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Posted Sunday, April 28, 2002 Copyright is a Phony IssueThe real issue is the fact that CD's are obsolete. Consider these figures from a site called Disenchanted.com Disenchanted notes that the current capacity of a typical hard drive is 40 gigabytes. Next, Disenchanted estimates that one minute of music compressed as MP3 requires one megabyte. Putting these figures together, a typical hard drive has a capacity of 40,000 minutes of music. If a typical CD gives you 80 minutes of music for $15, then a hard drive with pre-loaded music would be worth $7500. In other words, CD's have become a really expensive way to distribute pre-loaded music, compared to hard drives. What the music industry is struggling against is not copyright theft--it's the obsolescence of the CD. If the music industry wants to make money using hard disks instead of sending lawyers to fight them, I have some proposals. . . . . . .
Posted Friday, April 26, 2002 Classic Consulting PitchThe folks at PremiumBlend pointed to this come-on by a consultant.
This is a typical hunk of Baloney Sandwich from a consultant. First of all, the online fate of the Republicans and Democrats has just about zero to do with the Senatorial committee web sites. How many web surfers are out there thinking, "Hey, I really want to check out the Senatorial committee web site?" I would argue that the party that is getting its lunch eaten on line is the one that is wasting the most money on its Senatorial committee website. Second, the consultant says that the problem is too much decentralization. Pretty slick pitch. The fact that it's absolutely wrong about the Net--which is a decentralized medium--is not the issue. The consultant is pitching himself to bureaucrats, whose interest will be served by centralization. The first rule of consulting: tell your client what they want to hear. I hope the pitch is successful. I would like to see the Democrats put all their money into their Senatorial Committee web site, and not have anything left to give Fritz Hollings when he runs again. . . . . . .
Hollings "privacy bill": %@#*^%$#&!!Thanks to Lawrence Lee for pointing me to this column in Salon.
My position is that the determination of what is sensitive or not should be up to me, NOT the government. Got that, Senator? . . . . . .
Posted Wednesday, April 24, 2002 Privacy Audits for Government AgenciesThis is what I think privacy advocates should be pushing for. "A good-government bill that will improve the regulatory process and protect Americans from unjustified or unintended invasions of privacy, by:
I am more worried about what a government agency might do when no one is looking than I am worried about technologies such as databases or ID cards. . . . . . .
Posted Monday, April 22, 2002 AOL Time Warner Powerhouse, or notI searched Google for AOL Time Warner "media powerhouse" and I got 547 hits. All of them predate this story.
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Posted Sunday, April 21, 2002 The High Cost of Fending off ProfiteersAccording to the web site for the Connectivity2002 conference, it's the people vs. the powerful.
All right, now I'm motivated to attend. I've gotta save the Internet from the evil corporate interests! So I click on the "register" button, and it says that the conference costs... $1895! Hmmm, might have to pass. At that price, I'll wager that there won't be many of us independent types in the audience. My guess is that the organizers are counting on Microsoft, Verizon, and Disney to send delegates to hear their companies berated. Corporate training budgets subsidize these conferences, which is how the professional ranters can pull down large speaking fees. Kind of like the Net version of a Jesse Jackson shakedown. . . . . . .
Posted Friday, April 19, 2002 Privacy Luddites in Panic: Don't Let Government Authenticate!Imagine that you were trying to communicate with the government about some sensitive matter, such as your bid on a contract or an inquiry about your taxes. Would it be a bad idea if the government tried to verify your identity in order to protect your privacy? The privacy Luddites think so.
Fine. If you'd rather have anonymity than secure communication, then stay anonymous. Some of us might make a different choice. I am not an admirer of government, nor am I a fan of Microsoft, but it's the privacy Luddites that really scare me. . . . . . .
The Economics of Spectrum AllocationDavid Reed has put up a valuable resource page pointing to articles that pertain to the issue of the economics of spectrum allocation. Basically, you have traditional economic theory, which says that you should create a market for spectrum, and like water seeking its level, the optimal uses for spectrum will be found. In contrast, you have the argument of Reed and others that with the proper set of rules, you could have Open Spectrum, which, like the Internet, would be accessible to any device that obeys the appropriate protocols. At the moment, we have something that neither side would support. That is, we have spectrum allocated to specific uses. For example, the television industry is not allowed to sell its spectrum for use in telephony. Economists would say that this keeps the market from functioning; and Open Spectrum advocates would say that this keeps spectrum in the hands of evil corporations who profit from specialized applications, thereby making it more difficult to build the ideal wireless Internet. What makes spectrum valuable now is the artificial scarcity that is created by regulations that limit the uses of particular frequencies. Economists and Open Spectrum advocates would agree that those restrictions should be eliminated. . . . . . .
Posted Thursday, April 18, 2002 Imagining a Music Industry Without CD'sI suggest that the music industry can make money using current technology, instead of fighting it. . . . . . .
Posted Wednesday, April 17, 2002 Automatic Blogrolling?Right now, the process of blogs "picking up" posts from other blogs is manual. I see something on a blog, and then I link to it. Maybe this process should be automatic. That's what the folks at Radio think.
It certainly has some potential. . . . . . .
Posted Sunday, April 14, 2002 Why My Spam Cure Won't WorkBob Frankston explains the simplicity of email.
He points out that it is not even necessary to use a mail server for email. Once I read this, it was obvious why charging somebody ten cents to send email is a complete nonstarter. . So I'll wait for someone to write an email filter of the type outlined by John Gilmore--one which I attach to my email program, and which learns from how I discard and keep email. The inference that I draw from Frankston's argument is that any "policy" about identity and the Internet needs to be enforced at the endpoints. Trying to put something in the middle adds complexity. . . . . . .
Bad News for Privacy LudditesThe New York Times Magazine reports that
People that I call Privacy Luddites are upset. They claim that the system will not work, and that it will give the government too much access to personal data. The Privacy Luddites argue that the data mining will not work perfectly, and therefore it should not be tried. However, I think such a system is certain to reduce Type II errors (searching and "screening" people who pose no risk) while probably reducing Type I errors (letting terrorists evade screening) considerably as well. It is disingenous to imply that data mining must work perfectly in order to be worth trying. If it works better than what we have now, then it has benefits. The Privacy Luddites want to ban data mining. But banning data mining is not a Nash equilibrium. Nash is the subject of "A Beautiful Mind," although as Hal Varian points out, the movie botches the Nash equilibrium concept. As David Brin pointed out in his book The Transparent Society, as an individual I want to have information about others while others have no information about me. So in a Nash equilibrium--where each individual attempts to optimize subject to the optimization behavior of everyone else--everyone will try to get away with spying. Brin's calls this solution "mutually assured surveillance." In this context, the best feasible outcome is for government to use databases to screen for terrorists, but with sufficient knowledge by the public to deter abuses. In particular, we should make sure that government use of databases is subject to audits and checks and balances. Any agency that engages in data mining should be monitored and audited by another agency, preferably from another branch of government. I think that we should use technology to the maximum feasible extent to ensure our security. We should build in a strong system of checks and balances that enables auditing agencies to quickly identify and stop abuses. If your main concern is government intrusion and the potential for tyranny, then your energy should go into advocating strong audits and supervision of surveillance agencies. The technology is available and beneficial--we need to work on capturing the benefits while avoiding potential abuses. . . . . . .
Posted Friday, April 12, 2002 Solutions without Problems, Problems Without SolutionsI tend to distrust "solutions" that lack problems. Although wiser heads than mine (Tim O'Reilly, to name one) are enamored of peer-to-peer computing, I can't get my arms around it. The way I look at it, disk space is cheap and getting cheaper, while good programmers are always scarce, and competent network administrators are nearly an oxymoron. The benefit of P2P appears to be that it saves disk space, by allowing computers on the Net to share files, while requiring lots of smart programming and making network admin more complex. What problem does this solve, exactly? Meanwhile, problems of digital identity are without solutions. This includes our old friend spam, of course.
As an economist what I have proposed is that the sender of every email be charged by the recipient's email host 10 cents per email, which would be refundable if approved by the recipient. This is how it would work.
If all of this were feasible technically, spammers would soon go out of business. The top 100 spammers would lose millions of dollars within hours. . . . . . .
Did the Internet Kill Profits?Apparently, forecaster Ed Leamer is prepared to make this claim.
Economists have a tendency to reduce the Internet to an innovation in markets--a way to bring down the cost of information about goods and services. This implies that corporate profits will be squeezed, as consumers and workers are better informed. I am skeptical of this hypothesis. Goods and services sold over the Internet are still a very small percentage of the economy. And I have not seen any evidence, either in academic papers or anecdotal, to suggest a reduction in price dispersion as a result of the Net. One of my favorite macroeconomic sites disappeared when Ed Yardeni moved to Prudential, which seems to have taken him off of the Web. Yardeni, like Leamer, saw the potential for the Internet to put pressure on profits. However, unlike Leamer, Yardeni actually predicted the decline that occurred in the past two years, and Yardeni's prediction was based on pretty standard macroeconomic analysis:
The article on Leamer cites the airline and hotel industries as examples of where profits have collapsed. Somehow, I think that the Internet has relatively little to do with this. I think that 9-11 represents a better explanation. Finally, the profit increases of the early 1990's simply were not sustainable. The share of profits in GDP expanded dramatically in the early 1990's. Business finally ran out of legitimate ways to squeeze more profits out of the system. So a company like Enron, addicted to stock price increases based on unsustainable profit growth, turned to not-so-legitimate ways to goose reported profits. . . . . . .
Posted Thursday, April 11, 2002 From Tim O'Reilly's Mouth to Google's EarsToday's Tomalak's Realm includes two related items.
This does seem like pretty important news. As an economist, I can imagine the Commerce Department putting up this kind of API into the census data, for example. In theory, record companies could put up their catalogs along with programming interfaces. But their heads could not be any further away from that concept. . . . . . .
Microsoft Will Not Own Your IdentityHuman beings need clearer identity on the Internet, and a year ago Microsoft was planning to provide it, with "passport" or "hailstorm" or "my services" or...isn't it a bad sign for a project to get re-named too many times? Anyway, they were going to centrally store the information that links your identity with other information about you. Now, they are retreating from that objective.
I have mixed feelings about this. I do not think Microsoft's comparative advantage is the secure storage business. On the other hand, Microsoft had the philosophy that the consumer owns the rights to their own data. Most other companies think that they own whatever data they store for you, as if a bank were to say that they can use whatever you put in your safe deposit box. And apparently it was those companies that forced Microsoft to retreat. If there is a win here for consumers, I do not see it. . . . . . .
Posted Wednesday, April 10, 2002 Big Entertainment: You're in the Software IndustryFormer Netscape golden boy Marc Andreessen suggests that the entertainment distribution industry is in the software business.
Software makers take advantage of cheaper hardware to sell at low cost at higher volume. The entertainment industry sees cheap hardware as a threat rather than as an opportunity. The ultimate winners will be companies who work with Moore's Law rather than against it. . . . . . .
Posted Tuesday, April 9, 2002 Stock Options: Warren Buffet's $.02In today's Washington Post, we hear directly from Warren Buffet on the subject of accounting for stock options (he was quoted in an op-ed last week by Baumol and Malkiel).
Back then, the Financial Accounting Standards Board wanted to treat stock options as the expense that they obviously are. Corporate CEO's ran to Congress to change the meaning of the term "expense." The politicians dutifully complied. . . . . . .
Posted Monday, April 8, 2002 Don't Trust Anyone Over 30 to Get Rich?I was struck by this paragraph in an article that the corante/premiumblend folks found.
Paul Romer, like Paul Krugman, has much stronger credentials than what I've got. However, every now and then Romer, like Krugman, will say something that I find spectacularly stupid. The quote above falls in that category. I just returned from the Jonathan Lax Conference on Entrepreneurship, held at Swarthmore College. The conference was notable for the enthusiasm of the Swarthmore alumni--and for the extreme disinterest of the student body. Not that I was surprised. When I was an undergraduate, you could not have gotten more than a handful of students to attend a conference on entrepreneurship. As Tom Snyder '72 put it, "You would have seen many more students at a conference against this conference." Even now, it's very difficult for most students at high-powered liberal arts colleges to picture themselves in the world of business. Offering to talk to them about business is like offering to talk to teenagers about death. So here you had various alumni talking very enthusiastically about their "passion" for entrepreneurship (as Robin Shapiro '78 put it, sounding like devotees of the "human potential" movement), and all the adults in the audience were excited while the few students who were there stared at us through glazed eyes. And I don't blame them. It's really not such a good idea to start a business in your early 20's. It helps to have maturity and experience. I started an Internet business right around my 40th birthday. I think it's an understatement to say that I came out of it much better than the average post-college dotcom entrepreneur. The Internet lowers the barrier to entry for entrepreneurs. Some of the people who take advantage of that lower barrier will be under 30. But most of them will be older than that. If Paul Romer wants to make a bet, I'd be glad to take him up on it.
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Telecom Conspiracy (or was it just a bad forecast?)When companies crash, as happened recently in the telecommunications sector, journalists expect to find villains. For example, there is this article (first spotted by the corante/premiumblend bloggers), which quotes Fred Hickey, an industry analyst.
In fact, what I believe that the telecom bubble illustrates is the difficulty with forecasting nonlinear processes. A venture capitalist recently pointed out that a couple years ago the CEO of Worldcom was predicting that the demand for bandwidth would triple every year. That would imply that in three years you would need 3x3x3=27 times as much capacity as was needed at the time he made the prediction. Had that prediction been borne out, all those telecom suppliers would be in great shape now. Instead, the demand for bandwidth increased at "only" 50 percent per year, so that after three years the capacity required was less than four times the original capacity. If you plan for 27x capacity and it turns out that you need only 4x capacity, that is a huge error! And yet, when demand growth is nonlinear, it is very hard to make predictions three years out. Statistical models are best suited to making linear approximations, which work well only when growth is in single digits. Once growth gets to be really large, it is hard to distinguish statistically between the likelihood of 200 percent growth and the likelihood of 50 percent growth. So, the telecom bubble may have been due to reasonable, honest mistakes. It's unfortunate that people used unreliable forecasts, but it is not a sin. . . . . . .
Posted Friday, April 5, 2002 Violent Agreement: Searls vs. KlingDoc Searls went ballistic after reading my essay. He wrote in part,
I suspect that underneath what he calls my econo-jive and his just plain jive, we are in violent agreement. I don't see much future for an entertainment industry that uses "copyright protection" to try to turn back the clock on the Internet. My own bet is that the entertainment distribution industry incumbents are "in the way" only in the sense--to use Kurzweil's metaphor-- of being stones in a stream. They want to stop the water, but I don't think they will. I certainly don't think they should. But Doc, if you want to have an argument, I'm ready. What I said was, "Information wants to be free, but people need to get paid." Which one of those statements are you disputing? . . . . . .
Size Matters: Don't Expect Mass Media to Feel Like a CommunityClay Shirky has some sensible comments about what happens to communication as the size of a community increases.
His point is that even with something like weblogs, once the user base gets large enough, the communication tends to be more one-to-many than peer-to-peer. Even if Glenn and Andrew could still answer all their emails, there is not much they can do to foster relationships among their readers. This blog, on the other hand, is still at a community scale. So if you have comments you want to share, feel free to send something to arnold@corante.com . . . . . .
Posted Thursday, April 4, 2002 Creation vs. Distribution in the Front-Loaded Economy: Information Wants to be Free, but People Need to Get PaidTo provide some general background, I wrote an essay for Corante's Bottom Line on an issue that is central to many of the controversies in today's economy. The essay starts out:
The essay's the foundation for much of the analysis that's taking place in this column - please send your feedback my way. Arnold . . . . . .
Stock Options: Expense or Not?Today there appeared two more defenses of the practice of not treating stock options as an expense. James V. DeLong (not to be confused with Brad DeLong), writes,
His point is that the movement to expense employee stock options is not coming from the investment community. Instead, it is coming from political opponents of the investment community. Also, in today's Wall Street Journal, economists Burton Malkiel and William Baumol discuss the pros and cons of expensing stock options (Their piece currently is not available online to non-subcribers).
I agree that it is a terrible distortion to have the accounting rules favor regular options over performance-based options, because the latter are more sensible economically. But the anomaly in this picture is the stock options that are not expensed. I am with Warren Buffet. Put the options on the expense side of the income statement, where they belong. And I would add that outstanding options should be marked to market each quarter, in order to give an even clearer accounting picture. Finally, I would like to see a shift toward performance-based options, and I believe that eliminating the peculiar treatment of standard options would help to encourage such a move.
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Posted Wednesday, April 3, 2002 The Skeptical Media AnalystBjorn Lomborg's The Skeptical Environmentalist debunks the "litany" of Chicken Little forecasts made by environmentalists. I talk about the economics behind Lomborg's analysis here and here. Another class of Chicken Littles that deserves skepticism is the folks who tell you that Any Day Now the Big Corporate Giants are going to take away everyone's choices in media. Maybe Zimran Ahmed will write The Skeptical Media Analyst. He could start with his riff on vertical integration of media companies.
Later, he amplifies his views.
This is another instance where we can apply Ray Kurzweil's metaphor of stones in a stream. In this case, the big media companies are stones, and the stream of new media and new choices is rushing around them. People who are watching the stones and worrying about what they might do to stop the stream are getting all worked up over nothing. Anyone remember all the dire predictions that were made when AOL and Time-Warner merged, about what that powerhouse might do? Well, what exactly has it done? The stockholders are sure wondering... . . . . . .
Posted Tuesday, April 2, 2002 The Copyright TaxZimran Ahmed has an analysis of what he calls the copyright tax.
You really should read the entire analysis to see how he arrives at his conclusion. Ahmed estimates the copyright tax (the deadweight loss to consumers that is not captured by producers) at $3 billion per year. However, he assumes implicitly that there is a zero-cost way to provide incentives to produce while allowing consumers to redistribute at zero marginal cost. One could argue that in fact the social cost of copyright can only be measured in comparison with the best feasible alternative system for providing musicians with the incentive to create. . . . . . .
Stock Option HysteriaAlan Reynolds sees hysteria in some news reports of stock options.
Reynolds raises a valid point. There are some people, myself included, who believe that stock options should be valued when they are issued and counted as compensation. However, over time, their value changes, until ultimately they either are exercised or expire worthless. What should be done about these re-valuations? Reynolds argues that the fact that the market value of options changes is a reason for not counting options as an expense until they are exercised. I think that the better alternative would be to mark them to market, and adjust earnings for changes in the market value of options. So Enron would have taken a $155 million charge against earnings when it compensated employees with stock options. Next year, the drop in the stock price lowers the value of the options, which represents a gain to the company. Because employees have involuntarily given back some of their compensation, the company reports higher earnings as a result of the decline in the value of options. . . . . . .
Posted Monday, April 1, 2002 The Shareware Model: a Sobering LookIf you think that the solution to the copyright issue for music might involve something analogous to shareware, you might want to read this first.
If you write shareware, and lots of people download it but do not register, then you would like to think that it's because they did not find the software useful. But if people are willing to take the trouble to steal a registration code, then that suggests that the shareware model has not overcome the unwillingness of people to pay for software. Bill Gates knew what he was up against when he wrote his famous letter in 1976.
Of course, Gates did eventually figure out a revenue model for software. Too bad his is one of the few that seems to work. . . . . . .
Satellite-based Businesses Dead Before LaunchIf your business model takes long enough to implement, Moore's Law can make it obsolete before it gets started. Bob Frankston says this is the case with satellite radio. At the end of a long rant that covers several topics, he writes
It seems to me that just about any problem that you can think of solving by satellite can be solved more cheaply some other way. This means that satellite-based businesses are bound to crash and burn (remember Iridium?). . . . . . .
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