Archive for the ‘General Business’ Category.

Tesla Predictions Secured

I had dinner last night with my old college roommate Brink Lindsey and he even sort of rolled his eyes about my recent Tesla obsession, so I really really will try to make this the last post for a while.  However, I have to count coup on a few accurate predictions I made last week here and here.

First, I said, in reference to how Musk can bail himself out of his "funding secured" tweet when it has become clear this is not the case:

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

Today Musk writes:

Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed....

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement.

Of course the Feds probably expect "funding secured" to mean a signed term sheet (which does not exist) accompanied by an 8-K (which STILL has not been issued).  I then said in my prediction:

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

And today we learn:

But was the funding really secured? Apparently not, because in the very next paragraph Musk writes that "following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements."

Hmmm.  So basically Musk had a chat with the Saudis that did not include any due diligence, any percentages, or anything about the structure of the transaction and nothing has been submitted formally to the Saudis for the required review and approval.  The Feds would never accept this BS from an unpopular CEO like, say, Jeff Skilling.  It remains to be seen whether they will really go after cultural icon Musk.

Finally, I predicted the odd and relatively unprecedented transaction that Musk likely envisioned:

Here is what I think Musk wants -- he wants an LBO without any actual change in ownership. Basically he wants to create Tesla New, which will be private and not trade on the markets. He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New. Musk has already said he will do this with his 20%. In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO. Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity

There was no way that Musk could expect to raise $70-$80 billion ($420 times the float) or to run an already cash-starved business with that much debt.  The only way to imagine this is if the buyout was only of a small percentage of owners.  And sure enough, here is Musk this morning:

Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.

I won't comment on whether this is possible because I don't know enough about security laws.  I have been told that the SEC would likely frown on a private company with no public disclosures that has thousands or even millions of individual shareholders, but again, I don't know.

I find it amazing that anyone would want to stay in on this basis, but like Musk, the Tesla fan-boys seem to care more about burning the shorts than the quality of their own long investment in Tesla.  How can moving your small (percentage-wise) investment in Tesla from being exchange-traded to being locked up in a private company possibly be an improvement?  Today your investment has total liquidity (you can sell any time), it has massive 3rd party scrutiny and accountability, and it has real-time price discovery.  You would lose all of that in a private company.  You can only sell when Musk lets you sell and at the price he chooses to give you based on whatever company information he chooses to release.  Choosing the private option as a minority shareholder is like saying that you would rather hold non-refundable airline tickets than fully refundable ones.

Postscript:  I am new to the world of short-selling fights, as I am not really an active investor and just got sucked into watching Tesla because I found it interesting.  But wow, the tribalism of politics sure has leaked into the investment world!  In tribal politics, we see people more motivated by hatred of the other tribe than by making progress on their own tribe's goals.  This same kind of "reasoning" seems to dominate a lot of the Tesla long-short battle.

Update:  Here is a new prediction.  For a while Elon Musk has claimed he will not have to raise capital this year.  Everyone basically looks at his numbers and thinks he is nuts.  What's more, given his $50 billion equity valuation currently, he SHOULD be raising capital now while his stock is high and thus his cost of capital is low.

But one way to look at this is if he raises $20 billion in equity to buy out the 1/3 he thinks will want the cash rather than the new stock, he could easily just make that $22 billion so the company has an extra $2 billion in operating cash and thus raise capital this year without it looking like he violated his promise not to raise capital.

 

What's Going On At Tesla

Matt Levine of Bloomberg has many of the same guesses I made the other day (here on the transaction Musk likely wants, and here on how might paper over his lie about "funding secured").  Levine writes:

The intermediate possibility is that there is some sort of deep misunderstanding, that when Musk tweeted about “taking Tesla private at $420” and having “funding secured,” he didn’t mean what you and I and the SEC normally interpret those words to mean, which is that he would make a binding offer to buy any Tesla shares not owned by Musk and his financing partners for $420 a share in cash.He meant something more like: He would like to not be subject to the obligations of being a public company anymore, and it would be nice if there was a way to do that. After all Musk immediately followed up by tweeting about letting shareholders continue to own their shares in a “private” Tesla, which is not how going-private transactions normally work. There has been a lot of speculation about how that could be done, and I remain a bit skeptical, but the important point here is that if Musk believes that (1) there is actually a way to “go private” while keeping all of his existing shareholders and (2) most of his existing shareholders love him and would prefer to stay private with him, then he could rationally believe that he doesn’t need much financing. If no one will take the cash, then you don’t need any cash. Both of those things are kind of weird things to believe, but neither of them seems impossible for Musk to believe.

If I were Musk’s lawyer, and if he doesn’t actually have $80 billion of financing locked up, I’d be working on a termsheet for the board that (1) offers Tesla shareholders the choice between (A) $420 in cash or (B) shares in a new special-purpose-vehicle that will hold shares in a private Tesla (or whatever your plan is to let people hold on to their shares); (2) limits the cash consideration to, like, $5 billion, or whatever Musk can actually raise; and (3) has some sort of proration mechanism in case more people choose the cash than he can afford. Does this fit with the spirit of the going-private transaction that Musk tweeted about? No, absolutely not, not even a little bit. But it is … something. And then let the special committee reject it, and then quietly walk away and say “well no we were serious about the buyout proposal but it just didn’t work out.” Which is a much better position to be in than walking away saying “oh yeah sorry we were kidding about that.”

The Weirdness That Is Twitter

So the last couple of days I was bored and I logged into Twitter for the first time in a while and spent a few hours trying to convince myself that if I really wanted to, I could build a presence on Twitter.   Increased my follower count from about 1000 to about 1300 and got some notice and retweets.  And pretty much zero satisfaction, so I think we are going to declare that experiment over for a while.  But, this time, unlike the last effort, I managed to pretty much remain a nice guy and not become a hateful troll, so that is a step forward.

Anyway, weirdly, I managed in the process to create my single most -- by far -- liked and retweeted post, and it is really random.  It was just a toss-off reply to @popehat when he asked rhetorically if dentists all hire awful lawyers.  So I wrote this (which is an entirely true experience)

 

My Guesses About $TSLA, and Why @TSLA Shareholder May Be Presented with a Bad Deal

@Elonmusk is facing real blowback for his management buyout by tweet the other day, in particular for two words:  "funding secured."  Many, including myself, doubt he really had tens of billions of dollars of funding secured at the time, particularly since all bankers and likely sources of funding as well as most large Tesla shareholders had never heard of any such transaction when contacted by the media.  The SEC is now looking into this and other Musk corporate communication practices.  If he lied in the tweet, perhaps to get revenge on the short-sellers he hates with an irrational passion, he could be in deep, deep legal poop, up to and including jail.

Let's play a game.  Let's assume he did NOT have funding secured at the time he tweeted this, and now is running scared.  What can he do?  One ace he has is that the board is in his pocket and (I hate to be so cynical about this) will likely lie their asses off to cover Musk.  We already saw the dubious letter the other day, from "members of the board" rather than officially from the board, attempting to provide cover for Musk's tweets.  This is not just a crony thing -- it is entirely rational for the company to defend Musk.  He is, in my opinion, a terrible executive but he is the avatar that drives the fan boys and the stock price.  The day that Musk leaves is the day that the company can really get its operational house in order but it is also the day the stock trades under $75.

So what can Musk do?  Well, the first defense might be to release a statement like "when I said funding secured, I was referring to recent conversations with ______ [fill in blank, maybe with Saudis or the Chinese, call them X] and they told me that if we ever were looking for funds they would have my back."  This is probably the best he could do, and Tesla would try to chalk it up to naivete of Mr. Musk to accept barroom conversation as a firm commitment.  Naivite, but not fraud.   I don't have any experience with the Feds on this kind of thing but my guess is that the SEC would expect that the CEO of a $50 billion public company should know the rules and legally wasn't allowed to be naive, but who knows, the defense worked for Hillary Clinton with her email servers.

But this defense is MUCH MUCH better if, in the next day or so, Tesla can announce a deal with X on paper with signatures.  Then Musk can use the same defense as above but it has much more weight because he can say, see, they promised funding and I believed them when they said they had my back and here they have delivered.

The problem with this is it would be really a deal being crafted for tens of billions of dollars on a very short timeframe and with limited negotiating leverage (X will know that Musk NEEDS this deal).  As a result, the deal is not likely to be a very good one.  X will demand all sorts of extraordinary provisions, perhaps, for example, a first lien on all Tesla IP and a high breakup fee.  I picture this more like the negotiation for bankruptcy financing, and in fact the IP lien was part of the financing deal Theranos made when it was going down the drain.  But put yourself in Musk's shoes -- jail or bad deal?

And likely his conscience would be clear because this deal would be killed quickly by shareholders.  That would be fine, because the purpose of the exercise would be to keep Musk out of jail, not to actually buy the company.  Tesla shareholders will still get hosed, probably having to pay some kind of break-up fee which any sane investor X would insert as the price for participating in this farce.  And we will go back to the starting point of all this, which is Tesla being public and focusing on operational improvement in what may be the most important operational quarter in its history.

Disclosure:  I have in the past been short Tesla but have no position in it now (I did short when trading reopened the other day after Musk's announcement but covered this afternoon).  I am not in any way, shape, or form giving any financial advice you should spend actual money backing.

Recommendation: 99Designs

I am going to a trade show in a month or two.  I bought one of the standard backdrop things and needed some art for it.  I was quickly told that all my attempts looked like bad powerpoint slides transferred to the backdrop.  So I tried a site called 99designs.  They have a whole pool of freelance designers that compete for simple jobs - logos, wordpress templates, backdrop art, etc.  I committed $250 to a design contest for my backdrop (the site takes some cut of that and the rest is a prize for the winner).  That was 2 days ago.  At this moment I have 35 different designs sitting there for me to comment on and choose from.  Almost any one would be acceptable, and many are fabulous.

This strikes me as a classic victory for the division of labor. I am getting what seems like a crazy amount of good work for $250, work I could not duplicate myself for 100x that.  I suspect that some of this stuff is super-derivative and is banged out using simple tools in just a few minutes, but so what?  They can do something fast that I can't do at all and we all benefit.

My End Game Prediction for @Tesla ($TSLA) if They Really Do Go Private at $420

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Musk's Proposed Tesla LBO Price of 420: Intentionally Hilarious? My Guess Is Musk Wants An LBO Without Any Actual Change in Ownership

Today, following his usual practice of ignoring all the securities laws that other CEO's have legions of lawyers to educate them on, Musk teased a possible Tesla LBO in a series of tweets.  In case you are wondering, it is not generally considered best practice in legal compliance to issue such information in cryptic tweets, and it is definitely not usual to do so while the stock is actively trading.  You can read the whole story here, though it continues to evolve as the market has finally halted trading in Tesla.

Here is the part I found funny watching this in real time:

Mr. Musk’s account tweeted at 12:48 p.m. ET: “Am considering taking Tesla private at $420. Funding secured.” It isn’t clear what prompted the tweet. Mr. Musk has a history of joking on Twitter and sending erratic tweets.

About 30 minutes later, the account tweeted “420” in response to a reporter’s tweet asking what price buyers might pay.

When this came out, I honestly thought "420" was an admission by Musk of a drug-induced mental state when the previous tweet went out, but in fact it appears to be his target price for the LBO.  Some quick thoughts

  • This would fit Musk's personality, as he seems unable to ignore those shorting Tesla stock and would get the twin satisfactions in such a deal of a) burning a lot of current shorts and b) making shorts irrelevant in the future as going private ends the active market for the company.
  • The implied valuation would be insane, something like $75 billion in equity (compared to GM and Ford which are both around $50 billion) plus $9 billion or so of assumed debt.  Tesla is already at the breaking point on debt so it is unclear where the funding would come from -- LBO's generally increase leverage and Tesla needs to decrease it, and needs a lot more capital for operations and growth going forward.  But Musk claims he has the deal funded already.
  • Part of the clue to the capital availability may be the Saudis.  It was revealed today that the Saudi's own just under 5% of Tesla' stock.
  • Here is what I think Musk wants -- he wants an LBO without any actual change in ownership.  Basically he wants to create Tesla New, which will be private and not trade on the markets.  He is hoping that all his current fanboy shareholders will exchange a share of Tesla for a share of Tesla New.  Musk has already said he will do this with his 20%.  In the extreme case, if every current shareholder wants in on the new private company, then no capital at all is needed for the LBO.  Musk might admit that perhaps a billion or two are needed to buy out the few recalcitrants at $420, and then all the Tesla fanboys can enjoy short-seller-free illiquidity.

This is great for those who want out, but for those who are in for the long haul, it seems like a lot of capital just to remove short sellers from the picture.  This is a company that does not have anywhere near enough capital to do the things it has already promised to do (China plant, model 3 ramp, $35,000 model 3 car, semi, pickup truck, two-seater, battery storage projects, revive SolarCity, etc.).  For those who think that the capital will always be there for Musk, just remember SolarCity, which was close to bankruptcy and in steep decline when Musk engineered the insider deal with Tesla.

Update:  This statement from a Morningstar analyst makes no sense to me:

Taking it private would allow the billionaire “to not constantly worry about going to the public markets for more money,” Mr. Whiston said. “He can do what he needs to do behind closed doors and keep growing the company without all that extra scrutiny.”

I get the second part -- Musk would love to avoid the extra scrutiny -- Theranos probably survived years longer as a private company than it ever would have as a public company.  But I don't understand how it stops the need to go to the public markets for more money.  Cash needs are driven by Tesla growth plans and they still need a LOT more.  Going private does not make this easier, it makes it harder by cutting off one huge source of capital (public markets) and potentially loading up the company with extra debt from the privatization transaction.

Tesla New Math

I was reading the Tesla shareholder letter and I found this funny.  Tesla began by celebrating that it produced 5,000 Model 3 cars  in the last week of Q2.  And also

Highlights from the company’s letter to shareholders included the promise to produce 6,000 Model 3 sedans a week by late August, and to produce 50,000 to 55,000 of the sedans in the third quarter.

So we began the quarter at 5,000 per week and will hit 6,000 a week about two thirds of the way in so that we will on average produce around 4,000 a week for the quarter.  Right.

 

Open Letter To Walmart: I Have a Business For You

The last few days I have written of my frustration at trying to get local business bank accounts, the sole purpose of which is to accept deposits of cash from my local campgrounds and then transfer that money to my main account.  This is a major hassle as opening a bank account as a corporation is not a simple task and, as I have found out, some banks won't even accept this sort of business.

Here is what I need:  I need a national network of offices, many in rural locations, that will take my cash and ACH (a cheap form of wire transfer) the money to my bank account.  So naturally, I think of Walmart.  Walmart already is used to handling a lot of cash and Walmart is already starting to offer a number of consumer banking services.  One reader told me about the Bluebird service, a joint effort between Amex and Walmart to create a sort of virtual consumer bank.  I love the idea, but it has rules limiting it to consumer accounts.

So here is my business for you Walmart

  • I bring my cash to you at any store.  You zip it through a counter.  We agree on the amount.
  • You wire my main account with the money.  I will give you three days so you can use the cheapest transfer and have time to get the cash into your own account.
  • I will pay you 100 bp (1%) of the cash value for the service

Currently I pay merchant processors 270-300bp for those transactions and I have to wait 3-5 days for the money to hit my accounts.  So 100bp on cash would be fair for me, and I would guess fair for Walmart.

Why Tesla ZEV Credits Don't Appear on the Balance Sheet

I asked this question to an accountant friend you runs a web site on accounting technical issues:

Tesla gets Zero Emission Vehicle (ZEV) credits from about 10 states for selling EV's.  These have a LOT of value and can be sold to other car makers who need them to compete in these states.  In the past Tesla has sold batches of them for upwards of a billion dollars, so they are material.  Tesla tends to horde them for several quarters and then sell them in a big batch to juice a particular quarter.  However, they do not appear on the balance sheet.  Anywhere.  It is a public company but no one in the outside world knows how many of the ZEV credits Tesla has until they show up on the income statement as having been sold and having generated a huge profit.

How is it possible that Tesla is gaining these valuable assets with each sale of a car in certain states but they are not getting put on the balance sheet in any way?
He answered, and for now I am going to leave his name off -- he says he may post on it soon and I will link him then.

I  learned of this a few weeks ago, and was actually thinking about writing a blog post on it because it is so ridiculous.  I’ll try to explain quickly.

One’s first reaction could be that this is a “tax asset,” like tax loss carryforwards.  BUT, GAAP only addresses tax assets that arise from determination of income taxes; hence, the literature on “deferred tax assets” is not directly in the scope of this issue.

The second thought is that this is a contribution from a government that has value.  BUT, GAAP is silent on how to account for donations to a company from the government (ironically, this is addressed by International Financial Reporting Standards, but not GAAP).

In a nutshell, that leaves Tesla with a lot of wiggle room on accounting for this.  The FASB’s definition of an asset in its conceptual framework would pretty clearly include this, but not perfectly.  So, with the permission of its auditors, Tesla gets to treat this as sort of a rainy-day reserve.  It’s utterly ridiculous – classic definition of a loophole.

It's probably a marker of our expanding corporate state that GAAP needs to address more carefully "donations to a company from the government."

Your In-Office Entertainment This Week

UPDATE:  I had the wrong link.  The call is Wednesday but at 2:30 Pacific after the market closes, which makes more sense.  Like many companies, Tesla likes to dump the quarterly financials, dozens of pages in 8 point font, just seconds before the conference call.

If you are sitting in your office this week and need to be entertained in a way that looks like you are working, consider the Tesla investor conference call Wednesday at 2:30 PDT.  I can't guarantee anything but past conference calls have been a circus.  Normally I would expect the Tesla Board or the corporate counsel (who is Musk's divorce lawyer, lol) to bring adult supervision to the party, but so far that has not happened in any Tesla communications to date.  Expect potential discussion around:

  • Tesla's immediate external capital needs, given that they are burning cash faster than you could actually physically burn it (Musk claims zero is needed but everyone else in the free world thinks its >$2 billion, with a huge part of Tesla's existing debt also expiring and needing to be rolled over soon)
  • Model 3 order blacklog (this was the question in the last call that caused Musk to tell the experienced Wall Street analyst to shut up and then he switched to taking questions from a Youtube fanboy
  • Model 3 production rates and quality issues
  • Gross margins.  They HAVE to get higher for survival.  Particularly since Telsa has chosen to eschew traditional dealer networks so corporate bears all the cost of service and support.  This demands Tesla not only get its gross margins as high as other auto makers, they need to be higher.
  • Expiration of tax subsidies -- the $6500 government tax credit for Tesla customers slowly disappears once their 200,000th EV has been sold in the US, which has happened.
  • The disappearance of the $35,000 Model 3 from the web site (this is the promised car that generated a lot of the Telsa hype in the first place)
  • Disappearance of all those other teased products (coupe, semi) that were released to great fanfare and have not ever been mentioned again
  • ZEV credits (these are credits it gets from states like CA that other car makers have to buy to do business in those states with gasoline vehicles).  These are odd ducks as they have a lot of value but for some reasons do not show up anywhere on the balance sheet, so one doesn't know they even exist until Tesla chooses to sell them for a LOT of money.   They can flip a single quarter positive by saving these and exercising them at the same time.  Most folks see this happening in a bid to make Q3 profitable.  (By the way, anyone out there that understands by what accounting rules these valuable assets don't get put on the balance sheet are encouraged to email me the answer).
  • Introduction of competitive products (Jaguar, Volvo, and pretty much everyone else soon)
  • Pending lawsuits from both shareholders and whistle-blowing employees
  • Implosion of SolarCity (now part of Telsa) such that new installations are on a trend line towards zero
  • (unlikely but someone should really ask) Musk's silencing of critics
  • (unlikely but someone should really ask) Musk's social media demeanor, including calling the Thai rescue hero a pedophile because he did not use Musk's goofy submarine

Tesla is a train wreck I cannot take my eyes off.  Unlike Theranos, which combined a product that didn't work with a screwed up management, and which operated in the dark, Tesla combines what has been a really good product with a screwed-up management, and operates in an absolute blaze of publicity.  I have never seen any stock where sentiment was so polarized between bears and fan-boy bulls (Herbalife, maybe?)

I have a personal metric of sentiment and volatility I invented but I am pretty sure has been used since before I was born.  Anyway, I look at the sum of the price of an at-the-market put and at-the-market call for the stock about 6 months out.  I then divide this combined price by the share price.  For Tesla January options, this comes to 31%.    This is really a huge number.  Take ExxonMobil, which has a lot of split sentiment right now (a historically fabulous company that keeps screwing up its quarters recently) this metric sits at 9%.

Disclosure:  I am in and out of short positions on TSLA, typically selling around 350+ (usually after Musk has honeytrapped the fan boys) and covering in the 290-300 range (usually after real news or a Musk meltdown).  This strategy has been profitable for 2 years but I think that is coming to an end.  TSLA is either going to fall more or stay high based on what it does in the 3rd quarter.

Elon Musk Combines the Social Media Maturity of Donald Trump With the Business Ethics of Elizabeth Holmes

Frequent readers will know that I have expressed both admiration and skepticism for Elon Musk's various business ventures.   SpaceX is cool.  I am extremely skeptical of the hyperloop, which looks like the technological equivalent of the emperor's new clothes.  I thought Tesla's acquisition of nearly-bankrupt SolarCity was corrupt insider self-dealing.  I think the initial Tesla cars were terrific products but that Musk's management is likely to kill the company.

Lately, I have tried to avoid discussing Tesla and Musk much because I don't want to turn this into a dedicated blog on those two subjects.  Also, with all the press (positive and negative) that it gets, another article on Tesla is about as necessary as another article on Stormy Daniels.  I even resisted the urge to comment on Musk's childish need to insert himself into the Thai cave rescue story and his subsequent rant on Twitter petulantly calling one member of the rescue team a pedophile because he did not use Musk's submarine.  Lol, a submarine for a rescue where one passage was so narrow a diver wearing tanks could not even squeeze through.

My will to avoid Musk and Tesla on this blog collapsed the other day when Musk personally called the employer of one of Tesla's harshest (and I would add most intelligent) critics pseudonymed Montana Skeptic, and threatened to sue the critic and get him fired unless he shut down his criticism.  He succeeded, as Montana Skeptic was forced to shut down and issue this statement:

Yesterday, July 23, I decided to cease writing about Tesla (TSLA) here at Seeking Alpha web site. I also deactivated my Twitter account, where I was @MontanaSkeptic1. Here is what prompted those decisions.

Yesterday afternoon, the principal of the family office in which I am employed received a communication from someone purporting to be Elon Musk. Doubtful that Elon Musk could actually be attempting to contact him, my employer asked one of my colleagues to investigate and respond.

My colleague then spoke by phone with Elon Musk (it was indeed him). Mr. Musk complained to my colleague about my writing at Seeking Alpha and on Twitter. Mr. Musk said if I continued to write, he would engage counsel and sue me.

My colleague then spoke with me about the phone call. We both agreed that Mr. Musk’s phone call and threatened lawsuit were actions that would tend to involve our employer in matters in which he has had no part. To avoid such a consequence, I offered to immediately cease writing at Seeking Alpha and to deactivate my Twitter account.

How did Mr. Musk learn my identity, and that of my employer? It appears to me his information came thanks to the doxing efforts of some of his followers on Twitter.

Neither Mr. Musk nor Tesla has ever attempted, at any time, to contact me. Instead, Mr. Musk determined to go directly to my employer.

I do not know what Mr. Musk’s precise complaints are about me. I do not believe he has any valid legal claim, and I would have no trepidation in defending myself vigorously were he to bring such a claim. My response to his threats were simply to protect my employer and preserve my employment.

And so, you might say, Elon Musk has won this round. He has silenced a critic. But he has many, many critics, and he cannot silence them all, and the truth will out.

Folks who have read the book "Bad Blood" about Theranos will recognize this behavior immediately.  Musk took advantage of the work of some of his fanboys who bravely doxxed Montana Skeptic and allowed Musk to determine his true identity.   Musk is certainly a child (emphasis on "child") of his age, preferring to force critics to shut up rather than respond to them in a reasoned manner.  And by the way, where the hell is his board of directors?  Just like at Uber, it is time for the grown-ups to come in and take over the visionary but flawed company started by their founder.

If you have a chance, you really should look at at least some of Montana Skeptic's work.  He was fact-based and analytical -- this is not some wild crazy social media guy going off on biased rants.  I would take Musk's action as a ringing endorsement of Montana Skeptic's analysis, most of which you can find here but require a Seeking Alpha membership.  However, if you have time to listen, the Quoth the Raven podcast has two good episodes with Montana Skeptic on Telsa (#23 and #28).

By the way, Elon.  If you wish, you may contact my employer here.

The Days I Love My Job

I write on this blog a lot on those days in my job that get me down.  That only makes sense because I write about government regulatory policy vis a vis business and it is government interventions that often cause me the most heartache.

But there are good days too.  I have been putting together a new division and really need someone with b2b sales and marketing experience to run it and get it going.  I was just trying to figure out how I wanted to do a search when a resume came to me unsolicited from a current employee who has done a great job for us.  Basically they were applying for our manager training program (all our campground managers start in front-line service jobs).   Well, it turns out this guy who is currently cleaning bathrooms and doing landscaping for us in a campground is recently retired from over 10 years running a sales force for a $80 million industrial company and more recently running the whole division for that company for 2 years.  Talk about just finding a $100 bill lying on the sidewalk!

The Value of Branding

This is yet another in a series of posts on the value of branding (previous iterations include here and here).  Socialists and anti-capitalists often deride branding as, at best, a complete waste of resources and at worst a huge value destruction in that the marketing associated with branding tricks consumers into buying products they don't want or need.  This argument that consumers effectively lack agency in the face of corporate marketing is characteristic of a broader class of capitalist critiques that assume the powerlessness of individuals to make good choices.

I don't buy into these critiques because I think individuals are hugely powerful in a capitalist system, far more powerful in fact than they are in any more authoritarian system  (just ask Toys R Us and Pontiac).  Brands are obviously useful to producers as they help create barriers to entry and a potential basis for obtaining a price premium.  But they also have benefits to consumers.  I ran into one this morning.

My 21-year-old daughter is in another city and called to say that she thought she had a bad tire on her car and was not sure what to do.  Every dad worries about his daughter when she is on her own (I know, patriarchy, but I am not apologizing) and this is particularly true in car repair because women have historically been taken advantage of in many car repair situations.  But I sent her without hesitation to the local Discount Tire store.  That's because I knew from past experience with several of the stores in this chain that the stores were clean and safe and the people who worked there were fair -- they have never tried to charge us for something we don't need.  My wife goes there all the time because she is kind of panicky about her tires and most of the time they tell her the tires are fine and fill them with a bit of air and send her on her way with no charge.  They easily could have sold her a crapload of tires she didn't need but have never done so.  So it was with relief that I saw Discount Tire had a store near her.  Sure enough, she just needed air (is this sort of tire-related behavior genetic?) and they were very nice to her and filled up the tire and told her she was fine.

This is the power of branding.  From a distance, without any chance to inspect or check out the establishment, I knew exactly what the store would look like and was pretty confident how their employees would treat my daughter.  That has real value.

The Death of Honor

When my company screws up, one of the steps we take to try to make customers happy is to give them a refund or some free future services.  For example, last weekend we had a customer who reserved a boat and apparently our staff in the rush of the holiday weekend lost the reservation, so that when the customer showed up there was no boat ready for him.  He was understandably angry and we offered him a free boat rental any time in the future and he felt that we had done our best to make things right.

Unfortunately, we have one campground were word has gotten around that if you make up complaints and threaten bad reviews, you can get free camping.  It started a few years ago when I offered a customer there a couple days free camping to ameliorate a complaint that frankly I don't even remember.  Apparently, this person told all their friends that complaining was a path to free goodies.  This morning, I had a call that one customer from this friend group was not even pretending any more.  They were fine with their stay but were essentially holding us hostage by saying that she wanted free days of camping or she and her friends would cover Trip Advisor with bad reviews.  Obviously we had to bring a halt to this whole thing so we told her to bring it on.  Now we have a policy that no one in that campground gets free camping for any reason, and thus in this one location, at least for a while, I have lost one of my best tools for resolving customer satisfaction problems.

This is obviously frustrating, since the folks involved clearly have no personal honor in the matter, and they are taking advantage of my sense of honor in wanting customers to leave satisfied when they have paid me money.

I Have The Cover Story In Regulation Magazine -- How Labor Regulation Harms Unskilled Workers

I have written the cover story for the Summer 2018 issue of Regulation magazine, titled "How Labor Regulation Harms Unskilled Workers."  The link to the Summer 2018 issue is here and the article can be downloaded as a pdf here.  I meant to be a bit more prepared for this but it was originally slated for the Spring issue and it (rightly) got kicked to the later issue to add a more timely article on tariffs and trade.  The summer publication date sort of snuck up on me until I saw that Walter Olson linked it.

FAQ  (I will keep adding to this as I get questions)

How did a random non-academic dude get published in a magazine for policy wonks? This piece started well over  a year ago, back when my friend Brink Lindsey was still at Cato (he has since moved to the Niskanen Center).   I had told him once that I was spending so much of my personal time responding to regulatory changes affecting my company that I had little time to actually focus on improving my business.  I joked that we were approaching the regulatory singularity when regulations were added faster than I could comply with them.

Brink asked that I write something on small business and regulation.  After about 10 minutes staring at a blank document in Word, I realized that was way too broad a topic.  I decided that the one area I knew well, at least in terms of compliance costs, was labor regulation.  After some work, I eventually narrowed that to the final topic, the effect (from a business owner's perspective who had to manage compliance) of labor regulation on unskilled labor.

Once I finished, I was ready to just give up and publish the piece on my blog.  I sent it to Brink but told him I thought it was way too rough for publication.  He told me that he had seen many good published pieces that looked far worse in their early drafts, so I buckled down and cleaned it up.  My editor at Regulation took on the heroic task of getting the original monstrosity tightened down to something about half the length.  As with most good editing processes, the piece was much better with half the words gone.

The real turning point for me was advice I got from Walter Olson of Cato.  I "know" Walter purely from blogging but I love his work and had been a substitute blogger at Overlawyered in its early years.  At one point, I was really struggling with this article because I kept feeling the need to address the broader viability of the minimum wage and the academic literature that surrounds it.  But I am not an academic, and I have not done the research and I was not even familiar with the full body of literature on the subject.  Walter's advice boiled down to the age-old adage of "write what you know."  He encouraged me to focus narrowly on how a business has to respond to labor regulation, and how these responses might effect the employment and advancement prospects of unskilled workers.  As such, then, the paper evolved away from a comprehensive evaluation of minimum wages as a policy choice (a topic I have opinions about but I don't have the skills to publish on) into a (useful, I think) review of one aspect of minimum wage policy, a contribution to the discussion, so to speak.

Update:  Eek, I forgot since I started this so long ago.  I also owe a debt of gratitude to about 8 of our blog readers who own businesses and volunteered to be interviewed for this article so I could make sure I was being comprehensive.

There are many positive (or negative) aspects of labor regulation you have excluded!  Yes, as discussed above this paper is aimed narrowly at one aspect of labor regulations -- understanding how businesses that employ unskilled workers respond to these regulations and how those responses affect workers and their employment and advancement prospects

Everyone knows employer monopsony power means there are no employment or price effects to minimum wage increases.  Some studies claim to have proved this, others dispute this.  I would say that this statement has always seemed insane from my perspective as a small business owner.  It sure doesn't feel like I have a power imbalance in my favor with my workers.   I address this with a real example in the article but also address it in much more depth here.  The short answer is that for minimum wages to have no employment or price effects, a company has to have both monopsony power in the labor market AND monopoly power in its customer markets.  Without the latter, all gains from "underpaying" a worker due to monopsony power get competed away and benefit consumers (in the form of lower prices) rather than increase a company's profit.

The costs of these regulations are supposed to come out of your bloated profits.  Perhaps that is what happens at Google, where compliance costs are a tiny percentage of what their highly-compensated employees earn and where the company enjoys monopoly profits in its core businesses.  For those of us in highly-competitive businesses that employ unskilled workers, our profit margins are really thin (as explained in more depth here).  When profits are close to the minimum that supports further investment and participation in the business, then labor regulatory costs are going to get paid by consumers and workers.

Then maybe the best thing for workers is to create monopolies.  Funny enough, this idea was actually one of the centerpieces of Mussolini's corporatist economic model, a model that was copied approvingly by FDR in the centerpiece New Deal legislation the National Industrial Recovery Act (NRA).  The NRA sought to create cartels in major industries that would fix prices, wages, and working conditions, among other things.   The Supreme Court struck the legislation down, a good thing since it would have been a disaster for consumers and for innovation and probably for most workers too.  As a bit of trivia, this year's Superbowl winner the Philadelphia Eagles was named in honor of this law.  More here.

So do you think minimum wages are a good policy overall or not?  Hmm, mostly not.  For a variety of reasons, minimum wages are a very inefficient way to tackle poverty (and also here), and tend to have cronyist effects that help one class of worker at the expense of other classes (this latter should be unsurprising since many original supporters of the first federal minimum wages were explicitly hoping to disadvantage black workers competing with whites).

Why are you opposed to all these worker protections?  Or, more directly, why do you hate workers?  This is silly -- I am not and I don't.  However, this sort of critique, which you can find in the comments below, is typical of how public policy discussion is broken nowadays.  When I grew up, public policy discussion meant projecting the benefits of a policy and balancing them against the costs and unintended consequences.  In this context, I am merely attempting to air some of the costs of these regulations for unskilled workers that are not often discussed.  Nowadays, however, public policy is judged solely on its intentions.  If a law is intended to help workers (whether or not it will every reasonably achieve its objectives), then it is good, and anyone who opposed this law has bad intentions.  This is what you see in public policy debates all the time -- not arguments about the logic of a law itself but arguments that the opposition are bad people with bad intentions.  For example, just look in the comments of this and other posts I have linked -- because Coyote points out underappreciated costs to laws that are intended to help workers, his intentions must be to harm workers.  It is grossly illogical but characteristic of our post-modernistic age.

I will retell a story about Obamacare or the PPACA.  Most of my employees are over 60 and qualify for Medicare.  As such, no private insurer will write a policy for them -- why should they?  Well, along comes Obamacare, and it says that my business has to pay a $2000-$3000 penalty for every employee who is not offered health insurance, and Medicare does not count!  I was in a position of paying nearly a million dollars in fines (many times my annual profits) for not providing insurance coverage to my over-60 employees that was impossible to obtain -- we were facing bankruptcy and the loss of everything I own.  The only way out we had was that this penalty only applied to full-time workers, so we were forced to reduce everyone's hours to make them all part-time.  It is a real flaw in the PPACA that caused real harm to our workers.  Do I hate workers and hope they all get sick and die just because I point out this flaw with the PPACA and its unintended consequence?

I've heard that raising the minimum wage increases worker productivity so much that businesses are better off.    I know there is academic literature on this and I am frankly just not that familiar with it.  I can say that I have never, ever seen workers suddenly and sustainably work harder after getting a wage increase.  What I see instead is employers doing things like cutting back employee hours and demanding the same amount of work gets done.  This could result in more productivity if there was fat in the system beforehand but it also can result in things like lower service levels (e.g. the bathrooms get cleaned less frequently).   Without careful measurement, these changes could appear to an outsider to be productivity gains.  In addition, as discussed in the article, with higher minimum wages employers can substitute more skilled for less skilled workers, which can result in productivity gains but leave unskilled workers without a job.

Workers are human beings.  It is wrong to think of them as "costs" or "resources".  The most surprised I think I have ever been on my blog is when I got so much negative feedback for writing that the best thing that could happen to unskilled workers is for someone to figure out how to make a fortune hiring them.  I thought this was absolutely obvious, but the statement was criticized as being heartless and exploitative.  My workers are my friends and are sometimes like family.  I hire hundreds of people over 60 years of age, people that the rest of society casts aside as no longer useful.  They take pride in their ability to continue to be productive.   You don't have to tell me they are human beings.  Just this week I have helped modify an employee's job responsibilities to help them manage their newly diagnosed MS, found temporary coverage for a manager who needs to get to a relative's funeral, found a replacement for a manager that wants to take a sabbatical, and loaned two different employees money to help them through some tough financial times.  From a self-interested point of view, I need my employees to be happy and satisfied in their work or they will provide bad, grumpy service.  But at the end of the day I can only keep these people employed if customers are willing to pay more for the services they provide than the employees cost me.  If the cost of employing people goes up, then either customers have to pay more or I can hire fewer employees.

You probably support child labor too.   Child labor laws are an entirely reasonable zone of government regulation.  The reason this is true stems from the definition of a child -- a child is someone considered under the law to lack agency or the ability to make adult decisions due to their age.   We generally give parents, rightly, a lot of the responsibility for protecting their children from bad decisions, but I am fine with the government backstopping this with modest regulations.  In other words, I have no problem with the law treating children like children.  Instead, I have a problem with the law treating adults like children.

Aren't you just begging to get audited?  Hah!  That's what my wife says.  To me, the logical response of a regulator should be, "wow, this guy knows the law way better than most of the business folks we deal with, so he probably is not a compliance risk" -- but you never know.  Actually, we have been audited many times on many of these laws.  So much so that practically the first series of posts I did on this blog, way back in the blog pleistocene era of 2004, was 3 part series on surviving a Department of Labor audit.  Looking back on the series, everything in it (which included experience from a number of different audits) still seems valid and timely.

Fraudulent Caller ID

You guys know me, I am not calling for some new law or government program.  But I would like to see the telephone companies exercise a little bit of basic professionalism.  The last several spam marketing calls (50/50 it is either for toner or credit card processing) have had legitimate-looking caller IDs that have caused me to actually pick up the phone when I would have normally let it ring through.  This morning's call from a credit card processor showed up as "Pediatric Urology" in Phoenix.  Really?  I guess they are pissing on my time, but other than that I think this is BS.  I don't think it is too much to ask that the caller ID match the business name or individual who is paying for the phone line.  I have this problem even more on calls to my cell phone where spam businesses have somehow obtained caller IDs that are just for individual's names.

Postscript:  It is amazing to me, given the sheer volume of calls I get for merchant (credit card processing) services that there actually seems to be an expectation someone might actually say, "wow, I never ever thought of accepting credit cards, tell me how it works?"  I find this super hard to believe but it must happen or else people wouldn't be paying a lot of real money to make these calls.  So PLEASE, all you business people out there, do not buy things from cold callers.  I promise you can just google whatever they are selling and likely find a better deal online.

Also, if you are starting your own business, do not -- whatever you do -- put any personal phone in your state business registration files.  These are the files all these spammers mine for prospects.  I finally had to change my home phone number because I made this mistake and we could not stop getting 5 phone calls a day from toner and credit card processing sales people.

Book Review: Bad Blood

Over the weekend I read John Carreyrou's book Bad Blood, which is a narrative of the fraud at blood analyzer startup Theranos that Mr. Carrreyrou broke in the WSJ.  To save me summarizing the story, here is the Amazon description:

 In Bad Blood, the Wall Street Journal’s John Carreyrou takes us through the step-by-step history of Theranos, a Silicon Valley startup that became almost mythical, in no small part due to its young, charismatic founder Elizabeth Holmes. In fact, Theranos was mythical for a different reason, because the technological promise it was founded upon—that vital health information could be gleaned from a small drop of blood using handheld devices—was a lie. Carreyrou tracks the experiences of former employees to craft the fascinating story of a company run under a strict code of secrecy, a place where leadership was constantly throwing up smoke screens and making promises that it could not keep. Meanwhile, investors kept pouring in money, turning Elizabeth Holmes into a temporary billionaire. As companies like Walgreens and Safeway strike deals with Theranos, and as even the army tries to get in on the Theranos promise (there’s a brief cameo by James “Mad Dog” Mattis), the plot thickens and the proverbial noose grows tighter. Although I knew how the story ended, I found myself reading this book compulsively

In short, I really enjoyed the book and found it hard to put down.  Carreyrou has made it an interesting narrative, that gets bogged down only slightly by the fact that there are just so many people's names that pass through the narrative, an unavoidable problem given the huge employee turnover at Theranos.  There is a meta-narrative that repeats over and over:  new employee shows up full of passion, new employee starts seeing bad stuff, new employee reports bad stuff to visionary founder, visionary founder fires employee on the spot, employee gets harassed for months and years by Theranos lawyers.

I will warn you that a book like this was always going to be catnip for me.  I love business craziness and disaster stories (e.g. Barbarians at the Gate and the Devil's Candy).  Possibly this is just schadenfreude, or possibly it was from my personal brush with another one (I worked for Jeff Skilling briefly at McKinsey & Co. on the Enron study).  But I think many will enjoy it, if for no other reasons that while Skilling at Enron or Johnson at RJR were not well known to the average person, Elizabeth Holmes was a household name, almost a pop culture figure.  She was  on the cover of every magazine and on every talk show.  She was both admired and envied, both as a young female billionaire and as someone who had a real vision to help humanity.  How did she go so far off the rails?

I followed this story originally in the pages of Carreyrou's WSJ articles, and as it unfolded I was asking, like most everyone, could this be true?  As he continued to report, it became steadily clearer that there was real fraud involved.  So I wanted to read the book and see where the fraud started.  I assumed that the central mystery of the book would be when that fateful step over the line occured.

But it turned out that Holmes was going over the line almost from the very beginning.  The real mystery became:  when and how is someone finally going to blow the whistle on this?  And also, given that I knew the whole thing doesn't start to unravel until 2016 or so, how is it going to take that long for this to come out?  Part of the answer is the insane security and non-disclosures put in place in addition to borderline-unethical legal pressure brought on potential whistleblowers by lawyers like David Boies.  But there are other causes as well, including:

  • People wanted her vision to be true.  My wife is a borderline diabetic who has to give a lot of blood -- she was very passionate about this technology.
  • Companies like Walgreens operated from a fear of missing out.  They had a lot of clues there were problems, but if they didn't pursue it, what if it really did work and their competitors did the deal instead?
  • The oddest cause of all (and one Carreyrou does not really dwell on) was that rich older men fell for Holmes hard.  Hardened, seasoned business people time and again fell under her sway and followed her almost like a cult leader and helped protect her from accountability.  The list is like a who's who:  Larry Ellison, Steven Burd (CEO of Safeway), Rupert Murdoch, David Bois, James Mattis, George Schultz, Henry Kissinger -- the list goes on and on.  She had the highest power board I have ever seen at any company ever and she completely dominated them.  On the other hand, I don't think there is a single young female in the story who fell for her BS for more than a few months.

One other note that I think is worth mentioning:  Rupert Murdoch gets a lot of cr*p for being the poster child of destructive corporatization of media.  In this story, he was the single largest investor in Theranos with $125 million of his money in the company.  He was one of the older men who fell totally for Holmes.  But when Holmes came to him several times asking him to shut down an out of control reporter at Murdoch-owned WSJ, Murdoch said no, despite the fact that this reporting would eventually make Murdoch's $125 million investment worthless.

Postmortem on SolarCity

Two years ago, I wrote about the acquisition of SolarCity by Tesla.  I thought this represented near-criminal self-dealing at the time and there has been little since to convince me otherwise.  As I wrote then:

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?

I went on to discuss several possible reasons for the deal but settled on this one as the best explanation:

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

Essentially, I saw the SolarCity deal as a bailout of Musk's and his friends' and family's investments in SolarCity by Musk-controlled Tesla.  Nothing that has happened since has convinced me this is wrong.  The most prominent evidence has been the dog that never barks -- SolarCity, or Tesla Energy as it is called, is almost never mentioned in conference calls and investor communications by Tesla any more -- certainly the rooftop business is not.  The only thing that ever seems to get a mention are a few big standby battery installations in Australia.   Turns out there was a reason (via Seeking Alpha):

This was a dying business when Tesla bought it an insiders all knew it.

Disclosure:  I tend to short Tesla when it reaches the 350/360 level and cover when it drops into the 200's.

Update:  Here is a great timeline of the whole sorry history of the SolarCity acquisition by Tesla.  This paints an even worse picture than I was aware of.

The Interesting Parallel Between Pop Music and Sex Work

Based on a Tyler Cowen pointer (who else), I thought this Twitter thread on how the Internet was changing sex work was really interesting.  This in particular caught my eye:

And now let's get to a third point: the internet has changed the economics of porn by gutting the industry through piracy, which means 3) there's increasing amounts of overlap between porn performers and escorts.

She makes this observation as part of a larger point that the Internet is breaking down some of the opposition to sex work (in addition to making it safer).  This would be a welcome change.  Sex work should be legal, and it has always been a weird thing to me that one of the stronger opponents of legalization has been parts of the keep-your-laws-off-my-body feminist community.

Anyway, what I found interesting was how parallel this is to the modern music business.  Piracy and streaming enabled by the Internet have killed the profits of the vast majority of the music recording business, meaning that top artists make a lot of their money in other ways, particularly from live performances.  In this business model, the published music is merely an advertisement and brand-building to encourage people to pay for the live performance.  If you consider pornography to be parallel to recorded music, and the escort business as the live performance, then the business models look surprisingly similar.

Businesses That Probably Did Not Expect to be Dis-aggregated By The Internet

This business in San Diego was probably just minding its own business, smug in the confidence that Internet companies like Amazon were not going to threaten a local rental business when, bam:

Bikes and scooters suddenly show up literally just sitting there on every corner, ready to be rented via smartphone app for prices starting at a dollar an hour.  Interestingly, even in sunny healthy California, I saw more than 100 people riding rental scooters and about 1 riding a rental bike.  This was not just tourists -- though it was certainly popular with visitors -- but I saw many young locals riding the scooters downtown to work.  In the morning they piled up in front of office buildings (from which they would presumably disperse at the end of day to apartment buildings).

Below is another business that could be in trouble, charging $7 (rather than $1 on the street bikes) an hour for a rental and requiring the bike be returned to a defined location, rather than dropped anywhere (I see these in many cities -- I wonder how much investment the government has in these or if it is a concession where all the investment was private).

Of course, in the long run this may work out better from an operational standpoint because it seems to take a lot less labor.  Re-positioning scooters and picking them up and dropping them off for recharge struck me as labor intensive and costly (particularly in California).  I am not sure how it is sustainable at the rates that are charged.  Fortunately, that is not my problem and I tried both the bikes and the scooters and enjoyed both.  Despite my doubts about their profitability, I hope they are making a fortune because it seems to be a fun a popular service and I would like to see it last.

IHOP And Modern Marketing

The International House of Pancakes announced the other day that they are changing their name to International House of Burgers, or IHOb.   I am 99% certain that this is just a marketing gimmick, a way to get social media buzz, after which they will "as a result of public pressure" go back to the old name.  A sort of intentional version of what Coke did years ago by accident with New Coke.

So far, I would judge it to be successful.  They were talked about on several national radio shows that I listen to (on sports talk radio, no less) and got a day's worth of media coverage (and presumably another day's worth when they change back).  This is a LOT of free advertising for a brand I have heard absolutely nothing about for years (except from my 21-year-old daughter who still makes me take her there from time to time for funny face pancakes.)

Brand strategy has really evolved a lot from when I was in B-school.  In the 1990's my wife was a brand manager at Frito-Lay and brand management at the time seemed incredibly conservative.  There were very defined, tightly-spaced rails that circumscribed what you could do with a brand.  But that is so boring it gets nowhere on social media.  "Fritos! They are... uh... everything they always have been."  This IHOP gimmick (and Budweiser's temporarily changing its name to America) demonstrate a lot less risk-aversion with core brands in a social media era where one has to be outrageous to get attention.

Postscript:  I was in Santa Monica the other day and saw something where they had a really lame, forgettable tag line for the city.  I wanted to help them with some catchier phrases.  Like, "Santa Monica:  World's Nicest Homeless Shelter" or "Santa Monica:  Watch Out For That Scooter!" or "Santa Monica:  You Want HOW MUCH for Rent??"

Consider a Personal Umbrella Insurance Policy, And The Art of Handling Bad Reviews

My agent has always signed me up for a persona umbrella policy, pretty much without even discussing it much.  The costs have always been nominal compared to my other insurance and I got it to handle liability issues that might exceed the limits of other policies, like a really bad car crash or a slip and fall suit around my house.

It turned out that I got a lot of value out of the policy, but not in the way I had planned.  I was once sued, pretty hard and seriously, by a company over a negative review I wrote.  I won't talk about the details but if you are really interested Mr. Google will help you find it pretty quickly.   But here is an example of a similar case in the news:

A Manhattan woman has found herself in a world of legal troubles after posting a bad review of a local doctor online.

Michelle Levine tells CBS2 she’s already spent close to $20,000 fighting the million-dollar suit which accuses her of defamation, libel, and causing emotional distress.

The plaintiff is Dr. Joon Song, a gynecologist Levine says she visited once in August for an annual exam.

“After I got a bill for an ultrasound and a new patient visit, whatever that means, and it was not billed as an annual I wrote a review about it,” she told CBS2’s Lisa Rozner.

I was determined to fight my case in the name of all those (like Ms. Levine) who could not afford to fight these overt attempts to suppress and intimidate perfectly legal speech.  I was ready to take a substantially loss in legal fees to defend myself but it turned out I was covered for all my defense costs by my personal umbrella.  Note, I am not an insurance expert nor a lawyer, so before you buy such a product I would be sure you know what it does and does not cover.

Postscript, to all you businesses who keep suing over bad reviews:  GET OVER IT.  I get dozens of reviews every day on multiple platforms.  Most of our locations sit at an average rating just over 4.5 stars out of five so perhaps one in 20 are negative and maybe one in 100 are grossly, absurdly unfair.  Sure, all of us service business owners gripe about unfair reviews when we get together, but we all deal with it.  Every review platform has ways to respond to bad reviews, and most have a way to challenge reviews that violate their terms of service.   Often times if you actually do have a good business, the best defense is to encourage all your customers to review so all the good reviews drown the bad ones.  This is not 1996 when customers have never seen a review site.  Customers know EVERYONE gets bad reviews.   The Mandarin Oriental in Bangkok had some of the best service I have ever experienced, but it gets 1-star reviews.  The movie Casablanca has one-star reviews on Amazon.

Sometimes the bad reviews are perfectly understandable.  For example, at one beach we run there used to be a high place where kids would jump off into the water.  Despite having a lifeguard there, we had too many close calls and too many kids did not heed the lifeguard, so the jumping area was closed.  We got bad reviews for months about how awful it was the kids could not jump.  Each time we took the opportunity to explain that yes the jumping wall was closed and if that is the experience customers are looking for, they need to explore other options.  Eventually we got customer expectations to match the services we provided and things improved.  As much as businesses hate to have bad reviews, these were useful to us because they communicated changed services to the public and helped make sure that customer who come are coming for the right reasons.   Having people expecting the Ritz show up at Holiday Inn Express does not help the Holiday Inn Express at all.

Sometimes one does get totally unfair reviews and there is an art to writing responses to bad reviews.  You want to explain why many customers might consider the review unfair without seeming defensive or seeming to throw the customer under the bus, which will lose you a lot of sympathy in the community.  I am still learning.  Here is a tough one we had:

I will need go back to Juniper Spring it not the forest or the camping grounds but the workers are really not friendly at all I’m black and I hope people who’s from my race trust me it not a good place to take your family you can feel the eyes and I know please know racism is strong in Ocala and I’m sorry to bring a nasty review but I owe it to myself if I was to read this I would know what to expect if I choose to go. But the camp grounds are very clean tho and the bathroom have hot water but the works are very nasty ways I see so to all people other then whites Ijs check it out and be sorry like I did. The water looks great but it cold ass ever but when you get used to it you would be ok I guess.

Obviously that is horrible, it makes us out to be a bunch of racists.  This customer did get special attention, but more because we had to work hard -- and often -- to get compliance with a number of rules we are required by the government to enforce.  After a lot of thought, this is the response I finally went with:

We are really sorry you did not have a good visit. We have a racially diverse group of employees in our company and all of them are trained and motivated to provide quality service to everyone. However, given that this is a campground in the Forest Service and adjoining a Federal Wilderness Area, we are tasked by the Forest Service to enforce a number of rules which are different than those in private campgrounds and can sometimes be surprising to new visitors. In this case, I am really sorry we obviously did a poor job of trying to courteously explain the rules.

For other readers considering a visit, I will take the opportunity to highlight some of these rules:

  • Firearms are not allowed in the Ocala National Forest (except in hunting season)
  • Dogs are not allowed in the day use area or at the canoe run
  • Alcoholic beverages are not allowed in the day use area or on the canoe run
  • Food and food waste must be properly stored in campsites when not actively being consumed (in order to avoid attracting bears)

Thoughts on Anna, the Millennial Sociopath

This article about Anna, the millennial sociopath, has been linked all around but it is a good yarn and I recommend it as an interesting read if you have not seen it.  I have a couple of thoughts.

I told me wife that I was unlikely to be fooled by Anna, because I have known a lot of rich and successful people and almost to a one they don't engage in this sort of name-dropping behavior.  Where I grew up we called that "all hat and no cattle."  I have met people with some of the same sorts of shticks as Anna and they have always been full of sh*t.

My wife, who used to live in Manhattan, said that from her experience things were different in New York and even successful people felt compelled to make a public spectacle of their success.   As much as I would like to believe there is a difference so we flyover country folks can feel a warm sense of superiority, this may be more a function of her having lived there in the 1980's.  I know successful New Yorkers today and they don't act this way, the one in the White House notwithstanding.

I actually think this may be more of a function of people without business experience building up their understanding of business from watching fictional shows on TV and in movies.  I call this the Dynasty effect, where everyone thinks big business works just like on Dallas and Dynasty (sorry, dating myself here).  Actually, business life is EXACTLY like fictional accounts on the screen, but you have to watch Office Space and Silicon Valley rather than Dynasty.

I want to add that there is something oddly compelling about this story for folks like me who are introverts.  When one starts a role playing game, one has a character sheet with different qualities.  Typically increasing one characteristic means decreasing another.  I think I found Anna compelling because her character sheet was filled in so differently from mine.   And I don't mean that in a self-serving way like she is dishonest and I am honest.  Sure, at the end of the day Anna is an unlovable parasite, but its hard as an introvert not to secretly admire so much daring, a willingness to walk up to pretty much anyone anywhere and ask them for almost any favorNext time you are playing your fighter in that RPG, wonder a bit -- as he wades through an ocean of blood with his sword and constantly takes near-fatal damage that has to be healed while watching you mage stand in the rear and just nuke creatures from a distance with spells -- whether that fighter might wish that you had specc'd him with just a bit of magic.

Volcanoes and Home Ownership

I have seen several web sites where folks looked at the neighborhoods getting devastated by lava in Hawaii and asked "why did the government let them build their homes there?"  I have three responses:

First, nature is hard to predict.  And even if it were, it tends to operate on really long cycles that are longer than most of our attention spans.  This style and location of eruption  has not happened in recent memory so folks treat it as impossible.  For a good example of this phenomenon see:  stock market.

Second, I laugh when I see the "why does the government allow homes built in dangerous areas" question.   In fact, in many cases, the government subsidizes construction of homes in dangerous areas.  Federal flood insurance is notorious for continuing to rebuild people's homes practically for free on dangerous coasts and in known flood plains.

Third, there are private entities who do take a hand in preventing construction in dangerous areas:  mortgage lenders and insurers.  Lenders do not want a lien on an asset that is underneath 20 feet of new rock, and insurers do not want to take on expensive risks in known danger areas (particularly if there are no federal guarantees as in #2).

I actually own some land on the Big Island, a long way away on the Kohala Coast.  And in the process of getting a mortgage and insurance, we had to go through a lava risk review.  There are apparently maps of risk zones similar to flood plain maps.   Obviously, these neighborhoods that are being consumed slowly (see:  Deadpool Zamboni scene) likely cleared this hurdle.  I am not sure how.  Perhaps the developer used pull to get the maps changed.  Perhaps the people who made the maps just predicted risk incorrectly (see #1).  Perhaps lenders ignored the maps and took on the mortgages anyway despite the risks (see: 2008).