Economists vs. consultants

In response to a discussion this morning of consultants and their use of 2x2 taxonomies, I offer this memorable quote this morning from Themis Pantos, a trained economist who is one of our senior finance faculty:

Life is not a 2x2. Life is a sequential game.

Amazon and Apple's open embrace

(Catching up on blogging after getting behind)

On Wednesday, Amazon released a Kindle format reader for the iPhone and iPod Touch. The move was widely praised by key tech pundits in the Washington Post, New York Times and Wall Street Journal as showing Amazon sees itself as a content distributor rather than a hardware platform company.

Several commentators have pointed out a few less obvious nuances. On the one hand, this gives Amazon multiple form factors that can display its 240,000 downloadable book titles. On the other hand, it could cannibalize sales of its $360 device.

Another is the implicit endorsement by providing access to its App Store. It isn’t interested in helping Amazon provide its users with music and video, but its cooperation implicitly endorsed Amazon as the book content provider — suggesting that books are not strategic. In fact, Gartner analyst Van Baker (quoted by ComputerWorld) cited the skepticism of Steve Jobs in 2008 about the Kindle and the e-book business:

“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”

Several weeks ago, I’d wanted to respond to Tim O’Reilly’s claim that Amazon must embrace open e-book standards. But as Rob Pegoraro notes,

But the arrival of this one program doesn't make the Kindle any sort of open system: You're still limited to reading your not-quite property on the devices that Amazon permits, not the ones you might want.

As I noted earlier, Amazon embraced “open” MP3 standards when it was a challenger to iTunes, but on the Kindle is using a proprietary approach.

However, I want to quarrel with one premise of O’Reilly and Pegoraro. There is no “open” and “closed”: openness is always a matter of degree.

One key metric of openness — in terms of industry structure, consumer choice, competition and switching costs — is when a standard is multivendor. If buyers can choose from multiple implementations, certainly that’s more open than buying products from a single vendor. (This also reduced but not eliminates the angry orphan problem).

By this standard, Apple was told be be more open (like Microsoft) — don’t just provide its platform with its own hardware but license its operating system to competing hardware makers. Now Amazon is doing just that, allowing for multiple sellers of reader hardware; I would presume that the next stop will be either Nokia or BlackBerry smartphones.

Somewhat more open is how Apple now sells DRM-free music on iTunes Store — in response to Amazon’s DRM-free service. Amazon uses MP3 (with patent royalties), Apple uses AAC (without content royalties): both are easily implemented and available on most computers, music players and phones.

However, the Kindle native format is still DRM encoded (“infested”). Jeff Bezos could claim (as Steve Jobs once did) that the content owners made him do it. But DRM has been around in the book industry for a decade, and absent a Kindle challenger, I don’t see it going away any time soon. (As long as DRM is used, will that restrict availability on the Linux-based Android? I can’t say.)

As many have noted, DRM prevents me from selling or giving away used books. In the 19th century, this would have been a big deal. Perhaps if Steve Jobs is right, books won’t matter in the 21st century. Certainly if the Kindle ends up selling snippets and chapters, people will be less motivated to resell a $.25 snippet than a $30 hardback.

Lock-in isn't as bad as they claim

The Wall Street Journal mentioned this morning that French authorities are ending France Telecom’s 5-year exclusive (with its carrier Orange) for the iPhone in France. The WSJ quoted an analysts as saying the decision could cost Orange €200 million in lost revenues.

I missed the decision (rejecting an Orange appeal) when it came out last month. Some expect it will end the exclusive elsewhere in Europe. US law is different enough that (absent a socialist government in DC) I don’t see AT&T losing its exclusive, while in other countries there are multiple iPhone carriers already.

Beyond my general aversion to government meddling in the free market (except to control monopolies), there are specific reasons that the decision by French authorities is mistake. (No surprise there). Yes, I agree that the bundling increases switching costs and reduces competition between carriers — which is what the carriers are intending.

However, it is quite clear that in the US, such bundling increases competition among device makers — which is sorely needed in the high-end smartphone segment. If Verizon can’t have the iPhone, it has to promote something else, as do Sprint and T-Mobile.

In the US, this imperative for the rival carriers gave Google an entry with the G-1, as well as a channel for RIM and the Korean firms to offer their “me too” smart phones. It may allow Nokia a chance someday to become a factor in the US market. And its undeniable that the Sprint exclusive on the Pre is the only thing keeping Palm alive as a smartphone supplier.

We need competition and innovation in smartphones to spur innovation in mobile networks. Despite their denials, the network operators are just running commoditized pipes between devices and the Internet, and as long as we have enough operators competing for business, it’s worth accepting a little bit of switching costs to maximize device choices.

To be fair to the European interventionists (not sure why), the US has a more fragmented and competitive mobile phone market than in countries where the privatized government ex-monopoly still dominates the mobile telecom landscape. Thus, the concern about ex-PTT domination is a real one in France, Germany and Japan. It seems less plausible in the UK, where the iPhone went to O2, the British Telecom spinoff that is in second place to Vodafone.

Free market vote is in

A great column in Business Week captures the free market response to efforts of the past seven weeks to create a new New Deal. As Ben Steverman wrote:

At least on Wall Street, the honeymoon is over for President Barack Obama.

Polls still show the President has strong popularity among the general U.S. population, and Obama continues to command power in Congress. But among investors, fairly or unfairly, there is griping that the new Obama Administration is at least partly to blame for the recent slide in stocks. Since Nov. 4, Election Day, the broad Standard & Poor's 500-stock index is off about 25%, and since Jan. 20, when Obama took office, the "500" is down 15%.

It's never easy to determine exactly why the stock market moves in a particular direction. … But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.

One of the key lessons from Steverman’s interviews was that uncertainty increases risk, which discourages buying. However, what Steverman doesn’t say is that highly interventionist government policies by their nature increase uncertainty, due to the inevitable arbitrariness and risk of political capture.

One elected politician (with a four year term) or nine unelected judges with life tenure do not have the same self-correcting feedback loop of hundreds of companies competing in the marketplace every day, or millions of private investors in the stock market. That’s why centrally planned economies (even democratic socialists) will never be as effective as free markets in producing and allocating wealth.

On Wednesday, the president sought to reassure investors:

"What you're now seeing is profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama said Tuesday.

In response, the Dow and other indices have plunged 3% today (down 4% at the close). Investors are not impressed: the president clearly doesn’t know what he’s talking about.

Beyond the near-term imperative of consumer confidence and liquidity, if the rules of the American economy are permanently changing, then we will have higher taxes, lower growth, and lower returns to investing in US equities. Prospects for a 2009 economic recovery are now gone. Investors are not being irrational to sit on the sidelines until this shakes out. As Steverman concluded

The problem for investors is the long-term outlook has never looked so fuzzy. With the economy deteriorating, the credit crisis continuing, and the Obama Administration still formulating a response, few feel confident enough about the future to buy stocks. It may be quite some time before investors find a change they can believe in.

I’ve paid a personal price for prematurely believing we were near a bottom. In addition to my foolish optimism on Bank of America, during last fall’s stock collapse I also attempted to buy Berkshire Hathaway after it fell: if Warren Buffet can’t find bargains in a down market, who can? However, BRK-B is down almost 40% since election day.

Our country is ruled by a caste of lawyers who are almost to a man (or woman) economically illiterate. The know how to write laws to redistribute wealth but don’t understand how that wealth is produced. They also write laws that make it easier for lawyers to extort money from productive members of society, and centralizing power to lawyer-politicians who use that power to stay in power.

Encouraging young scientists

Bill Gates and other captains of IT have been complaining for years about not enough science and engineering graduates of US universities. Their two-pronged solution has been to try to encourage more students to major in such subjects, and also to import the best and the brightest from the rest of the world.

One way that industry has been trying to encourage science and engineering careers since the early days of the Cold War has been through local science fairs. Here in Silicon Valley, students grade 7-12 (or 6-12) can enter their local school fair, then go on to the California State Fair, and even on to the International fair (once sponsored by nuclear reactor maker Westinghouse but now sponsored by Intel).

The science fair also has great sentimental value for me. My 8th and 9th grade science fair projects were the most meaningful educational experiences of my three years in junior high and perhaps all of K-12. The latter project — my first computer program, writing a parser in Fortran IV on a stack of IBM punch cards — would set the stage for the next 20 years of my career.

In 1989, I started as a volunteer judge for the San Diego fair that gave me that start, and switched to judging for the Silicon Valley fair when I moved up here. That one day commitment is an easy way for engineers to contribute back to the community to develop an interest by K-12 students in science. After mentioning that interest last fall at the MIT Club of Northern California, I became the club’s science fair coordinator, and prepared a web page listing fairs where our members can volunteer.

Five years ago, parents and one teacher launched a science fair at my daughter’s elementary school, in a community with a large population of IT engineers or (like me) former engineers who later went into management or marketing jobs. For the past three years, I’ve been running the judging and leading the committee that runs the overall fair. The last few days have been a blur as we tried to nail down which students and volunteers would be coming to the fair, and have everything ready for the contestants, judges and visitors.

Tonight was the culmination of all those efforts. We had 101 projects by 128 students, 30% bigger than last year and our biggest fair ever. Two years ago we were unable to fit in the school cafeteria and so had to move to the Almaden Community Center; tonight it looks like we may soon outgrow that.

We had 32 volunteer judges who spent 2-3 hours at the fair, talking to students and awarding prizes. Some but not all of them were local parents. In particular, we had 11 volunteer judges (mostly young engineers) from Lockheed Martin in Sunnyvale, and five judges from our local high school robotics team.

The event was bittersweet for me. It is a relief to have it over, as this is my biggest volunteer effort ever. On the other hand, this my last year running the fair as my daughter moves on to middle school (although I have offered to help judge next year). As in several previous jobs, I am working hard to document procedures so that my successor will have an easier job than I did.

Local technical professionals don’t have to start a fair to get involved. In fact, on March 18, the Santa Clara County fair for grades 6-12 is being held in San Jose and like other fairs they chronically need judges. For the MIT club, I’ve made a master list of all major fairs in California.

Those who judged last night and at various regional fairs say they find it a very rewarding experience, nurturing young scientific talent for our future.