Friday, July 31, 2009

Audacity of hops

It’s good to hear that the Prof. Gates photo op has turned into an argument over beer. The choice of a good beer seems much more important than a kerfuffle over which guy in Cambridge lost his temper first.

Dana Milbank’s syndicated column (in the Merc) called it

  • Beerastroika — the most universally repeated term and also the title of a humor video
  • Yes, Three Cans
  • Menage a Stella Artois
  • A Thousand Points of Bud Light
  • The Audacity of Hops
In the Washington Post original, the headline was “Beer summit wasn’t one for the Guiness books.”

A number of articles commented on the beer nationalism theme — since longtime US market leaders Anheuser-Busch, Miller and Coors are no longer American owned. Prior to A-B’s acquisition, Bud Light was the iconic American beer — and in fact, my presumption is that it was chosen for its symbolic value and not because our Harvard-educated president really prefers the taste.

If anyone asked, I personally would have been glad to suggest a domestic microbrew, having significant experience here. The WSJ quoted a representative from from California-based Sierra Nevada, which is sort of the Budweiser (or Michelob) of microbrew ales — widely distributed, solid, not exciting. Local rival Anchor Steam has a little more character. Given it’s a one-in-a-lifetime trip to the White House, I would have specified one of the Mendocino Brewing Company ales, such as Red Tail.

In the end, Prof. Gates saved the day by switching to the Boston-brewed Sam Adams Light. Merc beer columnist Jay Brooks rated the beers drunk by the three men, praising the Professor’s smart choice:
Unlike most low-calorie light beers, Samuel Adams' version is all-malt, meaning it has no added corn or rice to give it a lighter body. While I generally don't advocate low-calorie beers, if you have to drink one this is the one to go with. It's amber in color and has more flavor than the average light beer. In the end, Gates may have made the smartest choice, since it's full-flavored and has the lowest alcohol of the three beers.
Well, now it’s TGIF time, so I’ll have to do some sampling of my own.

Money for nothing

Cash for Clunkers is out of money, and some politicians say the answer is to spend more.

I think the Mises Economics Blog has it exactly right:

let's just pause and reflect on these people who were surprised. Here is the amazing turn of events:

  1. The government starts handing out free money.
  2. People start grabbing it as fast as they can.
  3. The bureaucrats quickly realize that they are hitting the program's budget in mere days (of the program being finalized) and suspend the program.
What is the reaction to this perfectly foreseeable sequence of events? "...dealers were amazed...", "the explosively popular... program."

How do you get an economic recovery going? Start raining free money down on everyone's heads. I grew up thinking that the people from the Middle Ages were idiots... They believed the earth was flat! Turns out they didn't actually. But Rep. Miller (and how many Americans?) really does believe this nonsense. I have found the Dark Ages and it is us.
Economic ignorance is expensive and we’re paying the price.

Sprint to the bottom

The news for Sprint is mixed this week. Analyst Walter Piecyk estimates Palm is selling 25,000 Pre phones a week, but argues it could sell more if only it would advertise more. The company is also preparing to offer an Android phone later this year “now [that] it’s ready for prime time.”

This week Sprint announced it is buying out Virgin Mobile — according to Wikipedia (if you believe that) the 2nd largest MVNO in the US after TracFone. The acquisition gives means that it will be be able to consolidate its revenues to the bottom line and gain full control of about 11% of the subscribers on its network.

One problem for Sprint is that Virgin is selling because the prepaid market is only going to get more brutal. (The Virgin Group owns 28.3% of Virgin Mobile and SK Telecom owns 15%). On Thursday, MetroPCS cut its unlimited price plan by $5/month, putting additional pressure on Virgin and Boost (Sprint’s existing prepaid brand).

Even if prepaid is the highest growth part of the market, it’s also the lowest margin. As the FT noted:

Average revenue per [prepaid] user is just $34 monthly versus $56 for post-paid customers and all-important "churn" or turnover was 6.4 per cent versus 2.1 per cent for those locked into contracts.
Of course, the worst news of all is that Sprint continues to lose money and customers. Its quarterly loss widened to $384 million, and it lost 991,000 prepaid customers during the quarter. With new prepaid customers, it only lost 257,000 customers overall — but AT&T Wireless added 1.4 million and Verizon Wireless 1.1 million.

Unstrung columnist Dan Jones is calling for CEO Dan Hesse’s head (attributing the idea to “restless” investors). As he notes, the company has yet to fix the problems that got Hesse’s successor fired, and the stock is down almost 80% in two years.

So in the end, despite the Pre exclusive and its aggressive pricing, Sprint has been unable to stop the loss on the income statement, subscribers or market cap. The company is trying all the customary approaches to saving money and they aren’t enough. Unless it can do something to get more high margin customers — of the sort keeping AT&T and Verizon alive — I don’t see what will end the hemorrhaging.

Thursday, July 30, 2009

New government efficiency push

From the Wall Street Journal this morning:

WASHINGTON -- With the budget deficit soaring toward $2 trillion, the Department of Justice has figured out how to play its part: double-sided photocopying.

There are other acts of national sacrifice. The Forest Service will no longer repaint its new, white vehicles green immediately upon purchase. The Army will start packing more soldiers onto R&R flights. The Navy will delete unused email accounts.

Three months ago, President Barack Obama ordered his cabinet secretaries to find $100 million in budget cuts for the current fiscal year to emphasize the point that he, too, was serious about belt-tightening. They responded with $102 million. That is 0.006% of the estimated federal deficit.

The list of 77 spending cuts, which the White House is calling "the $100 million savings challenge," reflects the vastness of government -- and its vast inefficiency. Hundreds of millions of dollars in savings were found simply by casting around for areas to trim.

Still, the reductions barely scratch the surface. "Some of these cuts are so small they would be a rounding error of a rounding error in the federal budget," said Brian Riedl, a federal budget expert at the conservative Heritage Foundation. They also show how "unbelievably outdated" the government is, he said.

If the administration produces $100 million in savings every 98 days for the rest of Mr. Obama's term, the savings will total $1.5 billion, or three days of interest on the federal debt, said Don Stewart, spokesman for Senate Minority Leader Mitch McConnell.

"These savings tends to be in thousands, tens of thousands and millions," said Rep. Paul Ryan of Wisconsin, the ranking Republican on the House Budget Committee. "Our fiscal challenges are in the thousands of billions."

Wednesday, July 29, 2009

Yahoo's last hurrah?

AP has a good article on the long-delayed Microsoft-Yahoo search agreement. (Great title on Yahoo Tech: “Microsoft, Yahoo team up to ding Google with Bing.”)

Yahoo gets no up front cash, but gains incremental revenue and reduces search R&D. (It’s not clear if the claimed $500m increasing in operating profit includes the R&D cuts).

Many commentators say Microsoft got the better end of the deal. Perhaps the most colorful analysis comes from Jason Calacanis, founder of Silicon Alley Reporter in his Business Week column:

Yahoo committed seppuku today.

The once-proud warrior of the Internet space laid down its sword, knelt at the feet of Microsoft, and gutted itself today. There was no honor in this death: It was brought about by the shame of losing to Google and a lack of faith in its ability to compete in the space it created. To be clear, Yahoo didn't need to do this deal; Microsoft did. Ultimately Yahoo will look back at this moment as the second—and perhaps fatal—mistake in its epic history.
(Of course, the bigger mistake was helping Google get established in the first place).

Clearly Yahoo’s bargaining power and stock price are far lower than when it turned down Microsoft’s various acquisition offers. He who hesitates is last (and lost). In this case, Carol Bartz is paying the price of the indecision of her predecessors, both Jerry Yang and Terry Semel.

IBM buying SPSS, but why now?

IBM is spending $1.2b to buy Chicago-based SPSS, one of the three major statistics and data mining software companies. The cash offer is a 42% premium to its previous close and 2.6x anticipated revenues.

Most academics know SPSS for its eponymous statistics software that is the standard for psychologists and other social scientists. Its main rivals in this area are SAS Institute — used by high-end data miners — and StataCorp, the favorite of economists. On a personal note, I dumped SPSS in 1996 when they abandoned the Mac (causing me to establish the MacStats web page), switching to Stata which I found more intuitive and easier to use.

SPSS has been following SAS into the data analytics segment for business since that’s a much bigger market than selling scientists statistics software. Personally, I think SAS is a tough competitor since they created this market and with 2008 revenues of $2.2b, are 5x as big as SPSS. More importantly, the privately held Cary, NC company has an admirable corporate culture that Google once studied to understand how to motivate and empower technical professionals.

IBM has a mixed record on software. They have a very successful software arm, and so (unlike Intel spending $884m to buy WindRiver) they understand the creation and sale of software. On the other hand, IBM’s largest software acquisition, spending $3.5b in 1995 to buy Lotus Development (instead of Apple) that turned out to be a declining business.

SPSS will have formidable competitors. SAS has rejected acquisition feelers with CEO/founder Jim Goodnight growling that “IBM and SAP acquire because they're so stagnant they're unable to grow themselves.”

More seriously, SPSS has a major open source competitor that’s gaining favor here among Silicon Valley dataminers (including at Google). The R software package was begun in 1996 as an open source knock-off to S from Bell Labs, and with nearly 2000 donated extensions, has the most vibrant third party community of any data analytics package. The popularity of the R platform has exploded in the past 4 or 5 years, and certainly SPSS must be feeling the competition.

So is this another example of IBM (as with Lotus) buying a software business too late? Or (also as with Lotus) is the value of integrating and aggregating the SPSS solutions with its other software and services create a value for the SPSS software that would not be available to a stand-alone company?

Monday, July 27, 2009

Trusting choice over control

In demarking his disagreements with Paul Krugman over healthcare, economist Greg Mankiw gets to the heart of how differing assumptions lead to differing policy proscriptions:

Perhaps a lot of the disagreement over healthcare reform, and maybe other policy issues as well, stems from the fundamental question of what kind of institutions a person trusts. Some people are naturally skeptical of profit-seeking firms; others are naturally skeptical of government. …)

I tend to distrust power unchecked by competition. This makes me particularly suspicious of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. …

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government
This is almost exactly the same puzzle I have faced ever since I began this blog. Most of my readers (here at blogspot) are interested in innovation and live either in the Bay Area or Europe, two of the most socially liberal places in the developed world. Thus I know we’d disagree on some key political or policy issues.

The Bay Area entrepreneurs believe in meritocracy and want to create economic success in the free market.† When they get personally involved in solving societal problems, the result is more likely to be John Gage’s NetDay (where I gave time and money to my local schools) or the Omidyar Network funded by eBay billions than yet supporting another failed government program.

So why do these people who understand the value of competition and markets want to have a single monolithic government mandate through bureaucratic fiat for 15% of the economy? Is it because the regulation will hurt other firms and not their own? Is it because their hearts overrule their heads?

An omnipotent ruler would not make optimal decisions for the computer or software or wireless communications or even photovoltaic industries. The independent decentralized knowledge and creativity of many producers will always be better than any central planner at creating solutions, just as the independent decentralized knowledge of many consumers will be better at choosing solutions. So why would anyone think central planning would work any better for healthcare?

† OK, so you would have to ignore KPCB's efforts to increase government subsidies for its cleantech investments, the exception that proves the rule.

Saturday, July 25, 2009

My inept pension fund

LA Times graphic
CalPERS has done a terrible job the last two years managing the retirement savings of 1.6 members and retirees. In 2008-2009, the nation’s largest pension fund lost $56 billion (24.4%) of its principal, its worse one-year loss ever. K-12 teachers have a separate fund (CalSTRS) which has done equally badly.

As with any other retirement fund, the earnings from investments are supposed to pay for retirement benefits, in this case a defined benefit plan for most state, municipal and California State University employees. Bad investments means higher taxpayer (or employee) contributions for retirement plans or (less likely) lower benefits.

While the fund may be avoid repeating stupid mistakes in high-risk undeveloped land (like its $970 million loss on Newhall Ranch, near Magic Mountain in north LA County), apparently it thinks the way to fix this is to increase its mix of risky alternative investments. As the NYT reported:

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

A somewhat unorthodox choice for the job, Mr. Dear sounds a little like Captain Kirk surveying the Starship Enterprise when he explains why he leaped at the opportunity earlier this year: “Calpers is the flagship command of the public pension fund world.”

He was hired in large part for his management skills and political savvy — honed in Washington, where headed the Occupational Safety and Health Administration in the Clinton years. He does not have an M.B.A. or any other advanced degree in finance. Harvard, Yale or Wharton is not on his résumé. Instead, his lone degree, in political economy, is from Evergreen State College in Olympia, Wash.

Most recently, Mr. Dear headed the Washington State public pension fund, which gained a reputation as a daring investor under his oversight. It risked more of its portfolio — 25 percent — on private equity than any other public fund. The bet pushed the Washington State Investment Board, which now has $67 billion in assets, into the top 1 percent of its peer group in performance during the boom years, according to Wilshire Associates. But in the fiscal year that ended last month, the fund lost 27 percent of its value, or $18 billion.
If that criticism is too subtle, how about Joe Wiesenthal of Silicon Alley Insider:
This is not a new phenomenon. Defined-benefit pension funds, wracked with losses after 2008, know that they only way they'll have enough money to pay out retirees is if they make some big, risky bets that hit.

And so it is with the grand dame, California's CALPERS, which lost $60 billion this past year.

Wow, a guy with little investment training thinks the cure is hedge funds, private equity, California real estate and timber. What could go wrong all of that? If there's anything redeeming, it's that at least there's an acknowledgment that these risks are in fact big risks, whereas two years ago, pension funds, like CALPERS, had deluded themselves into thinking that weren't highly exposed to risk, but that their various alternative-investment holdings constituted "diversification."

And it's great news for those hedge and PE funds, which otherwise might have a hard time raising money, were it not for all the pension funds that just have to get their numbers up -- or else. (Well, or else they'd have to get bailed out by the taxpayers).
His colleague Moe Tkacik is not so kind:
It is not hard to see why public pension funds like CALPERS -- and CALPERS has traditionally been one of the worst offenders -- are fertile ground for kickbacks and corruption: they put incomprehensibly vast sums under the management of political appointees who earn a yearly salary that would barely cover the dermatologist bills of the Wall Street advisers they have to talk to all day.

In the past, strict investment guidelines limited the potential for graft in this business, but at some point in the nineties "alternative" investments came into vogue, benchmarks and regulations and disclosure gave way, and by the turn of the millennium millions of teachers, firefighters, bus drivers and cops had earned the dubious achievement of playing the "greatest fool" in every major American asset bubble.

That the lifestyles of political hacks and the profit margins of funds-of-funds-of-funds and investment banks would be subsidized by the retirement savings of what remains of the nation's middle class came to be such an accepted reality that a Bear Stearns managing director openly bragged in 2007 about how public pension funds had become go-to dumping grounds for the unrated "equity tranches" of their crappiest synthetic subprime CDO-squareds.
I like to tell job applicants for SJSU faculty positions: “we have high teaching loads and high cost of living, but we make up for it with a low salary.” (I really do say that — it’s better to diffuse the issue up front and scare off those who are trying to find top dollar.)

The two bright spots of the compensation package were the defined benefit pension and retirement medical. Clearly I should have treated that as a political promise, rather than a contractual commitment.

To this we add an even lower salary — involuntary furloughs (a 9.5% pay cut without workload reduction) — in parallel to our our University of California brethren. While both the CSU and UC have management problems, in this case the proximate cause is a 20% funding cut from the politicians who are mismanaging our banana republic.

Friday, July 24, 2009

Smart, but not that smart

Continuing in the use of outsourced economic criticism as a cost-cutting measure in these difficult times.

Quoting libertarian commentator and ABC reporter John Stossel:

July 22, 2009
By John Stossel

It's crazy for a group of mere mortals to try to design 15 percent of the U.S. economy. It's even crazier to do it by August.

Yet that is what some members of Congress presume to do. They intend, as the New York Times puts it, "to reinvent the nation's health care system".

Let that sink in. A handful of people who probably never even ran a small business actually think they can reinvent the health care system.

Politicians and bureaucrats clearly have no idea how complicated markets are. Every day people make countless tradeoffs, in all areas of life, based on subjective value judgments and personal information as they delicately balance their interests, needs and wants. Who is in a better position than they to tailor those choices to best serve their purposes? Yet the politicians believe they can plan the medical market the way you plan a birthday party.

When I argued last week that medical insurance makes people indifferent to costs, I got comments like: "I guess the 47 million people who don't have health care should just die, right, John?" "You will always be a shill for corporate America."

Like the politicians, most people are oblivious to F.A. Hayek's insight that the critical information needed to run an economy -- or even 15 percent of one -- doesn't exist in any one place where it is accessible to central planners. Instead, it is scattered piecemeal among millions of people. All those people put together are far wiser and better informed than Congress could ever be. Only markets -- private property, free exchange and the price system -- can put this knowledge at the disposal of entrepreneurs and consumers, ensuring the system will serve the people and not just the political class.

This is no less true for medical care than for food, clothing and shelter. It is profit-seeking entrepreneurship that gave us birth control pills, robot limbs, Lasik surgery and so many other good things that make our lives longer and more pain free.

To the extent the politicians ignore this, they are the enemy of our well-being. The belief that they can take care of us is rank superstition.

Thursday, July 23, 2009

High margins, high entry barriers

Microsoft reported earnings on Thursday. Its gross margin was 80.3% (i.e. the cost of goods sold was 19.7%), down from 81.9% a year earlier. (Actual revenues were down 17.3%). Revenue from desktop OS licenses were down 29%, due both to cheaper netbooks and deferral of purchases awaiting Windows 7.

On the same day, the Federal government revealed the margins of one Levy Izhak Rosenbaum as it unsealed a sweeping indictment (and conducted arrests) of more than 40 corrupt New Jersey politicians and other community members. Mr. Rosenbaum is accused of buying kidneys for $10,000 and selling them for $160,000. His cost of sales were not revealed, but that implies a gross margin of 93.7%.

High margins are usually an indication of high barriers to entry or imitation: in this case, the government forbids a market in kidneys so there is a black market with high risk and high margins. Writing in the Atlantic two weeks ago, columnist Virginia Postrel notes that — absent markets or any other incentives, there is a huge imbalance of supply and demand for kidney donations. Or, as Harvard economist Greg Makiw summarizes the article:

What market has 80,000 potential consumers each demanding one unit, 300,000,000 potential producers each capable of supplying one unit, and a shortage nonetheless?
There’s no question that stimulating and allocating a supply of kidneys could be done more effectively. Today 11 patients die every day waiting for the donor kidney that never arrives, and all of the 80,000 are undergoing some form of dialysis that many patients view as only slightly better than death.

Postrel talks about donor chains as one short-term solution within the limits of the current rules that forbid kidney sales. In the meantime, she has done her part to solve the problem by donating one of her own kidneys to someone who otherwise had little hope for a donation.

Monday, July 20, 2009

40 years ago today...

I was sitting in the dining hall at Bob Mathias Sierra Camp. (Bob Mathias was like Bruce Jenner, except younger, less blond, and pre-television). All us boys (I think the girls had a separate camp) were looking at a small TV with barely visible pictures of Neil Armstrong and Buzz Aldrin making history.

EE Times, Popular Mechanics, National Geographic and of course NASA have websites marking the anniversary. Popular Science claims 10 things that I didn’t know about the landing (actually, only 8 were new to me.) A new book, Voices from the Moon, collects interviews from all 12 men who walked on the moon.

In his book Timeline, the late physician and novelist Michael Crichton wrote that 19th century scientist would be amazed “that humankind [sic] would travel to the moon, and then lose interest.” Columnist Charles Krauthammer cites Crichton favorably in lamenting the loss of political will since the last human being left the moon [on December 14, 1972.]

The reasons to return, Krauthammer (and I) would argue, are about the human spirit, not finding more velcro or Tang®:

Why do it? It's not for practicality. We didn't go to the moon to spin off cooling suits and freeze-dried fruit. Any technological return is a bonus, not a reason. We go for the wonder and glory of it. Or, to put it less grandly, for its immense possibilities. We choose to do such things, said JFK, "not because they are easy, but because they are hard." And when you do such magnificently hard things -- send sailing a Ferdinand Magellan or a Neil Armstrong -- you open new human possibility in ways utterly unpredictable.

We are now deep into that hyper-terrestrial phase, the age of iPod and Facebook, of social networking and eco-consciousness.

But look up from your BlackBerry one night. That is the moon. On it are exactly 12 sets of human footprints -- untouched, unchanged, abandoned. For the first time in history, the moon is not just a mystery and a muse, but a nightly rebuke. A vigorous young president once summoned us to this new frontier, calling the voyage "the most hazardous and dangerous and greatest adventure on which man has ever embarked." And so we did it. We came. We saw. Then we retreated.

Friday, July 17, 2009

Renting vs. owning information

Blogger Lauren Weinstein notes that Amazon has been deleting e-books off of Kindle owners

In a turn of events so ironic that even the seediest Hollywood porn producer would have rejected the plot as ridiculously unrealistic, has demonstrated that the worlds of electronic vs. paper books are universes apart, and in one fell swoop magnified the worst fears of e-book detractors around the world.

The script sounds so ridiculous that it's almost embarrassing to recount. To retroactively satisfy a demand from one of their suppliers, Amazon reportedly reached electronically into privately-owned Kindle electronic book readers and deleted recently purchased copies of -- get this -- 1984 and Animal Farm by George Orwell.

The irony drips so thickly that it practically coagulates on spinning disk drives. Just as 1984's Winston Smith's role was to delete and change unacceptable points of history from information databases, Amazon -- without any warning and without asking for permission from Kindle owners -- destroyed e-books that had been legally purchased, replacing them with a purchase credit.
This is one good reason why most of my audio is RIP'd CDs and not downloadable music tracks. (My daughter undoubtedly will be different). It also goes to the heart of a major worry of university faculty, since we now rent annual access to journals (with next year's rental price unspecified) rather than buying and holding paper copies.

As an epilog to the story, unlike with Big Brother, the protest against Amazon has caused Amazon to change its policy. Perhaps if there’s enough of an uproar, Big Bad Amazon will allow iPhone users to get a copy of Delicious Library rather than block all access to its APIs by mobile devices; if ever there was a product meant to be on a mobile device, this is it.

H/T: Doug Klein

Nokia needs some open innovation

Nokia’s stock price was punished after releasing glum financial news Thursday. As I write this Friday morning, the stock is off 16% from its Wednesday close. While some say buy on bad news, Tiernan Ray of Barron’s says “Easy Call on Nokia: Sell”. (I think that would be more prescient if it had been published on Wednesday morning, or last week).

Ray is not alone in the chorus of naysayers. Parmy Olson of Forbes calls Nokia the next Motorola — long-dominant now unable to respond to new rivals and even the FT is painting a glum picture. The Times of London seemed inclined to take Nokia’s upbeat interpretation at face value.

Nokia has long gotten no respect in the US from analysts, journalists and many industry members due to their geographically skewed footprints. (Nokia is hoping to solve this with increased US distribution.) Nokia and Apple have long seemed mirror images across the pond, with Europeans being unable to understand Apple’s strength (or Research in Motion’s) because they and their friends don’t use the products, just like American’s didn’t understand Nokia’s. But if European commentators are glum on Nokia, then that’s bad news.

The most interesting of the three FT articles was the one the editors buried, “Nokia to accelerate mobile services push,” which notes that Nokia has spent heavily to create its own maps, music and email services that are not producing financial returns.

I think the Motorola analogy is an apt one. Nokia is like Samsung and LG, a hardware company that makes new devices with lots of features. On a good day, it’s a devices company that makes stand-alone devices that people want to use, rather than (as with so many high-end phones) just lumps of plastic with abominable software.

However, Nokia is not yet a mobile systems company, the way that Apple and RIM are, and that Google seems likely to become. Some of this may relate to its software and services skills, or operator resistance in Europe to its clout, or many other factors.

But my sense is that the Motorola analogy is quite apt. Motorola invented the hand-held cellphone market and dominated the US for more than 15 years; it assumed it would be the leader because it always had, and now it’s in freefall.

The paradigm for mobile devices has shifted — with iPhone, BlackBerry and the dozens of gPhone models soon coming — and so far Nokia has not been able to make the shift. In particular, despite its redeployment of Symbian as an open source platform (to compete with Android), Nokia seems to think it can control all the shots. It’s the 1-tonne gorilla in Finland (and at least 300 kilo in the EU), and it’s gotten used to end-to-end control and people buying it anyway.

I think it’s long past time for Nokia to admit it can’t control everything; Google and Microsoft have admitted it, and they are certainly dominant companies in their own right. Nokia needs to use more open innovation — cooperating with outside suppliers of technology rather than trying to buy them and control them. And it needs to build partnerships — as it tried to back in 1998 when it co-founded Symbian.

Google provides a good example. Even though everyone knows Google is calling the shots, Android is nominally governed by the Open Handset Alliance, which defines aspects of the whole platform (such as the Android Market), not just the software. If Nokia wants to avoid becoming the next Motorola, it needs to cooperate on things like app stores and music portals to create a pan-industry standard to compete with Android, the iPhone and their ilk. It’s no substitute for being a nimble, capable software savvy systems integrator, but it’s the best play for the hand they’re now holding.

What's up with that?

There’s an American Express and Microsoft pitchman who apparently used to have a comedy show that, he bragged, was a “show about nothing.” Somehow he managed to create 9 seasons of DVDs out of nothing and a decade later is still milking that celebrity for $85 million/year.

I never watched the show, except occasional snippets in reruns or when trapped on an airplane. However, I recall that one of the favorite phrases of the protagonist (I’ll call him “Jer”) was “what’s up with that?” Apparently that made it into our shared cultural understanding, even if not to the same degree as “yada yada.” More on Jer in a minute.

I’m guessing that some readers have heard that another celebrity (The Gloved One) died earlier this month and had a blowout funeral. Probably fewer people recall that in 1985 he paid $47.5 million to buy the copyrights to all the Beatles songs, which is either the sort of one-of-a-kind collectible only rich people an afford or a high-profile way to convert cash into an income stream. (Evidence of the latter is that one estimate says the investment is now worth billions.) John Lennon doesn’t care anymore, but apparently Paul McCartney still performs these songs now and again.

What’s odd is apparently is that Jackson didn’t really buy all rights — because Congress retroactively created a loophole. For anyone interested in IP law, I recommend the posting by Hollywood blogger Chris Arledge. One excerpt:

People not familiar with copyright law might be surprised to hear that McCartney-one-half of music’s most-successful songwriting duo-must pay royalties to perform his own hit songs. The fact certainly seemed to grate on McCartney, who frequently made mention of it in interviews. But even more surprising, at least to those not acquainted with the intricacies of copyright law, is that Sir Paul will one day be able to re-acquire the rights to his music without even having to pay to buy them back.

This is true because of the Copyright Act’s reversion provisions, which allow the original author of a copyrighted work to reclaim the work many years after assigning it away. It is this same right to reclaim lost copyrights that will soon make millionaires of the heirs of Joe Shuster and Jerry Siegel, Superman’s creators, when they conclude their pending lawsuit against Warner Brothers.
(For younger blog readers, Superman is a fictional character who co-starred with Jer in those American Express ads.)

Intellectual property law exists for two reasons: to create incentives for creators, and (like all legal rights) provide a stable institutional framework for creators and users, buyers and sellers, competitors and complementors. Some of the trade-offs make sense: long IP term=more incentives, short IP term=more derivative works. If you want one outcome, then you put your thumb on that side of the scale.

However, indeterminacy of term makes for an uncertain property right. One example is the 1998 Mickey Mouse Copryight Extension Act — there is no economic rationale for lengthening the term ex post facto since it provides no incentive for something that was long since created. Meanwhile, the indeterminate term of sale provided by copyright reversion means that the buyer of the property right doesn’t know what it is buying, leaving the actual rights granted subject to the whims of the seller (or perhaps the courts).

When I mentioned this article to a legal blogger, her observation was that “Termination rights are an aspect of copyright law many people find strange.” I guess “strange” is the polite way a law school professor says “makes no sense whatsoever.”

I prefer to quote Jer the stand-up pitchman: “What’s up with that?”

Thursday, July 16, 2009

Symbian App Warehouse is now Symbian Horizon

In May, Symbian talked about plans to put together a wholesale app store for all its phones and operators. At the time, I suggested that the most descriptive name would be to call it “Symbian App Warehouse” but today it was announced as Symbian Horizon.

Perhaps for Brits the confusion with retailer Carphone Warehouse® (division of Best Buy) is too great, or perhaps it’s part of the forced silliness of Symbian Foundation as part of its efforts to act anti-corporate. Or perhaps they want a unique name (Horizon) and App Store (iPhone), App World (BlackBerry), Market (Android) and Marketplace (Windows Mobile) were already taken.

They’re still promising to do it free (rather than charge a nominal fee), which raises serious questions about how well a non-profit foundation can afford to scale up the evaluation and publishing process.

One way they can keep costs down is to not publish everything submitted. Rather than try to match Apple’s record of 65,000 apps in one year, Symbian sounds like it will be more selective.

Horizon is a publisher program similar to a book publisher or record label. Developers can submit their app or even an idea for an app that they will build. Symbian will select the best apps and help take them to market. We will sign the app, publish it to the App Stores and manage the transactions, all at no cost to the developers. It is a ‘code once, publish to many’ syndication service.
This approach will require more screening and will be subject to complaints about fairness, but (unlike the current Apple organization) the best apps won’t be lost in the clutter.

The devil is in the details, I think it’s a clever idea. Symbian Horizon will provide a common platform for developers (as Apple and Google and others do) while not trying to compete with or bypass the operator and handset maker stores. (Control is a big deal to Nokia, Vodafone, Orange and several other firms).

Reasonable vs. unreasonable intellectual opponents

I’ve previously written about Paul Krugman, the political pundit and NYT columnist who shares the same name (and AFAIK body) with an MIT-trained economist who won the “Nobel” prize in economics. Somewhere in the 1990s there was a “body snatchers” type moment and the old (Prize-worthy) Paul got replaced with the new one. Generally fans of the old one don’t have much respect for the new one.

Unfortunately for new Paul, like an incautious politician or Supreme Court nominee (i.e. David Souter), the views of the old Paul are preserved for posterity. As Bryan Caplan of EconLog writes:

The Krugman we've got is sold on the House health bill. But the Krugman we had, the thoughtful economist who wrote The Accidental Theorist, would have responded differently. Krugman Past, unlike Krugman Present, would have pointed out that when the unemployment rate is 9.7%, it's a bad idea to legislate an 8% payroll increase on businesses that fail to offer health insurance. Employers are reluctant to hire workers at today's wages; how are they going to feel once the marginal worker gets 8% pricier?
Serious economists do have differences of opinion, such as about value judgements over equal outcomes vs. equal opportunity. However, they tend to agree (as do physicists or chemists or materials scientists) about the basic precepts of their discipline, things the like increasing the price of something (in this case labor) will reduce the demand.

I’ve experienced this first-hand in my own life as a pro-entrepreneurship, anti-collectivist social scientist studying open source (actually “free, libre and open source software” or F/LOSS) where a majority of the researchers are promoting the cause. It is possible to have different values but agree on the facts.

This week I traded e-mails with a PhD student in the F/LOSS (as opposed to OSS) camp who nonetheless believes that F/LOSS software is usually imitative and (coming late) rarely better than proprietary software: it doesn’t matter to him, because unlike the proprietary software it is “free” (as in speech). Similarly, I have agreed with many activists (and even OSS execs) about certain companies whose open source strategy isn’t really open (in a governance sense) but merely a marketing gimmick akin to demoware or teaseware.

Usually with the reasonable people we can agree everything has its place: proprietary companies and open source companies (or communities) should produce their respective technologies and leave it up to adopters to decide what’s best for their needs. Certainly, if a farmer’s co-op or a rich socialist or a university wants to make something and give it away, then it’s up to the firm selling something for big bucks to show theirs is worth a premium — just as Apple has to show that an iPod or a MacBook is worth a premium over their commodity rivals. And if you can’t beat them, then you pull a Microsoft and give away something (e.g. a mini-Office suite) to compete with your free alternative while selling something for those who want more. (We call that freemium).

Such a pluralism of ideas works much better in free markets (where the markets decide) than government policy, where we have to pick one answer a priori. As in the Caplan example of healthcare, we know that taxing businesses to pay for healthcare will increase business costs and taxing affluent people will reduce investment capital and the incentives to work. What’s in dispute (as with any prediction) are how big these side-effects are, whether they are worth the cost, and whether there’s a more efficient way to achieve a similar outcome.

Alas, in economics (unlike experimental nuclear physics or recombinant DNA) there are enough confounds that the experts will argue over the data for decades, as (some) argue about the impact of minimum wage increases upon unemployment. Unfortunately, national policy choices are hard to reverse, even if they do prove to be flawed (Google “social security Ponzi scheme”).

Wednesday, July 15, 2009

Marginal tax rates exceeding 50%

The House is proposing to fund national health care with a “millionaire” surtax: a tax of 1-2% on those making $350K or more, rising to 5.4% for those making more than $1 million. Some estimate that the tax surcharge will not be enough to pay the projected $100 billion/year cost (which might not allow for a) higher costs than predicted b) people changing behaviors to avoid taxes).

However, assuming the surtax goes through, the Tax Foundation (via Greg Mankiw) calculates that the top marginal tax rate will exceed 55% in eight states — three (Oregon, Hawaii, NJ) at 57+%, three (NY, Calif, RI) at 56+%, and two (Vt., Md.) at 55+%. A full 39 states would be above 50%. The calculations do not take into account proposals to eliminate the FICA cap, currently at $102,000. If this were eliminated, individuals would pay another 7.65%, pushing California up above 64%. (If employers reduced salaries/bonuses to reflect their additional 7.65% share of FICA, it would raise effective marginal rates to 67%).

The Tax Foundation refers to an NBER research paper arguing that even under the current system there’s a strong disincentive for additional work. There’s at least anecdotal evidence that rates above 50% increase the psychological perception that additional work is not a good idea.

Anecdote #1 is “The Taxman” by George Harrison, written when he found out how much a Beatle must pay in taxes:

Let me tell you how it will be,
There’s one for you, nineteen for me,
‘Cos I’m the Taxman,
Yeah, I’m the Taxman.
Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cos I’m the Taxman,
Yeah yeah, I’m the Taxman.

(If you drive a car car), I’ll tax the street,
(If you try to sit sit), I’ll tax your seat,
(If you get too cold cold), I’ll tax the heat,
(If you take a walk walk), I’ll tax your feet.
To be fair, under new policies we’re looking at 1:2 and not 1:19.

I’m curious what this will do to the value of high-end real estate. One of the things that people do when they become more affluent is buy a bigger house, but if “millionaires” are all losing another 5% (or 13%) of their income, will it cause them to spend less on housing, reducing demand and prices? It would probably matter more in suburban NY (where the compensation is bonuses) than here in Silicon Valley (where it’s incentive stock options, currently treated as capital gains).

Real transparency

Columnist Jeff Jacoby presents Exhibit 1,000,001 as to why our political caste is dysfunctional and doesn’t seem to care.

Steny Hoyer, a Maryland Democrat, is the majority leader in the House of Representatives. At a news conference last week, he was talking about the healthcare overhaul being drafted on Capitol Hill, and a reporter asked whether he would support a pledge committing members of Congress to read the bill before voting on it, and to make the full text of the legislation available to the public online for 72 hours before the vote takes place.

That, reported CNSNews, gave Hoyer the giggles: The majority leader “found the idea of the pledge humorous, laughing as he responded to the question. ‘I’m laughing because . . . I don’t know how long this bill is going to be, but it’s going to be a very long bill,’ he said.’’

Then came one of those classic Washington gaffes that Michael Kinsley famously defined as “when a politician tells the truth.’’ Hoyer conceded that if lawmakers had to carefully study the bill ahead of time, they would never vote for it. “If every member pledged to not vote for it if they hadn’t read it in its entirety, I think we would have very few votes,’’ he said. The majority leader was declaring, in other words, that it is more important for Congress to pass the bill than to understand it.

“Transparency’’ is a popular buzzword in good-government circles, and politicians are forever promising to transact the people’s business in the sunshine. But as Hoyer’s mirth suggests, when it comes to lawmaking, transparency is a joke. Congress frequently votes on huge and complex bills that few if any members of the House or Senate has read through. They couldn’t read them even if they wanted to, since it is not unusual for legislation to be put to a vote just hours after the text is made available to lawmakers.
Jacobs notes that while 2009 is perhaps a high water mark for ramming through unread legislation with stimulus and cap-and-trade, Republicans pushed through the Patriot Act in just 3 days in 2001.

He lists a number of fixes from liberals, conservatives and libertarians — all of them well-intentioned, and none of them likely. Politicians don’t agree to rules that limit their prerogative — they seek office for years or decades to have the power to tell others what to do, and refuse give up the power once they have it. (Exhibit A: GOP 1994 promises for voluntary term limits. Exhibit B: Democrat 2006 promises to curtail earmarks.)

Tuesday, July 14, 2009

Praising Obama and his call for economic freedom

The WSJ editorial board is known for its strong defense of economic freedom — and, in that capacity, have been (along with Forbes and Investor’s Business Daily) the strongest critics of the new administration’s spending, regulation and government intervention policies.

Thus, the column “Obama Gets It Right on Africa” this morning by editorial board member Bret Stephens immediately caught my eye. The subtitle was “We'd be glad if the government only skimmed 20%.”

Stephens notes Obama’s first-hand encounter with corruption in Africa in Dreams from My Father, specifically the government-owned monopoly that controls coffee exports in Kenyan. Stephens quotes a farmer’s lament (page 352 according to Google books):

"'The Kenyan Coffee Union. They are thieves. They regulate what we can plant and when we can plant it. I can only sell my coffee to them, and they sell it overseas. They say to us that prices are dropping, but I know they still get one hundred times what they pay to me. The rest goes where?' Francis shook his head with disgust. 'It's a terrible thing when the government steals from its own people.'"
Another Google book on the Kenyan one-party state (by Jennifer Widner of Princeton) notes that in the 1980s, the government either eliminated or marginalized the two organizations that once represented farmers’ interests, to minimize the political voice and economic returns that the coffee growers gain from their efforts.

Stephens guesses that this encounter was on the president’s mind during his speech Saturday in Ghana, which Stephens calls “by far the best of his presidency.” As Stephens writes:
Here's some of what Mr. Obama said: "No business wants to invest in a place where the government skims 20% off the top." "The purpose of foreign assistance must be creating the conditions where it's no longer needed." "The West is not responsible for the destruction of the Zimbabwean economy over the last decade, or wars in which children are enlisted as combatants." "We must support strong and sustainable democratic governments." "America can also do more to promote trade and investment." "We have a responsibility to support those who act responsibly and to isolate those who don't, and that is exactly what America will do." "History shows that countries thrive when they . . . create space for small and medium-sized businesses that create jobs."

All this is not only true, it's groundbreaking. Since British Prime Minister Harold Macmillan gave his "Wind of Change" speech (also in Ghana) nearly 50 years ago, Western policy toward Africa has been a matter of throwing money at a guilty conscience (or a client of convenience), no questions asked. The result, as Mr. Obama pointed out, was that countries such as Kenya, which had a larger GDP than South Korea in 1961, "have been badly outpaced."

Maybe it took a president unburdened by that kind of guilt to junk the policy. Or maybe it simply took a conversation with some of the Francises of Africa -- the politically invisible middle classes held down by their own kleptocratic rulers. Whatever the case, Africa will be well served if Mr. Obama can make good on his rhetoric.
(Stephens laments the disconnect between Obama’s desire for government transparency in Africa though not in the US — which may be true, but distracts from the importance of the main topic: achieving economic development for the 800 million residents of sub-Saharan Africa.)

Economist William Easterly of NYU also praised elements of the speech, specifically the recognition that Western aid to African governments has failed (and will always fail) to pull the Africans up from their poverty. Like Easterly, Chris Blattman of Yale felt parts of it soft-pedalled the needs for change.
Also, though I share some of Easterly's fears on foreign aid gone military, I generally feel like peacekeeping does more good than harm. I've just come back from Liberia, and a well-financed, well-timed UN mission is a thing of wonder.

But not all conflict is ended at the barrel of a gun. Where Bush was supremely successful was pushing African leaders to end war. In Liberia, South Sudan, Uganda, Cote d'Ivoire, Sierra Leone (the list goes on) leaders got a simple message: stop the fighting, now. Most often, the threat wasn't one of force, it was an economic and diplomatic one. I would like to think Obama will keep this up, but he didn't say so in his speech. Rather, he pointed to the barrels of America's guns.
As recently demonstrated in Central America, even the best political institutions are often fragile, and thus ending revolution and war can be an ongoing struggle.

Of course, not everyone loved the speech, particularly those activists wedded to blaming the former imperialists for Africa’s problems decades later. Thus it was encouraging to see an interview with the President of Liberia acknowledge the need of African countries to solve their own problems
BBC: Basically, President Sirleaf, if I could summarize, Barrack Obama was saying to you, the leaders of Africa, that you need to step up your game, will you rise up to the challenge

[President President Ellen Johnson] Sirleaf: Yes, I think that’s exactly what he was saying, and I think that each African leader myself included, will be charged to rise to the challenge, of promoting good governance, and that means vibrant civil society as he said, that’s freedom of the press, accountability, transparency, honesty, fighting corruption, the rule of law… and so yes I think each African Country will determine the policies and measures they use to meet the challenges, but I think those challenges are being met in many Countries already, and more, I think ,will be able to do so, because that’s the only way that we will also meet the call for an inter-dependent world. That’s what he talked about…

BBC: I’m listening to President Obama there, if I may interrupt you there, this speech makes it clear that for him, democracy and good governances is not just about holding elections, it’s about leaders not enriching themselves, getting rid of bribery and corruption, can you do that?

Sirleaf: we must do that! Each of our Country has to face this in different measures, Liberia is facing it, it’s been entrenched, systemic for a while, we are taking measures to do that, we must! because if we don’t then we will not be able to get the transformation that we all seek, and so in that respect you are absolutely correct.
I think everyone in the West should be rooting for the success of democratic Africa and its implications for freedom in the world. The economic success of Singapore allowed some to claim that the path to economic growth only required a benevolent dictator to do the right thing — Africa, like Latin America, has had generations of dictators, few of them benevolent.

India is attempting a messy and sometimes difficult path to demonstrate that economic development can come through free markets, democracy, transparency and accountability. Let us hope that at least some countries in Africa (Kenya, Ghana, Liberia) can emulate that path in the short run, offering hope to the rest of the continent (as Chile does in South America) by demonstrating a path out of poverty and tyranny.

This issue is salient to me on a number of levels, in a way that wasn’t true a year ago. Last November I had the honor of visiting Chile to speak about open innovation. Before going, and while there, I learned a little about its difficult but unique path towards economic freedom (far ahead of anywhere else in Latin America or Africa ).

More recently, a few weeks ago the eldest son of my wife’s best friend (Aaron) graduated from Stanford and began a new job in Rwanda. His company, funded by private investors from Little Rock, is attempting to fuel economic development through trade, beginning with its purchase Saturday of a defunct coffee warehouse in Kigali.

It is only the latest effort by Little Rock investors to help Rwanda. As Aaron explains it, the private investment efforts from Arkansas are a direct result of friendship ties developed by an American-educated John Rucyahana, a Rwandan Anglican bishop who came to Little Rock in 1998 to sponsor a new Anglican parish there that later became the Anglican Mission in the Americas.

Microsoft cannibalizing itself

Microsoft Office is a cash cow that provides $15+ billion in revenue to the company. Thus far it‘s been more immune to open source competition than, say, Microsoft server and mobile phone operating systems, which compete with Linux and Android (and LiMo and Symbian) respectively.

Thus, Microsoft’s willingness to cannibalize its Office licensing business (as reiterated Monday) with a web-based subset of Office 2010 shows that it takes the challenge of Google Docs seriously. Sure, it’s doing this years after Google created its online offering. Sure, there may be limits as to how much the online Office can do. I’ll agree this is a measured experiment, not blowing up the existing revenue model.

But my estimate is that the actual impact of Google Docs on Office sales right now are probably barely measurable. Microsoft is responding not to a decline in its core business, but what it correctly recognizes is an incipient threat down the road — a Clay Christensen-style disruptive innovation. (Would that DEC, IBM, Sun, Apple and other big proprietary companies were able to do this when they faced similar threats in the past 20 years).

Perhaps this is another sign of the new and improved Microsoft. Perhaps not a kindler or gentler Microsoft, but one that expects to fight for revenue and customers rather than to have a perpetual annuity from customers too lazy, stupid or handcuffed to ever switch. In a perverse way, the mistakes of Windows Vista may have saved the company.

Monday, July 13, 2009

Everyone needs to learn accountability

“Moderate” NYT columnist David Brooks apparently wrote a column last week criticizing capitalism. Since I put little store in what Brooks (or any other NYT op-ed columnist) says, I hadn’t noticed.

However, in responding to the Brooks column, economist, Hoover Fellow and EconLog blogger David Henderson shared his own personal story about his first job at age 16. He quickly learned that a job was not a right, but a privilege, and if he didn’t perform he wouldn’t have a job. I guess because he assumes his audience is economically literate, Henderson doesn’t circle back to make the larger point.

Central planning has been shown to be an abject failure — no one person is so smart or knowledgeable (even with computers) to be able to make all the right decisions for everyone, whether in a city, a state, a country or an economy. The only alternative is decentralized authority and initiative, with the proper incentives and feedback mechanisms. (Cure cancer=make piles of money; cheat customers=go to jail.)

The one thing that’s often missing (as elsewhere in society) is accountability. Young David H. learned accountability from his restaurant supervisor, but not all workers do. The entire system fails if good workers (CEOs, middle managers or grunts) are not rewarded or bad workers are not punished, whether due to laziness, indifference, or a desire to be surrounded by sycophants.

What applies to individuals also applies to companies. If you make something good, people buy it; if it’s drek, they won’t. The worst thing that happened to the American auto companies is that people continued to buy their (mostly) lousy cars during the 1980s and 1990s out of loyalty or due to superior distribution, postponing and magnifying the inevitable day of reckoning. (The companies also cleverly created new product categories like minivans and SUVs which gave them temporary monopolies until the Japanese learned to make them better.)

When I study the best tech startups, they succeed as ruthless meritocracies fighting for survival, where good ideas and people win out. As they get older, they get more comfortable, more political, more bureaucratic. Eventually, they become indistinguishable from an American car or steel company — that is to say, like RCA, Zenith or (soon) Motorola, once-great electronics companies that drifted into irrelevance and oblivion.

Some of it is the loss of the founder and his (or her) ruthless vision and demand for accountability, such as HP after Dave Packard retired. Apple was this way between the Jobs I and Jobs II eras, and could easily revert when Jobs leaves for good. Google and Qualcomm are heading in this direction, and Intel (despite its paranoia) seems to have lost the battle.

Oddly, the verdict seems still out on Microsoft. The past two decades were more about pugnaciousness — fighting all comers — and milking monopoly rents rather than driving innovation. But a few recent signs (such as Windows 7) suggests that the company is coming back. Perhaps it realizes that it won’t be able print money forever, and (like the post-Gerstner IBM) will have to learn to succeed in the marketplace by providing things that people actually want.

In February, Microsoft CEO Steve Ballmer observed that each generation has to re-learn the need for prudence in saving and spending. Blogger Mike Shedlock applied this to the dissipation of entrepreneurial family fortunes across three generations — until the 3rd (or 4th) generation had to learn how to make a living the way their (great-)grandparents did, by earning it.

Sunday, July 12, 2009

República bananera de California

This last month has among the most embarrassing for the dysfunctional joke that is California state government. The state is issuing IOUs to pay its bills (which banks accepted for 10 days before they gave up), the state has missed its budget deadline for the 23rd consecutive year, the state credit rating is approaching junk bond status, and unemployment has reached 11.5%. After years of papering over and deferring a solution to long-term budget woes, apparently politicians are stalling hoping that President Obama bails out the state rather than lose its electoral votes in 2012.

The government needs employers and employees to pay taxes that keep government running, but instead the problems of the dysfunctional political system are bubbling over to do further damage to the real economy. The state’s budget problems are also damaging the system of higher education that contributions to local innovation and once (decades ago) the envy of other states.

In fact, beyond chronic deficit spending (papered over by accounting tricks and borrowing) the state is resembling a banana republic. Urban economist Joel Kotin wrote last week:

The state that once boasted the seventh-largest gross domestic product in the world is looking less like a celebrated global innovator and more like a fiscal basket case along the lines of Argentina or Latvia.
The problem is that state spending — ratcheted up during good times — is out of control. The governator is hoping to solve the long-term problem once and for all. As he told the Financial Times from his (“Bedouin-style”) smoke-filled tent:
"If you can't get them to cut down the costs of government when the state is facing such a financial crisis then it's never going to happen," he says. "If we don't make these changes [the deficit] will keep increasing."
Even the reliably liberal Mercury News agrees:
Gov. Arnold Schwarzenegger is demanding changes to retirement benefits in any deal to resolve a $26 billion deficit. And insist he should.

The unfortunate truth is that the Democrat-controlled Legislature has been too quick to increase pension benefits and will resist reconsidering them unless it's forced to. Now is the time to do that.

Schwarzenegger wants to repeal a huge mistake of Gov. Gray Davis's administration. It happened in a flash in 1999, when, with but a minute's debate, the Legislature greatly expanded pension benefits based on the promise by CalPERS, the state's pension manager, that it wouldn't cost taxpayers a dime.

Now, because of stock market declines and rising costs of health care, retirement costs are already siphoning $3.3 billion from the state budget, just when California is facing substantial cuts in education and services to the poor. That cost is expected to rise steeply.

County and city officials should be cheering on Schwarzenegger. The Davis era escalations in benefits, like retiring at 50 with 90 percent of pay, have had a domino effect, leading police and firefighters to demand and get the same terms. Now cities and counties also are looking at huge budget deficits inflated by millions in pension and retiree health costs. If the state rolls back unaffordable benefits, local government will have more leverage to negotiate with police and fire unions.

Schwarzenegger blew a chance for pension reform in 2005, when voters rejected a poorly drafted initiative. This will be his last chance. He must not waver.
Despite his recent efforts, the governor’s record is mixed. Kotkin — as unsentimental and presicent an analyst as any in the state — lists five major causes of “who killed California’s economy”:
1. Arnold Schwarzenegger

The Terminator came to power with the support of much of the middle class and business community. But since taking office, he's resembled not the single-minded character for which he's famous but rather someone with multiple personalities.

First, he played the governator, a tough guy ready to blow up the dysfunctional structure of government. … Next Arnold quickly discovered his feminine side, becoming a kinder, ultra-green terminator. … With the state reeling, Arnold has decided, once again, to try out a new part. Now he's posturing as the strong man who stands up to dominant liberal interests. But few on the left, few on the right or few in the middle take him seriously anymore. He may still earn acclaim from Manhattan media offices or Barack Obama's EPA, but in his home state he looks more an over-sized lame duck, quacking meaninglessly for the cameras.

2. The Public Sector

Who needs an economy when you have fat pensions and almost unlimited political power? That's the mentality of California's 356,000 workers and their unions, who make up the best-organized, best-funded and most powerful interest group in the state.

State government continued to expand in size even when anyone with a room-temperature IQ knew California was headed for a massive financial meltdown. … Almost no one dares suggest trimming the pension funds, particularly Democrats who are often pawns of the public unions. Some reforms on the table, like gutting the two-thirds majority required to pass the budget, would effectively hand these unions keys to the treasury.

3. The Environment

In California today, everyone who makes a buck in the private sector--from developers and manufacturers to energy producers and farmers--cringes in fear of draconian regulations in the name of protecting the environment. The activists don't much care, since they get their money from trust-funders and their nonprofits. The losers are California's middle and working classes, the people who drive trucks, who work in factories and warehouses or who have white-collar jobs tied to these industries.

4. The Business Community

This insanity has been enabled by a lack of strong opposition to it. One potential source--California's business leadership--has become progressively more feeble over the past generation. Some members of the business elite, like those who work in Hollywood and Silicon Valley, tend to be too self-referential and complacent to care about the bigger issues. Others have either given up or are afraid to oppose the dominant forces of the environmental activists and the public sector.

"The business community is so afraid they are keeping their heads down," observes Ross DeVol, director of regional economics at the Milken Institute. "I feel they if they keep this up much longer, they won't have heads."

5. Californians

At some point Californians--the ones paying the bills and getting little in return--need to rouse themselves. The problem could be demographic. Over the past few years much of our middle class has fled the state, including a growing number to "dust bowl" states like Oklahoma, Texas and Arkansas from which so many Californians trace their roots.

The last hope lies with those of us still enamored with California. We have allowed ourselves to be ruled by a motley alliance of self-righteous zealots, fools and cowards; now we must do something.
(To this, I’d add that the politicians have been consistently putting off tough choices — which apparently will continue into the next administration unless Tom Campbell is the next governor. This is exacerbated by California large-state retail political market, which insulates all but the most corrupt politicians from any semblance of individual accountability.)

Noticeably absent from Kotkin’s list is the favorite scapegoat of high-spending politicians:
I covered the Proposition 13 campaign for the Washington Post and examined its aftermath up close. It passed because California was running huge surpluses at the time, even as soaring property taxes were driving people from their homes.

Admittedly it was a crude instrument, but by limiting those property taxes Proposition 13 managed to save people's houses.To the surprise of many prognosticators, the state government did not go out of business. It has continued to expand faster than either its income or population. Between 2003 and 2007, spending grew 31%, compared with a 5% population increase. Today the overall tax burden as percent of state income, according to the Tax Foundation, has risen to the sixth-highest in the nation.
(High-spending politicians blame Prop 13 for the requirement for a 2/3 vote to pass the state budget, but that requirement actually dates back 70+ years).

All of this has taken a toll on the business climate. Even before the latest downturn, the state lost 21% of its manufacturing jobs from 2000-2007, and 23% of its high-tech manufacturing jobs. In fact, a group of seven peer states studied by the Milken Institute has been increasing high-tech manufacturing jobs. As Kotkin and Milken note, such jobs have previously provided blue collar workers an entree to the middle-class.

To add insult to injury, the financial shortages is causing already stifling regulators to ignore the rule of law in an arbitrary display of bureaucratic power. The founder of LA-based Creators Syndicate notes that the city of Los Angeles in 2007 ignored its own precedent to reclassify the company (retroactively) at a higher rate.

Politicians and bureaucrats seem to assume that regulations and taxes can be increased indefinitely, when in reality one of the (few remaining) advantages of our system is Federalism is that individuals and firms have choices and can flee an unfavorable business climate for a favorable one.

In a reverse of the great Okie migration of the Great Depression — made famous by John Steinbeck (and then Henry Fonda) in the Grapes of Wrath — a few Californians are migrating back to the Dust Bowl:
From 2004 through 2007, about 275,000 Californians left the Golden State for the old Dust Bowl states of Oklahoma and Texas, twice the number that left those two states for California, recent Internal Revenue Service figures show. In fact, the mid-South gained more residents from California during those four years than either Oregon, Nevada or Arizona. The trend continued into 2008.
As someone a decade or two from retirement, with all my (and my wife’s) living relatives in California, we’re likely to tough it out. But I’ll be recommending that my daughter consider other states for college and the workforce when she leaves high school in seven years, particularly if she has an entrepreneurial bent.

Graphic credit: Cartoon by Steve Breen, San Diego-Union Tribune, July 2, 2009.

Saturday, July 11, 2009

Still Cobol after all these years

It may not have a Paul Simon soundtrack, but I found something poignant about a column Friday marking the 50th anniversary of Rear Admiral Grace Hopper’s second greatest† contribution to mankind, the COmmon Business Oriented Language.

Yes, the column was a self-serving plug by the last remaining COBOL vendor. But it was also a reminder of the economic role of trailing edge technology, and the distortions of judging what’s important by what gets headlines.

As Stephen Kelley, the CEO of MicroFocus summarized in the FT:

Today, Cobol is everywhere, yet is largely unheard of among the millions of people who interact with it on a daily basis. Research shows that people, on average, still use Cobol 10 times every day in the UK: using an ATM, stopping at traffic lights or purchasing a product online.

There are more than 220bn lines of Cobol in existence, equating to around 80 per cent of the world’s actively used code. There are 200 times as many Cobol transactions each day than Google searches – a figure which puts the influence of Web 2.0 into stark perspective.

Its versatility has also played a part in its abundance and longevity. Applications first developed to run on IBM System 700 mainframes are now being readied for an Amazon or Microsoft cloud computing platform.
Rather than versatility, I might say something about legacy code and switching costs, but perhaps that’s the cynic in me.

Not surprisingly, Kelley has a self-interested plug for industry/academia cooperation:
With many computer science students opting to learn web 2.0 skills, and many of those who are proficient in Cobol reaching retirement age, its success and longevity are almost proving a hindrance to its long-term survival.

Ensuring Cobol remains a key part of the IT skills set must be a priority for business, government and academia alike, as the effects of a serious shortage could be disastrous. The cost of re-writing Cobol programs is estimated at around $25 per line (with more 200bn lines in existence).
I’m not sure I’d recommend Cobol classes to a bright high school student, but I’d bet it has more job security for marginal programmers than editing HTML or writing Perl scripts. Nothing poignant or sentimental there.

† Most computer scientists would agree that inventing the compiler is of more lasting significance than creating any particular higher-level language.

Friday, July 10, 2009

Yahoo deserves a break today

One of my Twitter friends, Nilofer Merchant, recommended a good column of advice to Carol Bartz on how Yahoo can revive its struggling brand.

The column by Nicholas Carlson offers examples from McDonald’s, Harley-Davidson, Gucci and Apple. Given industry fit, the first one on its face seemed the most improbable:

Stoke employee passion with promises of upward mobility. McDonald's CMO Larry Light has a new book out called Six Rules for Brand Revitalization. It's about how McDonald's went from a stagnant brand in the the 1990s to the once-again-growing powerhouse that it is today. It's full of groan-worthy business book jargon like "the eight P's."

One lesson from the McDonald's turnaround is very relevant to Yahoo, though. Back when Larry joined the company, McDonald's HQ in Oak Brook, Ill., was full of a "sense of malaise and dispirit." He writes, "people who were working on the brand did not really believe in the brand."

Yahoos know the feeling.

Larry writes that McDonalds got past this problem by marketing internally about the upward mobility available to employees of even the most humble, french fry-serving beginnings.
This advice rings true. Yahoo (like Google and other information worker shops) is defined by its people, and the company has taken a non-stop beating of ongoing layoffs even after ousting two Yahoos who claimed qualified to be CEO. I know someone who decided to stay at Yahoo — despite the bad news — in hopes of advancing in his career while others jumped ship: his plan was to get the new responsibilities, prove himself worthy of the company’s trust, and then decide whether his best options were inside or outside Yahoo.

Carlson’s other advice: fix the product (ala Harley), buy something sexy (as Gucci bought Yves Saint Laurent) and explain who a Yahoo user is (ala Apple’s “Think Different” campaign).

BTW, when Bartz was appointed six months ago, I encouraged her to reach out to employees and buy successful startups. Carlson’s advice today is more focused and better supported by evidence from business history.

Web 2.0 supply side substitutability

In the 2½ years I’ve been blogging, I’ve thought occasionally about who writes blogs, who reads blogs, what value they provide and (most of all) whether it’s something I should be doing.

Among people I know or follow, some occasionally blog with long articles, while some blog with very short referrals to existing articles and little if any marginal commentary. Others have given up on blogging and just tweet, and a handful both blog and tweet while running their day job.

I always assumed there was a self-selection involved — some people craft long pieces with words, others frenetically toss out ideas, still others have the skill to produce a YouTube video.

But Peter Whitehead of the FT Digital Business section argued Thursday that at the margins, blogging is just yet another form of social media:

[S]tatistical and anecdotal research indicated the vast majority of existing blogs had not been updated for at least 120 days and that amateur bloggers seem to have shifted to Facebook and Twitter, the social networking websites.

But surely the activity of these blogs – let alone their present inactivity – has never been of any real consequence.

Apart from a very small percentage which are informative, original or entertaining, they have little or no value. They are vanity publishing, only made feasible by the removal of costs.

The fact that their creators appear to be giving up on them is hardly surprising, given the amount of time they take to write, to discover and to read. Only a tiny proportion of any working population has this time to spare.

Worthwhile blogs – and there are many of them around – tend, according to my own anecdotal evidence, to be linked to well-known organisations able to provide time and resources, or they have become professional concerns in their own right.
I think his claim of what’s “worthwhile” is a little too narrow, since some of the most interesting blogs are from very smart people who spare a little bit of their time from their day job to share ideas. (e.g. Madisonian, or Michael Mace’s blog).

Still, what I found interesting — what prompted this blog post — was his idea of supply-side substitutability for social media. In strategy classes, we teach future managers to think about defining potential competitors not just by similar technologies, but about substitutability of demand and (in some cases) substitutability of supply.

Whitehead argues the same pool of people with the same amount of free time will choose between some very different technologies. It’s not just Typepad vs. Blogger, but Tweeting vs. updating your Facebook page. (The exception of course are blogs that are “professional concerns in their own right,” such as Om Malik.)

Interestingly, Twitter seems to be the 140-character least common denominator between many of these technologies. You can view and update your Twitter feed within Facebook, or you can convert your blog postings (via RSS feed) into Twitter postings. (Although Whitehead advertises his Twitter feed, the newsman’s feed seems to have less news content than OSS execs Matt Asay or David Wood).

Because of that, I’m a little more optimistic about Twitter than Rupert Murdoch. That may not be saying much, given how much Web 2.0 prowess he’s demonstrated by running MySpace into the ground.