stories filed under: "economics"
Financial Columnist Stands By Her Claim That Kids Giving Away Lemonade Are Destroying America
from the it-must-be-stopped dept
We recently wrote about the bizarre, and economically clueless, column by a so-called "financial expert," Terry Savage, who apparently accosted some young girls for giving away free lemonade, saying that they showed what was wrong with America, since they should be selling the lemonade. The irony over the fact that she was giving them "free" advice apparently did not occur to her. Not surprisingly, a lot of people contacted Savage to express their bewilderment at her column, and rather than admit that perhaps she got the story wrong, she's standing by it. Phillip alerts us to her most recent column, where she tries to explain, yet again, why these girls were destroying America. It's not that she's against charity. Or even that she thinks charity goes against capitalism. It's that she has decided what's best for these girls is to learn how to make an honest buck.Basically, Savage seems to insist that, despite not knowing anything at all about these children, their situation, their upbringing or their parents, that it was an absolute mistake not to have them selling the lemonade.
It's important to start teaching those financial lessons at an early age. These little girls, around age 7 or 8, are already targets of consumer marketing -- for everything from toys to videos, from fashion to food. Certainly, it's also the right time to teach them the value of the money they spend, and how difficult it is to earn it.It certainly is important to teach kids financial lessons. But that doesn't mean they can't give away lemonade as well.
The children weren't rescuing people from the heat, since it was a temperate day. They were just looking for something to do -- and there was no one around to teach them how a lemonade stand should really work.And that's the crux of the issue. Savage has decided that she knows how a lemonade stand "should work." She's also decided that she knows how to best act as a parent for some young girls she knows nothing about. How does she know that they didn't earn the money used to set up the lemonade stand? How does she know that the lemonade stand wasn't a reward for something else they did? She's just decided to take it upon herself to tell children what they should do without knowing anything about the details of what's going on? That's not very convincing.
Filed Under: economics, free, lemonade, terry savage
Andy Grove Suggests US Protectionism For Tech Jobs
from the didn't-see-that-coming dept
Former Intel CEO Andy Grove is one of those guys who I always pay attention to when he speaks. Usually, he makes me look at things in a different light and, more often than not, shift my thinking on a certain subject. It's quite rare that I finish reading something he's written in near total disagreement, but it's happened this time. Grove has penned a long, and thought-provoking piece for Bloomberg, where he takes the surprising-for-Silicon-Valley position that offshoring jobs to China is bad, and the US government should get involved with protectionist policies on American jobs.Now, as always, his position is deeply nuanced, and not as simplistic as the typical calls for US job protectionism. He talks up the importance of job "scaling" in the US economy:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.First of all, I'm not convinced he's right that the scaling doesn't happen in Silicon Valley. The same day that Grove's column was released, Tom Foremski had a short post about the hockey-stick-like job growth at Silicon Valley's most popular companies, where even he worried that such scaling -- which does appear to be happening -- might "crowd out" other startups. So, we have Andy Grove saying Silicon Valley startups can't scale from an employment standpoint just at the same time the data shows that they still do...
The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.
But as we dig a bit deeper into the article, we find out what Grove's real concern is. It's not that jobs aren't scaling, but which kind of jobs are scaling. And, to Grove, the problem is that we're no longer scaling manufacturing jobs:
Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.I'm kind of surprised that Grove would make this argument. From David Ricardo, writing 200 years ago, forward, the concept of comparative advantage is pretty well-established. Now, there definitely are some recent critiques of the concept of comparative advantage, and one major concern is whether or not it really applies in a globalized world, but the general theory still seems valid: if it's more efficient and economical (other things equal) for manufacturing to take place in China, then it should actually make the US better off. Now, obviously, reality is more complex than theory, and there are other considerations as well, including human rights, quality, and even safety (lead in toys and poisoned toothpaste, anyone?). But, on the whole, that's not what Grove is talking about. Instead, his main worry seems to be that if we lose our manufacturing prowess in certain tech fields, it actually puts us behind the curve in important new fields:
There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.Now, I will agree that this is a point that got me thinking. It certainly fits well with our recent post about how scientific knowledge advances, where the research has shown that those who aren't actively involved in a particular field simply can't understand that field enough to stay innovative or competitive in that field. So, the real question is whether or not the jobs that are being offshored are really the ones in areas where the US needs to be that knowledgeable... and also whether or not the knowledge transfer really is that complete. If, as is sometimes the case, the design work still really takes place in the US, but the manufacturing takes place in China, which bit of knowledge is more important?
That's a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn't participate in the first phase and consequently weren't in the running for all that followed. I doubt they will ever catch up.
I can understand where Grove is coming from. While many people still think that Intel's advantage was in its chip design, that was never really the case. It was always its manufacturing capabilities that put the company ahead. Intel's manufacturing expertise meant that its yield rates (effectively, the percentage of silicon that was successfully turned into a working computer chip) were always significantly higher than competitors, allowing Intel to produce more at a lower cost, and keep its margins higher. So, it's no wonder that Grove would focus in on manufacturing expertise as being key. But there is more to innovation than just manufacturing.
Grove reiterates the same point later in the article, but makes a big assumption:
Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."But you could make the same argument with plenty of industries that went overseas, or were more automated, that didn't end up harming the US. The textile industry was once a huge domestic industry, but much of it has gone overseas, and because of that, we tend to have cheaper clothing for everyone. Again, there are issues there to be aware of, such as human rights and sweatshops -- something I'm not defending -- but it's not clear that jobs going overseas automatically means harm to the economy, as Grove implies.
I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry.
Grove then challenges the "free market" orthodoxy by pointing to the growth of certain east Asian economies in the 70s and 80s that were largely due to heavy government involvement and planning:
Consider the "Golden Projects," a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks -- used for transactions, communications and coordination -- in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time, they contributed to the rapid development of China's information infrastructure and the country's economic growth.Indeed, that's undoubtedly true. But Grove is playing a bit of a game with confirmation bias on this one. Yes, certain government mandates worked well for certain countries, but some of them also had governments force them to bet on the wrong technology. Japan bet on certain technologies (like HDTV) too soon, and discovered that they got leapfrogged in the market. Sometimes, it's absolutely true, a government can help an industry develop, but often it can push an industry down the wrong road. To ignore that is dangerous. In fact, we were just discussing how some of Japan's choices pushing certain industries have had long term negative consequences in terms of Japanese domestic efficiency and innovation.
Protectionism leads to perverse incentives that can absolutely work against long term growth and innovation.
Yet, Grove goes so far as to suggest that we should put a tax on offshoring and try to force companies to keep certain types of jobs in the US:
We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted.Yikes! Grove should certainly know that the history of trade wars -- even when you "fight to win" is not pretty for any of the countries involved in those wars. They lead to less growth, less innovation and higher prices. They're incredibly dangerous, and the unintended consequences do significantly more harm than good.
Besides, how do you pick the "good jobs" from the jobs we're actually better off offshoring. Nearly every day we hear stories about attempts by the US government to protect jobs in a particular industry. Just look at US telco policy or US copyright policy -- both of which are very much designed to prop up less efficient companies in the industry, at the expense of more innovative, more efficient upstarts. Protecting jobs comes at a cost to efficiency. If we always had a policy of "protecting jobs," then we never would have automated the telephone switching system, which put tons of "operators" out of work. But that also opened up massive new innovations, including the internet. I don't think anyone would argue that the jobs created due to more efficient telephone switching have so far surpassed the jobs lost from no longer needing operators to connect one party to another.
Yes, Grove has an important point in the middle of all of this, about the potential loss of key knowledge and expertise that is needed for the next generation of innovation, but he's cherry picked the other examples, without realizing the very real and very serious downsides to protectionism and to having government policy pick which industries (and which players in those industries) are "winners" and which are "losers."
In the end, the article is thought-provoking, and is at least making me reconsider some aspects on how we handle knowledge transfer for future innovation. But mostly the suggestions seem to go too far in heavy handed government involvement in propping up less efficient businesses, just to keep jobs local, even if it comes at the expense of future innovations that actually will (despite Grove's claims) create the jobs of the future.
Filed Under: andy grove, economics, employment, manufacturing, protectionism
Is It Better To *Require* Or *Request* Something In Return For Free Content?
from the the-debate-goes-on dept
Over at Music Think Tank there's a blog post provocatively titled: Why Music Should Never Be Given Away For "Free", which brings up a point I've heard multiple times from various music industry marketers (many of whom I generally agree with). They say it is okay to give away music without a monetary transaction taking place, but instead you should demand something else in return. In this post, he suggests requiring an email address, a retweet or a Facebook share in order to get free music.I definitely understand the general rationale for this line of thinking, but I'm afraid that people are going too far with it, and it's actually harming the value of free music in some cases. Obviously, it's great if you can get something (monetarily or not) in exchange for the music, but putting up a barrier can also be harmful. First of all, if it's truly a brand new fan who hasn't heard your work, they might not be willing to commit to you in that way. Especially when it comes to Tweeting or Facebooking an artist. If I don't know the artist, there's no way I'm mentioning them to all of the people who follow me on various social networks. On the flip side, when I do see friends who make those kinds of Tweets, they feel like spam. They're not at all convincing and they don't feel authentic. They feel forced. Honestly, when I see people post social networking messages in exchange for free tracks, it actually makes me less interested in the musical act, because I feel like they need to beg for attention, rather than letting the fans organically give them attention.
Finally, part of the reason the whole "free music" world exploded the way it did was because of the massive simplicity and lack of friction in music sharing, which made music discovery and promotion much more seamless and easy. Putting required friction back into the process seems like a mistake, and will likely just drive fans (or potential fans) either to other artists or back to the same file sharing systems that remove that friction. That doesn't help anyone.
So rather than requiring an explicit exchange, it always seems a hell of a lot more effective to offer the content for free, but ask for the exchange as a voluntary setup: "If you like these songs, tell your friends or sign up for our mailing list" or something like that. This way it's not forced. It's not inauthentic. It's not friction. It's about trusting the listeners, rather than trying to force them to act in a certain way.
Filed Under: business models, economics, email, fans, free, music, social media, transactions
Canada Needs To Outlaw Breaking Digital Locks Or Popcorn Vendors Will Starve
from the and-other-tales-of-bizarre-logic dept
You may recall a few years back the ridiculous claim (never retracted) from NBC Universal's General Counsel Rick Cotton that if the unauthorized sharing of movies wasn't stopped, it might mean tragedy for the American corn farmer:"In the absence of movie piracy, video retailers would sell and rent more titles. Movie theatres would sell more tickets and popcorn. Corn growers would earn greater profits and buy more farm equipment."Of course, this ignored some rather basic facts. First, corn remains a hugely successful crop for giant agribusiness, who are quite fat and happy thanks to massive government subsidies. Second, despite the rise in movie file sharing over the years, attendance at theaters continues to rise -- suggesting no decline in popcorn sales at theaters. Finally, even if people are file sharing at home, why wouldn't they eat popcorn while they watch those movies at home? Cotton never explains what it is about a downloaded film that makes it less likely to induce popcorn eating than a rented film. In fact, it seems that the corn business is pretty much immune to whatever is happening online.
However, it looks like the whole "corn-file sharing" mythical connection has made its way north in amusing and unhinged ways. Michael Geist points us to an editorial by musician Loreena McKennitt in support of the Canadian copyright reform bill, C-32, where she claims that it's necessary to help the poor popcorn vendors at concerts.
What does that have to do with the copyright bill? That's not at all clear. There's nothing in the copyright bill that will create more concerts that lead to more work for popcorn vendors (and, um, I've been to plenty of concerts -- and really don't recall "popcorn vendors" being at concerts). The link isn't just tenuous here, it's non-existent. McKennitt claims that the music tours are struggling these days, but that has nothing to do with copyright. Even if it's true that touring, as a whole, is struggling (and that's not what the evidence really shows), stricter copyright laws don't have any impact whatsoever. So why is she even bringing it up? She appears to be trying to get sympathy for something totally unconnected to the issue at hand.
In the opinion piece she also attacks "so-called users' rights," which shows you what she thinks of her fans. Geist responds adequately to that part of her opinion piece, which shows a stunning disregard for her own fans and the basic purpose of copyright law.
From there, McKennitt concludes:
Better protection of our intellectual property rights will help to change this. We can once again have a thriving creative environment where artists are paid and the communities where they live and work reap the rewards.Huh? She never actually explains how better protection of intellectual property rights gets more people to pay or helps anyone. Hell, if we're using McKennitt logic, what about the poor popcorn vendor who no longer can go to concerts because he now spends the money he would have used for concerts on CDs, since he can no longer download for free? Of course, as McKennitt knows (she runs her own record label), the money from music sales mostly goes to the labels, not the artists. So, in that scenario, the artist is making a lot less. Of course, there are lots of other factors, but remember, we're using McKennitt logic. In that world, it seems empirically proven that passing such a law that magically makes popcorn vendors buy CDs actually harms musicians. Uh oh...
Filed Under: canada, copyright, economics, loreena mckennitt, popcorn
Financial Columnist Lectures Little Kids Who Want To Give Away Lemonade That They're Destroying America
from the wow dept
Stuart sends over a column from a Chicago Sun-Times columnist, Terry Savage, that I could have sworn was satire until someone convinced me that it's not. Savage is apparently a "financial" columnist, who apparently is a bit confused about her basic economics. Over the long weekend, she decided to celebrate the American way by berating and lecturing some children who set up a lemonade stand because they wanted to give away the lemonade for free. According to Savage, these kids represent all that is wrong with America. I'm not joking."No!" I exclaimed from the back seat. "That's not the spirit of giving. You can only really give when you give something you own. They're giving away their parents' things -- the lemonade, cups, candy. It's not theirs to give."Shockingly enough, you can read Savage's column -- for free -- online. I'm guessing she doesn't get the irony. Savage seems confused about a whole lot of things, from the concept of philanthropy and sharing to some very, very basic economics. For someone who presents themselves as a financial expert, this one column seems to undermine any credibility in the field.
I pushed the button to roll down the window and stuck my head out to set them straight.
"You must charge something for the lemonade," I explained. "That's the whole point of a lemonade stand. You figure out your costs -- how much the lemonade costs, and the cups -- and then you charge a little more than what it costs you, so you can make money. Then you can buy more stuff, and make more lemonade, and sell it and make more money."
I was confident I had explained it clearly. Until my brother, breaking the tension, ordered a raspberry lemonade. As they handed it to him, he again asked: "So how much is it?"
And the girls once again replied: "It's free!" And the nanny looked on contentedly.
No wonder America is getting it all wrong when it comes to government, and taxes, and policy. We all act as if the "lemonade" or benefits we're "giving away" is free.
Of course, the kids aren't expecting that they should get government handouts for free. They're getting marginal benefit from making (most) people happy in giving them free lemonade. Economics is not about cash, it's about benefits vs. costs. Yes, they're often calculated in cash terms, but if the marginal benefit to the children is greater in giving away the lemonade, there is nothing wrong with that at all, and it's certainly not against "basic economics" as she claims later in her column.
Again, I need to remind everyone, that you can read her column for free on the Chicago Sun-Times website. Why? Because the marginal benefit to the Sun Times and to Savage herself is higher in giving away the content for free. In the case of the Sun Times, it's from the ad revenue it receives, and in Savage's case whatever (probably too high) sum the Sun-Times pays -- and also for the "free promotion" it's supposed to give to help her sell her books. In other words, the marginal benefit to having her columns online for free is greater than the marginal cost. Just as the marginal benefit to the little girls from seeing happy people by giving them lemonade outweighs the "costs."
If we can't teach our kids the basics of running a lemonade stand, how can we ever teach Congress the basics of economics?Why don't we start by teaching our "financial experts" the basics of economics?
If that's what America's children think -- that there's a free lunch waiting -- then our country has larger problems ahead. The Declaration of Independence promised "life, liberty, and the pursuit of happiness." It didn't promise anything free. Something to think about this July 4th holiday weekend.Wait, what? You know what the Declaration of Independence also didn't include? Anything about how much "life, liberty and the pursuit of happiness" costs. You know why? Because it has nothing to do with whether or not something costs money or is free. So that's not "something to think about" because it makes no sense.
But, perhaps we shouldn't be surprised that someone who thinks it's a good idea to lecture little children against sharing lemonade isn't exactly the most logical of thinkers out there.
Filed Under: economics, free, lemonade, terry savage
Economic Threat: Legacy Industries With Bogus 'Safety' Claims To Stop More Efficient Competition
from the sound-familiar? dept
NPR's Planet Money has started a sort of spin-off series which are direct interviews with smart people about the economy. Recently, it interviewed economist Raghuram Rajan, who is given credit as being one of the folks who accurately predicted the recent financial crisis. I'm always a little hesitant to give credit to people who "predict" financial upswings or downswings, because there's usually some serious confirmation bias problems, but Rajan definitely did a good job of calling out some of the specifics of what was likely to happen and which, subsequently, did happen. He now has a new book called Fault Lines, which suggests that many of the bigger world trends that resulted in the financial crisis are still in place, and we may be facing an even larger financial crisis going forward, since we did little to fix these underlying "fault lines." The first half of the interview is fascinating, discussing the political reality in the US that makes it nearly impossible to actually fix these problems.However, the second half gets into a subject that is much closer to what we regularly discuss around here. In that part of the discussion, he points to certain economies that grew through the government pressuring local industry to focus on exports, with Japan being a key case study. However, he points out that by propping up a small group of these firms, it actually did great harm to local innovation and local economic efficiency. And then, at the end, he gives this example which should sound quite familiar:
Let me give an example: Japanese haircuts are extremely expensive. Part of the reason is productivity in the Japanese haircut sector is lower. So, an upstart comes up and says 'I'm going to start offering cheaper haircuts.' That's the typical way that competition pushes down prices. If you have cheaper haircuts, more Japanese will go get haircuts, and there will be more activity in the haircutting sector and you will get growth there. Well, the startup provides cheaper haircuts, but the existing barbers get anxious, because they'll have to cut prices and they're perfectly happy where they are with fewer haircuts, but getting more per haircut.This is such a key point that gets overlooked in so many discussions, but is really the key theme about a very large percentage of posts on this site: recognizing the difference between real economic growth that comes from innovation that leads to a greater actual market size, and fake economic growth that comes from just the process of moving money around.
And so the "barber's guild" gets together and says: 'This is terrible. You know, this practice of offering haircuts, we have to find a way to nip it in the bud." And they have a brilliant idea. They say: "Well, offering haircuts without shampoos is un-hygienic. It's a bad idea. So, we're going to mandate that before every haircut, you have to offer a shampoo." Well, the nice thing is that all of the existing barber shops are equipped with basins and so on where you can offer a shampoo. But that new startup, because it's cutting costs and because it's cutting frills, doesn't have a basin where you can have a shampoo.
Well, in one stroke, in requiring a shampoo before a haircut, you've raised the cost of doing business for the startup. You've driven the startup to a corner. And, typically, they can't compete any more. And you've preserved the way of life for the existing barbers. In the process, though, you've far fewer haircuts in Japan than if you'd allowed much more competition.
You can see this play out in many sectors: transport, retail, construction. Where a few incumbents sort of monopolize what's going on and don't allow the kind of growth that would allow Japan domestic sources of growth as distinct from the export-sources of growth, which it typically relies on.
But that story of the Japanese barbershop sounds pretty damn familiar, right? It's the same story we just heard about hotels in New York trying to outlaw couch surfing. Or, as someone on Twitter referred to it: "Home sleeping is killing hotels." Or the story of a online carpooling efforts sued and fined for competing with the local bus company.
What's impressive, of course, is how the incumbents are almost always able to hinder the more economically efficient solutions -- the innovations that actually lead to real growth in the market -- by couching it in terms that make them look like they're being altruistic. In the Japanese haircut examples, it was about hygiene. In the stories about couch surfing and carpooling, it's about "safety." With the music and movie industries shutting down more efficient tools for distribution and promotion, it's about "protecting creators' rights." Of course, none of these are true. They're all just efforts to protect incumbent monopoly rents, so that they can be less efficient, collect more direct profit, but hold back overall economic growth and consumer surplus.
I think it's important to start calling out these sorts of ploys. Perhaps we should refer to them as "home sleeping is killing hotels" arguments, and point folks to Dan Bull's song on the subject:
Filed Under: economics, guilds, planet money, protectionism, raghuram rajan, regulatory capture
Another Journalist Seduced By App Madness Predicts The End Of The Web
from the ah,-technology dept
We've talked a few times about the media's obsession with "apps" as the solution to what ails them. They get one glance at the control that an app appears to provide, and they go wobbly in the knees and fail to consider basic trends and basic economics. As a few folks have noted, locked down apps are like the CD-ROM craze among media types just as the web first became popular. Who won that battle?The latest reporter to fall under the sway of the app-run future is The Atlantic's Michael Hirschorn -- a writer who's work I usually like quite a bit. He writes eloquently about the "closing of the digital frontier," and predicts that the days of the browser are dying, as the days of the app are rising. In the process, he misleadingly attacks the basic economics of free, the history of Silicon Valley, and some rather important trends.
He kicks it off, as nearly all attacks on the economics of digital goods does these days, by mocking the old "information wants to be free" phrase, which he falsely suggests led the world astray. Rather than recognizing the basic economic forces that made (and still make) digital goods to be driven towards free, he pretends it's just an idea a bunch of "hippies" had -- that somehow hypnotized everyone else:
With the long tail of Brand's dictum chopped off, the phrase Information wants to be free--dissected, debated, reconstituted as a global democratic rallying cry against monsters of the political, business, and media elites--became perhaps the most powerful meme of the past quarter century; so powerful, in fact, that multibillion-dollar corporations destroyed their own businesses at its altar.Of course, it wasn't some blind support for a mantra that resulted in so much being free online. It was the basic economics of content, and a recognition of how those models can work. But, Hirschorn is so sold on this idea that "free" was just the pipedream of a bunch of digital hippies someone tricked the rest of the world into buying, that the one story he uses to explain this sense of "gospel" actually seems to disprove his point. He actually suggests that the fact that the online world quickly and decisively debunked the infamous 1995 Time Magazine technopanic about online porn is an example of the unwillingness of the digerati to be open to new ideas:
It's a bit of a Schrodinger's-cat situation when you try to determine what would have happened if we had not bought into the IWTBF mantra, but by the time digital culture exploded into the mainstream with the introduction first of the Mosaic browser and then of Netscape Navigator and Internet Explorer, in the mid-'90s, free was already an idea only the very old or very obtuse dared to contradict.
At the WELL, the core gospel of an open Web was upheld with such rigor that when one of its more prolific members, Time magazine's Philip Elmer-DeWitt, published a scare-the-old-folks cover story on cyber porn in 1995, which carried the implication that some measure of online censorship might not be a bad thing, he and his apostasy were torn to pieces by his fellow WELL-ites with breathtaking relentlessness.... In retrospect, what seems notable is the fervor with which digital correctness--the idea that the unencumbered flow of everything, including porn, must be defended--was being enforced. In the WELL's hierarchy of values, pure freedom was an immutable principle, even if the underlying truth (that porn of all kinds was and would be increasingly ubiquitous on the Web, with actual real-life consequences) was ugly and incontestable.Now, I put a brief ellipsis in the middle of that paragraph, because right in the middle, Hirschorn hides the key fact: that those folks who pointed out the massive problems with the story were correct! Hirschorn basically tries to hide that point in the middle of the paragraph, where the beginning and the end of the paragraph suggest that people pointing out the massive flaws and outright ridiculousness of both the "study" and the Time report based on the study, were somehow overreacting in this religious fervor to sustain the digital wild west. The fact that Hirschorn even admits that the study was flawed, and then still claims the debunking was "political correctness" is bizarre and, quite frankly, insulting. Those who responded to the report didn't do so out of some "porn must be free" ethos. They did so out of a belief that truth is more important than blatant lies.
Hirschorn then goes on to make a stunningly ignorant statement concerning how the entertainment industry responded to the "open and free" internet:
Ironically, only the "old" entertainment and media industries, it seems, took open and free literally, striving to prove that they were fit for the digital era's freewheeling information/entertainment bazaar by making their most expensively produced products available for free on the Internet. As a result, they undermined in little more than a decade a value proposition they had spent more than a century building up.Wait. Which "old" entertainment industry is he talking about here that put its most expensively produced products onto the internet for free? Last I checked, we seem to have a new story pretty much every single day about just how hard the old entertainment industry is fighting to stop its content from being online for free. Furthermore, in the few cases where they have put stuff online for free, it's not because they were "striving to prove they were fit for the digital era's freewheeling information/entertainment bazaar," but because they were dragged kicking and screaming after someone pointed out to them that others had already put all their content online for free, and that if you put your content online, you actually had some ability to monetize it -- whereas, if you left it to everyone else, you made that more difficult. Somehow Hirschorn doesn't know this. It makes me wonder if he even uses the same internet the rest of us use.
This is the myth of "the original sin of free" all over again, where otherwise smart people think the decision of some to go free wasn't actually driven by marketforces, and that there actually was a different choice back then. These forgetful souls don't want to acknowledge that paywalls and micropayments have been tried time and time again since the early days of the web -- and they almost all have failed.
But now, it seems, things are changing all over again. The shift of the digital frontier from the Web, where the browser ruled supreme, to the smart phone, where the app and the pricing plan now hold sway, signals a radical shift from openness to a degree of closed-ness that would have been remarkable even before 1995. In the U.S., there are only three major cell-phone networks, a handful of smart-phone makers, and just one Apple, a company that has spent the entire Internet era fighting the idea of open (as anyone who has tried to move legally purchased digital downloads among devices can attest).It's a weird sort of argument that plays up the benefits of a lack of competition in the marketplace.
Apple, for once, is swimming with the tide. After 15 years of fruitless experimentation, media companies are realizing that an advertising-supported model is not the way to succeed on the Web and they are, at last, seeking to get consumers to pay for their content.Actually, plenty of media companies are finding that an ad-supported model works great. And, yes, while many publications are seeking to get consumers to pay, history has shown that it doesn't tend to work very well in the long run.
They are operating on the largely correct assumption that people will be more likely to pay for consumer-friendly apps via the iPad, and a multitude of competing devices due out this year, than they are to subscribe to the same old kludgy Web site they have been using freely for years. As a result, media companies will soon be pushing their best and most timely content through their apps instead of their Web sites.That's one theory, but it seems unlikely beyond a certain niche. Yes, people will pay for some apps. But already some are realizing that the web itself is actually better. And, the key point that so few app-afficionados seem to recognize is that apps and websites really aren't that different. Most of the things that an app can do can also be done on the web. And, as HTML5 starts to catch on, the web will be able to do even more. Hell, the dirty little secret out there (which isn't really a secret -- it's just that a lot of folks praising apps don't realize it) is that a good percentage of these "apps" that they're so amazed by? They're really webpages. They're really HTML that's wrapped in a little app container. But there's no reason they can't just be HTML -- and as the inevitable market forces continue, many are likely to move to the web, and get out from under the withering thumb of control of Steve Jobs.
On a more conceptual level, the move from the browser model to the app model (where content is more likely to be accessed via smartly curated "stores" like iTunes, Amazon, or Netflix) signals the first real taming of the Wild Digital West.Statements like this remind me back of the days when people would load up their computer desktops with all sorts of apps as well. And then the web got good. Those who don't know their history are doomed to miss the fact that it's about to repeat...
Apple's version of the West has nice white picket fences, clapboard houses, morals police, and lots of clean, well-organized places to spend money. (The Internet, it seems, is finally safe for Rupert Murdoch.) These shifts are seemingly subtle, but they may prove profound.AOL's version of the West, back in the 90s, also had nice white picket fences, clapboard houses, morals police and lots of clean, well-organized places to spend money. And then people discovered the web. And all that got abandoned quickly.
Like the AOL of the 90s, it is true that the closed platform of the iPhone offers a nice on-ramp for people to learn how smartphones can work, and what they can do. But, in the long run, the openness of and raw innovation of the open internet won out. Why does Hirschorn think that the same won't happen again? Oddly, when he does get around to Google -- who is providing one extremely popular open road -- he repaints Google's position as being on the defensive and trying to preserve an old business model:
Google, which built its once monopolistic position by harnessing the chaos of Web search, has been forced to move aggressively to preserve its business model against this new competition: it has teamed up with the Apple-scorned Flash; is making conciliatory gestures to the content owners it once patronized; has reached a deal to purchase a mobile ad-sales platform; and is promoting its own vision of the future based on cloud computing. Phones using its open-source smart-phone operating system, Android, are outselling the iPhone. Even so, Google still needs for the Web, however it's accessed, to remain central--because without contextual search advertising, Google ceases to matter. Smart phones in general, and the iPad more pointedly, are not driven by search.Again, most apps actually are just webpages. And there isn't anything about Google's business model that requires the web to be central. I have plenty of apps on my Android phone that have Google contextual ads. Also, the last point: that smartphones are not driven by search, seems utterly bizarre to me. I use search pretty damn frequently on my phone.
All of this suggests that the era of browser dominance is coming to a close.Except that most of the points leading up to that conclusion weren't substantiated or were blatantly wrong.
And then, Hirschorn really goes off the deep-end. He brings back up the importance of paywalls, which leads to this doozy of a statement:
If they don't end up licensing original content, networks such as Twitter and Facebook will become purely communication vehicles.Wait, what?!? Twitter and Facebook are communication tools. That's why people use them. What does he think they are? That's like saying, a century ago, that if the phone company doesn't license radio programs, the telephone might just be used for communication.
Honestly, this article is one of the more bizarre ones I've read in this style. It's as if it's written by someone living in an alternate universe, and has no access to history or general computing trends.
The Lack Of A Billion Dollar Pureplay Open Source Software Company Shows The Market Is Working Properly
from the economics-of-monopolies dept
A few weeks back, Glyn Moody wrote a column discussing why there were no "billion dollar open source software companies," in response to a discussion he had with Redhat's CEO (Redhat is in the $750 million range):He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed "replacing $50 billion of revenue" currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software -- even if it only costs $5 billion -- is somewhat hard, which is why it will take a while to achieve.I immediately knew I wanted to write up something about it, as it reminded me of a point I've been wanting to discuss for a while. But I got busy with some other things, and in the meantime, a bunch of other folks picked up the ball and ran with it -- and each time they did, they added something different to the conversation, which gave me more to think about before writing up this post. Matthew Aslett pointed out that this is leading many companies to adopt hybrid models while Stephen O'grady pointed out that the question was really irrelevant. Katherine Noyes, over at LinuxInsider highlighted many other points that people brought up as a part of the discussion. It's all a very interesting read, though none really hit on the two key points that Glyn's original column got me thinking about:
- There absolutely are billion dollar open-source companies, but they're not pure play open source companies. But that's okay, because a "pure play" open source company is like a record label trying to focus on just selling music. You're in the wrong business -- trying to sell infinite goods -- so of course the direct profits should be limited.
- The lack of billion dollar pure play open source software companies is a sign of a working efficient economy. In fact, billion dollar pure play open source companies would be a sign of a market failure.
Arguing about the profits directly attributable to pure play software sales of open source software is like only counting CD/digital download sales and claiming that's the "music business." It's not. It's the recording industry.
But the more interesting and more important point is about the lack of billion dollar pure play open source software companies is the fact that this is a sign of a strong, healthy and efficient marketplace. Even if you go all the way back to your Adam Smith, you would know that when you have a company making outsized profits, competitors will enter that market. That's the nature of a free market, and it tends to lead to efficiency, innovation and (most importantly) consumer surplus.
I'm reminded of various studies on modern societies without intellectual property protections (or with very weak intellectual property protections) that often saw thriving and highly competitive industries in those areas. One area that has been particularly interesting to me lately is looking at various countries that did not have patent coverage for pharmaceuticals, but then were forced into it. If you look at the pharma industry in those countries, you see the same story almost every time. Without patents, the industry is thriving with many, many different firms (sometimes hundreds). Yes, a percentage of these firms are certainly pure "copycat" firms, but the ones at the top are not. However, after patent protection is introduced (often with the claim that it will help investment, help competition and help innovation), the exact opposite occurs. Instead, many, many firms either go out of business or are gobbled up by large multinational conglomerates. The overall profits increase to those conglomerates, but the innovation and social welfare declines.
This is, of course, exactly what Adam Smith saw nearly two and a half centuries ago. If you give companies monopolies, they will take monopoly profits, but those monopoly profits come at the expense of innovation and consumer benefits.
So, giant billion dollar companies in markets -- especially markets of infinite goods -- suggests a market inefficiency of some sort. The lack of such pure play billion dollar companies is a good thing. It means the market is acting as it should, and being more efficient and creating greater economic benefit to the wider market. And this goes back to a point that Glyn makes in his original column:
I think this is the first time I've heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies -- and thus shrink the overall market. Opponents of open source like to paint this as "value destruction" that takes money "out of the economy" -- as if free software went around burning down offices and warehouses.And that's exactly the point. When a market is made more efficient, that actually spreads throughout other areas and helps consumer surplus, economic growth and the rest of the world benefit. Automobiles and airplanes "shrunk" the railroad market, but opened up massive new markets. The end result was a much bigger economy and greater economic opportunity and consumer surplus. Automated telephone dialing "shrunk" the telephone operator business, but opened up massive new efficiencies, leading to advancements like the internet itself. And that created massive economic efficiencies and growth and consumer surplus.
What they fail to grasp is that the 90% savings do not just vanish like the smoke from those supposed conflagrations. That money is still in the economy, it's just spent on other items: free software allows people to use their hard-won money for things other than operating systems, office suites and applications. In developing countries, for example, it might mean more funds available for education or health.
So, just as we shouldn't worry about the lack of "billion dollar" pure play open source software firms, we should also not fall sway to the complaints of companies who are being disrupted by these models, about how all that money they make is somehow "disappearing" if the government doesn't come in and protect their business model. What's actually happening is all that money is being put to more efficient use. Unfortunately, it's rare to see politicians or business leaders who actually understand this simple, but important fact, and it leads them to propping up legacy businesses, which actually slows down innovation, economic growth and consumer surplus.
Filed Under: economics, open source, proprietary, software
Companies: red hat
The Economic Argument For Why Court's Viacom Ruling Makes Sense... And Why Viacom Hates It
from the money-money-money dept
Larry Downes has a different, but important, analysis of the Viacom/YouTube decision, where he looks at it from an economic perspective. Specifically, he looks at it from "the principle of least cost avoidance." The idea is that which solution costs the least from a social perspective: Google trying to prevent infringing videos from appearing on YouTube or Viacom doing the same? And he makes the convincing case that the ruling here makes the most economic sense by a long shot. He compares it to the recent Tiffany/eBay ruling which hits on the same basic principles (noting that eBay is not responsible for others selling counterfeit Tiffany goods). Downes first points out that these platforms, like YouTube and eBay have certainly opened up amazing new markets that have great social benefit -- even if they've also opened up opportunities for infringement. There's no doubt that there's value in both platforms, but the question is does that value outweigh the downsides, and if so, what's the most economically beneficial way to "police" any such infringement:Given the fact that activities harmful to rights holders are certain to occur, in other words, the least cost avoider principles says that a judge should rule in a way that puts the burden of minimizing the damage on the party who can most efficiently avoid it. In this case, the choice would be between YouTube (preview all content before posting and ensure legal rights have been cleared), Viacom (monitor sites carefully and quickly demand takedown of infringing content) or the users themselves (don't post unauthorized content without expecting to pay damages or possible criminal sanctions).This is, to some extent, just a different way of making the point that having the platform provider monitor all content is so difficult as to make it prohibitively costly from a social standpoint. Viacom is upset because the ruling does, in fact, increase its own cost. But the other choice puts a much greater economic burden on society as a whole, because it would almost certainly make services like YouTube a lot less useful. So if you were to judge this purely on the basis of an economic/social solution that makes society better off, the judge clearly ruled in the best manner.
Here, the right answer economically is Viacom, the rights holder who is directly harmed by the infringing behavior.
That may seem unfair from a moral standpoint. For, after all, Viacom is the direct victim of the users' clearly unlawful behavior and the failure of YouTube, the enabler of the users, to stop it. Why should the victim be held responsible for making sure they are not caused further damage in the future?
But there's a certain economic logic to that decision, though one difficult to quantify (Judge Stanton made no effort to do so; indeed he did not invoke the least cost avoider principle explicitly.) The grant of a copyright or a trademark is the grant of a monopoly on a certain class of information, a grant that itself comes with inherent economic inefficiencies in the service of encouraging overall social value--encouraging investment in creative works.
Part of the cost of having such a valuable monopoly is the cost of policing it, even in new media and new services that the rights holder may not have any particular interest in using itself.
Filed Under: copyright, economics, least cost avoidance, liability
Companies: google, viacom, youtube
