What's Going On?

Welcome to my project – a website in which I’ll try to write stuff intelligent people would find amusing, hopefully with some regularity, and hopefully amusing enough to get you to come back and read the next piece. Think of it this way; something funny to read for free.

Why? Because I want to, but more broadly, being amusing in an intelligent way strikes me as a very high calling, and is a “now more than ever” kind of thing. The times in which we live are a direct insult to the very essence of amusing. Our society’s deficits – the marginalization of people of color, the profound material inequality among us, our collective inability to invest in a sustainable and rational future – let’s stop there in the interest of brevity -- are no longer things “nice people” don’t discuss, like a loopy aunt’s drinking problem. Our planet’s future is as tenuous as was Krypton’s when Superman’s father rocketed him here to escape its doom -- there’s a bittersweet paradox for you. All of this desolation makes you wonder if there’s a place for humor, for anything resembling light-heartedness.

And then there’s him. I’m amazed Trump didn’t appear until the third paragraph. He’s everywhere. Living in Trump’s world is like living in a world in which an image of a psychotic clown has replaced the sun and travels across the sky all day – ubiquitous, banal, inescapable evil. The ubiquity of his presence as upsetting as the actual wickedness he does – there’s just no escaping his leer, his bloviation, his obliviousness to human wants and needs, his swollen, orange face teasing us with the possibility of a heart attack that’s never delivered. So, this project, dedicated as it is to material that’s amusing in an intelligent way, begins with the premise that making fun of him isn’t very amusing. It’s just another reminder of the odiousness of the whole catastrophe.

I’m not saying I won’t descend into that putrid mire, but if and when I do, I’m going to enforce (my idea of) a high standard. Ditto for the virus. My feeling as a writer and a human is “let sleeping piles of shit lie,” but sometimes being drawn to wallowing is inescapable, like rubbernecking civilization’s car wreck on the highway. But my focus is not to traffic in outrage – it’s been done, and my outraged moral sensitivities aren’t that finer than anyone else’s. Don’t get me wrong, I’ll deal with political life – the post that will get us started (on Thursday) will probably be one -- but the point is not to make a point. It’s to entertain, to be amusing.

And to write. Writing is the point – I don’t want to get all “that way,” but you get to a point when writing tells the writer what it wants. I’ve had two novels in print – Big Government (1998) and Grant Speaks (2000), both by Warner Books – and it was fun to savor the accomplishment, some bucks, and the weird knowledge that The Grateful Dead, Humphrey Bogart, Ry Cooder, and I all had our creative output brought to market by the same greedy conglomerate. But with my career in economics an evermore distant memory (a biography, found elsewhere on this site, provides a full confession to this effect), the writer in me is now unleashed. Since hanging up my slide rule a few years ago, I’ve finished a third novel, The Adventures of Brightthinking McCoy, a satire about land speculation on the colonial frontier (I have an amazing feel for what sells!) and have started a fourth, Birds of America, about Audubon’s late-life search for a rare bird, which leads him on a De Tocqueville-like wandering through America, a rear-guard testament to our society’s character. Maybe those projects will show up here in some form, but that’s not the point right now. In all of these cases, the thrill of writing and creating is as exhilarating as is the little world in which you live with your characters isolated and frustrating. More than any other thing I’ve done in life, writing proves the dictum “there’s a fine line between stupid and clever.” But at some point it almost becomes a biological need – you’ve got to do it, or at least that’s how it feels.

And that’s the bottom line – I’ve got to do this. Admittedly, I’ve done something like this before. I was a commentator on NPR’s Morning Edition for eight years (some of my triumphs can be found elsewhere on this site), and the foremost challenge of that effort was having one or two good ideas a month. The same challenge exists here. And, let me add, I was thrown off the air for using profane Spanish slang to an audience of 10 million people in a commentary on Social Security. So, hopefully, this comes to a better end. But the challenge to have something worth saying remains. It's a challenge worth accepting.

So that’s the deal, or as they say nowadays, “the value creating proposition.” In a few days, I’ll get started, to the extent this isn’t that start. Expect a “first” post (other than this one) on September 9 and then one every ten days or so. Let me know how I’m doing, and give me a few chances. If you like it, stay with me, and let folks who might also like it know about it.

And in the meantime, be well, be safe, and be positive. If you allow yourself to look at it dispassionately, the world is an unholy mess – cue the litany -- Trump, the virus, the culture of intolerance, the death of truth as a virtue, senseless executions on the street, the planet’s descent into a permanent heat wave, the remanding of low-wage workers into modern morlocks who will be forced to risk their lives to make us hamburgers and empty our bedpans, whatever. But to paraphrase Victor Frankl, without a purpose and hope to power us towards it, life is extinguished. That’s the challenge we face – the greater the challenge, the greater our hope must be. And that’s my underlying goal – to help grow the organisms of good feeling and hope in the Petri dish of the human spirit.

Let’s see how I do.

Facebook at 50

We learned this week that Facebook has turned 50 – certainly not 50 years old – I wonder if Zuckerberg’s parents are 50 years old – but worth $50 billion, or at least that’s the value implied by the sale of a portion of its (privately held) stock to Goldman Sachs, which will own $450 million worth of the company, and a Russian company, Digital Sky, which added $50 million to the $700 million it owns in Facebook already.

If there was ever a time to sell a piece of Facebook, it’s now. Zuckerberg was just made Time’s Person of the Year – which prompted by new favorite satirist, Andy Borowitz, to applaud Time’s controversial decision that Zuckerberg was, indeed, a person – and the movie is going great guns, even if I’ve never seen it (although I’m told the novice actor given the part really nails Larry Summers – I thought the part really belonged to Gary Shandling). And we only recently learned that Facebook has now surpassed Google as the most visited site on the American Internet – about 9 percent of all site visits in the U.S. go there, although Google would account for 10 percent of you added in Google’s e-mail and YouTube affiliations. So Facebook is the Flavor of the Month, and if you think having money makes you immune to that kind of faddishness, I have mortgages to sell you.

Is Facebook really worth $50 billion? I don’t mean that in the cosmic shake-your-head-and-bemoan-man’s-fate sense, but in the down-to-earth context of whether this valuation is for real. The answer is more yes than you’d think.

The first perspective on this question is – who are the investors in question?. And when you think about Goldman and the Russians, it’s not an open-and-shut case. Digital Sky added incrementally to its already existing holding, so they have some incentive to create a demonstration effect that makes their existing stake in the company look more attractive. And since Facebook is not traded public in markets and therefore subject to the information disclosure requirements and open trading procedures the stocks you own are, it’s easier to try to manipulate its value. That’s not to say it would work, but you could try – Facebook’s limited number of existing shares are traded in a private market in which former employees and angel investors can buy and sell, and that means there’s limited liquidity and nebulous price revelation, as we economists like to say, which means you can’t really be sure what the hell it’s worth.

As for Goldman, I’ll pick that up in a moment. To get there, though, start here:

One issue raised by the Facebook valuation is whether the company will go public. Some analysts see this sale as a teaser to goose the market and get the public ready for an offering in the near future. Others take Zuckerberg at his word – or his mumble – that he’s not interested in ceding that much control, and see this sale as proof that he can raise enough money to finance whatever plans he has without a public offering. The reasons not to be become a public company boil down to the transparency it requires – you have to reveal your financial information and tolerate a distracting debate among investors, analysts, journalists, and idiots such as myself as to the extent to which you can differentiate your rear end from a hole in the ground. And while the regulation of securities has been proved by history to be an essential part of a well-functioning capital market, it’s no picnic for the regulated.

The reason to go public is to raise money, a problem Facebook obviously doesn’t have. Moreover, it’s possible that Facebook and Goldman are showing us the first inklings an alternative to the public markets for raising large sums of capital. To wit: the Securities and Exchange Commission will allow stock in a company such as Facebook to be traded privately – that is, without the disclosure, governance, and other requirements made of public companies through laws such as Sarbanes-Oxley – so long as they have 499 or fewer shareholders. That’s a pretty tight limit. But Goldman is said to be considering a new investment structure in which it would buy Facebook’s private stock and then allow investors to buy shares of something like a “Goldman-Sachs Facebook Trust” or some such with a minimum participation of $2 million per investor.

That gets me back to Goldman and the valuation. I think Goldman sees itself as a competitor, down the line, to the New York stock Exchange – not for schleps such as, say you and me, but as a market-maker for big block institutional traders. It’s already in that business in a big way. And if it were to do so, the line between public and private companies would blur, since both would be traded behind Goldman’s closed doors, instead of in the more regulated environment of the NYSE. Regardless, Goldman’s interested in both private and public issues, and the idea of a Facebook structure in which it “owns” the stock and that it passes along all the goodness and badness of ownership to customers who don’t actually take title to the stock, has to be an intriguing one to a company with that kind of aspiration – it’s like a little Facebook stock exchange. Moreover, for Facebook, it’s a way to create liquidity without having to comply with regulations that require it to be forthright about its circumstances, which is its right unless it wants to come to public markets. As for whether I’d feel as protected in that arrangement as I do in a regulated, public exchange – well, I wouldn’t. But that doesn’t mean it wouldn’t fly. And Goldman’s buying into the company could be a step towards that kind of arrangement, or at least Facebook’s participation in it. So Goldman’s buying Facebook at a $50 billion valuation could be like the Nationals giving Jayson Werth seven years – OK, there’s a risk we overpaid, but it gets us closer to a strategic goal, so what-the-hey.

But there’s then the question of Facebook’s intrinsic worth. An interesting piece by an analyst named Andy Zaky, last August, made the case for a $50 billion Facebook, months before it actually traded at that implied valuation. http://seekingalpha.com/article/222076-the-case-for-a-50-billion-facebook His argument, if I may distill it, is this. Right now, Facebook doesn’t bring in much money, certainly in proportion to its user base; Zaky used the number 500 million users, but that was last August. It’s closer to 600 million now. And Facebook now has roughly the same number of visits as does Google, and Google’s worth $200 billion (in a public market). So if Facebook gets better at monetizing itself – primarily through advertising – there’s no reason why it can’t get close to valuations like Google’s.

I see one strong and one weak argument buried in this chain of reasoning and, one argument that Zaky’s analysis misses, or at least seems to from what I read into it. The strong argument is that Google became a dominant site through innovation, while Facebook became one through…well, what’s the technical term for bullshit? Ah yes…network effects. A product has network effects if its value increases the more people have it. Like the phone system, Facebook is more valuable to me, the individual user, if more people join me in using it. Sure, it’s more inviting looking than competitors such as MySpace (which was the most visited site in America as recently as 2007 -- Hey? How’s MySpace doing now?), http://www.telegraph.co.uk/technology/myspace/8130097/MySpace-surrenders-to-Facebook-in-battle-of-social-networks.html but the real driver is reaching the network-based critical mass that generates the value to the individual user. Google, in contrast, got where they are by doing something very well, there’s no network effect behind it. Its value as a search engine has nothing to do with how many other people are using it. There are a myriad of questions about Google’s algorithm, about whether Google’s conflicted in its role as an “impartial” search algorithm and, at the same time, a purveyor of other services for which people search, and there are privacy issues(which they share, in some respects, with Facebook). But it’s possible to imagine that Google might one day face competition from someone who out-Googles them, that is, does the search job better. If Facebook is somehow out-competed, it will be because hundreds of millions of people were so pissed off at them for whatever reason that they switched to another, comparable service. Absent an ergotistic spore breaking out in Facebook’s headquarters, that’s harder to imagine. Google sits on top of a network; Facebook is a network. So that’s the strong argument for why Facebook out-survives Google.

The weaker argument, as it pertains to Zaky’s analysis, is that advertising is about selling people things, and Google’s clientele are people looking for things, as opposed to Facebook’s users, who are looking for each other. Advertising is relevant in the extreme to the value Google creates for its users, but only incidental to what Facebook’s users want. I can’t imagine that Facebook qua Facebook is going to be worth as much – in terms of ability to generate revenue per user or per visit from its core service – as is Google.

But Google’s valuation, to my thinking, isn’t completely, or really, about their value as a search engine. It’s about their value as a gateway into the tangled maze of value created on the Internet. Google is a search engine, but it’s already failed as an equipment manufacturer, succeeded as an e-mail provider and originator of operating systems for equipment, and could end up being everything from a travel agency to a television station to a carriage provider, a wistful vision to which it occasionally purports to subscribe. Facebook hasn’t added this kind of dimensionality, but it’s going to – yes, I said, will – because something to which so many people feel allegiance and are involved with daily cannot help but evolve in that direction. It will own a generation of users in a way Google cannot, even though Google, their monopolistic hearts, does something.

That’s the issue I have with the Zaky analysis, the argument he misses, as does any other valuation that focuses on advertising revenue per view. Just what market are Google and Facebook in? They’re monopolists in their own bailiwicks, but the spaces they occupy are only islands in a larger archipelago of value on the Internet. They might be “service” or “software” companies, but that misses the point. If it turns out that Facebook can truly cement the attentions of a generation of (self-absorbed, to be sure) users, then they can dominate the decisions about what equipment gets used, what broadband providers area selected, what other services enter the Internet space. Is Facebook something you “get” on your mobile or broadband provider? Or is your mobile or broadband provider someone that lets you “get” Facebook? The difference comes down to who will capture the lion’s share of the value you realize by having the entire package – access, device, services, applications, the whole “stack.”

That’s why it’s possible to talk about Facebook’s being worth $50 billion – because it might end up, with all its gruesome banality (who gets to light the pyres that reward the villains who gave us Farmville or Mafia Wars?), the gateway to the broadband world. There’s some chance that one day, all broadband access, service, and device providers will have to dance to their tune.

Today, 500 million users. Tomorrow, the world.

January, 2011

Baggage Handlers

I have a new favorite television show, although it will have to work hard to maintain that distinction once a new season of 30 Rock resumes – Baggage. Baggage, simply put, is The Dating Game for neurotics and misfits. Three contestants (“datees”) stand before a solitary “dator” and serially reveal three things about themselves that constitute their baggage – they believe they were descended by aliens, they save their hair from bikini waxes, they have specific sexual limitations or demands, they use coupons on dates, they were in a cult, and so on. After three rounds, the dator picks a winner, but the dator must then reveal his or her own foible – my mother will always come first, I live with my ex-husband, I once was a pimp – and the selected date candidate then decides if they’ll spend a romantic evening together at a restaurant in Beverly Hills or some such.

Well, where do you start peeling the onion? At the simplest level, Baggage is a tremendous will-he-or-won’t-she proposition. Will the New Age-y physical therapist, having weathered the selection process, be deterred when it turns out the guy who picked her is a bankrupt circus performer? (She did, I’m pleased to report. He seemed like a lovely guy and they looked genuinely pleased to meet each other.) Or, in perhaps my favorite episode, the geeky-looking Star Trek devotee reveals in his final “piece of baggage” (suitcases are used quite dramatically for props) that he’s an award-winning porn star, and the very good looking woman charged with the selection, who had shown no interest in, if not outright disdain for, him, up to that point now has an agonizing and instant reappraisal. She picks him (with the active encouragement of my wife and daughter from a distance), and then reveals her baggage – she insists that a man pay for everything on dates – she even pumps her fist Arsenio-style when the audience catcalls in response. In other words, an asshole. The porn star shrugs and tells her that he knows (and I mean knows) all sorts of beautiful women on a daily basis at the workplace and that he had hoped to meet someone with “more depth.” He walks away, leaving her stunned, but then again, people without depth are often stunned at such moments.

There is also the host of Baggage, Jerry Springer. I’ve always found him distasteful, but here, he’s in full flower. He projects a sense of detached and intelligent amusement with the proceedings, and his occasional quipping is at its best delightfully reminiscent of (and this is the highest flattery possible) Groucho Marx. It’s Springer, of course, so there’s a regrettable undertow to the smutty (and in Baggage’s second and subsequent seasons there was a lot more of this, which cost the show its charm) while the audience has been encouraged to voice their opinions, much as a similar audience doomed gladiators two millennia ago. But it all works.

Down another layer, Baggage is a field investigation into the calculus of mate selection. I don’t want to go all Gary Becker economics-of-marriage on you and talk about how there’s a market for marriage and that you have to maximize your potential value in exchange when picking somebody with whom you’ve created a call option for a lifelong risk sharing agreement. Character, age, looks, wealth, habits – all of it is somehow traded off in the mate selection market. As Marilyn Monroe tells Charles Coburn in Gentlemen Prefer Blondes, after he’s accused her of marrying his son for the son’s money, “No, I’m marrying him for your money.” Money in a man, she goes on to explain, is like good looks in a woman – just another superficial reason why people don’t address intimacy as a facet of their self-actualization in a sense reminiscent of Fromm, or Carl Rogers – well, that’s not really what she said, but it’s what she meant, I could tell. Baggage looks at these transactions. Do a guy’s looks compensate for his ploy of trying to meet girls at gay bars? How does a market participant assess a woman who is good-looking, flirts in French, and has a graduate education, but who is saving herself marriage and may well be a religious crackpot? I have the fantasy that Malcolm Gladwell is a contestant on the program and intuits a selection who turns out to have a wardrobe of matching woman-and-dog outfits or is currently involved with an 80-year-old man. Look before you blink, brother.

And once we peel away these musing, we get down to the basics – economics. The New York Times reported recently that Baggage is the runaway hit of the Game Show Network, one in the endless series of life-splintering cable channels (moving inexorably towards my friend David Moore’s prediction, made years ago, of The Parking Channel). Game Show Network, says the Times, is up 20 percent in the last three years, with Baggage the flagship of its recent efforts to create new programming (as opposed to its staple, reruns of the iconic Match Game and Hollywood Squares. There are, apparently, 472,999 other households watching Springer. But GSN’s strategy is not just to create programming, but to use the cable network as a platform for on-line gaming, live gaming on television, and as a partner for such websites as Pogo.com, purveyors of Poppit, which can destroy your day’s schedule if you’re not careful and have my specific personality disorder.

And at the nub of the economics is the role of aggregators, people you pay to buy your television programming for you, like Comcast or Time Warner or Verizon or ATT. Their role was raised once again last week when Apple announced its revamped Apple TV device, a $99 box that plugs into your television and that delivers first-run television episodes for 99 cents each. Sure, I’d pay 99 cents – if I had to – for an episode of 30 Rock – heck, at $10 a month of whatever it costs, I was paying that or more for episodes of The Sopranos and The Wire by subscribing to HBO.

But Apple’s attempt to make this product work, and to make the pay-per-view model work for all of television, raises the question of whether people want to watch television that way. I’m sure many people have, at some point, looked at their cable (or fiber) television bill and thought, “Why am I paying $50 a month for all this crap like Baggage when all I really want to watch is CNN and the Food Channel?”

But what that complaint misses is that cable, fiber, or whomever is an aggregator – they use their scale and presence in the market to get you the best rate on the Food Channel, GSN, or whatever it is. The rights fees paid by cable television providers for something like the Food Channel is probably something on the order of 20 cents per household. If Apple TV were to be the dominant medium and model, the ability to sell programming to cable and fiber aggregators with tens of millions of viewers would disappear. Instead, networks such as The Food Channel would hone in on their core audiences and charge them the kind of rates others pay for HBO or Showtime, let’s say $10 a month. You do the math – if you raise your monthly carriage fee 50-fold and keep more than 2 percent of your old audience, you’re ahead. In essence, cable/fiber aggregators let you pay what you’d have been willing to pay for the stuff you watch regularly and then throw in the rest for free, and the free stuff is where I found Baggage, It’s Always Sunny in Philadelphia, and other light classics.

The proponents of Apple TV and the pay for service model note that the iPod put a fork into radio and records, and that the same will happen here. I doubt it. For one, they haven’t thought through the role of aggregators in getting consumers a mix of price and variety that will look attractive when they consider the alternative. Second, television has a live component that gives it an ace in the hole – sports obviously comes to mind. Fox’s regional sports channel only recently decided to pay the Detroit Tigers $40 million a year for ten years for the right to televise their games. It’s a fairly substantial amount of money, but where else do you find programming that people will watch real-time, including commercials?

And, most crucially, people watch all sorts of programming, from Baggage and Inspector Poirrot. But when you get down to it, my musical tastes run from A to B – my Pandora channels range from Bireli Lagrene to Count Basie to Art Farmer, with a Johnny Winter in case I need to amp it up a little. But three out of the other four think they should play Stan Getz. (When you ask Pandora for Red Shadow: The Economics Rock and Roll Band…well, I’ve never seen a digital device spit up before.) I get XM for the ball games – otherwise, my jazz collection anticipates my tastes as well as theirs and the Grateful Dead channel is only interesting in small bursts, and even then, only when the burnouts who host it shut up. I’m sure other people’s musical tastes are as limited, even if not as well-developed.

So my guess is that the much-anticipated iAssault on programming aggregators isn’t about to take down the citadel. In fact, other digital developments, like a monthly charge for access to up-market hulu, run the other way – they’re asking to be your aggregator, but on a different technological platform. But perhaps the last and final lesson in the nesting-dolls of Baggage implications is that I might be wrong. It’s happened before.

But it makes no difference. Content aggregators and pay-per-view (or click) providers are betting large quantities of money that they’re right, and we’ll find out soon enough. And when the policy debate in telecommunications talks about a “cable/telco duopoly,” it misses this point. Perhaps the most important competition underway in that world today is the competition of business models. What does the consumer want – aggregators, pay-per-click, steaming, storage, discounts for time commitments, all you can eat? Nobody knows, but people are investing to back up their guesses. And beyond static price competition, this model competition is the most important feature of the market today. It will decide who will become the next generation of Baggage handlers.