Ride the Coattails of Technology

Over the weekend with Groupon rejecting Google’s rumored $6 billion and Mark Zuckerberg’s much-hyped 60 Minutes interview, technology has taken center stage in the mainstream media.  More interestingly, many in the blogosphere have been expressing their views about the trailblazing nature of technology in today’s world.  We are at one of those interesting moments in time where the advancement in the capacity of technology has taken a parabolic trajectory, bringing about a transformative time in history where new innovations are fundamentally changing the way we as people live our lives.

Innovation as Progress

The Internet has streamlined the process of innovation to the point where a company like Groupon, barely removed from its 2 year old birthday could not only spurn a $6 billion offer from Google (NASDAQ: GOOG), but could do so comfortably knowing that a greater future lies ahead.  Just four years ago Facebook rejected a $1 billion offer from Yahoo! and people thought Zuckerberg to be insane.  Sure enough today, according to recent transactions on SecondMarket.com, the company’s valuation lies northward of $25 billion and somewhere in the vicinity of $40 billion.

Not too long ago growth of this kind was not only unprecedented, but impossible.  The capital and time required to build a large company placed a built-in limitation on growth.  What’s amazing today is that while all this is happening, many are missing the real story.  Since we are in the midst of the worst financial crisis in a lifetime, far too much of the focus ends up on the gloom and doom lying ahead and far too little on the dynamic advancement taking place on the tech arena.  While clearly these innovations have not led to a decline in the unemployment rate today, they truly do hold the potential to change the landscape of our economy tomorrow.

A blog post highlighted the fact that one device, the iPhone replaced $2,700 of someone’s electronic equipment (Devost.net), and we’re only talking about one device right here.  That is the power of innovation.  Innovation is the primary way through which we can (and have) kept inflation in check for so long.  Innovation is at the essence of democracy.  Innovation is the silent equalizer that lurks beneath the surface of all discourse.  When our country is at its best, our innovations are at the forefront.  That is a simple fact of the American Dream.  The very essence of American Democracy is in and of itself an innovation in the history of governance.  Let us not forget that fact.  And innovation is inherently dynamic and progressive.

Yesterday I came across an intriguing interview of the sci-fi author William Gibson in New York Magazine (hat tip to the Daily Dish).  In the interview, Gibson put forward a noteworthy perspective on humanity, technology and politics:

One of the things that’s unknowable is how humanity will use any new technology.

No one imagines that we’d wind up with a world that looks like this on the basis of the technology that’s emerged in the last hundred years. Emergent technology is the most powerful single driver of change in the world, and it has been forever. Technology trumps politics. Technology trumps religion. It just does. And that’s why we are where we are now. It seems so self-evident to me that I can never go to that Technology: threat or menace? position…This is not only what we do, it’s literally who we are as a species. We’ve become something other than what our ancestors were.

Technology as Politics

With the “adult conversation” over our deficit taking center-stage in today’s policy debate, I found this both a timely and important point to make.  Steve Blank argues that “accountants don’t run startups” and the argument is founded in his empirical evidence from years in the startup industry (it’s a great presentation to learn about how entrepreneurs go about innovating).  Accountants don’t function well in an environment of constant iteration and innovation.  In the world of entrepreneurs, businesses grow out of models, not plans.  There are no neat cozy number-centric projections that last from the early days of an idea to the later stages of a mature business.  It is a world where chaos reigns supreme and accountants don’t deal well with chaos.  I don’t mean this as a knock on accountants, because they do a very important service–and all of my accountant friends out there, and there are many, you know I love you all!

I want to take this a step further in arguing that accountants shouldn’t run governments either.  Accountants do a great job of taking numbers and crunching them to figure out what happened in the past and to project where things will be moving forward.  However, any forward-looking projection from accountants places far too much a reliance on the past than it does the present and future.  The entire discussion over the deficit is based on a numbers-centric analysis which takes many variables as assumptions.  These assumptions may be valid at present, but leave little room for progress and innovation.  Granted things can get worse, but considering the human track-record of innovation and where we are today on that path I feel these budget projections are far too gloomy and leave little room, if any, for innovative progress.

The Cure for Medicare Lies in Progress

One of the most popular lines of attack on future budget projections is that Medicare will inevitably reach a tipping point whereby it cannot be paid for.  Much of the projected increase in medical costs is borne in demographics; however, a large coefficient of that increase also stems from the fact that health care costs have risen in the past, therefore they must continue to rise in the future.  Why is it that today, while Medicare is still in balance and paid for, that we take these future projections so seriously?  Budget projections rarely ever are correct and that is for good reason.

Why won’t Medicare costs necessarily rise as projected?  For starters, there is a major patent cliff coming for the big pharmaceutical companies.  The late 1980s and early 90s saw a major boom in biotechnological innovation and with patents expiring 20 years after their filing, we are now entering what is dubbed as a “patent cliff” for the industry.  Over the next two years, analysts project that somewhere around $100 billion worth of pharmaceutical treatments will soon be available in generic form (Bloomberg).

While this means contracting profit margins for the big pharma industry, it bodes very well for people.  One particular treatment reaching its cliff in the next year is Pfizer’s Lipitor, the world’s best selling cholesterol control treatment.  People will now benefit from this life-changing treatment at a fraction of the cost.  That is unquestionably a good thing!  This patent cliff, which will continue over the next few years, will place great downward pressure on the end-consumer price.  No one really knows the full extent to which this will drive lower prices, and as a result, it’s simply impossible for the patent cliff to be fully accounted for (if at all) in projections of long-run medical costs.

Further complicating future projections on the cost side is the role that genomic sequencing will play in medical treatment.  In 2003 we as a society essentially completed the mapping of the human genome.  This technology has yet to unleash a fundamental change in medical treatment; however, its day is quickly approaching.  Companies like Illumina (NASDAQ: ILMN) are making great strides in bringing sequencing into a cost-effective price range.  While there is still room to go, within the next few years a price effective mapping of the genome will be a practical reality for many.  This will generate great efficiencies in medical treatment, helping mitigate the need for expensive diagnostic tests and allowing doctors to better tailor treatments to an individual’s needs.  Again, it’s nearly impossible to project the impact that such an innovation will have on medical costs moving forward, but we can almost assuredly say that as the cost of genomic sequencing comes down, there will be some degree of cost savings in medical treatment.

Add in the fact that we now have robots that do surgeries allowing for formally invasive procedures to be done with limited risk of side-effect and a shortened hospital stay, new treatments for old illnesses and a world of unknown innovation lying ahead and the picture doesn’t look nearly as gloomy as many would have you believe.

Uncertainty=Opportunity

While much of this analysis is based in uncertainties, that’s exactly the point.  In terms of risk/reward, the risk is to the side of progress.  In other words, we are far more likely to have a better than expected outlook than any of the numbers project.  Accountants can talk about the holes in the balance sheet all they want, but a government and a country are very different than a large, established company.  Numbers don’t take into account some very significant variables and while politicians like taking credit for economic successes, the real catalyst behind America’s greatness is not necessarily the fiscal balancing of good and bad, but rather it is a direct result of our country’s innovative prowess.

Following Groupon’s rejection of Google’s takeover offer, James Altucher put forward his 6 Reasons Groupon’s Rejection of Google is Great for the Universe and the basic point is that this rejection is proof positive that we are in the middle of the second wave of Internet-driven innovation.  Today these companies are already changing our lives for the better, already making money, and just reaching the tip of the proverbial iceberg in Web 2.0 development.  As the early movers in this latest wave of innovation cash out on their initial achievements, the funding for the next round of progress will soon hit the entrepreneurship market.  With the streamlined innovative capacity of the Internet, the next round of game-changing progress is right around the corner.

We have developed a society in which the capacity for innovation is greater than any other in world history and that capacity has persisted despite World Wars, depressions, 9/11 and the financial crisis.  Even when banks were failing, entrepreneurs were starting businesses and scientists were doing their science.  Aside for a bubble of innovative optimism in the late 1990s, the worries of the short-run has always weighed far heavier than the avenues for progress in the long run.  Rather than focusing exclusively on the accounting behind the deficit, we should also place an equal amount of attention on improving avenues for innovation in important areas, because therein lies our answer to our greatest problems.  When we step out of the world of yesterday’s numbers and into the world of abstract future progress the future beholds a far more optimistic reality.

Disclosure: Long GOOG, ILMN