Month: July 2004

Microsoft is selling Slate

Not only are they paying dividends, but they are seeking to unload the beloved as well:

Microsoft Corp. is in talks with five or six potential buyers for its online magazine Slate, an executive said Friday.

Scott Moore, general manager of MSN Network Experience, which handles content for Microsoft’s MSN division, said the company is in early discussions with several media companies over a potential sale.

Moore declined to identify the companies, and cautioned that the deals might not come to fruition. “We’re at the beginning of the process,” he said.

Moore said Microsoft has been approached before about a possible sale of Slate, but this is the first time it is taking the offers seriously. He said Microsoft is especially interested in a deal that might allow it to create a partnership with another media company, which could potentially help increase advertising revenue on the MSN site.

The paper version of this article mentions The New York Times and Washington Post as possible buyers.

Here is the full story.

The bottom line: Slate will get worse. Current revenue is $6 million a year, the site breaks even, and visitor numbers are falling. Microsoft can treat it as a kind of vanity project, but trying to squeeze regular profit out of it is unlikely to succeed.

Slow medicine

Here’s another death of common sense story:

Would-be California medical students with learning disabilities filed a discrimination suit Monday saying their prospects of becoming doctors are being thwarted because they aren’t given enough time on the medical school entrance exam.

Do you remember the episode on ER where a patient was rushed into the hospital with severe head trauma and Doctor Green had to go to a quiet room to think about what to do? No, me neither.

(Not every doctor works in an ER but even general practioniers must think quickly if they expect to see enough patients to earn a good living.)

Even more shocking than the lawsuit is the response of the American Association of Medical Colleges. Instead of making the obviously correct argument that time is a legitimate testing hurdle for a physician they argue that the students involved are not disabled enough! If only they had failed more of their undergraduate classes then the AAMC would give them special accomodation. Really, I’m not making this up.

About the only saving grace in these stories is that the underlying assumption is usually wrong. Fact is, there just aren’t that many slow geniuses. Speed and quality of thought are correlated. (How else to explain my co-blogger? See here for more systematic evidence.) If there are other hurdles, these same students will soon be selected out. As a professor, I have seen this many times. Of course, that just means more lawsuits.

Thanks to Right Side of the Rainbow for the pointer.

Could the iPod fail?

Above and beyond the ephemeral value of superior style, what is the source of Apple’s long-term competitive advantage? True, they have more artists signed up, but this is likely a short-term phenomenon. And there is a more serious problem as well:

MP3s downloaded from Sony’s Connect service can only be played on Sony’s MP3 Walkman, and not on the more popular iPod (and vice versa).

Behind the scenes, the battle waging for commercial dominance is reminiscent of the early 1980s cut-throat competition to establish video standards between VHS and Betamax. And lest we forget, VHS won despite being technically inferior.

Although Apple has been the pioneer in the MP3 market, with Sony/BMG controlling 25 per cent of the music market it will be interesting to see whose digital distribution platforms will survive. Will all those expensive iPods we have been rushing out to buy wind up piled high in car-boot sales alongside Betamax video players and 8-track cassette machines?

Here is the full account.

Going out on a limb: I’ve never been convinced that the “iPod as we know it” could make money, especially once the market becomes more competitive for hardware. Right now the songs are being used as a loss leader for the gadget. And dare I cite Apple’s history of being a leader with ideas but failing to lock up the market? But hey, I’m the same guy who said the Dow was overvalued at 7000 and the single European currency would never happen.

Addendum: Andrew McGuinness recommends this reading on the topic, especially the excellent section five.

Socking it to us

The Bush administration has decided to consider a request from the domestic sock industry to impose quotas on imports of Chinese-made socks and will make a final decision on the matter just before the November presidential election, the Commerce Department said Wednesday…

“Urgent, significant action is needed immediately to save the domestic sock industry, the most competitive sector remaining of the once flourishing U.S. domestic apparel manufacturing industry,” wrote Charles Cole, chairman of the Domestic Manufacturers Committee of the Hosiery Association, and three other industry executives…

Cole, of the Domestic Manufacturers Committee, owns Alabama Footware in Ft. Payne, Ala.

From a CBS MarketWatch story. The administration has already imposed quotas on bras from China, despite the fact that there is no domestic bra industry to protect.

China is selling us a lot of socks (22 million pair in 2003 up from just 1 million pair a few years ago) for which I am grateful. I find that they go great with shoes from china.

Thanks to Marc Andreessen for the pointer.

Do the Latin countries need more R&D?

That is the recipe of Jeffrey Sachs:

Latin American countries have not yet tried to foster a technological revolution, certainly not with the focus, skill, commitment, and financing that Asian countries have shown. Such a push could play a major role in jump-starting economic growth.

Such a policy would entail committing to a major increase in spending on research and development, as Asian developing countries have done. Latin American countries should aim to increase spending to around 2% of GNP (from 0.5% currently), partly through public support for laboratories and universities and partly through incentives for private-sector R&D. They should roll out the red carpet for high-tech multinational firms, just as Asia has done.

They should also increase their focus on scientific and technological training and encourage a higher proportion of students to go on to university education. Government stipends for tuition and for new and enlarged universities can play a big role, as can investment in computers and information technology in schools and communities.

My take:

I worry that this is putting the cart before the horse. Many of the public sector universities in the Latin countries are disasters. They are good places for left-wing politics, bad places to drive economic growth. Tech prowess has tended to come from the private sector and then the tuition-driven private institutions, not the subsidy-driven state universities. And Asian higher education did not play a major role in the Pacific successes, unless of course you are referring to MIT and Stanford.

Should the Latin countries be “home-breeding” their R&D? In other contexts economists insist that R&D is a public good. Why not borrow R&D from Europe and the United States and look elsewhere for comparative advantage? Process innovations might suffice, yet they typically arise from practice rather than from science in the narrower sense. Mexico is succeeding with this tactic. Furthermore process innovations, by their nature, are best implemented in decentralized fashion.

Most of all, the Asian technological revolution worked because the success stories made themselves relatively free of corruption. Effective technology arises from incentives, rather than from the mere desire to be technological. The Latin economies will grow faster once they can offer greater legality and predictability. The path here is slow but not impossible. Strong penalties against corruption, and non-tolerance of the idea, combined with higher public sector salaries, are moves in the right direction. But penalties alone do not suffice. Most of all a country needs a culture of trust, including trust in government, and for this there are no rapid solutions.

Watch what you write me

According to research from Forrester Consulting, 44 per cent of large corporations in the United States now pay someone to monitor and snoop on what’s in the company’s outgoing mail, with 48 per cent actually regularly auditing e-mail content.

The Proofpoint-sponsored study found the motivation for the mail paranoia was mostly due to fears that employees were leaking confidential memos and other sensitive information, such as intellectual property or trade secrets, with 76 per cent of IT decision makers concerned about the former and 71 per cent concerned about the latter.

Here is the full story, from the ever-excellent

How do political blogs matter?

Blogging is politically important in large part because it affects mainstream media, and helps set the terms of political debate (in political science jargon, it creates ‘focal points’ and ‘frames’). Note that we don’t provide an exhaustive account of blogs and politics – some aspects of blogging (fundraising for parties, effects on political values in the general public), we don’t have more than anecdotal data on.

So writes Henry of CrookedTimber, concerning his recent paper with the ever-prolific Daniel Drezner.

I would phrase my view as follows. Blogging creates “common knowledge,” even if only among a few at first. Will an idea fly or not? You find out quickly by sending it out into the blogosphere and seeing the reaction. The verdict will be swift and often ruthless, but more often than not fair. And once this common knowledge leaks out to broader and more general communities, the effect is powerful. People will abandon an indefensible idea before it gets started. Or they will jump on the bandwagon right away. They already know how the fight will turn out. In short, the blogosphere is like simulating the larger debate with very swift intellectual mini-armies.

Under this account what matters about the blogosphere is the quick back and forth and the ability to construct rapid-fire dialogues through links. It also means that a better than average debator can influence the broader world by swaying the earlier mini-debate through sheer force of intellect. Of course as the blogosphere gets larger this will become harder to do. The argument will be “thicker,” and arguably less conclusive as well. After all, what if everyone wrote a blog? The debate would not be simulated any more.

What else does it mean for ideas to be evaluated more quickly? Many new ideas will have better chances than before. Throw it out there and see if it sticks; the blogosphere is relatively egalitarian with regard to traditional credentials. Debate-defensible ideas will do better, on average. I hold a number of views that I believe are true, but find difficult to defend in debate on blogs. Either the supporting data are not on the web or the ideas may sound politically incorrect. Ideas that take time to mature, and reveal their full wisdom, may suffer as well.

Print out and read the whole paper; at the very least it is likely to become a mini-classic, maybe more.

Diamonds are Forever…Not

How long can the diamond cartel last? I remember, as a kid, watching Milton Friedman tell us that the New York Stock Exchange was the only longstanding market monopoly he could think of. The NYSE has lost much clout, but why isn’t the diamond sector more competitive? Diamonds are found in many countries but the De Beers cartel has been dominant for much of the twentieth century.

But things are now changing:

…this stable, established and monopolistic system is now falling apart…other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers’s control. In Canada, Australia and Russia rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have been chipping away at De Beers’s dominance for two decades.

De Beers once controlled (though did not mine directly) some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. Today production from its own mines gives it a mere 45% share. Only a contract to sell Russian stones lifts its overall market share to around 55%.

An Israeli named Lev Leviev has been instrumental in breaking down the old system:

Mr Leviev recently moved into diamond retailing. He claims that he is the only tycoon with interests in every stage of production from “mine to mistress” (a canard in the industry holds that men buy more diamonds for their mistresses than for their wives). But his real power lies in the cutting and polishing businesses. He has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him power to challenge De Beers’s central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers.

The price of diamonds, however, has yet to fall. My more fundamental question is why these supply-side developments have taken so long.

Perhaps synthetic diamonds will put the market under for good. Few people if any can tell the difference. The diamond industry is spending large amounts to tout “the real thing.” But will a generation used to reproduction and “multiples” buy this line? And will men manage to move to a lower-cost signaling equilibrium in the marriage (and mistress) market?

The bottom line: File this one under “Markets Economists Do Not Understand.” But if there was one commodity I would not want to be holding today, it is diamonds. Someday students will wonder why they ever called it the “diamond-water paradox.”

Does Microsoft think Kerry will win?

Microsoft just announced a forthcoming dividend of more than $32 billion, the largest ever, here is one brief account, read more here. That comes to $3 a share. Additional dividends and stock buybacks may run over a four-year period, amounting to over $100 billion in cash transfer. You will recall that is the amount that Bush pledged to fight the war in Iraq.

1. Would these dividends have happened without the Bush tax cuts? Maybe not.

2. Does Microsoft fear that Kerry will win and raise taxes on dividends? Probably.

3. Will this help the economy? For perhaps the first time since J.P. Morgan, we see an American company with enough free cash to perform “fiscal policy.” However most people now believe that fiscal policy does not do much to stabilize an economy or boost its fortunes.

4. Will the funds now be reinvested in more profitable companies? Maybe yes, maybe no, see number two. Note also that the first funds will arrive just in time for holiday shopping.

5. What will Bill Gates do with all that money? He has already pledged it to his foundation.

6. Will Microsoft ever be a dynamic, growth-oriented company again? Probably not. Why pay a dividend when you have wonderful ways to invest the money? But if there is a way to make the place buzz again, cash starvation (relatively speaking, of course) is a good first step.

Mexican update: How to compete against China and win

Too often we think of the Chinese economy as a massive juggernaut that crushes all before it. But the Mexicans are starting to adapt to Chinese competition nicely:

Between October 2000 and March 2002, Mexico’s maquiladoras – factories that assemble imported parts for re-export – lost 270,000 jobs, or more than one in five, sparking fears that Mexico had permanently lost ground to China. But now the trend seems to have sharply reversed.

In the year to May, maquiladora exports rose by 21.8 per cent, part of a increase of 21.1 per cent in overall exports – the strongest monthly rise in almost four years. Employment is at its highest since 2001, with the number of maquiladora jobs up by 2.5 per cent over the year to April.

Far from buckling under competitive pressures, the link between Mexican and US industrial production seems stronger than ever.

Mexico has continued to lose jobs in such labor-intensive sectors as textiles, furniture, toys and leather goods. The new expansions are coming bundled with manufacturing innovation, “just in time” inventories, and complete integration into the chain of American production. America and Mexico also share time zones, easy travel, and yes a language (more than thirty million Spanish speakers in the U.S.).

“If you need customisation, you’re going to want that done in Mexico rather than China,” says Mr Watkins. So sectors such as auto parts, large screen TV sets, aerospace equipment and medical supplies are fuelling the sector’s recovery.

Of course this is just the theory of comparative advantage in action. If Mexico someday truly turns the corner, and becomes more like Chile, China is one of the places they will thank. Already the Mexican government has taken a constructive attitude toward Chinese competition and spoken of the need to improve in response.

Here is the full story. The next step is for Mexico to improve the cost and quality of its industrial electricity supply. Stay tuned…

Fly the friendly (Russian) skies

Drunken passengers often give air crews trouble, but Russia’s leading airline on Tuesday reported an “unprecedented” reversal: A passenger was assaulted by intoxicated flight attendants…on a domestic Aeroflot flight…Seeing that the crew were intoxicated and were not fulfilling their duties, Chernopup [a passenger] asked to be served by a sober and competent flight attendant, Dannenberg said. He was then beaten up by crew members.

Here is the full story. If only Gogol had written about airplanes…

The Mounties are Challenged

In Canada, near Winnipeg, Manitoba, a number of communites have hired a private company, Prairie Bylaw Enforcement Services to enforce local bylaws. Here is more from the July 20th Winnipeg Free Press (subs. required).

The turf war between Mounties and Prairie Bylaw Enforcement Services has
been brewing for several months as more municipalities hire PBES to
enforce local bylaws, like noise complaints, and go after speeders and
red light runners….

PBES officers are armed with Tasers that administer a quick, sharp
electronic jolt to get suspects to comply, and folding batons, but by
law are restricted to only enforcing the Highway Traffic Act and local

By contracting PBES, municipalities get a bigger share of fine revenue
than if RCMP issued a ticket. As well, some municipalities believe they
need PBES during the busy summer months because Mounties are spread too
thin patrolling large detachment areas.

Overall, I applaud, but contracting out is not the same as privatization. When a service is privatized, government no longer plays any role in the supply or demand for the service. With contracting out the government remains the demander so we get improved technical efficiency but perhaps for entirely the wrong goods. Do we want efficient tax farming or efficient prison camps?

Bruce Benson discusses these issues further in a book I edited on private prisons called, Changing the Guard. For more on the history of truly private policing see the eye-opening chapter on policing in 19th century England by historian Stephen Davies in The Voluntary City.

Thanks to Eric Crampton for the pointer.