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March 19, 2019
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Instagram founders say losing autonomy at Facebook meant “winning”

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Rather than be sore about losing independence within Facebook, Instagram co-founder Kevin Systrom told me it was an inevitable sign of his app’s triumph. Today at South By South West, Systrom and fellow co-founder Mike Krieger sat down for their first on-stage talk together since leaving Facebook in September. They discussed their super hero origin stories, authenticity on social media, looming regulation for big tech, and how they’re exploring what they’ll do next.

Krieger grew up hitting “view source” on websites while Systrom hacked on AOL booter programs that would kick people off instant messenger, teaching both how code could impact real people. As Instagram grew popular, Krieger described the “incredi-bad” feeling of fighting server fires and trying to keep the widely loved app online even if that meant programming in the middle of a sushi restaurant or camping retreat. He once even revived Instagram while drunk in the middle of the night, and woke up with no memory of the feat, confused about who’d fixed the problem. The former Instagram CTO implored founders not to fall into the “recruiting death spiral” where you’re too busy to recruit which makes you busier which makes you too busy to recruit…

But thankfully, the founders were also willing to dig into some tougher topics than their scrappy startup days.

Kevin Systrom and Mike Krieger (from left) drive to Palo Alto to raise their Series A, circa January 2011

Independence vs Importance.

“In some ways, there being less autonomy is a function of Instagram winning. If Instagram had just been this niche photo app for photographers, we probably would be working on that app for 20 year. Instead what happened was it got better and better and better, and it improved, and it got to a size where it was meaningfully important to this company” Systrom explained. “If this thing gets to that scale that we want it to get to which is why we’re doing this deal, the autonomy will eventually not be there as much because it’s so important. So in some ways it’s just an unavoidable thing if you’re successful. So you can choose, do you want to be unsuccessful and small and have all the autonomy in the world, or no?”

AUSTIN, TX – MARCH 11: Mike Krieger speaks onstage at Interactive Keynote: Instagram Founders Kevin Systrom & Mike Krieger with Josh Constine during the 2019 SXSW Conference and Festivals at Austin Convention Center on March 11, 2019 in Austin, Texas. (Photo by Chris Saucedo/Getty Images for SXSW)

Krieger followed up that “I think if you study . . . all the current companies, the ones that succeed internally eventually have become so important to the acquiring company that it’s almost irresponsible to not be thinking about what are the right models for integration. The advice I generally give is, ‘are you okay with that if you succeed?’ And if you’re not then you shouldn’t do the deal.” If the loss of autonomy can’t be avoided, they suggest selling to a rocket ship that will invest in and care for your baby rather than shift priorities.

Asked if seeing his net worth ever feels surreal, Systrom said  money doesn’t make you happy and “I don’t really wake up in the morning and look at my bank account.” I noted that’s the convenient privilege of having a big one.

The pair threw cold water on the idea that being forced to earn more money drove them out of the company. “I remember having this series of conversations with Mark and other folks at Facebook and they’re like ‘You guys just joined, do not worry about monetization, we’ll figure this out down the road.’ And it actually came a lot more from us saying “1. It’s important for us to be contributing to the overall Fb Inc . . . and 2. Each person who joins before you have ads is a person you’re going to have to introduce ads to.” Systrom added that “to be clear, we were the ones pushing monetization, not the other way around, because we believed Instagram has to make money somehow. It costs a lot to run . . . We pushed hard on it so that we would be a successful unit within Facebook and I think we got to that point, which is really good.”

But from 2015 to 2016, Instagram’s remaining independence fueled a reinvention of its app with non-square photos, the shift to the algorithm, and the launch of Stories. On having to challenge the fundamental assumptions of a business, “You’ve got maybe a couple years of relevance when you build a product. If you don’t reinvent it every quarter or every year, then you fall out of relevance and you go away.”

That last launch was inspired by wanting to offer prismatic identity where people could share non-highlights that wouldn’t haunt them. But also, Systrom admits that “Honestly a big reason why was that for a long time, people’s profiles were filled with Snapchat links and it was clear that people were trying to bridge the two products. So by bringing the two products [Feed and Stories] into one place, we gave consumers what they wanted.” Though when I asked anyone in the crowd who was still mad about the algorithm to hiss, SXSW turned into a snake pit.

Regulating Big Tech

With Systrom and Krieger gone, Facebook is moving forward with plans to more tightly integrate Instagram with Facebook and WhatsApp. That includes unifying their messaging system, which some say is designed to make Facebook’s apps harder to break up with anti-trust regulation. What does Systrom think of the integration? “The more people that are available to talk with, the more useful the platform becomes. And I buy that thesis . . . Whether or not they will in fact want to talk to people on different platforms, I can’t tell the future, so I don’t know” Systrom said.

AUSTIN, TX – MARCH 11: Josh Constine, Mike Krieger and Kevin Systrom speak onstage at Interactive Keynote: Instagram Founders Kevin Systrom & Mike Krieger with Josh Constine during the 2019 SXSW Conference and Festivals at Austin Convention Center on March 11, 2019 in Austin, Texas. (Photo by Chris Saucedo/Getty Images for SXSW)

Krieger recommended Facebook try to prove users want that cross-app messaging before embarking on a giant engineering challenge of merging their backends. When I asked if Systrom ever had a burning desire to Instagram Direct message a WhatsApp user, he admitted “Personally, no.” But in a show of respect and solid media training, he told his former employer “Bravo for making a big bet and going for it.”

Then it was time for the hardest hitting question: their thoughts on Presidential candidate Senator Elizabeth Warren’s proposal to regulate big tech and roll back Facebook’s acquisition of Instagram. “Do we get our job back?” Systrom joked, trying to diffuse the tension. Krieger urged more consideration of downstream externalities, and specificity on what problem a break up fixes. He wants differentiation between regulating Facebook’s acquisitions, Amazon white-labeling and selling products, and Apple’s right to run the only iOS App Store.

Acquisition vs Competition

“We live in a time where I think the anger against big tech has increased ten-fold — whether that’s because the property prices in your neighborhood have gone up, whether it’s because you don’t like Russian meddling in elections — there are a long list of reasons people are angry at tech right now and some of them I think are well-founded” Systrom confirmed. “That doesn’t mean that the answer is to break all the companies up. Breaking companies up is a very specific prescription for a very specific problem. If you want to fix economic issues there are ways of doing that. If you want to fix Russian meddling there are ways of doing that. Breaking up a company doesn’t fix those problems. That doesn’t mean that companies shouldn’t be broken up if they get too big and they’re monopolies and they cause problems, but being big in and of itself is not a crime.”

attends Interactive Keynote: Instagram Founders Kevin Systrom & Mike Krieger with Josh Constine during the 2019 SXSW Conference and Festivals at Austin Convention Center on March 11, 2019 in Austin, Texas

Systrom then took a jab at Warren’s tech literacy, saying “part of what’s surprised me is that generally the policy is all tech should be broken up, and that feels to me again not nuanced enough and it shows me that the understanding of the problem isn’t there. I think it’s going to take a more nuanced proposal, but my fear is that something like a proposal to break up all tech is playing on everyone’s current feeling of anti-tech rather than doing what I think politicians should do which is address real problems and give real solutions.”

The two founders then gave some pretty spurious logic for why Instagram’s acquisition helped consumers. “As someone who ran the company for how many years inside of Facebook? Six? There was a lot of competition internally even and I think better ideas came out because of it. We grew both companies not just one company. It’s really hard question. What consumer was damaged because it grew to the size that it did? I think that’s a strong argument that in fact the acquisition worked out for consumers.” That ignores the fact that if Instagram and Facebook were rivals, they’d have to compete on privacy and treating their users well. Even if they inspired each other to build more engaging products, that doesn’t address where harm to consumers has been done.

Krieger suggested that the acquisition actually spurred competition by making Instagram a role modeI. “There was a gold rush of companies being like ‘I’m going to be the Instagram of X . . . the Instagram of Audio, the Instagram of video, the Instagram of dog photos.’ You saw people start new companies and try to build them out in order to try to achieve what we’ve gotten to.” Yet no startup besides Snapchat, which had already launched, has actually grown to rival Instagram. And seeing Instagram hold its own against the Facebook empire would have likely inspired many more startups — some of which can’t find funding since investors doubt their odds against a combined Facebook and Instagram

As for what’s next for the college buddies, “we’re giving ourselves the time to get curious about things again” Krieger says. They’re still exploring so there was no big reveal about their follow-up venture. But Systrom says they built Instagram by finding the mega-trend of cameras on phones and asking what they’d want to use, “and the question is, what’s the next wave?”

News Source = techcrunch.com

Huawei sues America as SoftBank spends more money

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Today, a bunch of analysis on stories we have been covering the last few weeks.

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SoftBank wants to spend more billions

Kiyoshi Ota/Bloomberg via Getty Images

Three inter-related stories today on SoftBank and its Vision Fund. First, an analysis from my Bangkok-based colleague Jon Russell, who notes that controversies surrounding the murder of journalist Jamal Khashoggi hasn’t deterred the Vision Fund from its investments in the Asia-Pacific region:

The $100 billion megafund has done 21 deals over the last two quarters, that’s as more than in the other quarters of the previous year combined, according to data from Crunchbase, thanks to an uptick from Asia. Since the October 2 murder, there have been 11 investments in U.S. companies, seven in Asia, two in Europe and one in Latin America. Just this week, the fund completed a near $1.5 billion investment in Southeast Asia-based ride-hailing company Grab.

While U.S. and European firms have more options, and therefore, perhaps deserve more scrutiny, Softbank’s cash is increasingly the only game in town for startups in Asia, where there are fewer alternatives for later stage capital outside of large Chinese private equity firms or tech giants — which come with their own risks.

You should read the rest of Jon’s data analysis of where the Vision Fund is investing and why.

I want to comment though on this incessant framing of Khashoggi and SoftBank by the press. By now, we all know that Saudi Arabia and Abu Dhabi are the plurality of the Vision Fund’s capital. It’s a bit of an unfortunate circumstance, as I wrote in my year-end report on SoftBank:

There have been strong calls for Masayoshi Son to avoid Saudi Arabia in future fundraises, but that is complicated for one simple reason: there are just not that many money managers in the world who can a) invest tens of billions of dollars into firms backing risky technology investments, and b) are willing to ignore SoftBank’s massive debt stack and existential risks.

The murder of Khashoggi was heinous and wrong. Yet, there is a whole spectrum of bad LPs. Chinese government funds are among the heaviest investors in Silicon Valley as well, and of course, its record on human rights is hardly out of sync with Saudi Arabia. Many family offices with ties to unsavory industries and corruption permeate the LP lists at prominent venture capital funds.

I’d love to see less money laundering in Silicon Valley and cleaner capital sources. Until founders, VCs, and employees jointly work to make clean capital a priority though, I think the constant focus on one-off cases is shrill and mostly unhelpful.

The second major story is that SoftBank is launching another multi-billion dollar fund, this time in Latin America. The Innovation Fund, as my colleague Ingrid Lunden wrote, has $2 billion in capital to invest in the region. From the article:

This is the first time that SoftBank has created a fund of this kind focused on a single region — although it has spearheaded big bets into specific countries like India in the past — and it appears to the be first time that it has formally established a group to help other portfolio companies expand in a region, although this is likely something that SoftBank would have been doing on an informal basis before now.

We will have more on global expansion of the internet to the next billion users tomorrow, but suffice it to say, major investors are opening their checkbooks to regions outside the West as billions of consumers join the digital economy and become targets for investment. The first wave was around the seed stage in places like Latin America and Africa, but as that initial wave of startups mature, we can expect growth-stage VCs to start to intensely search for deals.

Finally, we have been tracking SoftBank’s horrifying debt situation for some time, which is complicated by the Japanese government’s goal of increasing competition among the country’s mobile service operators in a bid to lower prices.

Now, Japan’s prime minister Shinzo Abe intends to move forward with such plans. His cabinet this week approved a plan to force mobile operators to lower fees by separating service fees from device costs. Cabinet approval sends the bill to the legislature for a vote. From the Japan Times:

Two of the country’s three major carriers, SoftBank Corp. and KDDI Corp., through its au brand, say they already comply with the new rules, while NTT Docomo Inc. has said it plans to do so this spring.

SoftBank has argued that it is already in a strong position to handle these new laws, but with a new telecom entrant expected from ecommerce giant Rakuten, things are changing rapidly in the normally staid Japanese telco market, and that could put pressure on SoftBank given its debt load.

Huawei and the U.S. both have weak strategies

Horizon Plaza, the office building where the headquarters of the Polish branch of Huawei is located is seen in Warsaw, Poland

Photo by Jaap Arriens/NurPhoto via Getty Images

Last night, Huawei announced that it was suing the U.S. over last year’s ban on government agencies buying Huawei equipment, which was passed by Congress as part of the defense authorization bill. Legal scholars say that the lawsuit is highly unlikely to succeed, although it may delay implementation of the ban as the courts handle yesterday’s lawsuit.

Meanwhile, the U.S. continues to ratchet up pressure on its allies to ban Huawei, pressure that hasn’t been well-received.

Far from a nuanced battle over the future of telecommunications infrastructure, the U.S. and Huawei seem to be engaged in a muddy slugfest without a clear strategy on where this fight will lead.

The U.S. continues to demand a ban on Huawei even as it steadfastly refuses to provide evidence of backdoors or other security flaws in the company’s equipment. Given that Huawei’s competitors are almost exclusively American companies, the clear economic benefits of a ban for the U.S. increases the evidentiary standards. The U.S. has failed to provide that evidence.

As TechCrunch’s security editor Zack Whittaker wrote a few weeks ago:

The reality is that China is no more a national security threat than the U.S. is to China, which has its own burgeoning networking equipment business. Just as much as the U.S. and Canada might not want to use Huawei or ZTE equipment in their networks for fear of a surprise cyberattack ten years down the line, why should China, Russia, or any other “frenemy” state choose HPE or Cisco technologies?

Companies have an option: Is the enemy you know better than the one you don’t?

One theory of course is that the U.S. doesn’t have such evidence. Another theory that I would posit is that the U.S. does know about specific backdoors, but wants to use those backdoors for espionage rather than revealing them to the public. Whatever the reason, the continual lack of evidence but constant demands for a ban is stretching the patience for many of America’s most important allies.

Meanwhile, Huawei’s lawsuit is a weak strategy for confronting American intransigence on its cybersecurity. While its equipment has been purchased by rural American telcos due to its cost effectiveness, the U.S. is not a critical market for Huawei. Last year’s ban might have symbolic power, but no more or less than any other regulatory action against the company. If anything, the Streisand effect here is kicking in: more and more Americans (and presumably international news readers) now know about the ban.

Frankly, the U.S. and China are usually much more sophisticated than this.

Other news of companies spending (or not spending) billions

Photo from Lyft

Lyft S-1

I (finally) read through it last night, and I have to say that I have very little to say on it. Since Lyft files its S-1 through the emerging growth companies mechanism, it has to provide less disclosure about its business than a typical listing. I found the S-1 to reveal surprisingly little about the health of Lyft’s revenue model other than the obvious jaw-dropping losses. There is a little bit of cohort analysis, and some numbers around user spend, but very little in the way of city-by-city market share or changing spending and earning patterns of drivers and riders.

That said, one facet of the S-1 I found interesting is the cap table. Given Lyft’s profligate spending, it is interesting to see how much its early VC investors have been diluted over the years. Andreessen Horowitz owns 6.25%, Alphabet owns 5.33%, seed investor Floodgate owns 0.63% of the company, and most other firms are below the 5% reporting threshold. No one at Floodgate is crying at the math of 0.0063 x BIG HUGE VALUATION, but it is quite something to see how much these ownership percentages shrink on high-spending startups.

Remixing infrastructure

We’ve talked about infrastructure costs a lot around here, so it is exciting to see some great investments in the space. Remix grabbed $15 million in VC, which should help the SaaS urban transportation planning startup continue to grow.

There is a huge opportunity for new companies to enter these sorts of planning spaces — software here tends to be extremely old, as Bloomberg recently discussed. These may not be Lyft-scale businesses, but there is a serious chunk of change to made here, while improving society and the environment to boot.

Also on infrastructure, I finally got around to that Guardian article on concrete. I found it quite compelling:

After water, concrete is the most widely used substance on Earth. If the cement industry were a country, it would be the third largest carbon dioxide emitter in the world with up to 2.8bn tonnes, surpassed only by China and the US.

It’s worth the 15 minute read if you haven’t thought about the core material of most structures built on the planet today.

Obsessions

  • Perhaps some more challenges around data usage and algorithmic accountability
  • We have a bit of a theme around emerging markets, macroeconomics, and the next set of users to join the internet.
  • More discussion of megaprojects, infrastructure, and “why can’t we build things”

Thanks

To every member of Extra Crunch: thank you. You allow us to get off the ad-laden media churn conveyor belt and spend quality time on amazing ideas, people, and companies. If I can ever be of assistance, hit reply, or send an email to danny@techcrunch.com.

This newsletter is written with the assistance of Arman Tabatabai from New York

You’re reading the Extra Crunch Daily. Like this newsletter? Subscribe for free to follow all of our discussions and debates.

News Source = techcrunch.com

Court dismisses Paris lawsuit against Airbnb for illegal listings

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A court in Paris has dismissed a case against Airbnb, as Le Monde reported. Last month, the City of Paris sued Airbnb for 1,010 illegal listings. According to the mayor’s office, Airbnb failed to comply with regulation in Paris.

Paris has been trying to limit the effect of Airbnb on the housing market in Paris. Paris is one of the top cities for Airbnb in the world. A few years ago, many people stopped renting their apartments the traditional way in favor of Airbnb. The average rental price in some areas of Paris has increased as a result.

Mayor of Paris Anne Hidalgo didn’t want to ban Airbnb altogether. Instead, the city asked hosts to get an ID number so the city can track how many nights someone is listing their apartment on Airbnb. You can’t rent an apartment more than 120 days a year.

But many listings still don’t have that ID number. The mayor’s office flagged around 1,000 apartments, saying that Airbnb was also responsible by dragging their feet.

But the court has said that screenshots are not enough to prove that these apartments without an ID number are permanently available on Airbnb. Maybe some of these apartments are available for less than 120 days a year, after all.

The case is not over, as this is just a summary judgement. But it sounds like the case is not strong enough to condemn Airbnb.

News Source = techcrunch.com

Dragonfly, ethics, and infrastructure spending

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Yesterday’s analysis of the ethical tradeoffs faced by engineers working in the Valley certainly lit up my inbox with responses.

The general thesis of that piece is that startups and tech companies face more — and worse — tradeoffs as they have migrated from the “purity” of the early internet into more socially and ethically complicated spaces like labor, social media, health, and elsewhere. That led me to suggest that:

If you disagree with the ethics of your company, the best course of action — particularly in the strongest employment economy in years — is to find a job more in line with your values.

I was specifically talking about Google’s censored search engine project Dragonfly, but I think the discussion applies to a wide swath of the Valley today.

One subscriber wrote in response:

-1 for this piece as a new Extra Crunch subscriber. If this kind of the theme will be a key part of the Extra Crunch editorial voice, it makes me less likely to renew/recommend. Just a datapoint from one reader.

As always, you can just reply to this email and send me your thoughts, and I appreciate feedback.

One of my major objectives for Extra Crunch is to expand the dialogue around the challenges facing startups and how they conduct disruption. Startups and large tech companies are entering more complicated industries, and the decisions required of founders, engineers, product managers, and everyone are increasingly not black and white.

My sincere hope is that as you read Extra Crunch editorial, you tremendously agree with some articles and vehemently disagree with others. Only be conveying that debate and expanding the range of views can we hope to handle the decisions we face with nuance.

Do tech workers have power to shape the world? What world?

Taxi drivers protest Uber in Madrid. Photo by Marcos del Mazo/LightRocket via Getty Images

Another reader wrote in:

“I am a resolute defender of human rights, but the world is the world” [a quote from my analysis]

This statement is not only defeatist, it is meaningless. Like saying,”it is what it is”, you convey nothing. You also negate that you are a resolute defender of anything. This statement paints a closer picture to nihilism – nothing is important, everything is meaningless. How do you consider yourself a defender of human beings, when your suggestion to those affected is to move on and find somewhere else to go? You are promoting apathy, not the determinism of a fighter of freedom.

You paint a world in which corporate interests, and ultimately profits, decide how this world will operate. Suggesting that employees find another job is disregarding the power which they have in their current positions. Google hires top tier talent and has enormous influence. Where else can a person have more impact in their role? Like many other companies, Google has a code of ethics that suggests that employees should do exactly what these employees have done in cases where they disagree with corporate guidance. This is the importance of company culture and”culture fit”. Suggesting that good people do nothing when asked to do something that compromises their ethical values promotes the idea that there are no true ethics in business.

This is a fine critique and an important one.

I think one of the secrets of Silicon Valley’s startup success is that there is a large band of innovators who are not apathetic about their ability to change the world. You really can write some software in Xcode, publish it in the App Store, and eventually affect the lives of millions if not billions of people. That is an awesome power.

Yet, the ethics of disruption is complicated. Take Uber, for instance. The company broke the law not just in multiple urban jurisdictions across the United States, but in jurisdictions around the world. They ran an unregulated taxi service in cities where people who have tried to do that for decades were fined and possibly jailed. Breaking the law though meant offering a compelling new service that is clearly popular among consumers.

From a utilitarian perspective, that outcome is for the best, and Uber was right. But from a deontological approach focusing on duties and values, Uber is clearly in the wrong. It conducted possibly criminal actions in order to open up the taxi market and make an enormous profit. Was that ethical?

Uber has its adherents — it has a huge staff after all. But clearly some people would be uncomfortable working for a company that continually flouts the law in order to make disruption happen. Workers have the ability to shape their corporations to some degree, but their ultimate agency is their ability to walk out the door and apply their talents to companies that match their ethical values.

Infrastructure spending

Photo by Don Bartletti/Los Angeles Times via Getty Images

Three pieces on megaproject infrastructure spending, which we have been focused on here for some time, since we seem to spend billions on high-speed rail only to see it evaporate before our very eyes.

First, a subscriber wrote in with thoughts on where the cost drivers are from his own experience in the space:

1. Contracting strategy – what seems like a good plan turns out to drive bad behavior

2. Design – starting construction before the design phase is complete (risk is amplified when the design is first-of-a-kind, and/or if the schedule is aggressive to start with)

3. Rapid pace of change – tech is obviously changing rapidly, but on multi-year, mega-projects even things like codes, laws, regulations, etc. change ”rapidly” relative to the overall duration of the project. And together with tech/software, it can be very difficult to manage. […]

4. Manufacturability or constructibility – design is difficult to manufacture/build

5. Modular – people fall in love with the concept, but it’s another thing to execute it

I think #3 is a particularly interesting one. We might think that construction methods don’t change, or building codes don’t get updated, but at a certain timescale, even those subtle changes over time have a huge impact on projects that might take a decade to complete.

Second, Alon Levy, a long-time commentator on infrastructure, has written up his comprehensive guide on the drivers of infrastructure costs, primarily focused on the United States. His nine factors run the gamut from engineering to management to procurement, but I loved his last factor around global incuriosity:

Incuriosity is not merely ignorance. Ignorance is a universal trait, people just differ in what they are ignorant about. But Americans are unique in not caring to learn from other countries even when those countries do things better.

[…]

Another Caltrain official, confronted with the fact that in Japan trains turn faster than Caltrain thought possible, responded “Asians don’t value life the way we do” – never mind that Japan’s passenger rail safety per passenger-km is about 1.5 orders of magnitude better than the US’s.

The most innovative people constantly work to learn from the smartest people in the world, which perhaps explains America’s appalling state of infrastructure.

Third, Bloomberg Businessweek published a brief interview with President Trump’s former infrastructure czar D.J. Gribbin. The answer he gives on whether an in infra deal could get done in Congress I think is just a perfect example of the challenges in this space:

It wasn’t like there was a deal sitting out there that was baked and could have moved earlier. You didn’t have bipartisan support for a plan. You had bipartisan support for a concept. The concept of, “Yes, we should do more.” Should it be better? Everyone agrees. And then as soon as you start getting into, “How do we make it better,” people balk and go, “Wait a minute. Why can’t someone else just cover the cost of this?”

Obsessions

  • Perhaps some more challenges around data usage and algorithmic accountability
  • We have a bit of a theme around emerging markets, macroeconomics, and the next set of users to join the internet.
  • More discussion of megaprojects, infrastructure, and “why can’t we build things”

Thanks

To every member of Extra Crunch: thank you. You allow us to get off the ad-laden media churn conveyor belt and spend quality time on amazing ideas, people, and companies. If I can ever be of assistance, hit reply, or send an email to danny@techcrunch.com.

This newsletter is written with the assistance of Arman Tabatabai from New York

News Source = techcrunch.com

Can predictive analytics be made safe for humans?

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Massive-scale predictive analytics is a relatively new phenomenon, one that challenges both decades of law as well as consumer thinking about privacy.

As a technology, it may well save thousands of lives in applications like predictive medicine, but if it isn’t used carefully, it may prevent thousands from getting loans, for instance, if an underwriting algorithm is biased against certain users.

I chatted with Dennis Hirsch a few weeks ago about the challenges posed by this new data economy. Hirsch is a professor of law at Ohio State and head of its Program on Data and Governance. He’s also affiliated with the university’s Risk Institute.

“Data ethics is the new form of risk mitigation for the algorithmic economy,” he said. In a post-Cambridge Analytica world, every company has to assess what data it has on its customers and mitigate the risk of harm. How to do that, though, is at the cutting edge of the new field of data governance, which investigates the processes and policies through which organizations manage their data.

You’re reading the Extra Crunch Daily. Like this newsletter? Subscribe for free to follow all of our discussions and debates.

“Traditional privacy regulation asks whether you gave someone notice and given them a choice,” he explains. That principle is the bedrock for Europe’s GDPR law, and for the patchwork of laws in the U.S. that protect privacy. It’s based around the simplistic idea that a datum — such as a customer’s address — shouldn’t be shared with, say, a marketer without that user’s knowledge. Privacy is about protecting the address book, so to speak.

The rise of “predictive analytics,” though, has completely demolished such privacy legislation. Predictive analytics is a fuzzy term, but essentially means interpreting raw data and drawing new conclusions through inference. This is the story of the famous Target data crisis, where the retailer recommended pregnancy-related goods to women who had certain patterns of purchases. As Charles Duhigg explained at the time:

Many shoppers purchase soap and cotton balls, but when someone suddenly starts buying lots of scent-free soap and extra-big bags of cotton balls, in addition to hand sanitizers and washcloths, it signals they could be getting close to their delivery date.

Predictive analytics is difficult to predict. Hirsch says “I don’t think any of us are going to be intelligent enough to understand predictive analytics.” Talking about customers, he said “They give up their surface items — like cotton balls and unscented body lotion — they know they are sharing that, but they don’t know they are giving up their pregnancy status. … People are not going to know how to protect themselves because they can’t know what can be inferred from their surface data.”

In other words, the scale of those predictions completely undermines notice and consent.

Even though the law hasn’t caught up to this exponentially more challenging problem, companies themselves seem to be responding in the wake of Target and Facebook’s very public scandals. “What we are hearing is that we don’t want to put our customers at risk,” Hirsch explained. “They understand that this predictive technology gives them really awesome power and they can do a lot of good with it, but they can also hurt people with it.” The key actors here are corporate chief privacy officers, a role that has cropped up in recent years to mitigate some of these challenges.

Hirsch is spending significant time trying to build new governance strategies to allow companies to use predictive analytics in an ethical way, so that “we can achieve and enjoy its benefits without having to bear these costs from it.” He’s focused on four areas: privacy, manipulation, bias and procedural unfairness. “We are going to set out principles on what is ethical and and what is not,” he said.

Much of that focus has been on how to help regulators build policies that can manage predictive analytics. Because people can’t understand the extent that inferences can be made with their data, “I think a much better regulatory approach is to have someone who does understand, ideally some sort of regulator, who can draw some lines.” Hirsch has been researching how the FTC’s Unfairness Authority may be a path forward for getting such policies into practice.

He analogized this to the Food and Drug Administration. “We have no ability to assess the risks of a given drug [so] we give it to an expert agency and allow them to assess it,” he said. “That’s the kind of regulation that we need.”

Hirsch overall has a balanced perspective on the risks and rewards here. He wants analytics to be “more socially acceptable,” but at the same time, sees the needs for careful scrutiny and oversight to ensure that consumers are protected. Ultimately, he sees that as incredibly beneficial to companies that can take the value out of this tech without risking provoking consumer ire.

Who will steal your data more: China or America?

Jaap Arriens/NurPhoto via Getty Images

Talking about data ethics, Europe is in the middle of a superpower pincer. China’s telecom giant Huawei has made expansion on the continent a major priority, while the United States has been sending delegation after delegation to convince its Western allies to reject Chinese equipment. The dilemma was quite visible last week at MWC Barcelona, where the two sides each tried to make their case.

It’s been years since the Snowden revelations showed that the United States was operating an enormous eavesdropping infrastructure targeting countries throughout the world, including across Europe. Huawei has reiterated its stance that it does not steal information from its equipment, and has repeated its demands that the Trump administration provide public proof of flaws in its security.

There is an abundance of moral relativism here, but I see this as increasingly a litmus test of the West on China. China has not hidden its ambitions to take a prime role in East Asia, nor has it hidden its intentions to build a massive surveillance network over its own people or to influence the media overseas.

Those tactics, though, are straight out of the American playbook, which lost its moral legitimacy over the past two decades from some combination of the Iraq War, Snowden, WikiLeaks and other public scandals that have undermined trust in the country overseas.

Security and privacy might have been a competitive advantage for American products over their Chinese counterparts, but that advantage has been weakened for many countries to near zero. We are increasingly going to see countries choose a mix of Chinese and American equipment in sensitive applications, if only to ensure that if one country is going to steal their data, it might as well be balanced.

Things that seem interesting that I haven’t read yet

Obsessions

  • Perhaps some more challenges around data usage and algorithmic accountability
  • We have a bit of a theme around emerging markets, macroeconomics and the next set of users to join the internet
  • More discussion of megaprojects, infrastructure and “why can’t we build things?”

Thanks

To every member of Extra Crunch: thank you. You allow us to get off the ad-laden media churn conveyor belt and spend quality time on amazing ideas, people and companies. If I can ever be of assistance, hit reply, or send an email to danny@techcrunch.com.

This newsletter is written with the assistance of Arman Tabatabai from New York.

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