Paper Napkin slashes the, uh, transaction costs of rejecting:

"...If someone random asks you for your email address so they can contact you for a date, give them an email address @papernapkin.net (write it on a cocktail napkin for maximum effect) and we will send them a rejection message."

Actually, if you geek out with me for a second, this is an absolutely beautiful example of unintended consequences. That's because it slashes the cost of getting rejected as well as rejecting. This lowers the price of hitting on random people and asking them for an email address. Since the price has gone down, the quantity demanded at equilibrium rises. The market becomes more efficient; more people - not less - hit on others for dates.

"...With chapters titled "The Morons Who Are Sitting Next To You" and "Beautiful Swindles," it declares that corporate culture is nothing more than the "crystallization of the stupidity of a group of people at a given moment."

A far better job of explaining why innovation fails in Europe than I think I have done. Read it.

Tivo, Strangeberr, Etc

Om is, um, really smart. His post from six months ago sheds more light on the Tivo-Strangeberry pondering that's choking the blogosphere than anything I've read (and I went to the trouble of dl'ing company filings and everything). Highly recommended.

Uhhh...don't get your prescriptions filled at Wal-Mart.

Timetrax lets you record XM streams straight to MP3.

Rise of the Insects

Argentinian ants imported to Australia are superadapted to their new environment, wreak havoc on the existing ecosystem, and form a colony stretching 100km.

Meanwhile, in Santa Ana, bees go on a neighborhood-wide rampage.

Humour of the Day

Headline: "Decline in U.S. consumer electronics prices slowed".

Yeah, because if it kept accelerating, half the world would be starving to death. Oh, wait - half the word is starving to death!

Farmed salmon contain high levels of flame retardants. Why? The authors argue it's what the salmon eat. Veeery nice. Next time, order the tuna. Oh yeah - and try not to vote for the guy who's stacked our environmental regulators with corporate profiteers and religious fanatics, will ya?

Bad metadata is killing music.

No, bad metadata is not at all killing music. In fact, we now have more 'metadata' about music (and everything else) than we ever did before. MP3 blogs and playlists are massively rich - and accessible - sources of metadata. Not only that, but they're interconnected sources of metadata, which give rise to all kinds of network externalities which provide huge benefits for consumers.

The economist in me says: who cares about metadata anyways? Do I really care if a single is some obscure Jazz record from 1901's mega-arcane something-or-other sessions? Or should I just care that it's music I think is worth consuming? Hmmm, not a bad thought for an essay - 'markets don't care about metadata'.

Coral can adapt to global warming by taking on heat-resistant symbiotic algal partners, and actually improve their rate of photosynthesis (possibly to compensate for lower overall photosynthesis production time). Wow, cool, but should we have expected different? The big losers in the now inevitable global warming stakes are gonna be the newest and least adapted to climate change species (aka...us).

Distributed Economies of Scale

Freecinema:

"...Rule One: No money may be spent on the production
Make a film for free, and suddenly giving it away is a lot easier.

Rule Two: The film must be copylefted
A "copyleft" means that you let anyone copy and/or make new things from your film--as long as they promise to release anything they make from it with the same terms."

Sounds very cool. Let the games begin; God knows Hollywood's future was vaporized ten years ago, when it decided against strategy, and for imitation. It's entire model's been predicated on ripping off the rest of the world's great film talent (and now the rest of the world is about to start fighting back).

Link of the Week

Cringely on 'Why We Send So Many Americans to Prison and Probably Shouldn't'. Absolutely brilliant stuff.

Next Big Things (VC/Startup Edition - Summary)

1) Death of Branding - almost anything in this space gets acquired - why doesn't more vc capital flow here?
2) Reverse aggregators - ie reverse syndication and plays that unbundle and massively distribute aggregated information
3) Outsourcing disruptors - infrastructure to massively shift the outsourcing value equation)
4) Distributed economies of scale platforms
5) Community/social capital (local, not virtual) machines - related: democracy/political coordination machines
5) DRM and DRM defeaters - infrastructure, grey markets, tools, platforms
6) Post-search - power-law flatteners and value revelation mechanisms.
7) Alternative web currencies - ie link inflation compensators
8) Markets, everywhere, for everything.

Sorry if this is confusing - just wanted to make a note of it.

Politics of the Day

You know, I really feel, watching all the incredibly sorry electioneering that's happening, like I'm reliving high school. Like it's the nerds vs the jocks all over again. I know, I know, the colossally asinine and banal David Brooks has said the same thing. But I really feel it - in the tone of the attacks, the same kind of deafness on both sides. You know what I mean.

The real question, I guess, is this: where the hell are the punks? When I was in high school, it was the obligatory role of the punks to prey on both jocks and nerds. So why are the punks completely disengaged?

More fortune at the bottom of the pyramid : Intel is rumoured to make low-cost chips targeted at emerging economies. (Via Emergic). This will become an extremely important strategy for technology corporation, especially as their gross margins in developed markets are reduced due to hypercompetition and hypercommoditization.

Hi folks,

Here's a draft of a fresh piece that I had a lot of fun writing. Enjoy!

The Economics of Free � The Problems with Free Culture (1)

Many marked the bursting of the Net bubble as the End of Free. It wasn�t. We�re only now witnessing the real Beginning of Free � in everything from clothes, to traditional media, to web services, to academic journals. The Beginning of Free � by this I mean the growing economic and social legitimization of the old info-anarchists� notion that things �want� to be free - is having radically disruptive effects on society, business, and innovation. I�d like to discuss one here: the rise of barriers to consumption.

It seems paradoxical for firms to put barriers to consumption in place. But everyday, new invitation-only services � which are trapped in a perpetual state of beta � seem to make the rounds of the digerati.

Why is this happening? Why do firms increasingly deliberately lock entire groups of consumers out of the possibility of consumption? I argue that it�s an interminable consequence of the economics of the Beginning of Free.

If a free service is released on the Net, it�s by definition available to everyone who�s got a net connection. Now, firms are discovering that this costs them more than it benefits them. In fact, firms stand to gain only � as they always have done � by excluding those who can�t pay, in one way or another, for their products.

The costs of Free are fairly straightforward � the costs of scaling a service to meet the needs of all possible users. Clearly, this is a losing proposition for firms without massive scale economies � unless they can justify the benefits. But the benefits are trickier to understand, and here�s where the problem lies.

How do Free services get monetized? Well, firms must charge for access to their customers � that�s the heart of advertising and sponsorship business models. But all customers don�t have the same value to firms. Some part of the distribution of customers, in Free models, represents a net loss � nobody wants to pay for access to these customers. The marginal value of a customer, then, to the Free firm declines after a certain point. So how do Free firms balance rising costs against marginally declining benefits? Well, newspapers charge some nominal amount. TV networks use different kinds of shows to segment and discriminate amongst consumers. But Free models can�t use any of these mechanisms � they can only raise barriers to consumption, such as invitations and referrals.

The point is this: economic orthodoxy teaches that firms must always stop those don�t pay � in one form or another � from using their product. Exclusion is the heart of value. And those who are invited to the Beginning of Free are paying � firms are capturing gains from trading with them. Those who are not invited are those the firm doesn�t want to trade with � they represent a net loss.

Above I argued that firms realize gains to trading with customers from simply charging for access to them. But the truth is a little more complex: Free firms realize gains from consumers in a variety of forms: status benefits, demographic exclusion, technical expertise, and user innovation are some of the most powerful. By definition, not everyone can provide Free firms such benefits � that�s why barriers to consumption have been put in place. If you can�t pay, you still don�t get to play.

But wasn�t Free Culture supposed to make the Net a more inclusive place? Of course. And this is the problem: the unintended consequences of Free Culture might involve exclusion based not on a consumers� ability to pay financially, but his ability to pay in terms of status, technical expertise, innovation contribution, and simply belonging to the right demographic. Some of these are fair; some are not; the problem is that the intervening mechanism of money as a value exchanger has been removed.

This flies in the face of why markets work: because they reward value creation with money , which must be earned by passing the market test. Free threatens to replace the market test � what you�ve done (and by that measure, how much you can pay) � with tests biased towards status and reputation � who you are. In fact, the epistemology behind the Beginning of Free is, taken to it�s logical extreme, even more pernicious: it suggests that markets are completely inaccurate at rewarding people with money on the basis of their achievements, so firms must choose their own mechanisms to separate valuable (and thus those with the ability to pay) consumers from those who must be excluded.

But the barriers to consumption that are the inevitable but unintended consequences of the Beginning of Free are more than just unfair to consumers with open pocketbooks � they�re bad strategy for firms, and a deadweight loss to society. It�s bad strategy for firms because it artificially limits and slows the growth and evolution of new markets. They�re a deadweight loss to society because wealth which has the potential to be created is excluded and vanishes.

Now, of course, there is a model which remedies this situation. It requires a shift to Semi-Free. The concept is simple: those consumers whom the firm doesn�t want to trade nonfinancial benefits with in exchange for the right to use it�s service must pay financially. This way, firms optimize the value they capture from the full population of potential consumers. Free consumers give them nonfinancial benefits; non-Free user give them financial benefits. Barriers to consumption fall, the pie expands, and everyone�s happy.

There�s just one problem: will Free Culture accept Semi-Free models? It�s an ideological shift, especially to info-anarchists. To do so, they must first acknowledge that the unintended consequences of the Beginning of Free may be more unjust (and more costly) to firms, consumers, and society, than they otherwise thought.

Innovation of the Day

RIAA toilet paper.

How microsoft can embrace Linux. Businessweek's recommendation for Micrsoft is to port Office on Linux and extend its reach. What are the strategic implications of this for Microsoft as well as Linux?

There are a number of elements in the strategic position of Office:

1.Network effects arising out of the spread of its proprietery file formats. Winning this standards game allowed Microsoft to build the Office monopoly.

2.Tight control of the interfaces (Win32 API) as well as the OS itself allowed Microsoft to prevent competitors from offering the same features and functionalities as Office.

3.Leveraging the OS monopoly to cut off the distribution channels for rival products.

Does Microsoft have the competitive advantages to apply any of these strategies if Office were ported on Linux? Can MS extract monopoly rents on the Linux platform even if it did succeed in building an Office monopoly on Linux? Let's see:

1.OpenOffice and StarOffice have the incumbent advantage, and they have already reverse-engineered Office file formats to a large extent. In future, file formats are moving towards XML-based open standards for Linux-based applications. Even Microsoft has committed to "open" file formats based on XML, but protected by patents. Can Microsoft do anything to push its old proprietery formats or the new patented ones onto Linux? I don't think so. This also shows that the era of winning standards game and then leveraging proprietery protocols to extract rents is coming to an end. Markets are smarter now, they'll fight the emergence of de-facto standards more vigorously than they did in the past.

2.Microsoft does not own Linux or libc, the closest to Win32 API on Linux. This lack of ownership of the OS platform lelves the playing field for everyone, and fosters true competition. Without loading the dice in its favour, Microsoft has a much smaller chance of prevailing in this race.

3.Distribution channels aren't what they used to be in the nineties, thanks to the Net and the emergence of stronger players like IBM, Novell and Red Hat for Linux.

Clearly, these strategies cannot work for Microsoft. The greatest threat to Microsoft is not the erosion of Office monopoly, but the very platform that Linux represents. If MS validated the platform by porting Office onto Linux, it'll strike a strong blow to Windows platform and immensely weaken itself. The argument about non-US governments being ready to accept MS-Office on Linux are also invalid : they hate Microsoft, not Office. Just by offering Office on Linux, will their perception of Microsoft change overnight from a rapacious predator to anything better? I don't think so.

BTW, Microsoft itself knows all this and it has wisely chosen to ignore the sage advice from Businessweek. It's business as usual in Redmond : spreading FUD, buying PR, discrediting Linux, lies, deception, blah, blah, blah. Will that work this time around? I don't think so.

I Fought the Econ and the Econ Won

Hey look, it's another nice example of grey markets defeating property rights:

"...A Taiwan-based site is offering to sell the DVD copying software once sold by defunct 321 Studios Inc., which was driven out of business last week."

You can't fight the market, grasshopper. You must use the market.

Incidentally, I've talked to record labels about this more than once - imagine discussing the War on Drugs with Nancy Reagan. That's what it was like.

Robo-one - a robot kickboxing tournament in Japan. Hey Matt, have you been to this??!

IBM to hire 19,000:

"...One-third of the positions are in the United States, spokesman Edward Barbini said."

Ummm, realistically, I would expect about maybe 1/5 of these to end up in the States - and even those will vaporize in a year or two. Outsourcing = competence erosion for many firms, but IBM ain't one of them.

The rebirth of math education. Well, really just the rebirth of algebra. Do people actually graduate from high school without understanding x/2+5=7? Amazing. At least it's a start...

Cable operators 'unintentionally' blocking VoIP calls. What a surprise. I would never have expected tactics aimed at raising barriers to VoIP access from them.

SenderID updates. Blah, blah, blah.

Look, this is a classic case of MS leveraging it's resources to exploit an innovation hole - just like the one Netscape left. I know that sounds heretical considering the amount of $$ that's been pumped into antispam plays, but let's face it: they're a pretty homogeneous set of solutions.

Yeah, of course MS is going to extend their offering via proprietary xyz's and co-opt the market. That's the entire reason they're doing this - so they can then charge a nice fat toll, use it lock-down their Windows-as-service model, etc, etc. The sky is literally the limit when you have monopoly power over identity in any digital consumer market. But you already know that.

The dirty secret no one's talking about is that this is going to accelerate the fragmentation of the Net. It will create a Net for those who can pay the MS tax, and those who can't. That is a terrible thing - not just from a social pov, but also from a strategic pov - the pie will suddenly, massively shrink.

Of course, this leaves a nice gaping hole for Linux to vaporize the MS death star. Will they care? Nah, MS's strategic intent has never been long-term wealth creation, it's always been short-term value extraction. I can practically hear the drooling in Redmond already. What I should also hear is the drooling from radical innovators who can sense the huuuge opening this creates for them - but I don't. Which is troublesome.

Brin + Page give Playboy interview. All hell breaks loose.

Technocapitalist points to a Rheingold interview where he talks about post-capitalism.

I'm not sure this is in the cards yet. Post-corporations, yes, but post-capitalism still has a long way to go. That's because our system of wealth creation is, despite accelerating disruption, fundamentally capitalist - VC's or other capitalists fund new firms, whose value increases according to the measure of the wealth they create (well, that's the theory :).

I think post-capitalism requires first some kind of glimmer of waht might replace the VC's/capitalist's role in the wealth creation chain (which may be long overdue, from the look of things). What might this be? Massively distributed 'VC'? I don't know - but it's not about to happen any time soon.

I think what Rheingold senses is that many of the recent disruption he discusses have vaporized capital constraints to producing goods - they've destroyed barriers to entry. This enables massively distributed production - what I call distributed economies of scale - where consumers can produce goods more cheaply than firms, because their opportunity cost are naturally lower and capital constraints (ie the $$ you need to buy machinery, equipment, tools) have vanished. Open-source is a great example of this.

But this isn't post-capitalist (yet). I'm still trying to fully understand it, but my intuition is that it's anticapitalist - it destroys huge amounts of traditional 'value', and thus wealth - this is reflected in the market cap of, for example, industries being vaporized by open-source and hypercommoditization.

Now, the question is, is that wealth replaced? My intuition is a resounding yes (and there are gains to this trade). But, if it is, how do we value it? Break and Shake are two of my attempts at a crude valuation model for anticapitalist strategies - but valuing distributed economies of scale (ie Threadless, Xingtone, etc) is much, much more difficult.

OK. If you got this far, let's go have a beer or something :)

Humour of the Day

What would Super Nintendo have looked like if MS made it? Hilarious stuff. Unfortunately, it's at Fark - but don't let that stop you.

Does as good a job of exposing why MS is getting strangled as it does of why Nintendo dominated the games industry for so long.

Modular by design - a post that examines the role of modularity in business models. Interesting discussion - I think modularity is a powerful but dangerous weapon strategically. It's powerful because it massively expands the possibility pie which your goods and services enable. But it's dangerous because it exposes you to bigger, faster, or smarter players - because it (usually) makes your key resources replicable and less rare than they were before.

That's why it imposes massive innovation pressure on you, so should be used with care. For example, the outsourced workers of the US are vulnerable largely because their skills are 'modular' - they can be easily replicated in another place and then interfaced with the larger platform.

Nice piece from Oblomovka about how the Net's changed the distribution of fame.

My take: Basically, if we say that fame follows a power-law distribution, the Net's created decreased the exponent, flattening the area under the curve; but it's also raised and fattened the area under the curve. More people are more famous, and the average amount of fame/person has risen dramatically. This is why so many theoretial economies are becoming actually possible - search economies, distribution economies, etc, etc.

I think an interesting thing to consider is the time dimension of fame (Sorry Dr G). The Net has had a more dramatic impact, IMHO, on the dynamics of fame - as we can see in the world of political blogs, etc. This is because cutting search and transaction costs makes it possible to gain fame much faster than before - but the flipside is that the churn rate of fame is also much higher, since fame is also easier to lose.

That is too much nerd factor for one post.

The EFF's recommended economics of file-sharing - a Pigouvian tax; or, as they call it 'Voluntary Collective Licensing of Music File Sharing'.

Great for consumers, terrible for publishers(record labels), and - crucially - artists. I wrote a paper about this in b-school; it was actually my first thought when the replication wars broke out - 'why not create an ASCAP/BMI for file-sharing?'

The problem is that, from an incumbent's pov, the economics are less attractive than that of any other solution - even the current one. Think about how ASCAP and BMI haven't exactly encouraged a flourishing songwriting industry - the gains to licensing are simply too small, even if they're redistributed efficiently. As a consequence, we don't see massive entry into the songwriting business. I think the EFF is incredibly cool, but from a strategic pov, I'd be surprised if this is the industry economics that emerges.

What's wrong with BitTorrent - the usual, the market can't grow because less knowledgeable users are forced to pay interface and compromise costs, since the technology is not transparent yet. An interesting read nonetheless.

MUDDA: Peter Gabriel's new project - an infrastructure for digital media distribution. The problem: if it's just the same old economics, but massively distributed, not much is gonna happen. MP3.com tried that in 1998, and while it was very cool while it lasted, their business model never created new wealth - it just redistributed old wealth.

This kind of innovation gives me some faith, though:

"...Be creative with what you sell and how much you sell it for. For example, release several stages of the process, sell a process, the evolution of a song and not just a single �piece of product�."

My kid sis made me watch Shrek 2 today, so I thought I'd throw this in:

"...Disney Chief Executive Michael Eisner said despite the company's ruptured relationship with Pixar Animation Studios, the company is moving ahead with its contractual right to develop sequels based on the Pixar titles to date."

Makes for a very interesting situation - Disney can use this right to credibly threaten Pixar with massive dilution of it's brand equity essentially. Link (sub).

Blockbuster (finally) launches online rentals. It's about time - they've been getting hammered lately. How will the dynamics of this industry play out?

Well, Netflix has a significant first-mover advantage that's backed up largely by learning and mild network effects. The problem for Netflix is really gonna be increasing entry from all sorts of players, and the ensuing massive price and quantity competition.

But the problem for everyone is going to be that this industry is essentially disintegrating - it's going to be a victim of convergence into online services, substitution from independent film makers and distributors, and consumer needs shifting further and further away from Hollywood.

The writing's on the wall; if Netflix was smart (I'm assuming none of the other players are going to be) it would expand downstream and attempt to capture rents by financing innovative new kinds of content creation and licensing, or expand upstream and attempt to capture rents from movie consumption complements and infrastructure (aka hardware/software/platform).

Did you know sugar is still a protected commodity in the US? Not a bad piece.

Market Power

"...Picasso's 1905 painting "Gar�on � la Pipe" sold for $104.2 million in New York to an anonymous buyer on May 5, the first time any painting has broken the $100 million barrier.

Sotheby's, based in New York, earned about $11 million in commissions on the Picasso sale."

Link.

Ambush marketing. Basically, parasitization of agglomeration economies. Evil, but interesting.

Replication Wars (Humor of the Day Edition)

Uhhh...

"...Washington, DC �(August 10, 2004)� Elementary school students heading back to
school in September will be invited to name the �Play It Safe in Cyber Space� mascot, a �copyright-crusading� ferret who teaches tech-savvy kids about cyber ethics.
Beginning September 1, thousands of kids nationwide are expected to log on to
www.playitcybersafe.com to vote for one of five ferret names by the end of the month.
The winning name will be unveiled in January in a new, educational comic book
curriculum."

From (who else) your friendly neighborhood BSA. Link (PDF).

Hypercommoditization

Toys R Us' last ditch defense - to spin off Babies R Us. The reason, obviously, is price wars and massive supply-chain pressure by Wal-Mart.

Politics of the Day (Paranoia Edition)

Bush planning to kill Kerry and blame Al Quaeda. Aaaaaah, the Net.

Management 2.0

Knocking out dopamine receptors in the rhinal cortex dissociates effort from predicted reward - turning monkeys into workaholics.

Humans

"...For the second time in three years, a hypoxic "dead zone" has formed off the central Oregon Coast. It's killing fish, crabs and other marine life and leading researchers to believe that a fundamental change may be taking place in ocean conditions in the northern Pacific Ocean."

Link.

Recombinative Innovation

Using inkjet printers to print tissue with bio-ink:

"..."We've created cardiac tissue successfully," Boland says. "It actually beats in the petri dish."

Incredibly cool, even if you forget for a minute that this offers an orders-of-magnitude cost advantage.

Replication Wars

Congressional economists review copyright law. Blah, blah, blah. The next big step will happen when the lawyers catch up with what economists have recently realized - that there are many different ways to redistribute wealth from innovation. Don't worry about it until then

A nice piece about online game rentals. A market that will see increasing entry, competition - and profits - especially globally.

Fat Planet

The next step in the War on Fat - major implications for not just business, but culture and society:

"...Investigators...have identified compounds that mimic the effects of a low calorie diet but without a change in the amount of essential nutrients."

The first glimmers of the infrastructure for a radically new value equation - food that tastes like it's smothered in fat but doesn't cost consumers (or society) much in terms of health. Link.

Macro Picture

The global macro picture ain't what they teach you at school. It's much more plastic and much more hackable. The IMF's report on it's own shortcomings during the Argentina crisis is a long slog - but highly recommended. It reads like a history of the US may read in 2015 given the current state of our finances.

Full disclosure: I have a close family member who works at the IMF.

As advertising capital and readership accelerates away from the real world and to the Net, the magazine industry's architecture begins to shift. Innovation arms races begin, designed to raise switching costs by providing consumers added benefits; second. Cannibalism fears lead to exclusion tactics, where consumers are increasingly charged for access.

Do either of these tactics answer the new value equation offered by the Net? No, because, ultimately they're the same old business model - none of these tactics take advantage of the the Net's unique economics. My upcoming experiment with paid discussions is just one simple example; reverse syndication a la reBlog is another.

Simulation Economy

The technological convergence of games and simulation - the military using video games as training. Old news, decent article.

Innovation Engine

Britain grants a license to clone a human embryo. It's about time.

Distributed Economies of Scale

Slate piece discussing 'art mobs'. Not bad.

Another Google free-rider: PlanetOut delays its IPO.

Neural Darwinism - an interesting discussion of some of the sense-making strategies the brain uses.

Calacanis with a pretty good rant against Vibrant Media. They make the engine that powers the 'contextual advertising' in, for example, Forbes - ie, roll over a link in an editorial and get a nice big ad.

Now, I agree that tactics like this bastardize ads. But at the same time, the traditional separation between ads and content, well, sucks - because it turns ads into transaction costs users must pay to gain access to content. I think models like the Post's 'paid discussions' - where sponsors pay for discussions NOT about their product, but about things that users derive value from reading about (ie VW sponsored a discussion from a prof about the history of engineering or some such)- are the future for ad-supported content-rich media. (Via PaidContent).

Death of the Sitcom

Bravo to film a new reality show about the making of a sitcom. What they should really do is massively distribute the search problem - air different pilots and leverage distributed prediction to more efficiently find the next great sitcom. If, that is, it exists.

More patform entrenchment for Google : hackers making cool gmail apps.

Epilepsy

"...But the fact that official declines in output were so widespread in June suggests globalization is increasing the degree of synchronization in the world economy, particularly in sectors where supply chains have become global. As a result, slower growth in China or the U.S. can have an almost immediate impact on activity around the world."

Link (sub).

VoIP spam is coming:

"...Consider software from Frederick, Mass.-based Qovia, which seeks out the IP addresses assigned to phones, then sends each a 30-second recording. Its pace � 1,000 synthetic calls every five seconds � is a quantum leap from the automated "Demon Box" dialers that telemarketers use now."

Link (sub - use bugmenot).

Absolutely cool roundtable of MP3 bloggers highlights the reason for the strategy decay of the media industry - they have no competence in understanding consumer needs - and how radical innovation is happening right under their noses. Highly, highly recommended.

The BSA's new report calls consumers 'generation pirate'. Note to BSA: your business model is dead when it's this far out of alignment with the preferences of an entire generation of consumers.

Post-Consumption

Post-consumption, as I've talked about before, is going to be the tectonic shift from price and status driven consumption to meaning based consumption. Not the crude attempts at engineering 'social meanings' that Madison Ave clumsily tries to hack into your subconscious in cheesy ads - but consumption of actual meaning, driven by a search for possibility and purpose.

This sounds pretty airy-fairy (trust me, I know). But here's a great example: The birth of industrial tourism in the Rust Belt:

"..."People are reaching back and touching their beginnings," says Stephen Donches, president of the soon-to-open National Museum of Industrial History in Bethlehem, Pa. "Where do their parents and grandparents come from? Where did they settle? What did they do for work? It becomes more of a story about people, not just objects."

Link (Sub).

Dot Com 2.0

Cinomatic, Food Porn Watch and the MP3 Blogs Aggregator - the ongoing rebirth of the aggregator. Ongoing differentiation means that the locus of competition will be from general to segment and category specific (ie food, cinema, music), just like in any maturing industry.

This is a big step in the evolution of .com 2.0. But the biggie is going to be reverse syndication - not syndicating your site to these aggregators, but syndicating these aggregators to your site. That's what will massively cut search and transaction costs across the network, creating huge economies for users and growing the market.

How will this happen? It's already happening: reBlog, for example.

Bajaj (pretty much the Indian scooter manufacturer) begins exporting scooters to the US:

"...A Bajaj scooter, for example, sells for about $2,700 in the U.S., while a refurbished Vespa with a similar old-style look and steel construction costs close to $4,000 at Mr. Khurana's shop in Seattle. A new Honda scooter, which packs a more powerful engine, costs close to $5,000...

Still, Bajaj has something to learn about tailoring products for other markets. Mr. Kolvites says he could sell four times as many scooters in the U.S. if they had automatic transmissions. "Customers love the retro styling, but once they find out that they have to shift, they say, 'I can't do it,' " he says."

Link (sub).

Fashion of the Day

Another sign of the rebirth of artifice in high fashion means the end of bling (when it trickles down) to low fashion.

A long and somewhat confused piece about AT&T's decision to focus on the business market.

Outsourcing of the Day (2)

New entrants in...Kashmir.

Very nice piece by an inside on the birth of Pixar at Lucasfilm.

The Beeb has a nice piece discussing Genetic Savings & Clone. I've discussed them before; I think it's a killer idea and a sound model.

Wow. Reuters takes the plunge and outsources some editorial jobs to India. Let the stampede up the skills chain begin...

Column about why Moritz invests, he basically says: 'do something cool'.

Eminently sensible advice.

'The End of Imagination'. Interesting.

If you ask me, the reason why the UK has relatively low innovative capacity is because it's labor market is culturally retarded. In the UK, entrepreneurs have no time to be imaginative - you graduate from University, start your 'career' in your early 20s, and it's game over - switching costs are very high, because skills aren't seen as transferable across industries/positions/etc. So you don't have the kind of time to try out a variety of positions, industries, and roles as is common in the States - and this is where innovation, especially recombinative innovation, comes from.

I think people should start asking the question nobody wants to ask: What if the Google IPO doesn't open the window? What if it doesn't restore the confidence etc etc of, well, everyone?

We know that firms and consumers alike are sitting on capital - unless that capital is put to some kind of productive use, the economy ain't going anywhere.

Running a company in Silicon Valley? I hope you're not planning to move out. Maybe you can call the shots as an employer in the current economy, but don't forget what made the Valley such a great place to work - extremely low switching costs on the part of the employee and a wealth of sharable knowledge and access. A good engineer does not a good manager make, and managers often forget that when an engineer finds him/herself doing less of what made them tick, the wealth of other engineering companies in the Valley provided a chance to change jobs, sparking a slew of positive effects. Just remember, it works both ways.

Tim O'Reilly once said something along the lines of "user contribution is key to market dominance", which I thought I agreed with until I read the bottom of this NYT article

"...according to a recent Jupiter survey of Internet shoppers, only about 20 percent of so-called intense shoppers considered customer-generated reviews valuable. Fewer than 10 percent of more casual shoppers regarded such reviews as valuable."

I wonder how reputation metrics were being measured. We entered a "freebie/test" culture a while back - free tastes, test drives, free trials, Fry's "return policies". The winner is whoever figures out how to increase user contribution value - if I can somehow post not just words, but an actual experience ...

Next Big Things

The CCX and carbon trading - as exchanges for whole new kinds of wealth and risk transfer like this grow and gain liquidity, huge amounts of innovative capacity will be built. Highly recommended.

"...When William Coyne, who led 3M Co.'s R&D operation for many years, was asked about how to manage innovation in a big company, he replied that he didn't ask people a lot of questions about what they were doing or demand constant updates. "After you plant a seed in the ground," he said, "you don't dig it up every week to see how it is doing."

Link.

Absolutely cool article about markets, innovation and property rights. 'Supercorrecting' DVD players in China were made to compensate for the crap quality of 'pirate' DVDs. Very nice illustration of why grey markets will always defeat property rights (as long as the government doesn't control transaction costs).

Beyond Hypercompetition

Profit margins for DVD players down to $1. We can safely call this perfect competition - largely due to massive entry from Chinese rivals. Now, clearly, competing in this market has been a sucker's bet. The interesting question is: why? I think there are three reasons.

1) Barriers to entry fell suddenly, and massive amounts of capital are still chasing a smaller and smaller number of good bets. Hypercompetition is the inevitable result.

2) One of the biggest DVD players manufacturers in China is Jiangsu Shinco. As far as I can tell (this data is pretty hard to come by), it's a 'Jiangsu province advanced technology enterprise' - which means it's still majority publicly owned. This means it can accept a much lower return than private investors would demand.

3) Because they face extreme buyer and platform power, and because their innovative capacity is relatively low (it takes a long time to build), price wars are these firms' first, last, and only tactic.

But these firms are smarter than I've given them credit for. For example, Skyworth is happy to accept 1% margins because it's using these to invest heavily in R&D in a place where 1% goes a long, long way.

Nice piece about the birth of the corporation. Highly recommended - especially if you think corporates are lame.

A basic but well done presentation if you'd like an introduction to general global business issues (ppt).

Massive growth in demand for fast-food in China causes an innovation explosion down the potato supply-chain. Canada's the only country allowed to send seed potatoes there - and stands to profit nicely if the biotech play detailed in the article works out. The lesson here is how trade agreements will play a larger and larger part in the dynamics of innovation.

News of the Bizarre

Philippines to tax SMSing.

Branson to launch low-cost airlines in India and China.

Tivo

OK. We all know, that despite it's recent win with the FCC (who let Tivo transmit data to users over the Net), Tivo is in deep trouble. This is because network owners have co-opted Tivo's technological advantage, and rebuilt as a peripheral component of their platform.

I think Tivo's brilliant. But I also think that strategically, they were ultimately ahead of their time. Here's my take: Tivo business model really rested on them being the iTunes of advertising - essentially, controlling access to a captive market. Now, the most efficient way to capture rents from suppliers - advertisers - is to offer buyers ads at a price they're willing to pay. That means dynamic targeted product placement, contextual branding, and similar tactics - basically advertising without the compromise costs users pay in watching painfully stupid 30-second clips of utter nonsense.

The tragedy is that these tactics aren't technologically possible right now. If they were, think about what a great game Tivo could play. Now, I'm sure that Tivo has many tricks up it's sleeve, like it's recent pseudo file-sharing tactic, and it's recent announcement of price competition. But these tactics are not going to save Tivo - because switching costs for consumers with bundled functionality are incredibly high.

Tivo's best hope right now is that the networks kill their own Tivo substitutes, by pushing costly ads on consumers whose price is greater than the cost of a Tivo. Now, this is likely to happen. But can Tivo stay in business that long? Certainly, it's platform and filesharing strategies give it some breathing room. But I think it will have to do something revolutionary to have a real shot at letting the network owners shoot themselves in the foot.

Something like stimulating the development of a market for entirely new (not evil) advertising mechanisms, and then using suppliers to subsidize the cost of Tivos to users. That would be leveraging it's resources to build a new source of advantage.

Nice op-ed which points out that firms unwilling to pay for employee healthcare simply shift the burden onto the public. No doubt some clever economist will soon point out that our average cost of an employee plus the average percentage of private/public healthcare is much more than in India, Russia, or China - making our labor costs even less competitive.

Folks, I am going to talk less about the tech sector and more about the macroeconomy for a few months. Frankly, the tech sector right now is incredibly boring - we know who the winners and losers are in all the big things for the next year or so (open-source, replication wars, rebirth of advertising). The real action is in the macro picture - and trying to understand the macro picture's implications for innovation.

How can we make sense of the conflicting labor market data? I think all the data basically confirms what we feel: what little jobs are out there are the ones that no one want.
60% of job growth has been in professional and business services. But:

"...when
we disaggregate the PBS sector, almost
three-fourths of its employment gains
are in administrative and support services,
where average hourly earnings run
17% below the national norm.

Link.

Market Drivers

Canadian survey reveals that people - especially women - still find online dating too risky and not trustworthy. I find this especially interesting because these results seem to be highly culture specific - the same seems to hold in Europe, but the reverse is true in Asia. Good stuff for entrepreneurs in this space to mull over.

How can you not read a story titled 'Muzak Thinks Outside the Box'? Especially when it's a gripping tale of total strategy decay and how not to recool your firm?!

Actually, that's facetious. Muzak has problems here, but globally is poised for massive growth - if it plays it's cards right. That's because it's already got the resources and competences that the developing world needs: historical musical knowledge, engineering skills, horizontal scope, and professional creative management. The key competence it needs to develop is rapid cultural learning - something it's not exactly renowned for.

NIH to set limits on consulting work and put in transparency guidelines for researchers. This is a good idea, because given the sorry state of the patent office, public knowledge spills over and gets irreversibly privatized, killing whole branches of innovation - unless rules like this are in place.

You mean you've never read a company filing? No wonder the average shareholder gets taken time and time again.

Next Big Things

As hypercommoditization extends from here to China, India, and Russia, the nature of consumption itself will shift. Ours will become, for lack of better word yet, a kind of post-consumerism - basically, meaning based and socially focused consumption. Theirs will become price and status based consumption (what ours has been for the last 20-30 years or so). Watch out for this - it's already started here (viz War on Fat/Smoking/etc, anti Wal-Mart movements, blogging, Fairtrade coffee, Home Depot's environmental care strategy). Firms that can't make the shift will begin to decay organizationally and strategically.

Note that consumption in Europe is not post-consumerist - it is more highly stratified and rigidly status-based than here.

Dualdiscs: a case study in property rights as strategic errors.

The Economist reviews a paper which examines the impact of bestseller lists on book sales. The results are intuitive, so I won't go into them here.

I think the far more interesting paper to do would be to examine how bestseller lists are gamed: it's fairly well-known in the publishing world that places on bestseller lists can be bought and sold, just like countries defend their exchange rates. How? By buying up books from the few stores from which the lists are calculated.

If you're just getting into valuation, this is not a bad paper to read. It examines how valuations were constructed during the bubble, how this differs from traditional valuation, and reviews the correlation between nonstandard value drivers and actual market value. Interesting.

Innovation Engine

Where has all the innovation gone? Leaving VC's aside - who we know are waiting for the IPO window to open - Morgan makes clear a very important point we've discussed a few weeks ago: corporates are absolutely awash in piles of cash after a few good earnings seasons. This is as big a brake on innovation as VC's current (rational but lame) risk aversion.

I won't go into a tedious discussion of capital flows to shareholders (ie why most firms don't pay dividends). I'll just say that this is a big hotspot to watch - and firms will, I think, be forced by the market to redistribute this cash rather then being given the latitude to invest it themselves, because of the current state of corporate governance. That's when the next innovation cycle will pick up in earnest.

Why Wall Street Wants Google IPO to fail.

Al-Jazeeeeeera Banned in Iraq

Look, you're probably thinking this is great news. Actually, here's what your friendly local talking heads aren't telling you:

1) Al-Jazeera is cut off all over the Arab world, because those guys think it's too biased towards us. The Saudis hardly let it cover anything at all. Bahrain's completely banned it.

2) Nobody cares, they get it via satellite anyways.

3) I am no big fan, but I will say this: Al-Jazeera is the only channel on which I have seen the war. Fou will see what a car bomb does to innocent bystanders in total detail - bodies blown apart - on Al-J. Of course, this kind of information may force you to reevaluate what your preferences - which is exactly what the talking heads doesn't want.

Their strategy is simple: they're always and everywhere better off grabbing attention-share (viz Michelle Malkin) than winning mind-share, because it's cheaper and stickier.

3) Saudi clerics issued a fatwa against Pokemon.

Hours of Fun

Classics in the History of Psychology. Surprisingly thorough.

Nalebuff on the Google IPO. The only article all week (of hundreds) that you really should read about it.

Art of the Day

"...Graffiti half a century ago had this innocence. It has long been commercialised, corrupted and, worst of all, acknowledged."

Link.

Nice piece about how hypercompetition's hit diminishing returns in consumer satisfaction:

"...Companies are offering the best bargains in history. It has never been cheaper to fly from Dallas to Los Angeles, to make a phone call from Boston to Brussels or to buy a computer or a DVD player. Yet the harder companies work to make products cheaper and better, the less they seem to impress their customers."

That's because consumers want more than simply low prices: they want to find meaning in the goods they buy.

Why They Hates Us

"...Did anyone think the appointment of Colin Powell and Condoleezza Rice, promises of $15 billion in grants to combat AIDS in Africa, and lectures to the politically powerful Arab world to cease the genocide of black Sudanese would earn George Bush slurs evoking the Taliban, the old Confederacy, and fascism?"

'Lectures' to the 'politically powerful Arab world' are gonna end the genocide?! Note to Victor (Gollum voice):This is why they hates us. Because we turn a blind eye to evil - real evil, not the 'axis of evil'.

You can see the Sudan post below if you don't understand what I'm talking about.

Genocide of the Day

Sudan.

OK. I got a nice email telling me that many of you probably don't get this.

It's pretty simple actually - why is the government ignoring the 'rebels' who are raping, killing, and starving it's people? Simple - the victims are not Muslims. And having an all-Muslim state is a pretty good way to get more $$ from the Saudis. Not to mention the fact that the Saudis have trained an entire generation of Muslims to believe that they cannot live in the same world as non-Muslims.

That's why asking the Arab states to help (as the colossally stupid Victor Hanson suggests above) is not gonna work - it's like asking the fox to guard the henhouse.

Full disclosure: I have known some of the people mentioned in these articles for many years.

Nice article which discusses the shift in how art and film have portrayed the corporation (from something which provided security and hope to something that's universally reviled). Related to my 'death of the corporation' article.

1984 (2004)

Prozac found in drinking water (Link 2). Level not revealed - Government dismisses it, arguing it's just trace amounts.

Uhhh...it doesn't matter if it's a trace amount. Because, well, it's still enough to have neurolochemical consequences over time. But possibly more importantly, we can take this as the MOST RELIABLE INDICATOR ever devised (economists everywhere would kill for a Prozac-drinking water dataset) of just how unhappy, bored, fragmented, divided, frightened, and generally anomized your society really is (and will be)

I am so moving to the 3rd world.

'Netflix Fallacy'

Crooked Timber folks are going on and on about the 'Netflix Fallacy' - which is really a nice example of hyperbolic discounting and preference reversal.

Shhh, don't tell them, I like it when they get ultra-theoretical and go on deeply probing two-week long lit reviews.

Politics of the Day

Krugman interview:

"...it is amazing, if you look at some of the ways they are willing to change policy, not in fundamental ways, but in ways that help them politically. If you read closely the reporting from Iraq, what�s pretty clear is that our army has been told to basically cede control of large swaths of the country to the insurgents in order to hold the casualty figures down until November."

Indeed.

Killer link about falsification as a dominant cognitive strategy. (Via the phenomenal N-C Thoughts).