A 7-post collection

Taxing data

Recently Google has made a large push towards their photo sharing app, Google Photos. Offering unlimited high-resolution storage for anyone who buys a Pixel phone, and standard resolution for anyone who signs up, it seems like a deal too good to be true. Whilst signing up is easy, removing yourself from the service (as I tried to do a few months ago) is much harder. Photos can only be deleted in batches of 500, and the process will fail four out of five times. It’s the sort of dark user experience that you can see in other products, but it is a reminder of an important point: Google is a data collection company, and its value is dependent upon the quantity and quality of data that it can collect.

The problem with taxing technology

Historically tax has been used to collect revenue for the state by extracting a proportion of the value that businesses or individuals create. Taxation from Biblical times is described as

"When the crop comes in, give a fifth of it to Pharaoh.

Genesis, Chapter 47, verse 24

In this case, the taxation system is quite simple: whatever value you create (i.e crops), give 20% of it to the Pharaoh. Since biblical times this principle of extracting value from producers has been extended to value added tax (VAT), where every transaction that creates some element of value is taxed at a percentage. The bottom line of a capitalist taxation system is that where value is created it is only fair to take a proportion of that transaction as tax.

When it comes to technology companies, the value almost always sits in the data that they own. Citymapper, a UK based transport company is valued at over £250 million, despite the fact that it doesn’t make a profit. What it does have, though, is huge amounts of data about transport patterns in cities all over the world - often much more accurate data that municipal transport companies themselves have access too. It’s a similar story with Uber, which recently launched Uber Movement, a service demonstrating just how valuable their data collection of journey times has been.

Citymapper recently launched a pop-up bus service to demonstrate the power of the data they have access to

The issue with taxing these companies is that though an organisation like Citymapper is generating substantial value with the data that it’s collecting, there is no concrete monetary figure associated with it. Therefore, for most fast-growing startups the core of their value goes completely untaxed.

Where value goes, tax should follow

Over the past few years, the regulation on the collection and processing of data has become stricter. In order to collect data of any kind in the UK, you need to register with the ICO, and soon companies will have to comply with strict security legislation brought about by GDPR. Despite this regulation of data, though, there has been absolutely no attempt to tax the collection or processing of data.

Google’s search algorithm is improved with every search that is made. Though there is a monetary cost of providing the service, the benefit of having the most predictive algorithm is clear to be seen. Terms of service across any tech company that you care to mention includes clauses about using consumer data to improve the service for others. This may seem like an altruistic motivation, but in reality, it is anything but. Taking the insights from Google search and integrating it into Google Home, for example, allows Google to create a much more valuable product. Again, this value is completely untaxed.

Government & regulators are unprepared

The shape of the global economy has been dramatically transformed by technology, and yet the regulatory and taxation system has remained relatively static. As technology companies experiment with new ways to create value it’s the responsibility of government to experiment with new ways of taxing them. Sadly the exact opposite has happened. HMRC recently removed the flat rate VAT scheme benefit for what they call “limited cost business.” Typically these businesses are tech companies whose only capital expenditure are laptops at the beginning of the year. From then on they operate with limited costs - but this doesn’t mean that they’re not creating value.

Simply closing the option for companies to claim back flat rate VAT doesn’t solve the problem, it only seeks to demonstrate the difficulties of creating a fair taxation system where most of the value is invisible when measured with traditional metrics. We need a radical rethink of the way that value is measured and tax is administered, and this has to start with a technology first approach.


A New Company Lifecycle

In the past, the fundamental lifecycle of a company has remained broadly the same. Underlined by models like Steve Blank’s customer development process, young companies are responsible for taking risks and discovering customer needs. This means they go through a fast process of testing and learning, establishing whether anyone needs the solution they’re providing, and succeeding or dying based on the result. As a consequence, the most common reason start up founders give for the failure of their companies is that they were producing a solution for a problem that didn’t exist. This phase of a company lifecycle is often called ‘customer discovery/validation,’ and it always happens in the early stages.

Once a consumer need has been discovered, it is then up to the company to scale up and deliver the solution in as efficient a way as possible. This phase - which is often called the “company building” phase - involves hiring the right people, outsourcing when required and working out efficiency gains to optimise the core value proposition. Experimentation can still be a big part of this phase, but typically the efficiency gains will be incremental, and will rely heavily on growing the customer base through activities like marketing. Most companies, and all the large ones that you care to think of, are brilliant at optimising their operations towards this goal. Why do large companies tend to be more risk averse than smaller ones? Because rather than making dramatic pivots, the goal is to make constant tiny adjustments to bring operating costs down whilst keeping customer satisfaction the same.

This model has held for the past hundred or so years, because even when new technology is introduced that allows for a dramatic efficiency gain the time taken to introduce it to the market is usually measured in months and years, giving incumbents the opportunity to adopt or die out.

The Technology Enabled Model

As a result of technology trends, in today’s world once a company gets to a certain size or maturity the model of linear efficiency gain ceases to explain what is actually happening. Instead of the incremental efficiency gains seen over time, the reality is something that looks like this:

Radical drops in cost and increases in need satisfaction can be achieved by companies that use the right technology, and this change can come into effect overnight. It is for this reason that a company like WhatsApp could have 55 employees and a multi billon dollar valuation - in the recent past something like this would simply not be possible.

The reason why these accelerated jumps in customer satisfaction and reduction in cost are possible today are because of four key trends:

Speed of software delivery

Smartphone proliferation and increased connectivity has meant that a company’s customers can have access to improved technology overnight. One of the best examples is Tesla, constantly shipping updates to cars that contain not just efficiency tweaks, but features like autonomous driving. These features fundamentally change the workings of the product — either in a positive way like autonomous driving, or averting a negative like a security update. In the past competitors had time to adjust to these jumps in customer satisfaction, but in the new company operating model you have minutes to respond.

Low barriers to entry

As a result of low technology costs companies can experiment at much lower cost than before. Research and development labs used to be restricted to only the largest firms, but today a company of twenty can build physical devices, push software updates and try new things. New discoveries that dramatically reduce cost can be found and released to the public in moments — open source libraries that replicate the functionality of already established products (or currencies, as in the case of Bitcoin).

Low switch friction

Consumers used to be disincentivised in using radically new products because of the high switch friction of a piece of hardware, or high replication costs. Today, the switch cost to a consumer is searching for an app and adding it to their phone. A culture of experimentation and trying new pieces of software only continue to rise, making it difficult for incumbent companies without significant competitive advantages to defend themselves.

Lack of regulatory understanding

The speed of technology’s entrance to market is often aided by a lack of regulatory understanding. In the past, regulators had a firm grasp of technology that entered a specific market. Technology today is by its nature cross industry, and it takes time for regulators within industry to recognise what the impact of a new technology might be. In the past, radically new technologies were sheltered from the market because of the time that it took to approve them (healthcare being the best example of this). Today, there is a large grey area that technology exploits, hitting the market instantly and forcing regulators to enforce the past rather than the present.

Taking advantage of this new model

This new operating model presents significant challenges for big business. The question that will differentiate those that flourish and those that fail will be who recognises not only what’s possible with new technology, but also what’s right for their business and customer base.

For most companies, the key problem is that to get this synthesis of what’s possible and what’s right, you need to involve completely disparate groups of people. Those who understand what’s possible will typically be the developers, engineers and technologists. Those who understand what’s right for the business will often be those in client development and senior management.

Companies like Tesla, Facebook and Google who are able to relentlessly evolve their offering and radically reduce cost and increase satisfaction are only able to do this precisely because the people that know about the technology (the engineers) also know about what’s right for their business and customers, often because they are founded by or run by engineers.

For non-tech companies, bridging this gap is essential to enable anyone in an organisation to develop company sustaining innovations that will allow a company to not only survive but thrive in the new world.


The modes of production have been democratised: so where's the revolution?

Today, technology is smashing down barriers to entry. Want to start a magazine? An insurance marketplace? A travel agency? In decades past you'd have to have a lot of investment up front in order to make your dream come true. One of the core tenants of capitalism - that an investment in capital brings return - meant that class systems were ingrained and the owners of capital were pretty much untouchable.

With technology, the 'untouchables' of business are being severely disrupted. Owning the modes of production today helps, but it isn't enough. Those with an entrepreneurial spirit can spin up an app and take away your business overnight. In the past decade this has happened to countless unfortunate industries; some centuries old. This disruption is powered by a profoundly open and democratic force: the web. Unlike modes of production before it, the web is at its core open (anyone can view the source for any page), and accessible (anyone can write code, put up a website and have access to a market of billions.) Hardware used to be the biggest barrier to entry for technology, but computing hardware is now so cheap that soon every global citizen will have access.

This would lead you to predict, surely, that forces like technology and the web would allow capitalism to become much more meritocratic, and for Marx's demands to look a little, well, 1800s.

The new mode of production: The Mind

In fact, the state of the world in 2016 is exactly the opposite. Technology has helped create the most unequal global economy in history. In the UK the top 1% own 25% of the UK's wealth. Globally, the picture is even bleaker. And yet the same thought keeps coming back: if anyone can start a company and disrupt the status quo, what is going wrong? Why is tech one of the least diverse industries?

The answer, I think, lies in the skills required to participate in the disruption of technology. Whilst some are taught to code at a young age, other's don't have enough access to technology or mentorship. How can you disrupt industries if you don't have the skills to be able to do so? There is the illusion of a meritocracy but in reality something very different. Initiatives like Code Club and Coding in schools are good but they're not enough.

Everyone needs to believe that they can disrupt and change the world, and be given the tools in order to follow through. Technology is not enough. Without the training and education required to allow everyone to participate we'll create a world more unequal than even Marx could have imagined.