Coyote Blog

Am I the only one who is wildly less likely to buy an Audi after Sunday?   Advertising is often about image.  Frankly, almost none of the ads yesterday addressed their product’s or service’s value propositions in any real way.  They are trying to connect their product with images and emotions – Coke has always been great at that.  Beer commercials always try to connect their product with, well, sex with hot women.  This is pretty traditional for beer, though less so for ISP hosting until GoDaddy came along.

So now “Audi” has been permanently tied up in my mind with intrusive state control and loss of individual liberty.   Perhaps they were trying to be funny, but I really got the impression they were more than half serious, maybe because several of the examples (composting, light bulbs) are real issues subject to state control even in parts of this country.

Update: Obama appointee expresses need for SWAT teams in neighborhoods to enforce energy efficiency.

Via the WSJ, on the Mortgage Banker’s Association (MBA) being underwater on their real estate loan:

On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. The price is well below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also falls short of  the $75 million of financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. for the purchase.

John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. “We’re not going to discuss the financing,” he said. A spokeswoman for the MBA added that the MBA has reached “an agreement with all relevant parties” regarding the outstanding amount on that loan but declined to provide any details.

…In an interview late last year, Mr. Courson said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest.  He said paying off a mortgage isn’t only a matter of personal interest.  Defaults hurt neighborhoods by lowering property values, Mr. Courson said. “What about the message they will send to their family and their kids and their friends?” he asked.

A reader sent me this list at of salaries at BART (via here).  The amazing thing is to sort the list by overtime.  Pages and pages of people with $50-$100 thousand a year in overtime.  This is just insane.  Either put these guys on salary or, if it really is a job that is non-exempt and legitimately pays hourly, hire some more freaking people.  I can’t in my wildest dreams imagine such overtime being paid in my company year in and year out.  If it is not for isolated cases, it is a sign of poor management.

I have been kind of amazed at the backlash at Amazon over its showdown with Macmillan Publishing.  As I understand it, Apple, with its new iPad, had adopted a strategy of wooing publishers by offering promises of higher retail prices, an offer Amazon basically refused to match.   This dynamic (with retail discounters pleasing customers but ticking off manufacturers and product suppliers) is not at all new to retail.  I am sure a lot of manufacturers wish Wal-Mart was never invented, but they have to try to play ball with them because Wal-Mart wields so much power with customers, in large part because of their pricing.

In this sense, I have always thought of Wal-Mart and Amazon as my agents, using the power of my and other consumer’s volume to pound manufacturers on price.  They serve the same role as, and in fact are more effective than, a buying cooperative or consumers union.

So my agent, Amazon, had to go to the mattresses with a publisher on its pricing.  This happens in all negotiations — if you are not willing to walk out the door, then at some point there is a limit to your bargaining power.  I was ready to applaud them for it.  Sure, they had selfish interests of their own, but who cares?  That is how capitalism works — through the alignment of incentives, people who really don’t even know me or really care if I live or die work hard to create value for me  (this is the opposite of big government, where people who claim to care about me deeply work really hard to destroy value).

Anyway, the clients that Amazon represents apparently lost faith quickly, and decided they were more freaked out by a couple day blackout than increased retail prices.  Wimps.

Postscript: I understand the debate is a bit more subtle, with Macmillan arguing that they want price flexibility over a range from $6-$16 (or whatever) for e-books rather than a hard cap at $9.99.  Trust me, though, any inference that this approach roughly averages Amazon’s approach is so much chin music.  Most sales would be for new books at the high price, with low-volume books at the lower price  (something, by the way, Amazon already does).  The average sales price is higher in the Macmillan approach, and I don’t blame them for trying.  And Apples is just trying to differentiate itself, and attempting to lock up publishers into exclusives or sweetheart arrangements fits their proprietary business model.   So I am not crying foul, I simply was rooting for Amazon because I felt my interests as a consumer lay with them in this dispute.   And I am wondering why so many people see it differently.

I had an idea, and I wondered if any of you were familiar with a program like this.  I can provide a pretty decent internship job for a motivated high school student in the summer at my company.  I have a motivated high school student who is my son.  However, from a college admissions perspective, and frankly from an experience perspective, it would be better if my son worked for something other than the family business.  I wondered if there might be an opportunity for a sort of entrepreneur’s internship swap, to exchange kids for the summer to work in each other’s businesses. I am toying with a website idea if such a thing does not exist.

As a follow-up bleg, our family’s philosophy is to try to have our son use his summers to test out potential interests to see if they are really something that interest him once he has seen the inside of it.  To that extent, he is researching summer internships in three highly diverse (to say the least) areas:

• international affairs, particularly comparative government systems and the interactions of different cultures and governments
• astronomy and space exploration  (greater emphasis on observation than theory)
• sports journalism, particularly analysis and production and possibly writing rather than being a broadcast personality

Anyone who might be familiar with a summer program for incoming HS juniors is encouraged to comment or drop me a quick email with a pointer.

My brother-in-law’s book, “The Constant Contact Guide to Email Marketing,” is doing quite well on Amazon.   After the early spam-crazy days, email marketing has really had to rebuild itself from the ground up.  I am a big believer in it, and can highly recommend his company Constant Contact as a email service.  I have several accounts and have set most of the non-profits I work with on it.  In his book, Eric discusses email marketing in the context of both customer acquisition and loyalty.  With Google clicks going for $2 or more, email remains a great value if done right.

Tiffany’s is (hypothetically) handing out coupons for 50% off diamond necklaces.  This generates a lot of press, but you do not get a coupon.  Are you, without a coupon, more likely to buy a necklace anyway given all the publicity?  Or is your behavior unchanged, because you received no inventive?  Or are you perhaps less likely to buy, with the full retail price you would be paying now seeming higher as compared to the 50% off others are getting?

This issue seems to be at the heart of the conflict between the Obama administration and Edmunds.com (what is it about this administration and picking battles with media companies?)  In their analysis, Edmunds said that only about 250,000 of the auto sales during the cash-for-clunkers period were incremental.  The White House says they are underestimating, because even people who did not qualify for the program bought more cars because of the program:

The White House said [totally great car-buying, car-selling, and all-around-awesome-info site for every goddamn great and awful car website] Edmunds based its analysis on the “implausible” assumption that “the market for cars that didn’t qualify for cash for clunkers was completely unaffected by this program. In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the cash for clunkers program.”…

Edmunds stands by its analysis.

“Instead of shooting the messenger, government officials should take heart from the core message of the analysis: The fundamentals of the auto marketplace are improving faster than the current sales numbers suggest,” [Edmunds jefe Jeremy] Anwyl wrote.

The central issue, Anwyl said, “is how many of these sales would have occurred anyway. Apparently, the $24,000 figure caught many by surprise. It shouldn’t have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales — always in the tens of thousands of dollars.”

Edmunds rejected the White House suggestion that people got caught up in the excitement of the program and bought cars, even if they didn’t qualify. And it discarded the notion that automakers boosted production solely because of the program.

“No manufacturer increases production, a decision with long-term consequences, based on the 30-day sales blip triggered by an event like cash for clunkers,” Edmunds wrote.

Its an interesting question.  I would tend to come down on Edmunds’ side from my own experience running promotions, but it is not totally cut and dried.  I can think of at least two examples where a discount to person A yields more sales to person B, but neither are really applicable here

• Example 1:  Ladies night.  Cheap drinks for the ladies bring in male customers, on the theory that that are looking for bars with, frankly, lots of drunk women
• Example 2:  Kids eat free.  Restaurants have programs with discounted or free kids meals to get their parent’s business

I think one could actually make the argument that people who did not get the clunker discount would be less likely to buy, as its really hard to buy something for X when you know all the people around you are getting it for (X-$3000)**.  This isn’t an absolute rule – after all, people fly all the time next to folks who paid more or less for the same service.  But I do think it is a psychological issue that would tend to offset the general excitement around the program.  In the end, we won’t have to guess, once we get sales data for the rest of the year and we can see if clunkers merely moved sales forward a few months or generated incremental sales.

**  As shown here, cash for clunkers amounted to about a $3000 subsidy per buyer, above and beyond the blue book value of the car turned in.

Tom Selling and Pat Walters are looking for participation in their survey on issues related to IFRS (international accounting rules) and their migration to the US.  Folks knowledgeable about these issues, either from the accounting or management side, are encouraged to participate.  Tom wrote this invitation:

This is a brief announcement of an online IFRS survey that I have prepared with Pat Walters of Fordham University.

I invited Pat to collaborate with me because we have divergent views on the questions being asked.  Thus, I hope that together we have achieved a modicum of balance in the survey’s design–particularly in the phrasing of the questions and response choices offered.  There are only 12 multiple-choice questions, and afterwards, I cordially invite you to express your own opinions regarding its design by posting a comment to this blog post.

We are also trying to reach many more stakeholders than any other survey has reached to-date on the IFRS adoption/convergence question.  To that end, we hope you will choose to email the link at the bottom of this post to anyone else whom you think might have an interest in taking it.

Pat and I thank you in advance for clicking here to take the survey, or by pasting this ugly link in your web browser:

http://www.surveymonkey.com/s.aspx?sm=pF0E3UgdSV_2bHMQvdAnXv8w_3d_3d

I wondered aloud last week at the fact that I when I raised my annual health care deductible to $2500, my annual premium savings were over $3000.   Which meant that from an economic standpoint, it was crazy to do anything but have a high-deductible health plan (even without considering the knock-on effects to the overall system of my now wanting to actually price shop for services).

TJIC offers one explanation that seems reasonable to me:

What kind of person is unwilling to pay the first $2,500 out of pocket? A person that intends to make lots of claims.

They know that they’re going to use much of that first $2.5k.

Question: between one person who has no intention of going to the doctor for every little thing, and another person who does, let’s assume that both get broken legs, which push them each to $5k in expenses … which one is going to demand more follow up visits, cancel and reschedule more often, demand an extension on their course of painkillers, etc. ?

The one who was intending to use lots of service down at the low end, I’d wager my middle nut.

Three other possible explanations:

• As alluded to above, it is in the insurance company’s interest to get their customers to start actively price-shopping for some medical services, so they encourage high deductible policies.
• Claims in the deductible range tend to be small and carry a disproportionately high overhead / processing cost as a percentage of the claim amount
• It is an economic IQ test, with results somehow correlated to attractiveness as a customer

This latter theory results from my experience at McKinsey & Co, a management consultant.  When I joined, they offered a $5,000 one-year interest-free loan to cover relocation costs.  As I became more senior and was responsible for hiring new consultants, some of them would come to me and say “that’s OK, I don’t need the money.”  I would look at them and respond, “we aim to hire the best young business minds in the country.  If you turn down an interest-free loan, we may have to rethink our hiring decision.  Go sock it in a 12-month CD like I did.”  My personal theory was the offer was really an IQ test, not a benefit.

I am a little behind on this, but Megan McArdle had this from Joe Wiesentahl, on the importance of loan down payments to prevent fraud and foreclosure:

The author, Michael Richardson, owned a Colorado mortgage company that was busted by HUD for processing too much fraudulent paperwork.  This caused him to discover that unbeknownst to him his employees were (on their own) engaging in mortgage fraud, prompting him to write this book and try to warn the industry.

This alone is interesting — that even on the small-time level, there was an information problem (bosses not knowing what the underlings were doing) — and the book is rich with details about the nuts and bolts of mortgage fraud.

But beyond that, one point he makes clear — and remember, this is before 2005, so before the crash and before conservatives blamed government intervention in the housing market for the crash — is that the FHA’s subsidization of $0-down loans made it all possible.

If you make someone pay 10% or 20% of a house’s cost upfront, then there’s no way you can alter the paperwork enough to make an ineligible buyer buy a house for an inflated price. But once you drop that requirement, everything goes. You can sell any house to any buyer for any price as long as you put in the effort to falsify documents and go through the cumbersome legwork.

I thought this was pretty illuminating, from Tim Carney via Hit and Run.  He is writing about lobbying efforts for and against an extension of cash for clunkers:

One lobbyist for this bill was Nucor Steel. In Cayuga County, N.Y., Nucor turns scrap steel into sheet metal and other steel products. The clunkers are now becoming a subsidized feedstock for Nucor, which helps explain why Sen. Chuck Schumer, D-N.Y., has led the push for $2 billion extra in clunker cash.

Then there’s Enterprise Rent-a-Car also backing the bill, supposedly out of solidarity with automakers. But Enterprise sells its rental cars after a few years. As a rental firm that buys its cars new, Enterprise benefits every time someone else scraps a used car.

On the other side of the lobbying debate were non-dealer auto-repair shops, whose businesses depend on used or older cars, which the owners don’t take to the dealer for repair. Also, the Automotive Aftermarket Industry Association opposed the bill.

These are the guys who can sell you the headlight for your 1998 Ford Taurus, or who rebuild an engine out of a junked car.

Shredding old cars saps both their clientele and their supply of old transmissions to rebuild.

Once I entered management-type jobs in corporate America, my life was dominated by making powerpoint charts.  That made some sense – I was a staff planner, and that’s what they do.  Ten years later I was Senior VP of Marketing for the $23 billion commercial aerospace division of a Fortune 50 company, and I was still spending a huge portion of my time making powerpoint slides.

I am sure other people have lots of sophisticated life goals for themselves, but two of my biggest goals in leaving large corporations were:

• Never touch powerpoint again
• Never wear a tie again

I have been succesful 100% on #2.  Powerpoint is still a useful tool, so I not totally fulfilled goal #1, but my use is scaled way back, to about 4 presentations in 6 years  (and one of these was for my climate work, not my real job).

It turns out the military has the same problem.

I had a question the other day:  Why is closing dealerships a cost savings for Chrysler?  My understanding is that dealers were independently-owned businesses that bought inventory from the manufacturer, and then sold and serviced the cars.

I came up with only two answers:

1. Auto makers finance dealer inventory in some way (either as financing or putting the inventory on consignment) such that cutting back on dealers cuts back on financing needs.  Yes, with fewer dealers, the others are likely to need more inventory, but basic inventory theory says the total in the system will still be less with fewer outlets.  Also, they might preferentially cut weaker dealers more likely to need financing in favor of larger dealers who can self-finance
2. Having too many dealers competing against each other with the same product undermines pricing in the market.  Dealers cut pricing to the bone in order to get the servicing income stream after the sale.  While this should not directly affect the pricing to the manufacturer, it might be argued that retail discounting is a negative for the brand over time  (electronics manufacturers have debated this point for years, and there is certainly no consensus on this).

Megan McArdle provides her own answers to this question, some similar and some different:

A number of readers have asked a simple, obvious question:  why do the dealers cost Chrysler so much money that they want to shut them down?  I don’t have a complete answer to it, but here’s what I understand:

• Inventory:  Chrysler often has to take back unsold inventory.  A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
• Financing:  Chrysler helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company’s effective spending)
• Brand costs:  Shabby, run-down dealerships don’t improve the image of the firm, and if they are the only game in town, drive users to other cars.

She follows with a good analysis of why independent dealers exist in the first place.

It will be interesting to see how this goes down.  Frequent readers will know that I often have said that the power base of many small-medium size towns is made up of 1) the auto dealers, 2) the beverage wholesalers and 3) the owners of the local TV stations and newspapers.  Auto dealers wield a lot of local political power – they are often the largest single financial supporter of local politicians and even some Congressional reps.  They also wield power as typically the largest single advertiser in local media, so they get sympathetic coverage.  Over the years, they have translated this into a lot of legislative help (such as limitations on Internet competition).

I couldn’t believe this when I read it:

General Motors is open to considering moving its headquarters from Detroit, selling off U.S. plants and even renegotiating parts of its restructuring plan with its major union, the new chief executive said Monday….

A move by GM to leave Detroit would represent another blow for the economy of a region already reeling from the bankruptcy of Chrysler and the sharp downturn in auto manufacturing.

GM purchased its glass-towered headquarter building known as Detroit’s Renaissance Center last year for $625 million.

The article moves on to other topics, but I was struck by this:  A year ago, when bankruptcy was only months away (delayed only by injections of taxpayer money), with the real estate market teetering at its peak and just starting to fall off, with GM hemorraging cash, GM decides to … spend $625 million on Detroit commercial real estate.

This is outrageous.  All the more so because GM’s fortunes and the value of downtown Detroit real estate have a beta coefficient that is probably well above 1.  In other words, if GM decides it wants to sell the building, Detroit commercial real estate is going to tank on the news that GM is leaving Detroit, making the real estate virtually worthless.  It is very dangerous to buy an asset for which you are the only possible buyer if there is any possibility you might want to sell it some day.

I understand that companies that have losing business models often find it more profitable to invest outside of their business**, but GM seems to have found the only investment on the planet worse than their own stock.

** Postscript: I am not a huge Roger Smith fan, but this was essentially his strategy — GM sucks as an investment, so I am going to invest outside of the auto industry.  Though he caught a lot of grief for it, most of his investments outside of GM turned out to have a substantially higher return for shareholders than his (or his successors’) investments inside of GM.   Wikipedia writes:

Smith’s purchases of EDS and Hughes were criticized as unwise diversions of resources at a time when GM could have invested more in its core automotive divisions.

But what if investments in your core business are even more unwise?

Over the years, I have developed a term “arrogant ignorance” to describe certain people we deal with from time to time.

We often get young and inexperienced contract managers assigned to one of our relationships.   These folks will struggle, due to lack of experience and fragmentary training, to perform their duties, because they really don’t know what to do in many circumstances.  We accept the fact that we often know more about our contract manager’s job than she knows herself, and try to help them get up to speed.

However, occasionally these folks, despite very obviously not knowing what they are doing, get hugely arrogant and refuse to admit they don’t know what they are doing.  They fire off orders and decisions that not only are wrong, but simply make no sense, and then yell at us within seconds for not complying with their bizarre requirements.   I have always scratched my head over this syndrome, and have assumed that it resulted from a combination of:

• a young person with absolutely no education and experience in how to work in a high-performing organization.  (think about the organizations a 20-something has seen — public schools, college faculty, maybe a non-profit over the summer, fake businesses on TV — nothing that would give them any clue how a high-performing organization works).
• really bad incentives.  Typically, the worst examples have non-existent formal performance management systems where the informal metrics therefore reign.  These informal metrics often default to things like “always look busy” or “always look like you know what you are doing” or “never do anything that will cause your boss to yell at you” or “never get caught making a bureaucratic process error.

Well, I was thrilled today to find that the syndrome I call “arrogant ignorance” actually has a name.  It was mentioned in this article by Simple Justice and is called the Dunning Kruger effect.   Here is the first line from Wikipedia:

The Dunning–Kruger effect is an example of cognitive bias in which “people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it”^[1]. They therefore suffer an illusory superiority, rating their own ability as above average.

This also helps to explain another phenomenon we tend to see — that the absolute worst, most incompetant, most clueless employees tend to be the first (and often only) ones who call me and threaten me with lawsuits over false termination.  The article goes on:

1. Incompetent individuals tend to overestimate their own level of skill.
2. Incompetent individuals fail to recognize genuine skill in others.
3. Incompetent individuals fail to recognize the extremity of their inadequacy.

But at least there is this ray of hope:

4.  If they can be trained to substantially improve their own skill level, these individuals can recognize and acknowledge their own previous lack of skill.

Despite years and hundreds of millions of dollars of effort on electric vehicles, competitors are coming out of the woodwork to beat it to market with an all-electric sedan — and, from the specs, seem to be beating it on price and features as well.

Miles Electric has confirmed that it’s working on a family sedan-sized all electric car for release in North America sometime next year. The car — which will be released under a different, unknown brandname — will be a first for the company, which specializes in neighborhood cars that only go up to about 25 miles per hour. The sedan will have a top speed of around 80 miles per hour, and a 100 mile range. It will also require 8-12 hours to fully recharge its dead lithium-ion battery. Miles is currently running the vehicle though crash tests, and expects to see about 300 of them on the road in California sometime next year. The going rate for one of these? About $45,000.

Radical shifts in technology often obsolete first mover and scale advantages.  The winners in the market for diesel electric locomotives (GM and GE) were totally different players from those who dominated the steam locomotive market (Alco, Baldwin, Lima and others).  It will be interesting to see if such a change occurs in the auto market.

Megan McArdle outlines some of the latest terms of a GM creditor settlment.  The interesting facts for me were:

• Creditors get 10% of equity in exchange for $27 billion in concessions  ($2.7B per percentage point)
• Employees get 39% of equity in exchange for $10 billion in concessions ($0.26B per percentage point)

McArdle argues that there are good reasons bankruptcy courts tend to give labor a good deal, and having argued all along to allow bankrupcy courts to sort this mess out following the usual rules, I am not going to reverse myself.

But is it really the case that, push come to shove, bondholders get a deal 10 times worse than employees?  If this is the case, I am surprised people ever buy bonds in a company with a large employee retirement overhang.

Russel Roberts deconstructs Obama’s auto speech.  Well worth the read.

I have worked with folks in the government for years.  One of the common syndromes I see in government officials of all levels is something I call “arrogant ignorance.”  I see a lot of it in this administration.

It is becoming increasingly clear that Obama has made an enormous blunder, driven in part by his best-and-the-brightest-style hubris, in taking personal ownership of GM.  Not because it will be an enormous waste of taxpayer money, because I don’t think he cares about a few tens of billions of our money.  It is a blunder because GM may not be fixable, and if it is salvageable in some smaller format, it will require painful compromises by politically powerful groups Obama really does not want to square off with.

Obama’s stepping forward and claiming ownership for GM’s success strikes me as roughly equivalent to someone stepping forward in March of 1945 to take ownership of the German war effort.   The decision is all the dumber because there was a perfectly good alternative — ie the bankrupcy courts — with far more experience (not to mention authority and legislative mandate) to handle these type of situations.

Megan McArdle has a good roundup of what challenges face GM and the Obamacrats.

Update: Obama seems to be hinting that a bankruptcy may still be in the cards.  The key challenge for him will be to deal with the obvious accusation of why he didn’t allow this before spending $20 billion or so of taxpayer money.  Expect the administration to be focus-grouping and trial-ballooning various euphamisms for chapter 11 to disguise this problem.

Critics of high executive pay on the soft-core / moderate left (as opposed to the hard-core socialist left) often argue that they are not against large incomes per se.  However, they argue that high executive pay is often the result of a failure in the structure of corporate governance, where a group of cozy insiders on the board and management hand each other compensation packages to which the rank and file of shareholders would be opposed  (a subset of the agency cost problem).

I am somewhat sympathetic to this argument, as I have personally observed instances where I thought boards and management were too cozy by far.  However, no one has really succeeded at proving this hypothesis on executive pay, and in fact shareholders when they have had a chance to vote on such packages have never really made a meaningful dent in them, and one can find a number of private companies where such governance issues presumably don’t exist but high executive compensation packages can exist.

Just as an aside, a classic example of this can be found in the fabulous book “Barbarians at the Gate” about the RJR Nabisco takeover fight.  The book does a great job of portraying a company with horrible corporate governance issues that seemed to be used to enrich managers with both salaries and perks, but then observed that the new private owners of the company gave their new CEO a compensation package that might have made the previous executives blush.

Anyway, I am yet again off the point.  My point was to observe that the mainstream left seems to believe that there are corporate governance issues at large corporations that disenfranchise the majority of shareholders vis a vis key decisions involving the company executives.  So I have to ask myself, if this is a real fear, then how does one justify having the President of the United States effectively fire the GM CEO, without any vote or substantial input from shareholders?

Postscript: It is all well and good to be cognizant of agency costs.  Everyone should understand when an employee (or contractor or whatever) has different incentives than they themselves possess.  For example, on my recent backyard renovation, I always kept in mind that my architect wanted to create a showplace that would advance his business and possible get into a magazine.  In general, this alligns our interests, but there were times he pressed for things I did not value and I had to be insistent we were not going to do those things.

However, many folks seem to want to run off to government to do something about agency costs whenever or wherever they are found.  This is hugely dangerous, as Congress tends to have the highest agency costs one will ever be likely to find.

It has become an increasingly common practice for companies that are making calls, say from a customer service center or the accounts receivables department, to use a computer auto-dialer.  If the customer picks up, they give the customer a recorded message to hold for a real person with an important message.  Sometimes the holds can last a while.  The idea is that the company is not paying people to waste time waiting for people to pick up, or worse, not to pick up.

I despise this practice.  The implicit assumption is that the time of the folks in their call center is more valuable than mine, such that it is better that I hold rather than their employees waste one second of time.  Well, all you companies who do this (Do you hear me Frito-Lay?  Coca-Cola?) are never going to get me, because I hang up the microsecond I get a recorded message.  I would do this even if I was sure it was a real business call, because I find the implicit assumptions insulting, but I am even faster to hang up now that telemarketers have latched onto this practice.

I am an early-adopter of the Amazon Kindle and must say that I have been thrilled with it, despite a number of design flaws I hope to see fixed in the new version.  Most of my complaints have to do with industrial design, not with the feature set  (from an industrial design scale where iPod=10 and the original MS Vista packaging =0, the Kindle and its case were about a 4.)

I was perusing a number of “reviews” of the Kindle 2 today.  Pre-release reviews can have a really wide spread, as they tend to be populated either by insiders who are trying to promote the product, or by folks who haven’t used the product but have some problem with its basic concept (or manufacturer) they want to vent on.  Which makes pre-release reviews worthless.

One such person in the second category is “Bohemian,” who seems to want to vent on Kindle because it is not open source, DRM-free, etc.  He is also upset that it does not have built-in solar power, lol.  But the line that really caught my eye is this one:

Overpriced – should be around $100

That is hilarious to me.  The Kindle has been absolutely sold out (at the current price of $300-$400) for months and months.  There is a waiting list, particularly since Oprah recommend it.  So how is the price too high?  My take on it would be the price is too low, since even at $359 demand is exceeding supply.

This is a common mistake by people across the political spectrum — mistaking one’s own personal assessment of value with what a price “should” be.  The correct statement for this review would have been “I would not pay more than $100 for this product.”  And in a free society, he doesn’t have to buy it.  But obviously there are a lot of people, in fact more people than Amazon can currently satisfy, who think the Kindle is worth at least $359.

By the way, one other note on DRM and proprietary platforms.  I am the last one to spend much time defending DRM, but proprietary platforms are totally normal for new technologies.  The thing that is often ignored about the Kindle is that … it just works.  You log on, download the books you want, and they are there in seconds and display correctly and reliably.  I lost my first Kindle, and when the second one showed up, all my books from my first Kindle where already on my second.  No crashes, no need for tech support.

People give Microsoft loads of well-deserved cr*p for problems in its software and for playing too many proprietary tricks, but the real reason PC’s can be a pain and can be tech support nightmares is because PC’s are not very proprietary — they are really a wide open platform, and try to integrate a hodge podge of components and software from a variety of sources, and sometimes things inevitably go wrong.  People tend to forget that the reason the Mac and the iPod are so compelling in the user-friendliness and stability is that they are proprietary, tightly controlled platforms.

I personally prefer the PC, because I like the flexibility and am not scared off by the occasional integration challenge.  Over time, I have realized that I am in the minority.  Most people want their electronic devices to freaking work, and don’t care if they don’t have access to the 100-item micro-configuration menu and probably will never have a desire to transfer the book file on their Kindle to be read on the LCD on their refrigerator.

Radley Balko demonstrates it.  Thank them for the opportunity, express sorrow for the passing of a good relationship, look for the next new thing.

Nothing makes purity more interesting than temptation.  This applies to ideological purity just as much as the physical sort.  As a libertarian, my greatest temptation to call for government action comes when I deal, as a retailer, with Visa and Mastercard (V/MC).

This post is not a call for government action, so I guess I am resisting temptation.  But I at least need to vent, sort of like a monk pounding his head on the wall after getting the Victoria’s Secret catalog in the mail.  So here is my rant.

First, let’s start with how credit card companies make their money.  I will confess that I do not know how the card companies (V/MC) and the card processors (often large banks) split the take, so this is how they make money together.  V/MC and the processors charge fees to merchants.  Typically this is a fixed fee per transaction plus a percentage.  On average, a merchant might be paying 2.5-3.5% of a transaction.  The card companies also make money from card holders, charging annual fees, interest fees, etc.

You will have seen of late that most credit cards offer various loyalty programs, from airline miles to cash rebates.  You might have thought those were marketing expenses paid by the credit card companies.  Wrong.  The card companies simply charge merchants a higher fee for processing transactions using these cards.  In a sense, the card companies have organized with card users to use their power to extract extra value from merchants.

All of this I can generally live with.   Visa and MasterCard, through both their credit facility and their implicit standardization, bring enormous value to retailers and customers.  Its a big circular game anyway — customers get 1% back and think they are getting a deal, merchants pay this extra 1% in fees, and then add it into the price of what they are selling.  It’s a wash, except to the extent that customers with reward cards in the end extract a bit of value from customers who pay cash (for reasons explained below).

For this value one must accept the typically arrogant and indifferent customer service provided by any monopoly  (American Express is particularly awful to deal with as a retailer).   But they are no worse to deal with than the government, so its unclear how the government could make the service any better.

What tends to tick me off, though, are rules and restrictions.  Like the creeping work rules in the UAW contract, these are in many ways more insidious than the service and pricing.  Here is what set me off today, from one of my card processors  (in this case Bank of America, which, to be fair, is someone I would recommend for merchant account processing).  Click to enlarge.

So, why are businesses breaking these rules so often?  Let’s take a look:

• No minimum transaction. Remember that V/MC charges a minimum fee, from 10-40 cents or so, per transaction.  So if someone buys a pack of gum in our store, likely 100% of the sales price is going to V/MC.  Typically it takes at least a one dollar total sale for there to be any money left over beyond paying cost of goods sold and the credit card folks.  So merchants logically want to set a minimum.   V/MC hates this practice, but it is rampant.  I plead the fifth on our own practices.
• Surcharging. Credit card customers cost more than cash customers.  Sure, we get some non-sufficient funds checks, but the eventual cost of these is nowhere near 2.5% of sales.  Merchants logically don’t like having their cash customers having to subsidize the frequent flyer rewards of their credit customers.  However, unlike transaction minimums, card processors have mostly been able to drive out cash discounts.
• Requiring ID and Fraudulent Transactions. I will take these two together, since they are so ironic one after the other.  V/MC is telling merchants that they can’t check ID, which is the only reasonable approach to limiting fraud, but that they can’t submit fraudulent transactions.  You say that the text says “known fraudulent?”  Well, read on –

To the latter point, I think most people assume that the credit card companies are absorbing the fraud, which is how they justify the fees they charge.  Wrong again.  Credit card companies only absorb credit risk.  Over the last 10+ years, they have pushed fraud back on the retailer.  If a consumer claims fraud on his card with some transaction, then the credit card company refunds the customer and takes the money from the merchant unless the retailer can absolutely prove he made delivery to the consumer personally (which he can’t prove because he can’t check identification) .  Merchants bear the cost of fraud, not card companies.  Which I could accept (since I have more ability than the card companies to control fraud) expect the card companies ban me from controlling fraud.  So I have to take financial responsibility for something I am not allowed to prevent.  And that really ticks me off.

Anyway, maybe someday we can organize a large merchant boycott, where, even for a day, we all refuse to accept Visa and Mastercard.  Of course we would be breaking the rules, because that is not allowed by our V/MC agreement.

Postscript: I suspect that a few retailers with some power are starting to crack this, at least for themselves.  Costco only takes American Express.  Sams Club only take one card (MC, I think).  My guess is that both, with their large size, bargained for exclusivity in exchange for concessions on fees and/or terms.

Postscript #2: I expect comments like, “Well so-and-so always makes me show an ID.”  I don’t doubt you.  I am merely saying that by doing so, they have either negotiated an exception to the V/MC agreement (very unlikely, as V/MC holds to these rules like the Maginot Line) or the retailer is breaking the rules.

You know you are in trouble when a guy who made his fortune in the early Internet boom (which featured companies like Pets.com using the last of their cash to put put sock puppets on the Superbowl) has to lecture you on making a profit.  From the always quotable Mark Cuban via TJIC:

For those in Detroit who have never operated a lemonade stand, or any other business, the way profits are generated is by making products at a price people want to buy them for, and then producing them, with all costs allocated, for less than you are selling them for. It’s not apparent that this is a principle that Detroit understands….

You Know Chrysler is Toast Because the CEO takes out a fullpage ad in the Wall Street Journal today to thank the American Public for “investing” in Chrysler.

Lets see, is there anything more idiotic than spending more than 100k dollars on a full page ad “thanks for letting me waste your money ” ad ? Does it make it worse that its a business publication where the readers might just recognize the stupidity of wasting money on ad dollars that doesn’t even try to sell the product ? How does it make the next unemployed Chrysler worker feel that their entire year’s salary just went for a single, ridiculous ad ?

Just one more example of how poorly run the car companies are. Note to the Big 3, spend money to make money. These types of ads have as much value as a Bernie Madoff account statement.