French open war against Google, Amazon

The CEO of French publisher Hachette Livre has declared war on both Amazon and Google’s efforts to commoditize (and perhaps disintermediate) book publishing, according to a front page story in Monday’s FT (quoted by Teleread, Barron’s, GigaOM etc. etc.). (Even the commentary en Français quotes the FT original).

Arnaud Nourry has two objections to the price-cutting American cultural imperialists. First, Amazon is selling best-selling books in the Kindle edition at $10 — less than the wholesale price. Since this Kindle pump-priming strategy is obviously not sustainable, Nourry is willing to say in public what American publishers (who perhaps fear Amazon) will not:

So, one day, they are going to come to the publishers and say: ‘by the way, we are cutting the price we pay.’ If that happens, after paying the authors, there will be nothing left for the publishers.

I remember back to 1998 when teaching the Amazon case — and writing my own BN.com case — we debated whether book publishers would disintermediate retailers or whether retailers would disintermediate publishers. I think this would be a good Five Forces question for MBA students: why is Amazon threatening to disintermediate publishers while the converse threat never got off the ground?

French publishers (including Hachette) are also hoping that a French court will toss out Google’s 10-month old settlement for giving away out-of-copyright books. The goal would be to force Google to negotiate more favorable terms with French (and perhaps other) publishers.

So in both cases, the French publishers don’t like commoditization of information distribution. Since such commoditization is inevitable, I guess they’re hoping to secure for themselves a tollkeeper role rather than being disintermediated by the big bad Americans.

My European history isn’t very good, but I don’t recall the French winning any wars against the Americans — only alongside the Americans (including their final victory over the English.) Still, fighting on home turf, under Napoleonic law, with Gaullist-inflamed passions against American cultural imperialism, I would bet $20 (not $500) that they’ll get the outcome they seek and extract additional payments from Google. The only wildcard is whether the Obama administration will intervene on behalf of the organization whose employees represented its 5th largest group of 2008 campaign contributors.

Amusing OSS perspective

I was poking around on a Google search and found an July 2002 speech by novelist Bruce Sterling at OSCON. Ironically the conference was held in San Diego a few weeks before I moved from San Diego to San Jose to work at SJSU and study OSS in Silicon Valley, but this is the first I’ve heard of the talk.

I found the reference from Slashdot (with plenty of commentary from those who were there), but the text of the talk is at the home of his “Viridian Design” movement.

It’s definitely inside baseball — for software geeks if not OSS geeks. And it’s long (5,000+ words). However, I don’t think “colorful” really captures the unusual nature of the talk or his viewpoints. His “Contrarian View of Open Source” seems an equal opportunity offender.

Here is a small excerpt:

The coolest thing about doing this artsy noncommercial creative work is that you get to stop. You get to throw up your hands and quit, if you want. It's like a charity. The widows and orphans are telling you "Thank you for not letting us starve, kind sir!" They're all grateful to you, they're touching the hem of your garment. You get to feel pretty good about what you're doing, and if you're tired, you just stop. It's like: "Okay, I'm tired! I've got compassion burnout now. No more free software. Lady, you and your damn kids can starve."

Nobody can do anything about that sudden refusal on your part. "Well, he gave us a really cool algorithm.... What more can we possibly ask?" If you abandon your rug in the bazaar, people just steal it immediately. They steal everything in a hot second. But if you abandon your open source code, the code just sort of sits there. Other people pitch in, and it gets bigger and fatter. There are big festering piles of code, huge piles of code. This has been playing out for seventeen, eighteen years now.

A classic struggle in other ways. You've got the Stallman free-as-in-freedom model... This guy sees code as some kind of handmade luxury vehicle. Maybe it's a tank. And you've got Gates, who is the commercial industrialist robber baron. The Ford Model T... any color you like as long as darkness is the standard.

The metaphor of proprietary vs. OSS as dating a supermodel vs. procreating with a hippie chick (playing Linda Ronstadt) might come across as sexist to some, but as the metaphor goes way over the top, it’s clear that Sterling has a very vivid imagination. Maybe even enough to get me to read his books.

Apple's encouraging semi-openness

I find really encouraging the big iPhone App Store news this week, i.e. Apple’s decision to allow the rival Spotify music service. I think it marks a crucial turning point in the degree of proprietary control that Apple will exert over the iPhone/iPod/iTunes ecosystem.

Apple has been playing an odd game for 30 years. Its quandary over proprietary control vs. the need for third party complements sends mixed messages to third party suppliers. Sometimes it wants 3rd parties, sometimes it begrudgingly allows them to compete, and sometimes it tries to stomp out third party competition for its end-to-end control of a complete system. (IBM in the 1970s, DEC in the 1980s and Microsoft in the 1990s were even more hostile to certain third party competition).

Of course, I have a very biased perspective, since I spent 17 years making money by allowing third party printers to connect to Apple’s Mac OS computers. For the first decade, our clients competed with Apple’s hardware (until they discontinued their printers in 1998). At times, Apple worked against its interests as a platform owner to hinder competition and protect its printer product line.

Maybe Apple’s latest App Store move is under the gun of an FCC threat (including an empty threat of litigation). Still, I find it encouraging.

Both as a product strategy, and as a nod to government competition policy, this points to a much better Apple strategy, defined in two parts:

1. Make a great end-to-end solution; but
2. Allow point replacement at any point within the modular design.

This sort of modularity and consumer choice is consistent with many technologies of the past decades. My first stereo was a Kenwood receiver, Advent speakers and a Teac tape recorder. Later on I used a Harmon-Kardon tape recorder with the Sansui amplifier — and did not have to use a Sansui tape recorder or a HK amp. Although I own some Yamaha speakers, in general the makers of the best speakers didn’t make electronics.

Of course, such open modularity is the DNA of the Internet: What would a Mac be if it only allowed use of Mac.com email, or a Windows machine if it only supported hotmail and MSN? Shouldn’t Android phones allow use of SaaS sites not owned by the Monster of Mountain View? Or if Outlook could only send email to other Outlook clients?

Apple’s point products are pretty darn good, so it shouldn’t be afraid of competing with its ISVs and IHVs. If it is afraid — and uses technical means to block third party competition — it’s no better than 1990s Microsoft, back in the Bill Gates days when it was crushing 1-2-3, WordPerfect, and DR-DOS.†

I don’t think Apple is done opening up, and I have no illusions that it’s going to end up as open as Mozilla or Eclipse. Still, it’s a great start.

† Charles Ferguson makes a convincing argument that Netscape was at least partly culpable for its own fate.

Web 2.0 ruining Gen Y

Too much IM, SMS, tweets and blogs mean they can’t communicate with people, according to professor and author Mark Bauerlein in Saturday’s WSJ:

In September 2008, when Nielsen Mobile announced that teenagers with cellphones each sent and received, on average, 1,742 text messages a month, the number sounded high, but just a few months later Nielsen raised the tally to 2,272. A year earlier, the National School Boards Association estimated that middle- and high-school students devoted an average of nine hours to social networking each week.
…
Back in 1959, anthropologist Edward T. Hall labeled these expressive human attributes "the Silent Language." Hall passed away last month in Santa Fe at age 95, but his writings on nonverbal communication deserve continued attention. He argued that body language, facial expressions and stock mannerisms function "in juxtaposition to words," imparting feelings, attitudes, reactions and judgments in a different register.
…
They may no longer, thanks to the avalanche of all-verbal communication. In Silicon Valley itself, as the Los Angeles Times reported last year, some companies have installed the "topless" meeting -- in which not only laptops but iPhones and other tools are banned -- to combat a new problem: "continuous partial attention." With a device close by, attendees at workplace meetings simply cannot keep their focus on the speaker. It's too easy to check email, stock quotes and Facebook.
…
It does, of course, but how would they know it? We live in a culture where young people -- outfitted with iPhone and laptop and devoting hours every evening from age 10 onward to messaging of one kind and another -- are ever less likely to develop the "silent fluency" that comes from face-to-face interaction. It is a skill that we all must learn, in actual social settings, from people (often older) who are adept in the idiom. As text-centered messaging increases, such occasions diminish. The digital natives improve their adroitness at the keyboard, but when it comes to their capacity to "read" the behavior of others, they are all thumbs.
…
Lots of folks grumble about the diffidence, self-absorption and general uncommunicativeness of Generation Y. The next time they face a twenty-something who doesn't look them in the eye, who slouches and sighs for no apparent reason, who seems distracted and unaware of the rising frustration of the other people in the room, and who turns aside to answer a text message with glee and facility, they shouldn't think, "What a rude kid." Instead, they should show a little compassion and, perhaps, seize on a teachable moment. "Ah," they might think instead, "another texter who doesn't realize that he is communicating, right now, with every glance and movement -- and that we're reading him all too well."

Mr. Bauerlein, a professor of English at Emory University, is the author of The Dumbest Generation: How the Digital Age Stupefies Young Americans and Jeopardizes Our Future.

Arming all sides in war on switching costs

This month the NYT and Walt Mossberg both mentioned TrueSwitch, a company whose services make it easy for people to switch email services. The system imports address books, mail messages and sends change of address notices.

Normally software vendors count on switching costs to encourage lock-in for their customers. People who use mail clients (like me but not our tween) find it easy to switch mail accounts since all the mail and addressbooks stay in the same mail program, but webmail users are left out in the cold.

TrueSwitch is being purchased by Google, Yahoo, Hotmail, AOL, Netscape, Comcast and Verizon. (Only SBC is conspicuously absent). People once joked about Swiss arms merchants selling to both sides in a war, but I don’t recall many 8-way wars.

The software is developed by Esaya, Inc., a 9-year-old NYC firm that specializes in “account migration.” (The stale website — with 4½ year old news articles — doesn’t make clear whether it’s bootstrapped or VC-funded).

While I wonder about the long-term value of the email switching market, it seems like a clever market niche: in any market, write a tool for Company B to make it easy to steal all of Company A’s customers, and then sell the reverse direction tool to Company A when they pony up the money.

Where’s Joel?

Last year Apple hired Joel Podolny, a top b-school sociologist who taught at Stanford and Harvard before becoming dean at Yale. Supposedly he’s going to head up “Apple University,” whatever that is, but there was no public mention at the Apple public events (such as WWDC) since then.

Joel has updated his LinkedIn profile and blogged in March with his new title. Otherwise, he’s more or less disappeared from the face of the earth. So where’s Joel?

My earlier comments rejected the assumption that Apple U is an internal training program. Instead, I speculated that Apple University is some sort of consumer-scaled online education platform, such as for distance education. A quick Google search shows Google considers the term “Apple University” as pointing to an Apple web page about iTunes U, although the phrase does not appear on the page at all.

An educated guess is that Apple U is a content delivery platform that’s waiting for other infrastructure to ripen before it’s formally announced. One part of that platform could be the iTablet, which apparently the newly revitalized Steve Jobs is tinkering with to perfect it before the world is allowed to see it. (If it’s hardware tinkering, then it won’t be shipping this fall).

So when the iTablet ships, then look for Apple U. If there’s no Apple U, I’ll pronounce it officially overdue. But if photographers can look for Steve Jobs on campus, how hard would it be to find Joel?

Not all disruption efforts succeed

In a provocative posting, open source fanboy Matt Asay is predicting failure for Android among other high stakes gambles:

If you look at the history of computing, very few companies manage to resurrect falling fortunes to lead their respective markets. Does this mean that once down, a company should resign itself to being out?
…
Few companies or products challenge an incumbent, at least not on its own turf. Disruption is required to displace an incumbent, following Clayton Christensen's thinking in The Innovator's Dilemma.

All of which makes me doubt Google's efforts to beat Apple in smartphones, and suggests Nokia and Motorola aren't going to fare much better. They simply aren't disruptive enough.

Matt make an important general point that’s usually overlooked. The Christensen talisman is not a silver bullet: just claiming you’re gonna be disruptive doesn’t mean you’ll succeed. (In this case, he might be underestimating the impact of the bazaar Android Market model).

His other point:

Open source has also failed to offer a disruptive panacea. Motorola is betting big on the Google Android platform, but thus far has little to show for it.

Google, for its part, has attempted to disrupt Apple's iPhone in its apparent area of weakness: its closed nature. Google open-sourced the Android platform and invited the world of third-party developers to flock to it.

They never came.

As Slate's Farhoo Manjoo writes, "Even though it's far friendlier to developers, Android has failed to attract anywhere near the number of apps now clogging the iPhone." Android may be open, but it's not cool, and "cool" is where customers and, hence, developers are.

Which leaves me with my original question: if a vendor finds itself playing catch up, should it even bother running the race? In response I'd suggest that unless a vendor is willing to commit significant resources to a disruptive strategy, it might as well give up.

As I’ve said repeatedly, if you’re desperate enough to be open, you must be far behind. (Netscape creating Mozilla, Sun vs. Apollo, Sony switching to ePub). So sometimes, the amount of money you make from sharing the follower crumbs makes it worthwhile.

Note to Matt: If you’re gonna refer to “pundits like Joel West” (that’s Professor Pundit to you!) then I can call you a fanboy.

Innovation in the trenches

A friend, Cheryl Perkins, has co-authored a new book entitled Conquering Innovation Fatigue. Here is the Amazon catalog copy:

This practical guide reveals the nine major “fatigue factors” that can block the path to innovation success, along with solutions to energize innovation. Original advances in innovation practice and new case studies are applied to guide inventors, entrepreneurs, companies, universities, and even policy makers in conquering innovation fatigue. Cost-effective solutions include guidance on intellectual assets, dealing with disruptive innovation, and driving innovation using the “Horn of Innovation” and “Circuit of Innovation” models. A surprising view of DaVinci as an engine of open innovation is presented. Throughout the book, a unique aspect is exploring the journey of innovators, including corporate employees and entrepreneurs, at the often-overlooked personal level using the metaphor of immigrants in a strange land to identify barriers and solutions.

The book has a website with a blog by Jeff Lindsay, who wrote the book with Perkins and Mukund Karanjikar. The authors base the book on the problems they faced at industry, and more recently as consultants.

I met Cheryl when she was the chief innovation officer at Kimberly-Clark. I giving my "intro-to-open-innovation” spiel to her co-workers in hopes they would get the OI religion the way that P&G had done (as recounted in the 2003 Chesbrough book).

Maybe mobile money

Nokia announced Wednesday that’s developing a new service Nokia Money by partnering with Obopay. The product is mainly targeted at the rural poor that lack any sort of bank account, just as mobile phones have been targeted in China and India for communities lack wireline infrastructure; the US is in the indefinite future.

So it can enter the services market on the cheap, without having to commit a lot of management mindshare to make it happen. Going outside for new technologies? We call that open innovation.

Nokia also has some form of option on the upside. In March it invested an undisclosed amount in the company in what I’m guessing (given this current market) was a down round. At a minimum, it won’t have to buy out its own shares, although one of the Obopay investors is its old friend Qualcomm.

The US press is focusing on the PayPal rivalry, but I think DoCoMo is a better analogy. PayPal is the big player in its segment, but it’s a small subset of Internet e-commerce. DoCoMo has had a big hit for the past decade with some 48 million i-mode customers, but failed in its efforts to export the business model to other countries.

It appears as though there are few if any between-country network effect for mobile payments, which means the Big Emerging Markets are up for grabs, no matter what happens in the US or Japan.

The official Nokia release says nothing about an exclusive arrangement. Does this legitimate Obopay the way that IBM legitimated MS-DOS back in 1981? Or does it put Obopay firmly in Nokia’s camp, ruling out interest from operators like Vodafone, Orange or T-Mobile?

Twitter-Geezers

The NY Times updates misconceptions about Twitter’s demographics:

Just 11 percent of its users are aged 12 to 17, according to comScore. Instead, Twitter’s unparalleled explosion in popularity has been driven by a decidedly older group. That success has shattered a widely held belief that young people lead the way to popularizing innovations.

“The traditional early-adopter model would say that teenagers or college students are really important to adoption,” said Andrew Lipsman, director of industry analysis at comScore. Teenagers, after all, drove the early growth of the social networks Facebook, MySpace and Friendster.

Twitter, however, has proved that “a site can take off in a different demographic than you expect and become very popular,” he said. “Twitter is defying the traditional model.”

In fact, though teenagers fueled the early growth of social networks, today they account for 14 percent of MySpace’s users and only 9 percent of Facebook’s. As the Web grows up, so do its users, and for many analysts, Twitter’s success represents a new model for Internet success. The notion that children are essential to a new technology’s success has proved to be largely a myth.
…
Many young people, who have used Facebook since they began using the Internet and for whom text messaging is their primary method of communication, say they simply do not have a need for Twitter.

Almost everyone under 35 uses social networks, but the growth of these networks over the last year has come from older adults, according to a report from Forrester Research issued Tuesday. Use of social networking by people aged 35 to 54 grew 60 percent in the last year.

So there may be a path-dependence argument — that Facebook and MySpace locked up teens early.

As the parent of a tween, there was also an encouraging note: at least some teens want to use Facebook (or MySpace) to limit updates to only their friends. Perhaps they are listening, after all.

The report also quotes Andrea Forte, a PhD student at Georgia Tech, who studied social media usage by high school students. She argues that Facebook — with its additional contextual clues beyond just ext updates — provides a richer sense of identity that teens share with their friends.

A trillion here, a trillion there

On Tuesday, the administration finally admitted that the March CBO numbers were right, and that the projected 2010-2019 deficit will be $9 trillion instead of $7 trillion. As the Washington Post editorialized this morning:

NO ONE LIKES to be the bearer of bad news -- especially when it could threaten your multibillion-dollar health-care reform bill. And so the Obama administration did not exactly rush to publish yesterday's required mid-session update to its federal budget estimates of last February. Still, once the numbers finally emerged in the dog days of August, they retained the power to stun: Instead of a cumulative $7.1 trillion deficit over the next decade, the White House now projects a $9 trillion deficit. These figures imply average annual budget deficits greater than 4 percent of gross domestic product through fiscal 2019, a rate of debt accumulation faster than projected GDP growth. This is not a sustainable fiscal path.

The extra $1.9 trillion in red ink mainly reflects the Office of Management and Budget's adoption of more realistic -- that is, more pessimistic -- estimates of economic growth and unemployment. White House officials protest that their original, rosier numbers made sense at the time; actually, plenty of forecasters, including those at the nonpartisan Congressional Budget Office, made more accurate calls. This situation was foreseeable and should have been acknowledged earlier.

The projected FY2009 deficit is $1.6 trillion and FY2010 is $1.5 trillion, increasing the national debt by 31% in just two years. That’s the highest level of deficit spending since WW II.

Editorial writers at the Wall Street Journal argue that even these deficit projections are unrealistically low:

[T]hese deficit estimates are driven entirely by more domestic spending and already assume huge new tax increases. CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019—and then keep climbing after that. CBO says this is "unsustainable," but even this forecast may be optimistic.

Here's why. Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation.

Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth.

Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019—which the CBO concedes is "high by historical standards." This implies some enormous tax increases.

The WSJ news article also suggests that the budget includes optimistic revenues from selling cap-and-trade credits.

The numbers don’t even include all proposed spending, according to the WSJ editorial:

The White House issued a statement yesterday that the President is "very concerned about these out-year deficits." But apparently not so concerned as to stop pushing for a new $1 trillion health-care entitlement that is conveniently not included in these latest budget forecasts.
…
Obamanomics has turned into an unprecedented experiment in runaway government with no plan to pay for it, save, perhaps, for a big future toll on the middle class such as a value-added tax.

This reminds me a comment by Lex in the Financial Times last week:

Deficit attention disorder

The notion that the US Congress spends money like a bunch of drunken sailors has been called unfair. After all, the latter spend their own money.
…
Like any debt, the sooner the insidious effect of compound interest is checked, the less painful it will be. But even reversing earlier tax cuts and avoiding expensive new programmes will not be enough. The CBO calculates that a permanent spending cut of 8 per cent of output today would be necessary to simply stabilise borrowing in the long run – equivalent to eliminating all military spending plus healthcare for the indigent overnight. It is not short-term deficits but the future budgetary abyss that should be Washington’s priority.

Despite the prevalence of high school economics classes, a majority of today’s teenagers and 20-somethings remain financially illiterate. Perhaps when they realize these deficits are being left for them to pay, they will support a cutback in these unsustainably high levels of government spending. (And if new taxes are created to support the spending, then a few years of Jimmy Carter-style stagflation will convince them that shrinking the size of government is the only answer.)

Reversing arbitrary path dependence

Some standards are arbitrary, with little if any technical justification. Certainly anyone who’s carried a pocket full of European AC plugs will attest to this.

The WSJ has an interesting article Monday on how Samoa is changing the handed-ness of its automobiles and roads. It’s giving up the choice of its neighbor American Samoa that matches its “imperial” master (left-hand drive), to match that of much larger neighbors, Aus/NZ who match their former imperial master (right-hand drive). Apparently the Americans (and the French) and their allies are 70% of the world while the Commonwealth countries (plus Japan) are 30% of the world.

In searching for cheap leftover cars from Aus/NZ (much as Mexico takes cheap leftover cars from the US and Eastern Europe does so from the EU), Samoa is swimming against the tide. The WSJ lists 11 countries that have switched from 1946-1974 — all switching from the losing standard (British) to the winner (Franco-American).

Nokia netbook nonsense

After proclaiming for a decade that smartphones will inevitably rule the world, on Monday Nokia announced the Nokia Booklet 3G, a high-end netbook that runs Windows.

To avoid allowing Windows Mobile get established in cellphones, Nokia created and nurtured Symbian for more than a decade. Now it’s becoming one of the last firms to adopt Windows, at a time when PC makers (like Dell) are adopting Linux-based Android smartphones, while other PC makers are considering ARM-based (rather than Intel-based) devices.

While I’ve noted that the netbook niche is growing rapidly, I don’t see how Nokia hopes to achieve any meaningful market share. Perhaps there will be a good 3G radio in its netbook, but HP, Dell, Lenova, Toshiba, Sony and others can buy such radios on the open market. (We call this open innovation).

I don’t see how Nokia will have an advantage on scale, innovation, features, branding or distribution over existing netbook makers like Asus, and Acer or the PC followers such as HP, Dell, Sony etc. etc.

It’s not that I doubt Nokia’s capabilities — although using software off the shelf will help it provide greater functionality than its current mobile devices.

However, I can’t see how being late to market in a commodity market is going to turn out well. The choices are low cost or differentiation. The former seems less likely, since it hasn’t been a low cost producer and it seems unlikely to happen any time soon.

Update 8am: However, based on the comments of reader Naru (below), it’s quite possible that Nokia is selling the product as a defensive measure to keep existing netbook producers from gaining a toehold among the network operators and their distribution channel.

Has Nokia has produced innovative phone hardware? Sure, but so have the Korean companies — and they also make PCs.

Meanwhile, the Taiwanese leaders seem to be keeping their lead producing low cost implementations of commodity netbooks. So far, there hasn’t been a lot of volume in the differentiated offerings, and perhaps there won’t be until the new Apple tablet comes along.

The great disconnect

John Goodman writes:

All across the country, Members of Congress are facing very angry constituents over the issue of health care. So ferocious has been the response that an estimated two-thirds of the Members are not even going to hold town hall meetings. Reportedly, our elected representatives are shocked.

I don't know why. … Where, you wonder, were the politicians as this anger was boiling over? Don't they have staffers who answer their telephones and open their mail?
…
How did this happen? I think there are three causes.

1. Politicians who don't know anything about health care.…
2. Policy wonks who do not understand the voters.…
3. A very deceptive presidential campaign … that made these promises: Universal coverage, … Paid for by taxes on the rich…; and If you like the health plan you're in (which 87% of Americans do) you can keep it

…
Now comes the surprise from Capitol Hill: Forget everything we said during the election. We really didn't mean it after all. In particular:

1. Whereas the campaign mantra was universal coverage ("we're the only developed country that doesn't insure all its citizens"), that term is almost never heard any more. The clear goal now is to nationalize the health care system ("we're the only country in the world that doesn't have a national system").
2. Far from being left alone if you like the plan you are in:
   1. You and your employer are going to be heavily taxed if your insurance doesn't conform to the plan the federal government is designing.
   2. You, along with millions of other Americans, may lose the plan you like and be pushed into a health insurance exchange where the premiums are likely to be higher than what you now pay and health plans have perverse incentives to underprovide to the seriously ill.
   3. Costs cannot be controlled unless we all get less — fewer tests, fewer exams, fewer services — with Barack Obama's grandmother's hip replacement being Exhibit A.
3. Far from escaping the financial burden of reform, it now appears that everyone will be burdened — from the elderly to the casual consumers of soda pops.

To lighten up the harsh and specific criticisms, the blog posting also included a funny reference to the oldie-but-goody “Shout”.

I might disagree with the “deceptive” part. My reading is that there are many on the left who are economically ignorant (perhaps willfully so) and made promises without adding up all the numbers — math, accounting and economics not being strong suits for most lawyers and politicians (left or right). So when Sen. Obama attacked Sen. McCain's proposal to tax expensive healthcare plans (which may end up part of ObamaCare), the political operatives making the decision (and perhaps the senator) didn’t realize the corner they were boxing themselves into.

Goodman — who has claim to be the “Father of Health Savings Accounts” — edits the Health Policy Blog where the article appeared. (He is not to be confused with the movie actor or Marine general). As his blog demonstrates, Goodman is clearly a healthcare policy wonk, but one from a free market perspective.

In a WSJ.com column on Saturday night, Goodman added additional thought on the public frustration:

For the past two months the National Center for Policy Analysis (the think tank I run) and Salem Communications (which employees such talk-show hosts as Mike Gallagher, Bill Bennett and Michael Medved) have been sponsoring an online petition at www.freeourhealthcarenow.com for those who wish to express their opposition to nationalized health care. In the process we've collected more than 1.1 million signatures and we're in email communication with many on a weekly basis.

These are a very diverse group of people. … For the most part, these individuals are not funded or organized by anybody. They really are grass roots. Sure, there may be a few top-down "astroturf" groups and some special-interest groups that are secretly gleeful. But there is no way the kind of spontaneous outpouring we've witnessed could be bought or organized by anyone.

Why are they so angry? The reasons are manifold, but the single biggest reason is the arrogance of our elected officials in Washington. Think about it. For the past seven months a small group of politicians has been meeting behind-closed-doors with powerful special interests to decide whether you will be able to keep your current insurance, where you will be directed to get new insurance and at what price, what fines you and your employer will have to pay if you don't conform, and how they're going to get your doctor to change the way he or she practices medicine. In the process, they never asked you what you thought about anything. If you are not mad about this, odds are you don't understand the situation.

A leading healthcare economist, Goodman not only sees the problems that ObamaCare is trying to solve, but also the new ones that it will cause.

As I see it, that’s the chronic problem with this (and several other) administration efforts to ram through solutions while they have the votes. The real world is messier than the idealized view used to justify the legislation, and the proposals to expand government have not seriously considered the serious side effects they cause (most noticeably adding trillions to the national debt.) Frankly, most economists are being ignored in favor of inside-the-Beltway political operatives who favor command-and-control solutions, achieved in a once-in-a-lifetime crisis opportunity that won’t be allowed to go to waste.

In his WSJ piece, Goodman concluded:

In an off-the-cuff answer to a question on ABC's nationally televised White House infomercial, the president said we're only talking about people giving up care that is "unnecessary." Yet no patient, no doctor, not even the most liberal person in the country thinks the government can pull that off without a glitch.

In truth, there is a deadly serious issue here: How do you get rid of waste and inefficiency without denying people care they really need? The answer is not easy. No other country has found it. And if the president wants to tackle this challenge he, not his opponents, bears the burden of proof to show how that will work.

Yet far from accepting this responsibility, the White House is ducking the issue. …

The new tactics it is employing show the White House is completely out of touch with the American people. Those who attend town-hall meetings know they are not being organized or funded by anyone. And when the administration attacks their character and their motives and intentionally distorts the truth, it only adds to the anger people already feel.

Continuing blogging cost reductions through outsourced economic criticism

App stores: mega-cathedral and small bazaar

Since I'm not a market moving-pundit, I won’t attempt to provide the definitive analysis of Friday’s filings by Apple, AT&T and Google in the Google Voice/iPhone App Store controversy. Business Week and the NYT have less impassioned reports than most of the blogosphere.

But stepping back a few feet (say to the 10,000' perspective), it seems as though — to use the Eric Raymond over-stylized typology† — the Android Market is a nascent bazaar and iPhone App Store is a much bigger, more popular and more carefully controlled cathedral. This difference could end up being as (or more) radical than the open source differences claimed by ESR more than a decade ago.

While Google (like Sun 15 years ago) often claims to be “open,” the company that wants the entire universe available as a freely-searchable text file has not released their reply directly (e.g. on the Google public policy blog). A purported version of the redacted Aug. 21 Google filing includes this answer to an FCC series of questions:

Please provide a description of the standards for considering and approving applications with respect to Google’s Android platform. …

The Android market is an open distribution channel for developers seeking to get their Android applications into the hands of users. As such, there is no pre-approval process conducted by Google or any third-party before applications submitted by a registered developer … are available for download by users.
…
Once an application has been uploaded by the developer … the Android Market community is relied upon to flag applications that do not abide by our policies.
…
An application could be removed from the Android Market if it is found to violate Google’s Developer Distribution Agreement … or Google’s Content Policies. … Approximately 1 percent of all applications that have been uploaded to Android Market and made available to customers subsequently have been taken down by Google. The majority of these applications have been removed after being flagged by users for containing impermissible adult content, or in response to valid Digital Millennium Copyright Act (“DMCA”) notices from rights-holders.

In other words, as with everything else it wants to scale, Google doesn’t want to pay an incremental penny of labor, but instead relies on free user labor to do almost all of the app evaluations.

Meanwhile, this is the Apple description of the comparable process.

What other applications have been rejected for use on the iPhone and for what reasons? …

In a little more than a year, the App Store has grown to become the world’s largest wireless applications store, with over 65,000 applications. We’ve rejected applications for a variety of reasons. Most rejections are based on the application containing quality issues or software bugs, while other rejections involve protecting consumer privacy, safeguarding children from inappropriate content, and avoiding applications that degrade the core experience of the iPhone. Given the volume and variety of technical issues, most of the review process is consumed with quality issues and software bugs, and providing feedback to developers so they can fix applications. Applications that are fixed and resubmitted are approved.

The following is a list of representative applications that have been rejected as originally submitted and their current status:

• Twittelator, by Stone Design Corp., was initially rejected because it crashed during loading, but the developer subsequently fixed the application and it has been approved;
• iLoveWiFi!, by iCloseBy LLC, was rejected because it used undocumented application protocols (it has not been resubmitted as of the date of this letter);
• SlingPlayer Mobile, by Sling Media, was initially rejected because redirecting a TV signal to an iPhone using AT&T’s cellular network is prohibited by AT&T’s customer Terms of Service, but the developer subsequently fixed the application to use WiFi only and it has been approved; and
• Lingerie Fantasy Video (Lite), by On The Go Girls, LLC, was initially rejected because it displayed nudity and explicit sexual content, but the developer subsequently fixed the application and it has been approved with the use of a 17+ age rating.

I found the candor here to be refreshing for Apple, particularly in explaining the notorious SlingPlayer case.

I find troubling the precedent about “undocumented” APIs, since this seems to be a business decision rather than a technical or security one. There was lots of Mac software that could not have shipped without using undocumented backdoors — we certainly depended on it, as did many other system software companies. Yes, the iPhone architecture is newer and better, but inherently there will be system APIs that are useful to certain utilities while not published to the average application. Microsoft faced potential antitrust trouble for allowing its own apps but not competing apps to use undocumented APIs, although the iPhone is unlikely to be subject to antitrust action because it lacks the Windows market share.

Is Apple the most onerous gatekeeper for app developers? Hardly. US carriers are the worst, which approve less than 50% and often take 6 months or more. The Apple filing implies its app store accepts 80% (or 95%) of applications on first try, and the vast majority in two weeks.

Will other app stores go for Android’s wide-open, anything-goes approach — equivalent to Guy Kawasaki’s “ask forgiveness, not permission”? Or will they still go for a a manual, discretionary approval process? Right now the BlackBerry App World and Nokia Ovi Store seem to differ from the iPhone (if at all) only in degree rather than a core idea of control.

If anyone were going to go for the open source, self-policing community, it should be the open source stewards at the Symbian Foundation. However, right now they seem to be planning an even more controlled model than Apple or RIM (perhaps only temporarily). Also, if the Symbian Horizon is only available to users through other portals (such as Ovi or carriers), then developers may enjoy two shots at rejection rather than the one that Apple or RIM offer.

Even if discretionary policing is the norm for almost any distribution channel, one zinger in the Google response hints at the potential monopsony abuse by Apple:

…it is important to note that the Android Market is not the exclusive method for distribution of Android applications. Developers are free to make their applications available through alternative channels instead of, or in addition to, the Android Market, and users are free to install Android applications from any source they choose.

Will it be OK for any ecosystem member to claim a monopoly on distribution channels for their platform or customers? (This has been the norm, for example, with Japanese keitai operators.) If the monopoly is examined, is it justified by security or quality concerns, or merely a desire to capture all the distribution margin for third party applications?

As an open source project, Android is open in only one dimension (IP) of the three dimensions of openness. However, as a platform, their model for distributing third party applications is potentially more radical in its conception (and impact) than anything Apple has done thus far with either the iPod or iPhone.


† The Linux “bazaar” is much more hierarchical than the ESR typology claims, and the BSD “cathedral” is not as hierarchical as claimed.

The decline of public higher education

Here in the Bay Area, with sky-high property values and a very intelligent workforce, we have public schools that would be the envy of most of the country. Of course, being “middle class” in Silicon Valley requires you to have a salary and asset value that would make you the richest guy or gal in most of rural America.

But eventually college rolls around, and it’s time to choose between the $40,000/year private tuition or the $10,000/year public tuition. A pretax family income of $100,000 or $125,000/year doesn’t go very far if you’re shelling out $200k for college. (Depending on your circumstances, planned tuition waivers by Ivy League and Stanford may or may not kick in).

Once upon a time, the bread and butter of the California middle class was the University of California. Berkeley was one of the top universities in the world, and the regional branches offered at least a good education. The social compact with the middle class was “pay taxes for higher education and your kid will get a first rate public college education.”

It’s hard to find many California-born members of the educated classes not touched by the UC. Both my parents and my father-in-law got their bachelor’s degrees from Cal, and both my wife and I have degrees from a lesser UC campuses. Our college financing plan for our daughter is “get into UCLA.”

Alas, the UC has been devastated by budget cuts during the 1990 recession, and of course the furloughs and other cutbacks this year. To backfill cuts, the professional schools (business, law, medicine) were allowed to charge market rates for graduate degrees, meaning the self-employed or otherwise those of modest means can no longer self-finance these graduate degrees. Today, California universities face the intersection of the long-term secular decline in funding, superimposed on the ongoing incompetence of political “leaders” and a deep recession that is worse here than almost anywhere else.

However, it’s not just a California problem. What was striking about Thursday’s rankings of 1400 universities from US News and World Reports (the former news magazine) was how much public universities all across the country are slipping. Even though I know that rankings have their limitations — they use only what’s easily measured and produce a single list for wildly heterogeneous needs — it’s still a scary outcome.

Not surprisingly, the rich get richer: the list was headed up by Harvard, Princeton and Yale. More strikingly, of the top 20 research universities, none were state-sponsored schools but instead private schools with annual tuition ranging from about $34k to $41k. Of the 262 universities on the list categorized as research universities, the public schools are 61.6% of the 262 but only 12% of the top 25.

This is not just a California problem. Those landing below the top 20 were not just Berkeley (#21) and UCLA (#24), but also Virginia (#24), Michigan (#27) and UNC (#28). Of the flagship campuses of the traditionally strong schools, Illinois and Wisconsin tied for #39 with Florida and Texas at #47, well behind secondary campuses in Virginia (William & Mary) and California (other UCs). Georgia Tech, Washington, and Penn State also ranked in the top 50, but Ohio State and Maryland are not.

The University of Michigan is instructive. My UCI PhD advisor left for Michigan a few days after I finished my PhD (a profound motivation to finish on time) and talked about how they solved the funding problems that UC had failed to do, through quasi-privatization. However, the benefits do not seem to be not visible through the crude prism of the rankings, although perhaps 5 years from now UM and UVa will have passed their under-funded California rivals.

Perhaps the factors used in the rankings favor rich private schools:

• 35% is faculty resources, financial resoures and alumni giving, all of which directly favor private schools
• 25% is peer assessment — the halo effect — which can be influenced by buying a few high-profile superstars or having lavish facilities
• 20% is retention, and frankly the public schools that serve middle- and lower-middle class students tend to have more students who committment to college (or financial situation) is more tenuous that Junior who got accepted to Harvard. (My dad was a counter-example, flunking out of Harvard Law in 1934 due to insufficient interest in studying.)

Even so, it’s impossible to argue against all these measures, and the cumulative effect is that private schools are continuing to get better, and elite public universities (let alone run-of-the-mill teaching schools) are struggling to maintain quality standards.

If you look at the US News “best value” rankings, the results are not that much better for the public schools, which only muster 2 in the top 20. The story is a little better for middle class parents, because the richest and most elite schools provide need-based aid to 50+% of their students; on, average student sin the top 7 (Harvard, Yale, Princeton, Stanford, MIT, Columbia, Dartmouth) only pay about 1/3 of the list price of the total cost).

An alternative ranking based on the core curriculum — the once-customary “classical liberal education” — rates UT Austin, Baylor & Texas A&M high and the educationally trendy Ivies rather low. However, I must agree with the WSJ evaluation:

the American Council of Trustees and Alumni … has the quaint notion that a university be judged on what it teaches its students. … Their effort to change the focus to learning is no doubt an admirable one, but I suspect that it will have a limited effect. Any grading scale that gives an "A" to the University of Arkansas and an "F" to Yale may prove too contrarian to capture the public imagination.

One salutary benefit of the US News (and competing) rankings is that once a year the sponsoring magazine publishes some longer sidebars on the state of higher education, and this year one article is on budget cuts for public colleges. The article focuses on California’s problem (more on that another time), but notes the issue is broader than this:

Even during the boom years, most states weren't increasing college budgets to match rising enrollments. The average public research university got almost $8,350 per student from taxpayers in 2002. By 2006, that had dropped below $7,100, according to the Delta Project on Postsecondary Education Costs, Productivity, and Accountability.

Of course, that average will have plummeted even further by 2010; a few well run (mostly “red” states) states will keep up their spending, but many states beyond California are cutting state funding by “double-digit percentages” just this year alone. Even if you’re not a conspiracy theorist, the numbers suggest a long-term (and probably irreversible) decline in public education support.

As anywhere else, a crisis is an opportunity to make changes (good or bad) that would otherwise be impossible. The sidebar continues:

"This is an opportunity," says William Bowen, a former Princeton University president who has written several books examining inequities and quality problems in higher education. "Some sensible pruning is occurring. Some good could come out of this." But, he worries, colleges are not using the recession as a spur for the kinds of fundamental changes needed to give more Americans better training.

The article lists some example of colleges (like the U. Alabama) that have attempted more scalable, computer-driven instruction techniques to server higher volumes at lower costs. It concludes:

Cheaper, better classes are the only long-term solution to the growing demand for education and shrinking funding, says Carol Twigg, founder of the National Center for Academic Transformation.

The economy will some day rebound, of course. But those colleges that are just cutting courses or having instructors lecture in front of ever bigger classes will simply offer lower quality. They won't have solved the structural problems that have led to high costs and low graduation rates. "Thinking differently," Twigg says, "is the only solution."

I think the reworking will happen, but I still see that the public schools will unable to compete with private schools in the long run, as politicians throw money at direct benefits (which buy them votes) and powerful public employee unions which provide campaign dollars.

(The story may be slightly less grim for graduate school, because in departments such as engineering and medicine, graduate students are funded by external grants that do not discriminate between public and private schools.)

If the elites of American higher ed do become a private-only club, I hope that the leading universities are forced into some sense of public accountability — not to pressure groups and other activists, but to a broader societal imperative of producing an educated workforce and fueling economic growth. Having followed MIT presidents over the past 35 years, if they are any indication then the record of accountability is mixed at best.

However, the current MIT president and her Stanford counterpart both seem to understand the responsibilities that come with the great privilege they and their well-paid faculty enjoy. Frankly, the universities that are largely funded by contract research — produce results for external commercial or government sponsors who can take their money elsewhere — are more directly accountable for improving societal welfare than those who can sit on fat endowments and spend it as they please.

New business cards

My new promotion was announced in May but not effective until Thursday. Yesterday, I went ahead and ordered new business cards:

Joel West, Ph.D.
Associate Professor
Innovation & Entrepreneurship

College of Business
One Washington Square
San José, California 95192-0070
…

Of course, I’m pleased to get the promotion — and also a little relieved, given the paperwork required (two 5" binders). The only downside is that unless I become an administrator of some sort, this is the last promotion I’ll ever see in the CSU system.

This calls to mind the old joke:

• In academia, they motivate with both the carrot and the stick.
• When you get tenure, they take away the stick.
• When you make full professor, they take away the carrot.

Protesting unfavorable business climate

On the likely closing of California’s only auto plant, SJSU economics dept. chair Lydia Ortega summed up the state’s problems in an interview with KPIX-TV tonight: “We want to do more to protect wetlands than we want to do to protect jobs.”

This was the postscript on a videotaped report that the United Auto Workers were outside the Fremont plant with protest signs says “Save NUMMI Jobs.” KPIX has video of the protest but not Prof. Ortega.

Somehow I must be missing something: how is having a bunch of angry union workers out there protesting in front of the Toyota facility going to make the employer more likely to keep the plant open? (For example, wouldn’t a rational employer want to get rid of a plant filled with angry workers who march around with protest signs?)

Prof. Ortega is right: business climate is a longstanding issue. Nevada is running ads to aid the ongoing migration of businesses to the casino state. In April, a dozen state legislators heard why

Attendees heard from more than a dozen businesspeople who complained of high workman's compensation insurance, "predatory" regulators, an unfriendly business climate, a "never ending paper trail of business forms," exorbitant utility expenses, fees, taxes, quality of life and overpriced overhead.
…
Steven Patmont, president of the company that manufactures "California Go-Ped" motorized scooters, said his company left California for Nevada because California doesn't appreciate business. He described how California regulators hit him with hundreds of thousands of dollars of small fines even though his company has a stellar safety record.
…
Villines said he was disturbed to hear so many speakers say that no one from California tried to convince them to stay while Nevada officials have helped businesses scout potential factory sites and have generally made themselves available to business people. Villines said the testimony clearly indicates California isn't business friendly.

So at least two SJSU professors would ask: if blue-collar workers want more manufacturing jobs in California, how about demonstrating in Sacramento to make the state a more favorable business climate for manufacturing?

I can only speculate at possible reasons. Is it because that the unions don’t want to antagonize their customary political allies? Is it because they are so trapped in their Marxist class warfare mentality that they don’t understand the basic economics of job creation? Is it because confrontation is a better career move for union leaders than cooperation?

(BTW, Toyota denies that it’s decided to close the Fremont NUMMI plant, while other reports say Toyota is seeking another partner).

Demokratija

Relations between Russia and Ukraine have always been difficult. … Last year Vladimir Putin, then Russia’s president, escalated the conflict by publicly questioning Ukraine’s sovereignty and territorial integrity. He has repeated his claims as prime minister.
…
The Kremlin’s misunderstanding of Ukrainian politics is based on the fact that, unlike Russia, Ukraine is a democracy. The Russian leaders think they can “buy” Ukrainian politicians, but in the end they must listen to their voters, not Moscow, to gain office. This is an alien thought to the authoritarian Muscovites, who believe everything is manipulated from above and by Washington. …

The broader problem for Russian foreign policy is that the country’s rulers do not know how to deal with their post-Soviet neighbours. Their policy objectives are mixed. … Private businessmen aspire to expand their corporations. … Russian nationalists persist in neo-imperialism and populist politicians try to win domestic support by attacking their neighbours.

The result is that post-Soviet nations are trying to develop relations with anybody but Russia. Kazakhstan and Turkmenistan are opting for gas exports to China. Most starkly, Georgia and Ukraine are turning to the west, but even Belarus, the ultimate Russian loyalist, is fed up with the Kremlin and seeking other options.

“Russia’s botched policy in its own backyard”
Financial Times, Aug 18, 2009, p. 7
By Anders Åslund, author of How Ukraine Became a Market Economy and Democracy

This is part of a series of outsourced economic policy criticism as a cost-cutting move during difficult times.

Please call

We are continuing our survey marathon during pledge week.
This week, we have only increased survey responses from 13 to 15.

This is your blog. We really need your support.

Won’t you fill out the survey now?

H/t to Carr Communications for pledge break tips.

Pledge break

We take a break from our regular blogging to once again ask for your help.

We need your help to keep this blog going.

No, we don’t need your money.
Instead, we need your answers in the annual blog user survey.

Our last pledge break raised the survey responses from 5 to 13, but we need your help to reach our goal of 20 (stretch goal of 25).

Please take just a few minutes of your time to answer the survey. When school starts next Monday, I will have to prioritize my postings and so your answers (in a statistically representative sample) will help me know what I should be writing about.

H/t to Carr Communications for pledge break tips.

Dellphone commoditization

Dell is developing an Android smartphone, reportedly for China Mobile, the world’s largest mobile phone carrier.

All the conventional analysis makes sense: Dell wants to be in smartphones to line extend down from netbooks. There’s the obvious question of whether a smartphone is more like a netbook or like an MP3 player, where Dell entered last summer and predictably failed. One nice thing for Dell is that it didn’t have a retail store to compete with the iPod, but for cellphones the operators will supply the distribution.

I don’t quite get why CM needs Dell. HTC has already shipped two Android phones, and overall there are three Taiwanese and one Chinese handset vendor to choose from. Maybe Dell offered an aggressive price to break its Dellphone into the cellphone business in the world’s largest market.

Of course, this illustrates the number rule of Dell: if Dell enters your market, you’re a commodity. As with any other open source software, Android commoditizes handset operating systems, in this case enabling easy entry by handset makers who know nothing about making usable handset software. WIth help from suppliers like Qualcomm or TI, I’m guessing there will be more than a dozen Android handset vendors by Xmas 2010.

If Android succeeds in product proliferation and commodization, will it gain significant market share? WIll it cut price premiums for Apple, Nokia or RIM smartphones? Right now, those would be much harder predictions to make.

Health reform vs. biotech innovation

A major reason for the high cost of US healthcare is that Americans pay full prices for brand new drugs that are either not available in other countries or (due to monopsony buying power) sold at a vastly reduced price. We have an American pharmaceutical (and now biotech) industry because of this policy, and we get solutions before anyone else, but effectively American consumers subsidize the rest of the world.

Without healthcare reform, one of the biggest healthcare policy questions before Congress would be establishing the policy for generic biotech drugs. Unlike small molecule (chemically produced) drugs, it is much harder to establish the biological equivalence of large molecule biologics (which tend to be protein-based created using recombinant DNA) without conducting new clinical trials.

Of course, generic biotech drug makers do not want to be required to conduct expensive and time-consuming clinical trials. They would rather sell knock-off drugs after patents expire, just as small molecule generic makers did after Hatch-Waxman came into effect.

The government has two hats here. As the safety regulator, it must reduce the chances of unsafe drugs being sold. As the nation’s largest drug purchaser (and antitrust regulator) it wants lots of competition for drugs to push down prices, as Hatch-Watchman has done for small-molecule drugs.

Alas, there is also the little inconvenient problem that if the biotech companies never get monopoly rents, then they won’t get VC investment and won’t develop drugs and probably won’t even come into existence. Large risky investments in innovation (new compound investments are among the riskiest) don’t get made without financial incentives and a supply of capital. (There are academic criticisms of using patents to incentivize innovation, but patents are a much cleaner incentive for pharma innovation than for say software or electronics).

Blogger Gene Quinn of IP Watchdog notes an interesting policy discussion last week on CNBC with two former government officials and the head of BIO (Biotech Industry Organization), the industry trade association. He summarizes the issues succinctly:

[T]he segment is well worth watching and will no doubt dispel the myths and lack of understanding by open-minded individuals who question why the biotechnology industry wanted 12 to 14 years of exclusivity for biologics, when the FTC said zero years of exclusivity would be sufficient, President Obama wanted no more than 7 years of exclusivity and Congress opted for 12 years of protection. Co-anchor Joe Kernan started off the questioning by saying: “How did you get 12 years? Why exclude biotechnology from the cost pressures that everyone else is going to have to live under?”

Surrounded by Republicans, apparently the CNBC host interjected himself to speak for the administration’s position:

Specifically, Kernan said: “it just seems like you are a poster child for the exorbitant costs of treatment and maybe some of the costs we shouldn’t be undertaking and we have to judge where to spend the money.” And people wonder why throughout the health care debate the public has been fighting so hard, despite the erroneous and scandalous labels hurled at ordinary citizens who simply want answers and know the government is lying about so much.

Here, Kernan defines the problem as should we be undertaking the cost of exorbitant treatments? Despite what President Obama and his team say, and despite what Democrats in Congress say, the truth is that the overwhelming majority of health care costs come at the end of life, and the only way to lower costs is to ration care at the end of life, as was suggested by Kernan.

Or, as Harvard economist Marvin Feldstein put it Wednesday: “The Obama strategy is to reduce health costs by rationing the services that we and future generations of patients will receive.”

Patent term is the key policy lever for increasing or decreasing the incentives for new drug discovery: it can make or break companies in this industry (while at the same time, excessive term delays competition that makes readily available).

I hope that the patent issue can be debated outside the context of healthcare reform, because it’s too important an issue to get buried among 1,011 unread pages of the healthcare reform bill.

Can get some satisfaction

Prof. Claes Fornell and his American Customer Satisfaction Index have come out with new quarterly satisfaction rankings for a variety of industries, two of them IT-related.

Here are the rankings for search

• Google: 86%
• Yahoo: 77%
• MSN: 75%
• Ask: 74%
• AOL: 70%

Prof. Fornell’s commentary:

Google has led among portals and search engines for seven of the last eight years and this edge in user satisfaction is reflected in Google's dominance of the search market. Measured by query volume, Google does 74% of all search business on the Internet, with Yahoo! a distant second with 17% and Microsoft’s new entrant Bing.com third with 7%. Bing has won early accolades among industry insiders, but even a recent collaboration by the two smaller rivals (Yahoo! Search is now powered by Bing) hasn't managed to put a dent in Google’s usage. Strong and stable customer satisfaction has also left Google’s share value more insulated than most companies.

Here are the rankings for personal computers

• Apple: 84% (down 1.2%)
• Dell: 75%
• Compaq (HP): 74% (up 5.7%)
• Gateway (Acer): 74% (up 2.8%)
• HP (HP): 74% up 1.4%)

and Prof. Fornell’s commentary:

Customer satisfaction with PCs improved slightly after two years of decline, increasing 1.4% to an ACSI score of 75. Rising satisfaction among Windows-based machines drove the improvement. Dell was steady with an ACSI of 75, while Gateway improved 3% to 74. The aggregate of smaller manufacturers also improved 3% to 74. The HP division of Hewlett-Packard made a modest gain of 1% to 74, while the Compaq division surged 6%, also to a score of 74. The satisfaction of Apple PC customers retreated slightly (down 1% to 84), but the small decline has done nothing to hurt the large lead Apple has enjoyed for six straight years over the Windows-based PC manufacturers. In fact, Apple’s customer satisfaction lead is the second largest of any industry in ACSI—only Southwest Airlines' advantage over its closest rival is bigger.

…Despite the recession, Apple has posted strong financial results, with profits up 15% for the second quarter, and sales of Mac computers have increased, while competitors’ sales have shrunk.

As the recession has shifted demand for lower priced PCs, Hewlett-Packard has been rolling out less expensive Compaq laptops—consumers can now get a fully loaded Compaq notebook computer for less than $300. The emphasis on Compaq has driven up recent sales and HP's stock is up 20% since the beginning of 2009, more than double the market.

Surprise, surprise: success in the sale of commoditized Windows boxes has come from selling ever-cheaper commodity boxes. At the other extreme, Apple has more than 90% of revenues from computers priced over $1,000.

What I found surprising is that Fornell didn’t mentioned the role of Microsoft’s $300 million “I’m a PC” ad campaign (made on a Mac) in raising satisfaction of Windows machines across the board. The initial ads last fall emphasized “pride” in being part of the Windows clan, while this year the fetching actress Lauren De Long and her “laptop hunters” ad (recently revived by HP) have been brutally effective in identifying Apple’s price premium at a time in which buyers are pinching pennies.

The Windows brand revival story is a pretty clear one, particularly after they dropped the attempt to leverage Jerry Seinfeld’s popularity and got a little closer to their actual product attributes — cheap hardware, ubiquitous, lots of choice.

Two newspapers in one!

A regular feature of Best of the Web Today (at WSJ.com) is the “Two Newspapers in One!” excerpt, showing schizophrenic reporting by the same paper (usually the NYT) at the same time. Here’s my own entry on the Journal’s London-based rival, which editorially has shown a much greater affinity for national heathcare than does its American cousin.

Edward Luce, “Health opens a new front in America's culture wars,” Financial Times,US ed., Aug 15-16, 2009, p. 7:

Barack Obama has been accused by his more constructive critics of mishandling America’s increasingly deranged debate over healthcare reform …
…
To its surprise, the Obama administration is faced with a full-scale culture war over healthcare which has very little to do with arguments and everything to do with identity.
…
More than a generation ago, the great American historian, Richard Hofstadter, wrote the classic The Paranoid Style in American Politics. Having watched many public servants and colleagues in academia hounded out of their jobs on the flimsiest of pretexts during the “red scare” of the McCarthy era in the 1950s, Hofstadter identified what he saw as a peculiarly American pathology of proneness to conspiracy theory.
…
His theory holds up very well in 2009. Anyone who visits a few of this month’s rowdy town hall meetings can grasp that opposition to Mr Obama’s healthcare proposals is a lightning rod to a far larger world view, which seeks to protect American values and the US constitution from an alien takeover.
…
The multi-generation battle to reform healthcare will be won or lost over faith rather than reason. The more nuanced Mr Obama appears, the more frenzy it will provoke in his critics.

Clive Crook, “Obama took wrong turn on health,” Financial Times, US ed., Aug 17, p. 9:

Unruly protest makes good television and is especially welcome in a slow month for news. The protesters have been dominating US newspapers and news programmes in recent days.

It is all a little misleading. Many who are sceptical about the Democrats’ plans have asked intelligent questions. But this is too dull for prime-time, and before you know it, intelligent questions bog you down in complex details. Better to make the protests the story.

Rowdy demonstrations are not what the administration wanted, but in a way they have played into its hands. They have shifted the focus from the reform measures to the unreasoning anger of the least appealing opponents.
…
[T]he great majority of US citizens have health insurance and are happy with it. To appeal to this majority, Mr Obama argued that health insurance, both public and private, would soon become unaffordable unless healthcare inflation was brought under control.

Fine – until the independent Congressional Budget Office examined the Democrats’ plans and found that they all added substantially to long-term costs. The CBO’s estimates attacked the core of Mr Obama’s case and they especially rattled moderate Democrats. Yet the line from the White House never deviated. This entire exercise, the administration blithely repeated, is about controlling costs. Can anyone be surprised that moderates are having doubts?
…
… Mr Obama needs to rethink his approach. His mistake all along was to promise nearly all Americans something for nothing. The sensible, pragmatic, Obama-supporting centre of the country looks askance at that, and it is right to.

WiMax finds a plausible Plan B

Here’s story about a potential application of WiMax† outside consumer mobile wireless by San Diego Gas & Electric, as reported by earth2tech:

SDG&E’s Director of Network & Communications Services, Jeff Nichols told us today that SDG&E has filed an application for $30 million in smart grid stimulus funds from the DOE for a $60 million smart grid wireless project called GridComm that will span the entire 4,100 square miles of its footprint. Nichols says GridComm will use different types of layered wireless technologies… For about 30 percent of the network where higher bandwidth is required, the utility could use WiMAX. …

Nichols says GridComm needs an option like WiMAX — a nascent, high-speed wireless technology that delivers a lot of bandwidth and has morphed into an alternative wireless option for cell phone companies’ next-generation networks — for areas of the network that will be collecting a lot of data. For example, around major grid assets, like substations, utilities collect data from phasor units, which monitor the reliability of the grid and collect information like voltage, current, and frequency in real time. Other examples he said could be using the network to deliver mapping information to mobile workers, or provide video services for facility monitoring.

Nichols said SDG&E hadn’t yet chosen a vendor for any WiMAX gear and the project is still a proposal, not a done deal. While we’ve heard of a couple WiMAX smart meter pilots, SDG&E is one of the first large utilities that I’ve heard of embracing WiMAX for the smart grid. It was just a matter of time before one did, as the ecosystem around WiMAX for the smart grid has grown considerably larger over the past year, and now includes smart meter software maker Grid Net, smart meter maker GE, Intel’s WiMAX chips and vendors like Alvarian eying the emerging smart grid market.

I think this is a wonderful opportunity for WiMax. The global race against LTE for mobile 4G wireless solutions is over, even in the US. Still, the technology works, it’s standardized and has credible suppliers. In businesses not subject to direct network effects of a 2-sided market — i.e. internal business networks rather than handsets and base stations — it has time to market advantages and probably some hungry vendors.

Hat tip: Greentech Media

† Like most financial journalists, as a matter of style I refuse to write WiMAX, QUALCOMM, INTEL, FORTRAN etc. etc.

Georgia on my mind

This week Georgia is on my mind. No, not the state that gave us the Peter Principle peanut farmer, nor the former Soviet republic that found it impossible to rest peacefully next to a belligerent bear. Actually, I mean the serif typeface family commissioned by Microsoft for Internet Explorer. As Wikipedia notes: “Georgia is designed for clarity on a computer monitor even at small sizes, partially effective due to a large x-height.”

What prompted this is the announcement that the LATimes.com switched to Georgia as their main screen font as part of their website redesign unveiled last week. Of its traditional national rivals, both NYTimes.com and WashingtonPost.com also make extensive use of Georgia. In fact, three years ago the International Herald Tribune (the European subsidiary of the NYT) reported on the “Georgia revival” among website designers that included the NYT.

In the print world, the conventional wisdom for decades was that serif fonts are more readable at small sizes than the sans serif fonts. However, in the web world, the old conventional wisdom was that sans serif fonts were more readable, although the recent tide has been tending back toward serif fonts. (Some claim there is no difference).

Still, I recall arguing with a web designer (who, alas, knows less about fonts than I’ve forgotten over the past 25 years) who was sure that Arial was the best way to go. As Will Rogers said decades ago: “It isn't what we don't know that gives us trouble, it's what we know that ain't so.”

Speaking truth to power

Last week, in a WSJ op-ed Whole Foods co-founder and CEO John Mackey proposed a free-market alternative to improve the nation’s healthcare system:

1. Remove the legal obstacles that slow the creation of high-deductible health insurance plans and health savings accounts (HSAs).
2. Equalize the tax laws so that employer-provided health insurance and individually owned health insurance have the same tax benefits.
3. Repeal all state laws which prevent insurance companies from competing across state lines.
4. Repeal government mandates regarding what insurance companies must cover.
5. Enact tort reform to end the ruinous lawsuits that force doctors to pay insurance costs of hundreds of thousands of dollars per year.
6. Make costs transparent so that consumers understand what health-care treatments cost.
7. Enact Medicare reform.
8. Finally, revise tax forms to make it easier for individuals to make a voluntary, tax-deductible donation to help the millions of people who have no insurance …

This is a fairly standard list of market-oriented reforms, not all that controversial particularly now that the public option is in trouble.

However, while Whole Foods has long been the darling of the organic food-loving crowd, apparently Mackey’s op-ed has brought calls for a boycott of the company from the cultural left.

Is it that he’s a libertarian? That he’s proposing free market solutions? Or that he’s opposing President Obama? Or perhaps it was the confrontational lead paragraphs of his op-ed:

“The problem with socialism is that eventually you run out of other people's money.”

—Margaret Thatcher

With a projected $1.8 trillion deficit for 2009, several trillions more in deficits projected over the next decade, and with both Medicare and Social Security entitlement spending about to ratchet up several notches over the next 15 years as Baby Boomers become eligible for both, we are rapidly running out of other people's money. These deficits are simply not sustainable. They are either going to result in unprecedented new taxes and inflation, or they will bankrupt us.

While we clearly need health-care reform, the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction—toward less government control and more individual empowerment.

Somehow, the phrase “speaking truth to power” doesn’t seem to be as popular as it was a year or two ago.