Posts tagged ‘AOL’

Why Large Corporations Often Secretly Embrace Regulation

I wrote the other day about how Kevin Drum was confused at why broadband stocks might be rising in the wake of news that the government would regulate broadband companies as utilities.  I argued the reason was likely because investors know that such regulation blocks most innovation-based competition and tends to guarantee companies a minimum profit -- nothing to sneeze at in the Internet world where previous giants like AOL, Earthlink, and Mindspring are mostly toast.

James Taranto pointed today to an interesting Richard Eptstein quote along the same lines (though he was referring to hospitals under Obamacare):

Traditional public utility regulation applies to such services as gas, electric and water, which were supplied by natural monopolists. Left unregulated, they could charge excessive or discriminatory prices. The constitutional art of rate regulation sought to keep monopolists at competitive rates of return.

To control against the risk of confiscatory rates, the Supreme Court also required the state regulator to allow each firm to obtain a market rate of return on its invested capital, taking into account the inherent riskiness of the venture.

@kevindrum Finds Absolutely Ubiquitous Feature of Regulation to be Mysterious

Kevin Drum simply does not understand why Wall Street might be piling into broadband stocks despite proposed "tough new regulations."  He posits a number of hypotheses -- that Wall Street expected the rules to be worse than they turned out to be.  But this can't be it because the hundreds of pages of rules are still a secret.  He also hypothesizes there might be some nefarious secret loophole buried in the rules Wall Street knows about but we don't.

This is crazy!  How can a reasonably bright person like Drum who writes about the political economy not understand the issue of regulatory capture?  Seriously, I have always figured that the Left, which has a seemingly infinite appetite for regulation, must favor regulation because they find the benefits to out-weight the crony-ist downsides.  Is it really possible Drum is unfamiliar with the downsides altogether, or is he just being coy?

Here is what regulation, particularly utility-style regulation, tends to do -- it locks in current business models and competitors.  It makes it really hard for new entrants to challenge incumbents with innovative new business models or approaches, because regulations have been written based on the old business model and did not take the new one in account.  So a new entrant must begin business by getting regulators to allow their new model, which never happens because by this time incumbents have buildings full of lobbyists aimed at the regulatory process.  Go ask Tesla and Uber and Lyft about how easy it is to enter a heavily regulated business even with a superior new business model.

This is particularly true in the technology world.  The biggest threat to incumbency is someone with a new technology or approach to the technology.  Don't believe me?  I suggest you go to the offices of Netscape or AOL or Lycos or Borders or Circuit City or Radio Shack and interview them about the security of their multi-billion dollar businesses in the face of new online technologies.  At best, regulators put a huge speed bump in the way of competitors, costing them time and money to get their alternative business model approved.  At worst, regulators block new competitors altogether.

I will give you a thought experiment.  Let's say these exact same rules were adopted in the year 2000, when AOL and Earthlink dial-up ruled the internet access world.  Would cable and satellite and DSL have grown as quickly?  I can see the regulators now -- "hey, all the rules specify phone dial up.  There's nothing here about cable TV.  Sorry [Cox, Comcast, whoever] you are going to have to wait until we can write new rules.

The other thing that happens with utility-style regulation is that companies in the business tend to get their returns guaranteed.  Made a bad investment in a competitive market?  Well good luck getting customers to pay extra to bail you out from your bad decision when they have other options.  But what happens when your local power company wastes $10 billion on a nuclear plant that never opens -- it gets built into your rate base!

In the cast of broadband, they are locked in what business school students would see as a classic supply chain battle.  Upstream companies like Netflix supply content via downstream broadband companies.  Consumers are only willing to pay a certain amount for this content, so the upstream and downstream fight a lot over who gets what share of that consumer $.    This happens everywhere in the business world, from Cable TV to oil refining to selling TV's at Wal-Mart.  There is a real danger that broadband will lose this fight in the future -- but not now.  Regulated industries never die, they appeal to their regulators for help.

As of yesterday, Wall Street is looking at broadband companies and realizing that they are now largely immune from competition and some level of minimum returns are likely now gauranteed forever.  Consumers should hate this, but what's not to love for Wall Street?

Postscript:  Kevin Drum describes the new regulation this way:  "Basically, under Wheeler's proposal, cable companies would no longer be able to sign special deals to provide certain companies with faster service in return for higher payments."  This is a bit like describing the Patriot Act as a law to force people to take their shoes off at the airport.  Yes, it does that narrow thing, but it does a LOT else.  The proposal is hundreds of freaking pages long.  It does not take hundreds of pages to do the narrow little niche thing Drum (like most neutrality supporters) wants.

This Administration has cleverly taken this one tiny concern people have and have used it as an excuse to do a major regulatory takeover of the Internet.  This is a huge Trojan Horse. But I have already ranted about the details of that and you can read that here.

The Map Every Intelligence Analyst Should Have on His Wall, For Humility

I have been playing around with this DVD, which is a collection of high resolution situation maps from the European theater of war after D-Day in WWII.  The maps are really interesting, though the interface is awful.  Like something from the AOL era.  I would play with this much more but it is just too kludgy.

This is probably my favorite map (click to enlarge)

click to enlarge

 

Of course, on the very next day, the last great German attack on the Western Front came right out of that empty red circle.

click to enlarge

In the software, one can zoom very deep into these maps, deeper than these images allow.  So it's a shame that the interface is so bad.

PS - The Bulge is deservedly a part of American military mythology but we should remember that in many ways it was a small battle compared to any number in the East.  This is one of those facts that always perplexes this libertarian, because there is no way the Western Democracies could have ever defeated Germany IMO.  Only Stalin's willingness to soak up astounding losses really defeated Germany.  German army casualties on the Eastern Front were nearly three times their combined casualties in Africa, Italy, France, and Benelux.

The flip side of this is that no one else other than the US could have defeated the Japanese, though again the Soviets would have given them real troubles in Manchuria.  That war was more about projecting power across great distances than pure numbers.  We did bravely soak up absurd casualties in short bursts.  But again, the Russians were soaking up Bettio-level casualties every few hours, and sustained it day in and day out for years.

Making Money in a Declining Business

One of the lessons we learned at business school is that there can still be money to be made in a declining business.  Today's case in point:  AOL.  The butt of much Internet-related humor, did you know that AOL still has 3.9 million US subscribers?  To give a sense of scale, that makes its subscriber base about as large as Charter Communications, a not insignificant 6th place player in the cable TV market.  Its income statements are a total mess, cluttered with enough special charges and unusual income items to scare me off from touching the stock, but it looks like it is still making about $50 million a quarter on about $500 million in sales.  Not what it once was, but not an awful business either.

A company like this run for cash flow could do well for quite a while for shareholders.  Of course, companies like that are seldom run for cash flow -- that is not how corporate management incentives work.  Corporate managers are going to want to take the cash flow from the declining business and try to build some new kind of empire on the corpse of the old one.  Shareholders can reasonably ask why they are not just dividended the cash to make their own reinvestment, but insiders benefit much more if the cash is reinvested within the company.  And sure enough, AOL seems to be buying a ton of small companies.

Congrats to Overlawyered, as it Moves to Cato

The Overlawyered blog is one of the blogs I read every day, and is one of the grand old blogs of the Internet, dating back to when AOL was relevant, Pets.com was still paying for Superbowl ads, and I was still using Netscape to browse.

The move to Cato is described here.

Facebook Tries to Recreate AOL

This sounds a lot like what AOL tried to do, back before anyone knew what the web was or how to navigate it.  Interesting how these things come back around

Facebook's long-term ambition has been twofold. First, to become the de facto front end for the web— to become a portal not just to the lives of your buddies, but to everything else that is on the web in the first place. (There is remarkably little discussion about Facebook eclipsing Google as a search engine, maybe because nobody thinks the subject is worth taking seriously; they need to reconsider.) The second step is to replace the web entirely— to take every piece of functionality that we've normally associated with the rest of the web, from picture storage to news aggregation to messaging— and reincarnate it inside Facebook's ad-driven walled garden.

Facebook Home is yet another way to do that. By giving people a low-entry-level device that's essentially a front end for Facebook— or a convenient all-in-one fullscreen app— they make it easier for people to dispense with dealing with any other part of the web that's not Facebook. They don't have to block anything explicitly; they just have to make the Home experience so immersive, and offer so much through it, that after a while you don't feel the need to touch anything else. And given that I have friends who barely know a web that exists outside of Facebook, that's really unnerving.

Creative Destruction

On UVA from Walter Russel Mead via Glenn Reynolds

As the NYT article points out, universities all over the country are facing a world of rapid change. This is going to be hard to face. Universities are structured to adapt slowly—if at all. Typically, university presidents have only limited controls, while faculties have a lot of power to resist. Management is usually decentralized, with different schools and departments governed under different rules and accountable to different constituencies. The fiscal arrangements of most universities are both byzantine and opaque; it can be very hard for administrators to understand or properly and fairly value the true cost and contributions of different parts of the institution.

The structural problem our universities face is this: confronted with the need for sweeping, rapid changes, administrators and boards have two options — and they are both bad. One option is to press ahead to make rapid changes. This risks — and in many (perhaps most) cases will cause — enormous upheavals; star professors will flounce off. Alumni will be offended. Waves of horrible publicity will besmirch the university’s name.

Option two: you can try to make your reforms consensual — watering down, delaying, carefully respecting existing interests and pecking orders. If you do this, you will have a peaceful, happy campus . . . until the money runs out.

This kind of organizational change issue is NOT unique to public institutions.  I think if one were a fly on the wall at Sears, or RIM/Blackberry, or AOL, one could describe exactly the same dynamic: insider constituencies were and are successful under the old model, so consensus processes involving these same constituencies seldom lead to change since these changes are inherently threatening to these same constituencies.  A simpler way of saying this is that it is really hard to obsolete oneself.  Just go ask Blockbuster Video.

But there is one difference in the world of public institutions.  In the private world, new success models in the worlds of Sears and AOL and Blackberry are already out there and growing really fast, run by outsiders who have absolutely no stake in the success of the old model (in fact by folks who have a strong economic stake in killing the old models).  But there is no parallel to capital markets and entrepreneurship in the public space.  There is no venue for new-model proponents to get capital and support outside of the old-model institutions.  In fact, if anything, public institutions will rally their political clout, up to and including sponsoring new legislation, to make sure new models are strangled in the crib.

If I were in the VA legislature and really cared about education innovation in the future, I would give up on UVA driving it and instead take 20% of its funding and hand it off to a brand new parallel entity, say UVA 2.0, run by an entirely new team.

Public vs. Private Privacy Threats

I am always fascinated by folks who fear private power but support continuing increases in public / government power.  For me there is no contest - public power is far more threatening.  This is not because I necesarily trust private corporations like Goldman Sachs or Exxon or Google more than I do public officials.  Its because I have much more avenues of redress to escape the clutches of private companies and/or to enforce accountability on them.  I trust the incentives faced by private actors and the accountability mechanisms in the marketplace far more than I trust those that apply to government.

Here is a good example.  First, Kevin Drum laments the end of privacy because Google has proposed a more intrusive privacy policy.  I am not particularly happy about the changes, but at the end of the day, I am comforted by two things.  One:  I can stop using Google services.  Sure, I use them a lot now, but I don't have to.  After all, I used to be a customer or user of AOL, Compuserve, the Source, Earthlink, and Netscape and managed to move on from those guys.  Second:  At the end of the day, the worst they are tying to do to me is sell me stuff.  You mean, instead of being bombarded by irrelevant ads I will be bombarded by slightly more relevant ads?  Short of attempts of outright fraud like identity theft, the legal uses of this data are limited.

Kevin Drum, who consistently has more faith in the state than in private actors, actually gets at the real problem in passing (my emphasis added)

And yet…I'm just not there yet. It's bad enough that Google can build up a massive and—if we're honest, slightly scary—profile of my activities, but it will be a lot worse when Google and Facebook and Procter & Gamble all get together to merge these profiles into a single uber-database and then sell it off for a fee to anyone with a product to hawk. Or any government agency that thinks this kind of information might be pretty handy.

The last part is key.  Because the worst P&G will do is try to sell you some Charmin.  The government, however, can throw you and jail and take all your property.  Time and again I see people complaining about private power, but at its core their argument really depends on the power of the state to inspire fear.  Michael Moore criticizes private enterprise in Capitalism:  A Love Story, but most of his vignettes actually boil down to private individuals manipulating state power.  In true free market capitalism, his negative examples couldn't occur.  Crony capitalism isn't a problem of private enterprise, its a problem of the increasingly powerful state.  Ditto with Google:  Sure I don't like having my data get sold to marketers, and at some point I may leave Google over it.  But the point is that I can leave Google .... try leaving your government-enforced monopoly utility provider.  Or go find an alternative to the DMV.

A great example of this contrast comes to us from Hawaii:

There may be some trouble brewing in paradise, thanks to a seemingly draconian law currently under consideration in Hawaii's state legislature. If passed, H.B. 2288 would require all ISPs within the state to track and store information on their customers, including details on every website they visit, as well as their own names and addresses. The measure, introduced on Friday, also calls for this information to be recorded on each customer's digital file and stored for a full two years. Perhaps most troubling is the fact that the bill includes virtually no restrictions on how ISPs can use (read: "sell") this information, nor does it specify whether law enforcement authorities would need a court order to obtain a user's dossier from an ISP. And, because it applies to any firm that "provides access to the Internet," the law could conceivably be expanded to include not just service providers, but internet cafes, hotels or other businesses.

Americans fed up with Google's nosiness can simply switch email providers.  But if they live in Hawaii, they will have no escape from the government's intrusiveness.