I took this interview from the intranet of the IIM Indian Institute of Management alumni Club in India. In the end of 2005 the analyst Tim Beyers spoke with Paul Saffo, director of the Institute for the Future, about what to expect in 2016. Some of the keywords are: robotics, social networks, green movements, spanish language in America, open source softwares, Asian manufacturing…
Tim Beyers: Paul, thanks very much for making time today. Before we get started I’d appreciate it if you’d give us an introduction to what you do and how you do it.
Paul Saffo: Sure. I am a long-range forecaster.
Tim Beyers: What does that mean, exactly?
Paul Saffo: I don’t predict; rather, my focus is about understanding uncertainty and translating uncertainty into a meaningful view of what may lie ahead. The Institute is a 35-year-old research foundation dedicated to long-range forecasting and, in particular, the intersection of technology and its impact on society. So, I do spend a lot of time looking at technology, though it is not my exclusive focus.
Tim Beyers: Great. Let’s get into the decade ahead. I’m interested because we have a service at The Motley Fool called Rule Breakers, wherein David Gardner and his team of analysts identify the best public companies in industries they believe to be highly disruptive. Those firms, David reasons, have the best chance to deliver multibagger returns because they are shattering industry conventions as we’ve come to know them. So with that definition in mind, tell us which industries you believe to be most vulnerable to up-and-coming Rule Breakers over the next 10 years?
Paul Saffo: First of all, there are some overarching trends to consider. The most important trend is the growth of the Internet, which is running just under 20% per year right now. And as for the number of [Internet] users, we have either just crossed or are just about to cross 1 billion. That total will probably double in the next 10 years.
So that is the macro trend. But it’s interesting to note that while this revolution started in the United States, today less than 25% of Internet users are here. The fastest growth is happening in places like China and, to a lesser degree, India. Europe is growing as well. And when the Internet is growing that quickly, it is not just that you are getting more users, but also that the Internet itself is changing in fundamental ways.
So I think it is a safe assumption that a disproportionate number of the most interesting Rule Breaking start-ups in the Internet space will come out of Asia, not the United States. It is not for the fainthearted, but I would definitely look at opportunities abroad.
Tim Beyers: Which companies come to mind? Are there any out there right now?
Paul Saffo: I have no professional expertise in picking stocks, but an interesting company that could be a bellwether is a Korean firm called NHN. You can find it by going to www.nhncorp.com. They are a darling of the [Korean] stock exchange right now. They had a 2002 IPO and their growth has been crazy because they are the No. 1 search portal in Korea, the No. 1 kids portal in Korea, and they are also the No. 1 games portal for a category that we really don’t have here, which is casual games.
Tim Beyers: What’s a casual game? Something you play to relax?
Paul Saffo: Sort of. Let’s say you want to play bridge with some people. You can do that, and win points as you go along. That’s useful because you can use the points to buy things. It is for communities of people who just like playing these games. And it is not nearly as intense as devoting your time to building avatars and EverQuests.
There’s also a cultural reason why NHN has been so successful with casual games. Koreans carry a national identity card with a unique serial number. So, unlike in the United States, where as the joke goes, on the Internet no one knows you are a dog, when you log on to the Korean Internet and to NHN’s site, you have to give your national identity number. That way, they know exactly who you are.
This shows that there are different populations of users out there, and that there are different cultural norms. There are going to be different things that excite users abroad that may not be big in the United States. Investors would be smart to look for lots of surprises in the global Internet, particularly in China and Asia. Although I should also mention that NHN’s innovations may also prove portable. The company has just opened an office in Silicon Valley.
Tim Beyers: Interesting. What else besides the evolution of the Internet is on the horizon? And what clues signal its importance in 2016?
Paul Saffo: To me, it is pretty clear what the next big, out-of-the-blue industry will be. And it will continue the pattern of a new industry emerging every decade or so. In the ’80s, it was the personal computer. Steve Jobs and Bill Gates were the poster children for it. In the ’90s, it was the World Wide Web, and Tim Berners-Lee and the Google (Nasdaq: GOOG) twins were the stars. Now we are teetering right on the edge of a revolution in the robotics industry — consumer robotics in particular.
Tim Beyers: So you must be following iRobot (Nasdaq: IRBT) then?
Paul Saffo: Yes, but I am not making a stock recommendation.
Tim Beyers: No, no, I am not asking you to. It just seems that you would consider the company to be fairly Rule Breaking.
Paul Saffo: Absolutely. They are Rule Breaking because their robots, while not very smart, are strangely endearing. That’s an indicator, you see. And that’s what I do; I look for indicators. Things that don’t fit because they often are whisperings coming down out of the future about what might be a big deal. Here’s an example. Two years ago, iRobot published some very interesting data. It turned out that over 60% of Roomba owners had given their Roombas names. Now, that is odd. I can’t remember the last time anyone gave a Roomba, or gave their vacuum cleaner, a name. It didn’t fit.
I also noticed that friends of mine who had Roombas were wildly enthusiastic about them. These were people who, in my recollection, never showed any interest in owning a vacuum cleaner before. They were Silicon Valley nerds. And, finally, I learned that one-third of Roomba owners have confessed to taking their Roombas on vacation with them, or over to a friend’s house to show off.
In other words, the Roomba, even though it does, in fact, vacuum floors just fine, is scratching some sort of deeper atavistic itch that consumers have. Combine that with the fact that the Roomba is a very capable robot that is very inexpensive and cleverly designed. All of which says to me: OK, we’re at a point where we can start mass-producing [consumer] robots.
Tim Beyers: What about iRobot’s future? Does it have the chops to become a durable business that we’ll see still thriving in 2016?
Paul Saffo: The interesting thing about iRobot, and why I honestly don’t know if one would endorse them or not, is they put a huge amount of effort and resources into marketing, especially before going public. I don’t know how deep their technical expertise is anymore. Which also begs a question: What matters at this phase of the game? Is robotics becoming a marketing game? Or is it a technology game? iRobot has a very strong brand, so if marketing is the key factor, they are in a good position.
Of course, the other obvious question is what’s next? Yeah, they’ve built vacuum cleaner robots. What else do consumers need? Is it baby-sitter robots? Is it security robots?
Tim Beyers: I’ve got three small kids. I’ll take the baby-sitter robot, please.
Paul Saffo: [Laughs.] Regardless, what’s next after the Roomba and the newly introduced Scooba isn’t so obvious. Which is why I think Intuitive Surgical (Nasdaq: ISRG) is also an interesting bellwether in this space. Its da Vinci telerobotic surgery system allows laproscopic options for operations that used to require cracking the chest cavity. Aging baby boomers had better hope and pray that they don’t need a bypass until after there are more of the DaVinci suites out there, as it looks like a much better way to have heart surgery than having your chest busted open.
Tim Beyers: Well, we will pass that along to David Gardner, who made Intuitive Surgical a pick for Rule Breakers. He will be very pleased to hear you say that.
Paul Saffo: Yeah, I noticed he did that. And I noticed that the company is trading for, what is it, a hundred dollars a share right now?
Tim Beyers: A little more than that, yes. But let’s move on. Five years ago, on The Motley Fool Radio Show, you said that you thought Jeff Bezos would go down as the F.W. Woolworth of his age. Do you still believe that?
Paul Saffo: Yes, Jeff has succeeded because he has leveraged network effects. He really has created a community at Amazon (Nasdaq: AMZN). People can actually write their comments about books and make recommendations and stuff. But an even purer example of this is, of course, eBay (Nasdaq: EBAY), which realized that the way you get big in the new economy is through creating community.
I think we are moving into a transitional period in terms of business. Where the last period was dominated by the few and the large, this one is going to be dominated by the many and the small. But I don’t mean that it is going to be a world comprised of only small businesses.
Tim Beyers: OK, what do you mean then?
Paul Saffo: The really big players are going to be the people who enable and empower the small players. eBay is the classic example. Think about how many so-called power sellers there are on eBay — people who are basically using eBay as their full-time job. Even though they are completely independent, eBay offers them merchant services and special credit cards and other benefits. Once upon a time, we would have called those people employees. In fact, if you consider power sellers employees rather than independent contractors, eBay would be one of the largest employers in the United States.
But, again, it has gotten very large not by hiring employees, but by doing the opposite: empowering other small businesses with a place where they can connect that is also deeply dependent on the network effects of the community. It is pure increasing returns, even more so than Amazon. You know, I don’t really care if Amazon has more customers, except to the extent that it might allow them to buy more volume and make the books cheaper. But as an eBay person, I really care that there are more people on eBay because that means that there are more products offered for me if I am a buyer, and more potential buyers for me if I am a seller.
Companies will succeed by organizing their customers into a network. Google is doing the same with advertising and enabling mashups.
Tim Beyers: What are some other areas where network effects are going to matter?
Paul Saffo: Well, the most extreme example would be Linden Lab and their massively multiplayer online environment Second Life, which I think is also an interesting bellwether. Everybody is familiar with EverQuest and avatars and the fact that there are digital farms in China where people are creating avatars and selling them on eBay. It is completely unremarkable at this point.
Yet Second Life, which is funded by Mitch Kapor, the founder of Lotus (now a division of IBM (NYSE: IBM)), took a very different approach than Sony (NYSE: SNE) did. On Second Life, you get to own what you create. So this is a community where the users are spending — a lot. In fact, according to the company, there are 40,000 user hours a day on Second Life, and 30% of the time people are creating stuff, fixing their rooms, creating artifacts to sell to other people. There is a very lively commerce on the site.
So much so, in fact, that one woman — I forget her name but she was recently profiled in the media — is making over $100,000 a year in real money buying and selling virtual real estate in Second Life. She’s a virtual real estate mogul who is facilitating a digital community.
Tim Beyers: So she’s the Donald Trump of Second Life?
Paul Saffo: Yeah, and it isn’t terribly surprising. Throughout business history, organizational structures have tended to resemble the communications and information systems available at the time. So in the 1920s and ’30s, companies looked like a telephone exchange with the CEO at the center and everybody else dialing in. In the ’60s, the age of the mainframe, General Motors looked nothing like so much as a hierarchal computing system. Today, everything is about networks.
What we are seeing is that network organizational structures are really defining companies. But we are also just beginning to realize that there are very distinct kinds of networks. There are linear networks. There are hub-and-spoke networks. There are all-contact networks. Companies and investors alike would do well to really deeply understand the different kinds of networks and how they have evolved.
Tim Beyers: That’s a pretty big idea, with seemingly big consequences. What are the other economic forces in place today that give investors clues as to what the world will be like in 10 years?
Paul Saffo: I would be watching open source, not just as a way to write software, but as a business model. Take the example Second Life. Here is a company that basically is having its users pay for the privilege of building the world. In effect, its software is being written by its customers, not by Linden Lab. In other words, Second Life is an example of open-source software development — collaborative open-source software. That movement is getting bigger daily. Think of the incumbents challenged by open source. It is a whole new way of organizing work, and one of the reasons Microsoft (Nasdaq: MSFT) recently announced that it will no longer support its Internet Explorer browser for Apple’s (Nasdaq: AAPL) Macintosh computers because of the pressures from Firefox, an open source browser.
Tim Beyers: Yeah, I wrote about that not long ago. An interesting development, to be sure.
Paul Saffo: The Mac market may not matter much, but we know that Microsoft’s share of market from Explorer was savaged by the arrival of Firefox. It’s a case where open wins over closed. I think Microsoft is actually caught in a very difficult position. Open source is challenging it economically and in terms of its development model, and the shift to web apps is only adding pressure. There is a glass ceiling in that web apps are cutting into Microsoft’s business. And I don’t mean that somebody is going to do a web app version of a word processor and put Word out of business. Instead, web applications will target new kinds of activities and new kinds of software that never made sense for a stand-alone application business. That, in turn, will block the opportunity to create major new applications that are sold as shrink-wrapped software.
It is no coincidence that Bill Gates hired (collaborative work guru) Ray Ozzie because the company has got to deal with both of those things at once. How does a very closed, proprietary company respond to the threat from open source? And how does it draw on a legacy of shrink-wrapped applications — such as the Office suite — to create value when businesses begin moving towards web apps?
Tim Beyers: What do you think your personal world will look like in 2016?
Paul Saffo: Well, first of all, one of the secrets to my job — the reason why my job is actually quite easy — is that even in periods of seemingly rapid change, the things that don’t change are vastly greater in number.
Tim Beyers: Point taken. Still, you must have thought about what your life might be like in the future. You’re a forecaster, for heaven’s sake!
Paul Saffo: [Laughs.] Let’s see. I live in California, in the [San Francisco] Bay Area. And we know that the U.S. population is going to grow by 25% between now and 2030, so there will be over 350 million people in the United States. But the projections are that population growth will happen disproportionately in three states: Texas, Florida, and California. It is no coincidence that those are states with high Hispanic, native-speaking populations. Two years ago, English ceased to be the majority language in California for native speakers, and, of course, Los Angeles is the second-largest Mexican city on the planet. It just doesn’t happen to be inside Mexico.
So by 2016, the place I live will be even more multicultural than it is today, and there will probably be more battles over requiring people to speak English. Though it is ironic that people forget that the original California constitution, passed in 1849, specified that all of our laws would be simultaneously presented in English and Spanish.
So, demographically, where I live will be much more multicultural. And this is a good thing because people who live with and cross into other cultures will have an enormous advantage over people who only speak one language and understand only one culture. Still, there are challenges. Economically, Silicon Valley in the next 10 years will have to fundamentally reinvent itself to fully acknowledge the huge role that India is playing in software and that China is playing in manufacturing.
What is quite obvious is that China is becoming to global manufacturing what Saudi Arabia is to global oil. There are other countries that sell oil besides the Saudis, but the sheer volume of oil they control means that they get to set the world price. And the same thing will be true for global manufacturing and China’s role.
So all of the industries in Silicon Valley are going to be challenged by competition at all levels from the Asia Pacific region, and that may or may not have a huge impact on quality of life in Silicon Valley.
There is also a tectonic wild card. San Francisco could get hit by a major quake between now and 2016. The probability of a magnitude 7, 8, or bigger quake in the Bay Area in the next 25 years is well over 60%. Imagine the 1906 quake hitting again. There is a lot of attention to that right now because 2006 is the 100th anniversary of that quake. If people thought Katrina had an impact on the U.S., a devastating quake in Silicon Valley could have the same financial impact on the United States that the Civil War had 150 years ago.
I will also be driving a hybrid car. In fact, I will have a hybrid car considerably before that. The debate over global climate change is over in the scientific community. Climate change is real and we must address it, whatever the political naysayers believe.
Tim Beyers: In which direction? Will the green movement finally become mainstream?
Paul Saffo: Global climate change is happening and we are already seeing the effects. As an investor, I would be looking for good green businesses, but I am skeptical about the traditional environmental and green movements. They simply haven’t connected with people and, with a few exceptions, haven’t come up with great ideas that actually work in the business world.
Tim Beyers: You mean companies like Ballard Power (Nasdaq: BLDP), Energy Conversion Devices (Nasdaq: ENER), and Evergreen Solar (Nasdaq: ESLR)?
Paul Saffo: All interesting companies, but I would look to the leading thinkers like Paul Hawken for an indicator of even more interesting models on the horizon.
Tim Beyers: Why?
Paul Saffo: Because we need new ideas. For example, if I were going to look to a place for ideas, I would look to the Natural Capital Institute that Hawken established. His book, The Ecology of Commerce, is also a good place to start. His work underscores that there is an emerging group of capitalists that believe green is good business and that green is profitable. It is not hair shirts and granola and the like; green capital is not an oxymoron. The first investors that really understand that are going to make a lot of money.
Tim Beyers: OK, let’s get to the meat and potatoes. What do you think has been your best prediction and, conversely, what has been the worst?
Paul Saffo: Well, you are not going to like my answer. I have certainly been very wrong about things, and other times I congratulate myself on being right. As far as being right goes, I did an essay in 1994 in Wired magazine entitled, “It is the Context, Stupid.” I wrote that the future does not belong to the content providers but to the people who give us the tools to search and sort. I had no idea that Google specifically was on its way, but for me at least, it was quite obvious that the search engine companies would be more important than the content providers that everyone was so fascinated with back then.
Tim Beyers: I’ll say. How did you know that was going to happen?
Paul Saffo: I didn’t. The indicators led to that conclusion. But the fact is that I don’t predict. I forecast. It sounds like a technical difference, I know. But I think it is really important for people who are investors to think the same way. It is not just that prediction is hard; I believe prediction is logically impossible. Unless you are a fundamentalist Christian who believes in predestination, that God has a plan, and that it is all written out, there is no way to predict what will happen. Our actions in the present change outcomes. Besides, if it was a world where prediction was possible, why bother? You wouldn’t be able to change the plan anyway.
So I work on the assumption that the world is intrinsically uncertain, and the object of forecasting is to map a “cone of uncertainty” that extends out from the present. My job is to map that cone and ask: How broad is the uncertainty? What are the elements in it and what are the logical relationships among them that could lead to a set of outcomes? So the times when I have been most unhappy with my forecast is when I have looked back and I realized that even though I forecast the outcome correctly, my assumptions were fairly narrow and that the level of uncertainty was much higher than I thought. As they say, even a broken clock can be right twice a day.
Tim Beyers: It sounds as though you are describing yourself as somebody who looks at the factors and calculates the odds.
Paul Saffo: My job is about understanding uncertainty and then figuring out what next steps are.
Tim Beyers: So you are saying that if you are going to be a Rule Breaking investor, you must first consider the odds that the earth-shattering innovations you expect will come to pass as you believe they will. Correct?
Paul Saffo: Absolutely. I have codified it into some basic rules. First of all, never mistake a clear view for a short distance. Things always take longer to happen than people realize, especially in the technology arena. In fact, most ideas in Silicon Valley take 20 years to become an overnight success. The problem with people who are close to technology is that they’re usually way ahead of the general public. So they get in early and have to hang around a long time to earn the returns they’d like.
Second, even the most expected of technological futures tends to come about in unexpected ways. So when I look at start-up companies, I am always interested in what they want to do, but I also want to make sure that they have a contingency plan and possess the flexibility to listen to the market. eBay’s Pierre Omidyar didn’t really realize he was starting eBay when he started eBay. He was solving a more specific problem but was wise enough and flexible enough to listen to consumers and realize that eBay was something much, much larger than he originally thought.
Third, do not allow your opinion of what you wish would happen to interfere with your judgment of what will happen. That is the toughest one. For example, I saw so many people get passionate about fuel cells. They were investing in them five years ago. And here I was saying, “Hey, it is going to take a lot longer. You have lots of time. Just watch it.” Today there’s nanotech, which is along the same lines. Everybody is excited about it. Well, with the exception of the carbon nanotubes, there are no sensible investments there. Just because you are enthusiastic about it doesn’t mean it is going to happen soon.
Tim Beyers: What about a notable failure?
Paul Saffo: Well, I said that cyberpunk was going to grow up into an idealistic activist new movement not unlike the hippies, and that youth would tackle our greatest challenges. It hasn’t happened. I was just wrong. I think it was a case of my allowing what I wished would happen to interfere with my judgment of what was likely.
Tim Beyers: Fair enough. Now, let’s say you have got to invest your portfolio in stocks. Well, before you answer, I guess I should ask: Are you a stock investor or a fund investor? Or are you not an investor at all?
Paul Saffo: It is a mix of both. We’ve some funds, but our portfolio is a mix of funds and stocks. I am also in some venture funds.
Tim Beyers: OK. Well, thinking ahead to 2016, let’s say you have to invest your entire portfolio in stocks and you get to choose whatever you want. What do you choose?
Paul Saffo: [Laughs.]
Tim Beyers: I am not asking you to make a particular stock pick here. Instead, I’m wondering how you would deal with an uncertain future as an investor. David Gardner, for example, has said he’d bet on the best company managers. What would you choose?
Paul Saffo: Well, that is very hard not to agree with, as Silicon Valley is littered with the corpses of companies that had great technology but lousy management. And the same applies to investment managers, of course. For example, we have seen tremendous fund managers from Harvard and Stanford recently leave their posts. I would watch them carefully.
Tim Beyers: Paul, thanks for making time for us Rule Breakers.
Paul Saffo: Anytime.