Banks and ice

Some years ago, I happened to be reading William Bernstein’s A Splendid Exchange: How Trade Shaped the World when I was mildly startled to see a reference to the magnitude of America’s 19th century ice trade. Startled because I’d never heard of this trade despite that fact that ice was America’s second largest export tonnage (second only to King Cotton) at the time of the Civil War! I immediately resolved to learn more and a few moments of augmented intelligence (ie, Google) threw up the name of Frederic Tudor, the “Ice King” who invented the industry. From there it was a quick jump to Gavin Weightman’s The Frozen Water Trade, one of my favourite books.

The story of Frederic Tudor (perhaps “yarn” might be a better description) ranges over most of the seven seas, taking in privateers, shipwrecks, invention, speculation, enterprise and vision on the way. Tudor had an idea and spent years, in a truly American fashion, pursuing it until he had created an entirely new market and had satisfied it through an entirely new industry. When he shipped his first cargo of New England ice down to Martinique in 1806, he thought he would have a sure-fire success. But the inhabitants had no idea what to do with it: if you’ve never seen ice, would you buy some? Eventually he found using it to make ice cream a moderate economic success and was encouraged to continue. A decade later, his breakthrough came when he began shipping not to the Caribbean but to Charleston, Savannah and New Orleans and the business began taking off.

At the same time, an ice ecosystem began to develop. Downstream, the waste water coming off of the melting ice was sold as a cold draught rather than poured down the drain. Upstream, the demand for sawdust (used to insulate the ice cargos) from the Maine timber industry (previously a nuisance) generated more wealth. New technology was applied to cutting, storing and hauling the ice.

Frederic’s marketing strategy was dynamite. He created an insatiable demand for two main products: ice cream and cold drinks. When opening up a new town, he would provide free ice to bartenders knowing that customers would never go back to warm drinks once they’d tried a mint julip or an iced tea. It seemed to me slightly reminiscent of the bottled water industry today: create a demand, satisfy it and the use brand to drive up the price. Indeed, Weightman notes that the only difference between “Wenham Lake Ice” (one of the main brands of the time) and other ice was purely marketing.

Tudor was a ruthless businessman, seeing off competitors by lowering the price of his ice to ruin them, but not a perfect one. Some of his enterprises outside ice went well (graphite mining and property) and some not so well (he lost a fortune speculating on coffee futures). In any case, by 1849 the ice trade he had created was going so well that he ran out of ice in Boston and had to send a ship and a crew north to cut chunks off of icebergs!

“To speak literally, a hundred Irishmen, with Yankee overseers, came from Cambridge every day to get out the ice. They divided it into cakes by methods too well known to require description…” — Henry David Thoreau, from “The Pond in Winter,” Walden

From The ice men come to Walden Pond (Walden 186) | The Curious People

By the time Thoreau was moaning about the ice trade disturbing his peace on Walden Pond, Tudor was shipping ice to Calcutta (where the grateful British Raj coined him a medal), round the Cape to San Francisco and even to Australia. In America, ice was no longer a luxury item but an essential comfort.

Naturally, as I followed this wonderful tale, I couldn’t help but try and extract key messages around the intersection between economics and technology. In this field, there is a definite paradox around Frederic and I find it fascinating. Frederic was not a luddite by any means and appears excited by the new inventions of the time. In 1830, he predicted that “steam will soon take the place of horses” and went on to say that “the times are surcharged with novel inventions and improvements of all kinds… steam seems now the ordinary power: in all probability some other and more convenient one will be discovered”. And, of course, it was.

Yet as Weightman notes in passing, it never seems to have occurred to Frederic that someone might “undermine his ice trade by manufacturing ice or making an artificial refrigerator”. Perhaps it is some kind of innovator’s curse, to imagine change in all businesses except the one they have created: it’s why Bill Gates didn’t invent Google and why Akio Moirta didn’t invent the iPod.

As it turned out, when artificial refrigerators did arrive, they at first bolstered the trade by providing an inexhaustible, year-round supply of clean ice for shipping through the existing supply chain before, in time, they destroyed the trade by decentralising ice making to the point of consumption. Destroyed the trade so thoroughly, in fact, that few people remember that it ever existed. The market that Frederic’s genius created is still with us, but the industry he created to service it has melted away.

This is how I see the banking sector. As the former CEO of Barlcays, Anthony Jenkins, said (I paraphrase), banks digitised banking rather than make it digital and are facing the “Uber moments” to come. The digital financial services revolution has barely begun. Our cool new finance stuff is running on some very old rails.

The banks have indeed spotted the invention of refrigeration and they have taken the first primitive refrigerators (e.g., the blockchain) and are using them to make blocks of ice that are then packed in sawdust and sent off in sailing ships just as they were before (by which I, of course, mean the legacy information technology infrastructure). Meanwhile, other people (the fintechs, the internet giants, new businesses yet to be born) are looking at decentralisation and are shipping the fridges rather than the ice. They are looking at using blockchain technologies to create new and decentralised markets founded on translucent transactions and ambient accountability.

I hope this isn’t too clumsy a metaphor for taking a look at the 21st century technologies that are already upon us (ranging from biometrics and the blockchain to artificial intelligence and the internet of things) to try and see what they will really do to the financial services sector in general and the banking industry in particular. I think I have a fairly structured way of thinking through these issues and, more importantly, I think I have an idea for a new book…

Slide rule precision

I’ve written before about my interest in paleofutures. I think it’s important not just to look at what people used to think about the future but why they thought it. Not to make fun of them, but to try and understand why they were wrong, so that we can use that knowledge to help to construct our own narratives about the future. I need these for work, because narratives are the way to create shared visions for organisations try to develop realistic strategies (and therefore make the right tactical investments right now).

Technology’s Martyrs: The Slide Rule” by Kirk Johnson in the New York Times (3rd January 1987) covers the story of Keuffel & Esser. This company, founded in 1867, was America’s pre-eminent manufacturer of slide rules. In 1965, they sold one million of them. In 1967, their centenary, they were commissioned to prepare a report about the future called “Life in the year 2067”, looking a century on. They interviewed scientists to come up with a vision that predicted electric cars and 3D TV. What it didn’t predict was that they would be out of business within a few years because of the electronic calculator. The end came quickly. On this day in 1976

K&E produced its last slide rule, which it presented to the Smithsonian Institution.

[From Computer History Museum | Exhibits | This Day in History: July 11]

In less than a decade they were gone because of technological change. But note the “Gibson” take on this: the invention that destroyed them, the electronic calculator, already existed when they wrote their report. In fact the first all electronic calculator desktop calculator went on sale in 1961

At the end of 1961 the Bell Punch Company put the Anita Mk VII on the market in continental Europe and the Anita Mk 8 in the rest of the world as the world’s first electronic desktop calculators. These were the only commercial electronic desktop calculators for more than 2 years

[From Anita: the world’s first electronic desktop calculator]

What’s more, the first electronic all-transistor calculator (from Sharp) went on sale in 1964. So by the time the slide rule guys did their study, the technology that would destroy them had been on open sale for several years. They made the mistake, I guess, of thinking that because slide rules cost $10 and calculators cost $1,000 they would never compete, forgetting that the inevitable curve of technology price/performance would do for them in time. And, I suspect, the scientists that wrote the report all used slide rules and were perfectly happy with them.

 

In the future, everyone will be famous for fifteen megabytes

Let’s ask BT where the next Skype is coming from

[Dave Birch] Some years ago, I wandered into work one morning to find the client I was working for absolutely furious. The client was an American, and he was reading about a presidential “power breakfast” or some such. It was to bring business leaders together with the White House to do something about unemployment, as I recall. My client pointed out that the people invited to the breakfast (the usual suspects: General Motors, Citi etc) employed a small number of people, in subsectors that had very special drivers, and that the single largest employer in the US at the time was Manpower, who were not at the breakfast. But, as he pointed out, since almost all employment in the US in small businesses and that (I can’t remember the exact statistic, but it was something like) 90% of all new jobs were being created in companies that employed less than 20 people, the President should have thrown out GM and Citi and invited in a few small businesses instead: a shopkeeper, someone starting a new company in his basement, a VC-funded started with less than 20 people, and so on.

Government is big, and backward looking, so it finds itself most comfortable dealing with big companies that have been successful in the recent past. As far as I can tell, this provides absolutely no help at all looking forward. If Google didn’t invent Facebook, how will talking to the government about it help to see what’s next? And Microsoft didn’t invent Google, and BT didn’t invent Skype, and Electronic Arts didn’t invent Zynga, and so it goes.

In the future, everyone will be famous for fifteen megabytes