Entrepreneurs Who Create Value vs. Entrepreneurs Who Lock Up Value

from the cornelius-vanderbilt-was-the-skype-of-his-day dept

Andy Kessler is coming out with a new book today, called Eat People: And Other Unapologetic Rules for Game-Changing Entrepreneurs, which I wholeheartedly recommend. It's billed as "rules for entrepreneurs," but it's more than your typical "rules" book, in that it really discusses many of the key underlying themes we talk about here on Techdirt all the time: things about abundance and scarcity, value vs. price, why zero marginal cost matters, the importance of "free," the nature of disruptive innovation and how value is often created in the tearing down of old monopolistic business models.

If you haven't read Andy's previous books, well, you should. But, this latest is typical Andy: packed full of thought-provoking insights, but done in a nice, easy (and quick) to read conversational manner. Like all of his books, this one made me stop and say "huh, I never quite thought of it that way... but that's exactly right" many times.

After reading the book, I asked Andy if he'd do a guest post, diving into one point he made about the difference between "political entrepreneurs" and "market entrepreneurs," and he came back with the following wonderful historical example (also discussed in the book) about Cornelius Vanderbilt, who was the Skype or Napster of his day -- figuring out ways to get around the "political entrepreneurs" who offered high prices due to their ability to gain monopolies. It's a great read, enjoy:

While entrepreneurs are out there busting their humps, making something cheaper, expanding its usage, increasing productivity, fending off fierce competition, and hoping to turn a profit along the way, there are those who, through the stroke of a pen, make a killing doing absolutely nothing of value. These "political entrepreneurs" leverage their political power to own something and then overcharge or tax the crap out of the rest of us to use it. Political power instead of competition.

Carlos Slim Helu comes to mind who briefly passed Bill Gates in 2007 and 2010 to become the richest man in the word. He controls 90% of the phone lines in Mexico and 80% of cellular customers. He didn't invent anything. He doesn't drive down prices. There is little innovation. And why should there be? He is milking this franchise for all it's worth.

Easy money forever. But then again, maybe not. Because for every stroke of the pen, for every piece of legislation, for every paid-off congressman, there now exists a price umbrella that overvalues what he or any political entrepreneur is doing. Real entrepreneurs, "market entrepreneurs," recognize the price-to-value gap and jump in. Ignoring legislation, they innovate, disintermediate, compete, stay up all night coding, and offer something better and cheaper until the market starts to shift. I call home from Mexico using Skype. Eat that Slim!

There's one guy who figured this out before being a market entrepreneur became fashionable.

Cornelius Vanderbilt was born in 1794 on Staten Island, New York. As they say about Dominicans in Major League Baseball: you don't walk off the island, you gotta hit your way off. When he was sixteen, Vanderbilt's mom gave him $100 to clear and plant an eight-acre field. Instead, Vanderbilt bought a two-mast sailboat and started charging for ferrying passengers and goods around New York. It didn't take him long to save enough to get into where the real money was: steamships. The powers that be in the New York legislature had granted a thirty-year monopoly for steamship traffic to Robert Fulton and Robert Livingston, a classic move by political entrepreneurs. Fulton was even able to convince the politicians that he couldn't make money unless he doubled his prices. He set up a fat umbrella for Vanderbilt to shred.

In 1817, hired by a local businessman, Vanderbilt started running, quite illegally mind you, freight and passengers from Elizabeth, New Jersey, to Manhattan. He charged $1 per passenger, well under the $4 monopoly price, until he took most of the business. One dollar was probably below cost, but he also ran the ship's bar, a much higher-margin business! Vanderbilt was threatened with arrest and impounding of his ships so often that Vanderbilt started flying flags from his ship that said "New Jersey Must Be Free." Makes an old Jersey boy like me smile.

At one point, and how's this for twenty-first-century thinking, Vanderbilt lowered the price to zero, nothing, nada. He gave away the trip for free. He not only made money at the bar on the ship, but his wife ran a saloon at the Elizabeth port, right where the passengers conveniently spilled out of Vanderbilt's ship.

Notice, Vanderbilt didn't ask permission, he just did it. There was a $4 price umbrella and he shredded it down to $1. Fulton and Livingston eventually sued and, in 1824, the U.S. Supreme Court decided in Gibbons v. Ogden that interstate commerce was federal jurisdiction. So, wink, wink, only Washington could decide who could be political entrepreneurs, not states.

Vanderbilt never slowed down, charging $7 for the trip up the Hudson River to Albany, or $1 for each twenty miles for intermediate stops, well under the monopoly rate charged by the Hudson River Steamboat Association. He employed tubular boilers and coal instead of burning wood, cost-lowering innovations not previously tried by others milking the route. The competition quickly followed. Vanderbilt was eventually bought out by the Association so they could get their high fees. Over time, Vanderbilt ran one hundred ships around Long Island and up and down the coast, making a fortune.

Then he yanked the price down on the New York to San Francisco trip during the California Gold Rush. By going through Nicaragua instead of Panama, he shaved two days off the thirty-five-day trip. He cut prices from $600 to $400. His competitors were paid $500,000 by the Post Office to deliver the mail to California, so Vanderbilt offered to do it for free, and then he cut his passenger price for the trip to $150. Volume surged as every would-be gold miner had only to find $150 worth of gold to make the trip worthwhile.

It didn't take long for Vanderbilt to set his eyes on the lucrative transatlantic route. A political entrepreneur named Edward K. Collins got Congress to subsidize his business to the tune of $3 million and $1,000 a day so he could profitably run the route. Vanderbilt ran more efficient ships and undercut Collins, who was saddled with all sorts of rules and regulations that went along with his subsidy. By 1858, Collins went belly up from losing so much business to Vanderbilt. The only competitor left was Cunard, the subsidized British steamboat company. Vanderbilt cut rates, especially for second- and third-class passengers, and used iron-hulled ships with screw propellers, cutting the trip to nine days, much less than the wooden paddle-wheel boats. Again, lower prices and scale led to innovation, even though common wisdom says the opposite, that is, we need to subsidize unprofitable business (hear that rural broadband?) so they can afford to innovate. Yeah, right.

Again, Vanderbilt didn't ask, he just did it, lowering prices and gaining share, leaving subsidized and monopoly players in his wake.

During the Civil War, Vanderbilt sold most of his vessels to the Union and more or less moved on. Vanderbilt soon started playing with railroads, except this time he was able to buy stock, in the Harlem line that crossed the Harlem River into Manhattan as well as the Hudson line that ran up the east bank of the river all the way up to Albany. This meant he was competing against the old Steamboat Association again, and that he could lower prices on the trip even more!

Lots of stock manipulation charges followed Vanderbilt around, and he almost lost his fortune to a competitor named Daniel Drew, in a fight over the Erie Railroad. The New York Times likened Vanderbilt to medieval robber barons, who as gatekeepers, or actually more of a protection racket, would charge merchants for being allowed to operate on their land without getting robbed and beaten. Robber barons didn't do anything but charge for something they could do. Historian John Steele Gordon did some work trying to find references to medieval robber barons anytime before the 1850 reference to Vanderbilt, and came up empty. It fit a narrative, though, so the Times went with it, but there may never have been such a creature as a robber baron. With that reference, an expression was born that is still being used today.

Vanderbilt and Rockefeller and Carnegie built giant empires by lowering costs, again and again and again, creating economic growth and increasing living standards by constantly lowering the cost for steel or oil or transportation for passengers and freight, by boat or by rail. They had scale on their side, yet they were labeled "robber barons" for amassing huge fortunes. Go figure. Find something that scales and you'll be so lucky as to be vilified in the press and in high school history textbooks.

The real lesson? Those political entrepreneurs who thought they had it made, with a Hudson ferry, a subsidy to carry the mail, the transatlantic franchise and subsidy--they got fat, dumb, and lazy and set themselves up for a market entrepreneur to come in and take them out at the knees. Real market entrepreneurs should never rest on their laurels. Progress is a continuum. What seems like it is risk-free today carries the greatest risk tomorrow.

Filed Under: andy kessler, entrepreneurship, markets, politics

Would Copyright Work Better If It Was Treated More Like Property?

from the um,-no dept

Lawyer Terry Hart, who we linked to last month for his discussion about whether or not it was okay to call infringement theft has now written another piece arguing that those of us who point out that copyright is not property may also be making a mistake. Specifically, he points to a recent paper by Christopher Newman, which suggests that the problem might be that we don't treat copyright enough like property, and that if we treated it even more like property, many of the problems with copyright law, specifically in the area of derivative works, would be more efficiently handled. In many ways, Newman's paper is quite similar to the argument of Bessen and Meurer in the patent realm. Their research details how much the patent system is hindering innovation, and they chalk up the problem to the fact that patents are not enough like property, in that the boundaries are not clearly defined. Newman appears to take a similar position, with a few more specifics having to do with copyright.

At a first glance, there is definitely something compelling about this argument (in both the patent and copyright realms). The lack of clear boundaries in either is, certainly, part of the problem because it allows the copyright and patent holders to try to expand their ability to exclude well beyond what many people feel is reasonable or economically justifiable. So, the argument goes, if the boundaries could be more properly calibrated, and clearly stated, it would do away with the worst abuses of each system.

In the end, though, I find neither argument convincing. Both are predicated on the idea that property rights, when properly defined with clear boundaries, lead to the more efficient allocation of resources. This is, of course, the fundamental rationale behind economics and property rights. The problem? They leave out an important condition: property rights are about the efficient allocation of resources in the presence of scarcity. The real reason for property rights was to handle the allocation of scarce resources. And, in fact, property rights do a pretty efficient job of that. The problem is that when the resource isn't scarce, allocation is not the problem any more. Putting property rights on non-scarce items doesn't make it more efficient, it makes it less efficient. It's telling, then, that Newman's paper makes no mention of either abundance or scarcity.

That's not to say the analysis provided in both Newman's paper or Bessen and Meurer's book isn't interesting and worth reading, but the fundamental error of not recognizing the different fundamental issues when dealing with scarce goods and abundant goods means that the solutions presented in each seem to be answering the wrong question, set up by a faulty assumption concerning the nature of property rights.

The reason that we point out that copyright and patents should not be considered property is not because we believe, as Hart implies, that thinking that way only papers over the problems of copyright, but that, fundamentally, copyright and property rights serve exceptionally different purposes. Could clearer boundaries improve things at the margin? Perhaps, though I doubt how effective it can really be. But, focusing on property rights as a "solution" is tackling the wrong problem. We don't need more efficient allocation of creativity -- it can already be allocated perfectly efficiently, since you can never run out of a particular (digital) work. So aiming for a better property rights regime, by definition, can only serve to limit that efficient allocation and make it less efficient.

Filed Under: copyright, markets, property

A Week After Feds Approve Movie Derivatives Market, Congress Bans It

from the so-much-for-that dept

Over the last few years, a few companies have been trying to set up financial markets for buying and selling movie derivatives. Effectively, it was a way to financially bet on the performance of certain movies -- whether long or short. There are all sorts of markets like this, and it's difficult to come up with any reason not to allow them -- but, of course, the MPAA cobbled together a bunch of complaints, including the idea that this would encourage more file sharing, as short sellers attempted to undermine the performance of a movie. So, it seemed like good news last week when regulators from the Commodity Futures Trading Commission voted to approve one of these operations, the Trend Exchange, from Veriana.

But it appears that victory was very short-lived, as Congress banned such offerings in the middle of the night last night. Basically, the MPAA was able to shove this issue into the Wall Street Reform bill which has widespread support, and politicians who didn't want to hold it up any more refused to take that provision out (which would have involved a fight).

Apparently Hollywood is so afraid of free markets that it has to oppose them every chance it gets.

Filed Under: congress, derivatives, markets, movies, trading

EU Digital Agenda Commissioner Admits That 'Piracy' Has Created The Market That Legislators Did Not

from the knocking-down-barriers dept

I've been reading the excellent book, Property Outlaws, which I'll write more about when I'm done, but it's main thesis is that oftentimes, people violating certain restrictions -- such as on copyright or civil rights -- actually are helping to refine the law in those areas by highlighting problems with the existing laws. Basically, it builds on the idea that people taking a stand are more able to change and to fix highly dynamic areas of law more efficiently than slow moving bureaucrats. Along those lines, it appears that the EU's Digital Agenda Commissioner, Neelie Kroes, is recognizing that unauthorized file sharing actually has been useful in building a single market, where politicians and bureaucrats have been unable to do so:

"We have effectively allowed illegal file-sharing to set up a single market where our usual policy channels have failed.... While the internet is borderless, Europe's online markets are not. It is often easier to buy something from a US website than online from the country next-door in Europe. Often you cannot buy it at all within Europe... Consumers can buy CDs in every shop but are often unable to buy music online across the EU because rights are licensed on a national basis. No wonder the US market for online music is five times bigger than Europe's."

Of course, she's saying this in an effort to pass the EU "digital agenda," which tries to make it easier to do licenses across the EU, rather than having to do individual licenses in each country. And, with that, she does go on to complain about various aspects of unauthorized file sharing, but it's nice to at least see a recognition that such forms of infringement are often useful in breaking down the barriers that bureaucrats are too slow to manage.

Filed Under: eu, markets, piracy

The MPAA Doesn't Want Anyone Shorting Movies

from the show-me-the-money dept

Last December, we noticed the revival of an interesting idea: a futures market on movies. There are actually a few companies trying to realize this concept: the Hollywood Stock Exchange (HSX), Veriana Networks' TrendEx, and simExchange (for video games). Instead of only allowing investors to trade with fake money, HSX and Veriana are looking to let investors use real money to trade shares in the prospects of movies, and have asked the Commodities Futures Trading Commission (CFTC) to approve these exchanges for trading with actual money.

However, the MPAA isn't too keen on the idea of having outsiders gamble on their movies. Understandably, the MPAA doesn't want to deal with complex liability for various kinds of insider trading or "market manipulation" that might result if studios/producers/directors could profit from simply making marketing decisions. Additionally, the MPAA likely also worries that movie futures would further encourage movie piracy -- given that investors who are shorting movies may have a significant financial incentive to distribute copies of movie files before a theatrical release.

These futures exchanges actually bring up several interesting questions regarding the metrics of movies -- and how betting big on theatrical releases could be open to alternative marketing techniques. And if these market exchanges are allowed, will Hollywood be forced to adapt to additional business models? Could investors push studios towards taking advantage of their infinite goods or towards even more stringent copyright enforcement? These exchanges could also determine how much movie popularity can really be manipulated by investors and marketing efforts. But we may never know without real money behind movie trading. So, with this fairly important change to the movie industry at hand, the Commodity Futures Trading Commission is taking a bit longer to decide what the fate of these exchanges will be.

Filed Under: markets, mpaa
Companies: hsx

Another Battle: Can Teachers Sell Lesson Plans?

from the so-first-we'll-learn-that-1+1-equals-2 dept

I missed this last month, but a friend sent over a NY Times article looking at the growing practice of teachers making additional money by selling lesson plans. Marketplaces are emerging, and teachers who have crafted smart and useful lesson plans are able to earn extra cash, while other teachers who are looking for help in crafting smart lesson plans, or understanding what kinds of lesson plans work gain the ability to learn from others, rather than starting from scratch. However, there's a problem (isn't there always?). Some school districts are upset that the teachers are selling lesson plans, believing they deserve some of the "cut." Thanks to our "ownership society," we've built up this belief that every idea must be "owned" and if anyone makes money, others come grabbing as well.

Of course, while the article doesn't go there, I would bet that a growing number of teachers are seeing value not just in "selling" lesson plans, but posting them publicly for free. In doing that, you can get better feedback and open a nice discussion among other teachers to share what they all have learned, and create a better overall lesson plan that helps everyone out (especially the students). In fact, the more you think about it, the more you realize that expecting teachers to keep coming up with their own lesson plans entirely separate from what thousands of other teachers are doing, seems positively backwards.

Filed Under: copyright, lesson plans, markets, teachers

Photographer Compares Microstock Sites To Pollution And Drug Dealing

from the yeah,-that's-convincing dept

I guess it's natural to lash out at technologies and companies that undermine a business model built up on artificial barriers and scarcity, but it won't do much good in terms of actually adapting. But it's kind of amusing when it's done at the same time that someone is embracing those new technologies as they undermine other business models at the same time. Taylor Davidson points us to a photographer bashing the idea that microstock sites like iStockPhoto help "create new markets." It's actually been really depressing to see so many photographers react so poorly to new technologies, and this case is no exception. In the ranting post, he compares microstock sites to pollution in China and drug dealing. All the rant really screams out is "I'm so set in my ways that I can't compete or adapt my business model."

However, the really amusing part is highlighted by an anonymous commenter on the site who mocks the photographer for whining about how microstock sites are undercutting his old business model at the same time that he's advertising his own books and services online, rather than advertising in newspapers and phone books. As the commenter notes:

If everyone is supposed to stop posting their photos and selling to istock, how about photographers stop using the Web and advertise in phone books and newspapers so those jobs aren't lost? And maybe you can go back to using film instead of digital so that film manufacturers aren't put out of business? Sounds like to me you're all for taking advantage of technology except when others doing it hurts your bottom line.

And that's really a key point. Technology changes markets, and the more you look, the more you realize that it almost always enlarges the overall market for those who take advantage of it. Yes, there's more competition in the photographer market, and the model for stock photography has changed. But the nice thing about the microstock market is that it has opened new markets. A lot more people can and do buy stock photos than did in the past. If I can't find a decent Creative Commons/public domain photo for presentations, I'll go in search of one I can license from a microstock photo site in a second, because it'll just cost $1 or so. So I actually end up spending a fair amount on stock photos in the course of a regular year. Compare that to the situation seven years ago when we were working on a revamp of our corporate website. We went in search of a photo to use, and the licensing deals we saw wanted about $1,000 for just one year of usage. That meant we spent nothing, because that just doesn't make sense.

So, yes, the economics are changing, but if you're smart, you can take advantage of it. It may mean moving beyond just the stock photo market, or using such photographs (or even giving away works for free) to build up reputation for freelance or custom assignments. Most photographers I know never made much money from stock photos anyway, finding much more value in commissioned work. And recently, I've been hearing of success stories from some really good photographers who have used their existing work, given away for free, as strong advertising to get more (and more lucrative) commissions.

In the end, it really comes down to how you deal with it. Do you whine and stomp your feet and compare the new world to pollution? Or do you figure out how to adapt? Economic progress doesn't care in the slightest how much you liked how things used to be.

Filed Under: economics, markets, microstock, photography

Why The Traditional News Media Is Becoming Less Relevant: They Didn't Adapt

from the must-read dept

Michael Skoler, over at Nieman Reports, has such an amazingly good essay on how the traditional news business lost its audience, I'm having trouble deciding which parts to quote. The whole thing is great, and is a must read. The basic thesis, though, is one you'll hear a lot around these parts. As the newspaper folks lash out at everyone, the real problem has been their own inability to adapt and change. They were built on a model where they were the sole place for a community to gather, but that community now has other options, and the news media has not kept up. Here's one snippet:

The truth is the Internet didn't steal the audience. We lost it. Today fewer people are systematically reading our papers and tuning into our news programs for a simple reason--many people don't feel we serve them anymore. We are, literally, out of touch.

Today, people expect to share information, not be fed it. They expect to be listened to when they have knowledge and raise questions. They want news that connects with their lives and interests. They want control over their information. And they want connection--they give their trust to those they engage with--people who talk with them, listen and maintain a relationship.

Trust is key. Many younger people don't look for news anymore because it comes to them. They simply assume their network of friends--those they trust--will tell them when something interesting or important happens and send them whatever their friends deem to be trustworthy sources, from articles, blogs, podcasts, Twitter feeds, or videos.

Mainstream media are low on the trust scale for many and have been slow to reach out in a genuine way to engage people. Many news organizations think interaction is giving people buttons to push on Web sites or creating a walled space where people can "comment" on the news or post their own "iReports."

People aren't fooled by false interaction if they see that news staff don't read the comments or citizen reports, respond and pursue the best ideas and knowledge of the audience to improve their own reporting. Journalists can't make reporting more relevant to the public until we stop assuming that we know what people want and start listening to the audience.

Again, don't just read this snippet, read the whole thing. It goes on to talk about how other community sites have built trust, and have done it by really involving the community and empowering them. Anyone in the news business who doesn't understand this shouldn't be working in the news business much longer.

Filed Under: adapting, journalism, markets, newspapers

Bad Ideas: Trying To Build Patent Marketplaces

from the a-market-in-ideas-after-the-fact? dept

The NY Times has what feels like a warmed over press release talking up the rise of patent auctions and makes some very one-sided and weakly supported assertions that this is somehow good for the market of innovation. It's not. In any way. There have been a bunch of companies trying to "trade" in patents or patent auctions, and all they've done is help make innovation harder by separating the idea from the implementation, and encouraging more lawsuits or extortionary techniques. Patents are no longer being used for innovation or to distribute knowledge. They're used to create a tax on anyone who actually innovates, and comes up with the same concept that others have come up with. Amazingly, the NY Times notes none of this. Instead, it makes the following statement:

And patents, after all, are ideas. Any market mechanisms that speed up the process of figuring out what a patent is worth should hasten the flow of ideas into the economy, accelerating the pace of innovation, policy experts say.

That's wrong. Flat out, bizarrely, backwards and wrong. Ideas don't need a market. You want a market for scarce goods. You don't need a market for goods that are not scarce. This is fundamental stuff and has been obvious for ages. Hell, Thomas Jefferson famously noted that very issue ages ago:

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property."

Markets are for property exchange and the more efficient allocation of property. Ideas are not property, and making a market for them and holding them back doesn't accelerate the pace of innovation, it retards it. Greatly. And, more and more studies have been showing this.

Filed Under: economics, ideas, markets, patents