Category Archives: business economics

Ben Thompson and James Allred on Facebook

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It’s a podcast, and if you haven’t come across it yet, I strongly recommend it. One central point is that Facebook is an advertising company, which means that freely sharing their data with app developers was a strategic mistake (never mind the privacy issues). They claim that Mark Zuckerberg was too enamored of the platform model and too reluctant to accept an identity as an advertising company. They make the point that regulating Facebook so that it cannot give away data would be good for Facebook and bad for start-ups that otherwise could make use of Facebook’s data.

What they say makes sense, but:

1. Zuckerberg has built a powerful, successful company, and they are just kibbitzers.

2. One can argue that refusing to accept an identity as a ____ company has enabled Amazon and Google to be successful. Amazon has failed at some thinga, but they succeeded as a cloud computing company, and nobody really saw that coming. Google has failed at some things, too, but other things, such as buying YouTube, were successful.

3. In general, it seems as though these companies try to create new opportunities and then see which ones work, rather than decide what to do based on some grand strategy. They create “luck.”

4. Thompson and Allred point out that Facebook “stumbled” into being a dominant advertising platform on mobile. But maybe they stumbled into it in part by making opening up their data to app developers. Maybe if they had kept their platform closed, app developers would have been forced to operate independently, competing with Facebook or working against it rather than with it. As it is, they helped steer Facebook into the mobile market.

Listen to the podcast before making your own comments.

Why consolidation?

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In my latest essay, More or Less Competitive?, I discuss the very important question of what accounts for the apparent consolidation within industries, with a few winners taking large market shares. I think that the role that software plays in the competitive environment is a big factor.

The strategic utilization of software becomes crucial when software is eating the world, as Marc Andreessen put it. Firms led by executives who quickly grasp the business implications of software and the Internet will win, and other firms will lose.

Read the whole thing (so far, not many people have).

Barriers to competition

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Commenter Handle writes,

That is, there is a kind of natural selection at work, and corporations – especially those in expensive developed countries – without some special insulation from upstart competition, or benefiting from barriers to entry, will not be able to stay strongly profitable, because some cheaper copycat abroad will be able to arbitrage and eat their lunch.

So, the survivors will all have a special something. A good and classic candidate for one of those special somethings is “positive economies of scale / scope” which includes matters related to “network effects.”

Another commenter writes,

In addition, we should consider the “social norms” multiplier effect on networks.

By this I mean, not doing things because of connections/compatibility (network effects) but doing things (buying particular products) because your community, peer group, etc. do. Or using a particular service out of habit (see amazon prime…)

Girard would say that we want things because our peers want them. The trick for the business offering X is to convince you that all of your peers really want X. Tesla has been successful at that among the tech crowd.

Also, I think that high-quality management is a source of competitive advantage. And that tends to promote concentration, because the firms that are less well managed fall by the wayside.

Carl Shapiro on anti-trust for tech

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The abstract says,

This article discusses how to move antitrust enforcement forward in a constructive manner during a time of widespread and growing concern over the political and economic power of large corporations in the United States. Three themes are emphasized. First, a body of economic evidence supports more vigorous merger enforcement in the United States. This can and should be done in a manner consistent with sound economic principles. Tighter merger control can be achieved by utilizing the existing legal presumption against highly concentrating mergers and by reinvigorating the potential competition doctrine to block mergers between firms that may well become important direct rivals in the foreseeable future. Second, close antitrust scrutiny is appropriate for today’s largest and most powerful firms, including those in the tech sector. However, the coherence and integrity of antitrust require that successful firms not be attacked simply because they obtain dominant positions. Proper antitrust enforcement regarding unilateral conduct by dominant firms should continue to focus on identifying specific conduct that harms customers or disrupts the competitive process, especially conduct that excludes pesky, disruptive rivals. Third, while antitrust enforcement has a vital role to play in keeping markets competitive, antitrust law and antitrust institutions are ill suited to directly address concerns associated with the political power of large corporations or other public policy goals such as income inequality or job creation. Campaign finance reform, tax policy, labor, education, and other policies are far better suited to address those critical public policy goals.

My emphasis. Pointer from Timothy Taylor.

I think that a lot of problems with the dominant firms in tech would go away if somebody were to come up with a subscription model that can displace the advertising model. With subscriptions, the interests of the consumer and the service provider are better aligned. Anti-trust is ill suited to fixing that.

Aggregation, not paywall AI, is the answer

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Shan Wang writes,

The [Wall Street] Journal has found that these non-subscribed visitors fall into groups that can be roughly defined as hot, warm, or cold, according to Wells. Those with high scores above a certain threshold — indicating a high likelihood of subscribing — will hit a hard paywall. Those who score lower might get to browse stories for free in one session — and then hit the paywall. Or they may be offered guest passes to the site, in various time increments, in exchange for providing an email address (thus giving the Journal more signals to analyze). The passes are also offered based on a visitor’s score, aimed at people whose scores indicate they could be nudged into subscribing if tantalized with just a little bit more Journal content.

Pointer from Tyler Cowen.

I think that the future of paywalls is aggregation, not artificial intelligence. Spotify is an aggregator. It works better than having individual recording companies set up and manage their own paywalls. Maybe Amazon Prime will become a news aggregator. It already has access to the WaPo (gee, I wonder how it got that?). Facebook is a news aggregator.

The WSJ should get together with the NYT and other major publications to create a news aggregator. I have been saying that for twenty years, but the legacy media won’t do it. Pretty soon they won’t have much choice. Aggregate or be aggregated.

The Economics of the Peter Principle

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Alan Benson, Danielle Li, and Kelly Shue write,

Using detailed microdata on sales workers in US firms, we provide the fi rst large-scale empirical evidence showing that fi rms prioritize current performance in promotion decisions at the expense of promoting the best potential managers. Our fi ndings are consistent with the “Peter Principle,” which, in its extreme form, states that fi rms promote competent workers until they become incompetent managers (Peter and Hull 1969). In particular, we show that high-performing sales workers are more likely to be promoted, but that prior sales performance negatively predicts managerial performance, even after accounting for selection into the sample of promoted workers. These results suggest either that fi rms make mistakes in their promotion decisions or that the incentive befine ts of promoting based on sales performance justify the costs of promoting workers with lower managerial potential. We provide supportive evidence for the latter possibility by showing that fi rms appear to actively manage the trade-off between providing incentives and promoting the best potential managers: fi rms place less emphasis on sales performance in promotions where managerial roles entail greater responsibility and where sales performance is also rewarded by relatively strong pay-for-performance.

The latter paragraph suggests that there is a sort of a Peter Antidote. That is, give meaningless promotions as a reward for performance, but not when you are really counting on someone to be a good manager.

Keep in mind that putting people into positions where they will fail is going to hurt profits. Sooner or later, firms that put the right people into management positions will out-compete those that don’t.

Thanks to a reader for the pointer.

Jeremy Bailenson on Virtual Reality

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The book is called Experience on Demand: What Virtual Reality is, How it Works, and What it Can Do. It was a useful corrective to a lot of my naive impressions of the technology.

A few excerpts:

By January 2015, our lab’s state-of-the-art HMC, the one that cost more than some luxury cars, had been replaced by developer models of consumer HMDs like the Oculus Rift and the Vive.

HMD = head mounted display

if someone sees his avatar get lightly poked with a stick, and also physically feels his chest getting poked synchronously, the avatar is treated as the self. People “transfer’ their consciousness into it, according to dozens of studies.

People in taller avatars negotiate more aggressively, people in attractive avatars speak more socially, and people in older avatars care more about the distant future.

Virtual reality is going to become a must-have technology when you can simply talk and interact with other people in a virtual space in a way that feels utterly, unspectacularly normal.

But we are not close to that point.

One reason we might prefer avatars to video for communication is latency. . .videoconferencing at its essence is designed to send everything the camera sees over the network, regardless of how important the feature is concerning communication.

The neat thing about VR is that you don’t need to send all those pixels over the network over and over again. . .

Tracking the actions of two speakers, transmitting them online, and applying them to the respective avatars all occur seamlessly, and all the participants feel as if they are in the same virtual room

I have little doubt that virtual reality will be an excellent tool for spreading propaganda.

VR is about exploration, and storytellling is about control.

People who make movies are used to having control of where the user is focused. Good VR gives the user the freedom to focus anywhere. Contrast Hollywood movies with video games.

The educational field trip is the elusive unicorn.

Again, the conflict between exploration and control emerges.

by analyzing the body language of teachers and learners while a class was being taught, we could accurately predict the test scores of the students later on.

Very interesting result to think about.

To the extent that it is the teacher’s nonverbal communication that matters, and to the extent that students respond individually to nonverbal communication, students might learn better from avatars:

Virtual reality makes it possible for one teacher to give one-on-one instruction to many students at the same time. . .from a nonverbal standpoint

Shorter Jerry Muller

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In a Q&A, he writes,

My critique is of what I call “metric fixation.” The key components of metric fixation are the belief that it is possible and desirable to replace judgment, acquired by personal experience and talent, with numerical indicators of comparative performance based upon standardized data (metrics); that the best way to motivate people within organizations is by attaching rewards and penalties to their measured performance, rewards that are either monetary or reputational (college rankings, etc.); and that making the metrics public makes for greater professional “accountability” — as if only that which can be counted in some standardized way makes for professional probity. My book is about why this so often fails to have the desired effects and leads to unintended negative outcomes, which, after decades of experience, ought to be anticipated.

Read the whole thing. His book is The Tyranny of Metrics.

Sounding rather opposed is Bryan Caplan, who writes,

If you’re teaching something existing tests can’t detect, write a better test! But if you’re teaching something no conceivable test can detect, you probably aren’t teaching anything at all.

Bryan seems to be saying that everything one can learn is measurable in some way. Can you test for curiosity? For intellectual humility? For willingness to question one’s own beliefs?

Algorithms vs. judgment

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Jason Collins discusses the issue.

the reluctance to have our decisions and actions replaced by automated systems extends through a range of human activity and decision-making. It took nearly 50 years for people to accept automated lifts. Today, over three quarters of Americans are afraid to ride in a self-driving vehicle.

Automated systems tend to increase efficiency but at a cost of fragility. When algorithms are first introduced to a domain, humans are better at spotting circumstances that were unanticipated by the algorithm.

Amar Bhide, in A Call for Judgment, argues that the financial crisis in part reflects the fragility of a regulatory system (including internal regulations at financial institutions) that relied too much on formulas and too little on judgment.

But Collins points out that there are many situations in which humans over-ride algorithms in a harmful way. The challenge is to enable humans to distinguish situations in which the algorithm is making better calculations from situations in which the algorithm is missing something that the human sees.