Extraordinarily pessimistic, and yet still extraordinarily motivational

Saturday, August 11th, 2018

Peter Thiel speaks to Die Weltwoche, in English — after beginning the conversation in German with an American accent:

At the moment, Silicon Valley still looks all-powerful.

The big question is: Will the future of the computer age be decentralized or centralized? Back in the 60s, you had this Star Trek idea of an IBM computer running a planet for thousands of years, where people were happy but unfree. Today, again we are thinking that it is going to be centralized: Big companies, big governments, surveillance states like China. When we started Paypal in 1999, it was exactly the opposite: This vision of a libertarian, anarchistic internet. History tells me that the pendulum has swung back and forth. So, today I would bet on decentralization and on more privacy. I don’t think we are at the end of history and it’s just going to end in the world surveillance state.

What has become the problem with Silicon Valley?

One of the paradoxes of Silicon Valley is that this internet technology revolution is supposed to get rid of the tyranny of place and geography. And yet, it was all happening in one place. There is, however, always a tipping point with network effects. At the beginning, they are very positive, but at some point they can become negative. In economic terms, they become negative when the costs get too high. If you have to pay 2000 dollars a month for a one-bedroom apartment in San Francisco, maybe that is a sign of the boom. But when it is 4000 dollars a month – with a city government where the police don’t work, the roads don’t work, the schools don’t work – 4000 dollars is just a very high tax, in effect. There is also a cultural component: At one point, the wisdom of crowds tips into the madness of crowds – and you end up with a sort of conformity, lemming-like behavior. It actually becomes a somewhat less creative place.

You label yourself a “contrarian”. How did you become one? How does one become a contrarian?

It is a label that has been given to me, not one that I give normally to myself. I don’t think a contrarian per se is the right thing to be. A pure contrarian just attaches a minus sign to whatever the crowd thinks. I don’t think it should be as simple as that. What I think is important for people is to try to think very hard for oneself. But yes, I do deeply mistrust all these kinds of almost hypnotic mass and crowd phenomena and I think they happen to a disturbing degree.

Why do they happen in a supposedly enlightened society?

The advanced technological civilization of the early 21st century is a complicated world where it is not possible for anybody to think through everything for themselves. You cannot be a polymath in quite the way people were in the 18th century enlightenments. You cannot be like Goethe. So there is some need to listen to experts, to defer to other people. And then, there is always the danger of that going too far and people not thinking critically. This happens in spades in Silicon Valley. There is certainly something about it that made it very prone to the dotcom bubble in the nineties or to the cleantech bubble in the last decade.

Tell us about how your support for Donald Trump for president of the United States was received in the Silicon Valley.

That was quite striking. My support for Donald Trump was, on some level, the least contrarian thing I have ever done. If it is half the country, it cannot be that contrarian. And yet, in the Silicon Valley context it has felt extraordinarily contrarian. It is not that politics is the most important thing. I think there are many things that are much more important than politics: Science is more important, technology is more important, philosophy, religion… We normally think that political correctness is literally about politics. But politics is sort of a natural place to start. If you cannot even have differences of opinion in politics, that’s a sign that things are very unhealthy.

What was unique about the Trump campaign?

Republican candidates have always been way too glibly optimistic about everything. I’ve thought for many years that it was critical for the Republicans to somehow run a more pessimistic candidate just because that was a more honest description of what was going on. It is very hard to know how to do that because if you are too pessimistic, you demotivate people: If everything is just going down the drain, no point even voting for me. Somehow, the genius of Trump was that it was extraordinarily pessimistic, and yet still extraordinarily motivational. The slogan “Make America Great Again”, the most pessimistic slogan of any presidential candidate in a hundred years: The country used to be great, it is no longer great. That is a shocking, shocking statement!

Another issue that is debated very controversially is Trump’s trade policy. People are shocked by his imposition of tariffs.

At the center of this is the question with China. The US exports something like 100 bn a year to China, we import 475 bn. What’s extraordinary, is that if we had a globalizing world, we would actually expect the reverse to hold: you would expect the US to have trade surpluses with China and current account surpluses because we would expect that there is a higher return in China because it is a faster growing country than the US. This is what it looked, let’s say, in 1900, when Great Britain had a trade surplus of 2 percent and a current account surplus of 4 percent of GDP. And the extra capital was invested in Argentinean railroads or Russian bonds.

The fact that the US does not have a surplus, that actually it has a massive deficit, tells you that something is completely wrong with the standard globalization picture that we have. It is sort of like: Chinese peasants are saving money and it is flowing uphill into low-return investments in the US and bonds in Europe with negative interest rates. There is something completely crazy about that dynamic.

What’s your view on Switzerland?

Switzerland is an extraordinarily well functioning country. I don’t like the neighborhood it is in, but it is really remarkable. If you compare Switzerland with Austria or Scandinavia, human capital is equally good but the per capita income in Switzerland is 50 to 100 percent higher. It does tell you that there is something that people are doing that is dramatically better. The question is whether its cities are big enough. If you are a talented young person: Do you move to Geneva or do you move to London? It was good if Switzerland had a somewhat better answer to that sort of question. But as I stated at the beginning, I think the technology will be more decentralized and so I think what has been a limitation for Switzerland will be much less going forward.

Are you jealous that you didn’t invent Bitcoin?

It is hard to be jealous of something that you weren’t remotely capable of doing. I have to acknowledge I would never come up with anything like that. So I can’t even be jealous. I was very interested in all these virtual currencies in the late 90s. We started Paypal thinking about that, but at the end it was a payment system for existing fiat money. Somehow, that experience weirdly primed me to underestimate Bitcoin early on. It was on the radar in 2011 and there were people telling me I should buy it, and we didn’t really get involved until 2014. When you have experiences and you learn things, it is often very dangerous and my experience in the late 90s was that cryptocurrencies didn’t work. And it was largely correct, but you always have to be open to think about it.

(Those are just some of the questions and answers.)

Why does tech have so many political problems?

Monday, August 6th, 2018

Why does tech have so many political problems? Tyler Cowen suggests some reasons:

  • Most tech leaders aren’t especially personable. Instead, they’re quirky introverts. Or worse.
  • Most tech leaders don’t care much about the usual policy issues. They care about AI, self-driving cars, and space travel, none of which translate into positive political influence.
  • Tech leaders are idealistic and don’t intuitively understand the grubby workings of WDC.
  • People who could be “managers” in tech policy areas (for instance, they understand tech, are good at coalition building, etc.) will probably be pulled into a more lucrative area of tech. Therefore there is an acute talent shortage in tech policy areas.
  • The Robespierrean social justice terror blowing through Silicon Valley occupies most of tech leaders’ “political” mental energy. It is hard to find time to focus on more concrete policy issues.
  • By nature, tech leaders are disagreeable iconoclasts (with individualistic and believe it or not sometimes megalomaniacal tendencies). That makes them bad at uniting as a coalition.
  • The industry is so successful that it’s not very popular among the rest of U.S. companies and it lacks allies. (90%+ of S&P 500 market cap appreciation this year has been driven by tech.) Many other parts of corporate America see tech as a major threat.

They can hold two or more conflicting concepts in their mind

Monday, August 6th, 2018

Closed-minded people would never consider that they could actually be closed-minded. In his book Principles, Ray Dalio lays out ways you can tell the difference between the open- and closed-minded:

  • Closed-minded people don’t want their ideas challenged. They are typically frustrated that they can’t get the other person to agree with them instead of curious as to why the other person disagrees.
  • Closed-minded people are more likely to make statements than ask questions.
  • Open-minded people genuinely believe they could be wrong; the questions that they ask are genuine.
  • Closed-minded people focus much more on being understood than on understanding others.
  • Open-minded people feel compelled to see things through others’ eyes.
  • Closed-minded people say things like “I could be wrong … but here’s my opinion.” This is a classic cue I hear all the time. It’s often a perfunctory gesture that allows people to hold their own opinion while convincing themselves that they are being open-minded. If your statement starts with “I could be wrong”…, you should probably follow it with a question and not an assertion.
  • Open-minded people know when to make statements and when to ask questions.
  • Closed-minded people block others from speaking.
  • Open-minded people are always more interested in listening than in speaking.
  • Closed-minded people have trouble holding two thoughts simultaneously in their minds.
  • Open-minded people can take in the thoughts of others without losing their ability to think well — they can hold two or more conflicting concepts in their mind and go back and forth between them to assess their relative merits.
  • Closed-minded people lack a deep sense of humility.
  • Open-minded people approach everything with a deep-seated fear that they may be wrong.

Best Buy is like an arms dealer

Sunday, August 5th, 2018

Best Buy should be dead, but it’s thriving in the Age of Amazon:

There is, of course, one thing Best Buy has that Amazon doesn’t: more than 1,000 big-box stores. Joly saw the benefit of using them as showrooms — a word so fraught in retail that the company calls them showcases — for the big tech brands, Amazon included. Best Buy was among the first chains to feature Apple boutiques. In April 2013, Joly said there would be Samsung mini-shops in its 1,400 U.S. locations by June. That same month, Best Buy began adding 600 Microsoft stores-within-stores. Sony arrived in 2014. Last year, Best Buy turned over more space to Amazon and Google to better display their smart home technologies. The two are bitter rivals: Amazon doesn’t sell Google Home and offers a limited selection of Google’s Nest products. Best Buy is neutral ground.

The brands essentially pay rent to Best Buy (it’s cheaper than building stores) and either send in their own salespeople or train the blue shirts. No one at Best Buy would offer details about these partnerships. But even analyst Michael Pachter of Wedbush Securities Inc., who in almost 10 years has never recommended buying Best Buy’s stock, describes the partnerships as a phenomenal success because they ease the financial burden of operating stores while enhancing profit margins. “Best Buy is like an arms dealer,” he says. “They’re indifferent to what brand you buy as long as you buy it from them.”

[...]

In August 2013, the company recruited Rob Bass from Target Corp. to make it more efficient and to save a couple hundred million dollars to help cover the costs of Joly’s price-matching strategy. Bass discovered quickly why customers were frustrated: Best Buy’s distribution centers typically weren’t open on weekends or holidays, and its warehouse management software was at least two decades old. The software has been updated, the supply operations extended, and two-day free delivery is standard on orders of $35 or more. In April 2016, Best Buy announced it would offer same-day delivery in a few cities for a fee. Right after that, Amazon expanded same-day delivery to some Prime customers for free. Best Buy then lowered its price, which had been as high as $20, to $5.99. This past holiday season, Best Buy expanded its same-day service to 40 cities.

Bass also turned back to the stores. He started a system that allowed them to fulfill orders via delivery and pickup. Best Buy says 70 percent of Americans live within 15 miles of one of its locations, so it’s been encouraging customers to come collect their orders. Forty percent of the time they do, which “helps my budget a lot,” Bass says. To make those pickups faster, the company is testing an “On My Way” function on its app to ensure customers don’t arrive before their TVs are retrieved from the back of the store. Since 2012 the proportion of its online revenue has more than doubled, from 7 percent of all U.S. sales to 16 percent, well above those at other big-box retailers.

As individual pieces of technology become simpler to use, connecting them gets more complicated and important for their utility. To Joly, this was a missed opportunity. “The vision I had from the beginning is for us to be to the consumer what a company like Accenture is for a business,” he says.

To one longtime employee, this was an enticing idea: an elite group of salespeople who could offer more than the Geek Squad did. Corie Barry had tried to start an advisory program in 2010 when she was a senior director without a budget. Now she’s chief financial officer.

It starts with Fibonacci

Monday, July 30th, 2018

If you ever go to a Robeco presentation, Eric Falkenstein says, be sure to hit them up for their Concise Financial History of Europe:

It starts with Fibonacci introducing the Arabic number system in 1202, but interestingly the Florentine bankers prevented anything but Roman numerals as of 1299, and the Medici’s didn’t adopt Arabic numerals until 1500.

The Florentine bankers Bardi, Peruzzi, and Acciaiuoli, who prospered from 1300 to 1340, left a lot of documentation about their business. The Medicis then dominated from 1397–1494, followed by the Fuggers, and then the Rothschilds from 1800-1900. Interestingly, the Rothschild patriarch created the perfect family business, putting his five sons in key cities throughout Europe, allowing them to arbitrage the different exchange rates common to markets that are not fully integrated. Last year Bitcoin often traded at prices 5% higher in Korea, but it is difficult to move money in and out of Korea. The only way to arb this requires a non-formal relationship with someone in Korea, like a brother. You then buy in the US while your brother sells there, settling when you meet for a holiday.

Jan notes the rise of finance from Northern Italy, to Bruges, then Antwerp (1500-1550), and then Amsterdam. As the Dutch East India company was the first traded stock (1602) and prospered throughout the 17th century, Amsterdam was well situated. Amsterdam also reduced the uncertainty caused by the many coins and their various levels of debasement by requiring every transaction above 600 guilders to go through the Bank of Amsterdam, which kept a 100% reserve ratio and cleaned up the system by melting down ‘bad’ coins.

The English are fond of deprecating the Dutch — Dutch Uncle, courage, date — but they really owe the Dutch quite a bit. The financial center of Amsterdam literally moved to London around 1680, as when Dutch stadtholder William of Orange took over England via the Glorious Revolution in 1688, it gave them not only a Bill of Rights that limited monarchical power, it also created the Bank of England, tradable bonds, and an active London stock market. The start of the Industrial Revolution is often dated around 1750 centered in London, and surely it would have taken a lot longer without those innovations.

There was a simple way to get around the Catholic prohibition on interest. The 14th-century Florentine bankers simply used different FX rates on contracts. As FX rates could fluctuate the bill was not considered a loan and so not usury. Explicit loans were also available, but they would have been more like ‘payday’ lending today, a business dominated by two outsider groups: Jews who could charge interest to non-Jews, and pawnbrokers nicknamed Lombards, whose name underlies the ‘Lombard Streets’ found in many financial districts.

One streaming platform is prioritizing classic catalog titles

Sunday, July 29th, 2018

I’m not at all nostalgic for video-rental stores like Blockbuster, but they did have their advantages:

Over five billion rentals have come through 40,000 Redbox kiosks since the company’s launch in 2002 — they now control 51% of the physical rental market in the US. But even the biggest Redbox machine only holds around 600 discs, covering up to 200 titles — no match for even a tiny video store.

Since 2010, the total number of feature films available to stream on Netflix has dropped from 6,755 to 3,686 as of writing this — a loss of more than three thousand titles. There are far more television shows available on Netflix than in 2010 — up from 530 to 1,122 — but that doesn’t make up for the massive decline in streamable films.

And, as BGR notes, “Not only is Netflix primarily focused on generating original TV content, Netflix chief content officer Ted Sarandos a few years ago said that 66% of all Netflix subscribers don’t even watch movies.”

In 2018, over 375 million people subscribe to Netflix, HBO, Amazon Prime, and Hulu. Streaming has become the dominant way in which most of us consume media, but little consideration has been given to what we’ve lost in saying goodbye to the tactile, human experience of visiting a video store.

[...]

Netflix’s current streaming catalogue of 3,686 films seems paltry when compared to even the most average Blockbuster, which stocked in the neighborhood of 10,000 titles. Amazon Prime’s streaming library is three times the size of Netflix’s, with 14,214 films now streaming — Amazon also offers an additional 20,265 titles via their rental service for an additional fee. Hulu has less than half as many movies as Netflix with 1,448 titles now streaming. On HBO NOW, that number falls to only 727 films.

[...]

No streaming service has been able to match the breadth and depth of a decades-old video store — at least not yet. Netflix’s disc rental service included 93,000 titles as of 2015 — a comparable library to somewhere like Eddie Brandt’s. But, disc rental isn’t a priority for Netflix: in 2016, they spent almost $1 billion promoting their streaming platform, but the physical rental service “doesn’t even have a marketing budget,” reports AP News.

And, even with 125 million streaming subscribers, Netflix still relies on physical media more than one might assume. AP News notes that Netflix makes “an operating profit of roughly 50 percent on DVD subscriptions, after covering the expense of buying discs and postage to and from its distribution centers…DVD profits have helped subsidize Netflix’s streaming expansion outside the U.S., a push that has accumulated losses of nearly $1.5 billion during the past five years [2011–2016.] The DVD service has made $1.9 billion during the same period, enabling Netflix to remain profitable.”

Besides Netflix’s physical DVD and Blu Ray service, the best, more accessible option for physical media rental for most is one of the 40,000 Redbox kiosks currently operating in America. While Redbox does carry many new release titles long before they reach streaming, when I looked up the Redbox closest to me in Hollywood, I found that only 168 titles were available in the machine, most of them from the last three years — not exactly an extensive selection, nor one that appeals to viewers interested in film history beyond the last decade.

The dearth of classic films and focus on new content becomes more apparent when taking a closer look at what’s available by decade on each of the major streaming services. According to JustWatch, two titles made before 1930 are now streaming on Netflix — they offer only 15 films made before 1950, 26 made before 1970, and 98 made before 1990. By streaming fewer than one hundred films to cover the medium’s first one hundred years, Netflix is doing an egregious disservice to film’s first century.

With four times as many titles as Netflix overall, it’s not surprising that Amazon Prime offers far more classic titles as well — 77 films on the platform were made before 1930; 661 before 1950; 1,292 before 1970; and 3,048 before 1990. But Amazon is the exception among streaming platforms — Hulu offers 115 films made by 1990 or earlier, and on HBO NOW, there are only 55 films that meet that same criteria.

There’s simply no question that new and exclusive content is the priority for Netflix, Amazon Prime, and Hulu. 3,155 of the 3,686 films now available to stream on Netflix are from the last ten years — 85% of their entire catalogue. On Hulu, 75% of all movies are from the last ten years too. And while Amazon Prime certainly bests all other major platforms when it comes to “old movies”, 59% of their currently streaming films are from the last ten years as well.

But, one streaming platform is prioritizing classic catalogue titles: FilmStruck, which launched in late 2016. FilmStruck self-describes as featuring “iconic films of all kinds from Hollywood classics to independent, foreign and cult cinema. As the exclusive streaming home of TCM Select and the Criterion Collection, FilmStruck is the world’s largest classic film vault.”

FilmStruck partnered with Warner Bros. to (eventually) bring films like CASABLANCA, CITIZEN KANE, SINGIN’ IN THE RAIN, REBEL WITHOUT A CAUSE, and WHO’S AFRAID OF VIRGINIA WOOLF? to a streaming platform for the first very time. Including Criterion Collection titles (which are available for a small additional monthly fee) FilmStruck’s catalogue is still growing with 1,975 titles available. But more than 86% of their library is from 1990 or earlier, providing film fans with exclusive access to essential titles that are being overlooked and de-prioritized by other streaming services.

The idea that beloved, superlative films like CASABLANCA and CITIZEN KANE can only be accessed with a subscription to an arthouse/classic focused streaming service is quite frankly insane. THE GODFATHER trilogy is now available on Netflix, but that’s only been the case since January of 2018. Even something as ubiquitous as STAR WARS is only available in its first, unedited iteration as a VHS box set from 1995 — and the original trilogy isn’t currently streaming anywhere.

And of course, most major streaming platforms are deep into the original content game. Netflix has released 25 original films and added 7.4 million new subscribers thus far in 2018 — that’s as many releases as the six major studios combined. They plan to release 80 films by the end of the year. The focus on new content creation over the preservation of and access to catalogue titles for most streaming services is quite clear.

There are many hurdles to making the classic available:

The biggest hurdle affecting deep catalogue home video releases, going all the way back to the dawn of the format, has been music rights, since from EASY RIDER onward, when pop song recordings became common on film soundtracks. Contracts only covered theatrical and TV, and even after they started accounting for home video, they didn’t factor the invention of DVD. Some of the earliest home video releases are the rarest now because they were put out before the lawyers realized you needed to make a new deal for the new media.

Now that there are only three major labels, with the downturn of physical media and the slivers of pennies that come from streaming, they and the artists they control get significant money from licensing to TV, film, and commercials, so their incentive is to take the studios for all they’ve got, feeling they have them over a barrel, since many times the songs are often so embedded in the films, they can’t be replaced, or directors won’t approve of the change. But in turn, studios are loath to pay the inflated music fees because they feel the cost spent in clearing the songs will not be recouped by whatever sales a title may have, and it’s cheaper just to do nothing.

The second biggest problem keeping movies off of physical media is ancient, expired intellectual property rights, usually involving books or plays that were originally only cleared for so many years because back then, nobody thought about repertory demand years after the fact. Warner Bros. has had a big problem with this in particular, a lot of Golden Age classics that they own — BEYOND THE FOREST, LETTY LYNTON, CEILING ZERO — can’t be cleared for video because the estates of the authors of those original source materials can’t come to terms about relicensing the story rights. This is what held up NIGHTMARE ALLEY for years, and likely also what has kept one of the greatest comedies of all time, Olsen & Johnson’s HELLZAPOPPIN’, in limbo.

Since the rise of “secondary studios” from the ’70s onward, lots of movies that went out through the majors are now reverting to other companies that are only interested in them as properties to be developed rather than preserved. Bristol-Myers-Squibb owns the original THE HEARTBREAK KID, THE STEPFORD WIVES, and SLEUTH, and they’ve done nothing with them since the early noughts Anchor Bay releases, aside from sell remake rights. We’re beginning to see that on a larger scale with Morgan Creek, Regency, Revolution, and others — the old deals are expiring, what new deals are being made are just cherry-picking the hits and leaving the deep cuts behind.

Amazon’s Kindle Unlimited is a boon for some authors

Saturday, July 28th, 2018

Amazon’s Kindle Unlimited is a boon for some authors:

Industrywide, self-publishing is gaining readers as traditional publishers are losing them, according to Author Earnings, a site produced by an anonymous marketing analytics expert who calls himself Data Guy. The self-published share of paid US e-book units increased to 46.4 percent from 44.7 percent between the second quarters of 2017 and 2018, Data Guy told me in an email, while the traditionally published share of paid e-book units decreased to 43.2 percent from 45.5 percent. (His data takes into account self-published and Amazon imprint-published books, which many traditional data sources do not.)

Central to Amazon’s gambit — and authors’ pay — is Kindle Unlimited. Launched in 2014, the feature was a response to other companies that were trying to create a Netflix for books, such as Oyster, which shut down in 2015, and Scribd, which is slowly gaining acceptance from the Big Five publishing houses. Authors can choose to participate in KDP Select, which automatically puts a book into Kindle Unlimited, and which can be highly lucrative. Amazon sets aside a pot of money every month that it divvies up among KDP Select authors, based on how many of their pages have been read each month by Kindle Unlimited subscribers and readers from the Kindle Owners’ Lending Library, which allows Prime members to borrow one book a month for free. The payment ends up being a little less than half a penny per page, authors told me, but those who are read the most can also get monthly bonuses as high as $25,000. Last year, Amazon paid out more than $220 million to authors, the company told me. Regardless of participation in KDP Select, authors who self-publish on Amazon through KDP also earn a 70 percent royalty on books priced between $2.99 and $9.99, and a 35 percent royalty on books that cost more or less than that.

Kindle Unlimited works in the same way as Amazon’s other big subscription service, Prime: Just as Prime users often think of shipping as free, even though they’re paying a monthly or annual fee for it, Kindle Unlimited readers may begin to think of books as free, even though they’re paying a monthly fee, because each additional book they read in Kindle Unlimited doesn’t cost them anything extra. This can be a boon for new authors: Readers who might not be willing to pay outright for books by unknown writers will read those books on Kindle Unlimited, where they feel “free.”

“I truly believe that people would not read as many of my books were I not on Kindle Unlimited,” Samantha Christy, who decided to try writing romance novels in 2014, told me. Christy’s Amazon writing career has been so successful that it supports her four children and husband, who quit his job two years ago to manage her IT, taxes, and publishing business. Christy, who typically writes three books a year, talked to me from Hawaii, where she was vacationing with her family before they were headed to Comic-Con International in San Diego to speak on a panel about self-publishing.

Kindle Unlimited has its downsides. Amazon demands exclusivity from its KDP Select authors, meaning they can only sell their books on the Kindle Store, and not on any other digital bookstores, or even on their own websites. The payment structure means that authors who produce a lot of pages, even if they’re not particularly good pages, earn more money than authors who write succinctly. Almost since the launch of Kindle Unlimited, Amazon has been battling “book stuffers,” authors who publish hundreds of pages of content in Kindle Unlimited, some of which is gibberish, some of which tricks readers into flipping to the last page of the book, so the book will count as read and they’ll get paid. Self-publishing on Amazon’s platforms benefits authors in some genres — including romance and mystery, where readers tear through books and writing them might not take a long time — over those who spend years writing novels, or who do deeply researched nonfiction books, Mary Rasenberger, the executive director of the Author’s Guild, told me.

And authors on Kindle Unlimited have to work hard to promote themselves and attract new readers in a crowded marketplace; one, I.T. Lucas, told me she works 12-hour days, seven days a week. Part of that is writing — she has published 21 full-length novels in three years — and part is marketing. “You have to be willing to run a business at the same time,” Rasenberger said. Christy tries to answer every message she receives on Facebook, does a lot of free giveaways, and frequently holds Q&As and other events. Many authors buy ads on Amazon, effectively paying their employer to get more customers.

The structure of Kindle Unlimited also means writers need to churn out a lot of content. Since 2014, Lea Robinson and Melissa King have published more than 100 romance novels and novellas on Amazon under the pen name Alexa Riley. They told me by phone that they make the bulk of their money from payments from KDP Select as people read their backlist of titles on Kindle Unlimited. This motivates them to keep producing; the more pages they have on Kindle Unlimited, the higher the chance they’ll be a most-read author, which will win them tens of thousands of bonus dollars from Amazon. Each woman tries to write 3,000 words a day, and Alexa Riley generally publishes three books a month.

Even so, King and Robinson said that writing for Amazon doesn’t necessarily feel like more of a churn than any other job would. Each writes from about nine to five each day, and never on the weekends.They both recently left their full-time jobs (Robinson in banking, King as a CFO) to write Alexa Riley books. They have a formula — sexy men, headstrong women, a happy ending — that they and their readers both enjoy. “It is a production with us,” King said. “We don’t deviate from how we write, and we know there are key points we have to hit, and we don’t change our formula.” This formula helps them, since once people discover one book, they tend to pore over the Alexa Riley backlist on Kindle Unlimited for more of the same, which brings in more income for King and Robinson. If they publish a new book and make $10,000 a month, they estimate, just $3,000 of that income comes from sales of the new book on Amazon; the rest comes from Kindle Unlimited payments.

Google was not a normal place

Monday, July 23rd, 2018

Google was not a normal place, as this disjointed excerpt from Valley of Genius explains:

Charlie Ayers, Google’s first executive chef and, therefore, a member of an early executive team: I remember going in for an interview and Larry bounced on by on one of these big balls that have handles on them, like you buy at Toys “R” Us when you’re a kid. It was just a very unprofessional, uncorporation attitude. I have a pretty good understanding of doing things differently from the Grateful Dead—I’ve worked on and off with them over the years—but from my perspective, looking from the outside, it was an odd interview. I’d never had one like that. I left them thinking that these guys are crazy. They don’t need a chef!

Heather Cairns: I was very surprised that they hired this ex–Grateful Dead chef, since clearly everything that goes with that is coming with Charlie. Talk about a counterculture person!

Charlie Ayers: Larry’s dad was a big Deadhead; he used to run the Grateful Dead-hour talk show on the radio every Sunday night. Larry grew up in the Grateful Dead environment.

Larry Page: We do go out of our way to recruit people who are a little bit different.

Charlie Ayers: There was no under-my-thumb bullshit going on where you all had to dress and look and smell and act alike. Their unwritten tagline is like: You show up in a suit? You’re not getting hired! I remember people that they wanted showing up in suits and them saying, “Go home and change and be yourself and come back tomorrow.”

Heather Cairns: We said it was O.K. to bring pets to work one day a week. And what that did was encourage people to get lizards, cats, dogs—oh my God, everything was coming through the door! I was mortified because I know this much: if you have your puppy at work, you’re not working that much.

Douglas Edwards, Google employee #59: We would go up to Squaw Valley, C.A., and attendance was pretty much mandatory. That became the company thing.

Ray Sidney: The very first ski trip was in the first part of 1999. That was definitely a popular event over the years.

Charlie Ayers: On the ski trips in Squaw Valley, I would have these unsanctioned parties and finally the company was like, “All right, we’ll give Charlie what he wants.” And I created Charlie’s Den. I had live bands, D.J.s, and we bought truckloads of alcohol and a bunch of pot and made ganja goo balls. I remember people coming up to me and saying, “I’m hallucinating. What the fuck is in those?” . . . Larry and Sergey had like this gaggle of girls who were hot, and all become like their little harem of admins, I call them the L&S Harem, yes. All those girls are now different heads of departments in that company, years later. (A spokesperson for Google declined to comment.)

Heather Cairns: You kind of trusted Larry with his personal life. We always kind of worried that Sergey was going to date somebody in the company . . .

Charlie Ayers: Sergey’s the Google playboy. He was known for getting his fingers caught in the cookie jar with employees that worked for the company in the masseuse room. He got around.

Heather Cairns: And we didn’t have locks, so you can’t help it if you walk in on people if there’s no lock. Remember, we’re a bunch of twentysomethings except for me—ancient at 35, so there’s some hormones and they’re raging.

Charlie Ayers: H.R. told me that Sergey’s response to it was, “Why not? They’re my employees.” But you don’t have employees for fucking! That’s not what the job is.

Heather Cairns: Oh my God: this is a sexual harassment claim waiting to happen! That was my concern.

Charlie Ayers: When Sheryl Sandberg joined the company is when I saw a vast shift in everything in the company. People who came in wearing suits were actually being hired.

Heather Cairns: When Eric Schmidt joined, I thought, Well, now, we have a chance. This guy is serious. This guy is real. This guy is high-profile. And of course he had to be an engineer, too. Otherwise, Larry and Sergey wouldn’t have it.

This is what charisma is like in action

Saturday, June 9th, 2018

Randall Collins explains the micro-sociology of charisma:

A charismatic leader pumps up followers with emotional energy; they admire their leader and follow willingly in his or her trajectory. Emotional dominance is a different mechanism because it operates by hogging the emotional energy. Charisma includes people rather than excludes them. Durkheim would say that the charismatic leader becomes the sacred object for the group; I would say he or she is the focus of attention that sets the trajectory of the group, filling them with enthusiasm that they will accomplish something great together.

A few brief examples. Joan of Arc led French troops to assault English fortresses, not because she was a great fighter but because she carried the banner at the front, and her followers would swarm up after her because they believed she could not fail. In quieter moments, she would display her humility as an agent of God and her personal saints, by weeping in church, so expressively that everyone else would be weeping along with her. It is no exaggeration to say that she led a procession across France of crowds weeping, and rushing behind her into battle. The shared emotion of weeping — a bodily process that sweeps one out of control — was the emotional mechanism that generated the sense of religious-plus-political trajectory.

Jesus, like most charismatic leaders, was a good observer of persons; he knew who could be moved to join him, and who had something else on their mind. Jesus always seized control of the interaction by the second conversational turn: instead of replying to what someone else said, he intuited what they meant and challenged them on it. He could turn the tables even on hostile enemies by controlling the rhythm and letting embarrassing silences work against them, then seizing the moment to make his point.

Jumping to a recent example of a dominant business entrepreneur, Steve Jobs: Jobs was not an engineer or a designer, but he had excellent judgment as to who were the most creative people to hire. He recruited them, in part, by touting the revolutionary things they would invent, and offering generous shares of the profits. Above all, he challenged them to do things that they thought were impossible; his emotional domination in arguing with his technical staff was so strong that they jokingly said Steve had a reality-distortion field.

The way it worked was by an extremely intense interaction ritual in the workplace. Steve would visit the most advanced work group, look at what they had done, and start criticizing it. His comments were crude, obscene and insulting. We might think his high-tech experts wouldn’t stand for this, that they would quit or rebel. But Jobs was not the kind of boss who walks in, shouts at his workers, threatens them if they don’t do better, then slams the door and leaves. Steve would insult them until they were really angry; then he would stay and argue with them. His persistence was incredible — he would argue with them for hours. He was famous for dropping in on people and staying up all night arguing and expounding his vision. Obviously Steve has a lot of emotional energy to be able to do this: he shows the familiar pattern of the charismatic leader who doesn’t need sleep, a single-minded workaholic who never takes a break. This high level of emotional energy is the result of constantly being in the center of successful interaction rituals. But the most energizing interaction rituals are not mere emotional dominance, where everyone else’s emotional energy is crushed. Jobs wants energized workers who share his vision, technical experts who push beyond the limits of what they had thought possible.

The crucial pattern is in the time-sequence. Steve enters, and forcefully seizes the emotional center of attention. He uses negative emotions to begin with; he gets everyone seething with the same emotion, even if it is anger at himself. He gets them into an intense argument about how the thing they are inventing can or cannot be changed in ways no one has thought of before. Let us say, roughly, twenty minutes of insulting, then hours of heated argument. Over those hours, the emotions settle down; they are no longer focused on Steve and his insults, but about a vision of the piece of computer equipment in front of them, and where they can go with it. Steve did not always win these arguments; if something turned out to be genuinely impossible, he would tacitly accept that, provided they had figured out a work-around that would get them into the territory they were aiming for.

One could say that Steve Jobs was extremely egotistical, but his ego was in his products; and these were very much the products of a team, as cutting-edge as he could assemble. His core team became so convinced that Steve could do anything that they stuck with him, even in the dark days when he was forced out of Apple by the marketing and financial managers he had brought in to handle the non-technical side. It would be superficial to say that Steve Jobs achieved success by abusing his employees. He used very confrontational tactics to stir up emotions, but his secret was that he never walked away from them: but always saw the argument through to a shared resolution.  He was an expert at provoking intense interaction rituals.

This is what charisma is like in action: it energizes a group, along a trajectory that they believe will be a glorious success.

Making movies for the audience Hollywood has ignored

Saturday, May 26th, 2018

Someone is finally pursuing the obvious strategy of making movies for the audience Hollywood has ignored:

Since fleeing Los Angeles in 2015 for Texas, where he grew up, Mr. Sonnier has cast himself as the producer willing to do features that others in Hollywood consider politically radioactive. In the past year, he has wrapped production on “Dragged Across Concrete,” starring Mel Gibson as a cop accused of beating a suspect, filmed a drama about militia members, and bought a script about a school shooting in which a female student wrests control of a gun and fights back.

Mr. Sonnier’s revenues from a film are a tiny fraction of those from a major studio release, but he is making money off his strategy by keeping production costs low and relying on word-of-mouth to turn his movies into sleeper hits. With a budget of $3.8 million, “Brawl” has turned a profit, says Mr. Sonnier. He says Cinestate did it by selling distribution rights to overseas markets on the strength of Mr. Vaughn’s “Wedding Crashers” fame, pocketing nearly $2 million for streaming rights from one online service and selling more than 40,000 DVDs in the first two weeks of release at big-box stores — a healthy performance in an age when few buy DVDs anymore.

Hollywood has occasionally targeted conservative moviegoers, releasing faith-based movies in specific neighborhoods or producing patriotic blockbusters such as “American Sniper.” The difference is that Mr. Sonnier is betting a whole company on a strategy of finding consumers he says are “outside the coasts,” marrying ideology with opportunism.

“The political climate brings a spotlight to these kinds of movies. We’re not shying away from that,” Mr. Sonnier says. “It’s funny that, in this moment in time, the movies we’re making are almost counterculture.”

Other studios don’t appear to be mimicking his approach, but some recent Hollywood moves seem to affirm Mr. Sonnier’s conviction that he’s tapping an underserved audience. The revival of the “Roseanne” TV series, starring the comedian Roseanne Barr as a Trump voter navigating various social issues, was part of a strategy at ABC discussed by executives at a meeting held the day after the election about how to entertain a broader swath of the nation.

The premiere episode’s top market was Tulsa, Okla., according to ABC, where it outperformed the national average by 60%.

[...]

“Sparrow Creek,” filmed in under three weeks for less than $1 million, Mr. Sonnier says, is part of a microbudget strategy he has used to profitable effect on previous movies “Brawl” and his 2015 Western, “Bone Tomahawk.”

When “Brawl” appeared on iTunes, the prison revenge movie shot to the top 10. The other titles in the iTunes top 10 at the time, “Spider Man: Homecoming” and “Wonder Woman” among them, had wide theatrical releases.

[...]

To pay the bills, he made direct-to-video shoot-’em-up films with Steve Austin, the wrestling champion.

One day, he dropped off Ms. Gerwig at an audition for Noah Baumbach’s art-house film “Greenberg,” he says, and met Mr. Austin for lunch on Sunset Boulevard. A fan approached the wrestler, had him autograph her arm and returned to show she’d had it tattooed. “Talk about walking in two universes,” he says.

The Austin features, with titles such as “Hunt to Kill,” taught Mr. Sonnier a simple formula: budgets under $1 million and foreign-rights deals that put the project in the black before cameras roll. He deployed what he calls a “Mad Libs” plot:

“A guy named Jim/John/Jack gets out of prison/wakes up from the dead/survives and comes back to his hometown/scene of the crime/where the bad guys are and kills everyone to save his family/save himself/save someone who can’t save themselves.”

He says: “As long as we stuck to the Mad Lib, the movie sold 300,000 to 500,000 units.”

Making everything else that was previously considered into obviously terrible ideas

Wednesday, May 16th, 2018

John Carmack shares some stories about Steve Jobs:

My wife once asked me “Why do you drop what you are doing when Steve Jobs asks you to do something? You don’t do that for anyone else.”

It is worth thinking about.

As a teenage Apple computer fan, Jobs and Wozniak were revered figures for me, and wanting an Apple 2 was a defining characteristic of several years of my childhood. Later on, seeing NeXT at a computer show just as I was selling my first commercial software felt like a vision into the future. (But $10k+, yikes!)

As Id Software grew successful through Commander Keen and Wolfenstein 3D, the first major personal purchase I made wasn’t a car, but rather a NeXT computer. It turned out to be genuinely valuable for our software development, and we moved the entire company onto NeXT hardware.

We loved our NeXTs, and we wanted to launch Doom with an explicit “Developed on NeXT computers” logo during the startup process, but when we asked, the request was denied.

Some time after launch, when Doom had begun to make its cultural mark, we heard that Steve had changed his mind and would be happy to have NeXT branding on it, but that ship had sailed. I did think it was cool to trade a few emails with Steve Jobs.

Several things over the years made me conclude that, at his core, Steve didn’t think very highly of games, and always wished they weren’t as important to his platforms as they turned out to be. I never took it personally.

When NeXT managed to sort of reverse-acquire Apple and Steve was back in charge, I was excited by the possibilities of a resurgent Apple with the virtues of NeXT in a mainstream platform.

I was brought in to talk about the needs of games in general, but I made it my mission to get Apple to adopt OpenGL as their 3D graphics API. I had a lot of arguments with Steve.

Part of his method, at least with me, was to deride contemporary options and dare me to tell him differently. They might be pragmatic, but couldn’t actually be good. “I have Pixar. We will make something [an API] that is actually good.”

It was often frustrating, because he could talk, with complete confidence, about things he was just plain wrong about, like the price of memory for video cards and the amount of system bandwidth exploitable by the AltiVec extensions.

But when I knew what I was talking about, I would stand my ground against anyone.

When Steve did make up his mind, he was decisive about it. Dictates were made, companies were acquired, keynotes were scheduled, and the reality distortion field kicked in, making everything else that was previously considered into obviously terrible ideas.

I consider this one of the biggest indirect impacts on the industry that I have had. OpenGL never seriously threatened D3D on PC, but it was critical at Apple, and that meant that it remained enough of a going concern to be the clear choice when mobile devices started getting GPUs. While long in the tooth now, it was so much better than what we would have gotten if half a dozen SoC vendors rolled their own API back at the dawn of the mobile age.

Trader Joe’s eschews the long tail

Monday, April 23rd, 2018

What Megan McArdle and her neighbors love about Trader Joe’s is not a particular product, or even the store’s subtle hippie aesthetic, but its business model:

That business model can be summed up in two things: “private label” and “low SKUs.” Private label is self-explanatory; Trader Joe’s house-brands most of its products, which means they’re cheaper (no need to pay for all those national advertising campaigns).

But maybe you already realized that. It’s the low SKUs that really offer a hidden benefit to millions of unwary shoppers. SKU is an industry acronym for a “stock-keeping unit,” a.k.a. “one product.” The average grocer carries nearly 50,000 SKUs. Trader Joe’s, by contrast, carries only about 4,000. That’s an immense difference — though you’ll only realize how immense when you think through the implications.

Real estate, for instance. The new Trader Joe’s near my house is, by the standards of a Trader Joe’s, quite roomy, with wide aisles and lovely high ceilings. But compared to the local grocery stores, it’s still compact. In a dense, urban area like Washington, that’s a big savings on rent — which can be passed on to you in lower prices.

The advantages hardly stop there. When you only have a few SKUs, all of which have to earn their place on the shelf by selling briskly, you end up with less spoilage than a normal grocery store. Given the razor-thin margins typical of the industry, spoilage can be the difference between turning a profit and running into the red. Minimizing your SKUs gives you even more room to cut the prices on the products you do sell.

[...]

The thing about having 50,000 SKUs (or 100,000, as is typical of a Walmart) is that no employee can be familiar with more than a small fraction of them. It is not possible, in such a place, to deliver the kind of service that Trader Joe’s does. For example, the new outlet’s store captain, Rebekah Eagle, told me that the store regularly holds employee tastings to familiarize the staff with what they’re selling. A great idea, with a limited stock selection; not feasible in a conventional grocery. And since it is actually impossible for front-line workers at conventional stores to deliver Trader Joe’s-level service, it doesn’t necessarily make business sense to invest in the kind of training and retention policies that Trader Joe’s does.

The private-label branding allows Trader Joe’s to attract loyal customers with cheap prices. And the low number of SKUs allows it to generate extremely high revenue per square foot, enabling it to pay the rents even in expensively dense urban areas and to lower prices even further. It’s a pretty neat trick, if you can manage it.

Many firms don’t know their numbers

Saturday, April 7th, 2018

Alex Tabarrok has learned a lot about industrial organization by watching The Profit, a reality-TV show on CNBC featuring businessman Marcus Lemonis:

In each episode Lemonis buys into a failing small-to-medium-sized business and works to turn it around. Lemonis doesn’t invest in a random sample of businesses nor even in a random sample of failing businesses. Nevertheless, the lessons that The Profit teaches are consistent with the new literature on management which has increased my confidence both in the show and the literature.

In the perfectly competitive model, price is equal to average cost and firms operate efficiently at minimum cost. Yet, Syverson finds that in the typical US industry a firm at the 90th percentile of the productivity distribution makes almost twice as much output with the same inputs as a firm at the 10th percentile. It’s not easy to measure inputs or outputs, of course, but even firms producing very uniform products show big productivity differences.

How can firms that use inputs so inefficiently survive? In part, competition is imperfect which gives inefficient firms a cushion because they can charge a price higher than cost even as costs are higher than necessary. Another reason is that small firms eat their costs.

A typical firm on The Profit, for example, has decent revenues, sometimes millions of dollars of revenues, but it has costs that are as high or higher. What happened? Often the firm began with a competitive advantage — a product that took off unexpectedly and so for a time the firm was rolling in profits without having to pay much attention to costs. As competition slowly took hold, however, margins started to decline and the firm found itself bailing. But instead, of going out of business, the firm covers its losses with entrepreneurs and family members who work without pay, with loans which grow ever larger, and by an occasional demand shock which generates enough surplus revenue to just keep going.

The correct metaphor for competition isn’t a boxing match that knocks out the inefficient firm. The correct metaphor is a slow tide. Inefficient firms must scramble for a bit of high ground but as the tide ebbs and flows they can occasionally catch a breath when their head bobs above the profit line. An inefficient firm can survive for years before it inevitably sinks.

The second lesson from The Profit is that management matters and it matters in systematic and fairly easy to replicate ways. If mis-measurement explained productivity differences, Lemonis would not be able to successfully turn firms around. But he can and does. How?

One of the first things Lemonis does in almost every episode is get the numbers right so he can calculate which products are selling and which have the highest price-to-cost margin. Concentrate production on high-margin, big sellers. Drop the rest. Simple; but many firms don’t know their numbers.

Second, in episode after episode, Lemonis cleans up shop. Literally. He cleans the shop floor and gets rid of inventory that isn’t selling. He then arranges the floor to improve process flow (made easier by concentrating production on fewer products). He then creates an inventory system, tracks orders and the inputs needed to create those orders, and takes advantage of costs savings through economies of scale in input purchases.

Can it be so simple? To be sure, Lemonis is a smart guy but very little of what he does takes genius. We know this because we now have robust evidence from India and Mexico that better management increases profits and productivity and that such increases can be sustained over the long run. In the studies from India and Mexico, randomly selected firms were given access to a “management intervention” and their productivity and profits improved and stayed higher for years after the intervention ended.

Moreover, what were these management interventions? Did some bright Harvard grad recommend a complicated swap-options deal? A new chemical process? A new management form? No. By and large, the interventions were simple. Just like the Lemonis interventions.

Communist-style incentives at work

Friday, February 9th, 2018

While we were recently discussing flawed incentive systems, David Foster brought up some Communist examples:

There’s an old story about a Soviet-era factory that made bathtubs. Plant management was measured on the total tonnage of output produced–and valves & faucets don’t add much to the weight, certainly not compared with the difficulty of manufacturing them. So the factory simply made and shipped thousands of bathtubs, without valves or faucets.

He notes that the above story may be apocryphal. The version I heard involved cars and people stealing each other’s windshield wipers.

He continues with a more spectacular example from Viktor Suvorov, who was working on a communal farm in Russia, when the General Secretary of the Party announced that they needed to increase their output, and the fertilizer plant resolved to do its part:

A vast meeting, thousands strong, complete with brass bands, speeches, placards, and banners, was urgently called at the local Chemical Combine. To a man, they shouted slogans, applauded, chanted patriotic songs. After that meeting, a competitive economy drive was launched at the Chemical Combine to harvest raw materials and energy resources.

The heroic efforts of the factory workers filled the plant’s storage tanks to capacity, and the local communes had 24 hours to take possession of their liquid fertilizer:

There was a long queue of trucks of different makes, dimensions, and colours standing outside the Chemical Combine. But the queue was moving fast. I soon discovered that lorries, which had only a moment before been loaded, were already returning and taking up new places in the queue. Every one of these lorries ostensibly needed many hours to deliver its valuable load to its destination and then to return. But they rejoined the queue in a matter of minutes. Then came my turn. My tanks were rapidly filled with the foul-smelling liquid, and the man in charge marked down on his list that my native kolkhoz had just received the first one and a half tons of fertilizer. I drove my lorry out through the Combine’s gates and followed the group of lorries which had loaded up before mine. All of them, as if at a word of command, turned off the road and descended a steep slope toward the river Dneiper. I did the same. In no time at all, they had emptied their tanks. I did the same. Over the smooth surface of the great river, the cradle of Russian civilization, slowly spread a huge poisonous, yellow, stinking stain.

Foster warns us not to get too smug though. If you read the whole thing, he has an example of capitalist stupidity, too.

Three negative archetypes

Thursday, February 8th, 2018

Will Felps, who studies organizational behavior at the University of South Wales in Australia, secretly brought grad student Nick into his experiment, where groups were asked to construct a marketing plan for a start-up, and had him portray three negative archetypes — the Jerk (an aggressive, defiant deviant), the Slacker (a withholder of effort), and the Downer (a depressive Eeyore type):

In almost every group, his behavior reduces the quality of the group’s performance by 30 to 40 percent. The drop-off is consistent whether he plays the Jerk, the Slacker, or the Downer.

“When Nick is the Downer, everybody comes into the meeting really energized. He acts quiet and tired and at some point puts his head down on his desk,” Felps says. “And then as the time goes by, they all start to behave that way, tired and quiet and low energy. By the end, there are three others with their heads down on their desks like him, all with their arms folded.”

When Nick plays the Slacker, a similar pattern occurs. “The group quickly picks up on his vibe,” Felps says. “They get done with the project very quickly, and they do a half-assed job. What’s interesting, though, is that when you ask them about it afterward, they’re very positive on the surface. They say, ‘We did a good job, we enjoyed it.’ But it isn’t true. They’d picked up on the attitude that this project really didn’t matter, that it wasn’t worth their time or energy. I’d gone in expecting that someone in the group would get upset with the Slacker or the Downer. But nobody did. They were like, ‘Okay, if that’s how it is, then we’ll be Slackers and Downers too.’”