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Rock & roll is a disruptive innovation!

When Tribeca Film Festival co-founder Craig Hatkoff first started the Disruptive Innovation Awards in 2010, he had inspired the by body of work of Harvard Business School’s Professor Clay Christenson considered many, in not most, to be the world’s most influential business thinker.  His landmark 1997 book, "The Innovator's Dilemma," inspired the likes of Steve Jobs and Jeff Bezos.   Christensen changed how the world thinks about innovation explaining why great companies are designed to fail at world- changing innovation and it’s why two guys in a garage – think Bill Gates and Paul Allen or Steve Jobs and Steve Wozniak—who come up with the big breakthroughs decimating the industry leaders overnight. Nearly 20 years later Christensen’s theory of disruptive innovation is still the prevailing theory of change in the world of technology and has begun to spread to many new domains.

At the time I didn't fully understand the concept or the award; it seemed to me, perhaps over simplifying, that when it comes to disruptive innovation “less is more”. Game-changing products and services don’t have to be perfect or even great- they just have to be simpler, cheaper, easier to user and be good enough. In a funny way disruptive innovations were of like rock & roll. And rock & roll was itself a disruptive innovation. And that did appeal to me.

 Disruptive innovation is a paradox that runs against the grain of every major corporation that keeps trying to make their already perfectly good products better and better. And that’s where they fall into the trap. Their products become too good, too complicated and too expensive for the existing consumer. Consider the $15 transistor radios of the 1950’s and 60’s. They were pretty crappy but they were plenty good enough for a day at the beach or to listen to the world series while sitting in class. Yes, the transistor radio, and later, the SONY Walkman were inferior but the real job was to make music mobile and inexpensive.  These products  added a huge new population of consumers that the leading electronics companies weren’t even thinking about.  

Think about the MP3 file, initially rejected by the record industry; they unwisely determined it wasn’t good enough for audiophiles—their perceived core consumer. But two more guys in a garage, Shaun Fanning and Sean Parker, put that myth to rest when they launched Napster that was shut down for copyright infringement. It turns out millions of tech-savvy college and high school kids, who couldn’t afford to buy the latest album, loved the idea of free file-sharing even though it ultimately turned out to be illegal. But the horse was out of the barn.  It was clear to Steve Jobs that the MP3 was going to change the music business forever.  While Napster failed Apple’s iTunes and the MP3 file dominate the music business.

By the beginning of the new century, the tectonic nature of disruptive innovation theory had spread across the globe like a tsunami after an earthquake.  Every one was talking about disruption this and innovation that. Christensen himself became concerned that the term disruptive innovation was being over-used and things were getting a bit out of control.  And that’s where the Disruptive Innovation Awards come.  Christensen’s original theory explains some innovations extremely well and others… not so much. There were lots of anomalies that Christensen wanted to better understand. It turns out that pop culture itself plays a huge role in successful disruption.  And where better to discover the latest trends in pop culture than at the Tribeca Film Festival.

 in 2010, as 65 people in a screening room; today 1,000 people attend the award ceremony that recognizes innovators who are disrupting the status quo. Each year the roster of honorees is an eclectic mix of people ranging from world famous notables to those the audience has never heard of before. These are people changing the world for the better. Disruptive innovation is not about incremental change; it celebrates radical change that leads to nothing short of revolution.

 Simply put, the concept involved tktktktk.  Seven years later, the DIA event has become one of the major highlights of the annual Tribeca Film Festival and a highly regarded and coveted prize. As a longtime music journalist, I have contributed in getting music honorees, and in addition to the hundreds of people from the worlds of politics, science, medicine, philanthropy and the arts who have received this award, in the world of music, we have honored Keith Richards, Justin Bieber, Rick Rubin, Kanye West, and Lin-Manuel Miranda. Keith's award was for open G tuning using only 5 strings and 3 notes instead of 6 strings and 5 notes. Justin Bieber was honored for being the first global super-star discovered on YouTube. Rick Rubin's was for starting the Def Jam hip hop label from his dorm room at NYU; Rick and Kanye were honored together for their groundbreaking work with the 808 drum kit synthesizer whose kick drum beat was the soul of hip-hop. And this past year, the DIA honored Lin Manuel Miranda for bringing history and hip hop together and changing the world of Broadway with his extraordinary, Tony award-winning "Hamilton."

When it comes to music, there are many candidates for both "innovators" and "disruptors." But what Craig Hatkoff has always pointed out to me, especially, is that there are many ways of looking at something. And while I personally might not immediately agree with an honoree such as lightening rod Glenn Beck opposed to, say designer Norma Kamali - while I'm much more pro-the Bard Prison Initiative project than I am towards Twitter - there are reasons for recognizing people from all walks of life, both sides of the aisle, so to speak, and this is why Justin Beiber and Lin-Manuel Miranda can co-exist as Fellows in the Disruptor Foundation.

And after all to really understand disruption and innovation you only have to remember one thing.  It’s only rock & roll.

To be continued. 
--- Lisa Robinson 

History Lessons: Modern Sardine Management Revisited

In the 1980’s, I heard the lesson first-hand from the legendary Sam Zell, the Chicago based billionaire and real estate mogul. Sam was one of many mentors and partners over the past forty years.  Along with John Klopp, now head of Global Real Assets for Morgan Stanley, Sam, John and I went on to co-founded Capital Trust in the 1990’s which was subsequently acquired becoming Blackstone Mortgage REIT (BXMT).

Sam had written an article in the Real Estate Review in 1986 called “Modern Sardine Management.” I am sure there are many versions of the trading sardine story, but Sam told it this way in the article:

Mr. A had a can of sardines. He sold them to Mr. B for $1.  Mr. B Sold them to Mr. C for $2.  Mr. C sold them to Mr. D for $3.  Mr. D opened them and found they were rotten.  He complained to Mr. C that he wanted his money back.  Mr. C said, “No, you don’t understand. There are eating sardines and there are trading sardines. These were trading sardines.”

Legendary value investor Seth Klarman of Baupost also uses the trading sardines metaphor in his 1991 very rare, out-of-print book Margin of Safety.  While they are slightly different tellings, the message of both versions about speculation is clear: there is price and then there is value. Sometimes the two are the same but more often than many people think the two are not the same.

One only need to look back at the 2008 financial crisis to realize that when markets are gripped by financial crisis, which occur with a surprising degree of regularity every 5-10 years or so, the value and price of assets become disconnected.  A dozen years ago, the Great Recession was initially triggered by real economics losses from poorly underwritten or fraudulent securitized pools of subprime residential mortgages. Who can forget the NINJA loan (no income, no job or assets)?  AS the financial markets seized up, the prices of mortgage securities collapsed.  Severe misalignment– among brokers, mortgage bankers, investment banks, the rating agencies, regulators and the borrowers– was the real culprit.

But the contagion quickly spread from $300 billion in non-performing residential subprime mortgage loans to the broader commercial real estate CMBS whose underlying assets were frequently 100% performing.  Notwithstanding that the loans continued to perform throughout the crisis, prices for CMBS also collapsed as liquidity dried up, margin calls were made as the securities were marked to market.  While the value of the underlying collateral was fine, the prices of securities experienced enormous distress as everyone was heading for the hills and/or hiding under their beds.  The spreads on BB securities that had traded at 275-325 bp over suddenly shot up to 1200bp. Some securities became “no bid” as all trading came to a halt. Extraordinary measures by the Fed and the U.S. Treasury injected unprecedented liquidity into the market (TARP, TALF, QEI, QEII etc.) saved the day or perhaps just kicked the can down the road. When markets seize to function, all hell breaks loose. History has shown that with sufficient liquidity and the lender of last standing by market meltdowns can usually stabilized in 18-24 months.

For markets to function in an orderly manner a degree of speculative investment is needed. But the knowledge and expertise necessary to speculate successfully on a regular basis is best left to the professionals.  That doesn’t mean you should never invest based on an intuition or gut feeling that something looks too cheap to pass up.  But you should have to discipline to takes profits and losses if the the investment is in your trading portfolio.   But learn to tell the difference: when to invest for the long-term and when to trade for the short-term.

Over the past 25 years I have served, or am currently serving, on the boards of five REITs all in different sectors. I have watch first-hand as the market has evolved.  The issues I have witnessed in the structure of REIT market suggested the potential for LEX to be the next step in the evolution of real estate investing.  In a nutshell, LEX focuses on assuring the sardines are always good enough to eat. If you’re more interested in trading sardines, better to look elsewhere. But remember, caveat emptor.  Or perhaps I should say caviar emptor?

--Craig Hatkoff

Stray Cat Strut at the Feral Reserve

Is the Federal Reserve inadvertently trying to thread Cleopatra’s needle with an over cooked piece of spaghetti while simultaneously herding a bunch of feral cats gathered at the edge of a cliff? Best of intentions aside, the Fed’s semi-coherent policy might save half the cats but the other half will likely fall into the abyss. The question is which half will be saved?

Regarding semi-coherence, the Fed might learn a thing or two from the old adage most frequently attributed to retail baron John Wanamaker about the advertising industry : “Half the money I spend on advertising is completely wasted; the trouble is, I don’t know which half.” Google’s pay-per-click solved that problem for the advertising industry. Maybe the Fed should figure out a pay-per-click model for monetary policy.

Old business models die hard. When it comes to central banking the foundational policy wisdom about financial crises revolves around two constructs: “too big to fail” and “lender of last resort.” But book-ended by the 2008 Great Financial Crisis and the Covidolypse it seems the Fed has been exploring and tinkering, lest I say experimenting, with their business model. From ZIRP (zero interest rate policy) to NIRP (negative interest rate policy), QE1, QE2, TARP, TALF and so forth resulted in low inflation and free money that begets sloppy (undisciplined) capital set the stage for the prospects of stagflation and asset bubbles across almost all asset sectors.

Horror Vacui (Nature abhors a vacuum)

-Aristotle

Another lesson for the Fed comes from the oracle of Omaha himself, Warren Buffett, who cautions , “never try to sell a poodle to someone looking to buy a beagle.” Seems the market only wants to buy a beagle and Powell & Co. only have poodles for sale. Just as nature abhors a vacuum, financial markets abhor uncertainty. Given the unprecedented confluence of global challenges, the Fed’s response, seems to be as likely making a 7-10 split (professional bowlers have only a .7% probably of making that spare). The Feds lack of coherence have left the markets uncertain what they are even uncertain about…other than everything.

The world today doesn’t make any sense so why should I paint pictures that do?

-Pablo Picasso

The dilemma-saddled Fed Chairman Jay Powell finds himself in a bit of a quandary. He’s trying to sell the market a Picasso (a poodle let alone a labradoodle) , when what they really want is a beautiful, easy to understand Rembrandt or a Reubens or even a Monet (a beagle).

It wouldn’t be too difficult to make the case: “Half of Federal Reserve monetary policy is completely wasted; unfortunately we don’t know which half.” Not only is it wasted it’s downright dangerous bordering on an existential threat to civilization. There’s a 50% chance (a completely non-scientific conjecture) that 10 or 20 years from now people will look back at the period 2008- 2022 and equate Federal Reserve monetary policy to bloodletting as a state of the art medical procedure. (The same might also be said about our country’s fiscal policy.)

The idea that one man’s weathervane decision-making ripples through the financial markets at speed of light should call into question the wisdom of building a global financial system upon the shakiest of foundations. The three biggest risks confronting central bankers are: contagion, contagion, and contagion.

Having lived thru the Fed Chairman regimes of short-termer Arthurs Burns, Bill Miller, Paul “Tough Love” Volcker, Alan “the Put” Greenspan, Ben “the Put 2.0” Bernanke and Janet Yellen it is abundantly clear that Federal Reserve policy is anything but a science. A word of advice: the words “Federal Reserve” and “experiment” should never appear in the same sentence.

Before 2008, the regularly occurring financial crises of the 80’s and 90’s were mere annoyances dealt with deftly by an understanding of how to stabilize and clear the market over 24-36 months plus or minus. The standard protocol is to project confidence, stand ready to flood the market with enough liquidity and subtly remind people that Citibank is never going under and depositors will get 100 cents on the dollar. And don’t forget about moral hazard. Remember Enron? Even though a major financial crisis was averted Arthur Andersen was dragged into the courtyard and very publicly got their brains blown out for their egregiously bad behavior. Accountability for the people whose business was accountability. People even went to jail! Enron’s Ken Lay died before his sentencing but Jeff Skilling got to practice up on his golf while spending a dozen years in the slammer.

Up until the Great Financial Crisis federal reserve policy had a predictable pattern and rhythm for the myriad of crises since the early 90s. The crises came, they went and business was pretty much back to normal. Some lessons were learned, others not so much, and some not at all. But the Fed steady-as-she-goes by 2008 realized they were going to need a bigger boat… a much bigger boat. Controlled ambiguity, avoiding moral hazard, accountability and unlimited liquidity at the quick and ready could usually stabilize a market crisis in 24-36 months– give or take. Just enough time for Blackstone, Apollo, Carlyle, Goldman “the Vampire Squid” Sachs to make billions. By 2010 Goldman Sachs no longer had clients, they only had counterparties according to the Squid Master Lloyd Blankfein

Think of this as a thought experiment for dealing with the unprecedented GFC in 2008. What if….

1. …the Fed had simply bought in the $300 billion or so of subprime mortgages, ring-fenced them in a bad bank a la Resolution Trust Corp? Instead we let $300 billion of subprime NINJA loans (no income, no job, no assets) morph into a $100 trillion global meltdown. Everything is interconnected. Contagion, contagion, contagion. As Sam Zell likes to say, “when the tide goes down we get to see who’s wearing a bathing suit.”

2. …the Fed and the U.S. Treasury had jointly announced to the world that the financial markets we no longer functioning properly. What brought down the house of cards in 2008 wasn’t really the subprime detritus; it was only $300 billion crisis and easy enough to manage. But the real culprits who made margin calls at the speed of light. The margin calls were nade in the lenders’ “sole discretion” with no recourse. But if the and their speed of light margin calls the real culprits, whose repo loans which drove the entire over-leveraged industry were demanding additional collateral after marking to market performing securities with performing underlying collateral would be subject to clawbacks if it was determined that egregious margin calls made in the repo lenders’ sole discretion were “inappropriate” or worse in ” bad faith” would be subject to clawbacks and serious penalties/damages. Keep in mind anti-trust damages are subject to treble damages. and true accountability for bad behavior. Remember those rating agency text messages? Remind me again– who went to jail?

3. .. the Fed had focus on stabilizing spreads with global master credit spread swap agreements rather than flooding the market with unlimited liquidity (whether M1 or M2) that created massive asset bubbles and negative interest rates of unprecedented proportions. simultaneously manipulating the yield curve with artificial interest rates and playing chicken with the market. Remember at some point those chickens will come home to roost. They always do.

Note to self: in dysfunctional markets fair value accounting creates epic anomalies in the over structure of credit spreads across the entire debt spectrum from AAA to BB-rated securities. When BB spreads on mortgage back securities instantaneously widen from 275 basis over treasuries to 600 over then 1200 over to “no bid” what the hell do you think is going to happen to valuations? Keep in mind other than the subprime “crap” the securities and assets underlying the securities were by and large performing.

When moral hazard was thrown to the wolves, Wall Street learned that too big to fail coupled with the Fed “put” turned monetary policy into a game of cat and mouse flipping coins. Heads I win, tails you lose. Asymmetric risk is the breakfast of champions for Masters of the Universe.

Geitner and Paulson’s QE1, QE2, TARP, TALF etc. staved off a short term crisis by kicking the can down the road inflating the Fed balance sheet to a whopping $2 trillion. the road Problem is amplified by the response to covid has ende up sheet beyond all recognition. Problem is almost 15 years later we are still trying to find the can. Let’s be clear: the can is still there. As Powell tries to herd all the stray cats who expect him to put a bowl of milk out on the front porch, seems they don’t believe him even when he says he’s serious. The Fed’s loss of credibility (i.e. trust), use of “uncontrolled” ambiguity and hard-to-read messaging could lead to a Roubini-esque self-fulfilling prophecy of biblical proportions. Clearly Powell has yet to master the art of Greenspeak who did at least understand and embrace controlled ambiguity.

The only way to restore functioning markets is to restore trust and credibility… everything else is an experiment. Oh yeah. FTX and SBF should be a clarion warning to politicians and regulators: don’t try to regulate something you don’t understand. Mazars resigning from auditing crypto (on the heels of resigning as Donald Trump’s auditors.) should be a massive shot across the bow: if you can’t get auditors to audit proof of reserves, proof of asset or proof of liabilities no institution in its right mind will touch this stuff. For those of you have bothered to read or pretend to understand the pseudonymous Satoshi Nakamoto Bitcoin white paper one thing is clear. The fundamental premise is that trust can be created between untrustworthy parties algorithmically without a trusted intermediary to avoid what’s called the double spend problem. Trying to create trust between inherent untrustworthy parties is a really bad idea. Or as Alan Greenspan testified in Congress regarding the GFC– “there was a flaw in my ideology.”

How’s this for a novel idea: if you want a soft landing bring in Sully Sullenberger to run the Fed.

--Craig Hatkoff

Innovator’s Guide to the Universe: An Introduction

What is innovation? What is invention?

There is no official or universally accepted definition of innovation, but a general consensus might be “making changes to something that already exists or is established.” Innovation, often confused and/or conflated with invention, involves rearranging or combining existing products, services or ideas in novel or unusual ways.

Invention, on the other hand, entails discovery of, or stumbling upon, something new altogether. Cavemen undoubtedly first saw fire from natural events-perhaps lightening or wildfires– but the harnessing of fire itself was clearly a human invention. Learning to start a fire striking two stones and spewing sparks onto leaves and transferring the embers to kindling then to logs could be considered one of, if not the most, important inventions in the history of civilization. So,while the mastering of fire itself can be considered an invention, using fire to cook roots and meat, heat the cave, light the path, burn someone at the stake or inspire rituals and stories at night might be thought of as innovations: using something already in existence in a new way.

In modern times, inventions tend to be culturally neutral dissociated from people’s identities while innovations increasingly have become impacted by human world views, values and belief systems-the building blocks of culture. In fact, there is a movement that suggests culture, rather than the technology, in increasingly becoming the dominant variable in the successful diffusion of innovation.

The distinction between an invention and an innovation can frequently become blurred and any effort to definitively characterize something as invention or innovation might best be left to Talmudic scholars. A more useful approach is to look at where something falls on a continuum with pure invention on one end and pure innovation on the other. The number of innovations spurred by any new invention, is likely be exponential.

Invention<————–>Innovation

This guide is intended to introduce major concepts, tools and general frameworks for innovation writ large so that the reader can begin to better understand and harness the power of innovation. While not everyone can be an inventor like Edison, Tesla or Marconi, with a minimum of consistent practice almost anyone can master some basics concepts to become an innovator.

Deconstructing Innovation

This guide is intended to provide a set of diagnostic tools and/or simple heuristics for rapidly deconstructing products, services and ideas into the core components of innovation. In today’s world of medicine, the suite of diagnostics would include body temperature, blood pressure, blood test, urine test, x-ray, gene editing, MRI, CT scan etc.– each providing a different POV, perspective or angle to look under the hood.

Our set of diagnostics are a bit more metaphorical and less scientific but might prove very helpful,nonetheless. If one tool is not cracking the code, try another… or better yet come up with your own tools.

Examples of our diagnostic tools are:

-Connectivity

-Network effect (Metcalfe’s Law)

-Centralized-Decentralized-Distributed Systems

-Strong Ties/Weak Ties (Mark Granoveter)

-Processing/Price-performance (Moore’s Law)

-Transistor Effect (Moore’s Law)

-Killer App

-Analog to Digital

-Share-ability

-Scalability

-Social

-Open Source (Cathedral and the Bazaar/Eric Raymond)

-Proprietary versus Open Source design

-Choice/Famous Jam Study (Sheena Y engar)

-Threshold Resistance (Alfred Taubman)

-Inter-operability (Plug and Play)

-Modularity

-Gig-ability

-Jobs-to-be-done (Christensen)

-UX (user experience)

–UI (user interface)

-Utility-centric

-Identity-centric

-Disruptive versus sustaining innovations

Products, Services and Ideas.

Putting aside the subtle distinction, we generally view products and services as the milieu for invention and innovation. But a more expansive view that gives an important perspective is invention or innovation of ideas … often big, or really big ideas: language, burial, religion, art, hunting and gathering, agriculture, democracy, philosophy, mathematics, war, psychology etc. This broader take on innovation and invention invites us to explore certain anthropological factors and insights into the evolution of human civilization. A deep dive into the interplay between technology and culture can’t but help lay the foundation for a better understanding ofthe full potential of innovation.

Are there really any new ideas? We learn by imitation. We remember by stories. One of the greatest (and most controversial) achievements in intellectual thought was Charles Darwin’s theory of evolution set forth in his magnum opus On the Origin of Species. Ironically neither of Darwin’s two most famous terms- “natural selection” and “survival of the fittest”were original thoughts. Natural selection was independently coined by biologist Alfred Wallace with whom Darwin had collaborated. It was also Wallace who suggested to Darwin he consider using philosopher Herbert Spencer’s more precise term “survival of the fittest” rather than “natural selection.” Darwin agreed incorporating Spencer’s phrase but not until the fifth edition of Origin. Open mindedness and willingness to adapt is a crucial virtue of great innovators.

In understanding innovation, it is helpful to remember the oft repeated saying: “good artists borrow; great artists steal.” (see T .S. Elliot, James Joyce, Keith Richard, Jimmy Page et. al.)

In his book The Fatal Conceit, one of F. A. Hayek’s great insights is that humans learn more by imitation rather than reason. Trends are often spurred by imitation, impulse, and intuition. In a world of social media influencers and celebrities, things that go viral do so not out of any particularly deep introspective process or rationale. Keeping up with the Jones or…. the Kardashian effect. Culture is forged in the crucible of imitation.

Malcolm Gladwell is perhaps best known for his book The Tipping Point, which is an excellent resource on understanding trends. The concept of a Tipping Point is what Gladwell refers to as the “biography of an idea” somewhat akin to the “straw that broke the camel’s back.” While Gladwell certainly popularized the concept, he seems to have borrowed the term Tipping Point itself from others as well. (Remember: good artists borrow, great artists steal.) 

He also learned to not to give credit in footnotes but rather cleverly acknowledged the work of others in endnotes (i.e. at the back of the book) rather than acknowledging “as-you-go” in footnotes at the bottom of the relevant page– a very clever innovation indeed!

As humans moved toward bipedalism a host of physiological changes occurred larger related to the size of the human brain. Fire enabled to cooking meats and roots radically altering the caloric intake of the human diet. It is estimated that the human brain is only 2% of the humanbody but consumes 20% of the calories. While Darwin’s survival of the fittest really appliedmore to adaptability rather than physical strength, one interesting case to note where the stronger Neanderthals species didn’t survive since their physical prowess did not create the need for more socialization and communication of the weaker homo sapiens. As it turns out strength became the Neanderthals’ weakness—a true paradox where their strength and resilience led to the demise of Neanderthals. 

So stay tuned and welcome to the Innovator’s Guide to the Universe…

--Craig Hatkoff