Posts tagged ‘strategy’

Chip Card Transition, And Life as A Small Business Owner

Well, per the new rules, we replaced all of our old credit card readers (dozens) with new ones that can take chip cards (EMV).  Here is the bone pile of all the old technology, many of which were bought less than 2 years ago:


This illustrates both the best and worst of running one's own company.

The bad:  As CEO, I am actually futzing with distributing credit card terminals to the field and collecting the used ones to be recycled.

The good:  I have total control.  I was just in Washington DC, and in one meeting the National Park Service was there talking about some multi-year, multi-million dollar study to figure out their electronic payments "strategy" at their parks.  My payments strategy discussion went literally something like this:

Merchant guy:  Do you want to pay an extra $100 for the terminals to accept NFC payments (e.g. Apply pay, Android pay).

Me: Um, sure seems like the future.  Does it cost more to clear a transaction that way?

Merchant guy: no

Me:  They yes, I'll take it.

Now, we can take smart phone payments at dozens of public parks my company operates, all decided and implemented in about 30 days.

By the way, I am amazed at how many large companies like CVS appear to have the chip card readers but the store clerk tells me that they are not turned on yet whenever I try to stick my card in that slot (for those of you who don't know, the chip side goes head into a slot like an ATM slot on the front).  October 1 was the date that there was a liability shift, where merchants bear more liability for fraud if they don't take the chipcards.  Not sure how I was able to get this done in my little company but they can't manage it.

I was told by one person at CVS, a store manager but they may be off base, that they don't take the chip cards yet because they take longer than swiping.  This seems dumb.  First, many retailers for swipe cards waste time asking for the last four digits of your card, which is not necessary with the chip cards.  Further, CVS wastes a TON of time at the register with their stupid loyalty program.  Yes, I know it is a pet peeve of mine I rant on from time to time, but I have spent a lot of time waiting for people in front of me to try different phone numbers to see which one their account is under, or to waste time signing up for a loyalty card with 6 people in line behind them.  Makes me crazy.  If they can waste 30 seconds each transaction on stupid loyalty cards they can wait three extra seconds for a more secure credit card transaction.

Postscript:  It really should have been chip and pin rather than chip and signature

PS2:  Never, ever lease a credit card machine.  You pay about 4x its retail price, even present value.  I got roped into doing this for a few machines on the logic that this equipment transition was coming, and they would switch out my equipment.  But then they sold their leasing portfolio and the new owner wouldn't honor this promise, so I ended up overpaying for the old terminal (and having to pay $1000 each just to get out of the lease) and then buying the new terminals.  Live and learn.

Government Is Spending Millions to Rush To the Front of the Parade

From Shawn Regan at PERC, via Arnold Kling

Last year, riding the buzz over dying bees, the Obama administration announced the creation of a pollinator-health task force to develop a “federal strategy” to promote honeybees and other pollinators. Last month the task force unveiled its long-awaited plan, the National Strategy to Promote the Health of Honey Bees and Other Pollinators. The plan aims to reduce honeybee-colony losses to “sustainable” levels and create 7 million acres of pollinator-friendly habitat. It also calls for more than $82 million in federal funding to address pollinator health.

But here’s something you probably haven’t heard: There are more honeybee colonies in the United States today than there were when colony collapse disorder began in 2006. In fact, according to data released in March by the Department of Agriculture, U.S. honeybee-colony numbers are now at a 20-year high. And those colonies are producing plenty of honey. U.S. honey production is also at a 10-year high.

The White House downplays these extensive markets for pollination services. The task force makes no mention of the remarkable resilience of beekeepers. Instead, we’re told the government will address the crisis with an “all hands on deck” approach, by planting pollinator-friendly landscaping, expanding public education and outreach, and supporting more research on bee disease and potential environmental stressors.

I am sure the government, once they have had some bureaucrats running around filing reports and plans for a few years will soon claim credit for the improvement.  My prediction:  This agency will still be here 50 years from now.  You can never kill these things once created.  This is only slightly less irritating than politicians who claim that they "created X million jobs" when in office, but only slightly.

Update:  Another very similar example:  transfats.

The Food and Drug Administration recently moved to eliminate trans fats from the American diet, and food activists and the public-health lobby are claiming a historic victory. Yet this is a rare case of the Obama Administration regulating from behind. Markets had as much to do with the fall of trans fats as government did with their rise.

The FDA’s first restrictions on the use of partially hydrogenated oils as a major source of trans fats in processed foods—think Crisco shortening—give food makers three years to phase out the substance. Evidence began to accumulate in the early 2000s that trans fats were connected to bad cholesterol and cardiovascular diseases. Shoppers and diners concerned about health risks soon started to revolt against the fried and baked goods and the fast-food fare where they were prevalent.

Lo and behold, the food industry responded by changing their recipes and eliminating the oils from some 86% of their products. Trans fat consumption plunged by 78% over a decade, according to the FDA’s estimates, and is now well below the two grams per day that the American Heart Association says is the safe upper limit. The rare survivors of this purge are niche foods like microwave popcorn, frozen pizza and chocolate sprinkles, where trans fats are useful for improving taste and texture.

A Couple Lessons We Can Learn from Disney Pricing

Bloomberg (via Zero Hedge) had this chart on Disney theme park entrance prices:


A few random thoughts:

  • This highlights how hard it is to do inflation statistics correctly.  For example, the ticket being sold in 1971 is completely different from the one being sold in 2015.  The 2015 ticket gets one access without additional charge to all the attractions.  The 1971 ticket required purchase of additional ride tickets (the famous, among Disney fans, A-E tickets).  So this is not an apples to apples comparison.  Further, Disney has huge discounts for multi-day tickets.  The first day may cost $105, but adding a fourth day to a three day ticket costs just a trivial few bucks.  Local residents who come often for a single day get special rates as well.  So the inflation rate here grossly overestimates that actual increase in per person, per trip total spending for access to park attractions
  • This is a great case in pricing strategy.  Around 1980, the Bass family bought into a large ownership percentage of Disney.  The story I am about to tell is often credited to their influence, but I am not positive.  Never-the-less, someone had a big "aha!" moment at Disney.  They realized that families were taking trips just to visit DisneyWorld.  These trips cost hundreds, even thousands of dollars.  The families were thus paying hundreds of dollars per person to enjoy Disney, of which Disney was reaping... $9.50 a day.  They had a stupendously valuable product (as far as consumers were concerned) but everyone else in the supply chain was grabbing most of the value they created.  So Disney raised prices, on the theory that if a family were paying over a thousand dollars to get and stay there, they would not object to paying an extra $50 at the gate.  And they were right.

The Fatal Allure of the Sexy Business

The tech site Engadget directed me to this article on Visual FX and CGI as a "must-read".  What I found was one of the odder economics and business hypotheses I have encountered lately.

The article begins by relating that VFX and digital effects specialty houses all lose money, even when they are providing effects for wildly profitable movies (e.g. Avengers) and purports to explain why this should be.  The author believes that this is a result of Hollywood purposely criticizing the artistry of VFX movies as a way to keep returns in the VFX companies down (and thus increase the returns of film producers).

As the debate surrounding what visual effects are worth rages on, it is clear that the studios themselves have an interest in perpetuating the myth that VFX are the product of clinical assembly lines and the results are equally lifeless and mechanical. Blaming computers for the dumbing down of movies has become a journalistic trope that is bandied about to squeeze the one part of the Hollywood machine that has no union or organizational skill to push back. The right hand asserts they are something not worth paying top dollar for, while the left lines up an interminable roster of VFX-based box office juggernauts for the foreseeable future.

The author goes so far as to say that Avatar was denied the best picture Oscar specifically to support the anti-VFX sentiment and keep returns of VFX companies down (emphasis added).

In 2010, James Cameron’s Avatar became the highest grossing film of all time just 41 days after its release, raking in an incredible $2.7 billion by the end of its run. Weta Digital, the VFX studio that created the majority of the visual effects, along with Lightstorm Entertainment, invested years in developing the tools and talent necessary to create Cameron’s almost entirely computer generated vision, with the cost of making the film rumored to be upwards of $500 million. Cameron had promised to show the world what visual effects could do and he succeeded. The results were universally lauded as visually stunning and unparalleled.

Yet, rather famously, the film and Cameron were snubbed that year at the Academy Awards, both for Best Picture and Best Director. The blame was laid at the feet of the critical success of The Hurt Locker. However, awarding Avatar the Academy’s highest honor would have been acknowledging visual effects as not only lucrative, but high art as well, worthy of its astronomical price tag. And that was a bargaining chip Hollywood was unwilling to concede to an industry it continues to hold hostage with threats of outsourcing to unskilled laborers around the globe.

This hypothesis seems outlandish, and in fact the author never really provides any evidence whatsoever for her hypothesis.   At least equally likely is that Hollywood insiders are snobbish and conservative and reject new approaches to film-making in a way that the public does not.  Or it could be that Avatar wasn't a very good movie (go try to watch it again today, you will be surprised what a yawner it is).  So why are VFX companies really losing money on profitable films?   Let's take a step back, because there is a useful business lesson buried in here somewhere.  I think.

This discussion is a sub-set of an age-old business problem -- how do rents in a supply chain get divided up?   Think of the billion plus dollars the new Avengers movie will make.  Everyone in the supply chain for making that movie, from the actors to the caterers to the VFX houses to the distribution companies believe their contribution has immense value, and that they should be getting a solid cut of the profits.  But profits in a supply chain are not divided up based on some third party assessing value, they are divided up by negotiation.  And the results of that negotiation depend on a lot of factors -- the number of competitors, the uniqueness of the service, regulatory rules, etc.  The most visible example of this sort of negotiation we see frequently in the news is in sports, where players and team owners are explicitly negotiating the division of the end revenue pie between themselves.

If we return to the article, the author actually gives us a hint of the true dynamic that is likely bringing down VFX profits.

The international subsidies-driven business model under which VFX companies operate has been well documented. In pursuit of tax rebates offered by various governments to produce films in their jurisdiction, studios insist that VFX companies open branches in these locations or reduce their bids by the amount of the subsidy in question. Even as studios, directors, and audiences demand the latest in cutting edge technology, VFX houses must underbid one another to get the work and many have been shuttered due to operational losses in the wake of explosive blockbuster budgets. The cost of research and development, shrinking schedules, and the unlimited changes that are the building blocks of every tentpole film, are shouldered entirely by VFX houses.

This is the best clue we get to the real problem.  Here is what I infer from this paragraph:

  1. This is a high fixed cost industry.  There are enormous up-front investments in research into new techniques and large investments in the latest technology, which presumably must be constantly refreshed because it has a short half-life before it is out of date.  The situation is worsened by government policy, which provides incentives for VFX companies to build extra capacity in multiple countries, losing economy of scale benefits from large concentrated production facilities.    One would presume from this that these companies' marginal cost of output, say 15 seconds of finished effects, is way way below their total costs.
  2. There is rivalry among VFX companies that seem to have excess capacity, such that bidding for work is very aggressive.  In such situations (think American railroads in the late 19th century) competitors lower prices down to marginal cost to keep their capacity and their trained people working.  Over time, of course, this leads to numerous bankruptices

I will add a third point which the author fails to cover.  To do so I will return to one of my favorite things I learned at Harvard Business School (HBS).  At HBS, in the first two days of strategy class, we studied two very different business cases.  The first was of a water meter manufacturer, a dead boring predictable unsexy business.  The second was a semiconductor company, which was hip and cool and really sexy.  It turned out that the water meter company coined money.  The semiconductor business was in and out of bankruptcy.

Why?  Well the water meter company had limited investment (made the same meters the same way for decades) and made most of its money off the replacement market, where it had no competitors since users pretty much had to replace with the same meter.  The semiconductor business had numerous shifting competitors and was constantly trying to scrape up enough investment money to keep up with shifting technology.  But there was one more difference.  By being sexy, tons of people wanted to be in the semiconductor business. They got non-monetary benefits from being in it (ie it was cool and interesting).  When there is an industry where lots of people are getting into the business for reasons other than making money, look out!  The profits are probably going to be terrible.   This is why most restaurants fail.  The business-for-sale listings are awash in brew pubs.   The aviation industry was like this for years, and I would argue this also suppresses rents in farming.

I don't know this for a fact, but I would bet that the VFX industry attracts a lot of people because it is sexy.  Yes, like a lot of programming, the actual work is detailed and dull.  But if the coding is detailed and dull, would you rather be doing it for Exxon's new back-office system or to put Ironman on the big screen (and have your name deep into the film credits, seen by the dozen or so people who hang around waiting for the Marvel Easter egg at the end)?

This is why I think a conspiracy theory to believe Hollywood is dissing the artistry of VFX movies as a way to keep VFX company rents down is silly.  It is totally unnecessary to explain the bad rents.  Had you told me it was a high investment business with huge fixed costs and much lower marginal costs and alot of rivalry driven by participants who piled into the business because it was sexy, I would have told you to stop right there and I could have immediately predicted poor returns and bankruptcies.

So what can VFX companies do?  I have no idea.  The first idea I would offer them is branding.  If you are buried deep in the supply chain and want to increase your bargaining power, one way to do it is to develop a brand with the end consumer.   If consumers suddenly latch on to, say, the CoyoteFX brand as being innovative or better in some way, such that they might be more likely to go to a movie with CoyoteFX sequences, then CoyoteFX now has a LOT more power in negotiations with producers.  Dolby Sound is a great example -- you probably don't even know what it is but movies used to advertise they had it.  Certain camera technologies like Panavision are another, where movies actually sold themselves in part on the features of one member of their supply chain.  As a digital house, Pixar effectively did this -- so well in fact its brand actually was bigger than Disney's (its distributor) for a while, and Disney was forced to buy them.  This does not happen just in movies.  I just bought a car that advertised it had a premium Bose sound system.  The car maker doesn't advertise who made, say, the fuel tanks, so my guess is that Bose, via branding, gets a better cut of the supply chain than does the fuel tank maker.

Wherein I Come Clean to Representative Grijalva

Here is the letter I wrote today (pdf) to Representative Grijalva confessing my climate funding biases.  The image is below.  I feel so much better.


I wrote this in support particularly of Roger Pielke, who has educated a lot of people about climate and is not even really a climate skeptic and who has been pretty upset by this scrutiny.  Call it the "I am Spartacus" strategy.

My earlier post on funding and bias is here.

Techniques to Aid Authoritarians: The Supposed Statute of Limitations on Outrage

In the Fast and Furious and IRS scandals, the Administration has purposefully dragged its feet on disclosures.  The strategy is to let as much time pass so that when bad revelations eventually come out, the heat from the original scandal is gone.  Defenders of the Administration will then argue the revelations are "old news", as if there is some statute of limitations on outrage.  This strategy has driven Republicans crazy.

So what do Conservatives do when the torture report comes out after months and months of foot-dragging trying to prevent its release? You got it, they scream "old news".  Scott Johnson:

I confess that I do not understand the rationale supporting the publication of the Democrats’ Senate Select Committee study of the CIA’s detention and interrogation program. On its face, it seems like ancient history (of a highly tendentious kind) in the service of a personal grudge. It is not clear to me what is new and it is not clear that what is new is reliable, given the absurd limitations of the committee’s investigation.

By the way, I want to make one observation on this line from attorney John Hinderaker:

Similarly, the report confirms that the Agency’s enhanced interrogation techniques were used on only a small number of captured terrorists, 39 altogether. These enhanced techniques include the “belly slap” and the dreaded “attention grasp.”

Most important, it appears that waterboarding really was the most extreme sanction to which any of the terrorists were subjected (and only three of them, at that). Given all the hoopla about CIA “torture,” one might have expected to learn that far worse happened at the Agency’s dark sites. But, as far as the report discloses, the Agency stuck almost exclusively to its approved list of tactics, all of which the Department of Justice specifically found not to be torture.

Were some of the captured terrorists treated roughly? Absolutely. Their lives must have been miserable, and deservedly so. Some of the 39 were placed in stress positions for considerable lengths of time, doused with water, fed poor diets, left naked in cells. In one instance, a terrorist was threatened with a power drill. In another case, an interrogator told a terrorist that his children may be killed. There were two instances of mock execution.

A few observations:

  • The fact that they were "terrorists" seems to justify the mistreatment for him.  But how do we know they were terrorists?  Because the Administration said so.  There was no due process, no right of appeal, no ability to face witnesses, no third party review, none of that.  A branch of the Administration grabbed the guy, said you are a terrorist, and started torturing them.  I am not saying that they did this without evidence, but I am sure Mr. Hinderaker know from his own experience that every prosecutor thinks every person he or she tries is guilty.  That is why both sides get to participate in the process.
  • "Terrorist" is an awfully generic word to give us automatic license to torture people.  My sense is that there are all kinds of shades of behavior lumped under that word.  Conservatives like Mr. Hinderaker object, rightly, to a wide range of sexually aggressive actions from unwanted kissing to forced penetration being lumped under the word "rape".  But my sense is we do the same thing with "terrorists".
  • In my mind the casualness with which he can accept these kinds of treatments for people he does not like is morally debilitating.  It is a small step from accepting it for one to accepting it for many.  It is like the old joke of a debutante asked if she would have sex for a million dollars and saying "yes", then getting asked if she would have sex for $20 and responding "what kind of girl do you think I am?"  We've already established that, we are just haggling over price.
  • For those on the Right who say that all this stuff about due process does not apply because the "terrorists" were not citizens, then welcome to the Left!  Individual rights are innate -- they are not granted by governments (and thus by citizenship).  The Right generally says they believe this.  It is the Left whose positions imply that rights are favors granted by the state to its citizens.

The Non-Crony Pledge

Three cheers for Koch Industries:

“We oppose ALL subsidies, whether existing or proposed, including programs that benefit us, which are principally those that are embedded in our economy, such as mandates,” wrote Philip Ellender, president Koch’s government affairs division, in a Wednesday letter to members of Congress.

Ellender singled out the wind production tax credit as particularly deleterious. But unlike that provision, some of the tax breaks included in the House package benefit activities in which Koch and its subsidiaries are heavily invested.

Koch subsidiary George Pacific, for instance, qualifies for a tax break for the production of cellulosic biofuels. Another subsidiary, Flint Hills Resources, operates biofuel production facilities that could benefit from another of the provisions.

Those tax breaks could improve Koch’s bottom line, but the company sees federal tax preferences in general as economically harmful.

“Koch doesn’t view these as ‘benefits’ even if they are in industries we’re in,” explained a source familiar with the company’s public affairs strategy. “They are wasteful and market distorting, and allow other firms to run businesses that aren’t making money any other way.”

It May Be Hard to Go Back To Full-Time Work

Back in April of 2013 I wrote about how Obamacare was increasing incentives for offering part-time rather than full-time work.   I warned at the time that once employers got used to scheduling based on part-time shifts, they might never want to go back because it could actually be cheaper and easier than using full-time workers

The service industry generally does not operate 8 hours a day, 5 days a week, so its labor needs do not match traditional full-time shifts.  Those of us who run service companies already have to piece together multiple employees and shifts to cover our operating hours.  In this environment, there is no reason one can’t stitch together employees making 29 hours a week (that don’t have to be given expensive health care policies) nearly as easily as one can stitch together 40 hours a week employees.   In fact, it can be easier — a store that needs to cover 10AM to 9PM can cover with two 5.5 hour a day employees.   If they work 5 days a week, that is 27.5 hours a week, safely part-time.  Three people working such hours with staggered days off can cover the store’s hours for 7 days.

Based on the numbers above, a store might actually prefer to only have sub-30 hour shifts, but may have, until recently, provided full-time 40 hours work because good employees expect it and other employers were offering it.  In other words, they had to offer full-time work because competition in the labor market demanded it.  But if everyone in the service business stops offering full-time work, the competitive pressure to offer anything but part-time jobs will be gone.  The service business may never go back.

The future American service worker will likely be faced with stitching together multiple part-time shifts.  Companies may partner to coordinate shifts so that workers split time between the companies, and third-party clearing houses may emerge in a new value-added role of helping employers and employees stitch together part-time shifts.

Today Virginia Postrel sees this effect in action

The worst thing about being on jury duty isn’t actually serving on a jury. It’s having to check in every day -- possibly several times a day, depending on your local system -- to see whether you’ll be needed. You can’t plan either your work or your personal life. Your schedule is unpredictable and completely out of your control.

For many part-time workers in the post-crash economy, life has become like endless jury duty. Scheduling software now lets employers constantly optimize who’s working, better balancing labor costs and likely demand. The process demands enormous flexibilityfrom part-time workers, sometimes requiring them to be on call all the time without knowing when they’ll work or how much they’ll earn. That puts the kibosh on the age-old strategy of working two or more part-time jobs to make ends meet. As my colleague Megan McArdle writes, “No matter how hard you are willing to work, stringing together anything approaching a minimum income becomes impossible.”

What Happens When You Abandon Prices As A Supply-Demand Matching Tool? California Tries Totalitarianism

Mostly, we use prices to match supply and demand. When supplies of some item are short, rising prices provide incentives for conservation and substitution, as well as the creation of creative new sources of supply.

When we abandon prices, often out of some sort of political opportunism, chaos usually results.

California, for example, has never had the political will to allow water prices to rise when water is short. They cite all kinds of awful things that would happen to people if water prices were higher, but then proceed instead with all sorts of authoritarian rationing initiatives that strike me as far worse than any downsides of higher prices.

In this particular drought, California has taken a page from Nazi Germany block watches to try to ration water

So, faced with apparent indifference to stern warnings from state leaders and media alarms, cities across California have encouraged residents to tattle on their neighbors for wasting water — and the residents have responded in droves. Sacramento, for instance, has received more than 6,000 reports of water waste this year, up twentyfold from last year...

Some drought-conscious Californians have turned not only to tattling, but also to an age-old strategy to persuade friends and neighbors to cut back: shaming. On Twitter, radio shows and elsewhere, Californians are indulging in such sports as shower-shaming (trying to embarrass a neighbor or relative who takes a leisurely wash), car-wash-shaming and lawn-shaming.

“Is washing the sidewalk with water a good idea in a drought @sfgov?” Sahand Mirzahossein, a 32-year-old management consultant, posted on Twitter, along with a picture of a San Francisco city employee cleaning the sidewalk with a hose. (He said he hoped a city official would respond to his post, but he never heard back.)

Drought-shaming may sound like a petty, vindictive strategy, and officials at water agencies all denied wanting to shame anyone, preferring to call it “education” or “competition.” But there are signs that pitting residents against one another can pay dividends.

All this to get, in the best case, a 10% savings. How much would water prices have to rise to cut demand 10% and avoid all this creepy Orwellian crap?

One of the features of Nazi and communist block watch systems was that certain people would instrumentalize the system to use it to pay back old grudges. The same thing is apparently happening in California

In Santa Cruz, dozens of complaints have come from just a few residents, who seem to be trying to use the city’s tight water restrictions to indulge old grudges.

“You get people who hate their neighbors and chronically report them in hopes they’ll be thrown in prison for wasting water,” said Eileen Cross, Santa Cruz’s water conservation manager. People claim water-waste innocence, she said, and ask: “Was that my neighbor? She’s been after me ever since I got that dog.”

Ms. Franzi said that in her Sacramento neighborhood, people were now looking askance at one another, wondering who reported them for wasting water.

“There’s a lot of suspiciousness,” Ms. Franzi said. “It’s a little uncomfortable at this point.” She pointed out that she and her husband have proudly replaced their green lawn with drought-resistant plants, and even cut back showers to once every few days.

Update:  Seriously, for those that are unclear -- this is the alternative to capitalism.  This is the Progressive alternative to markets.  Sure, bad things happen in a free society with free markets, but how can anyone believe that this is a better alternative?

The Corporate State Is Winning

Successful businesses often seek to cement their position and block new competition by running to government for legislation that blocks new entrants and/or makes it harder to compete for smaller upstarts.  One only need to look at the taxi cartel trying to kill Uber and Lyft to see exactly how this operates.  It is working:



This is a strategy that works with both Republican and Democrat politicians, which may explain why both Occupy Wall Street and the Tea Party shared opposition to cronyism among their complaints.

Of course there are other factors than just powerful incumbents blocking new competitors.  In California, regulations that make it just debilitating to try to run a business are also driven by the tort bar, which has created a thriving business in extracting settlements from companies over miniscule rules violations.  And the California government obliges by shifting the rules constantly, so companies are both constantly vulnerable and have to pay other attorneys to strengthen their immune systems against these assaults.

Two Business Realities I Underestimated in My Youth

1.  Its all about having the right people.  When I was in b-school, I honestly laughed at statements like this.  I thought it was new age bullsh*t.  I was totally enamored of quantitative analysis and business strategy.  After running a business for 10 years, I now know that people are everything.  Everything - our ability to grow, to handle difficult compliance issues, to work safely, to reduce costs - relies entirely on my finding the right people in the right spots.  Everything else is a rounding error.

2.  There is only a very limited number of things you can deploy to the field at any one time.  It took me a really long time to realize that my mind - in fact, any manager's mind - likely works way faster than the bandwidth that exists to actually deploy new things to the field.  Putting customer initiative X on hold because compliance issue Y needs to be deployed first is really frustrating, but trying to do too much means nothing gets done.

I would observe relative to #2 above that over the last few years the combination of the Feds + legislatures like in CA are generating new compliance issues faster than we can deploy solutions and train for them.   In California, we have put most all new customer initiatives on hold because we are simply overwhelmed with management and employee training relative to various local government mandates.

A Small Bit of Good News -- DC Circuits Slaps Down the IRS

The creeping regulatory / corporate state gets a setback

Faulting the IRS for attempting to “unilaterally expand its authority,” the D.C. Circuit today affirmed a district court decision tossing out the agency’s tax-preparer licensing program. Under the program, all paid tax-return preparers, hitherto unregulated, were required to pass a certification exam, pay annual fees to the agency, and complete 15 hours of continuing education each year.

The program, of course, had been backed by the major national tax-return preparers, chiefly as a way of driving up compliance costs for smaller rivals and pushing home-based “kitchen table” preparers out of business. Dan Alban of the Institute for Justice, lead counsel to the tax preparers challenging the program,called the decision “a major victory for tax preparers—and taxpayers—nationwide.”

The licensing program was not only a classic example of corporate cronyism, but also of agency overreach. IRS relied on an 1884 statute empowering it to “regulate the practice of representatives or persons before [it].” Prior to 2011, IRS had never claimed that the statute gave it authority to regulate preparers. Indeed, in 2005, an IRS official testified that preparers fell outside of the law’s reach.

Perhaps a first indication that the Obama Administration strategy to pack the DC Circuit with Obama appointees may not necessarily protect his executive overreach.

PS - you gotta love the IJ.

PPS - The IRS justified its actions under "an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses"

The Public Rail Spending Game

Kevin Drum has a very good, succinct description of how the rail (light rail, high speed rail, commuter rail) spending game works, in the context of California High Speed Rail (HSR)

As near as I can tell, the HSR authority's plan all along has been to simply ignore the law and spend the bond money on a few initial miles of track. Once that was done, no one would ever have the guts to halt the project because it would already have $9 billion sunk into it. So one way or another, the legislature would keep it on a funding drip.

It's a time-tested strategy, and it might have worked if not for a meddling judge.

Here is a great example of this from Chicago, where all they could afford at first was a single station.

I applaud Drum for opposing this boondoggle, but if he really understands this so well, I wonder why he seldom demonstrates any skepticism about other rail and mass transit projects.

Rail projects, particularly light rail projects that are being constructed or proposed in nearly every major city, are a classic example of a nominally Progressive policy that ends up hurting all the people Progressives want to help.

Bus-based mass transit is an intelligent way to help lower income people have more urban mobility.  Buses are relatively cheap and they are supremely flexible (ie they can switch routes easily).  Such urban bus systems, which like any government run function often have their problems and scandals, never-the-less can be reasonably held up as a Progressive victory.

But middle and upper class people, for whatever reason, don't like buses.  But they do like trains.  And so cities, under middle class pressure, have shifted their mass transit investment to trains.  The problem is that trains are horrendously expensive.    The first 20-mile leg of Phoenix light rail cost over $1.4 billion, which amounts to about $70,000 per daily round-trip rider.  Trains are also inflexible.  You can't shift routes and you can't sell them-- they have to follow fixed routes, which tend to match middle class commuting routes.

Because the trains are so expensive to operate, cities that adopt them quickly start cutting back on bus service to feed money to the rail beast.  As a result, even transit poster-boy cities like Portland have seen the ridership share of mass transit fall, for the simple reason that rail greatly increases the cost per rider and there is not an infinite amount of money available to transit.


The Difference Between Private and Public Governance, Part Number Whatever

Let's suppose a Fortune 500 company went through a rancorous internal debate about strategic priorities, perhaps even resulting in proxy fights and such (think Blackberry, HP, and many other examples).  The debate and uncertainty makes investors nervous.  So when the debate has been settled, what does the CEO say?  My guess is that he or she will do everything they can to calm investors, explain that the internal debate was a sign of a healthy response to adversity, and reiterate to the markets that the company is set to be stronger than ever.  The CEO is going to do everything they can to rebuild confidence and downplay the effects of the internal debate.

Here is President Obama today, talking about the budget battle

“Probably nothing has done more damage to America’s credibility in the world than the spectacle we’ve seen these past few weeks,” the president said in an impassioned White House appearance.

Good God, its like he's urging a sell order on his own stock.   I was early in observing the Republican strategy was stupid and doomed to failure, but you have to show a little statesmanship as President.


Standard & Poor’s estimated the shutdown has taken $24 billion out of the economy.

If this is true, this number is trivial.  0.15% of GDP (and this from someone hurt more than most) loss from a government shutdown about 4.4% of the year (16/365)

Republican Fail on Obamacare

I find Republican strategy in the recent Obamacare and budget fight to have been insanely aggravating, and that is coming from someone who hates Obamacare.

Yes, I understand why things are happening as they are.  From a re-election strategy, their approach makes total sense.  A lot of these House guys come from majority Republic districts where their biggest re-election fear comes from a primary challenge to the right of them.  I live in one of these districts, so I see what perhaps coastal media does not.  In everyday conversation Republicans are always criticizing their Congressmen for not rolling back Obamacare.  Republicans need to be able to say in a primary, "I voted to defund Obamacare".  Otherwise I guarantee every one of them will be facing a primary opponent who will hammer them every day.

But from the perspective of someone who just wants the worst aspects of this thing to go away, this was a terrible approach.  Defunding Obamacare entirely was never, ever, ever going to succeed.  Obama and Democrats would be happy to have a shutdown last months before they would roll back his one and only signature piece of legislation.  They may have caved in the past on other issues but he is not going to cave on this one (and needs to be seen not caving given his recent foreign policy mis-steps that has him perceived as weak even in his own party).  And, because all the focus is on Obamacare, we are going to end up with a budget deal that makes no further progress on containing other spending.

The Republicans should have taken the opportunity to seek targeted changes that would more likely have been accepted.  The most obvious one is to trade a continuing resolution for an elimination of the IPAB, one of the most undemocratic bits of legislation since the National Industrial Recovery Act.  Another strategy would have been to trade a CR for a 1-year delay in the individual mandate, a riskier strategy but one the Administration might leap at given that implementation problems in exchanges are giving them a black eye.  Finally, an even riskier strategy would have been to tie a CR to a legislative acknowledgement that the PPACA does not allow subsidies in Federally-run exchanges.  This latter might not have been achievable (and they might get it in the courts some day anyway) but if one argues that any of these is unrealistic, then certainly defunding Obamacare as a whole was unrealistic.

I think as a minimum they could have killed the IPAB, but now they will get nothing.

Update:  This line from All the President's Men seems relevant:

You've done worse than let Haldeman slip away: you've got people feeling sorry for him. I didn't think that was possible. In a conspiracy like this, you build from the outer edges and go step by step. If you shoot too high and miss, everybody feels more secure. You've put the investigation back months.

Photoshop Practice

I am working on a couple of euro-style strategy card games at the moment.  The first is a business start-up game, and the second is a space-themed game loosely based on my experiences playing the Traveler role-playing game years ago.   A good stock image account (I use Shutterstock) gets me everything in terms of card images I need for the first game, but royalty-free space images are harder.  However, it is actually possible to start with prosaic industrial and other images and hack them to look futuristic, but it takes some work.

So I have been working on Photoshop skills.  If I could digitally paint, I would paint beautiful concept art, but I cannot.  So my Photoshop training has focused not on painting per se but on hacking images together and overlaying effects.   A LOT of the work is learning to do selections well to mash up images and then overlaying a few effects.   I can make a really good laser beam now, for example.  Take a modern weapon, have a laser beam come out, wala a pretty functional sci fi gun  (Don't believe me?  Look at the Death Star Turrets in the original Star Wars movie and tell me those aren't essentially current-era battleship turrets with green and red light coming out).  I wrote earlier about the lessons I followed in making custom planets.

As an example, here is the lesson I did last night.  It is not production value because it started with a low-res iPhone photo my daughter sent me and as you can tell from the edges and especially the hair, I did not spend much effort getting the edge selection just right.  But my daughter liked being a cyborg:

Click to enlarge


She has dark brown hair and dark brown eyes, so she is not the ideal model for this because those are hard to colorize well.  Blondes may or may not have more fun, but they are much easier to colorize.  The downsize of the exercise is that she loved the hair and now wants to color it that way for real.

Government "Investment" Of the Day

Over the course of Lance Armstrong's career, the US Postal Service paid him over $40 million in sponsorship money (at least according to the radio report I heard this morning).

I don't necessarily begrudge advertising -- the USPS was nominally acting as a business enterprise, and businesses advertise to promote their services.

But I do find this expenditure odd in the extreme for a couple of reasons.

  • First, sponsorship money of this sort generally can only build name recognition.  Paying to name a ballpark "Chase Field" builds name recognition for Chase, but by necessity does not communicate anything else about its services or value proposition.  The same is true for putting one's name on Lance Armstrong's jersey.  Does the US Post Officer really need name recognition?  Are there people wandering around unaware of the US mail?  I could understand advertising such as "this is why our express mail is better than Fedex" or "you should send a real paper thank you note and not just an email to really thank someone."  But name recognition for the USPS?  "Oh, so that is what that funny box in front of my house is...."
  • Second, to the extent one did indeed feel the need to build name recognition, why in the hell would one do it in a sport primarily competed and followed in Europe?  This seems an odd strategy for a service that is essentially limited by statute to US operations.

The only thing I can guess is that someone in the USPS decided, "Hey, everyone hates us.  Let's sponsor someone (preferably in a tangential sport that we could actually afford) who is beloved so some of those positive feelings might transfer to us."   That worked out well, huh?

How Much Is Sucking Up To The Government Worth in the Corporate State

One potential gauge can be seen in, of all places, advertising during the Masters golf championship.

I am not a huge golf fan, but enjoy watching the Masters and the British Open (if you have never been in Britain during the Open, it is a fun experience -- people are in bars at 9AM watching).  The Masters is unique among sporting events in that it eschews getting the maximum advertising check, and instead only accepts a tasteful 2-3 corporate sponsors, who run just a few minutes of advertising an hour.  This year the sponsors were AT&T, IBM, and ExxonMobil.

AT&T and IBM had generally non-specific ads that played up their companies' innovativeness, telling well-heeled golf viewers that they would be a good business partner on technology issues.  Exxon did something very different.  They ran ads over and over about how much they cared about education, and in particular in support of common core curriculum.

In our modern mixed economy, the worst thing you can have as a corporation is a bad image.  It means that politicians will look to score points for the next election by gutting you like a fish.  ExxonMobil is the perennial leader on this dimension, though Walmart occasionally grabs the number one spot.  So one purpose of the ads is clearly to improve its image and make people like it.  It is telling that ExxonMobil does not bother to do so in its core business.  There is a great story to be told about how much technology and capital must be invested over long time horizons to get gasoline as cheap as three or four dollars to the pump, but ExxonMobil has obviously given up on this message.  Instead, it works to be liked on a subject, education, largely tangential to its core business.

But its strategy at the Masters seemed to go further.  By actively shilling for the common core curriculum, an Obama-favored initiative to further Federalize k-12 education, they are essentially sucking up to this administration.

I and most of my family worked for Exxon.  I only worked a few years at Exxon (in beautiful Baytown, Texas) but members of my family worked for Exxon their entire lives, and I have known and still know a number of Exxon execs.  And I can say with good confidence that few if any of them really believe that shifting control of education from local agencies close to parents to Washington is really going to help education very much.

So, if you watched yesterday, you saw a multi-million dollar suck-up. And the pathetic thing is that it was probably a useless exercise. The bullied often try to end bullying by sucking up to the bully -- it seldom works.

My New Favorite Store, and I Haven't Even Been There. Plus, Christmas Game Recommendations

In my high school days, I used to play a lot of wargames from Avalon Hill and SPI.  I once spent an entire summer playing one game of War in Europe, which had a 42-square-foot map of Europe and 3500 or so pieces.     Each turn was one week, so it was literally a full time job getting through it in a couple of months.

All that is to say I spent a lot of time hanging out at game stores, particularly Nan's in Houston (a great game and comic store that still exists and I still visit every time I am in Houston).  I play fewer wargames now, but I still like strategy games that are a bit more complicated than Monopoly or Risk.  But it is hard to find a game store with a good selection (if there is one here in Phoenix, I have not found it).

But I definitely want to try this place -- the Complete Strategist in New York City.  Click through for some good game pr0n.

His list of games is good, though I have never played Gloom and I have never been a huge fan of Carcassonne.  Ticket to Ride is an awesome game and is perhaps the most accessible for kids and noobs of either his or my list.  If you recognize none of these games, it is a great place to start (there is also a great iPad app).   To his list of games I would add:

All of these games tend to present simple choices with extraordinarily complex scoring implications.  In most cases, one must build infrastructure early to score later, but the trade-off of when to switch from infrastructure building to scoring is the trick.  Five years ago Settlers of Catan would have been on any such list, but it is interesting it is on neither his nor mine.

Once you catch the bug, there are hundreds of other games out there.  My son and I last summer got caught up in a very complex Game of Thrones expandable card game.  Recommended only for those who love incredible complexity and are familiar with the books.  There are also a couple of games I have liked but only played once so far.  My son and I last summer played a fabulous though stupidly complex game of Twilight Struggle (about the Cold War, not hot vampire teens).  This is considered by many to be one of the greatest war / strategy games ever.  We also tried Eclipse (space game, again not the teen vampires) which we liked.  I have played Le Havre and Puerto Rico as iPad apps.  They were OK,  but I think the fun in them is social and the of course does not come through in the iPad app.  In the same vein, tried to play Agricola with my kids and they were bored stiff.

Update:  When in doubt, research it on Board Game Geek.  Their game ranking by user voting is here.

Life In The Corporate State

This strikes me as typical of life in the corporate state.  

  1. The Administration champions a plan to save $11.5 billion through lower Medicare reimbursement rates  (we can argue about whether this is simply sensible procurement strategy or a mindless price control, but won't today).
  2. The Administration gives back $8 billion, or 70%, of these savings to the providers through another program.  It is unclear what criteria are used to select who gets the money and who does not, so I think we can assume political ass-kissing probably comes into play

Through this right-hand-left-hand game, the Administration can claim $11.5 billion in savings that don't actually occur; claim that the "cuts" are not hurting service, since they are giving the cuts back; while creating yet another multi-billion dollar fund that can be distributed to friends and supporters.

Where Did the Mid-Range Jumper Go?

NY Times has a great interactive graphic of Miami and OKC shooting by location on the court (roll over the face pictures to get the actual graphics).

It provides some insight as to why the NBA game seems to be all threes or points in the paint -- the mid-range jump shot just does not have the same return on investment (ie points per shot).  Which begs the question, I suppose, as to why anyone shoots the mid-range jump shot at all  (look at Battier's and Hardin's maps - they are almost all threes and layups/dunks).  I suppose the answer likely takes the form of "you have to shoot mid-range to open up the other two zones", a sort of run to set up the pass in football strategy.  Don't know enough about basketball to say if this is true.

Update:  Also, the shot clock probably has a lot to do with it.  Given infinite time, teams would be able to get the shot they want, but in 24 seconds sometimes you just have to loft one up  as time runs out from wherever you are.

Here are the stats:  Close range -- 1.19 points per shot, 3-point -- 1.08 pps, mid-range --  0.80 pps

If You Disagree With My Economic Policies, It Must Be Because You Are Trying to Wreck the Economy

Kevin Drum is back on his "because Republicans won't agree to more massive deficit spending, they must be purposefully trying to destroy the economy."   Literally.  He translates Republican opposition to Obama's proposed stimulus packages as being explained by this strategy:

Basically, the Republican strategy for the past three years has been this:

  1. Do everything humanly possible to prevent the economy from recovering.
  2. Wait for 2012.
  3. Run a campaign focused on the fact that the economy is lousy.

This is such a shabby bit of false logic it is amazing anyone even attempts this any more, or more accurately, it's amazing that folks continue to buy it.  Is it really so impossible to believe that there are actually people of goodwill who wish to see the economy improve but disagree with Drum and Obama as to the correct course to achieve that?  Apparently not  (I suppose the last stimulus was so wildly succesful that it is impossible to doubt the success of another trillion or so of deficit spending?)

The irony is that for some reason I simply cannot fathom, from a political tactics point of view, he points to this chart when talking about Truman and his "do-nothing" Congress:


He's is trying to make some political tactical point, but he is so blinded by his own assumptions that he misses the real point -- that the American economy grew at records rates through a "do-nothing" Congress.  Now, I suppose Drum might argue that this was an accident of timing, but in fact Truman inherited what should have been, by Drum's Keynesian thinking, the worst economic situation ever since an enormous amount of government spending was going away after the war and new workers were simultaneously flooding back into the job market.  If any time in recent history should have demanded Keynesian stimulus, this was it, and yet a do-nothing Congress led to a massive expansion.  Hmmmm.

I Find This Impossible to Understand

Most of you are familiar with the razor and blades strategy:  Give away or sell the razor below cost to ensure years of profitable razor blade sales.  We had a great example of this at AlliedSignal (later Honeywell) Aerospace where we pretty much gave Boeing the brake assemblies for the aircraft plus a free spare plus I think we put some cash in the box as well, all to get decades of guaranteed high price brake replacement business (courtesy in part to government regulation which made is extraordinarily difficult to the point of being impossible for anyone else to produce aftermarket parts).

So what I don't understand is, why is this company proposing to sell only the razors while inevitably leaving the blade sales to someone else:

The UK's biggest bookstore chain has announced that it will start selling Kindles alongside other digital services from Amazon. Waterstones stores will let Kindle owners digitally browse books in-store and link up with special offers, tying into the chain's plans for substantial renovations that would also include dedicated digital book areas and free WiFi.

One buys the books right from the Kindle interface.  I understand the issue that browsing books online is less satisfying than in a book store (but much more convenient), but I am not sure how they are going to make money.  Are Waterstone Kindle's coded to give Waterstones a share of each purchase?  I can't find anything like that in the media reports, but I would certainly demand that at Waterstones.  If not, this is like selling gift certificates for your competitor.

I will confess to being a book store free rider.  I shop airport book stores but if I see something I like, pull out my iPad at the gate and buy it.  Yes, I understand the appeal of physical books and it frankly pulled at me for years.  But having just gone on a trip with 100 pages to read in the third Game of Thrones book, the relief I felt in having both the third and fourth books on my iPad rather than carrying both physically  (think 800 pages or so each) was great.

Wal-Mart's Bribery Problems

Walter Olson has been writing a lot about Wal-Mart and FCPA.  I don't have a lot to add except my own experience working for a large corporation in third world countries.

I worked for a manufacturer of industrial equipment for years.  In most countries in Europe and North America, part of our strategy was a dedicated in-house sales force that could provide a high level of technical support.  But we went away from that strategy when we went into third world countries, just the place where we needed more rather than less technical support for our customers.

Why?  A big reason was the FCPA.  There are many countries where it is simply impossible to do business without paying bribes.  Bribes are absolutely wired into the regulatory process.  In Nigeria, public officials are paid less with the expectation they will make it up on bribes, similar to the way we pay waiters who get tips.  The only way to legally work in these countries is to work through third party resellers and distributors and other such partners, and then tightly close your eyes to how they get things done.

What always ticks me off about these cases is the fake attitude of naivite in the press that seems to be constantly amazed that corporations might have to pay bribes to do basic things we take for granted here, like get the water turned on or have your goods put on a ship.  But in fact reporters can't be this naive, as they almost certainly have to deal with many of the same things in their business.  I would love to see an accounting of the grease payments the NY Times pays in a year in foreign countries.

I think most people when they hear these foreign bribery cases assume corporations were paying to get a special advantage or to escape some sort of fundamental regulation.  And this is possibly the case with Wal-Mart, but more likely they were simply paying because that is what you have to do just to function at all.

Weird, Who Would Have Predicted This?

I wrote on the day of Obama's inauguration:

I will be suitably thrilled if the Obama administration renounces some of the creeping executive power grabs of the last 16 years, but he has been oddly silent about this.  It seems that creeping executive power is a lot more worrisome when someone else is in power.

From Charlie Savage in the New York Times:

As a senator and presidential candidate, he had criticized George W. Bush for flouting the role of Congress. And during his first two years in the White House, when Democrats controlled Congress, Mr. Obama largely worked through the legislative process to achieve his domestic policy goals.

But increasingly in recent months, the administration has been seeking ways to act without Congress. Branding its unilateral efforts “We Can’t Wait,” a slogan that aides said Mr. Obama coined at that strategy meeting, the White House has rolled out dozens of new policies — on creating jobs for veterans, preventing drug shortages, raising fuel economy standards, curbing domestic violence and more.

Each time, Mr. Obama has emphasized the fact that he is bypassing lawmakers. When he announced a cut in refinancing fees for federally insured mortgages last month, for example, he said: “If Congress refuses to act, I’ve said that I’ll continue to do everything in my power to act without them.”