Banking on Bitcoin: Decentralization means Direct Access

Bob Fogg is an anonymous finance insider and works at a large buy-side firm, which provides him with an intimate view of the industry.

Innovations in technology allow companies to evolve existing business models with the endgame of reshaping the landscape of entire industries. Slight alterations to the way a business operates can garner astronomical valuations and create new levels of competition in industries that have been “safe” from such competition for years. The one unifying trait between many recent innovations is the increased direct access provided between companies and consumers. Never before have individuals been able to directly express their preferences so cheaply, and this trend is slowly affecting previously untouched industries. Another way to refer to this innovation is a movement towards decentralized business models. Communication cost has decreased at a rapid pace. This has allowed information to be cheaply distributed in a personalized manner to each customer instead of processed identically through a singular hub. In most cases, it has become just as cost effective, if not cheaper, to provide direct access optionality to consumers.

Most people understand the concept of decentralization, but understanding the idea of something is completely different than recognizing it in action. The idea of decentralization (a dispersed network) is very removed from our everyday lives, but companies are taking advantage of it, and utilizing it now more than ever. Some of the added benefits of decentralization are increased efficiency and cheaper cost. The inherent dispersion that decentralization breeds necessitates individual (p2p) contact. Most importantly, decentralization mean direct access.

The advent of “quick-service” restaurant giants Subway and Chipotle has allowed consumers to be intimately involved in the process of creating what they eat; all at a similar price point and time investment as ordering a meal at McDonalds. This quick-service model has taken over the food industry in recent years, as restaurants such as Potbelly filed for IPO last year, whose only discerning quality is that it offers a particular type of food in the quick-service model. Instead of customers liaising with a server, who then interacts with the kitchen staff, who then prepare the food; customers essentially make the food themselves by personally directing various members of an assembly line as to how they want their food prepared. Instead of having the cash register operator act as a centralized point of ordering, the quick-service model foregoes the cash register operator until the end of the transaction. Living in New York, I see these types of restaurants popping up everywhere, such as Naya Express, Tres Carnes, and Indikitch. The expression of preferences is obviously advantageous to the consumer, and it provides, a real-time streamlined approach to product preparation and distribution.

One of the most popular business model tweaks an industry has undergone is in the taxi industry where Uber has unequivocally upended the everything. Uber has garnered astronomical valuations (reportedly $40 Billion at the time of writing) and spawned tons of competitors who replicate their model. Uber only slightly changes the existing taxi model by allowing people to hail and track individual cabs from an app on their phone instead of calling a centralized taxi dispatcher. Realistically, this change in the operating model is very small, but the new model provides more intimate access between the customer and the cab. The ability for the person hailing the taxi to have direct access to “their car” (they can “see” the type and location of the cab on their phone just like you can see your burrito being made at Chipotle) has been deemed revolutionary. The alternative to hailing a taxi through an opaque dispatcher over the telephone, has opened up entirely new and untapped markets that were not available before; only because of the slight tweak that moved the customer experience towards a more decentralized direction (or feeling).* In New York, I have my doubts that Uber will completely replace the yellow cab; instead it has opened up a new lane in the highway of transportation options, allowing for a more efficient flow of traffic through both the city and rural areas that originally has less access to cabs.

I’d like to note that the argument could be made that Uber is actually a more centralized taxi service, as all requests are routed through a phone app. The point I am making is that Uber gives the customers an experience that is more decentralized than going through a dispatcher (more poignant in less urban areas). As I was chatting with Matt about this over lunch recently, he suggested that a completely decentralized example of cabs already exist… its called hitchhiking.

The news, television, and music industries are currently undergoing the transfer from centralization to direct access as well. Twitter has allowed one to tailor his preferences on both sides of the information exchange. One no longer needs to rely on a news company to aggregate what the company thinks he will want to know. Instead, people have the power to decide what they want to know. Conversely, this also means that news makers do not have to go through the centralized news hubs to distribute their stories. Persons of influence, companies, and organizations have direct access to the world through bypassing traditional media structures.

Within the next ten years, it will be unheard of for people to be forced to purchase a 700+ channel cable package in order to have access to the few channels they really want (those of you who try to purchase NFL RedZone through Comcast know what I’m talking about). Companies such as Netflix have challenged industry standards and won. With the advent of ESPN 3 for sporting events and HBO deciding to spin off their HBO GO service to be purchased online, cable conglomerates are quickly losing traction of their centralized control of content distribution. With examples such as the reviving of Arrested Development by Netflix, consumers are now market makers in the entertainment industry due to direct access. There are more choices than ever before, as the number of viable entertainment providers has skyrocketed, forcing increased competition and efficiency.

The digital music era has also forced more consumer choice and competition by decimating record companies’ stranglehold on content distribution and profits. Artists now can directly upload their music through decentralized distribution channels such as Soundcloud and Bandcamp. This has driven the price down for music, eliminated the premium paid for single songs, and actually increased the overall wealth going directly into artists’ pockets. If you have an hour to kill, the legendary record producer and audio engineer, Steve Albini, explains how the music industry has been revolutionized because of the new direct access model better than I ever could in his 2014 Face The Music keynote address. Having to buy an album for access to a single song is no different than being forced to buy a premium cable package in order to access a single channel. The advent of the direct access model eliminates this premium and provides huge benefits to the consumer.

Technological innovation makes life easier; especially when the innovation is directed towards consumers. Providing consumers with direct access to products and services has allowed new waves of companies to take advantage of industry inefficiencies, and these companies have been wildly successful. The aforementioned innovations do not fully replace, but compliment existing services. Fast food restaurants, yellow cabs, cable companies, and major record labels all still exist. However, these entities are now forced to cope with a restructuring fueled by competitors offering added efficiency, lower price points, and individualized services through decentralized direct access.

This piece is part I. It’s not hard to figure out where I’ll be going with part II.

Previous Posts:

Banking on Bitcoin: Operational Inefficiencies

Banking on Bitcoin: Misunderstanding Mindsets

Banking on Bitcoin: #FirstWorldProblems

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