How to tax the platform economy?

In the engine room of nation states, ie the tax departments, the coming battle with platform providers is taking shape. Uber, airbnb, facebook, linkedin, ebay, jobseek, and a myriad of specialised platform providers facilitate micro-trades that are largely untaxed by the authorities. In stead, the platform providers themselves take a cut, partially via advertising and partially via a direct fee for their services. They have taken over an activity that has mainly been provided by governments in the past: places to trade. The town square, the stock exchange, public infrastructure, and the unemployment office are relics of a past where governments were market providers that facilitated trades. Now, it is largely private companies with tax-avoidance structures that have taken on this role on the internet. That role is set to expand hugely.

This is a crucial battle that, so far, the tax authorities are losing because they have not yet grasped the magnitude of the shift. They lack the key new power that they must attain: the power to deny the operation of a platform provider in their country.

At the moment, tax authorities around the world, lead by the Scandinavians whose tax needs are high, are going the usual ‘reporting route’. They are trying to get Uber, Airbnb, and all the other ones to report the trades and the value of the trades that they have facilitated. Understandably, these companies are refusing to play ball because they of course are taxing the same trades themselves in a different way. They are competing with national tax authorities and hence their business model depends on tax evasion, so of course they refuse to help their competitors. Their lawyers make millions from refusing to play ball. The horror example for these companies is the 2015 data on Uber that had to be released to the Dutch tax authorities and that was subsequently shared with Denmark which promptly went after the drivers for added tax payments. This reflected the circumstance that the administration of Uber was in the Netherlands at that time, which allowed the Dutch to force Uber to hand over some of their data, a mistake Uber wont make again. The others too will have learned a salutary lesson from that episode.

Frustrated, the tax authorities are turning to pretty hopeless measures, such as new international treaties on the reporting of micro-trades by private entities. In a race to the bottom between countries trying to attract large companies, that is just a hopeless avenue where the authorities will always be many steps behind the tax-advisers of the big trading platforms.

What are the next moves we might then see when the tax authorities get up to speed? I think two developments are likely: full internet observation by national agencies and government-lead internet firms.

Full internet observation follows the model of China, which now has the capacity to track most of the internet activity of most of the population. That allows it to observe the trades facilitated on internet platforms, which in turn can be used for tax purposes. Those observations can be used to directly go after individual traders or can be used to go after the platform providers, simply by making their activities illegal if the platforms do not assist in tax observations. Adopting the China route would spell the end of internet privacy, but it probably works. And tax is such a key part of the nation state that it in the end trumps privacy concerns.

The second possibility is for the government to re-enter the market for platforms and set up its own internet firms for micro-trades and social media. It can simply copy the best examples on the internet for how to set these things up. The transition will come with losses, but authorities can appeal to national pride to get support from their populations and companies cannot compete with that. For micro-trades within a country or tax region (the US and, in the future, the EU) that should work. For international trades, one should expect more difficulties because government-backed firms from different countries might then directly compete with each other, which in turn might lead to competency battles and new dispute resolution mechanisms.

Why Blockchain has no economic future

When Bitcoin went public in 2009 it introduced to the world of finance and economics the technology of blockchain. Even the many who thought Bitcoin would never make it as a major currency were intrigued by the BlockChain technology and a large set of new companies have tried to figure out how to offer new services based on blockchain technology. It is still fair to say that very few economists and social scientists understand blockchain, and governments are even further behind.

I will argue that blockchain has no economic future in the regular economy. I will give you the bottom-line, then describe blockchain, discuss its key supposed advantages, and then take it apart as a viable technology by giving you a much more efficient alternative to the same market demand opportunities.

The bottom line for those not interested in the intricacies of blockchains and public trust

The essence of my argument is that a large country can organise a much more trustworthy information system than a distributed network using blockchain can, and at lower costs, meaning that any large economic role for blockchain is easily displaced by a cheaper and even larger national institution.

So in the 19th century, large private companies circulated their own money, in competition with towns and princedoms. In that competition, national governments won, as they will again now.

The reason that the tech community is investing in blockchain companies is partially because some are in love with the technicalities of blockchain, some hope to attract the same criminal and gullible element that Bitcoin has, some lack awareness of the evolution and reality of political systems, and some see a second-best opportunity not yet taken by others. But even in this brief period of missing-in-action governments, large companies will easily outperform blockchain communities on any mayor market. Except the criminal markets, which is hence the only real future of blockchain communities. Continue reading “Why Blockchain has no economic future”

Opportunities for innovation in Australia

The Australian startup ecosystem is growing too slowly, but existing firms are becoming more interested in innovation as a source of competitive advantage.

MBS students brainstorming during the Innovation Bootcamp
Students brainstorming during the MBS Innovation Bootcamp

Australia performed poorly in the global startup ecosystem ranking 2015 which was published recently ( Sydney fell 4 spots and now ranks 16th in the world, while Melbourne fell entirely out of the top 20 despite being on that chart in the previous version of the report published three years ago. The study expresses concerns about the Australian ecosystem that echo those in other studies performed by academics as well as in the Australian Government’s Innovation System Report ( The 2014 AIS report sums it up nicely: “Australia performs relatively poorly on ‘new to market’ innovation”.

Yet on the ground, interest in innovation and startups has never been stronger than before in Australia. Compared to five years ago, we now have many more ‘meetup’ groups in Melbourne and Sydney for founders and entrepreneurs, a variety of incubators and accelerators, and a number of innovation-oriented programs at leading universities including Melbourne, UTS, Swinburne and QUT. There is strong interest in courses on “design thinking” and “lean startups”. MBS has our innovation bootcamp for MBA students, while the University of Melbourne now has an accelerator and is about to launch a new Masters in Entrepreneurship program. A growing number of entrepreneurs are contacting me to discuss new business models, market entry and how to protect their innovations. These will take time to bear fruit.

How do we reconcile the weak findings at the ecosystem level with growing interest at the ground level? Part of what’s happening is that other startups ecosystems are maturing faster than the one in Australia. Many ecosystems abroad have continued to enjoy stronger government support, better access to venture capital and closer industry-university linkages. The most successful ecosystems (including Silicon Valley, New York, Los Angeles, Boston, Tel Aviv) have continued to develop and reinforce a coherent system for connecting resources, talent, funding and market access. Here in Australia, we have bits and pieces that are good in each major city, and we also have specific firms and sectors that are incredibly innovative. But that distribution is uneven and the parties involved are not as seamlessly interconnected as they could be.

A second part of the explanation is due to the business environment in Australia. Given our small domestic market, many of our startup entrepreneurs will continue to sink at least one foot (if not both feet) into other ecosystems. This makes sense from the point of view of being close to market and expertise.

A big change however is the growing interest in innovation by existing firms. In recent years, incumbent firms in industries ranging from retail to energy, news and financial services have been jolted out of a comfortable (often monopolistic or duopolistic) existence due to the threat of entrants, both online and offline.

The embrace of innovation by Australian firms has taken a long time, partly due to the difficulty of changing the mindsets of senior executives who run these organizations. However, it is clear that in a variety of industries across the globe, the terms of competition have changed and Australia is no exception. In conversations with senior managers at Australian organizations, I am discovering a growing interest in innovative strategy, business transformation, ‘design thinking’ and ‘business model innovation’. These conversations often begin with a reactive or defensive tone reflecting a need to respond to market or technological threats. However at some organizations the discussions have begun to advance beyond that stage: managers at some firms start to view innovation as an opportunity to reconsider their existing ways of doing things, engage new stakeholders and to develop new capabilities.

In the short run, I see a good opportunity in helping existing Australian firms learn to innovate and become more agile and competitive. In the longer run, it would be nice to see the startup ecosystem flourish in Australia, but that is something that will take time and sustained effort.

Note: I was invited to write this article for the Melbourne Business School student newsletter. It is reprinted above, sightly edited.

Should you activate fingerprint authentication on your new iPhone (or other mobile device?)

Bottom line: if you care about security you should avoid activating fingerprint authentication. Use an alphanumeric password in place of the 4-digit PIN and deal with the inconvenience. If you don’t care much about security but are careless about where you leave your phone or which networks you connect to, you should also probably skip it. For everyone else, it depends on your risk appetite. Good luck.

Fingerprint_picture.svgYesterday, Apple launched two new iPhones. The flagship model, the 5s, is impressive and includes many new features including fingerprint based authentication. It is part of a trend towards using biometrics on mobile devices, e.g., facial recognition on Android and voice recognition on the new Moto X.

The use of fingerprint authentication is not new (a family member has that on their Lenovo notebook), but deployment by Apple usually signals the onset of mainstream adoption. At present the iPhone offers it as an option, so you can still choose to use a traditional password instead. The main benefit of fingerprint technology is slightly faster unlocking than using a PIN code. Also the Apple device is said to be accurate and fast, unlike some earlier consumer-oriented implementations. At present Apple is allowing its use for iTunes and Apps Store purchases but one can imagine third-party applications are around the corner.

Before you activate this system, you should consider several issues. Online forums are abuzz about whether your fingerprint can be spoofed, whether the NSA might be spying on you, and whether you can be legally forced to unlock your device. In turn, Apple has tried to allay fears by stating that your fingerprint only exists in a “secure enclave” on the phone (strictly speaking, it is an electronic description rather than an image of your actual finger). However, there are several issues that I believe need consideration:

1. It is hard to replace your fingerprint.
If your password is compromised, you can just revoke it and create a new one. Replacing your finger can probably be done, but it will involve a bit of pain. If you lose your phone and a hacker gets in, or if they are able to remotely access your fingerprint data, the personal costs may be rather high. We also we have no information about know how cleanly (if at all) the data is erased when you sell your phone or recycle it; can the data be extracted afterwards?

2. The fingerprint encryption scheme will be hacked.
This is not a possibility but a certainty. The only questions are how long before it happens and whether you will get to hear about it. People are worried that the NSA is helping Apple keep a backup copy of the master encryption key (i.e., can you trust them to keep it secret, since they lost thousands of documents to some junior guy without knowing it?). But the problem is more fundamental than that: in order to make use of that encrypted data, your phone must contain the key. This is unlike the case where a password is kept separate from your encrypted fingerprint data, or a design in which a password (or some other security token) is needed in addition to your fingerprint data. Keeping the decryption key on the device makes it vulnerable, since with enough effort the key will be recovered, or some weakness in the encryption software can be found. If you think you have heard this story before, it’s because the same thing happened with DVDs. Any DVD player must contain the decryption key and mechanism for doing so, otherwise you won’t be able to view the movie contained on the disc. When DVDs were launched, manufacturers thought their encryption was sufficient, but were quickly proven wrong. Same thing with BluRay.

3. A magnet for attack
Some are worried about the NSA, but they probably already have your fingerprints. The real threat is elsewhere: encryption is broken and various encryption standards have been compromised (including at an atomic level involving encryption libraries used to build software). Thus, storing the data in encrypted format is just a deterrent. Apart from the NSA, you should worry about the other, possibly more nefarious organizations and governments out there. The fact that we know it is possible implies that others will try to get in, either through the same means or by creating new methods. Nathan Rosenberg calls these “inducement mechanisms” that focus the efforts of others; I have observed it in my own fieldwork on semiconductors. All over the world next week, communities of hackers and spy organisations will probably be posting “do not disturb” signs on their doors and begin working on this new challenge.

4. Large attack surface
The data on the fingerprint chip itself might be fairly secure but IOS, like all operating systems, is complex and has been compromised. Every year we hear of interesting exploits at events like Black Hat. There is no such things as a completely safe program, especially one as elaborate as a modern operating system. Your phone or mobile device is not locked down, unlike the scanning device at your neighborhood immigration counter. You bring it everywhere: to airports, cafes, public places, friends’ homes and to pubs). It is exposed to many angles of attack: physical hacking, software backdoors, security holes, hidden code in apps, and compromised websites that you might visit on the phone’s web browser. Another way in is through your computer that syncs to the phone via iTunes because your phone treats it as a trusted connection. Apple claims that the operating system has no access to the fingerprint data on the chip itself, but you’ll have to go on trust with that one as it is not verifiable (Apple also said it did not store your GPS data!).  The question remains of how separate the fingerprint system really is, since iTunes and the App Store will be able to authenticate using the fingerprint sensor, suggesting there may be some indirect paths available to hijack the authentication process, even if one does not touch the data itself.

While these risks are real, they do not necessarily imply that you will be hacked. That depends on whether you are a high enough value target. It also depends upon your personal habits and whether these practices expose you to a larger or smaller attack surface. And it depends upon your luck. Even with a regular old password, you could still end up being hacked, but at least you won’t risk losing your fingerprint data along with your other stuff. It is just a question of being aware of the risks. By no means am I dissuading you from buying that shiny new iPhone.

Bottom line: if you care about security you should avoid activating fingerprint authentication. Use an alphanumeric password in place of the 4-digit PIN and deal with the inconvenience. If you don’t care much about security but are careless about where you leave your phone or which networks you connect to, you should also probably skip it. For everyone else, it depends on your risk appetite. Good luck.

Image source:

Unlocking DRM Lets You Open Multiple eBooks Simultaneously

The Amazon Kindle, Apple iPad and other e-readers are fast becoming mainstream and their usability has improved tremendously over the past years. However there is one area in which printed books are still much better: the ability to open multiple books at once. This might not matter if you are reading the latest “50 shades” novel and want to be uninterrupted. However, if you are working on a research project and constantly need to switch across multiple books, you will find that current eBook readers are a nightmare. Switching eBooks involves creating bookmarks, returning to a main menu (library page), going to another book and navigating it. This quickly becomes tedious. I cannot understand why tabbed browsing is absent from eBook software since it is rudimentary and exists in practically every web browser.

One solution is to buy multiple eBook readers and open one book per device. This turns out to work quite well. One might argue that the savings from not having to ship printed books will more than cover the cost of additional eBook readers. However it occurred to me recently that another solution exists: simply remove the DRM from your existing books. This is really easy to do. You can then manage your books using software like calibre, which allows multiple eBooks to be opened at the same time. On a fast computer with a large screen, this is a liberating experience! A 27″ or 30″ screen is sufficient to give me as good an experience as with 3-4 printed books. You can even do things that you cannot with regular books (without mutilating them) such as opening multiple instances of the same book for quick cross-referencing across different sections. If you take the extra step and export your library into pdf format, you then have the ability to manage, annotate and search your eBooks using software like Papers 2, treating them just like any other pdf file and merging them with your collection of journal articles.

There are other benefits of unlocking DRM, including the ability to prevent vendor lock-in (e.g., read your Amazon ebooks using Apple iBooks), avoid arbitrary and unfair removal of your books, and to overcome silly device download limits. For some of us, opening multiple books at the same time is another big plus. I suspect that over time, eBook DRM will go away. We are at the stage of the eBook industry that we were at with music 10 years ago, when we had to rip music from our personal CD collections or the proprietary formats on iTunes and convert them into unlocked files that were more flexible. Today music is sold unlocked and I don’t see why it should end up otherwise with eBooks.

(ps: yes I know eBooks are licensed, not sold, but lets save that for another discussion).

Reading multiple books at once
Your 30″ monitor can show all these books at the same time

Improving Wireless Ordering at Restaurants

Last night, we got to order dinner on a wireless touchscreen, actually an iPad in Aluminum body armour. Pretty cool. This was not our first time, but it was a surprise because we were not at some fancy restaurant but instead at a modest place in Chinatown. It just goes to show how widely this technology has diffused. The use of a touchscreen menu was useful in this context for overcoming language barriers as the waiters weren’t the most fluent English speakers and although some of us spoke Chinese it was not the same dialect.

Unfortunately, like at many other places, we found that the restaurant was using a smart tablet in the same old “non-smart” way. i.e., just as an electronic version of their printed menu but with ordering capability built-in. I suspect that we’ll be seeing smarter devices soon. For instance, the computer should make customised recommendations based on your dining preferences, group composition and the chef’s knowledge of which dishes and beverages go well together. It should be more interactive, adapting the menu recommendations as you progress through a meal based on whether you liked a particular dish. This could change the dining experience from being a static one, where you order at the start and cannot make changes, to one that is more interesting and dynamic.

At a basic level, many restaurants are using the wrong device: instead of investing in their own tablets they should be offering a software application that downloads directly to your own smartphone/tablet as soon as you sit down at a table. This would allow you to make more personalised selections, for example using your own (private) dining history and food restrictions to help find suitable matches in the menu as well as making recommendations based on reviews posted by others online, or maybe even via a transitory peer-to-peer network of other diners.

ps: now that I’ve put these ideas out, they become “prior art” so hopefully this prevents companies from patenting them and filing frivolous lawsuits, thus ruining my future dining experiences.

Ordering on a Tablet
Ordering on a Tablet


Apple wins $1bn case against Samsung

The more important aspects of the verdict are that it found Apple’s patents to be valid and that Samsung wilfully and knowingly copied Apple.

Apple has won a massive victory in the latest round of its dispute against Samsung. Part of the case is on patents, and part of it is on “trade dress” (the look and feel of the iPhone).

The $1bn award sounds like a lot, but it isn’t really the most interesting part of the decision. The RIM/Blackberry case was much narrower but saw a $600m+ decision some years back. The more important aspects of the verdict are that it found Apple’s patents to be valid and that Samsung  knowingly copied Apple. The validity of Apple’s patents will probably allow it to earn a healthy stream of licensing revenue from other smartphone companies into the distant future. It will also give a well-needed jolt to the rest of the industry to explore different technological trajectories and to develop smartphones that do not resemble the iPhone as much. The willful nature of Samsung’s copying is why I believe the jury reached a surprisingly quick decision while others had expected it to be a protracted case, i.e., once they decided in their minds that Samsung willfully copied Apple, it was only a step away to reach the conclusion that Samsung infringed across a broad range of its products (see this chart at TheVerge). Very bad news for Samsung.

Some people view this as part of Steve Job’s vendetta against Google, which created the Android operating system running on Samsung’s phones. While this may or may not be true, it is not the whole story. The Android operating system is quite versatile and it is possible to build quite a diverse and novel ecosystem around it without copying the iPhone. An example of this is Sony with its aesthetically elegant Xperia phone and Android-based Walkman. Another is Nikon which has just released an Android camera and is an iteration away from it becoming an actual phone.

No doubt the Samsung/Apple ruling will be appealed, but it will inevitably shape the future of smartphones.