Recently in Economics Category

As Alex reported in the Weekly Mobile News Roundup, NextWave Wireless, Inc. (yes, THAT NextWave) is planning on selling off their 2.5GHz PCS spectrum licenses.

I'll be the first to admit a few things about myself:

[Snipped out greetings and pleasantries]

One of the ideas that I have been trying to share about the battle that all new technologies face dates back to the days of Ned Lud - the perhaps mythical character who led the fight against power driven weaving looms during the Industrial Revolution. The people he led became famous and have even entered our modern lexicon - "Luddite" is the term applied to people who stand in the way of progress. They are often seen in a rather complimentary way as fighting to preserve an idyllic way of life against technology driven change.

I've never heard it used in a complimentary way, incidentally. To address this first paragraph, economic-driven fear of new technology did not begin with Ludd, but dates back to actions by stocking-makers in the late 1600s, and led up to what most consider the start of the "Luddite" movement in 1811. Actually, Ludd 's destruction of looms in 1779 is believed to have nothing to do with the movement that bears his name.

A deeper reading of the story gives a slightly different understanding of what the word really means. The specific people who followed Lud's lead and took direct action against the people building and installing power driven looms were not disinterested bystanders who wanted to maintain a simple way of life. They were, instead, members of the guild of skilled weavers. They were elites whose skills with hand looms provided a much better living than the average person; they protected their knowledge through limited apprenticeship programs. They had a lot to lose in a world where people could purchase large quantities of inexpensive cloth made without much reliance on skilled labor.

Actually, this is a disputed point among historians of technology and economists. Often called the "Luddite Fallacy," this idea that protest against technological change was due to fear of mass unemployment and degradation of working conditions is simply untrue. At the Macro level, technological advancement which increases productivity drives down prices, increases demand for material goods and the number of workers needed to produce them. See Alex Tabarrok's excellent post on the subject.

One thing I may concede is that as global trade barriers have been relaxed, the Luddite Fallacy may be somewhat true as the cost of labor becomes comparatively expensive in countries with a high standard of living and thus unemployment does rise in industrialized nations while production of material goods is relocated to countries with lower wage and living standards. While Thomas Friedman waxes eloquent about the Flat Earth, he forgets that Henry Ford made sure he paid his workers enough that they could buy the cars they built. Sadly, even Wal Mart neglects the lessons of Mr. Ford today, and pays wages that barely let their employees shop there. Sam Walton may be revered as a genius and a paragon of morality by some while Ford is routinely vilified as an anti-semite and violent union-buster, but Ford improved the standard of living of his own workers while revolutionizing industry productivity. If I was President and had to choose an economic advisor, I'd probably gravitate towards the anti-semite and union-buster instead of the guy whose company wastes money investigating executives for having affairs with each other. (yes, I know Ford had a morals police, but in today's world I think Mr. Walton's standards are a bit anachronistic.)

If you want to nitpick about Guilds, Guild membership was a requirement to engage in most trades in pre-industrial England, earned through a process beginning with apprenticeship, and after time spent as a "journeyman" a prospective member would present the senior membership of the Guild with a "masterpiece" along with what could be called an application fee. If you were judged to be competent enough to operate your own business, you were admitted.

What the Guilds actually did was an early form of accreditation or licensing, not dissimilar from many professions today, including your own, in which you had to pass Nuke school and eventually qualify in order to earn your Dolphins and serve on those two SSBNs. Because of the process involved in joining a Guild as a "master," this maintained a standard of quality for products and services which continues today in professional associations, licensing boards and some unions, to say nothing of military organizations. 

In addition, the Guilds provided many services which Government did not, including pensions and benefits for widows and orphans of members. 

Please forgive me if I get all the details wrong, but as you entered the Silent Service after your graduation from USNA, did you not experience a similar process?. Upon completion of Nuke school (Apprenticeship) you endured a training period ending with qualification and testing, after which you earned the right to wear the Dolphin insignia, letting all that saw you in uniform (and knew what meant) know that the DNR (at the time the legendary Admiral Rickover) considered you fit to serve as an Officer aboard a Nuclear powered submarine. You did join a Guild. As a benefit, you also will receive a pension, and your family would receive similar benefits were anything to happen to your boat (doubtful considering the safety record of American subs since the sinking of the Thresher). 

Now, the advent of the Nuclear boats in the '50s and '60s didn't make obsolete the skills of those who maintained the Diesel-electric plants of the older subs, since the Diesel is still carried as a backup, and at the beginning there was certainly still a role for the huge pool of engineers out there (you certainly should know the "Diesel Boats Forever" pin). Were those guys Luddites?

(as an aside,  Weavers were certainly not "elites" in English society, as they "worked with their hands" and in no way could be considered Gentlemen. )

The original Luddites were members of a well established, prosperous enterprise that organized to take action to stop or at least slow the advance of a competitive technology. They were not selflessly seeking to protect a good way of life from destruction by new technology, they were selfishly trying to protect their own privileged position in a society. They did not care that clothing was so terribly expensive before industrial production that only the wealthy could afford more than one or two outfits. They were unmoved by the fact that poor people often shivered in inadequate garments or lived in filth because they avoided washing the few outfits that they had for fear of wearing them out.

Actually, the movement is viewed by some historians as a mass protest (some even go so far as to say paramilitary organization) that grew from the 1815 end of the Napoleonic Wars' and the economic devastation of the English economy, including mass unemployment that followed. Other uprisings at the same time that might be more appropriate to your thesis were directed against the introduction of farm equipment and decrease of agricultural workers' wages, leading to the Swing Riots of 1830. See if you can find a copy of E.P. Thompson's seminal work The Making of the English Working Class. 

The same story plays itself out in industry after industry. Plastics got demonized by a coalition of the steel and aluminum industries who saw their container, toy, and automotive markets getting invaded by the easier to handle, lighter weight material. Apple and Commodore - in the early days of personal computers - got portrayed as suppliers of buggy, unreliable, insecure machines that could never handle real business tasks by companies like Digital, Unisys, and IBM that made mainframes that only large companies could afford.

You're comparing apples and oranges. While plastics may have gotten a bum rap at first, much of the vitriol was directed at them by consumer groups who saw them as unsafe, especially in the automotive industries (which they were). 

The analogy to the Computer industry is simply just plain wrong. Apples and Commodores flew off the shelves despite the efforts of the DEC, etc. Remember, the Apple II and IBM PC were huge sellers because the industry underestimated the value of the software that could be ran on them, or as we say, the Killer App (see VisiCalc).  

DEC fell on their faces because they simply didn't see it coming and were too invested in the minicomputer market. IBM got on board with the original IBM PC, but made a major mistake in using commodity parts, which begat the IBM Clone industry (remember Compaq?), and stumbled a second time by passing the buck for the operating system software to a New Mexico-based outfit called Micro-Soft, run by a couple of Harvard dropouts known for implementing BASIC on pretty much any home PC you could buy. IBM failed to see the power of these Generative Systems (as Harvard's Jonathan Zittrain calls them in his new book) just as Microsoft failed to see the rise of the browser and Internet (another Generative System).

As you pointed out, MySpace, Facebook and other interactive media efforts get bombarded by mainstream media with stories about their potentially negative impact on the young. Of course those same media properties air programs that portray hundreds of murders and other violent acts every week while trying to attract the same eyeballs that are moving to more interactive, arguably more educational uses of their time in the online world. In other words, FUD happens.

I will again take issue with your portrayal of the negative media attention as purposeful FUD. I see these stories on my News Corporation O&O Fox News station (WTTG-DT) as well as Dateline, etc etc because they attract viewers, not due to any effort to discredit social media or the Internet. If it Bleeds, it Leads. 

From a human security point of view, the battle against nuclear power was probably the worst example of all. The visible Luddites in that case hid behind the mantle of selfless Environmentalism, but the real power probably came from the richest enterprise the world has ever known. Though there is a lot of money in Silicon Valley, the total revenues of all technology companies combined pale when compared to Exxon-Mobil. Last year, that single company sold more than $340 BILLION worth of product and banked more than $40 BILLION in net profit. That company, however famous, only has a 2-3% share of the oil market, which itself is only about 1/3 of the total energy market.

You're unhappy that I criticize you, but look at the context. In response to an interview with Greenpeace founder Moore, who directly links the anti Nuclear power activism to what was a groundswell of antipathy towards further testing of Nuclear weapons like those carried by the SSBNs on which you served, you point fingers at Big Oil, while hedging your bets with that weasel-word, "probably."

Take a look at the people who control energy wealth in Texas, Saudi Arabia, Russia, Dubai, Iraq, and Iran (not an exhaustive list) and compare the way that they live with the way that most energy consumers in the world live. They have tremendous motives for loosely organizing to fight against the only real source of power that can help displace our collective addiction to fossil fuel. In his talk with you, Patrick Moore mentioned the forward looking master plan of Exxon-Mobil and Shell International for new energy sources in the US, but please understand that the energy business has had long term master planning in place for many decades - there are plenty of books on the subject.

I'd be happy to read some if you'd refer me to a few authoritative ones. I still am skeptical of your idea, though. Again, I'll refer back to Iran. They want to build Nuclear power plants. Of course, they could build breeder reactors and a few bombs here and there, but cheaper electricity flowing into their power grid would free up much of their domestic fuel market (which itself is strained, as their heavily subsidized gasoline prices continue to rise) for other uses, including international sale. Russia, although rich in untapped fossil fuels, has even more to gain as an exporter of Nuclear technology. While we're busy trying to enforce sanctions and beat drums of wear, Putin and friends are selling Iran expensive reactor technology. Dubai only makes 6% of its' GDP from Oil and Gas revenue. I'll repeat my Iran theory with the Saudis, every kilowatt of energy that the Kingdom can generate internally with Nuclear power means more to export. Similarly, in America, increased Nuclear capacity would free up much of our massive petroleum imports for refining for gasoline (a different problem in itself) and other products for which oil is used (hint: watch The Graduate). 

In conclusion, I don't think you're a crackpot, but I do think your historical arguments are flawed to a degree, and that your other ideas are based on a view of the Petroleum (and to some extent coal) industries that gives them far more credit as planners of extended exploitation than simply slow-moving dinosaurs who, as IBM did, fail to see potential in new developments and possibilities for business models. You can even see it in the Music industry today. 

I'm sure everyone has heard that R.E.M. is letting people get to the premiere of their new album, Accelerate via the iLike Facebook Application. 

...digital opened up many new ways the record companies can take their music to fans and this is one example. this is through a service called iLike and music is a social thing, people define themselves by it and it is one of the things you talk about with your friends and sharing it is a great way to do it. this is a way of sharing music legally with other friends and you can post it on your blog or Facebook and do other things with it... 

...this is a new model for record companies to take music out there. can they make money out of it? this is a licenceed legal service and what the music business is trying to do against a backdrop of most music being available for free illegally, the record companies are trying to licence as many new services as possible to give music fans an option, because that's what we want. we want more ways for music fans to get their music. that's what the record companies would like. that's the message they would like to send out. nobody really knows. once it is available, it is available and you are trying to convince people to pay for it...a lot of artists realise you don't need a record label, you can say ""i can make it available myself."" 

very few artists can do this. rem have done this through their record company. record companies and artists can do these things and use the new digital services. what does it mean for music? do you think it is good for a band that doesn't have a label, can go out and get people listening to their music?

I see some sad double-talk here. On one hand, the labels wants to allow streaming over the 'net when they see fit, but when 'Net Radio took off, they rushed to extract every dollar out of it because they saw it compromising their existing distribution networks. Not illegally, but in the sense that in that world, they lack their traditional influence in what gets pushed to the top of the DJ's "record stack." So, with the help of the Library of Congress and the Copyright Office, they want to replace 'net radio, especially independent stations and services like Last.Fm and Pandora (which actually drive record sales by pushing new music to consumers based on their tastes) out of business, because it imperils their vertical model of middle-manning that has been in place for the past fifty years. 

I'm making my way through Professor Zittrain's book as carefully as I can, and the more I read the more I get how dialed in he is to what is happening to the state of the 'Net these days and how we're so blinded by these "gee-whiz" technologies to see what is happening to our world.

Michael Arrington at TechCrunch has a fantastic rant up about the influx of VC to "blog networks" and the recent (well, 2 years recent) tendency of bloggers to be looking for the VC infusion smoothie or to get in on the big networks.

This comes at a time when people ask me "how do you plan on making money with this thing?" and "where are the ads?" They assume I want to get into an ad network or get someone to invest in my writing looking for a return, they assume that is the way I see a payoff for my efforts.

They're wrong. On the other hand, Michael has it right:

So what's the point of this rant? Well, all this money flowing into the blogosphere is disrupting the complicated and emotional, but also stable way things are done. Bloggers with money and employees and health care programs and boards of directors and shareholders have to play politics with a whole new group of people, splitting them away from what they do best - Fighting the Blog War. Their behavior can become erratic as they have to decide to tone down their writing to get a certain type of sponsor on board, which in turn lets them make payroll. Investors want to see growth, so more and more blogs are launched, but perhaps without the right talent to grow it into a long term business.

In short, I believe the money is being, for the most part, wasted.

If a VC hands you a check, their intention is not to hang around for 20 years while you build a nice lifestyle business for yourself. What they want to see is an exit, preferably a 10x or higher exit, within 3-4 years. But something tells me that few of these networks are going to be able to grow quite as easily as they think and reach those liquidity events. The talent is, increasingly, locked up. Even when new talent is discovered or trained, every niche has serious heavyweights already there with page views and advertising dollars to back them up for a long fight.

I'm just going to print out his post and carry a laminated copy with me to show people next time I get asked "the question" and keep the URL handy to forward and pass around.

His (quite timely) point is that there are things that are worth investing in over the long term, by putting in time to develop relationships, content, style, etc, and then there are the "bubble" investments, where some believe that throwing Other People's Money and advertising around is the solution.

Last week I sat in on a panel where Robert Scoble  (correctly) pointed out that he doesn't run ads (except for his book) because the truth is, good content is king. Arrington takes this a step further and explains why he's been shying away from Other People's Money:

What I'd like to see, and even be a part of, is the blogger equivalent to the 1992 U.S. Mens Basketball Dream Team. That team could take CNET apart in a year, hire the best of the survivors there, and then move on to bigger prey.

Just the thought of being a part of something like that has held us back from raising any outside capital at all. I believe we have the beginning of a team that can play a role in this new Dream Team.

He's so right I can't even begin to get at it. I've been trying to explain it to friends, to family, to people I meet at conferences, and this guy just nails it.

I'd be happy to be the last guy off the bench on that Dream Team, because the content would blow the current "A-List" paid networks out of the water.

Content is king. Bubbles burst.

Well said, Michael.

(apologies for the rhyming. I couldn't resist).

 

Reuters' DealZone Blog reports that Sirius CEO and Howard Stern's chief benefactor Mel Karmazin has voiced hopes that the FCC would rule on the merger by the end of this month.

At the Bear Stearns 21st Annual Media Conference, Karmazin is quoted as saying that he "took heart" about FCC Chairman Martin's desire to make a final ruling by...the end of March.

On the other hand, as Reuters notes, Karmazin has been wrong before on this.

Karmazin's predictions on timing, however, may prove false since the companies have been wrong before. The satellite radio companies previously predicted that regulators would sign off on their their proposed $4.2 billion merger by the end of 2007.

XM Satellite Radio Holdings Inc Chairman Gary Parsons was less specific than Karmazin when he spoke at the Bear Stearns conference. He merely said he was confident the regulatory review was moving forward "in a timely manner."

Smart interpretation of a cryptic comment from Martin, or just another prediction? XM Chairman Gary Parsons was more circumspect, saying that he was "confident the regulatory review was moving forward in a timely manner."

Of course, it's been more than a year (February 20, 2007) that they announced the proposed merger, which would allow the combined company to offer more programming on their combined spectrum and eliminate the duplicate channels that each of them carry.

Considering the glut of radio station ownership consolidation since the 1996 Telecommunications Act and the FCC's new print-broadcast cross-ownership rules, I'd think that anything which strengthens the Satellite Radio option for consumers to avoid the commercial-laden, boring FM radio dial is a good thing. Already, both XM and Sirius have more diverse content than most of the stations in major markets, simply because they have the ability to offer it. Most radio stations, on the other hand, play the same playlists, and often don't even have a real DJ in-house. They're computer controlled.

Sadly, XM also plays more local DC music than any of DC's terrestrial stations.

I'm generally not a fan of monopolies, but this one wouldn't be a bad thing. When you're competing with free, you need all the help you can get.

Anyone remember Betamax, Sony's VCR format that was technically better than, but cheaper than VHS? Anyone else remember that Sony lost that war to the lower quality but cheaper to license, produce, and sell VHS player? A small snipped that I overlooked in last Wednesday's NYT suggests that Sony might be dooming themselves to repeat history:

 

Mr. Glasgow expressed hope that price levels wouldn't collapse the way they did for DVD players. To protect against this, he said the Blu-ray Association, the group that controls the Blu-ray standard, has not licensed it to any manufacturers in China. (Cheap players from China were a large part of the collapse of the DVD player market.)

"Will there be Chinese players? Yes," he said. "We don't need to drive that and hand the technology over" any time soon, he said.

 

Let me get this straight. You (the Blu-ray Association) are pushing an expensive (albeit high-quality product) that can only survive with widespread adoption, yet you aren't going to allow it to be licensed to manufacturers that can get your product in the hands of millions of customers to keep the price up?

Two things come to mind: most Americans are happy with DVD. We like it more than VHS. It lets us do everything Blu-ray does. Even if we bought HD-DVD players, they still upconvert our regular DVDs to look better. DVD is a nice, open format. We can even make our own movies on DVD. So, for us to want to switch, we really need a clear incentive, and artificially driving the price up does not help.

Second. The Blu-ray association is a group of companies. A "trust" that controls the licensing of patents related to Blu-ray disc technology. Now, for them to refuse to license a technology to a manufacturer that can make a cheaper Blu-ray player, well, that would "fix" the price at a certain level. Come to think of it, isn't "price-fixing" a key component in "anti-trust" law?

I've heard that somewhere before...that whole thing about "price-fixing..." Where was that?

Oh yes, the Sherman Anti-Trust Act. Let's take a look, shall we?

15 U.S.C. §1: Trusts, etc., in restraint of trade illegal; penalty

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

15 USC §3

Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Territory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or both said punishments, in the discretion of the court.

 

Uh oh. If you're going to refuse to license a product to keep the price artificially high, shouldn't you refrain from announcing it in the pages of the Grey Lady?

 

Just a thought.

...and waiting for our $600 checks as part of the much-ballyhoed "Economic Stimulus Package," maybe it's time to look at the true state of the economy. The two of us running this thing live on both coasts in two of the most expensive of urban areas in the United States. Let's be blunt: our economy sucks, but tonight we get our bread and circus. Barbara Ehrenreich, who normally I cannot stand, write a fantastic book a few years back, called "Nickel and Dimed" where she gave up her relatively privileged life as a writer and took jobs incognito as a waitress, hotel maid, clean service worker, etc. She lived as they lived, in hotels and by-the-week rentals, and only broke character when she left for the next job and city. In today's Washington Post, Ms. Ehrenreich pens a rather poignant op-ed where she refers back to her experiences during this process and ridicules the complete lunacy of our country's economic situation:

 I t begins to sound a bit naughty -- all this talk about the need to "stimulate" the economy, as if we were discussing how to make a porn film. I don't mean to trivialize our economic difficulties or the need for effective government intervention, but we have to face a disconcerting fact: For years now, that strange stimulus-crazed beast, the economy, has been going its own way, increasingly disconnected from the toils and troubles of ordinary Americans. 

 

The economy, for example, has been expanding, at least until now, and growth is supposed to guarantee general well-being. As long as the gross domestic product grows, World Money Watch's Web site assures us, "so will business, jobs and personal income."

 So, the theory says that if Wal-Mart is growing, the economy is doing fine, right? Wait a minute, doesn't Wal-Mart pay their employees next to nothing, but keeps their prices low enough so they can barely afford to shop there? Don't they buy most of their stock from overseas manufacturing? 

 

We like to attribute our high productivity to technological advances and better education. But a revealing 2001 study by the consulting firm McKinsey & Co. also credited America's productivity growth to "managerial . . . innovations" and citedWal-Mart as a model performer, meaning that our productivity also relies on fiendish schemes to extract more work for less pay. Yes, you can generate more output per apparent hour of work by falsifying time records, speeding up assembly lines, doubling workloads and cutting back on breaks. That may look good from the top, but at the middle and the bottom, it can feel a lot like pain.

 When people don't feel like they have enough. Even Wal-Mart had to cut their prices last Christmas to save their shopping season. Their customers, including most of their own employees didn't have enough money to buy Christmas presents for their children.  This looks pretty familiar to Ehrenreich, as one of our most famous American entrepreneurs knew enough to keep this from happening:

Not that we hadn't been warned. A century ago, Henry Ford realized that his company would only prosper if his own workers earned enough to buy Fords. But, like Wal-Mart, too many of our employers today haven't figured out that their cruelly low wages would eventually curtail their own growth and profits.  

 Henry Ford was a notorious anti-semite, Nazi sympathizer and devoted an entire division of his company to spying on the private lives of his employees, a practice that Wal-Mart emulates today for some strange reason. On the other hand, for all his faults, Henry Ford knew enough about economics to pay his employees a fair wage, and keep his products fairly priced. Enjoy the commercials.