Computers and telecommunications were being used together to add a new immediacy to financial transactions. Reuters created a new online facility for international currency trading in the early 1970s and Bloomberg followed up in the next decade with the “Bloomberg Box” to allow traders to analyze and trade Treasuries and other equities. Geosynchronous satellites and undersea fiber optic cables provided a new technological environment for the movement of money and news. Combined with faster micro-processing capacity, it created new transactional spaces so that money did not have to sleep; it became continuously active. Electric money was 24/7, and it was global.

I wrote my Masters thesis on international finance and telecommunications deregulation, so I had a lot of interest in two of Oliver Stone’s films: Wall Street (1986) and the recent Wall Street: Money Never Sleeps (2010). In Deregulation and the Telecommunications Structure of Transnationally Integrated Financial Industries, I examined the forces that were transforming the technological infrastructure for banking, currencies, derivatives and other financial activities. These financial industries have been a major driver of computerization and communications technologies since the 1970s. Consequently, the emergent financial technologies have transformed the spatial and temporal limitations on OTC (over-the-counter) transactions and bypassed the barriers to international data communications and the flows of information and money.

These developments that led to money’s insomnia provide the backdrop for Stone’s Wall Street: Money Never Sleeps (2010). This film is not as enjoyable as his classic Wall Street (1986) which I argued used the icons of a gangster film moved from New York City’s outer boroughs to heart of its official economy. In “Figuring Criminality in Oliver Stone’s Wall Street” I examined both the iconographics that Stone uses to dramatize his morality tale as well as the dynamics of the new era of global electronic finance.

In this latest film, Michael Douglas revives his role as Gordon Gekko, but he is no longer the “Master of the Universe”, pontificating the “greed is good” mantra. He emerges from jail in the beginning of the movie to find instead that his universe is a lonely one, having lost his wife to divorce, his son to drugs, and the affections of his only child, a daughter named Winnie, to Jake Moore, a young trader. Jake works at a venerable Wall Street company caught up in the credit crisis. Played by Shia Labeouf, he seems to lack Charlie Sheen’s Adonis DNA, but the comparison is unfair. More palpable is his character’s lack of depth emanating from the dramatic and narrative limitations of the story.

It’s clear that the story that Stone wanted to tell was the one about the financial crash and the resultant “Great Recession” so that is the direction I’m going here. The story is personal for Stone whose father was a stockbroker on Wall Street and Wall Street the film series has been his main vehicle to grapple with this issue. But Wall Street has changed a lot since Stone’s father was a broker in 1960s. He might have seen the automation crisis that accompanied the turn of that decade but not likely the financial derivatives phenomenon which started in Chicago during the 1970s and began to take hold on Wall Street in the 1980s.

What drove the derivative markets were the combination of algorithms such as the Black-Scholes equation and microprocessing power that enabled quick calculations on the trading floors. But even the exchanges notable for their frenetic energy and strange hand signals are seeing their demise as online trading platforms replace the face-to-face “open outcry” trading floors. Soon traders spent most of their time behind desks, coolly scanning economic data and trading trends while setting up parameters for automated trades.

By the 1990s, automated systems merged with hedge funds to trade a global buffet of new electronic instruments. The new hedging strategies not only exploited the global diversity of financial trades from developed and emerging markets, their risk models depended on them. “Dynamic hedging” was based on the capability to trade anywhere and all the time. Money truly never slept.

Most notable of the new hedge funds was Long-term Capital Management, the Greenwich Connecticut-based financial firm that John Meriwether, the famed bond trader from Salomon Brothers put together with 2 Nobel Prize winners and 80 founding members putting up the minimum investment of $10 million. LTCM’s computerized trades made good money for three years before the “Asian Contagion” and the collapse of the Russian market in 1998 sparked a major disturbance in the global markets that their systems hadn’t anticipated. When Russia defaulted on its debt in August of that year, LTCM lost billions and put a trillion dollars of trading at risk throughout the world. The subsequent global flight to US treasuries and the tech markets destroyed LTCM and nearly brought down the US financial system.

This Frontline video with the same name provides an interesting historical analysis.

Oliver Stone’s Wall Street: Money Never Sleep picks up the story and addresses the financial crisis of 2007-2008. One could say it started with the securitization of student loans for college students in the 1980s, accelerated in the 1990s when Freddie Mac and Ginnie Mae used these techniques for home mortgages, and turned a major fiasco when Wall Street began to package mortgage-backed securities into collateralized debt obligations (CDOs) for global distribution. The low-interest rates set by the Federal Reserve Bank that was trying to recover from successive “dot-com”, 9/11 and telecom crashes set off the housing bubble that was fueled by this securitization process.

As in any bubble, people leaped in to buy lest they are left out. Add to this ratings agencies that were paid for their evaluations by the over-leveraged banks and the credit default swaps set up as insurance policies on futile instruments and you have the recipe for the greatest financial disaster since the Great Depression.

Anthony J. Pennings, PhD was on the NYU faculty since 2001 teaching digital media, information systems management, and global economics. © ALL RIGHTS RESERVED

Online Media Business Models: The Intercontinental Interview

Posted on | June 25, 2011 | No Comments

Recently I was contacted by Stanislav Serdyukov, a second year Master’s program “Media Management” student in Moscow, Russia at the School of Business and Political Journalism at National Research University – Higher School of Economics. He is working on the master’s project with the theme “The Online Media Business Models and their Transformations” and wanted to ask me some questions about online media business models.

Q. What factors cause the origin of new online media business models?

I think the simple answers are technology and customer expectations. Media consumers are busy and they want their content where and when they want it. Digital technology has disrupted traditional media models and the empowered the media consumer – so far. One way to start thinking about this topic is by reflecting on Nielsen’s 3 screen strategy. The venerable ratings agency is now tracking attentive eyeballs on PCs and mobile phones as well as televisions. These viewing options expanded the time and place of viewing media and challenge the traditional media models and in the process they have created a more demanding media customer. Having said that though I think innovation is driving these services, creating new services customers didn’t even know they wanted, creating a “cool” factor when unanticipated new apps, technology and services are released, literally “blowing people’s minds”.

Q. How can online media firms renew their business model in the dynamic media industry?

From the business perspective it’s all about competitive advantage, something that has been hard to obtain in the web world. How can a company create or utilize barriers to entry to keep other companies from competing with them?

It is unfortunate in many ways, but the “app” is a vehicle to reduce competition on the Internet. How many apps do you have on your Droid X? On your iPad? When you are mobile you generally look to reduce your options so the apps are convenient. How many apps do you actually use? Compare that to the links you interact with when you get on your PC or MacBook at home.

Mobile devices are quite small for the web model – physically. How much space do you have smartphone? How small do you want the icons to be? How long is your thumb? The app will capture customers by limiting their options like the web never could. I’m sorry to say.

3. What are the future challenges for the online media business models?

I think money, people making payments, is a real issue. As is a related issue, security. Companies that tie in customers with comfortable payment systems like Amazon and Netflix have real advantages. People love the advantages of e-commerce and the social media aspects of the web, but are extremely wary of identity theft, fraud, malware and other problems that come with giving up personal information and making purchases over the Internet.

All this discussion about “free” is useful too. Free has always been an important model for the broadcast industry in that advertisers picked up the costs of production and distribution. Interesting that Netflix has challenged that model with a subscription model – remember that cable television started off in the US promising an ad-free environment. Now you have pay the subscription fee and suffer the ads. Cable has managed to maintain some key sources of competitive advantage: government protection, customer captivity, and fixed costs such as their huge investments in the network infrastructure. Media industries will have to continue to figure that calculus between ads and subscription prices. The higher the subscription costs, the lower the customer base, and the less interested advertisers will be. Its interesting to the see the New York Times has had some success with their new subscription model but other newspapers may not have the base of high income readers that don’t know how (or care) to clear their cookie cache. Media firms, particularly, news organizations need to come to grips with ads and economics of the Internet.

The “freemium” model is popular now and it makes a lot of sense. Sites build up a large customer base by offering a free service and then offer a premium service at a price. Picture sites are good at this, Flickr provides free storage services to the general public and makes money by offering advanced services to more serious photographers for a price. I noticed Skype is aggressively trying to move people into the premium paid services after their purchase by Microsoft last month as is Linkedin, after its recent IPO. Another strategy is to offer something free and then sell other products to produce a revenue stream. Fotki.com, another picture site, makes money by selling products like coffee cups, mousepads, and refrigerator magnets customized with user images along with traditional images used for framing.

4. What online media business models will be efficient during next five years?

Content continues to be overrated. Anytime you can get someone else to produce your content you are ahead of the game. Content is expensive and extremely interchangeable. Digital cameras, mobile camcorders are providing a lot of useful “user-generated” content and of course anytime you do a search you are producing statistical content that companies like Google are increasingly able to monetize. Just because you are not paying for something, it doesn’t mean someone is not making money from your online activities.

Syndication is also an important dynamic to consider. The process has been around for awhile. Think cartoons in your local paper. But it is particularly effective in an online environment. Think RSS feeds. Syndication is basically selling the same thing again and again. Hard to do with a car and hamburgers but possible with digital processes and products where the costs of reproduction and distribution are nil.

It’s hard to think 5 years into the future, but it’s clear one trend is that consumers are putting the ‘commune” back into communication. I’m talking about social media here. This is working itself out in three ways. One is that they want to interact with content, question it, explore it further, and add to it. Shopping is a much richer experience now due to all the information and reviews you can access online. Much better in many cases than dealing with a pushy salesperson, if you can track one down. Second, consumers want to share the media content with others. By sharing they express themselves and construct an identity. Facebook as been great for this. People are sharing their intimate photos, revealing their links with other people, and attaching media content that they find interesting. Mimetic desire is an important factor here. That is a theory of desire that recognizes that people develop interests based on the interests of people they are interested in. Third, they want to connect with people who share the same interest and interact with them. Whether it is organized around a football team, a pop singer, or a political cause, people are interested in being part of a community that shares the same meanings, goals, and values.

Anthony J. Pennings, PhD has been on the NYU faculty since 2001 teaching digital media, information systems management, and global communications. © ALL RIGHTS RESERVED

Smith Effect III: Adam Smith, the Census Machine, and the Beginnings of IBM

Posted on | June 20, 2011 | No Comments

This is the third in a three part exploration of Adam Smith and how his ideas laid the foundation for information technology (IT). Here I specifically explore connections between his theories and the formation of IBM which last week celebrated its 100th birthday.

This post further develops the thesis that Adam Smith’s new conception of wealth set the foundation for modern information practices and calculating technologies. The premise of this section is that the new system of economic understanding engendered by Adam Smith, the Scottish philosopher and author of the Wealth of Nations (1776), laid an important intellectual foundation for modern information technologies.

Smith contended that the wealth of a nation lay not in the riches gathered by the monarch but rather in the enterprise and productivity of the population. This had the effect of helping to transform a system of calculation, “political arithmatik,” designed to tally the wealth of the sovereign, into statistics (“state-tistics”), a system of measuring a wide range of economic and social activities.

Smith is mainly known for his notion of the “invisible hand” – God’s infusion of the world with a regulatory system based on individual human desiring. However, his reconceptualization of governmental wealth reverberated through time to stimulate the development of information technologies.

This “Smith Effect” grew in importance, especially as modern computerized bureaucracies emerged and “electronic” monetary policy became heavily reliant on the surveying capacity of modern statistical techniques. Smith, while generally accredited with ideas used to argue for the limitation of the state, also set the foundations for modern bureaucratic states and extensive surveillance systems dependent on information technologies.

This new direction in governmental activities led to continual interest and innovations in mechanical calculations and statistical measurements.

Consequently, it can be argued that the Smith effect resulted in Herman Hollerith’s tabulating machines, created for the 1890 US Census. These technologies eventually became the foundational product that led to the formation of International Business Machines (IBM). The Constitutional Convention of 1787 mandated the counting of Americans every ten years.

Still, by the late 19th century the American population had increased to the point where calculations were nearly impossible to compute using non-mechanical means. Immigration surged after the Civil War, and the whole idea of census-taking nearly became obsolete because of the complexity of the task. By the time one census was finished, it was almost time to do the next one.

Hollerith’s machine became an immediate success and prospered mainly due to the process of “Morganization” occurring in major companies at the time. J.P. Morgan was consolidating several similar companies under names such as AT&T, General Electric, New York Central Railroad, and US Steel. These companies had significant data processing needs that required the telegraph for transmitting information from various locations to tabulating machines that would aggregate information for reports to upper management.

Failing in health, Hollerith sold his business to Charles Flint in 1911. Flint merged the enterprise with two other companies to form the Computing Tabulating Recording Corporation. IBM celebrated this merger as its centennial marker in 2011.

CTR changed its name to International Business Machines (IBM) in 1924 after it purchased German tabulating firm Deutsche Hollerith Maschinen Groupe (Dehomag). Under the leadership of former NCR and indicted supersalesmen, Thomas Watson, IBM expanded to other countries interested in tallying their own populations. In the 1920s and 1930s, IBM began to comb the world, selling its tabulating machines and personalized census services to countries like Russia and Nazi Germany. The punch-card tabulating systems were then generalized for a wide range of commercial and government purposes, including monitoring racial politics as well as parts management for the Luftewaffe, Germany’s air force.

In the US, IBM got the Social Security contract that supported them through the Great Depression. Former IBM salesman Ross Perot would follow that model by getting Medicare contracts to help build his company EDS. It was the son, Thomas Watson, Jr., who guided IBM into the electronic computer age during the Cold War.

Citation APA (7th Edition)

Pennings, A.J. (2011, June 20). Smith Effect III: Adam Smith, the Census Machine, and the Beginnings of IBM. apennings.com. https://apennings.com/dystopian-economies/adam-smith-the-census-machine-and-beginnings-of-ibm/

Ⓒ ALL RIGHTS RESERVED

---

Anthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University where he taught comparative political economy, digital economics and traditional macroeconomics. He also taught in Digital Media MBA atSt. Edwards University in Austin, Texas, where he lives when not in the Republic of Korea.

Category: dystopian economies, the cold war, the smith effect
Tags: Adam Smith > Census Bureau > Constitutional Convention of 1787 > Herman Hollerith > IBM > International Business Machines > Nazi Germany > punch-card tabulating machines > Social Security Act > state-tistics > Tabulating Machine Company > The Wealth of Nations

« go back — keep looking »