Economics of Technology – Page 102

Evan Williams Spurns Bad Money

Evan Williams (on left) with Noah Glass, co-founded Odeo. Source of photo: http://www.nytimes.com/2005/02/25/technology/25podcast.html?ex=1267419600&en=b80f1d3808f556cc&ei=5088

Evan Williams’ story illustrates Christensen and Raynor’s advice that disruptive innovators need to seek good money, and spurn bad money. Good money is patient for growth, but impatient for profit. Bad money is the opposite.

EVAN WILLIAMS recently bought his freedom. It cost him a bit more than $2 million, and he says it was worth every penny.

I’m not talking about paying off a big debt to one of Tony Soprano’s loan-shark underlings. Mr. Williams is a serial entrepreneur, one of those Silicon Valley characters who start company after company. And he purchased his freedom from the venture capitalists and others who financed his company, Odeo. Mr. Williams dug into his pockets and gave them back their money. He got to keep his struggling podcast company and renamed it the Obvious Corporation.

In the process, Mr. Williams, who is 34, has become something of a cause célèbre among a small group of mostly young entrepreneurs who seem determined to turn their back on venture capitalists. They say they yearn for a new entrepreneurship model. They talk about building ”sustainable companies” suggesting something idealistic in their quest. With comments on blogs urging Mr. Williams to ”keep up the goodness,” it feels a bit like the birth of a mini-movement in the Valley.

. . .

In candid posts on his blog, Mr. Williams chronicled Odeo’s story, warts and all. He admitted to making mistakes. Getting too much venture money too early was one of them. It made it harder to persuade the board and the company’s 14 employees to change course when, for example, Apple Computer introduced a competing product that cut into Odeo’s prospects. ”It’s a bigger ship to turn,” Mr. Williams said.

For the full story, see:

MIGUEL HELFT. "STREET SCENE: VC NATION; Yearning for Freedom From Venture Capital Overlords." The New York Times (Fri., November 24, 2006): C5.

(Note: ellipsis added.)

The reference for the Christensen and Raynor book is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

“Smart People Can’t Come Here”

Several years ago, I got up in the middle of the night to call the United States embassy in Beijing, in order to beg an embassy official to issue a visa to our best applicant for our open Research Assistant position. He did not want to do so, solely on the grounds that she might not return to China. The woman we wanted to hire had sky-high credentials by every measurable criterion, and based on letters of recommendation, was exceptional by the non-measurable criteria too.

How bizarre is the immigration policy of the United States when we view it as a problem that such a person might honor us by wanting to stay in the United States?

PALO ALTO, Calif. – Some of technology’s biggest names shared the stage at Stanford University last week to discuss the future of American innovation.

Yahoo co-founder Jerry Yang and Kleiner Perkins Caufield & Byers venture capitalist John Doerr were among the members of two panels at a technology summit at the university.

The third annual innovation summit, where industry leaders talked about emerging trends and government technology policy, was organized by TechNet, an advocacy group that lobbies on behalf of tech executives.

. . .

The executives also lamented government policies limiting student and work visas, warning that this shuts out people like Google co-founder Sergey Brin and former Intel chief executive Andrew Grove.

"We have this crazy policy in the U.S. that says smart people can’t come here. I think we all agree it makes absolutely no sense," Yang said. "Are people going to want to build a company in the U.S. . . . or in the new talent centers?"

For the full story, see:

SAN JOSE MERCURY NEWS. "Technology summit sees risks for U.S." Omaha World-Herald (Sunday, November 19, 2006): 7D.

(Note: the ellipsis between paragraphs was added; the ellipsis in the Yang quote was in the original article.)

Cheap, Easy, Transparent Property Rights Institutions Are Key to Developing Long Tail

Chris Anderson points out that the main thing currently holding back the long tail, are legal restrictions in the form of clearing copyrights. This is somewhat analogous to how the legal restrictions to starting up a small business, end up protecting the larger incumbent companies, a la Hernando de Soto’s The Other Path.

Figuring out how to quickly and cheaply process small intellectual property rights claims is the key. The assumption that this could and would be done was an underpinning of Bill Gates’ prediction of the key importance of content in his The Road Ahead.

If Gates’ vision could be realized, it would provide the consumer much greater variety (and much closer matches between what is sought and what is found); and it would provide many more producers of content, the opportunity to support themselves through their productive activities. (As opposed to the current situation where most such producers must produce as a part-time, labor-of-love, while they support themselves by their unrelated ‘day job.’)

Books mentioned:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Gates, Bill. The Road Ahead. New York: Viking Penguin, 1995.

Soto, Hernando de. The Other Path. New York: Harper and Row, 1989.

Does Focus on Scarcity, Blind Us to Abundance?

Chris Anderson ends chapter 8 of his stimulating The Long Tale, with a provocative jab at economists:

(p. 146) Finally, it’s worth noting that economics, for all its charms, doesn’t have the answer to everything. Many phenomena are simply left to other disciplines, from psychology to physics, or left without an academic theory at all. Abundance, like growth itself, is a force that is changing our world in ways that we experience every day, whether we have an equation to describe it or not.

The reference to Anderson’s book, is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Examine Your Assets and See If, and Where, They Can Add Value

In Gerstner’s book, there is an intriguing passage in which he defends turning IBM into an integrated services firm. As an aside, he says that it might not now have made sense to build up IBM’s diverse assets, but now, having them in existence, it made sense to use them. And he points out that even in the age of modularity, many customers needed, and were willing to pay for, a company that was able and willing to put everything together for them.

At first glance, this comment might seem at odds with the economist’s dictum that "sunk costs are sunk." But Gerstner was not advocating the integration of IBM services because IBM had historically invested a lot in building up the parts of the organization. He was pointing out that diverse parts, if properly integrated, would provide substantial added-value to an important sub-group of customers.

Here is the relevant passage from Gerstner:

(p. 61) Unfortunately, in 1993 IBM was rocketing down a path that would have made it a virtual mirror image of the rest of the industry. The company was being splintered—you could say it was being destroyed.

Now, I must tell you, I am not sure that in 1993 I or anyone else would have started out to create an IBM. But, given IBM’s scale and broad-based capabilities, and the trajectories of the information technology industry, it would have been insane to destroy its unique competitive advantage and turn IBM into a group of individual component suppliers—more minnows in an ocean.

The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

Rosen’s Superstars Versus the Long Tail

One of Sherwin Rosen’s most important articles is "The Economics of Superstars" in which he argues that if a superstar’s performance is even slightly better than the next best performer’s, if the performance can be cheaply reproduced (as with radio, CDs, etc.) then a small premium multiplied thousands of times, might result in huge differences in earnings.

This argument works, so long as most of us are interested in the same sort of performance, and are willing to pay some small premium for the best performer of it. But what if we care as much about the content of the performance as the quality of the performance? (In other words, we care as much about what is done, as we care about how well it is done.)

The new book The Long Tail can be taken to imply that there are many niches, and that the days of the "superstar" are over (or at least that in the future, the compensation of the superstars will not be quite so super). If this argument works, and I think it does, then it implies that the new technologies will serve consumers by better matching consumer preferences with the services provided, and also implies that a more diverse group of suppliers (performers) will be able to sustain themselves.

More speculatively, it seems as though it might imply greater equality in the labor market. If this last is true, it goes against most accounts of the effects of recent high technology on the labor market.

The reference to the Rosen article is:

Rosen, Sherwin. "The Economics of Superstars." American Economic Review 71, no. 5 (Dec. 1981): 845-58.

The reference to The Long Tail is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Antitrust Cases Can Hurt (Even Those that Get Dropped)

The antitrust lawsuit against IBM was dropped, and that against Microsoft result in the imposition of only minor legal remedies. So some may conclude that IBM and Microsoft bore little ill effects from the suits. But such suits can reduce morale, result in loss of talent, and restrain the efficiency, innovativeness and competitiveness of the prosecuted companies.

In the case of IBM, Lou Gerstner has made some strong, and plausible, comments on the deleterious effects of U.S. antitrust action:

(p. 118) The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration. The suit was ultimately dropped and classified "without merit" during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup. One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture. While IBM was subject to the suit, terms like "market," "marketplace," "market share," "competitor," "competition," "dominate," "lead," "win," and "beat" were systematically excised from written materials and banned at internal meetings." Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor. After a while, it goes beyond what is said to what is thought.

The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

Gerstner’s Insights on Business

Source of book image: http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg

Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes. His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations. I’ll mention a few of these in this and a few other postings in the next couple of weeks.

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career. One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter’s process of creative destruction.

I wonder if perhaps some of the success of McKinsey is due to the firm’s embracing and applying Schumpeter’s ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers. In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process. As a result some of them (e.g., Thomas Friedman) propose paternalistic ‘safety net’ labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM’s labor policies were among the most paternalistic. This is usually viewed as one of the positives about IBM. But one of Gerstner’s insights is to suggest that some of those in the IBM work force were hurt by IBM’s paternalistic policies:

(p. 186) . . . I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes. And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them. I was shocked, for instance, to discover the pay disparities—particularly in very important technical and sales professions—of IBM comployess when comapred to the competition and the industry in general. Our best people weren’t getting what they deserved.

Maybe I should mention that I don’t endorse everything in the book. For example, Gerstner seems to think that a desire to "win" is crucial to success in business. But I think the analogy between business and competitive sports is usually taken too far. Can’t one also succeed in business from a desire to innovate and to improve the world?

The reference on the book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

(Note: in the quote, the ellipsis was added, but the italics was in the original.)

Medical Cures Going First to the Dogs

One of the dogs cured of melanoma by a new vaccine. Source of photo: screen capture from NBC news report.

Melanoma has taken many human lives, including my father’s on April 15, 2000. Government licensing and regulations reduce competition in medicine and slow the pace of medical innovation. Animal health care is less regulated. Is it an accident that dogs are being cured for melanoma before humans?

Vet Philip Bergman remembers the first time he tried the vaccine in a dog.

"That was a dog that thankfully underwent complete disappearance of his tumor," says Bergman. "It was remarkable, obviously, to us."

Since then, more than 100 dogs have been treated, including Lawana Hart’s Lucky, who last June appeared to have only a few months to live.

For the full report, see:

Robert Bazell. "Treatment for canines with cancer raises hopes; Researchers encouraged by melanoma vaccine’s success on dogs." NBC Evening News Report; online print version updated: 6:36 p.m. CT Oct 26, 2006.

For the video version, go to:

http://video.msn.com/v/us/msnbc.htm?g=d7f603e0-86bb-44db-bad0-524ec79b02c8&f=00&fg=copy

More Good Done With Standard Oil Money: Henry Flagler

The Flagler Memorial obelisk was erected in on a man-made island in 1920, when Miamians still remembered the accomplishments of Henry Flagler. Source of image: http://www.miamibeachfl.gov/newcity/depts/arce/art_public/rw_flagler_monument.asp

The Standard Oil "monopoly" is often lambasted as a sorry episode in our economic history. And yet a strong case can be made that the Standard Oil wealth was created mainly by efficiently providing consumers with a commodity they valued. In addition, mention is often made of the Rockefeller philanthropic activities. Less known, is that others who became rich from Standard Oil, also engaged in productive entrepreneurship, and philanthropy, with their wealth. One of these was Henry Flagler.

In a region that prizes showy monuments to wealth, the lone monument to the man who made it all possible has languished in isolation for decades.

A soaring concrete obelisk dedicated to Henry Flagler, the oil tycoon who hastened South Florida’s development by building a railroad all the way to Key West, it sits on a tiny man-made island in Biscayne Bay, reachable only by boat or, more typically, Jet Ski. Almost everyone here has glimpsed the Flagler Memorial, but few know what it is called, why it exists or how battered it looks up close.

”I’m telling you, it’s a beautiful work of art,” said Paul Orofino, a board member of the Environmental Coalition of Miami Beach, a nonprofit group that occasionally tidies up Monument Island, the memorial’s scruffy, overgrown home. ”It’s a tragedy that nobody pays attention to this thing.”

It is not the kind of South Florida tribute one might expect for Flagler, who extended his railroad from St. Augustine to West Palm Beach in 1894, Miami in 1896 and Key West — a segment that lasted only 23 years until a hurricane demolished it — in 1912.

Flagler was the state’s original megadeveloper, after all, creating its tourism industry by turning swampy pioneer settlements into the world’s grandest resorts. He was also, perhaps, its first huckster, advertising the nascent Miami as ”the most pleasant place south of Bar Harbor to spend the summer.”

His over-the-top winter home in Palm Beach, awash in gold, is now a museum, but most of its visitors come from out of state, said John Blades, the museum’s executive director. Mr. Blades has tried to get a statue of Flagler erected in Palm Beach, which owes its sumptuous existence to the man, but has so far failed.

”Flagler,” Mr. Blades said, ”is probably the most unappreciated titan of the Gilded Age.”

For the rest of the story of the impressive, but deteriorating, Flagler Memorial in Miami, see:

ABBY GOODNOUGH. "South Florida Journal; Unappreciated, With Memorials to Match." The New York Times (Fri., October 7, 2005): A12.

(Note: the hurricane destroyed the Key West link of the railroad in 1935.)

Henry Flagler. Source of image: http://flaglermuseum.us/html/flagler_biography.html

Closing the Alleged ‘Digital Divide’

One version of the laptops produced by One Laptop Per Child for roughly $100 a piece. Source of image: http://www.laptop.org/OLPC_files/nigeria.jpg

Simply giving each child a laptop, won’t much improve their standard of living. (See Easterly’s The Elusive Quest for Growth.) But maybe a few of the children will obtain access to information about what is possible in the outside world, and maybe that will lead them to fight for more freedom?

But at least, if they remain poor, it will not be possible to lay the blame on some sort of ‘digital divide.’ Lay the blame, instead on government economic planning.

Note the aside buried in the article: ‘competitive advantage’ economist Michael Porter is telling the Libyans how to develop a "national economic plan"?? (Say it ain’t so, Michael!)

SAN FRANCISCO, Oct. 10 — The government of Libya reached an agreement on Tuesday with One Laptop Per Child, a nonprofit United States group developing an inexpensive, educational laptop computer, with the goal of supplying machines to all 1.2 million Libyan schoolchildren by June 2008.

The project, which is intended to supply computers broadly to children in developing nations, was conceived in 2005 by a computer researcher at the Massachusetts Institute of Technology, Nicholas Negroponte. His goal is to design a wireless-connected laptop that will cost about $100 after the machines go into mass production next year.

. . .

At the World Economic Forum in Davos, Switzerland, in January, Bill Gates, Microsoft’s chairman, suggested that the next generation of cellphones might be a better way to reach across the so-called digital divide.

Mr. Negroponte said Microsoft refused to sell its Windows software to the project at a price that would make it possible to include in his system. As a result, his laptops will come with the freely available Linux operating system, which is becoming increasingly popular in the developing world.

The idea of a laptop for every schoolchild grew out of Mr. Negroponte’s experience in giving children Internet-connected laptops in rural Cambodia. He said the first English word out of the mouths of the Cambodian students was “Google.”

Discussions between the One Laptop project and the Libyan government began as part of work being done by the Monitor Group, an international consulting firm co-founded by the economist Michael E. Porter. It is now helping the Libyans develop a national economic plan.

. . .

The first test models will be distributed to the five participating countries companies at the end of this November, according to Mr. Negroponte, and mass production is planned for June or July of 2007.

The computers come with a wireless connection, a built-in video camera, an eight-hour battery and a hand crank for recharging batteries. They will initially be priced below $150, and the price is expected to decline when they are manufactured in large numbers.