Man Bites Dog

Nice article here about how little CD sales have changed even as online file sharing has grown. In Australia, about 62M CDs worth of music are created from mp3s, and 63M CDs has been the (2001) record for CD sales.

It turns out that mp3s are a poor substitute for CDs, and that people are downloading music that they would not have bought in a store.

Long live the single

The splendidly titled "Chicago Boyz" have a good article on the return of the single. It comes from a Dallas News piece that notes, among other things,

Unlike brick-and-mortar record stores that deal mostly in full-length CDs, the Internet stores focus on songs. At iTunes, single downloads are outselling albums roughly 15-to-1.

"It's a song economy now," says iTunes spokesman Chris Bell. "Consumers have come to expect it through illegal file sharing and CD burning, and we're making sure every song is available for individual downloading."

The company's slogan – "iTunes is designed for instant gratification" – points to the biggest reason why albums may be withering. With attention spans shrinking and music outlets multiplying (on TV, satellite radio and in cyberspace), people aren't as willing to sit through an entire album as they were in the past.

A more plausible reason than a general degredation in people's mental ability (especially those darn young people!) is that singles offer better value than albums, so why not get those instead (note -- albums provide better value than singles for CD shops because of physical distribution costs, but online it's different).

The piece also has this quote for dear old Lars Ulrich

Some high-profile musicians insist that the album – not the song – is the be-all of pop music, and they argue that fans shouldn't be able to carve random pieces off an album any more than readers should be able to buy one chapter of a book.

"We have to be the ones who decide what happens to our music," says Lars Ulrich of Metallica. "We conceive entire albums, and I'm not gonna give it to you in any other form than the one I conceive. ... You can dissect it after that if you want, but at least you have to respect our choice."

The idea that the artist has some sort of inalienable right to his work, a right which cannot be sold, actually has some legal teeth in Europe where it is referred to as an artist's "moral right". IIRC, under "moral rights" you could not buy a painting off an artist and then modify the painting by, say, touching it up with a markerbelieveeive that some artists feel that their moral right extends to the frame the painting comes in. Needless to say, artists can add whatever clauses they wish when selling their work, but the law establishing an inalienable right, which cannot be bartered away, impoverishes artists who don't give a damn what frame their painting is in, especially if that means they can get the buyer to pay a little more for it. Or musicians who don't care if their work is sold as singles, or in album sized blocks.

Linux and Microsoft

Microsoft sells Windows much higher than it needs to do breakeven (much higher than marginal cost). This means it loses sales in some low willingness-to-pay customers through piracy. People might pay $10 for an original MSFT CD, but not $hundreds. In the past, Microsoft winked at these pirates because at least they were standardizing on Windows, and may end up paying more in the future.

Poorer countries, such a Thailand, are often havens for this sort of software copying. In the past, Microsoft did not enforce its copyright there the way it does in the US. But now that sales are slowing and the world has standardized, they are trying to price discriminate between countries (and customers) -- charging a high price in the rich US and a low price in poor Thailand. That's the thinking behind $37 Windows/Office in Thailand.

Linux made all of this possible because customers could claim it was a viable alternative to Windows and so give Microsoft some real competition. I am guessing that, right now, Windows *thinks* OpenOffice/Linux is more of a threat than it really is (I'm not sure if push came to shove, the same people who were threatening to defect actually would) and so is perhaps a little too willing to drop their price. Whatever the degree of actual substituability between Windows and Linux, there is at least some now and there will be more in the future. Look for more scuffles like the current one between MSFT and the Israeli government in 2004.

Happy New Year!

See you all in 2004.

Steve Mills on Microsoft

Steve Mills is the head of software at IBM. IBM has five major software "brands" -- Lotus, WebSphere, Tivoli, DB2, and Rational. Recently, he and Bill Gates presented their vision of web services in public, and it's worth reading his take on what's in store for Microsoft next year.

In essence, Steve thinks that Microsoft will try to integrate the client (where it is dominant) with the server (where it is not) and will do this through a combination of closed web-services from the technical side, and useful bundled client/server apps on the marketing side. Predictably, Steve thinks this will fail because 1) the tight bundling is not really that valuable and 2) the Internet has made open standards easier to create and be adopted.

IBM's software group recently re-aligned by industry sector, a move I thought was peculiar at the time because if anything is truly standard across industry, it's the sort of middleware database or management system software that IBM produces. It turns out that this restructuring was there to support building industry specific adaptors and XML schemas into true cross-industry platforms like WebSphere, and so incorporate the industry specific insight IBM has through its services division down into the code it wants to sell into those industries.

I'm a big fan of commoditizing low-level parts of the technology stack so the application builders end up closer to industry needs, and we will see if IBM's approach ends up changing the game to make this more common. Right now, home rolled applications tend to be ugly and buggy and maybe or maybe not close to the real requires specs, while vendor apps (at least Microsoft's) tend to be of extremely high quality (compared to home rolled apps) but quite far from what people actually need to do. I hope that, over time, web services will let home rolled apps be closer to Microsoft quality and specific to the task at hand.

Profits, returns, and labour

Brad DeLong points to a good article by Bill Nordhaus. They are both correct, the capital that went into dot-coms generated no returns for its owners, any rent was taken by employees (through fun work environments and high salaries) and consumers (through great new services that were usually for free). But the investment in capital stock was very real, and that stock is still around, boosting productivity (remember, capital and labor are complements).

After losing their shirts when the bubble popped, investors have demanded performance from their capital (namely, they want companies to stop screwing around and start throwing up some real profit). This has increased earnings, but not enough to justify the current price/earnings ratio in the stock markets, which continues to be historically high even though prices have collapsed post-bubble while earnings have risen.

A buddy of mine from Chicago (PhD program) thinks it is because the equity risk premium has fallen. Jeremy Siegel wrote a book called "Stocks for the Long Run" where he demonstrated that, over the long run (30 years), stocks outperform bonds even on a risk adjusted basis. This outperformance, which should not really exist in an efficient market, was called "the equity risk premium" and there have been all sorts of papers trying to explain it away. Historically, it's been about 5%-10% (IIRC), and now it seems to have become 0%. People still have money in stocks even though the prices have fallen, not because they think the prices are undervalued (historically, they are not) but because they believe that holding equities is a good strategy in the long run. If they believe that, then there is no more equity risk premium and the current, high price/earnings ratio is actually correct and stable. This also means that the returns to equity holders is going to be lower than it has been historically, it may be more like a real 1%-3% instead of 3%-6%. But hey -- where else are you going to stick your money?

Microsoft 2004

Directions on Microsoft has its list of what the challenges will be for the company in the coming year. It's clear headed and well worth reading.

In my mind Microsoft's issue boils down to this -- the PC market has matured, so new computers are only being bought to replace old ones. This means that the volume of PCs sold will dramatically shrink as the basic capital stock is now in place and only the "flow" (or replacement) market remains. To make matters worse, the PC has become good enough and no longer depreciates at the rate it did. This means that the depreciation rate of the capital stock has also become lower, reducing the flow even more. Finally, even as the volume of the PC business shrinks, the market has also entered the inelastic part of the demand curve, which means that people are responding to cheaper PCs by saving money on the computer and buying other things instead, not fancier computers.

Windows and Office make up 90% of MSFT's revenues and 110% of its profits (everything else loses money). Windows is driven primarily by OEM sales, and I guess Office is driven by corporate upgrades. Just as OEM sales have matured, Office has matured as well, with the current application suite doing what it does very well, and new functionality being a burden more than a feature.

Many companies waste perfectly good money on trying to grow instead of accepting the fact that they are now cash cows, operating conservatively, and returning money to shareholders. The people who run companies like to think they are dynamic visionaries doing exciting things, and I understand how it's hard to acknowledge that your role in life is to manage a slow, inevitable, but fantastically profitable stagnation, especially for a company that was once as revolutionary as Microsoft. I think 2004 will show them working to consolidate Windows and Office, beef up security, and struggle with licensing as 6.0 was a well deserved flop. I'm also interested to see how they will try to integrate the client to the server, perhaps via MSN or DRM, and I look to see some tight coupling between Windows Media Player, NT, and MSFT Media Server in whatever online music system they launch next year.

Christmas is over -- time to shop!

My old boss and good buddy Mark Hurst sent around this excellent Gift Guide and Almanac for 2004. Aside from being clear and pretty, it has great advice on which gadgets to buy that do the job as simply as possible. His digital camera entry gives you a good flavor of the entire .pdf, which is well worth downloading:

Buy the Sony CyberShot U30 because it’s really, really small. It’s smaller than my wallet, smaller even than a cell phone, which means I carry the camera in my pocket at all times. This is the whole point of having a digital camera: the film is free, so you want the ability to take a picture of anything at any time. When you get down to it, size is all that matters in digital cameras. This is because most digital cameras are about the same in other criteria.

Simple. Clear. Hard to argue with. (Also check out his excellent Zagat-esque Wiki Add Your Own. The Boston section is thin, but so is its restaurant scene.)

One gadget Mark did not talk about was cellphones. I was a happy Sprint customer in NYC and Chicago for 5 years, but I don't get reception in my underground Boston apartment nor in upstate New York where I frequently travel, so it's time to change. I met the Forrester Analyst in charge of cell phones at a party who told me that Verizon would have the least worst network if I picked a tri-mode phone, so that's what I've been looking into. Unfortunately, Verizon's phone selections have been pretty uninspiring, but if the other, more progressive carriers intimate the future, they are only going to get worse.

It seems that every handset maker has lost its mind. Instead of building rugged phones with sensitive reception, great audio fidelity, and batteries that last forever, they are making shiny gee-gaws with lousy reception, screens that turn black in the light of day, and batteries that run down faster than an antique Italian car. I've written about how I think camera phones are a good idea, and I think they are, but 1) they need to be easy to use to simply send photos between phones and 2) they come after basics like 1) reception 2) audio clarity and 3) battery life.

"Steve's Southern Ontario Cell Phone Page" has many wise words on the merits of a truly astonishing number of phones, and he focuses on the core features I find most important, such as how good they sound, and how well can they pick up a signal. Every phone seems to force the user into some sort of compromise between audio quality, reception, and battery life, and if you overlay the strengths and weaknesses of the different wireless networks you have an ocean of tradeoffs without anything that really fits the bill. What I'm really saying is "Verizon -- please offer a black and white phone with the Nokia menu system and an external antenna that really *is* tri-mode, unlike the Nokia 2285 which is only tri-mode on your website."

It's easy to blame the handset manufacturers, but they are just trying to make phones people want to buy. The same dynamic that makes people buy on shinyness even though they consume the experience of *using* the thing (not being dazzled by its polyphonic high-lights) is as true of us with phones as it is with technology in general.

Merry Christmas

Happy Holidays to all winterspeak readers!

Bruce Sterling reactions

Generally I think Bruce Sterling's books stink. He has a weblog now, and hopefully this new medium will work out better for him.

2 reactions to the blog.

1) If you are into Brazilian techno, I recommend Sao Paulo Confessions (Suba--who I believe later died in a fire), Caipirissima: Batucada Electronica (various), and Tanto Tempo (Bebel Gilberto -- disappointing in concert btw).

2) He spends a lot of time discussing modern India, Pakistan, and Dubai -- places which don't often make the news in the US (at least not their contemporary culture). I grew up in Dubai, and the nearest I ever got to see it's name in print was when Garfield tried to mail Nermal the Kitten to Abu Dhabi (which is just up the road). It's become much more common, and is considered to be a luxury retreat, which I find quite odd.

His flip comment regarding the US, not Pakistan, "crawling with armed religious fanatics and the pitiful remnants of democracy have been captured by feudalistic gangs of spymaster profiteers who can't run a real economy for the life of them" betrays a deep ignorance of both countries. Getting Pakistan wrong I understand -- it's far away and poorly covered, but his lousy characterization of the US can only come from *just* having lived here and therefore having no experience of what the real comparisons (namely, everywhere else) are like.

The number #1 issue in Pakistan right now, IMHO, is that it has done a poor job of controlling it's Muslim fanatics. Traditionally it's taken a sort of benign neglect posture, since generally people there are not fundamentalist and are more concerned with the petty travails of everyday life (unlike Saudi, which is a totalitarian state). Post-Sept 11th, fanatic Muslims started to make life much harder for regular Muslims by bringing their religion into disrepute and so burdening everyone with long lines at airports, extra legal paperwork, deferred investment, added scrutiny, etc. etc. To date, the main regular Muslim reaction I've noticed has been "hey -- no fair singling us out!" This is sad, because it illustrated how far they remain from tackling the real problem, which is that Islam has been hijacked by crazy people.

Who's next?

First the Taliban in Afghanistan, then the Baathists in Iraq, and now Qaddafi in Libya. Who's next?

Posner gets it right

It isn't just that Judge Posner gets it exactly right when the points out what a bad idea "Deliberation Day" would be (a day before an election where people would get together and debate the issues of the day), but that he puts across his point of view in such a pointed, yet playfully mischievous tone. In my view, anyone who thinks that reasoned debate can lead to a well informed consensus simply has not been exposed to much intellectual diversity.

Walmart and iTunes

I have no idea why Walmart thinks they will do better at digital music distribution than anyone else (and I think everyone, except for the labels, will get no money from it). Walmart's strength comes from its efficient logistics network and its ability to buy in tremendous bulk. Neither of these help with digital goods.

Digital Prohibition

I'm sure this will be all over the Internet, but Shirky's piece on how the RIAA is driving the adoption of encryption is interesting enough that I'll point to it anyway.

Dumbness from Kausfile

Slate's Kausfile has a response to the idiot Ehrlich article I commented on earlier. Essentially, Kausfile says that even if there only ever two parties, what the parties stand for might change. Get this they may even change their name

The most casual student of American political history knows that the two major parties have undergone dramatic ideological revisions over the years, and given how much change there has been in the world, it would have been kinda shocking if they had remained the same. Moreover, why does anyone care what a party calls itself, unless it has a sentimental soft spot in its heart for "Democrat" (or "Republican") as words and has quite lost the fact that they are fractious coalitions bidding for votes. *Sigh*

StumblingTongue gets it right though. Worth reading.

Worst. Article. Ever.

This Washington Post article is so bad, so extremely bad, so incredibly bad, that I don't even know where to begin describing it's extreme badness. I don't use words like "idiot" lightly, but, well, here I feel really really tempted.

First, the summary:

But the Internet has changed all that in one crucial respect that wouldn't surprise Coase one bit. To an economist, the "trick" of the Internet is that it drives the cost of information down to virtually zero. So according to Coase's theory, smaller information-gathering costs mean smaller organizations. And that's why the Internet has made it easier for small folks, whether small firms or dark-horse candidates such as Howard Dean, to take on the big ones.

For all Dean's talk about wanting to represent the truly "Democratic wing of the Democratic Party," the paradox is that he is essentially a third-party candidate using modern technology to achieve a takeover of the Democratic Party. Other candidates -- John Kerry, John Edwards, Wesley Clark -- are competing to take control of the party's fundraising, organizational and media operations. But Dean is not interested in taking control of those depreciating assets. He is creating his own party, his own lists, his own money, his own organization. What he wants are the Democratic brand name and legacy, the party's last remaining assets of value, as part of his marketing strategy. Perhaps that's why former vice president Al Gore's endorsement of Dean last week felt so strange -- less like the traditional benediction of a fellow member of the party "club" than a senior executive welcoming the successful leveraged buyout specialist. And if Dean can do it this time around, so can others in future campaigns.

Let's begin with Coase. Coase's primary insight on "The Size of the Firm" was that costly transactions may be easier to do in a centrally planned economy (a company) instead of a market economy. Note that the Internet means smaller companies -- lower information transaction costs do just as much for a large company's internal efficiency as it does for a small company's ability to compete. Ron Coase understands things that remain perfectly opaque to Everett Ehrlich, who perpetrated the article.

Secondly, the article is on crack regarding the viability of third party candidates. In the US, because of the winner take all nature of the presidential contest, there will only be two political parties, and if an independent does run, it will hurt the major party that most closely aligns with his ideology. Perot hurt Bush, just as Nader hurt Gore. The notion that "finally, in the next six or eight presidential elections, a third-party candidate will win the presidency" imagines that a Nader type candidate will grow stronger and stronger as he runs again and again (leading to ever more dramatic Republican victories each time) until he suddenly breaks through and swings the Presidency far left is hallucinatory. A vote for Nader was a vote for Bush in 2000, and will be again in 2004 if Nader chooses to run as an independent again. (Note to Ehrlich -- this will be true FOREVER).

Thirdly, while it is certainly true that the Internet allows more special interest groups to coordinate, it is not clear how this is a good thing. Special interest groups expend resources vying for government favors that benefit them but harm society as a whole. Having more of them may mean that each group is individually weaker (which may be good) or that there are simply more pigs at the trough (which is probably bad) but special interest groups are not going to Save America, and anyone who thinks that they are has not been paying close attention to the corrosive effect that lobbying has on good governance, which is to say has not looked at the functioning of normal government at all.

The core idiocy in the entire article is the belief that somehow The People are just not being listened to, and if they were listened to then everything would be All Better, and the Internet will force people to Listen To The People. Here on planet earth, the two party system is a result of extremely careful arithmetic, which results in third party candidates hurting the party they are affiliated with by dividing their vote, and politicians respond to the demand of their local constituents who happen to be in swing districts and so need to be listened to, and the Internet will not to anything to change that.

So, who is Everett Ehrlich? The byline says he is senior vice president and director of research for the Committee for Economic Development, and that he was undersecretary of commerce for economic affairs under President Bill Clinton. *Phew*. No one consequential.

Now Microsoft too

I wrote that it was all over when HP entered the digital music distribution game. Given that incumbents are making zero or negative margins distribution DRM'd singles, and that existing IP laws suggest this won't change any time soon, entrants gunning for this market are either desperate, or have more money than sense. I would put HP in the former category, but MSFT is definitely in the latter. (Link via the consistently excellent Tomalak's Realm)

Inch scale vs. Foot scale

This gizmodo article points to two pieces arguing that since new smartphones have so much functionality, they may replace laptops. This is wrong. Post-It notes have as much functionality as legal pads, and yet we don't see one replacing the other. People want to do some tasks at the "inch-scale" and others at the "foot-scale" and that's all there is too it. Mark Weiser, and other people in the ubiquitous computing arena, have understood this since Parc. It's as true today.

Direct to iTunes

The Red Hot Chilli Peppers have released their "Greatest Hits" album on iTunes. It's interesting that their management agency initially tried to stop this, arguing that per-track online sales should be discouraged to preserve the album format. Albums are valuable because they 1) bundle tracks (to increase the overall willingness to pay) and 2) increase profits by making the physical media distribution more efficient. Digital per-track sales erode both of these effects. It's worth thinking about what the "single" based music act looks like -- more experimentation? More one-off collaboration? More corporate sponsorship?

"A touching faith in arithmetic"

There is so much hot air in the media about which political party truly represents the people etc., that it is great to see the actual numbers that drives elections and therefore policy. Not that I don't think the hot air has a use -- I would not want those passions expended anywhere else.

Great news!

Saddan Hussein has been captured!

Steve vs Arnold

Rolling Stone has a nice interview with Steve Jobs where he talks about his discussions with the labels regarding the contracting terms around iTunes music store.

He's being polite when he says that the labels can pick musicians, but aren't good at technology, because I'm not sure how good they are at picking acts (by the same token, VC's only have about 1 great company in 10, so I'm not sure what the right base rate is).

Arnold Kling is unimpressed by the interview. He does not believe that record companies invest in unknown artists the way Jobs claims they do. He says that unlike VCs, record companies do not give big up front advances to unknown artists.

I think this is unfair. Firstly, record companies do at the very least finance artists at a rate better than other sources, we know this because artists go to labels for backing instead of borrowing money from a bank and paying for their own act. Secondly, labels do put big money behind albums, and there have been notable busts there. The money might be going into failed albums, not failed bands. Arnold argues that the distribution costs of moving plastic around are the big cost, but I am skeptical. There are plenty of goods, of similar size, weight, volume, and fragility, available on the shelves for far less than CDs. If the distribution portion of the cost is the same, why is the price so different?

The fat lady just sung

An old-ish story now, but HP is entering the online music distribution business, just like Dell, Apple, and a host of others. I don't know how they think they are going to make any money doing this, but they are desperate these days and probably willing to try anything.

It's kinda like Gateway entering home electronics -- why do they think they will succeed?