Wednesday, June 29, 2011

California politicians claim imaginary Amazon tax revenues

California Governor Brown promised to end smoke and mirrors budgets that were the hallmark of the Governator’s political weakness and failure to confront the state’s structural budget shortfall.

This year, the Democrat-dominated legislature passed an “Amazon tax” — an attempt to broaden sales taxes to out-of-state e-commerce sites. This tax was in the budget Brown vetoed, but is also in the final budget deal he signed Wednesday. (The Governator vetoed a similar law two years ago.)

Of course, more taxes are favored by politicians who want more money to spend. In this case, they have also been championed by local businesses (and national brick & mortar businesses like Barnes & Noble and Target) who are stuck paying the tax and don’t like giving Amazon a 10% cost advantage.

Being temporarily out of the state, it’s been hard to find a serious discussion of the tax online. The mainstream media seems to be demonstrating willful ignorance while the anti-tax bloggers are using doom-and-gloom hyperbole.

Thus, it was refreshing to find this description in Accounting Today:

The tax would bring in an estimated $200 million a year. The bill would allow California to collect taxes from any online retailer that has nexus with an affiliate site in California. and have been dropping their affiliates in several other states in a bid to fight against such laws.

The bill also includes two other bills that were also passed by the California State Legislature that would require online retailers that have corporate subsidiaries and distribution centers in a state to collect sales tax from customers, along with another bill that clarifies when other kinds of physical presence require a sales tax to be collected. The three bills were combined into one and sent to Brown's desk earlier this month.
There are three problems with the bill.

First, from a technical standpoint, there are questions are whether this is a tax increase that requires a 2/3 vote. Either it is or it isn’t, but this may take a lawsuit (and appeals up to the SCOTUS) to resolve.

The biggest issue is that the belief that Amazon will pay sales tax contains an (un)healthy degree of self-delusion. First, the Supreme Court has held that sales taxes can only be assessed if there is a physical presence in the state, and Amazon has responded to previous such efforts (like in NY) by eliminating any physical presence.

Thus, this story from Thursday’s LA Times predicting swift payment of taxes is either pure propaganda or willful ignorance:
Online retailers must start collecting sales taxes from California customers

Beginning Friday, Inc. and other large out-of-state retailers will be required to collect sales taxes on purchases that their California customers make on the Internet.

The new tax collection requirement — part of budget-related legislation that was signed into law by Gov. Jerry Brown Wednesday — is expected to raise an estimated $317 million a year in new state and local government revenue.

Brown's signature on the budget bills is aimed at closing a loophole that freed online retailers, such as Seattle-based Amazon, from collecting sales taxes and sending them to the state when they had no brick-and-mortar stores, warehouses or offices in California.

Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.

"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.

California's new requirement will generate badly needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.
The LAT assumes that Amazon subsidiaries in California make it vulnerable to the tax, but those subsidiaries can be moved or sold. Who thinks Amazon is going to keep IMDB if it forces a 10% price increase for 12% of its US customers?

The other nexus of presence is the affiliates program. In fact, I was alerted to this issue by an e-mail Wednesday from Amazon, that — as predicted — announced their intention to cancel the Amazon Affiliates program for all California residents:
For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. …

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here.
No subtlety on that last point, eh? For me it doesn’t matter much, because my revenues from Amazon links are negligible — much less than the rebate from my Amazon credit card.

(Update: At 9:42pm, Amazon sent a follow up email that said: “Governor Brown has signed into law the bill that we emailed you about earlier today.  As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011.”)

And this brings up the final point: as the anti-tax advocates note, terminating these affiliate programs terminates revenues for small businesses that depend on them. Their choice is either to give up the revenue permanently or move to a state (like Nevada) without sales taxes.

To its credit, the LA Times mentions the problem (without suggesting that Amazon’s gambit may prevent it from ever paying the tax):
Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.

That's what Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to do.

"Will it be Las Vegas or Scottsdale or Ensenada?" he said. "It's a question of where, not if."
Personally, I’d pick Flagstaff — a beautiful small town with a relatively mild climate for Arizona — but only if one believes that Arizona politicians won’t go ahead and do the same thing.

The anti-tax site notes that the new law may also tax eBay, specifically its online merchants. Since eBay is a San Jose-based company, it can’t (easily) eliminate its presence. Attempts by Bay Area politicians to carve a loophole to help eBay may not be enough — instead, non-California eBay merchants who don’t want to pay sales tax may jump to Amazon.

In the end, the politicians will claim they’ve raised taxes in the name of “fairness,” while (as in NY’s attempts to tax Amazon) failing to collect taxes from Amazon while this spends several years winding its way through the courts.

Perhaps this is the true intention of the legislature in passing the law: millions of dollars in billable hours for their trial lawyer friends as Amazon, Overstock and other out of state retailers sue the state seeking to get it invalidated.

Sunday, June 26, 2011

Naming Steve’s legacy

Steve Jobs is promoting a new Cupertino HQ for Apple, perhaps his most enduring legacy to the company.

A local newspaper columnist solicited suggestions for a nickname for the futuristic building design, and in Sunday’s Merc revealed the three finalists he (and three journalist buddies) selected from the submissions:

  • Fruit Loop
  • The Halo
  • The Core
Of course, he’s a reporter and (as he wrote in response to my email) “This is about having fun.” Still, the list suggests a lack of understanding of branding, positioning and (my own specialty) punmanship.

Semifinalists that didn’t make it into the finals were:
  • The Glass Donut
  • SteveHenge
  • Apple Saucer
The (drinking) journalists’ committee ruled out all the i-series names, including iSite, iO (after the moon), and iCycle. They had earlier ruled out Jobsite and Eden.

The problem is that the finalists lack the emotional core of some of the more abstract names (SteveHenge, Eden) and the cleverness of the i-names. (The building will only be used for 25-35 years before it needs remodeling, and I’m sure people will remember the iPhone by then.)

My sentimental favorite is SteveHenge, because this is literally the office that Steve built — after rescuing the company from the near-death condition he found it in 14 years ago. Perhaps the ruins will even be examined four millennia hence.

The Little Kingdom: The Private Story of Apple ComputerAs a business historian, however, I think the name that best summarizes Jobs’ 30+ legacy for the PC industry is Eden. The intended imagery is the Apple of temptation from the Garden of Eden, and of course the paradise-like working conditions that the coddled employees of high-margin Silicon Valley companies enjoy (at least until they get Mark Hurd as a boss.)

Probably unintentionally, it evokes the second book published on Apple Computer, Frank Rose’s West of Eden, which picks up where the seminal first book (Little Kingdom by Michael Moritz) leaves off.

West of Eden: The End of Innocence at Apple ComputerThe subtitle for West of Eden is “The End of Innocence at Apple Computer,” because it covers how Steve Jobs was forced out in his power struggle with John Sculley, the man who admittedly almost single-handedly wrecked the company. What more fitting a tribute to Steve Jobs do we need?

Friday, June 24, 2011

Smartphone vendors learn: commoditization is hell

As previously noted, the major goal of Android was to commoditize smartphones, to make them widely available from a wide range of sources. Consumers like open standards because they bring, entry, competition and lower prices — a point I made in a 2007 book chapter.

As any first year strategy student can tell you, low entry barriers that bring high rivalry and high buyer destroy industry profit margins. Assuming the major cellphone makers each employed one MBA graduate, this should have been utterly predictable.

But apparently this is news, at least according to a report by John Paczkowski in All Things D that quotes analyst Trip Chowdhry:

He says that Sony [i.e. Sony Ericsson], Motorola and Samsung are growing disillusioned with Google’s Android OS. They feel there’s too much fragmentation and too little differentiation among Android devices and that companies producing low-end handsets are collapsing the premium market they’d most like to play in.

“They’re starting to realize that their Android devices [are no different] in the eyes of the customer [than a] $20 Android Phone from Huawei,” Chowdhry says. “They’re worried that Android may dilute their global brand as customers put them in the same bucket with Acer, Asus, ZTE, Huawei, and MediaTek.”
Uh, yeah, we’ve seen this story before: it was called the Wintel PC (or for oldtimers, the IBM PC compatible.) Cellphones are worse, since the carriers control distribution and have an interest in selling the cheapest phone they can.

To prevent this lack of control and divergence of interests, these three branded vendors were co-founders and shareholders of Symbian. In the end, only Sony Ericsson took Symbian seriously.

Today, Chowdhry suggests that the big three should license webOS from HP. Two aspects of the report makes sense. One is that webOS is a modern, high quality smartphone OS. The other is that HP has negligible share and isn’t competing with them.

Still, the major handset makers are no more interested in sharing a standard with webOS than they were with Symbian. And the high royalties ($50-75/device) that Chowdhry proposes are not going to fly with companies that pride themselves on hardware designs.

WebOS and its (former) owner Palm are really a US brand. I think HP’s best shot would be to approach either Motorola (which is still US-centric) or Sony Ericsson (which is even more seriously in trouble) to see if they’re interested. HP could continue to use webOS for tablets and other devices.

Samsung is a lost cause. They put small bets on every open platform (Symbian, Windows Mobile, Android) while still hoping their proprietary bada platform will catch on outside Korea.

After two years of negligible sales, whatever window webOS has as a smartphone platform has just about closed. It takes more than a better mousetrap to get traction in a platform market: it also requires developers, hardware vendors, distribution and end users.

Wednesday, June 22, 2011

Dead BlackBerry bounce

Normally sober Rich Karlgaard of Forbes says it’s time to buy Research in Motion stock:

Research In Motion, much despised now, will enjoy share price bounce backs, as predictions of the company’s death will prove to be premature. In other words, RIMM is a good stock to buy now, even if its future is the cloudiest of the big four. Invest in Apple, Google and Microsoft. Be a trader with RIMM.
Even more so than some of us, Karlgaard re-interprets the contemporary world through the lens of the PC, Internet and dot-com booms. His argument is that the penetration of smartphones today is like PCs in 1989, with plenty of upside left to go.

The problem with the analogy is that the winners after 1989 were Compaq and Dell, commodity makers of the commodity standard PC. In today’s world, that would be LG, HTC and Samsung.

As a card-carrying PC historian, I’ll bite. The problem is, in this analogy the RIMM BlackBerry is much like the Commodore Amiga — a highly differentiated product with a loyal following that got swamped by the economic and psychological bandwagon effects behind the IBM PC that nearly drowned Apple too.

Atari, Commodore, Digital Equipment and many other once-great computer companies never came back.

Nowhere is it written that trouble cellphone companies will someday rebound. (Exhibit B: Motorola. Exhibit C: Sony Ericsson).

RIM is on the losing side of a 3- or 5-sided standards war. Its great hope, the Playbook tablet, has failed to capture the public attention or interest. (I tried to use one at my local Office Max but gave up when I couldn’t figure it out.)

RIM peaked at $144 in June 2008 and now languishes below 30, almost where it was 5 years ago before America learned what a smartphone is. Absent an acquisition, I don’t see how it will ever visit $100 ever again — and Nokia’s alliance with Microsoft seems to have eliminated the only possible acquirers.
Since the iPhone came out 4 years ago, Apple stock is 2.67x the June 2007 price while RIM is at 49%. Despite a huge advantage in installed base, distribution (and enterprise integration), the great smartphone boom has left RIM shareholders by.

So RIM’s long-suffering shareholders should take note of Karlgaard’s advice — and sell on good news or even a dead cat bounce. RIM tested $70 on Feb. 18 and it’s been steadily downward ever since. Even if this is a temporary bottom, prices above $50 will bring out a lot of itchy buyers, so anything beyond that is pure gravy.

Sunday, June 19, 2011

The hubris of the little lie

I was driving to a conference Thursday when I heard a radio ad that proclaims YAAT (Yet Another Android Tablet), the Toshiba Thrive, as being the “most usable” tablet ever.

Meanwhile, for several months we have been hearing: “Amateur hour is over” and “Introducing the world’s first professional-grade tablet” from Research in Motion.

RIM shipped 500,000 units in its first fiscal quarter ending May 28. By comparison, Apple shipped 4.7 million iPad 2 models in the quarter ended March 26, which was a bad quarter for Apple.

So why is it that the makers of the 2nd tier tablets assume that customers will believe the inflated claims of their products? Didn’t anyone think such exaggerations would undercut what little credibility they had? Or are these coming from such overconfident companies that they don’t recognize a lie when they see it?

Goebbels used to brag about the effectiveness of the “Big Lie,” but that assumed that people didn’t have access to other forms of information. Somehow I don’t see that happening for 2nd tier tablet makers.

Photo (June 12, 2011): Research in Motion demonstration trailer is ignored at Del Mar Fairgrounds, despite being astride a major foot traffic corridor.

Thursday, June 16, 2011

Accountability in K-12

A local K-12 charter school is proposing to expand its footprint in Santa Clara County with another 20 schools in the next seven years.

Rocketship Education has achieved impressive results (a state API of 925 in one elementary school) by doing something we take for granted in private industry but is never talked about in education: improving labor productivity. The school uses technology to automate rote learning, and then applies the savings to hire better teachers and give them more time to work with students.

In addition to its unprecedented business model, Rocketship also proposes unprecedented accountability — agreeing to surrender charter licenses if its API falls below 775.

The liberal Mercury News was gushing in their editorial endorsement Wednesday of the company’s proposed plans. And on Wednesday night, parents spoke in support of its proposal while school districts argued for business as usual:

In an emotional public hearing that contrasted different approaches to school reform, the Santa Clara County Board of Education on Wednesday heard heartfelt pleas for more high-achieving charter schools serving poor children, while local superintendents cautioned against moving too fast.

"Parents across Santa Clara County deserve more options," said parent Kevin Ngo, noting that his daughter's kindergarten year in the charter school Rocketship Los Sueños "exceeded our expectations."

He and several others spoke to support an application by Rocketship Education to open 20 charter elementary schools by 2017 near the worst-performing schools in Santa Clara County. It's an ambitious proposal that could make the charter operator the fourth-largest school district in the county. Palo Alto-based Rocketship aims to eliminate the achievement gap, the gulf between the highest-and lowest- achieving students.
Meanwhile, school districts and teacher union oppose the proposed expansion — presumably because they care more about losing resources to competing schools rather than improving education outcomes for local kids.

The final vote is due Aug. 10 on the plan to open new schools starting in 2013.

Sunday, June 12, 2011

Oxymoron: government efficiency

The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will(Eventually) Feel BetterFrom The Great Stagnation by Tyler Cowan (pp. 19-21):

Sometimes government outputs are worth a lot more than what we spend on them, and sometimes they are worth a lot less. The proper role of government is beyond the scope of this discussion. But still it is a general principle that the most fundamental functions of government are wroth more than the extra, add-on, or optional things that governments do.

A dollar spent on very basic police and courts and army protection is worth more than a dollar spent on refurbishing a warehouse in Minneapolis under the guise of urban renewal. A dollar spent on welfare for the poorest is more valuable than a dollar spent extending the program to better-off but still poor cases. And so on. Yet when it comes to national income accounting, and measuring GDP, we are valuing every one of these different expenditures at $1.

Over time, an increasingly percentage of what we spend on government is spent on optional rather than core services because the core services tend to have been around longer. ANother way of putting it is to say that the marginal value of added government, even if positive, falls as government grows larger. This statement is not antigovernment; it’s just common sense. …Government, at the margin, is becoming less productive.

To better measure how well we are doing as a nation, remember this about productivity:
The larger the role of government in the economy, the more the published figures for GDP growth are overstating improvements in our living standard.
…“government consumption” … commonly falls in the range of 15 to 20 percent of U.S. GDP. … If we go back to the peak time for innovation, estimated by Jonathan Huebner to have been the mid- to late nineteenth century, government at all levels was usually in the range of about 5 percent of U.S. GDP.
From the Wall Street Journal, June 10, 2011:
My Summer Road to Perdition
What did I learn as a young man laboring for the Virginia Highway Department? How to work slowly to slipshod standards.
By James Bovard

Mayors, governors and congressmen are busily hyping summer jobs programs. Kids can learn a great deal from a season on the government payroll. I benefitted from my 1973 experience at the Virginia Highway Department, digging postholes, cutting brush and, best of all, wielding a chainsaw—an experience that proved invaluable for my future work as a journalist.

As a 16-year-old flag man, I held up traffic while highway employees idled away the hours.

I was assigned to a crew that might have been the biggest slackers south of the Potomac and east of the Alleghenies. Working slowly to slipshod standards was their code of honor. Anyone who worked harder was viewed as a nuisance, if not a menace.

In the following decade, I hammered federal training and make-work programs in articles for this newspaper and other publications. Studies later proved that many of the participants in the two largest programs, the Comprehensive Employment and Training Act (1974-1982) and the Job Training Partnership Act (1983-1997), earned less later in life than those who never received government training.

The government has always been radically incompetent at imparting job skills or good work habits. Unfortunately, as long as politicians can profit from handing out jobs and paychecks, the waste and character damage will continue.

Friday, June 10, 2011

E-readers are not tablets—yet

This semester, three of my SJSU honors students studied the tablet and e-reader market. Swapnil Lall, Michael Edmonson and Joshua Hawley came up to speed on an emerging and turbulent market segment. Since their presentation last month, there have also been some important announcements in this market.

They did 20 interviews, 57 intercept surveys and 133 online surveys of owners and non-owners of these products.

Not surprisingly, they found that the iPad dominates mindshare as the iPhone did four years ago. Most respondents want an iPad, even if few are willing to pay the $500 price. As various analysts have noted, there is no tablet market — just an iPad market.

However, there is an e-reader market, and the separation of specialized e-readers from general-purpose tablets seems only temporary. Today there are significant differences in price and screen technology, but major overlaps in usage — as well as one product (the nookColor) that straddles both categories.

It is clear that the tablet market is growing, as awareness and usage grow. For owners, the products clearly compete with laptops, smartphones and physical books.

The most popular usage categories that our students found were (in order):

  • news
  • books
  • social networks
Two-thirds of the respondents say that e-reading is a primary reason for using the device. The web is important, but for most e-mail is less important than people thought it would be. Having a web-connected tablet provides the value of serendipitous discovery, as when one respondent uses it with IMDB to research actors in the current TV movie.

For now, the market has two distinct segments: the $100-150 black & white (E-ink) e-reader without Internet capabilities, and the $200-800 color web tablet with WiFi and possibly 3G. Even if the two categories will eventually merge, the entry level devices are spurring adoption, attempting to lock-in e-book formats and hastening the demise of physical books.

NYT columnist David Pogue evaluated the new Nook (aka “Simple Touch Reader”) and Kobo (“eReader Touch”) in his Thursday column. He laments the current limitations, like the lame “lend” features (one time only) and restricted availability (no Harry Potter).

Still, these 6" touchscreen E-ink tablets improve on the market-leading Kindle in terms of convenience and size, with the Nook nosing out its rival:
The All-New model, for this nanosecond in marketing time, offers the best combination of size, shape, battery life and features on the market; it’s a superb reading machine. But remember that buying an e-reader means locking yourself into that company’s bookstore. Idiotic, incompatible copy-protection schemes mean that you can’t read a Kindle book on a Nook, or a Nook book on a Kobo, or a Sony book on an iPad.
With a 2-week battery and a size that fits in my back pants pocket (when standing), the new Nook seems close to my ideal.

Amazon will presumably introduce an improved B&W device in the next few months, and is expected to offer a color tablet in time for Christmas. While all the press has been focused on Android tablets, it appears that (outside the iPad) all the action has been on the low-end e-readers that are permeating the public consciousness and changing behaviors. If I were doing a startup now, I’d be interested in developing enterprise software (or cloud services) for high school and college students who will quickly abandon physical books for e-readers.

Meanwhile, there will be a bloodbath in the 7" and 10" tablet segments as company after company loses their shirt. I don’t know who will eventually be left standing, but it’s clear there’s a lot of money to be lost trying to peddle $500+ products to consumers who don’t really need them and would rather buy an iPad anyway.

One thing I haven’t seen mentioned is the gender effect for tablet size. At least in the US, most women carry a purse that could easily hold a 6" e-reader or 7" tablet, while for men, it’s either a pocket smartphone or a 9-13" tablet or laptop. Is the 6-7" device a “tween” device, or will it find a permanent home?

While I like the size (and price) of the new (6") Nook, compared to my 7" nookColor the screen seems a little small for reading PDFs of letter-sized documents — and I’m not going to carry two devices for PDFs and e-books. Still, a $150, 8 oz. e-reader that reads books and PDFs would find a place in my briefcase alongside my laptop, both to provide better battery life and also provide a second screen while writing reports or emails.

Wednesday, June 8, 2011

Time to say goodbye to Steve Jobs?

A day after his appearance to sell iCloud to developers, Steve Jobs emerged from seclusion Tuesday night to sell his vision of a new 12,000 employee corporate campus to Cupertino politicians.

Apple has been HQ in Cupertino for more than 30 years, most recently at the Infinite Loop facility originally intended to house R&D employees but one that housed most of the company during the cutbacks of the darkest days of the 1990s.

Steve Jobs doesn’t make many public appearances nowadays because (one presumes) he’s really really sick. He doesn’t do trade shows or general press interviews although he was able to make it three months ago when the POTUS flew into town.

When his time is scarce, Steve Jobs doesn’t do anything by chance or whim. That he showed up to wow the part-time council members (monthly salary: $730/month) in a small town of 50,000 suggests that this is really important to him.

And even for a company as insanely profitable as Apple, the spaceship motif campus (a round Pentagon) to replace the old HP facilities on the 150-acre site is over the top.

So my guess — and it’s only a guess — is that Steve wants to create a permanent, tangible legacy for his life that will outlive people’s recollections of his role transforming the PC, mobile phone and tablet industries. The new facility will be a lasting testimony to the success of Apple during the early 21st century, just as the PanAm and Rockefeller and Carnegie and other buildings testified to the success of their respective patrons.

Maybe Steve will eventually return as Apple CEO. Maybe he’s just hedging his bets in case his health doesn’t improve as he and his family pray will occur.

But with or without the bronze statue of Steve out in front — ala Walt Disney at Disneyland — Steve already has more of a legacy than ten CEOs randomly selected from the Fortune 500. He doesn’t need a building or statue as proof.

Saturday, June 4, 2011

If you build it, they may go

In the past 24 hours I’ve had a chance to spend considerable time at two major US airports — Pittsburgh and Denver — thanks to my once-favorite airline, United Megalith Airlines. (“We try to ream you™”). In fact, UMA gave me multiple chances to enjoy Denver by canceling my flight home.

But both were examples of airports built in a period of boundless optimism by civic boosters hoping that massive government spending would boost the local economy.

Pittsburgh is pretty clear cut: when the new airport opened in 1992, US Airways was using the city as a major hub. However, the airline filed for bankruptcy after 9/11 and ended the hub in 2004. The airport is vastly over-built and under-utilized, just as the Kansas City airport expansion in the 1980s was tied to TWA’s brief experiment with hubbing there.

Denver is less clear-cut. United still has a hub here, and the airport gets considerable traffic from the 2.5 million people in the metropolitan area. However, the big planes are now medium sized plans and the medium sized planes now commuter jets, as United seeks to increase load factors and reduce service as part of its ongoing march toward high-volume, low-quality service.

However, after the merger with Continental, United is reducing its hubs to 10 worldwide, a pilot told me yesterday. Airlines have been eliminating their Western hubs — Delta has pulled back from Salt Lake City and Southwest from Las Vegas — and United no longer has the flights from Denver that it once did.

When (if) I get home, one terminal at San Jose airport was built for American’s hub there, now gone. With airline traffic less than expected, city fathers are wrestling with a range of options to pay what it borrowed for the $1.3 billion expansion.

The best analog I can think of is the sports stadium — worthless if the major league team leaves town. This seems a little different — you have the case of a single individual shopping his team (almost always a he) to the highest bidder. The airlines seem to be more dropping hubs than moving them and thus seem less likely to abandon a facility on a whim.

The fundamental problem is that capital investments like this have a 20-30 year amortization period against a planning horizon that may only be 2-3 years. Betting on local boardings/deplanings is a bet on the local economy — as long as there are local businesses and residents, there will be airline traffic. However, the hub bets are vulnerable to acquisitions, bankruptcies, or merely business incompetence.

I think this falls under the category of the fallacious “will,” as in statements like “this investment will bring $2.4 billion in economic growth over the next 20 years.” Obviously this is not true — the correct form is “is predicted to” or “is expected to” — but economically (or mathematically) challenged reporters seem to play along with this snow job by reporting these political claims unchallenged.

Of course, this ties back to the inherent short term/long term disconnect between our ruling caste and the common citizen. Politicians make promises to get re-elected next year, while taxpayers have to pay the bill s for decades to come.

Thursday, June 2, 2011

Airline mergers: half the competition, double the mediocrity

This week I flew Continental Airlines for the first time since it was acquired by United — and in fact the first time in three years. Where once Continental competed for customers with superior service, today — just as I feared — it offers the same customer hostile-policies that its corporate parent has so carefully pioneered over the past decade. The jetbridge slogans promising a better customer experience are just so much empty rhetoric.

If the processes have changed with the merger, so far the people have not. The Continental employees seem pleasant enough — certainly not like the surly TWA cabin crew in the years leading up to their acquisition.

Perhaps the Continental culture of pride and perhaps empowerment has yet to be destroyed by the penny-pinching bureaucracy that is the world’s largest airline. Or perhaps the Texas hospitality temporarily lingers, just as Delta once had a Southern charm before that was ground down by commoditization and its acquisition of an unhappy struggling airline.

There’s really nothing new here: big companies would rather force us to buy what they offer rather than compete for customers. Bigger is rarely better, except for the CEO egos and their paychecks. Mergers have not created better airlines, just ones with more market power and less accountability

Which of course brings us back to SBC, America’s largest telecom company, and its efforts to control 40% of the US cellphone market through purchase of T-Mobile USA. It's been over 10 weeks since the proposed acquisition was announced, but no real news from the FCC.

As with airlines, the promises of AT&T similarly ring hollow. At least United can offer some new destinations to its customers after gobbling up Continental.

Would the purchase of T-Mobile allow AT&T to serve another square mile that it doesn’t already cover? I doubt it, but it will end T-Mobile competing with AT&T to win customers.

Wednesday, June 1, 2011

Fixing K-12: technology is no silver bullet

Three items from the San Jose Mercury News this week offer competing theories of K-12 education reform:

A local news story Sunday (May 30):

U.S. should look abroad for education reform, study says
By Sharon Noguchi

By the thousands, U.S. public schools have undergone overhauls, launched pilot projects and experimented with "best practices." Yet despite countless reforms, overall student achievement has stagnated for about 10 years, according to national and international measurements.

Instead, the report from the Washington, D.C.-based think tank recommends emulating foreign success stories, primarily by expanding national standards for curriculum, administering smarter and less frequent testing, improving teacher quality, salaries and authority.

The report suggests expanding on the "common core" standards in math and English that most states adopted last year. In the five exemplary countries, national curricula also cover science, social sciences, arts, music and often religion, morals or philosophy.
A column Sunday by one of the Merc’s business columnists:
Building schools for the 21st century will take courage
By Mike Cassidy
Mercury News Columnist

I spent a good part of last weekend closed in a hotel conference room listening to smart people talk about kids, schools and technology.

And a strange thing happened: I started feeling better about the future of public education in California.

Moving our country's public schools back into the upper echelon of rankings worldwide is going to take courage. This is no time to be afraid of the dark side of digital media and the Internet. Quit fretting over digital distractions and the specter of online stalkers. Stop obsessing about completely controlling your kids' media diets. … And push your kids' schools to do the same.

Some middle and high schools are already out there. There are schools, yes public schools, where each kid has a laptop. Schools that have social networks on which students collaborate. Schools in which the kids write the rules for proper use of technology. Schools where students and teachers use smartphones to analyze scientific data. Schools that rely on computer games that send students on quests requiring the mastery of scientific and mathematical principles.
A letter to the editor Wednesday (June 1) by a “Professor of Innovation & Entrepreneurship” (and K-12 education activist):
Letters to the editor
True reform needed: Teach writing skills

In two stories May 29 about K-12 education reform, one need was conspicuously absent: teaching students how to write. I get college seniors who received social promotions from local high schools (and middle schools and elementary schools) but never mastered basic writing skills.

It's not sexy: it doesn't involve tablets or texting or social networks, nor does it show up in the multiple-choice benchmarks comparing the United States to other developed countries.

Instead, it requires a meticulous, labor-intensive process to teach kids how to express an idea, to organize it into coherent sentences, paragraphs and essays, and to do so without grammatical errors. By doing so, the students also learn logical thinking and how to support an argument -- crucial skills for any career.

Joel West
Professor San Jose State
In response to the letter, I  got an email from a professor in another SJSU college who had similar problems:
I am shocked and dismayed that so many of our students at SJSU not only have atrocious writing skills, but that they receive such high grades in courses that require them to write. I have given students Ds and Fs on term papers only to discover the same student received an A or B in [the required writing class] or another lower division class. 
It doesn’t take a college degree to figure out which theory I find most convincing — after the past nine years of teaching an essay-based course for college seniors at a Silicon Valley public university. As the strategy faculty have argued for years, a major reason our students arrive at SJSU unable to write is because they are unable to think. We try to make things better, but aren’t always successful.

Update Wednesday 9:30pm: I also got an email from Helene Joseph-Weil, retired music professor from Fresno State. Here are excerpts from her own experience:
No matter how talented or brilliant a student may be, if he/she can't construct a sentence with proper syntax and punctuation, professional or academic brilliance can never be fully realized. 

In the past few years, I've truly despaired that the majority of my students at Fresno State cannot construct a sentence that has the subject and verb in agreement; their spelling is not up to standard usage, they confuse parts of speech [there vs. their, it's vs its, you're vs. your, etc.]; topics for papers are not presented according to clearly defined guidelines; and there is a marked inability to express their ideas in well-constructed, coherent sentences.… They demonstrate good ideas, even creative research, but seem to have a complete lack of ability to express either.

Every once in a while I will have the joy of a student in my studio who has good writing skills, but almost all of these are home-schooled or come from families whose parents are teachers or doctors. Strong writing skills  shouldn't be the exception, but the norm for entry level university students, and the current valuing of technological and scientific skills over the humanities must be combined with the ability to express the very ideas gleaned from such studies.
and the Merc is running this letter Thursday in response:
Letters to the editor
Practicing what he preaches

Bravo to professor Joel West of San Jose State (Letters, June 1) for his letter about the importance of teaching basic writing skills in grades K-12. The message is right on, and his clear, precise letter is a perfect example of the skills he advocates.

Dave Stein
Mountain View