AIG. The company that’s too big to fail. Forget about retention bonuses for a minute and think about what brought us to the place where we’re sitting at home or at work or driving with the radio on listening to Congress scream at a guy who is making a buck a year to clean up a mess he neither made nor controls, because in some very real ways, it is a company that’s “too big to fail”.
I have some real problems with the whole ‘too big to fail’ (henceforth referred to as TBTF) theory, and yet my experience with employee benefits (and investments as a peripheral track) tells me that there are indeed some compelling reasons to prevent AIG from failing.
From Francine’s post:
It’s all a matter of “counterparties,” which seem to be the human equivalent of sliced up mortgages — the chain goes on so long that it can’t be traced. AIG has to put money in escrow for Deutschebank, one of its counterparties, to guarantee the risk of Deutschebank’s counterparties, who are hedge funds. And who are the counterparties of the hedge funds? It reminds me of the old song “There was an old lady who swallowed a fly.” Perhaps she’ll die.
I would only add this to her statement about the chain: The chain cannot be traced because there were never any tangible assets anchoring it. Ever. What AIG, Bear Stearns, and the rest of Wall Street did was sell investors the right to buy risk. AIG’s activity was particularly blatant, because they not only sold the risk, they insured the risk, effectively double-dipping the income stream in the good years, and falling doubly hard in the hard times. Like now.
It comes down to this: AIG had its hands in so many different parts of the credit swap business — parts that were fundamentally at odds with each other and should have been completely separate — that when the house of cards collapsed they became the dead-center target for the potential to topple entire economies here and abroad.
That is far too much power for any single entity to have.
The lesson here isn’t about competition and free markets. The lesson here is one that’s closely related to the issue of monopolies, and why they are generally bad for economies and people: When one entity has so many tentacles in related aspects of a single enterprise, it falls into the “too big to fail” category.
Ah, Google. They give away mail, maps, mobile applications, search, office apps, and much, much more in exchange for advertising revenue. I’ll bet every person who reads this post uses Google more than once per day. They also woo small businesses over with the Google for Domains business, where small companies can use GMail and Google Apps for a pittance, putting their own domain name on a version of GMail. Let’s not forget the Chrome browser.
But wait, there’s more: Google is looking to be a force in the mobile market on par with Apple’s iPhone and the RIM BlackBerry, and recently introduced their own operating system along with the G1 phone.
Most importantly, every single Google offering is “in the cloud” rather than on our computer, easily accessible from desktop or mobile devices, making Google ubiquitous.
What happens if Google fails? Before you scoff at me, think about the parallels to AIG. Their income stream is based on an advertising model which is rapidly becoming obsolete, thanks in large part to the rise of Twitter.
In the Web 2.0 period between 1999 and 2009, the dominant business model was advertising. So Internet businesses like Google, MySpace , Facebook , and YouTube Inc. all gave away their technology for free and then sold advertising alongside all their user-generated-content. If, however, as I suspect, Twitter represents the next big thing, then its business model is going to be radically different from the advertising-centric model of the Web 2.0 period.
There have already been cracks in the foundation. Layoffs, abandoned development of projects like Jaiku, consolidation around core business products like search, apps, and mail.
If Google is ubiquitous and bases its business model on a dying income stream, how long should we expect it to survive before it, too, becomes “too big to fail”? What would such a failure look like? Would we simply jump ship? To what?
It’s the “to what” question that Microsoft should be paying attention to. I see lots of information flying around about Microsoft’s development of Google-competitive applications, including Windows Live, but as far as I can tell, it’s not close enough to Google’s ubiquity to truly compete. At least, not yet. Microsoft also seems to be coming into things late in the game, and from a user’s standpoint, is already so TBTF* that it is operating with caution and large-corporation slowness. While I’m sure innovation is happening at Microsoft, it’s not out in front of users like me.
But it could be. And it should be. Microsoft, give me an alternative to Google. And make nice with Apple so I can use your products on the iPhone easily. Consider a spinoff of your cloud computing division as a way to speed innovation and invention, too. Like Google, you have a deep hold and reach on many, many aspects of desktop and mobile computing, as well as the enterprise and desktop markets. Still, Microsoft lags in search and cloud computing, areas that are growing, not shrinking. What we don’t need is a reinvented Google. Innovate.
Finally, there is Twitter. Twitter is far more than a social network. What you have in Twitter is a real-time attention stream, rich with information about what’s hot, what’s not, what’s rising, what’s falling. The key words there are “real time”.
Twitter is a transport mechanism for real-time data. Think about what’s on Twitter right now — there are the Blippers (music DJs), the newsies (breaking news world-wide), talkers, marketers, listeners, politicians, populists, charities and businesses. For the most part, social isn’t really their primary motive for being there. Information and attention are. New products spring up on a near-daily basis using Twitter streams or follower data as their foundation.
Twitter’s value is the real-time data stream, and they have absolute control over that right now, because it is the key to their income stream. It’s only a matter of time before the specifics of their model emerge, but Twitter represents the emergent economy: monetized attention. How it is monetized comes in many different ways, but the immediacy of the data and ability to identify attention streams from unrelated users is invaluable to businesses, artists, politicians, and people.
And once again we have an economy emerging out of an intangible, only in this case, the intangible is an asset. Right now, Twitter is the only game in town, which puts them in the TBTF* category, too. Despite the emergence of smaller twitter-like networks forming around specific interests (see BlogHer’s new features for an example), the largest cluster wins the largest market share.
All of this leads me back to the questions that got me thinking about the parallels between AIG and these companies: Is it wise to build an economy around businesses that are too big to fail? What fail-safes can be built in? In a world with shifting focus in real-time on large networks and microcommunities, what caution signs should we be building? And how do we, the people, participate in limiting the “too big to fail” model?
Update: Some bonus links, since we all seem to be mind-melding today. Steve Gillmor says Facebook’s opening of their tweetstream commoditizes the real-time stream. Also Frameshop’s analysis of why AIG’s actions are more evil than I described.
- we’re in this together
- can miles really separate us from friends?