Thursday, May 29, 2003

The Register goes off the deep end

Here's a funny article in The Register decrying the FCC's upcoming decision to relax 20 year old media ownership rules in the face of new technologies like, well, cable television and satellite. The argument is the usual media diversity one, and holds up the recent case of the media whipping Americans "into a state of strenuous flag-idolatry and xenophobia" as an example.

I clearly was living in a different America at the time where the airwaves were filled with Baathist sympathizers, the French, and people complaining that the media had an overpowering leftist bias. Given people's innate tendency to see themselves as right and everyone else as wrong, my guess is that a situation where everyone thinks the media is hopelessly biased and/or stupid is probably about as diverse as you can hope for.

Also, in my world they have invented this neat new technology called the Internet where anyone, anywhere, can publish whatever they want and people can read it or ignore it as they choose. I predict that this will be a boon to small publishers, a few of whom may even be foreign, and increase media diversity to the point where decades old law concocted in highly protectionist circumstances when there were only 4 TV stations can be relaxed. I also anticipate that when this happens, small media outlets, long protected from competition by the law, will complain. But anyone describing the puckish, libertarian Michael Powell's dad as "a Republican appointed by Dubya and an eager plutocrat plaything" is clearly living in a Universe parallel to my own.

Wednesday, May 28, 2003

RealOne Rhapsody

Real has launched a competitor service to Apple's called Rhapsody featuring on-demand streaming at $9.99 a month and as many burnable songs as you want at $0.79 a burn. It's available for PC. I think this is an improvement from previous offerings and I'm not sure how it stacks up to Apple. Generally, people prefer flat rate pricing to metered pricing, and in that sense $9.99/month is good, but you don't get to *keep ths songs on your computer*. I like the lower price for burning songs (79 cents instead of 99 cents), but I don't really want to burn songs onto a CD all that much, nor do I want to go through the trouble of burning a song to CD and then ripping it so I can play it on my mp3 player. But given that iTunes 4 is not yet available for PCs, and most PC owners don't have iPods anyway, I'm not sure how much of a difference any of this will make.

The key to this business is who can sign up the best deals with the most record companies, not number of users (yet), and I'm sure the RIAA is making sure that online distributors remain weak. ClearChannel has consolidated a fragmented media market and now charges content companies for distribution (instead of content companies charging media companies for content, which is how web radio works now).

And thank you those who wrote in pointing out that aac is no more proprietary than mp3. I meant "uncommon, and amenable to DRM".

Monday, May 26, 2003

iTunes 4

Long time readers of this site may remember when it focused on business, technology, and IP. Those were the days. But it's about time I got around to discussing iTunes 4 and Apple's new online music store.

For those of you who haven't tried it out, this is basically how it works. iTunes used to be how many Mac users organized their mp3s and coordinated between their main machine and their iPod. iTunes was a fat client that you could use to organize files and create playlists. It also had a list of some Internet radio stations and the very useful CD name archive (so you did not have to manually name your tracks) and, via Rendezvous, it seemed that it could also act as a streaming audio server. It, along with the iPod, was a great example of how integrated hardware and software could produce a better experience than alternatives.

The iTunes music store is an extension of this. It appears as an entry in the playlist, and then connects to Apple servers to display various ways to browse for music (I assume it uses some sort of XML to connect this specialized client to the server side services). You can preview music by clicking on it, or download tracks for $1. Downloads are not in mp3 format, they are in some proprietary format called aac which has some DRM embedded in it which allows you to have the song on both your iPod, CD, and home machine, but presumably restricts you from sharing it over Napster.

Some people moan that aac does not sound as good as a CD. This may be true, but the correct comparison is how it sounds vs. mp3s, and there I cannot tell the difference. And yes, some people dislike DRM, but here it seems Apple has struck a fine balance between letting the user do what he wants and placating the RIAA. Finally, although I have called for a flat fee with unlimited downloads in the past, I like the $1/track pricing. iTunes gives you the sense that you really are collecting music (in the form of assembling your own library) and not just renting it while the meter runs, which is something people seem to hate. It's extremely easy to use.

The service's two big flaws are lack of selection and the cost to Apple of supplying the service. While the store boasts 250,000 titles, it turns out that this is not nearly enough. Indy labels are notoriously absent, but I hear that Apple is trying to sign them up. Since the marginal cost to Apple of providing this service is fixed and not zero (as opposed to P2P where it essentially is zero) they will need to charge for every track they offer, negating the massive parallel capacity Napster tapped into by building a P2P network. This means that a struggling Indy band will not be able to offer their music on iTunes 4 for free--Apple can't afford it. I know that people can share music using iTunes, and maybe eventually the service will split into a customer hosted free music platform and an Apple hosted pay music platform, but DRM will split the market into famous and expensive vs. unknown by free. This is a good thing.

One nice to have: a web radio that generates its playlist from what people are downloading. But this would be very expensive to provide.

What are the business implications for Apple? I don't think there are any (big ones). Having lost the PC war, Apple's plan is to be the best Internet client it can be by taking advantage of its tight hardware/software integration. The iBook/iPod/iTunes combo is a easy way to enjoy digital music.

Sunday, May 25, 2003

A waste of money

I bought the Cognitive Style of PowerPoint by Edward Tufte because I had enjoyed his earlier books and it came recommended by Kottke (although now that I reread that post, it's just a mention). It was a disappointment. Tufte spends 24 pages talking about why PowerPoint is a terrible medium and how it supports flabby thinking. I've known for years that PowerPoint is a terrible medium (often) and flabby thinking is a universal constant. Save your money and don't buy the pamphlet.

Wednesday, May 21, 2003

You can't get there from here

A while ago I wrote a little about behavioral economics at Chicago. Between then and now I've come across various articles, one in the Economist, that I can't find now which hold behavioral economics as somehow proving standard microeconomics is wrong. This is a mischaracterization. (BTW. Previously I also wrote that Thaler had demonstrated upward sloping demand curves, and this was wrong. Demand curves continue to be downward sloping).

Behavioral ec. shows that people don't think about things in the right way, and this leads them to make suboptimal decisions. Economic markets anticipate people making the optimal decisions, which leads to them producing the absolute best possible outcomes. People who dislike economics (and there are many) bring these two facts together and argue that this means markets hardly ever produce the best outcomes. But there is no reason to think that a roomful of central planners is any less susceptible to the cognitive foibles that behavioral economics exposes, and they have less incentive to get it right than market participants. Taking people who naturally make bad decisions and removing their motivation to get it right does not produce good decisions. When I spoke with Thaler, he was pretty adamant that pro-central planning arguments that draw on behavioral ec. were getting it wrong.

Thaler has co-written a paper with Chicago Law professor Cass Sunstein provocatively entitled Libertarian Paternalism. With a name like that, how can you not read it, but I warn you -- be very careful when reading anything related to economics written by lawyers -- they are notoriously casual with the math. It highlights the fact that since framing matters to the decisions people make, and since it's impossible to offer people a choice without framing it somehow, you can pick the frame that encourages the best outcomes. People are still free to choose whatever they want, but a better frame makes them better off (thus the paternalistic aspect of libertarianism). The key aspect of this is that you can't not offer a frame, there is no way to offer a choice that does not encourage one outcome or another, so there is no absolute freedom a libertarian can claim is being taken away. Please note that this is a far cry from the politics and coercion drenched foaming that characterizes various post-modern positions and that framing is pretty weak in many instances, but you cannot deny it has a (large) effect in some cases.

Friday, May 16, 2003

Matrix Reloaded

I saw it last night with a bunch of friends and really liked it. I was worried it was going to stink like Phantom Menace, but it didn't. No spoilers here, but there's this French guy in the movie who is fantastic.

Wednesday, May 07, 2003

Myron Scholes

Nobel prize winner and ex-Chicago economist Myron Scholes came and spoke at the Chicago GSB today. He is perhaps most famous for coming up with the Black-Scholes option pricing formula back in the day, and for his ill-fated Long Term Capital Management hedge fund which blew up so spectacularly in 98.

It was clear that between 98 and today he's devoted all his time to trying to figure out what happened in financial markets when Russia defaulted on its rouble debt. I was fortunate(?) enough to have a front row seat through all of this as I was working for a hedge fund at that time. The Russian default caught people by surprise, and some folks lost lots of money. To recover from their loss, they had to sell some of their holdings, which depressed the price of those holdings. This made other people lose money, forcing them to unwind their positions into falling markets as well. Which depressed prices further. Long story short, things got very ugly. Prices that were uncorrelated began to move in synch, and all the liquidity dried up (read: became fantastically expensive). Everyone's models broke, prices went way out of wack, and lots of people lost their shirts.

Myron pointed out the following things:
1) We need to reconsider the distinction between idiosyncratic and systematic risk. Standard portfolio theory tells us that since idiosyncratic risk can be diversified away, no one should expect to be compensated for carrying it. But during shocks, risk that used to be idiosyncratic becomes systemic as unrelated prices start moving together. So what do we do now?
2) The price of liquidity also changes, becoming very expensive during shocks. This suggests taking out liquidity insurance by buying it cheap in unrelated markets ahead of time. But what does it mean if no one is buying or selling, even at (insanely) wide spreads?
3) Models drive buying and selling decisions. When the models break, people need to come up with new ones and figure out what went wrong with the old ones. This takes a really long time and there will be no trading activity while this is happening. Good teams will be able to reenter markets sooner.
4) Asset allocation and risk management needs to think of risk optimization, not minimization. I had no sense of what risk optimization meant, and I'm not sure Myron's sure either.
5) Speculators exist only to provide liquidity and bear risk. They need to get paid for this, even though people don't want to pay them. Risk transference is changing the banking business from a matching service (lender, meet borrower) to a factory where they produce appropriate financial instruments for a fee and they pay specialists to take them off their books.

His point about the way capital structures financing esoteric ventures (including most third world development, btw) can switch from being uncorrelated to moving together during a shock is well taken, and a huge problem. The Economist recently recommended that developing countries switch entirely to FDI (foreign direct investment -- factories) because the volatility short term capital flows created were too damaging. The alternative would be for the country to take on complex short positions against other third world countries, but I don't know if this would work out to be cheaper. Tricky.

Saturday, May 03, 2003

Lies, damn lies, and polls

I recently wrote about how deliberative democracy is (observably) a fantasy, and how people have poorly defined preferences in many situations, and so are open to having their answer influenced through how the question is phrased. This article discusses how these two facts come together in political polling, demonstrating how polls are a terrible way to get certain kinds of information.