Financial Cryptography

In Santayana's market for alternative money, the future is within the Firm!

Social Networks were the next big thing half a decade back, and to anyone in the field of financial cryptography they were obviously well matched to the money product. Like games, before them.

Those travels are reaching their destination now:

At a time when the likes of Google and Disney are beefing up in the online amusement business, a Santa Clara-based startup called PlaySpan has landed $18 million in third-round funding with plans to expand its services into Asia and Europe.

Vodafone Ventures, based in the United Kingdom, and Japan's Softbank Bodhi Fund led the investment in PlaySpan, a leader in providing services that help publishers of such brands as Neopets, Dungeons and Dragons Online and Lord of the Rings Online make money.

PlaySpan says its patent-pending monetization platform is used in more than 1,000 games, social networks and video sites to generate revenue, acquire new users and build customer loyalty. Game devotees may know it for its prepaid Ultimate Game Card, sold at many retailers.

The investment adds to a trend of venture capital and corporate dollars flowing into the online gaming sector in recent years, a business that has proliferated with the rapid expansion of Facebook and other social networks. PlaySpan supports the popular "freemium" business model, in which publishers enable users to play for free but charge for premium extras.

Earlier this month, Google, facing a growing challenge from Facebook for advertising dollars, acquired Slide for $182 million. In late July, Disney announced plans to purchase Playdom in a deal that could be worth as much as $762 million. PlaySpan counts Disney, Warner Bros. and Nickelodeon among its customers.
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The problem a lot of us saw was the way in; like the games that came before them, and the retail-space ventures before them, and indeed the banks before anyone, the social money groups tended to pay no attention to the outsiders. So the reliable engineering path was out, and the high-risk fast marketing ramp-up path was in. Throw any schlock accounting system in and call it money!

Much of the work was quite low quality, and in the retail and microfinance sectors it generally failed in part because of these characteristics. But in the games/social side, slapstick accounting dressed up as money can work. For games and social networks, it was possibly no bad decision to go light on the engineering, as they could afford to dump the lot. It was after all "social value," not real money, right?

Which brings us to the somewhat quixotic area of the gaming/gambling market. This is a money that is somewhat in both areas: social and real money, so it is facing both the demand for fast social value as well as the demand for hard monetary engineering. Dave Birch's comment over at Digital Money:

I happened to be at a seminar about online payments for gaming and gambling and sat in on a fascinating talk by Jim Noakes, the Head of Payments at Gala Coral Remote Gambling, on the challenges that he is facing at the moment. It was fascinating because his list of challenges could easily serve at the basis of a requirement specification for a next-generation payment system. Setting aside the challenges of compliance, I thought there were two key challenges that we (ie, the payment industry) might be able to help with. The first is reducing the cost of cash in, and the second is reducing the cost of cash out (ie, winnings). The latter is often where the fraudsters attack, particularly when they get payouts directed to stolen cards. And because the online gambling companies are specific targets for the fraudsters, any solutions must have a high level of security built-in from the very beginning.

What was it that Santayana said? Those who refuse to study history are doomed to repeat it?

We know all this. For my part, I tracked all this in the gold payments era, and how to solve Noakes' challenge is well understood (or at least, many can count on a lot of experience). Nor is this limited information, above, Dave has informed thoughts as well.

What I find fascinating is why Santayana's curse runs so deeply in the alternative payments sector, more so than in practically any other place? Is it the flip-side of entrepreneurship, that we must run a grand lottery of knowledge, and anyone can and should play? As David Theroux puts it:

Numerous economists have shown that without the freedom to learn, discover, and act, the process of entrepreneurship is stymied, and economic progress is not possible. For example, Nobel Laureate F. A. Hayek stressed that because the details of time and place are uniquely perceived at specific moments by some people and not by others, entrepreneurial discovery is decentralized to individuals in a spontaneous, dynamic process. In The Wealth of Nations, Adam Smith understood that having access to this knowledge of time and place of opportunity leads to entrepreneurial discovery. He discussed how such entrepreneurial discovery is necessary for any firm to survive, and when such a process is ignored or hindered by government edicts, the firm’s methods of production can easily become obsolete and the firm left with mounting losses.

Or, is the regulatory monkey so fierce that the curse of innovatory spirit leads to enforced loneliness? Or, is corporate death the punishment for contracting-out, as the costs arising from uncertainty and irresponsibility sky-rocket?

Or, maybe it is just that the entrepreneurial hubris runs deeper. For my own part, I recall that I simply declined to review any competitor's payment system from 1996 onwards, as there was no personal ROI in it. Consequently, my designs were occasionally overtaken by some systems, in some areas, but the experience still didn't change my views that spending time improving my own systems was better than spending time on "competitive intelligence".

No matter the why, it does seem a fairly convincing principle. The payment system is an internal, business-focussed evolutionary animal. With a nod to Ronald Coase's theory of the firm, it may well be that the future of payments lies within the firm, because we'll be darned if we ever discuss it outside the firm!

Just about every innovation in the last decade (including my own) has occurred within this space. The potential for reduction in costs and improvements in Hayekian information flow within the firm are immense, far greater than they are between firms.

And also, those that fight against innovation in money and the digital economy are going to find it harder to fight. After all, it's just another schlock accounting system, right?

Posted by iang at September 5, 2010 11:59 PM | TrackBack