December 22, 2003

London Black Cabs, Trust on the Internet

One of the early benefits of starting the Insider (for me and for you) is that I've been able to sign up Lord Rees-Mogg to begin writing a weekly, slightly less formal letter for publication here. The medium is new to him. But when you write with as much experience and insight as he has, you're bound to find something thought provoking to explore each week. This week, the issue is trust, but in a Internet context. As LRM points out, the Internet is largely a self-regulating medium (as opposed to un-regulated, if you ask me.) The upside, no government authority is telling you whom you can consort with. The downside, to some, the existence of unsavory types willing to take advantage of neophytes. To be honest, I don't think the existence of criminals on the Internet, whether corporate or amateur, is substantially different than criminals in your neighborhood. The marketplace is full or rogues. And the buyer should always beware. But if there IS a difference, I'd say the difference is that there are fewer layers of people between you and your interlocutors on the Internet than in the real world. And after all, that is exactly what a lot people celebrated about the 'net in the early days...the lack of "friction" between a business and its customer. The Internet made it easier to find the lowest price on virtually anything, effectively lowering prices for everyone. The "friction" in the transaction was the lack of pricing transparency. Take away the fog of costs coming from middlemen, and you'll pay lower pricesThis works well for consumers. And for low-cost producers or retailers (even producers of financial information) it works. But what it also does, as LRM points out, is put the issue of personal trust front and center. Businesses that are used to viewing each new sale as a "transaction" rather than a "relationship" soon find themselves besieged by customers who demand and expect a highly personal response to questions. How do you establish your bon fides as a business? Lacking a brand name that establishes trust, your garden variety firm doing some its business the Web has to earn trust one customer at a time. Trust is performance based. And performance is personal. No more hiding behind a corporate facade. I'd like to say that's one of the reasons I started blogging rather just writing a weekly or monthly e-mail. That is, all things being equal, the wide availability of information today means no one--particularly in the investment world--has a competitive advantage based on superior information. THe advantage comes from doing more and better work, turning the mish-mash of the news cycle into meaningful and actionable investment analysis. The only meaningful advantage a finanial product has today is having a highly-personal, subjective, "strategic perspective" (or 'Orientation' in the language of the Boyd Cycle you'll read about in the January issue. That orientation is just another way of saying direct and indirect experience. The direct experience being your own, the indirect being the experience of others. And since nothing new under the sun happens in financial markets, the indirect experience is often more valuable than the direct. As Liddell Hart says in Strategy, "The greater value of indirect experience lies in its greater variety and extent. 'History is universal experience'--the experience not of another, but of many others under manifold conditions.'" So, enough contextualizing. Here is your weekly helping of indirect experience from LRM. And incidentally, I plan on spending a LOT more time in London this year...where we've quietly been building some new contacts that should add even more to our "strategic perspective." Strategic Insider -- 22 December 2003 -- William Rees-Mogg In London, there are two kinds of cabs. The first is the familiar black cab. It is relatively expensive, but offers a high quality service. The price is fixed by regulation, the driver has had to spend a year learning the geography of London, on foot or on bicycle. He will lose his licence if he commits any but a very minor crime. The cab itself has to meet standard specifications which include the ability to carry a customer safely in a wheel chair. These regulations go back over a hundred years to the days of the Hansom cab. The alternative cabs are unlicensed minicabs. At their best they offer a cheaper service than the black cab and will pick up customers at times and places when there are few black cabs about. However, at the worst, they are driven by convicted rapists, who may have no insurance, may bully their customers into paying excessive fares, and very probably know only the most obvious London addresses. From time to time they are rounded up by the police. Londoners are nervous about using them, particularly London women. I do not write this as a travel note for people who are thinking of a winter break in England. Our two types of cab are as good an example as I know of the difference between regulated and unregulated markets. There are advantages in regulation, though not all regulatory systems work as well as the one which regulates the black Londotaxises. But low price is not one of them. The Internet is as near as one can get to an unregulated system. Its advantages are immense and they have changed almost every business system. But, like all unregulated systems, the Internet lacks the safeguards which regulations build in. The Internet is extremely attractive to criminals. The world’s police have now woken up to the danger of children being recruited by paedophiles in unregulated chat rooms, but parents still worry that a paedophile may have introduced himself, under a false name and giving a false age, into their child’s bedroom via a website the parent has never heard of. Police action is being taken to prevent that, which may or may not be successful, but paedophiles are an extreme example. At the other end of the scale of nuisance is Spam, and action is being taken to reduce that nuisance because it threatened the viability of the Internet itself. But the basic risk remains. None of us can be sure whom we are dealing with on the Internet. All sorts of scams and cons can flourish. All business depends on trust. The vendor has to trust the customer to pay and the customer has to trust the supplier to produce the goods as described. When businesses reach a certain size they no longer have an interest in cheating. Their reputation is worth more to them than any individual scam would be. We do not worry that Microsoft will not sell us the software as described, nor that Coca Cola will make a saving by cutting the quality of the product. Firms rely on celebrity or the value of the brand name, though this is even more expensive that regulation itself. But most businesses do not have a global brand name; hence the successgeneralizedised brand names, like the Virgin brand which applies to widely differing products. Yet the combination of the superboom of the 1990s and the Internet has created a problem of trust. There are real criminals prowling the virtual streets of the global city. There were hyper-criminals making phoney IPOs on the Wall Street of the dotcom bubble. No-one has forgotten the lesson of Enron. Those global businesses that do inspire trust will gain a very precious asset in the post Enron era. That may be worth remembering in 2004. William Rees-Mogg


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