Inflection Point

Blog Relocation

2010-07-03T11:41:00.002-05:00

Moving over to a new host. Link: www.aaronpigeon.com

Small Biz in the US, Myth or Reality?

2010-06-03T17:36:00.005-05:00

Small business success is usually taken for granted here in the US. We often refer to small business as the backbone of our economy, and at least in principle subscribe to the importance of small businesses in spurring job growth and innovation.

So it may come as a surprise that the US actually ranks in the gutter internationally according to some important small business metrics. According to the report An International Comparison of Small Business Employment, compiled from OECD data and published by the Center for Economic and Policy Research, the US ranks near the bottom of a set of 22 industrialized nations on all metrics examined.

The report found that whether in manufacturing, computer related services or research and development, the fraction of US residents employed in small businesses was lower than in countries such as Germany, Japan, and the UK, often by significant margins.

I thought these findings were very interesting in light of the rhetoric paid to the importance of small business in the US. As someone who believes strongly in the importance of small business as a proxy for entrepreneurial initiative, these findings worry me. Does our image of a nation of rugged entrepreneurs and innovators belong more to the realm of myth than actual reality?

This is hard to know. While the quality of our startups and small businesses is certainly more important than the quantity, it is also true that entrepreneurial success is assisted by the ecosystems that build up around large concentrations of ventures. The successes of venture communities in Silicon Valley, NYC, and Austin, TX certainly point to this.

A common view that I subscribe to, and one that is echoed in this report, is that the difficult task of starting a business is compounded greatly by a lack of access to affordable health care services in comparison to other countries. It is no trivial thing to quit a job with guaranteed health benefits to start a company with a significant risk of failure, and many commentators believe that affordable job-independent health care would greatly contribute to a long term increase in the number of successful small businesses.

Journalism (Remix)

2010-05-24T14:01:00.003-05:00

I have written before on how the news business model is in dire need of an update. Here and here, I've argued that what we casually refer to as news is actually a conflation of the two processes that go into making the news product. The first is journalism, or the actual gathering of news, the second is the process of distributing that product to consumers.

This distinction is crucial. Much is being made of the death of news, but the loudest voices making this argument all come from the traditional news industry. No surprise then that all this hot air is merely code for the increasing irrelevance of newspapers. But this should hardly be a surprise to anyone. Indeed, the surprise is that a nearly century-old business model still has some life left at all!

It is clear that there are two major flaws that must be addressed in order for the news business to return to profitability. One is a matter of journalistic process, the other is a more fundamental retooling of the news mindset. Both contain massive inefficiencies and for the most part, have failed to take advantage of the major technological shifts of the last decade.

For the most part, journalists operate as independent entities and “sell” a finished product to newspapers, a sort of ongoing freelance entrepreneurial relationship. But as is the case in most production processes, there are efficiencies to be realized through the division of labor.

Not being a journalist, I can only speculate on the form a division of labor would take. What is clear however is that as more and more information is becoming available via the internet, the difficult task has become not dredging up information, but simply making sense of it all. This is almost certainly more efficient when tackled by a team than by an individual.

The second opportunity for the news business is more of a philosophical shift. Journalists are hell-bent on accuracy and a polished product, a holdover from a time when an article had to actually go to press and stand on its own for a full 24 hours. But real time updates are a reality of the web, so a transition to a more informal “work-in-progress” mentality seems inevitable (Great article on this “product vs. process” war here).

Journalists have also not fully adjusted to the realities of a world where they are no longer the sole expert on their beat. In the case of the Gulf Oil Spill, much timely information has bubbled up into the blogosphere (sorry couldn't resist!) from people on the ground with access and technical expertise a journalist could never match. In such cases, what is needed is aggregation and verification rather than traditional reporting; again a process more efficient when performed by a large (potentially crowd-sourced) group.

It seems clear therefore, that a wholesale transformation away from publishing stand-alone, polished pieces is inevitable. Journalists should not be afraid to publish what they know, even in a fragmented form, and enlist their readers to help verify and add new information. This reporting model is far more efficient and timely than what comes out of a traditional news-making process, and fits well into the chaotic give-and-take environment of the web.

In closing, the key to seeing what the future of the news business might look like is to imagine that we had to reinvent the entire process from scratch. The tools and technologies developed over the last decade would play a much larger role than they do now.

I am convinced that all the elements of a profitable news industry are already in place. What still needs to happen is a major shift in attitudes toward news and how it is produced. There are almost certainly huge opportunities for those who figure out the recipe first.

Death Is Simple Pt. II: Book Stores vs. App Stores

2010-05-06T16:24:00.003-05:00

A friend of mine has written a multi-part piece explaining the concept behind the the name of this blog. Here is Part 2:

Goodbye bookstores, hello online app stores? I hope not, I truly enjoy the sanctuary a real bookstore has to offer, especially Ann Arbor, Michigan’s own Borders, the second largest bookstore chain in the U.S. However, the advent of versatile e-readers (Apple’s iPad, Amazon’s Kindle, Sony’s Reader, Barnes & Noble’s Nook, Borders’ Kobo Reader and more definitely on the way) has permanently transformed the basic paradigm of a bookstore to a virtual model based upon a reading device and its corresponding app store.

Bookstore chains can no longer rely on selling paperback books within the serene comforts of a brick and mortar store. Ultimately, the basic premise of a bookstore is no longer solvent; the focus has shifted to creating an e-reader ecosystem while maintaining relevance among existing customers, two points I will refer to later.

As I outlined in my previous post, an inflection point for our purpose occurs at the point when business as usual starts putting companies out of business. It is the point when past success stops paying dividends and begins to prevent growth in profitable directions. Everyone returns to zero once the paradigm shifts.

International Data Corporation (IDC) estimates about 2.5 million e-readers were sold in 2009, and that number is expected to double to 5.1 million this year. For now the Kindle rules 60 percent of the e-reader market share. Its place at the top is by no means guaranteed, but without a doubt e-book reading is gradually replacing the omnipresent paperback at your local bookstore.

Among my favorite bookstores, Borders is on the brink of succumbing to the e-book assault. Narrowly avoiding default on a $42.5b debt on April 1st of this year, it will live to fight another day. But the long term outlook for the company is grim, as the trends that have nearly brought it to its knees will only get stronger with time.

This author believes that Borders' best long term hope is an “acquisition by a larger bookstore chain like Barnes & Noble.” But, as I said last week, death is not simple in the business world. I disagree with the author’s long-term survival diagnosis. Borders should follow Barbes & Noble’s blueprint and attempt create its own inflection point, otherwise it will be facing something more akin to liquidation than acquisition.

But what has B&N done that has allowed it to become the top bookstore chain in the US? For one, it has been much quicker to jump onto the e-reader bandwagon than Borders has. In a smart strategic play, it recently unveiled compatibility between its Nook and the Android platform, plugging it in to an existing base of applications and users.

In addition, B&N is touting a feature called Read In Store, which allows Nook users to browse the retailer’s library of e-books free at any B&N location, with the entirety of each book accessible for an hour per day for free. This may prove to be popular, especially for fast readers out there, and may provide a partial solution to the question of how to lure customers back into physical bookstores.

Additionally, B&N will sell their updated Nook not only on its website and its bookstores, but also in Best Buy stores. Similarly, Amazon has announced that it will start selling Kindles in select Target stores. Selling the Nook at retailer store with retailer pricing may allow B&N and Amazon to partially avoid being outflanked by threats from the iPad and other e-readers.

Particularly, touting the “Read In Store” feature may allow B&N to remain on the offensive and at very least establish novel niche in the digitalized book business world and above all, revitalize the brick and mortar concept of selling books:

B&N's goals (and Borders' as well, if they are wise) can be summed up thus:

-Move quickly to maintain relevance among remaining bookstore customers.

-Integrate digital avenues of expansion into brick and mortar model.

It may be too late for Borders to successfully break into the e-reader/app store space, but waiting around for an acqusition is certainly not going to enrich shareholders in the long term. Either way, B&N is the model it should be trying to follow while rebuilding or positioning itself for acquisition.

That said, Borders and B&N still face a real long-term threat from dedicated e-reader companies like Apple and Amazon. This is the Catch-22: as e-reader devices add more performance enhancements and improve their online selections, fewer customers will enter a real bookstore and buy physical books. The real question may not be whether Borders can survive, but if bookstores in general will make it.

Adesina "Ade" Aladetohun is a Communications Officer in the US Marine Corps

Guest Post: Death Is Simple Pt. 1

2010-04-22T19:05:00.001-05:00

A friend of mine has written a multi-part piece explaining the concept behind the the name of this blog. Here is Part 1:

in·flec·tion point:

Noun: The point of change on curve: a point on a curve at which the arc changes from convex to concave or vice versa.

Encarta Online

"An event that changes the way we think and act."

-Andy Grove, Founder of Intel

An inflection point refers to the locus of major change within a system. When applied to a business context it refers to an invention or paradigm shift that disrupts entire companies and industries. It is a reminder that no matter how secure a position may be now, market disruptions are always a risk, if not an inevitability.

To minimize this risk, we must be able to conceive of change beyond our immediate views and perceptions. In doing so, we remove the blinders that may cause us to miss threats beyond the immediate event horizon.

From a medical standpoint, death is simple. The heart stops beating and the body stands by for decomposition. In the business world, death is far less final. Some business paradigms or models have become adept at simply remaining on life support for as long as possible, rather than succumbing to a natural death at the market's hand. Numerous unresolved consumer complaints, specious profits, and gimmicky marketing tactics are all symptoms of this underlying problem: Business models that fail to reflect consumer realities struggle to hang on at the precipice of death until they are gradually pushed off by emergent models.

Let's unravel this further by looking a case that illustrates this phenomenon. The US cellphone model is based on an archaic, closed legacy model whereby the cellphone carriers subsidize OEM phones and redeem their lost margins through monopolistic phone plans. Over time, as profit margins have tightened, this model has become synonymous with a lack of regard for the consumer, frustrating overcharges, hidden fees, and possible tiered data charges in the case of AT&T (who is just starting to get hit by iPad traffic).

Despite the best efforts by the big cellphone companies to hang on for a dear life, their business model is starting to change, if only because the current model is unsustainable. Viable competitive technologies are just starting to emerge after years of actively being resisted by their entrenched interests. For a perfect example of this collective industry stupidity, see this multipart series in which David Pogue enlists his readers to hassle the big four until they turn off maddening voicemail prompts. Chaos and hilarity ensue, and we see just how poorly these companies really treat their most vocal customers.

Despite all this, there are encouraging signs that the legacy model is moving closer to its expiration date. The advent of ubiquitous Wi-fi, Skype, magic jack, VOIP, and data centric phones are all harbingers of reliable alternative means of communications without rigid rules of service providers.

As we all know, Google and Apple have fired their respective opening salvos in this battle with their respective handsets. Although still (mostly) subject to existing industry rules, these phones represent the beginning of an open cellphone model consisting of "multi communication" devices. These internet centric devices have the capability of communicating via a wide range options, including social networking websites, text messaging, skype, AIM, Google Voice, and other technologies yet to be developed. Unlike the legacy model, the open, multicommunication model shifts the focus from voice plans (measured in minutes) to data packages that handle a wide range of consumer needs in addition to communication, such as shopping, media consumption, and navigation.

Because these internet centric devices are equipped with Wi-Fi, the need for a menu of voice plans is increasingly unnecessary. And as voice plans are cell companies' primary bread and butter, it is easy to see why the industry is so intransigent in embracing multi communication platforms.

Herein lies the lesson of the inflection point. Once the internet made its way to mobile devices, the game changed. Companies with a stake in older infrastructure were put on notice, but instead of embracing the change, their size made them unable to move quickly enough take advantage it.

The best way to avoid being upended by the next inflection point is to act generatively, not reactively. As the old saying goes, the best way to predict the future is to create it yourself. Past success guarantees nothing. Everyone returns to zero once the paradigm shifts, and the status quo becomes irrelevant.

Adesina "Ade" Aladetohun is a Communications Officer in the US Marine Corps

Why Health Care Reform Won't Work

2010-04-13T11:17:00.000-05:00

This post was difficult to write for a number of reasons. First of all, any topic touching on current political issues is immediately distorted and shoehorned somewhere onto the Republican/Democrat spectrum. The linguistic judo required to escape such juvenile binary categorizations are beyond my meager abilities as a writer.

Secondly, the problems that health care reform (HCR) is attempting to solve are very real. Medical costs contribute to almost half of all personal bankruptcies, our population is aging, and wages have not kept pace with the rise in costs. It is therefore clear that some sort of reform is necessary, probably just not the kind we're going to get. Here's why.

It is clear that the health care system as it stands is bankrupt. To help fix cost overruns, HCR has included a provision for an individual mandate that it hopes will prove to be the deus ex machina, corralling young and healthy payers into the system, thereby reestablishing solvency and magically providing affordable health care to everyone. I am utterly opposed to the concept of being forced to buy anything for any reason, there but there are other reasons to believe that the mandate won't work as planned.

The fundamental problem with the idea of health insurance is that it is so much more complex than other forms of insurance. For example, most homeowners pay for some sort of fire insurance. There are policies for flood insurance in places like New Orleans, and earthquakes in California. These types of insurance are conceptually simple. Claims don't get filed for maintenance or general repairs, and insurance is understood to be a last resort for when the house burns down, floods, or gets swallowed into the San Andreas fault. Because it's an all or nothing deal, you don't get to file for flood insurance when the drain clogs and your bathtub overflows.

It is also easy to understand the causes behind destruction of property by natural forces. A house built on a floodplain faces an above average risk of flood damage, and insurance will cost extra if it can be purchased at all. Fire codes demand that houses be inspected for faulty wiring, code violations, or other potential safety issues before they can be built or insured against fire.

If health insurance were like regular insurance:
*No claim could be filed unless a life was in immediate danger or death was imminent.
*Any coverage would be subject to rigorous, periodical health inspections, and "code violations" or unsafe behaviors such as smoking and obesity would be penalized.

There are other differences. Take for example the accumulation effect, or the extent to which consequences are "baked in" no matter what corrective action is taken. A old house can be renovated and brought up to code (and no insurance claims are filed in the process), but no amount of corrective action can completely reverse the health complications brought on by forty years of smoking, heart-clogging foods, and a sedentary lifestyle.

There is also difficulty in separating the direct consequences of an action with its secondary effects. Take smoking again as an example. It has been proven again and again that smoking not only directly causes numerous health problems, but also aggravates conditions that already exist, or ones that may not otherwise have become significant. All significant medical costs are theoretically covered if the person has insurance because there is no way to know whether a given condition is the result of bad luck or poor choices, and therefore we prefer to err conservatively, especially when we consider that we too may need our own assistance in the future.

Spreading the risk of personal decisions across society is a variety of moral hazard, which is defined as the increase in risky behavior brought on be the ability to outsource the consequences of said behavior. Most of the public was introduced to moral hazard when the financial industry was getting bailed out after its own poor "life choices." For all the wailing and gnashing of teeth over rescuing Wall Street, we seem to have no qualms about outsourcing our own personal health risks to the general public and engaging in behaviors likely to result in the need for increased health services.

I could at least feel better about reform if it included incentives for healthy lifestyles and reimbursements for preventative care. But there aren't any. Instead of attacking health problems across a whole spectrum, we are choosing only to deal with them at the most expensive stage. Furthermore, the tools we use treat late stage conditions are nowhere near as effective as preventing them in the first place. We know that personal responsibility and preventative care are effective, why then have they been left out of the most comprehensive health care bill in recent history?

This is why I find it utter impossible take the supporters of the reform bill seriously when moral issues are brought up in defense of HCR. Unless supporters are willing to admit that drastic restrictions on personal behavior are the inevitable outcome of an individual mandate divorced from any preventative incentives, and that cost estimates are wildly optimistic (See also: Afghan war, Iraq war, Social Security, Medicare), I have no reason to view HCR as anything other than a political stunt. This debate won't be ending any time soon.

Basics of Climate Change Economics via Paul Krugman

2010-04-10T15:02:00.002-05:00

I tend to keep Paul Krugman as a columnist at arm's length, but his recent long-form piece in the NY Times Magazine caught my attention for the quality and comprehensiveness of his analysis and the simplicity of his writing in summing up the climate change issue:

Let’s be clear. We’re not talking about a few more hot days in the summer and a bit less snow in the winter; we’re talking about massively disruptive events, like the transformation of the Southwestern United States into a permanent dust bowl over the next few decades.

He clearly explains the economics behind pollution, cap and trade, and carbon taxation in layman's terms and lays out some workable ideas for policy changes.

He also gets a shot in at the conservative troglodytes in office who oppose any climate action by railing against government regulations of business in principle:

This reaction — this extreme pessimism about the economy’s ability to live with cap and trade — is very much at odds with typical conservative rhetoric. After all, modern conservatives express a deep, almost mystical confidence in the effectiveness of market incentives — Ronald Reagan liked to talk about the “magic of the marketplace.” They believe that the capitalist system can deal with all kinds of limitations, that technology, say, can easily overcome any constraints on growth posed by limited reserves of oil or other natural resources. And yet now they submit that this same private sector is utterly incapable of coping with a limit on overall emissions...

Its good to see Krugman can still think like an economist, I've not been impressed with his column since he morphed into a reactionary Keynesian cheerleader during the stimulus debates.

The Downward Spiral

2010-03-28T16:04:00.008-05:00

Been far too long since I've been able to post, and I'm going to blame the GMAT for that. To make it up, here are three different angles to the ongoing saga of Old Media trying to adapt to the Internet Age and mostly failing. The dots should be easy to connect.

First, Rupert Murdoch is making good on his promise to cut off access to his news organizations' online content, and in June the British papers The Times and The Sunday Times of London will implement a subscription only policy for all online material. No longer will Murdoch be able to whine about "parasites" like Google helping to "encourage promiscuity" among online readers and steal his revenue streams.

Such petulance and its resulting folly has been well documented on this blog. It now only remains to be seen if the pay wall can reverse declining revenues caused by a 21% drop in readership from February 2009 to February 2010 (see NYT article above). My prediction, if people don't want your stuff for free, they're sure as hell not going to pay for it.

Secondly, there was a great Business Insider article recently regarding the relationship of the print media to the new Apple iPad. In short, it won't save them.

As I have mentioned previously, newspapers are in the content delivery business, not the news business. It is the delivery system that is dying, not the news itself. The article gets it spot on:

...the hullabaloo about the iPad-saving-publishers'-asses resembles the hullabaloo about what people thought the Internet would look like when it first burst on to the scene.

"Like TV", shouted the TV companies.

"Like a magazine!" shouted the magazines.

"Like a newspaper!" shouted the newspapers.

Of course, as it turned out, the Internet didn't look much like any of those things.

Precisely. Current news delivery is based on a business model only slightly more ancient than Mr. Murdoch himself, and is unlikely to adapt quickly enough to survive in the Internet Age.

Third, an excellent article from Mark McLaughlin at HuffPost on how wrong-headed media is about this entire issue. A great read, here are two highlights:

The holistic view of mass media overwhelmingly suggests that consumers are easily persuaded to pay for distribution but only rarely do they pay for content in a specific and direct manner. Advertisers underwrite content while consumers pay for distribution services.

In other words, it is not because of the internet that consumers do not like to pay directly for content, they have always payed for the delivery system rather than the news itself:

The reality is that the audience never paid for newspaper content. The audience paid the newspaper company to deliver the paper to their door and now they are paying an Internet Service Provider for distributing the content to their computer. The audience is still paying for distribution; they are just migrating to a digital distributor because it is better, cheaper and greener than newsprint.

Let's just cut out the middleman, shall we?

Manager or Persuader: A Case Study in Leadership

2010-02-17T12:28:00.003-06:00

President Obama's current difficulties governing this seemingly ungovernable nation serve up a valuable object lesson in leadership style.

The street parties that erupted on the night of the election helped us temporarily forget what many were saying throughout the campaign: despite the rhetoric, the good will, and the obviously historic moment, there was no way Obama could ever live up to his charismatic image built out on the campaign trail.

The President of the United States is casually said to be the most powerful man in the world. The reality is actually much more complicated. Power comes in two flavors: personal and institutional. Here's why this distinction is crucial to understanding Obama's troubles.

President Obama rode into office on a massive wave of expectations. These expectations were fueled in part by the historic nature of his campaign, but a large part of his appeal stemmed from tremendous personal charisma. This charisma is an example of personal power. It is bound up in the individual, and cannot be transferred to someone else.

When Obama spoke about hope and the desire to change Washington, he spoke from the realm of his personal power. Upon taking the oath of office, he picked up the mantle of institutional power. When people refer to the "Leader of the Free World," it is this type of power they are referring to.

Institutional power is power by fiat. The Office of The President of the United States conveys certain powers and limitations on whoever holds the position. Theoretically, anyone or anything elected President has the same authority regardless of ability or suitability.

When people expected that Obama would be able to translate his rockstar personality into action and effectiveness in the Oval Office they discounted how difficult it can be to transform one form of power into the other. Politicians and leaders are often able to develop both over long periods of time, but riding one onto the other proves a rare feat.

For example, politicians rarely rack up high profile accomplishments once they leave office. Rather, they tend to head straight for other rigid institutions such as corporations, executive boards, lobbying firms, or academia and disappear from the public eye.

It is equally difficult to find examples of famous actors, athletes, or other large personalities who successfully run for public office. Ronald Reagan was a success, but certain former body-builders and pro-wrestlers have had less-than stellar records. There are rumors from time to time of political pundits running for office (MSNBC opposites Chris Matthews and Ed Schultz both come to mind), and the jury is still out on comedian Al Franken's recent election to the Senate.

There is also the occasional wealthy businessman or CEO who makes a run for governor or third-party candidate, but they tend to closely resemble the politicians they seek to supplant in that they have been successful in a highly institutionalized environment. Can anyone really see a charismatic and successful industry player like Steve Jobs or Warren Buffett running for office?

This is why President Obama will have to build a whole new way of doing business in Washington in order to accomplish anything on his agenda. The Presidential Institution has swallowed up a large part of Obama's personal brand leaving him to go through the motions and try to keep his head above water. All of this while learning how to manage affairs on a day-to-day basis.

A manager personality is more effective in an environment that affords institutional power. A persuader prefers to use personal power to shape situations. Obama is a persuader that now needs to learn effective management. Fast.

The iPad: Apple's Diversion Tips Its Hand

2010-01-27T23:10:00.002-06:00

Let's all be perfectly honest. Apple's newest creation is underwhelming, more or less what was expected given the constraints of creating a device to bridge the gap between a phone and laptop. It's a large iPod Touch with a data plan and a great battery. Nothing more, nothing less.

However this product launch is extremely significant in another way. It is the latest data point indicating a tectonic shift in Apple's strategic outlook. The shift initiated with the iPod, was parlayed into the iPhone, and is now diversified into the iPad: Apple's long-term focus is no longer on hardware or software, but rather on content delivery.

Slate.com's Farhad Manjoo gets it partially right when he mentions that Apple has taken another step toward making the computer more like an appliance. But in his endearing wide-eyed way, he misses the greater significance of that very point.

Hardware has become a commodity of sorts in the tech world. Amazon, a leader in online retailing, has its own branded e-reader, the Kindle. Google, the leader in search and web advertising recently slapped its name on the Google Nexus One handset. When any heavyweight can jump into your business at will, your business has become commoditized.

No doubt about it, Apple makes money from iPhone sales and it will make money from the iPad, but it realizes that the strategic high ground in the increasingly crowded, incestuous computer/cellphone/netbook/e-reader/iPod industry no longer lies in the device itself, but rather at the choke-point of content distribution. The device is merely the portal to what users really value: music, TV shows, books, etc.

Did you catch that? The device is just a gateway. The device has become commoditized.

With the iPad, Apple has positioned itself once again as the undisputed king of content delivery. The fact that the gateway itself is another stunning example of Apple design aesthetic is merely a sideshow, a selling point.

Prediction: The iPad's success will be a proxy for the odds of Apple's bet on content. Keep an eye on the rumored Apple/NY Times relationship. If Apple can revolutionize online news delivery the way it did for music delivery, there is good reason to bet on Apple staying on top of the tech heap long after Steve Jobs retires.

Here's why: This news delivery puzzle is one of the last low-hanging fruits in content delivery. As I wrote previously regarding the NY Times, the journalism business is literally dying for an online content delivery model that makes money. If the iPad can provide that gateway, Apple's app store/content delivery-focused strategy will likely prove to be the most significant tech game changer since PageRank kicked off Google's search engine dominance.

The iPad is about as close as we will ever get to a glimpse of Steve Jobs' hand. Once again he appears to be a step ahead, but in reality he's merely building on something already in place. Apple knows that every time it comes out with a new toy, the rest of the industry has to copy it or else seem out of touch. In this case the toy is a diversion from Apple's true strength.

Well played, sir.

From Poverty To Prosperity: A Short Review

2010-01-25T16:53:00.004-06:00

I recently purchased and read "From Poverty to Prosperity." It is a succinct and insightful take on the profession of economics as it stands today, and I want to review it here.

“For years, the story economists told to describe the world around us was incomplete.”

-Arnold Kling and Nick Schulz

"From Poverty To Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity"

Economists and word leaders have long struggled with the question of why some countries seem utterly unable to lift themselves from poverty and enter the modern world. Due to the recent earthquake, much attention is be paid to Haiti in this regard. Why is it that no matter how much foreign investment and aid flows in, the vast majority of Haitians have remained mired poverty for so long?  

On the other side of the coin, how is it that for other countries such as Haiti’s next-door neighbor The Dominican Republic, progress seems to happen organically, without much outside help? In many cases, the modernization process happens quickly, sometimes taking as little as a single generation to transform an entire economy.

Is it possible to know why? And are these phenomena related from an economic perspective? According to AK and NS, the answers are yes and yes, and the secret lies in how we understand the growth of technology and its economic implications.

Technology can be defined as anything that increases productivity. It is often seen as the economic equivalent of a free lunch, a sort of deus ex machina that lets workers accomplish more with less, allowing the standard of living to rise for everyone.

But technology as an economic phenomenon is not very well understood. Traditional economics tries to explain the world using static models, and because the factors of technological growth are often quite subjective, it gets left out of many economic analyses or treated as a kind of afterthought. 

But the omission only serves to highlight the question: Why is it that technological progress is not only increasing, but increasing at an ever-increasing rate?

AK and NS believe they have they answer, and it revolves around the book's central conceptual model, the relationship between hardware and software. The hardware consists of traditional economic inputs (land, labor, and capital). As tangible things, they are limited to fulfilling one purpose at a time. A piece of land cannot both have factory on it and be used to grow wheat, just as a worker cannot not both farm a piece of land and work in a factory. 

That is is why the hardware segment of an economy does not keep pace with the exponential growth of the knowledge economy and why foreign aid seems to do so little for economic development. A single computer or factory can only serve one purpose at a time, whereas the design of the computer or factory can be spread across infinite applications.

But this knowledge economy has a very special need without which it cannot take root, and that is the software layer. For example, without clear intellectual property rights and legal recourse for disputes, a modern economy could not exist. This is the dividing line between countries that develop and those that do not.

According to NK and AS, this software layer is made up of a combination of cultural traditions and government/economic institutions that create and align incentives for entrepreneurship and economic growth. It is in "buggy" software that impediments to progress such as corruption, weak property rights, and lack of intellectual property laws occur.

In other words, without a robust, modern software layer, no amount of aid or capital investments will ever address the plight of undeveloped economies. And while many of these insights may seem to like common knowledge, the authors do an excellent job of paring back the layers of the modern economy and showing us how fragile and complex such a thing really is.

All this and more is served over an illuminating, non-technical narrative of the economic history of developed and undeveloped economies. Interspersed between chapters are interviews with leading economists such as Douglass North, Robert Solow, and others who operate just outside the current economic mainstream, but whose ideas in these areas are slowly gaining acceptance. 

All in all, From Poverty To Prosperity is an intelligent, well-grounded critique of modern economics and a necessary read for anyone trying to understand the role of technology in the modern economy.

The Scarcity Business Model in an Online World

2010-01-20T17:30:00.003-06:00

The beleaguered New York Times and other news outfits like it have been engaged a giant game of industry chicken over the last several years in an effort to see who will make the first move toward charging for its online content.

The stakes are huge. Each company is rightly worried that the first one among them to implement any kind of pay system will be the sacrificial lamb, and it seems the NY Times simply blinked first.

Details are minimal and speculation rampant. Unlike the failed TimesSelect model that was abandoned a few years ago, this model apparently will charge for general usage, rather than premium content.

The more interesting aspect to this development goes rather like this: Will people pay up?

My stance on this issue is the same as when I analyzed Rupert Murdoch’s petulant remarks about Google last month. The heads of the old media companies (think NYT, News Corp., NBC, etc.) are massively discounting the game-changing effect that the Internet has and will continue to have on media business models, some of which predate the last century.

By moving in the direction of paid content on their websites, they are attempting to replicate the Scarcity Business Model in the online world. This business model is based on charging for a good or service in accordance with its availability. Prices are determined based on the laws of supply and demand, and each consumer decides whether of the value of the good is worth its cost.

In the case of a newspaper the physical object is purchased for access to the intellectual content, as there is (or rather, was) no other way to get the information firsthand.

Scarcity is what gives the newspaper or any other physical good its value. But no such scarcity exists in the online world. The physical good is not the only gateway to the information. If you are reading a newspaper, I cannot read the same newspaper at the same time. But online, thousands of people essentially read the same paper or access the same information at the same time.

Clearly the laws of scarcity do not apply here, and therefore any content or media business strategy that takes the Scarcity Business Model for granted in the online world is making a colossal strategic error.

These companies will argue rightly that they deserve to be compensated for the services they provide. They will argue correctly that without some sort of pay system journalism as a profession will cease to exist, and we will all concur that an uninformed populace cannot sustain a democracy.

But the newspapers fail to realize that they are in the newspaper business, not the journalism business. There is no future to the gigantic, unwieldy broadsheet format that has fallen out of favor with the under-50 set, especially now that anyone with Internet access can be an aggregator and distributor of information and play the role of a newspaper without any of the overhead.

A parallel exists in the recent record industry collapse. When companies in this space began to lose money to the digital revolution, they tried every way possible to impede progress. They poured money into DRM and waged punitive lawsuits against their own customers. And like newspapers today, they wailed that without them nobody would make music any more.

Then Apple came along with the iPod and the iTunes store and developed a successful new business model selling music. It then successfully expanded it to movies, TV shows, even rentals, and is expected to make a play for the eBook market next week.

Record companies still exist as a legacy industry of course, but a dying one. This will likely be the fate of the newspapers as well, because someone along the line will hit upon a content delivery system that people will be happy to pay for and the journalism industry will realign itself. We will remember the old pay sites like we remember GeoCities, casualties of the creative destruction that has always driven the free market.

My guess is that the pay system may hold back the tides for now at the Times, but the Grey Lady is in a long-term slide. My prediction is that the Times as we have known it for the last 150+ years will cease to exist by the end of this decade, and the same goes for most of the other old-media companies. And to them, I say good riddance.

De-branding: A Thought Exercise, Part I

2010-01-04T14:28:00.001-06:00

It was recently brought to my attention that Starbucks has launched a rather innovative branding scheme. Perhaps it is incorrect to call it a branding scheme in light of what actually happened. Starbucks has in fact opened a store in the Seattle area that is completely devoid of any corporate branding, and plans for more of these “pilot” stores are in the works.

These de-branded stores in reality are likely listening posts for the coffee giant, which has been hit hard by the recession and has suffered from market saturation in recent years.

Starbucks has been losing business to the same local coffee shops that it gobbled down on its way up, and this move is likely a way to study what may be done about that.

I see this as a wise move for Starbucks. Its decline may be part of a long term trend (albeit a slight one) away from massive, sprawling corporations in favor of more ecologically and socially responsible local businesses, but I see few other ways for it re-invent itself.

Aside from corporate strategy issues, I got to thinking of this as a branding issue. Where else might this idea of “de-branding” be implemented? Would it work for a standalone product or would need to be an extension of an established brand? Would the product even need to be physical?

As I talked to friends about it, I hit on products where it might be accomplished, one has already been tried (poorly), and the other has not.

Vodka. Among purists, less is more. Taste, that is. Unlike any other spirit, the perfect glass of vodka is something of an alcoholic nirvana, the blissful absence of almost any flavor.

This Platonic Form of vodka must literally be distilled and filtered down to its essence (usually again and again), and if one considers that from a branding perspective, the logical conclusion is the utter lack of any branding whatsoever.

Clearly though a plain unlabeled bottle is not going to do very well on a crowded bar shelf. The bottle itself must be the brand or logo. As I mentioned, this has been done before.

It is called Crystal Head Vodka and comes in a skull shaped bottle. Dan Akroyd is featured in a series of videos on their website hawking the beverage and there is a back-story worthy of an Indiana Jones film.

But I think Crystal Head missed the point. The elaborate back-story and celebrity ad campaign are the exact opposite of the pure essence that is the hallmark of a good vodka, especially in the premium market segment it is clearly focused on.

I would instead hire an elite design firm to design a simple but iconic bottle that would exemplify the spirit of the beverage inside. (Forgive my blatant pun, if you will.)

This bottle would serve as the packaging, logo, and the entire brand.

Would it work? I expect it would if were launched under the umbrella of a premium label it just might.

Next, a de-branded sportscar........

Worst Calls of 2009

2009-12-22T13:29:00.000-06:00

Title says it all. From BusinessWeek.

http://www.businessweek.com/bwdaily/dnflash/content/dec2009/db20091215_621992.htm?link_position=link1

On The Vegetative State of the News Conglomerate

2009-12-09T21:47:00.000-06:00

One thing we know for certain about the web is that it has made people LESS likely to to pay for That Which Can Be Had For Free (see music, movies, tv shows, and of course news). So why why does Rupert Murdoch of News Corp seem to to believe that the pay model is the journalistic business model for the future?

Murdoch is right on one count. The current journalistic business model is not sustainable. Paper subscriptions are down, classifieds and ads are down, and people get more and more of their news from the Web. For free.

So what's an ailing news empire to do? Recent revelations that News Corp was in talks with Microsoft to delist its content from Google, in exchange for Bing's exclusive rights to all News Corp material, have fallen through. This proves that not only do subscribers and advertisers fail to see value in a traditional newspaper, a major tech player fails to see value in a newspapers' online counterpart.

Murdoch is not the only one. Billionaire Sam Zell recently had his acquisition of the Tribune Co (LA Times, Chicago Tribune, etc) go bad, and ever the sagely Warren Buffett has stated flatly that he would not buy a newspaper company "at any price," citing "unending losses."

The upshot is that News Corp and other old media companies seem to value their product more highly than many of their customers value it. And just like so many other things on the national consciousness, this is a highly unsustainable position to hold.

A major factor in play is the commoditization of news. There is no way to charge for what your customer can go next door and the door after that to get for free. From an average person's perspective, there is little difference whether they get their news from broadcast TV, the New York Times Home Edition, or the Wall Street Journal Online. Same goes for NYTimes Online vs WSJ Online vs AP Online, etc.

Lowering differentiation is death for subscription numbers, and therefore profits. With the exception of the Wall Street Journal, all the major dailies have taken a dive over the last several years (WSJ counts its paying online subscribers, and likely double counts a few). This forces major cuts in hard news, as it is more profitable (sadly) to cover a Gaggle of Gosselins than events that have actual import.

It is these declining revenues that are the primary impetus behind Murdoch and Co's recent petulant comments blaming Google for their loss in revenue. Murdoch and old media should be running scared, but it is not Google or ungrateful consumers that are killing them. As the record industry is proving, there is no long term survival for companies that treat their customers like dirt (hear that Comcast, Verizon?). Eventually someone comes along and eats your lunch, and in the case of old media, that someone is shaping up to be - well - new media.

During the Iranian presidential elections of 2009, the government succeeded in almost completely blocking traditional media from covering the horrendous violence perpetrated by the government and "militias" against peaceful demonstrators. Most of what made it outside the country came from Iranians in the streets, providing data points that were picked up and combined into narratives by bloggers in near real time. Only then were the stories picked up by traditional news.

The recent US presidential elections were also covered by all kinds of new media journalists using blogs, cell phones, twitter, and even facebook. They succeeded in capturing in rich detail all the various facets of political campaigns that were invisible even four years ago.

These outlets vastly increase the number of inputs into the national consciousness, capturing in higher resolution every aspect our lives. Traditional media is a bottleneck that is beholden to ratings, advertisers, and the political/economic agendas of their owners. Minor stories that may appeal to segments of the population smaller than an advertiser's target audience are often eliminated from coverage.

These stories still resonate with large numbers of people however. Independent news outlets can afford to pick up these stories and even thrive on them, as the numbers necessary to drive blog traffic is generally much smaller than that necessary for traditional coverage.

The aforementioned record industry implosion over the last ten years provides a parallel example that should serve as a cautionary tale to Murdoch. In face of slipping sales and declining profits the more the record industry tried to pursue absurd lawsuits against its customers and force consumer compliance, the more users drifted toward alternate methods of distribution. The same thing is happening in the news world.

Murdoch is absolutely right, the journalistic model needs to change. It already is. He should pay attention.

Wednesday Wit and Wisdom

2009-12-02T14:11:00.000-06:00

"In all affairs it is a healthy thing to now and then hang a question mark on the things you have long taken for granted."

-Bertram Russell

Models of Entrepreneurship and the Entrepreneur

2009-11-29T14:54:00.000-06:00

I've been meaning to write this post for a while. Part of this blog is going to be space for me to put down ideas that get kicked around in my head, hopefully a bit more coherently than I find them there.

This post has been simmering for a while and has to do with entrepreneurship, and more generally the concept of being self-employed.

The entrepreneur is a distinctly American archetype. It traces its roots back to the pioneers moving westward, pushing through hardships unimaginable to most of us today. It is the idea that by hard work and determination, an individual can carve out an existence on his own terms, rather than having his livelihood subject to existing structures out of his control. It is possible to argue to what extent these ideals exist and are achievable in the real world, but we will take them for granted in this discussion.

It is useful to think of three different paths of entrepreneurship, each with its own advantages and disadvantages. While these categories are generally more distinct in theory than in practice, they provide a useful way of understanding the concepts. Here are the three approaches:

* Franchise method. Simplest approach. Takes an existing business model and copies. May add some unique elements but in general can be described as "cookie-cutter." E.g. McDonalds.

* Bootstrap method (BM). Organic approach. Builds a business model from the ground up based on constantly changing environment. Relies primarily on growth to finance expansion. Describes the majority of small and medium sized businesses.

* VC method (VC). VC is most common in hi-tech arenas that require large amounts of startup capital (e.g. biotech). Can be used at various stages of a business as well. Primary focus is the exit strategy.

I want to concentrate more on the BM and VC methods, as I see the Franchise method as pretty much self-explanatory.

BM ventures are grown from the ground up. While there usually is (and should be) a business plan, a bootstrapped venture tries to respond to changes in the business environment in real time.

The VC venture is similar in this respect has a small but critical constraint that a BS venture does not: Time. Rather a lack thereof.

Most firms that get VC funding started out as BM venture, and grew to the point where VC was a viable option. When firms reach this level, there are some crucial decisions to be made about the future of the business. These decisions are about more than just the direction of the business, they are also of existential import to the entrepreneur himself.

Here’s why: At the point in time where venture capital enters the picture the game changes drastically.

A typical venture cap fund is financed by a group of large, institutional investors. The fund is run by a handful of partners, usually entrepreneurs previously successful in the field.

A typical VC fund has a 10-year lifespan. This means that a company getting venture cap funding has 3-7 years to generate the large returns necessary to generate a profit.

Put another way, a venture cap fund looks to profit off its investment at the end of a set time frame, not necessarily when the business itself is viable or has intrinsic value.

While the entrepreneur clearly cares about making money, by going the route of a VC he abdicates his position as the sole decider of the direction of the business. Part of the venture cap deal is that the funding does not come in a vacuum. Fund managers are former entrepreneurs and operational experts for a reason, and they exist to help manage the companies in their portfolio. They'd be crazy not to.

However, the recent phenomenon of tech companies that are essentially worthless by traditional valuation being sold for fortunes has changed the strategy of venture cap funds over the last 5-7 years (think Google's acquisition of Youtube). These massive paydays have encouraged VCs to position companies in their portfolio for one-time acquisitions rather than build a diversified portfolio of performing companies that develop truly breakthrough technologies. This phenomenon is well documented by Carl Schramm and Harold Bradley over at BusinessWeek (hat tip to Ade).

This critique isn’t meant to completely discount the VC approach, but I do think there is something personally fulfilling for the entrepreneur to be free to pursue the company as an end in itself, rather than as an entry in someone else’s ledger. I think there is also plenty to say on how to refocus venture cap, but I'll leave that for another day.