 companies: With one less buyer in the market, that makes it more difficult to sell at a rick premium.

I’m sure there are many others I’m missing. Feel free to comment in the discussion thread.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Non-obvious winners and losers in Microsoft Yahoo Deal. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Background

“People are concerned about your blog.” In the hushed world of banking, this was a clear sign that I was in trouble. People didn’t like my blog and it could become a career issue. At issue was the fact that I had an identity outside of the corporation and people were worried that what I was talking about on my site would be associated with the corporation in spite of my specifically mentioning that all opinions on this site are my own.So I was left with a couple of options: be quiet and keep progressing my career or find a place that would be more friendly to my blogging. I tried the former but, as more and more stories popped up, I found it harder and harder to be quiet. I wanted to comment, I wanted to write but I had to balance that against the idea of being gainfully employed in what was an otherwise good job.At the same time, I was getting a little antsy. I wasn’t happy with the workload. I was also thinking that I needed a change of scenery since I’d been at the firm for a long (in my view) time. I didn’t want to become a lifer and my options in terms of career growth were to move to London or Hong Kong, both open options but neither really appetizing to me. I wanted to stay in New York and I wanted out of finance. The goal became to restore a good work/life balance, to continue being creative and to be given enough flexibility in terms of what I could do in my private life.So I started putting out feelers to see if there were ways for me to gracefully get out and find something more in line with my media background.Why did I want to go back to media?In order to answer this, I have to give newer readers a little background about me. I’ve been involved in the media space since the early 90s and in the internet commercial media space since pretty much its inception. It is, and has always been my first love.

Why I went into finance

When I went to the banking side of the world, the attraction was two-fold:

• one, I wanted to learn more about money flow and how money moved around the world once you had sent it to a credit card clearinghouse.
• two, I wanted to work on large scale global project because they seemed much more challenging and therefore more interesting.

Along the way, I learned a whole lot of things. Six years in the financial world taught me how to properly manage global projects in a widely distributed environment. They also made me more understanding of the need for strong project management, the issues around regulations and a lot of legal stuff that I was aware of but had never experienced first-hand.All said, it was a great learning experience that made me a stronger project manager and allowed me to really understand how large organizations work and how to work within them. It also allowed me to mature as a manager. I have to admit that when I joined the bank, I may have been a good startup guy but I was not equipped with the proper skills to work in an organization with hundreds of thousands of people. Through a mix of great mentoring, amazing educational opportunities and lots of hands-on experience, the bank allowed me to acquire skills few people have.In this process, I also learned that transaction flows were actually relatively simple to understand, once you had properly dissected them and it gave me a couple of insights as to the nature of money (more on that soon).Fast-forward to today and there are a number of things on the horizon that gave me pause about the future of banking:

• Regulatory constraints have made banks hyper-conservative: this makes it very difficult to try to do anything innovative within the context of a large financial organization. The innovators generally tend to be smaller more agile players who don’t have as much to lose initially.
• The mortgage crisis is just the beginning: In talking with people who trade financial instruments, it is becoming clear that no one really understands the magnitude of the current financial crisis. People know it’s bad and expect it to get much much worse but no one has any idea as to how bad.
• Transactions are easy to understand but much of the innovation in finance is actually coming from non-financial actors. Margins on money transfers are dropping as regulatory costs are increasing and competition is increasing. At the same time, the real value of transactions is not in the transactions themselves but in the metadata associated with the transactions.

So looking at all this, I had to balance whether I wanted to stay in banking or do something else. That was the easy decision. The tough one was figuring out what something else would be.

Back to Media

I had options: with a second Internet renaissance looming, it seems that I could pretty much go to any startups. And, in putting out feelers, it was interesting to see how many were interested. What they were interested in were my ability to understand large scale projects, my strong project management background, and my understanding of large scale transactional systems.As they highlighted those facts to me, it became clear that the banking experience was a great entree in any area. So I had to choose.Fortunately, I also had a good background in media and the recent changes seem to line up with my thinking and skills:

• Media is increasingly becoming about transaction. For example, if one looks at the recent success of Google (an advertising company with a side business in search) and Facebook (and advertising company with a side business in lead management), it is clear that media is all about facilitating more and more and smaller and smaller transactions.
• Couple the previous point with the fact that most media is moving to the models that were established by the internet (or revenue is being siphoned from those media to the internet directly, as we’re seeing with newspapers) and it is clear that marketplaces will exist to mediate relationships between buyers and sellers.
• Large media companies could manage this change but they are still beholden to the formats they have stakes in. We’re seeing that with the music industry still thinking it sells plastic CDs instead of of its content, the movie industry thinking the same and the print industry being wedded to its printers.
• Because of that, the change will have to come from an industry that is not weighted down by a particular distribution medium.
• Traditionally, the industry that sells messaging and figures out distribution is the advertising industry. Media buying is the arm of that industry that is most likely to enact (and therefore profit) from the change. Large media buyers are uniquely positioned to help their customers present their message in a more effective fashion across media and, due to the unique expertise they are accruing across media are also the best ones to understand where the market opportunity may lie.

So with all that, let me get to the real announcement relating to all this:

I HAVE LEFT HSBC AND WILL BE JOINING GROUPM ON DECEMBER 3rd. 

Who is GroupM? What will you do there?

GroupM is the media investment arm of WPP, one of the (if not the) largest advertising groups in the world. In other words, it’s exactly the place to be if you believe in and are interested in the kind of change I highlighted above.Thanks to the great formation that HSBC has given me, I will be joining groupm as the project management office director for the company. In that capacity, I will head the company’s PMO and will work on a number of really interesting initiatives. Based on my discussions with the people there, I’m very excited about the opportunity and it also looks like I’m joining a pretty amazing team of very smart people (I hope I can help insure that the average smarts are not lowered by my presence).Also, I’ve worked closely with my new manager and the folks in H.R. to ensure that special provisions have been made relating to my blogging. The terms are fair to both sides and it will ensure that I can basically start blogging again in my spare time. However, I suspect that a lot of my blogging will go to more discussions of the changing nature of finance and money. The reason I had not written about that in the past is that, due to my working in a financial institution, I steered clear of anything that would relate to that world. But I did learn a lot about it and, more importantly, I did develop a few theories about it that I have not seen written about in too many other places. Now that I’m freer to blog, I think I can start writing more about it.At the same time, I might be more careful in my writing about advertising since that’s the world I’m moving back into. People hire me as much for my insights into a particular industry as for my other skills and I want to make sure that the keener ones are kept as a proprietary advantage to any employer.

Conclusion and Thank Yous

So there you have it. I’m moving to groupm; I’m leaving HSBC.However, before I close this out, I’d like to add a few thank yous to the people I have worked with at HSBC:

• First, I’d like to thank Kevin Newman and Raymond Cheng for giving me the initial opportunity. While both of them have moved to other parts of the organization, they were instrumental in bringing me on board and they are responsible for my initially joining and then staying on much longer than I had initially thought I would. Mark Martinelli also provided a fantastic guiding hand and a tremendous amount of sponsorship that probably ensured I’d stay on for an even longer period.
• I was also blessed with having to deal with a great management team. Over the years, mentoring by Rob Mian, Fred Hoysted, Gene Lavis, Bill McCloskey, and Mark Hibbard helped me better understand my own strengths and weaknesses and become a much more effective manager.
• I was also very lucky to deal with understanding internal customers like Larry Campbell, Daniel Hallac, Ian Haynes, Chris Walsh, Michael Artley, Joe Garner, Jeffrey Hughes, Bahvya Shah, Julie Lakha, Matt Dooley, Joe Garner, Julian Soper, Bev McArthur, Megan Heinze, Tom Cannon and Verity Coe.
• Internal friends worked hard to help me shape the best approach to problem resolution and, while it is hard to get every single name recognized, I’d like to also thank Satinder Sadhar, Simon Cox, Stewart Nacht, Kelly Hair, Fernanda Cabas, David Ruiz, Serge Besch, Vadim Permakoff, Venkat Lakshminarayanan, Aditya Kommaraju, Rajnish Jain, Amichai Lichtenstein, Stuart Bain, Pedro Crespo, Celia Bradley, Sarah Carroll, Sreenivas Duggiraala, Ainsley Rattray,and many others… It’s amazing that I could actually do all this off the top of my head and a testament to the amount of really great people working at HSBC these days…
• In 6 years, there are countless others I’ve interacted with who have made me a much better person. They’ve seen me grow as an individual and as a manager, they’ve forgiven some of my mistakes and they’ve taught me important skills. I will miss one and all but, at the same time, I’m excited about the new challenges coming ahead.

So looking back, it’s been a fantastic time at HSBC and I assume that it will be even better at groupm. There we have it, the big secret is out. I’m looking forward to the new challenge and I’m sure the new job will keep me very challenged and very busy but, at the same time, I’m also thrilled to be able to say that the blog will get more lively: I’m back baby and this time, I’m gonna stick around.…

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Transition time. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

It seems every time Apple or Google introduces a new product, the buzz is high. For example, Apple recently introduced a $350 speaker and, while the reaction was more tepid than it has been for other Apple products, no one seem to point that the emperor was looking very very naked. Yet, Microsoft keeps throwing out new products and few people seem to be very interested (no matter how Scoble tries to browbeat us into thinking of Microsoft as cool).

Similarly, today, Google introduced a finance section that mimicked much of what yahoo! finance has been doing for years. It has a couple of nice AJAX-based features but, all and all, it’s not enough of an improvement to be considered like something that could potentially dominate the tech news cycle. And yet, every major tech pub or mainstream publication has covered the release.

why?

Trying to divine the source of coolness

What Google and Apple seem to have understood is that there are ways to make oneself look cool. I’m going to try to lay out some of the things I’ve seen (and I hope that others will chime in in the comments):

Rumor Mill

First, let the rumors float or give the appearance that you don’t want rumors spreading. Google Finance has long been a rumored product (as is Google payment, for example) but no word ever came out of the company about their intentions. In fact, Google is relatively stingy in terms of providing advance information about their products. They have learned to let the rumors run wild, leaving their competitors tearing their hair out trying to divine what Google will do next.

Apple takes a different approach to this. In the past, the company has been relatively ruthless in its attempts to shut leaks down. However, it seems that, when leaks are presenting compelling products and the company doesn’t really have anything to announce, Apple is happy to let the rumor mill run wild. So, before the release of the iSpeaker, uh, iPod Hi-Fi, Apple did not crack down on rumors about a new video iPod.

The two approaches speak to two different traits: one is to be extremely secretive about your action and the other is to let rumors go wild as long as they paint a picture of your company that is far cheerier than its reality.

The one feature

When selling technology, there are two publics to serve: the early adopters, and the general public. The early adopters are a fickle bunch but they can have some influence on the general public. So giving the early adopters one feature that they will like is an important feature of creating good buzz. Similarly, when dealing with the general public, emphasize the one feature that makes your product different. It doesn’t have to be something that is actually innovative (many companies were making MP3 players years before the iPod; many companies have offered services (other than search) which did what Google did in categories like mail, web hosting, classified, news, etc..) but it has to be presented as such. The early adopters may groan but they are eventually drowned out by the masses.

Thus, Apple did not release a featureless MP3 players without a screen, they released the “Shuffle” which allowed people to get a little more randomness out of their music collection. Or Apple didn’t release a $350 speaker, they release a Hi-Fi system that will work with an iPod (iPod sold separately). Similarly, Google did not release a Geocities rethread, they released pages, a cool online web editor and page hosting service. They did not release a me-too version of finance: look at the cool graphs they have.

I may sound a little cynical in that last paragraph but I believe it is this kind of cynicism that infuses the marketing of cool products. They may not be the top technology in the market but they are different. And emphasizing that they are different gives a chance to the users to feel like they, too, are different.

Cool by association

The next item on the list, in terms of generating buzz is to create an appearance of exclusivity from the get-go. Thus Apple does not complain too much when the police report rise in theft of iPod, due to the high visibility of the white headphones (see, our product is so popular, people steal it). Similarly, Google did not offer a free web-mail service for all, you had to receive an invitation.

By creating a certain level of exclusivity or belonging to a certain tribe, Apple and Google have managed to go beyond the product. They’ve created an aura of cool in being associated with them. When a new product comes out, you have to check it out or you will be out of the loop. The trend folds on itself, ensuring that future product launches benefit from the buzz of previous product launches. Over times, the duds are forgotten, and the companies are seen as innovative.

Look! Feel!

One of the other things to consider, when creating some level of buzz is the fizz and whiz of look and feel. Apple is known for designing beautiful computers (in the mainstream PC world, only Sony puts as much thought into how their computers look). The energy they put into the design allows them to bypass some of the technology issues that other vendors would encounter.

Similarly, Google has become an expert at using AJAx for their interfaces. As a result, new products generally look more polished than the competition. In the case of Finance application, it was interesting to see comments by people in the financial space on the performance of the product in terms of delays giving stock quote prices, etc.. However, few users would drill in and discover that stock prices were about 20–25 behind, or that

What value does buzz have?

At the end of the day, though, much remains to be seen about the value of such buzz. While Apple generates a lot of buzz about its computers, it still only retains between 5 and 10 percent of the market. Similarly, while Google has generated much buzz for all its new products, its bread and butter is still revenue from advertising on the search engine. So the question that still needs to be considered is whether buzz has value beyond the introduction of a new product and what that value translates to in terms of real dollars.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Building Buzz. You can follow him on twitter here or receive his weekly newsletter by subscribing here.