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Posted Sunday, June 30, 2002 A Primer on Stock Options 'Jane Galt' talks about the pros and cons of stock options. She concludes with these recommendations:
I think that the last point, about relative performance, is important. When I worked at Freddie Mac, they tied employee bonuses to how the stock performed relative to the S&P 500 (among other things--it was a complex formula). Since it is feasible to tie employee bonuses to relative performance, it should be feasible to tie executive compensation to relative performance also. . . . . . .
Posted Friday, June 28, 2002 Inside the BlogosphereLarry Jarvik of The Idler invited some famous bloggers, including |, |, and |, to a live event in Washington, D.C. to discuss blogging and journalism. I went downtown and checked it out. James Lileks did not make it, citing travel issues. The other aforementioned speakers bugged out also, citing the lack of an honorarium. (Well, they didn't say that, but as an economist I would suggest to Larry that speakers are more likely to show up if there is some, ahh, incentive.) Willing to turn tricks for free were John Hiler, Dennis Loy Johnson, Doug McLennan, and James Taranto. As the State Department folks would say, it was a frank discussion that touched on many issues. The audience got into it pretty heavily. My favorite exchange went something like this: #1 "For reasons that I can't understand, there are actually educated people out there who regularly read Noam Chomsky and believe what he says." #2 "I regularly read Noam Chomsky and I believe him" There is a classic study in psychology in which birds (I think it's pigeons) are given levers to pull in order to get food pellets. It turns out that birds pull the levers most aggressively when they are given a random reward, as opposed to getting a pellet every time. This is viewed as a model of gambling addiction. In his "prepared remarks"--Larry gave him maybe a minute to prepare--John H. suggested that blogging might work that way. Both readers and writers are randomly rewarded. I sort of take exception to Mr. Hiler's comment. My problem is that this addiction model can explain too much. A lot of human actions yield random rewards--it's hard to think of anything that is absolutely predictable--so you can call just about anything addictive, IMO. This panel had much more faith in the future of newspapers than I do. I said that young people don't read newspapers, and Taranto said don't worry, as they get older they read newspapers. I'd love to see the data on that. My guess is that if you don't subscribe to a newspaper by the time you're 30, you may never subscribe. Anybody have data on how many people aged 30 are subscribing to newspapers these days? I'll bet it's a lot less than it was 10 years ago (controlling for whatever factors you need to control for to do that kind of analysis). Another thing that bugged me was panelists and audience members who said "You still need an editor." Fortunately, John H. and Larry seemed to be on the right side of that one, arguing that the blogosphere has collective editorial wisdom. I actually think that people who reflexively believe that traditional editing is superior to what happens in blogworld are a few clues short. I can envision journalism without a central editor. UPDATE: for another report, see Tleeves. For yet another, see WOIFM. I notice that my report left out the panel discussant, non-blogger Alice Goldfarb Marquis. At one point, she asked why all of the comparisons were being made with newspapers, rather than with television. Apart from some murmuring about blogs being text, her question did not get an adequate response. I also should have mentioned that the session was held at the National Press Club, which should explain why the focus of the audience tended to be on journalistic aspects of blogging. . . . . . .
Posted Wednesday, June 26, 2002 The Stock Market and AccountingHal Varian pointed out to me a while back (at least a year before Enron collapsed) that there were folks who were very worried about corporate accounting. Hal is one of those people who can go against conventional wisdom, and then be proven right. Here is an article he wrote two years ago questioning the viability of the broadband buildout. Maybe if Worldcom's executives had read his article, they would have conserved the company's capital and not had to cook the books. I don't think that the accounting scandals will be over until the tech industry changes its attitude about being an "exception." That means that they have to treat stock options as an expense. James DeLong (Brad's father, although they seem to differ politically) still argues against me. He makes a case that stock options can help resolve a problem of asymmetric information between technologists and investors.
I don't follow this argument. The way I see it, when the founders make their pitch, whether or not the founders have a stake in the company's success is not up for debate. The founders have 100 percent equity, and they propose to trade some of it (as little as they can get away with) for VC money. It's after the venture gets funded that it uses stock options to try to hire key executives. I suppose that if new executives insist on salary, that would send a warning signal to VC's, but at that point it's a bit too late, since they've already funded the deal. Unless I'm missing something... . . . . . .
Posted Tuesday, June 25, 2002 Enterprise Blogware?John Hiler of Microcontent News has some thoughts about blogging software as an alternative to content management systems.
This makes sense. However, I would caution John and other software developers that I do not think that the value and money in enterprise blogs will be in the software. I think that really making effective use of blogs to create an alternative corporate communication system will require training and cultural adaptation within organizations. Corporate intranets have tended to deliver fewer benefits at higher costs relative to their potential. Blogging could suffer from the same problem. Companies that are used to formal, hierarchical communication systems are going to need help getting started using blogs. If you agree with John that enterprise blogs have a potential to be a big deal and you want to make money from the phenomenon, my advice is to go into it from the training and organizational development angle. . . . . . .
Internet Media Vs. Legacy MediaA few thoughts on Internet media (such as blogs or song-swapping) vs. legacy media (newspapers or record companies). 1. The Internet media are more cost-efficient. However, the legacy media are more profitable, because the models for selling atoms are more well established than the models for selling bits. 2. Right now, bloggers and others who are active on the Internet do not get paid very well. So the Internet selects people with a lot of non-monetary motivation. 3. I think that eventually the equilibrium will change. Legacy media will lose money. On the other hand, more folks who contribute value using the Internet will make a living at it. 4. Eventually, some folks will figure out a way to make Internet-based distribution commercially viable. I made my guess as to how this will take shape in The Club vs. the Silo. Whatever form it takes, it will make a major contribution toward realizing the Internet's potential. It also will cause a lot of resentment among people who become attached to today's noncommercial world. . . . . . .
Posted Monday, June 24, 2002 I followed a link from Lawrence Lee to an article on a secret new initiative from the Evil Empire.
Gee, I thought that Microsoft Passport was supposed to do all those things. Of course, Microsoft is known for failing miserably the first time it tries anything, but then following along with new versions until they finally get it right, at which point version fatigue sets in. I'm sure that this initiative will arouse the paranoia of what I call the programming Soviet.
In fact, the issue of privacy protection, or what I call People Protocols, is an interesting arena for a battleground between proprietary software and open-source software. The open-source crowd will argue justifiably that we do not want Microsoft to "own the Internet." They also will point out that open-source software tends to be more reliable, which is something that we want in a privacy/security system. On the other hand, the proponents of a proprietary solution can point to the fact that the problems of authentication and security have been out there for years, and they have not been solved by the non-proprietary mechanisms. I get deluged by spam. I am afraid to give anyone my real email address. I am tired of filling out site registration forms. If the open-source comrades solve those problems by promulgating Internet standards, that would be great. Until then, if Microsoft tackles the issue and makes some money on a solution, more power to them.
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Posted Friday, June 21, 2002 Is Blogging a Fad?Well, no. I talk about this at great length in this essay, where I delve into economic issues related to blogging. . . . . . .
Posted Thursday, June 20, 2002 Another Last-Mile SolutionAnother reason not to worry about local telephone companies having a monopoly. Lawrence Lee points to this Scientific American article on the potential of something called free-space optics to span the last mile. . . . . . .
Posted Wednesday, June 19, 2002 Command Line BigotsAn article called Version Fatigue by Instapundit drew this response from Eric Raymond.
I wish that Raymond or Doc Searls or any of their command-line bigot friends could spend just one day as an attorney, a secretary, or any other office worker whose job is something other than composing rants or editing computer code. Try producing that inventory chart or sales brochure using emacs and shell scripts. Nowadays, thanks to the Internet, we might be able to get by with personal computers that have a relatively lean operating system. Raymond posted his piece using Blogger, an Internet-based app, so all he needs is a web browser. But could the personal computer revolution from 1980-1995 have been powered by ordinary Unix? One word: Baloney. . . . . . .
Why IBM (and others) support Open SourceI followed a link from Zimran Ahmed to this piece by Joel Spolsky. It explains that big companies whose products and services are complementary to (rather than competitive with) certain types of software would want to promote open source software in that niche.
Spolsky argues that the theory of commoditizing the complement means that Sun is shooting itself in the foot with Java. He argues that Sun is in the hardware business, and Java's cross-platform characteristics serve to commoditize hardware. Therefore, Java is not in Sun's interest. I think that Spolsky is wrong about Sun. The purpose of Java is not to commoditize hardware, and its strategic value to Sun is clearly positive, at least as Sun intended back in 1995-1996. What Sun is selling is a powerful, robust server. By the way, its operating system software, called Solaris, is at least as important to the package as the hardware. In any case, what Sun wanted in the late 1990's was to increase the demand for its servers. They believed that Java would make it easy for developers to move applications from the PC environment to the Internet environment. Doing so would increase the demand for servers. The strategy made sense. (My only quibble would be that I believe that Java turned out to be a relatively minor factor in promoting the migration to the Internet.) Spolsky's column has many other good examples of substitutes and complements. However, his attempt to apply this approach to Java and Sun is crude and misses the mark. . . . . . .
Posted Sunday, June 16, 2002 Storage and the Future of TVIn my essay Listen to the Technology I talked about how cheap storage changes the way music should be distributed. Here is an essay by Stewart Alsop on how cheap storage changes the way TV should be distributed. . . . . . .
Posted Saturday, June 15, 2002 Hold Onto Your WalletThe politicians want us to have broadband. Declan McCullagh reprints this letter from Democratic leaders Daschle and Gephardt.
If broadband is so important, then consumers should be willing to pay for it. We should not need all these government subsidies. My guess is that the reason that broadband is rolling out slowly is that both consumers and providers are still learning how best to deploy it and take advantage of it. At this point in history, we still do not know the best architecture for broadband (how to choose among fiber, cable, copper phone lines, and wireless) or the most compelling applications for broadband. Mistakes have been made and will continue to be made. I say, let those mistakes be made by the private sector, and keep my tax dollars out of it.
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Regulatory Cure Worse than Monopoly DiseaseDoes court-ordered restructuring of a monopolist provide benefits? Sonia Arrison cites work by Robert Crandall that suggests not.
The point is that we should not be optimistic that a court-ordered restructuring of Microsoft would benefit the economy. Regulatory schemes to try to create better markets often backfire. Examples include the California energy crisis and the apparent failure of the attempt to force local telephone companies to rent their lines to competitors. . . . . . .
Tiered Pricing for Bandwidth?Should consumers who download more data be charged more by their Internet Service Providers? Yes, say some cable companies, according to Business Week.
No, says Zimran Ahmed.
Ahmed is correct--the heavy downloaders are not imposing cost on the service providers, because the users are not driving a need for higher capacity. The variable costs for Internet service providers are in customer set-up and support. Chances are, the heavy users do not impose any additional costs in set-up and support. In a competitive market, ISP's would not punish heavy users. However, in the non-competitive markets that exist for many broadband providers, anything is possible. . . . . . .
Posted Thursday, June 13, 2002 Blogs in the Distribution SystemSuppose that John Hiler is right when he says,
Everyone else? John might want to reconsider. But if it does turn out to be the trend, then Dave Winer also was right when he said,
That is, we might want to think about a world without mass-media distributors. In such a world, you might find out about music through automated recommendation services, or you might find out about it through web logs. Either way, music does not have to achieve mass-market status to get your attention. Journalism could work the same way. I might find out about an article by a reporter in Pakistan not because it is picked up by a newspaper but because it is recommended in a web log. However, there also needs to be an economic infrastructure. Somebody has to figure out how to get money to flow to the reporter in Pakistan, the musician, and probably to the more useful recommendation services or weblogs. Once the economics are worked out, it becomes plausible that we can eliminate the publisher as middleman. Greater diversity of culture likely would be an outcome. . . . . . .
Posted Tuesday, June 11, 2002 Regulation Not WorkingEli Noam argues that telephone regulation (ironically known as the 1996 telecommunications deregulation act) is not working.
I agree with Noam's view. I doubt that there is a clean why to divide phone companies into wholesale and retail divisions, which is what you need to do in order to separate connectivity from service. Customer support, which is very important and expensive, cuts across both levels. Procurement and maintenance of equipment cuts across both levels. Research and development cuts across both levels. That is why I believe that we cannot achieve competition by regulation. Our best hope for competition in connectivity is cross-platform competition among telephone, cable, and wireless. . . . . . .
"Abolish Television"The economist's solution to spectrum allocation, which would achieve the objectives of the Internet Hippie Fringe with less regulation rather than more, is to let owners of spectrum use it for the most economical purpose. Thomas Hazlett argues that television over the airwaves no longer makes economic sense.
The hippie fringe argues that bandwidth should be used for pure connectivity. We should not allocate certain pipes to television, other pipes to phone calls, etc. Hazlett's idea is to let the market come to this conclusion, by freeing the owners of the pipes to do what they want with them. . . . . . .
Posted Monday, June 10, 2002 The Wireless Last MileZimran Ahmed (aka Winterspeak) discusses the position of the Internet hippie fringe on spectrum allocation. Ahmed says
I think that all of us would say that the FCC needs to change its thinking about spectrum allocation. It should not allocate spectrum to specific content, such as TV signals. Ahmed says that the owners of spectrum should be free to find its most economical use. The hippie fringe appears to be arguing that with the right engineering protocols you could get rid of the concept of spectrum ownership altogether. . . . . . .
Good-bye to Rock StarsIf your son were doing well in the music business in LA, what would you expect his friends and fellow musicians to be like? Well, our neighbors have such a son, and they came back from a visit to say that they were pleasantly surprised to find that his friends are normal, average people. Which is consistent with where Michael Wolff says that music is headed.
Wolff argues that the pop music boom of the second half of the twentieth century was an aberration. I think he may have a point. We were in a mass-media society, which made the distribution of success much more skewed than the distribution of talent. With the Internet, that anomaly may go away. In Equilibrium in the Market for Rock 'n' Roll, I said that I did not think that the Internet would reduce the network effects that tend to lead to skew the distribution of rewards in the music business. Wolff argues that in fact the Internet is making it hard for anyone in music to become a highly-paid pop star. . . . . . .
Wireless Last MileI'm not an engineer, but it makes sense to me that the last mile will be wireless. There are many efforts like this going on (a N.Y. Times story spotted by PremiumBlend). Accordingly, I think it is more important for the FCC to get wireless regulation right than it is to try to come up with a way to split phone companies between wholesale and retail units. Using the terminology of one of my earlier posts below, I prefer cross-platform competition to regulated competition. In this context, that means that I think that the phone companies can be held in check by the wireless providers more readily than by the regulators. . . . . . .
Posted Saturday, June 8, 2002 Betting Against GoliathIt always makes good copy to fret over the Big Monopolies Taking Over the Internet (see the Salon series referred to below). But it has nothing to do with reality, as Dan Bricklin points out.
Large companies have big hype machines to puff themselves up and appear more powerful than they really are. But companies like AOL Time Warner are never as scary as they seem. I became a Web-based entrepreneur to prove that the Internet favors small firms. I made the same point in my book. And I am still Betting Against Goliath. . . . . . .
What type of Broadband Competition?There are two models for broadband competition. One model might be called cross-platform competition. The idea is that locally the cable company might be a monopoly and the phone company might be a monopoly, but they compete with one another as platforms for Internet access. The other model might be called regulated competition. In this model, the government would try to regulate phone companies and cable companies in such a way as to enable other providers to compete to offer Internet access using the equipment of the phone company or the cable company. This article in Salon says that the FCC is tilting away from regulated competition and toward cross-platform competition. The article argues that this is a bad move. TechCentralStation's James Glassman feels the same way. He notes that cross-platform competition does not work in the small business market.
Unlike the writers just cited, I actually lean toward the cross-platform model, and I hope to write more about this issue soon.
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Posted Monday, June 3, 2002 Hold Onto Your WalletThe information superhighway is coming. At least if Dan Gillmor were to get his way.
I disagree with this. The cost of taking fiber to the last mile is enormous. And the benefits are still not compelling. People are adopting mobile communications, not the kind of thumb-in-your-mouth entertainment that fixed wires are suited for. The way the costs and benefits are shaking out, I think that a case can be made that wireless is the way to go for the last mile, at least in the household sector. Of course, I may be wrong, and the advocates of fiber to the curb may be right. But I'd like to see the mistakes made by private firms, not by the government.
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Picking up NickelsA friend of mine once described another company's portfolio strategy as "picking up nickels in front of a steamroller." I looks like easy money, unless one time you don't get out of the way fast enough. Malcolm Gladwell has a long and interesting article on the two sides of this issue: should you try to pick up nickels, or should you bet on the steamroller? . . . . . .
MSNBC Does WeblogsCorante's Hylton Jolliffe forwards this story about MSNBC launching web logs. It will be interesting to see how legacy media's experiments with weblogs plays out. Some points:
We'll see. . . . . . .
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