Monthly Archives: May 2010

Economics Intellectual Property

How Megan McArdle Is Ruining the Future of Entertainment

May 30, 2010 – 8:25 am

Megan McArdle has just returned from a time-machine visit to the year 2000, and she’s worried about a new scourge called Napster:

People have been pirating intellectual property for centuries, but it used to be a time-consuming way to generate markedly inferior copies. These days, high-quality copies are effortless.

Possibly she met with Jack Valenti when she was there, because she’s returned with his trademark pessimism about the ability of markets to find common ground between buyers and sellers.

Maybe it’s time to admit that we may never find a way to reconcile consumers who want free entertainment with creators who want to get paid.

Such a narrow defeatism! Along similar lines, can’t we also admit that we may never find a way to reconcile workers who want high wages with employers who’d prefer low? Where’s the Atlantic column complaining about this?

Or maybe McArdle is just talking her book?

Can the market evolve fast enough to keep up with the expectations, and predations, of Generation Free? Even if the music industry manages, what about all the other businesses that depend on intellectual property—including (gulp) my own?

“Sure, the internet has brought to the fingertips of billions of people an unimaginable wealth of information, a cosmic jukebox, texts and videos that otherwise might have been lost to the ages, a free encyclopedia, tool-assisted speedruns of old Nintendo games, and the greatest marketplace the world has ever seen, but won’t someone please think of the Atlantic bloggers?”

I wonder if the loom-smashers wrote similar columns.

But the broader music industry, like other entertainment fields, has always worked on a tournament model: a lot of starving artists hoping to be among the few who make it big. What happens to the supply of willing musicians when the prize is an endless slog through medium-size concerts at $25 a head?

Always? Really? I suspect Mick Jagger might disagree, although he probably doesn’t know as much about the music business as McArdle does.

Because the band (“Atlanta’s Best Party Band!”) that my sister hired to play her wedding certainly wasn’t starving, and they didn’t seem to have their sights set any higher than being Atlanta’s Best Party Band. My friend who put out a Facebook message to recruit for her would-be lounge band doesn’t dream of anything more than playing a few shows, nor does another friend whose cover band plays at Rock Bottom Brewery once a month. My other sister writes songs and puts them on her website with no motivation other than entertaining people who download them.

Quite possibly most musicians hope to make it rich. Almost everyone hopes to make it rich. But that doesn’t mean that’s the only thing that motivates them, and it certainly doesn’t mean they’ll quit what they’re doing if their lottery ticket up and vanishes.

As for the publishing industry, a year is a long stretch to spend typing without some prospect of financial return.

Isn’t it? Well, here’s a subject I happen to know something about, because a year is just about how much time I spent writing Your Religion Is False. Of course, the whole time I had “prospects” of financial return, but I certainly didn’t have any guarantees. No one promised me I’d make a single dollar, and no one promised me I’d sell a single copy. That’s why I didn’t quit my day job. (Until much later, when I quit my day job.)

Most musicians have day jobs. Most writers have day jobs. Most actors have day jobs. McArdle is astoundingly fortunate that someone pays her a salary (I assume) simply to write blog posts all day. But this makes her a fantastic outlier.

All artists want to get paid for their art. I want to get paid for my art. And of course I’d rather someone pay me for a copy of my book than read it for free. But if the choice is between “someone reading it for free” and “someone not reading it at all,” I’ll take the former 100 times out of 100. And if the choice is between “lots of people reading it for free” and “no one reading it at all,” it’s a complete no-brainer.

For without the internet and what it enables, I never could have written Your Religion Is False. I never could have published it, I never could have effectively promoted it, and I never could have sold the number of copies that I have. I never could have quit my job to try to make a living as a writer, and the world would never get to enjoy the multiple (awesome) books that I’m working on.

Perhaps the internet hurts the business model for McArdle’s creative output. But at the same time, it makes possible the business model for mine, and for countless others like me. Shouldn’t someone who calls herself “Jane Galt” have a little more appreciation for the essential-to-capitalism process of creative destruction?

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Politics

Fix-It Faith and Technocracy

May 30, 2010 – 12:32 am

Tonight at dinner I started got into an extended argument about technocracy, during which it was asserted to me that whatever faults I might find with our government could be quickly resolved if only we started electing really brilliant people to office.

This not uncommon belief that enlightened technocrats and politicians could easily solve complex problems demonstrates what the New York Times calls Fix-It Faith:

Americans have long had an unswerving belief that technology will save us — it is the cavalry coming over the hill, just as we are about to lose the battle. And yet … over the past month it became apparent that our great belief in technology was perhaps misplaced.

This is a refreshing admission from the Times. I bet they’re referring to the panoply of unintended consequences that are turning up in the (based on science) Health Care Reform bill they advocated for.

Wait, did I say the article was about politicians? I meant to say that it was about deep sea drilling:

“We’re pushing the envelope, but I personally believe that the technology, in terms of equipment and processes, will be able to keep up with what we’re doing — though this experience may slow things down,” said Stefan Mrozewski, a senior staff associate at the Lamont-Doherty Earth Observatory of Columbia University, whose research involves projects like drilling boreholes in deep water to study chemicals under the seafloor.

[...]

He said the blowout on the rig and the apparent failure of the blowout preventer was “beyond the realm of expectation,” most likely a combination of unimaginable human and mechanical error. Noting that rigorous planning precedes deepwater drilling, yet “the risk is still not zero,” he said the accident last month would encourage designers and engineers to improve the technology and procedures, so that a disaster like the Deepwater Horizon explosion could not happen again.

Nonetheless, with his science background, his faith that “improved procedures” will surely stop the next disaster, his demonstrated facility at writing off unexpected consequences of risky projects as “beyond the realm of expectation,” and his inability to imagine errors, he totally could be a technocratic politician.

If only they’d thought to ask whether he has any really clever ideas on financial reform or carbon rationing.

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Education

In Which Joel Gives Advice to the New York Times

May 28, 2010 – 4:57 pm

If you’re going to write a detailed column about a young college graduate who borrowed $100K to attend NYU and can’t pay it back, you probably shouldn’t wait until the 30th (!) paragraph to let us know what sort of useful degree she got for her money:

She recently received a raise and now makes $22 an hour working for a photographer. It’s the highest salary she’s earned since graduating with an interdisciplinary degree in religious and women’s studies.

To be clear, I have quite a bit of sympathy for this girl. Surely she was bombarded with messages, from the President on down, that going to college was the responsible choice. Meanwhile, politicians were making it harder and harder to escape student loan debts. No one at NYU had any incentive to tell her that she was borrowing stupid amounts of money to pay their gargantuan tuition, and no one in the Department[s] of Religious and Women’s Studies had any incentive to tell her that they were teaching her absolutely nothing of value and that she’d be lucky to someday get a job “working for a photographer,” which doesn’t actually require a college degree.

Even she seems eager to admit that going to college was a huge mistake:

“I don’t want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back,” she said.

I bet the New York Times could get an interesting column or two out of these themes. Maybe “College is a Huge Racket” or “Interdisciplinary Studies Can Be Your Ticket to a Life Filled with Poverty and Hardship” or “Politicians’ Pro-Schooling Propaganda Is Good For Them and Their Supporters But Might Not Actually Be In Your Best Interest.”

But my guess is they won’t.

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Economics Politics

Bootleggers, Baptists, Unions, Unions, and Small Grocers

May 27, 2010 – 8:31 am

Here in Washington State, hard liquor can only be purchased at dreary, state-run liquor stores. Most have DMV-ish levels of charm, DMV-ish levels of customer service, DMV-ish hours, DMV-ish selection, and DMV-ish prices.

Every few years someone will propose getting the state out of the liquor-store business, or at least allowing private businesses to sell liquor, like they’re allowed to in most of the civilized world. In California you can buy whiskey at Trader Joe’s, and — while California is falling apart at the seams — it’s hard to believe it has much to do with grocery-store booze. Here in Washington, Costco members seem to be eternally salivating at the prospect of Costco-sized 10-gallon jugs of vodka, while the rest of us just dream of having our own BevMo!

However, these proposals always seem to fall prey to the 21st-century version of Bootleggers and Baptists, which I’ll call “Unions and Unions.”

Here, the Unions play the role of the Baptists, making the case that our current system promotes virtue and temperance:

We have been opposed to this kind of proposal for years and remain opposed to it and feel the emerging coalition of people opposed to it shows how bad the idea is,” said Tom Geiger, communications director for UFCW 21. “We will actively work with health and safety advocates and others to make sure that the public is made fully aware of the dangers to the public safety posed by making liquor available in neighborhood grocery and convenience stores.”

Meanwhile, the Unions play the role of the Bootleggers, not wanting to give up their lucrative monopoly:

Task forces have repeatedly determined that private stores would not create more revenue for the state in the short or long term. What it would accomplish is the elimination more than 1,000 family-wage jobs. These experienced, safety-oriented state employees have the best compliance rate in the nation for preventing liquor sales to minors.

In fact, the only ones worrying about what might be good for consumers seem to be the large grocers:

The Northwest Grocery Association, which represents major chains including QFC and Safeway, has joined one of its largest members — Costco Wholesale — in supporting a voter petition to put Washington state out of the liquor-store business.

Sure, they’re acting purely out of their own self-interest, but at least for once it coincides with the common good.

However, lest this restore your faith in the power of markets, it’s worth pointing that the small grocers remain opposed to this change. While they make all the right noises about “morals” and “temperance,” they accidentally let slip their true motivation:

Small grocers oppose the measure, saying it would be difficult for them to compete against big chains offering low liquor prices. With other products, they can offer customers local or higher quality alternatives, but “a bottle of vodka is a bottle of vodka,” said Jan Gee, president and chief executive of the Washington Food Industry Association, which represents independent grocers.

In other words, “I can’t provide that service as efficiently as my competitors, so we’ve got to keep it illegal!”

I’m no longer an academic, so I won’t bother writing a paper about this revolutionary new “Unions and Unions and Small Grocers” paradigm, but maybe one of you will? Sarah?

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Economics

Off & Away, Gambling, and the Strategy of the Dollar Auction

May 26, 2010 – 2:30 pm

A common demonstration in economics classes is the dollar auction, in which the teacher offers a $20 bill to the highest bidder. The twist — when economists are involved there is always a twist — is that both the highest bidder and the second-highest bidder have to pay their bids, although only the highest bidder actually gets the $20.

What usually happens is something like the following: someone bids $1 (which would earn her a profit of $19 if she won). Then someone else bids $2. The first student, already owing the $1 as the second-highest bidder, ups her bid to $3, (temporarily) turning a $1 loss into a $17 profit. This typically goes on for a while, until at some point the bids are $20 and $19, meaning one student is just breaking even and the other is losing $19.

But still at this point, upping the bid to $21 turns that $19 loss into only a $1 loss. Of course it only stays a $1 loss if the other student stops bidding; otherwise, the bidding war continues until both students are out quite a bit of money and give up. (This sort of demonstration helps explain why economics professors tend to drive nicer cars than other professors.)

A slight variation on this is the Swoopo-style auction, in which you actually have to pay to increase the bid and become the high bidder. Reimagine the $20 bill auction as one where you can pay a $4 bidding fee in order to increase the high bid by $1 and become the new high bidder. When the auction ends, the winner pays the highest bid, but everyone who bid has to pay the bidding fees.

So, the first bidder might pay $4 to start the high bid at $1. That means she’s on the hook for $5 if no one else bids, earning her a sweet $15 profit. But now someone else pays $4 and increases the bid to $2. His (temporary, would-be) profit is $14, while our first bidder is still out the $4 she paid. If she shells out $4 for another bid, then her $4 loss becomes (temporarily) a $9 profit ($20 bill – 2 bids * $4 – $3 highest bid). And so, even when the highest bid is well over $20, a short-sighted low bidder has an incentive (especially if she doesn’t reason several steps ahead) to put in another $4 in the hopes of getting the $20 and making up for some of her loss.

Is there an optimal way to play this game? If you know all the bidders, it makes sense to collude — agree that only one person will bid and that you’ll all split the profits evenly. (Enforcing collusion can be tough in general, but in a game this stacked against the players it shouldn’t be tough.)

Otherwise, probably the most sensible thing to do is not to play. But whoever said people are sensible?

Enter Off & Away, which conducts timed Swoopo-style auctions for luxury hotel rooms. Your $1 fee makes you the top bidder and increases the top bid by 25 cents. When the time runs out, the top bidder gets the hotel room, while everyone else is just out whatever fees they’ve paid. (If you bid in the last minute or 30 seconds, the timer resets to a minute or 30 seconds, to give everyone else opportunities to purchase additional bids.)

Now, your bidding fees aren’t completely lost. If you’ve sunk (say) $100 in bidding fees into a losing auction, you can apply that $100 to purchasing a regular-priced hotel room through Off & Away. However, it’s not particularly easy to figure out what hotels and rates they offer. Also, you only have 7 days to do so, and you can’t combine failed bids from multiple auctions. My early suspicion is that most bidding fees just end up forfeited.

For instance, here’s an auction for two nights at the Wynn. The winning price was $189.50, which means that 758 bids were purchased, 23 of them by the eventual winner. That is, the winner paid $212.50 for his suite, while the other bidders collectively paid $735 for (probably) nothing. Similarly, in the auction for the Presidential Suite at the Pierre, the winner paid $938.25 (including $182! in bidding fees) while the losers paid a collective $2843 for nothing! It’s good to be the auctioneer!

Assuming one wants to play in such an auction, what should one do? One obvious observation is that it doesn’t make any sense to purchase early. Being outbid is an unambiguous bad — you’re out the bidding fee and you’ve got nothing to show for it. And if you bid early, you’re going to get outbid. In fact, without concocting pretty elaborate (and farfetched) stories about what your bid signals, it doesn’t make much sense to bid before the last 30 seconds of the auction.

Naively, it seems like what you’d want to do is wait until 1 second is left on the clock and sneak your bid in right then. Indeed, this seems to be a pretty popular strategy, as the clock tends to get down to 5 seconds or less before a new bid appears. Unfortunately (for the bidders), multiple people seemed to be trying this, as several bids all seemed to hit at once and you’d see the price jump by a dollar or more. Also unfortunately (for the bidders), this cycle seems to happen over and over again. If you are intent on seeing one of these auctions through to the end, then you’re signing yourself up to watch the computer for at least an hour after the auction’s scheduled end. (I sort of suspect that the typical Off & Away auction ends when all but one of its bidders die of old age.)

As a public service, I spent a fair amount of time watching an auction for a suite at the Mandalay Bay (“retail price $1050″).

With 20 minutes left, the highest bid was $10.75. With 10 minutes left, it had gone up to $12. With 5 minutes left, $13. And when the clock hit the 1 minute mark, the highest bid was $14.75. There were quite a few resets before we hit the all-important 30-second mark, when the highest bid was $30. And that’s when the magic happened.

The next two hours were an endless cycle of bids and resets, bids and resets, bids and resets. The price climbed to $50, then to $100, then to $150 and $200. Finally, at 1:40pm, 100 minutes after the auction was scheduled to end, it went to Eugene M. at $224.75 plus $82 worth of bids, which seems not bad for a $1000 hotel stay. Sad, though, for the other bidders, who are out a collective $817 in bidding fees. Total haul: $1123.75. Profit (assuming retail price, which is probably not reasonable): $73.75. That’s not a ton of money, but (based on my folk reverse-engineering of the Amazon Sales Rank algorithm) it’s probably more than I made during the same time period.

At any given time, the website shows who placed the few most recent bids, and anecdotally it seemed like people got into short-lived bidding wars before (possibly running out of bid credits or dying and) dropping out and ceding the bidding wars to a new group of people.

I’ll be the first to admit that I’m not much of an auction theorist. Sure, I took the course in grad school and could probably still prove any number of theorems about revenue equivalence if you forced me to. But the one really high-stakes auction I participated in (this year’s Strangercrombie “We’ll Review One Book of Your Choice”) I caved when it got too rich for me.

Nonetheless, as a data analyst with travel-industry experience and an advanced degree in economics, I’m shocked (shocked!) that they didn’t invite me to help make their evil auctions even more evil, which is the sort of thing I’d be pretty good at. At the same time, I’m trying to be less evil these days, so I might have had to turn them down.

I’m sure that somewhere there are highly-paid lawyers with well-reasoned opinions why this sort of auction doesn’t technically count as gambling. Nonetheless, winning one of these auctions seems to rest solely on a combination of dumb luck, lots of time, and lots of money, which (coincidentally) is pretty much the same recipe for winning at a slot machine. A packet of $1 Off & Away bids doesn’t seem substantially different from a packet of lottery tickets, with the notable exception that you don’t have to sit in front of your computer and keep clicking throughout the last two hours of the lottery in order to win.

And so, given our national love of getting something for what seems like nothing but is actually quite a lot, I predict Off & Away will do very, very well. Why the hell didn’t I think of it first?

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Meta Writing

Big Change

May 20, 2010 – 7:58 am

Today is my last day at Microsoft, as I will be leaving to pursue my boyhood dream of eating the world’s biggest hoagie becoming a famous author someday. I’m sure you have many questions about this move, many of which I’ve preemptively answered below:

Frequently Asked Questions

Q: Really?
A: Really.

Q: Aren’t you already a famous author?
A: While I do get famous-author levels of hate mail, I fall short by most other metrics.

Q: Do famous authors even make enough money to survive?
A: Not unless they write about love triangles involving vampires and werewolves.

Q: What’s your next book about?
A: I’m thinking a love triangle involving a vampire and a werewolf.

Q: Isn’t that market kind of saturated?
A: That’s why my book is going to be in 3-D.

Q: You mean like a pop-up book?
A: No, although that’s not a bad idea.

Q: How can a book be in 3-D?
A: We’re still figuring that part out.

Q: Well, what can I do to help?
A: If you buy a copy of my first book, that would help me afford food for my kids.

Q: You have kids?
A: For my metaphorical kids, I mean.

Q: What’s a “metaphorical kid”?
A: This interview is over!

Anyway, exciting times are ahead, and I plan to chronicle them right here, so stay tuned!

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