“Power does not corrupt. Fear corrupts… perhaps the fear of a loss of power”*…

Over at Harvard Business Review‘s blog, there’s a provocative post by James Allworth: “How Corruption is Strangling U.S. Innovation.”

If there’s been one topic that has entirely dominated the post-election landscape, it’s the fiscal cliff. Will taxes be raised? Which programs will be cut? Who will blink first in negotiations? For all the talk of the fiscal cliff, however, I believe the US is facing a much more serious problem, one that has simply not been talked about at all: corruption. But this isn’t the overt, “bartering of government favors in return for private kickbacks” corruption. Instead, this type of corruption has actually been legalized. And it is strangling both US competitiveness, and the ability for US firms to innovate.

The corruption to which I am referring is the phenomenon of money in politics…

Allworth goes on to provide a series of examples from arenas– the automotive industry, intellectual property, accommodation and transport, telecom– that illustrate his point all-too-painfully well. For example…

When Walt Disney penned Steamboat Willie — the first cartoon with Mickey Mouse in it — copyright lengths were substantially shorter than they are now (but still enough such that it gave encouragement to Walt to create his famous character). And yet somehow, it seems that every time that Mickey is about to enter the public domain, congress has passed a bill to extend the length of copyright. Congress has paid no heed to research or calls for reform; the only thing that matters to determining the appropriate length of copyright is how old Mickey is. Rather than create an incentive to innovate and develop new characters, the present system has created the perverse situation where it makes more sense for Big Content to make campaign contributions to extend protection for their old work.

It’s not just copyright, either — the same mentality has been driving draconian legislation such as SOPA and PIPA.

And finally, if you were in any doubt how deep inside the political system the system of contributions have allowed incumbents to insert their hands, take a look at what happened when the Republican Study Committee released a paper pointing out some of the problems with the current copyright regime. The debate was stifled within 24 hours. And just for good measure, Rep Marsha Blackburn, whose district abuts Nashville and who received more money from the music industry than any other Republican congressional candidate, apparently had the author of the study, Derek Khanna, fired. Sure, debate around policy is important, but it’s clearly not as important as raising campaign funds.

Allworth didn’t go on; but he could have. He could have elaborated on the abuses in each of the sectors he identified; there’s certainly plenty of material. And he could have added other sectors– financial services, for obvious example.  But his important point is well made. (Readers of this blog will recognize the concern, as it’s been a continuing theme here; see “Beware the Land of the Giants,” “Thinking the Unthinkable,” “To Promote the Progress of Science and the Useful Arts,” et al.)

What’s fascinating– and encouraging– to me is that Allworth’s piece is running at HBR. Lord knows, it’s only too important for that audience: the “corruption” that Allworth describes is poisonously bad for the whole economy and for all of the businesses in it– even for those fearful incumbents whose reflexively greedy moves seem to them to yield short-term return.

* “Power does not corrupt. Fear corrupts… perhaps the fear of a loss of power”  -John Steinbeck

Obeying the Law of Irony…

 

Recently, the Head of the US Patent and Trademark Office resorted to Orwellian Newspeak: “The explosion of litigation we are seeing is a reflection of how the patent system wires us for innovation.”  One character in Nineteen Eighty-Four, Syme, says admiringly of the diminishing scope of the new language: “It’s a beautiful thing, the destruction of words.”

Not so much.

Readers will know that I have argued for a more measured, balanced approach to Intellectual Property than has accrued over the last couple of decades, largely out of concern that the oligopolistic practices of incumbent rights holders will frustrate innovation and slow economic growth.  (See, e.g., “To promote the Progress of Science and useful Arts?…,” “Patently Absurd…,,” ”Caution! Pile up ahead…,” or “I was aiming for my foot, but I seem to have shot myself in the thigh…,”)

There’s new evidence that this imperial behavior is bad for the for the very industry it’s meant to protect… if not necessarily for the oligarchs who are behind it… at least in the short run.

Emil Protalinski, writing in The Next Web, explains:

We’ve heard this one before, over and over again: pirates are the biggest spenders. It therefore shouldn’t surprise too many people to learn that shutting down Megaupload earlier this year had a negative effect on box office revenues.

The latest finding comes from a paper titled “Piracy and Movie Revenues: Evidence from Megaupload” (via TorrentFreak) from last month, conducted by from Munich School of Management (LMU) and the Copenhagen Business School (CBS). Here’s the abstract:

In this paper we make use of a quasi-experiment in the market for illegal downloading to study movie box office revenues. Exogenous variation comes from the unexpected shutdown of the popular file hosting platform Megaupload.com on January 19, 2012. The estimation strategy is based on a quasi difference-in-differences approach. We compare box office revenues before and after the shutdown to a matched control group of movies unaffected by the shutdown.

The study analyzed weekly data from 1,344 movies in 49 countries over a five-year period. Here’s the crux of the results: “In all specifications we find that the shutdown had a negative, yet in some cases insignificant effect on box office revenues.” Not all movies were negatively affected: “For blockbusters (shown on more than 500 screens) the sign is positive (and significant, depending on the specification).”

The researchers try to explain how big blockbusters gained but overall revenues dropped:

Our counterintuitive finding may suggest support for the theoretical perspective of (social) network effects where file-sharing acts as a mechanism to spread information about a good from consumers with zero or low willingness to pay to users with high willingness to pay. The information-spreading effect of illegal downloads seems to be especially important for movies with smaller audiences. ‘Traditional’ theories that predict substitution may be more applicable to blockbusters

Unsurprisingly, the dip in revenues was most visible for average size and smaller films, as people are most likely to see big blockbusters with their friends regardless of what happens on the Internet. Those flicks are less likely to require word-of-mouth promotion by people who used Megaupload to share movies.

Of course this is just one paper, and I’m sure more studies will be done that will dive deeper into the data. By then though, Megaupload’s successor, Mega, will have launched.

The emphasis is mine:  while smaller producers suffer, the biggest studios, the purveyors of franchise blockbusters, are less affected… Competition recedes; a smaller and smaller number of larger and larger players have bigger and bigger shares of (what’s left of) the market– an altogether recognizable pattern of oligopolies.  One concerned solely with shareholder value in those surviving behemoths can argue over whether, in the long run, this is a good thing.  In the short run, some argue (from a shareholder value point-of-view), this is a good thing for the behemoths.  But in the longer run, it is deadly: it chokes off the competitive innovation that keeps the entire industry relevant and attractive.  In the not-too-distant future, the market will begin to shrink faster than an incumbent’s share can grow.

And for the “civilian,” the movie goer, it’s just plain bad:  more massive sequels, less diversity.  More Tron: Legacy and RoboCop 3; less Little Miss Sunshine and Precious.  It’s no wonder that cable is eating the movies’ lunch.

A ruse by any other name…

 

 source: xkcd.com

For reasons elaborated here, here, and here (among other places), I’m very worried that the efforts of incumbent media giants to extend copyright lengths, expand “enforcement” efforts, and escalate “infringement” penalties will (further) discourage real innovation– and thus real and sustainable economic growth.  That these moves are ultimately self-defeating– and kind of suicide– is certainly ironic; but it’s no consolation.

Of late there’s been some good news; consumers in the U.S. and regulators in the E.U. have said “no” to repressive (and in some cases, unconstitutionally-intrusive) grabs by the media industry:  SOPA seems dead; ACTA is stalled (with luck, forever)…

But now there’s PPT- The Pan Pacific Partnership.  A powerful agreement that is being secretly negotiated between 9 countries, the United States, Australia, Peru, Malaysia, Vietnam, New Zealand, Chile, Singapore, and Brunei. Mexico, Canada, & Japan are in the process of joining it.  The Obama Administration (which has been disappointingly complicit with the Legacy Media Agenda– see here and here, for example) is selling PTT as a trade agreement, aimed at easing commerce among the signatories.  (It likely also figures into the Administration’s thinking as a balance against The ASEAN–China Free Trade Area [ACFTA], to which China is central…)

As you can see in the State Department’s pitch for the treaty, it does have some potential for encouraging smoother trade among the signatories. But as you can see in this EFF analysis, there is a pretty vicious wolf under that sheepish clothing:

…The TPP will rewrite the global rules on IP enforcement. All signatory countries will be required to conform their domestic laws and policies to the provisions of the Agreement. In the U.S. this is likely to further entrench controversial aspects of U.S. copyright law (such as the Digital Millennium Copyright Act’s broad ban on circumventing digital locks and frequently disproprotionate statutory damages for copyright infringement) and restrict the ability of Congress to engage in domestic law reform to meet the evolving IP needs of American citizens and the innovative technology sector. The recently leaked U.S. IP chapter also includes provisions that appear to go beyond current U.S. law. This raises significant concerns for citizens’ due process, privacy and freedom of expression rights…

The details make pretty chilling reading… and when you note that, while there are (so far) only 9 signatories, the treaty will dictate the terms of any bi-lateral trade agreements that any of the 9 enter– so the the effective foot-print would be global.

Copyright– and the larger notion of intellectual property– was rightly enshrined in The Constitution (Article I, Section 8, Clause 8). But the Framers saw the importance of balance– of moderating the length and scope of protection– since their purpose was “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”  Sadly, the purpose of copyright law has, over the years; with each revision that’s made, become less about encouraging new innovation than about protecting the old, the status quo… and that is no recipe for growth.

U.S. citizens should seriously consider acting here; citizens elsewhere, here.

Only one thing is impossible for God: To find any sense in any copyright law on the planet.

- Mark Twain

The essence of entrepreneuring…

A guest post from (Roughly) Daily…

From the Kauffman Foundation’s “Sketchbook” series, “Make it Happen,“ a wonderful animation of a recent interview with Tim O’Reilly on the “Maker Movement” (see here and here)– and on what it can teach us about innovation and entrepreneurial energy:

 click image above, or here, for video

For more, see CNN’s interview with Make‘s founder (and Tim’s long-time publishing partner), Dale Dougherty.

 

As we return with enthusiasm to our workbenches, we might recall that it was on this date in 1872 that U.S. Patent No.123,790 was awarded to Silas Noble and James P. Cooley for a device that allowed ”a block of wood, with little waste and in one operation, [to] be cut up in to toothpicks ready for use.”  The inventors had been working together since 1854, as drum makers; at the time of the toothpick breakthrough, their company , Noble and Cooley, which remains in the percussion business to this day, was manufacturing 100,000 drums per year.

So, in much the same way that an unplanned byproduct of NASA’s space program was the powdered drink that gave American households a convenient source of vitamin C (Tang), Noble and Cooley’s quest for better drum shells and sticks helped bring down the cost of cleaner teeth and healthier gums…

 source

 

“Will Work for a Job,” Part Three

Further to “Will Work for a Job,” Part One (and Part Two), this bracing chart from the IMF…

(via Paul Kedrosky, TotH to Tim O’Reilly)

For a more detailed look, see this set of charts (pdf) from the April 2010 World Economic Outlook.

Government debt often finances crucial infrastructure, social services, or innovation.  But the huge upsurge in government debt from 2008 was much less a function of investment in “assets” or social goods than it was the price of stabilizing their economies– it was the bail-out.  Whatever my reservations about how the bail out was conducted across the developed economies (and how unevenly the benefits accrued), it seems to me clearly to have been necessary:  the alternative– total meltdown– being much worse.  Still, the reality is that this huge increase to national debts didn’t buy any future benefit or capacity; it simply covered the accumulated cost of irresponsible speculation.

And so, huge debt.

To be sure, more developed economies have more developed capacities to service debt.  For example,  U.S public debt was, in the years immediately following World War II, at the same kind of level (measured in % of GDP) as foreseen by the IMF; within a decade, it had been reduced by over half.  But that reduction was driven by the extraordinary economic growth of the U.S.in those post-war years, largely fueled by the increase in consumer demand occasioned by the growth of civilian employment, the rise in home ownership and spread to the suburbs, and the baby boom…  forces that laid the foundation for continued growth over the next couple of decades.

Current demographics in the U.S. and the rest of the developed world suggest that the next decade will have a very different character. The developed economies’ capacity to handle their debt will diminish as lower birthrates mean that their citizens will increasingly age out of the work force, and begin drawing services even as they cease to contribute to their funding…  add in the cost of responding to climate disruption, keeping aging infrastructure serviceable, et al., and it’s a pretty strained picture.

Necessity is, as we know, the mother of invention.  Japan, for example, is looking to robots to bridge the worker gap…  but even then, is having to plan for a tight squeeze.

For the rest of the developed world, immigration is the more obvious remedy; indeed, 2.5 million immigrants contributed to US growth in the Fifties (ten times as many as entered in the Thirties). These immigrants stepped into jobs all over the country– and they contributed new ideas, built new businesses.  They contributed to overall economic growth and contributed to support the social services available to all Americans.

But, as history reminds us, immigration will effectively remake societies even as it “saves” their economies.  Many see this growing diversity as a strengthening and enriching of the society (as well as the economy); I do.  But as the rise of anti-change nationalist nostalgia movements (like the Tea Party in the U.S., Le Pen’s National Front in France, and others throughout the developed world) illustrate, many others disagree– disagree loudly enough so far to have frustrated the reform of immigration laws in most of the (currently-)rich world.

In Part Two of this post (and elsewhere), I try to argue for a U.S. marketplace genuinely open to innovation and to the emergence of new, and new kinds of, businesses– as ours decreasingly is.  It seems clear to me that we need, similarly, to be more open when it comes to immigration as well.  On both those fronts, there are myriad ways to get it wrong.  Try as we might– and as we must– to legislate, regulate, and operate effectively, we could fail.  And indeed, opponents of these moves– apologists for advantaged incumbents and xenophobes– are quick to catalog the risks, to argue against taking action.

But the alternative?  We know that doesn’t work; indeed, that’s what drove us into the trench that we’re in.  We’ve got to find a way past the status quo– accelerating consolidation, enhancing the power of oligopolies, “retiring” people for whom there is no plan for support– or risk having to learn the same painful, costly lessons all over again.

In the meantime, further to Part One– and to observe the obvious– money spent paying interest is money that is not being spent on the things that can build a strong economy, reduce the level of debt, and fuel a healthy society.

“Will Work for a Job,” Part Two

As we face the situation recounted in Part One…

We’re all going to be making economic sacrifices for awhile, making cuts in order to dig ourselves, individually and as societies/economies, out of the trench into which we’ve fallen. There is, in country after country (and household after household), a great deal of arguing about which things to cut, and how far; there’s even (I believe wise) talk of restructuring the worst of the debts to make them more manageable.  Still, there’s no disagreement that something has to give, and that one way or another, the sacrifices required will denominated in some combination of lower consumption and reduced government services.

But as Lou Gerstner knew when he took on the turnaround of IBM, we can’t save our way to growth.  We can cut to stop the bleeding; but if we want to create opportunity and the possibility of improvement and growth, individual or national, we have to find ways to add new value– value that will translate into employment and well-being.  In theory, this new value can be created in incumbent companies or in innovative new ones; historically, it’s come from some combination of both.

But this time around, there’s data suggesting that we will be unusually reliant on innovation and entrepreneurs to create jobs– that’s to say, that incumbent companies can’t/won’t…

Celerant Consulting, an HR consulting firm, has just released  a corporate workforce productivity study, drawing on a  review of hundreds of subjects across the developed world (download a pdf of the report here).  The striking findings are summarized in this chart:

source

As the report observes,

Across all four industries surveyed – Energy, Chemicals, Healthcare, and Consumer Staples – the Impactability Study revealed a similar pattern of inefficiency. Value-add activity accounted for 50 percent or less of time spent on the job, leaving significant room for improvement. Although areas such as Healthcare and Chemicals are to some extent exposed to greater bureaucratic hurdles that direct more hours to approval processes, there is no question that each industry can reduce costs by refocusing the organization’s workforce.

One can quibble with Celerant’s methodology, and argue for marginally higher or lower productivity numbers in one sector or another.  But I doubt that anyone feels that the report is fundamentally wrong.  In our hearts (and minds and stomachs) we know that organizations that struck their “Coase balance” when the state of technology and society were very different, and have accreted layers of organizational sediment ever since, are bound to be inefficient today.  From Dilbert to The Office, we recognize the situation even as we laugh at it.

So, there’s plenty of productivity to be had in incumbent companies without adding any staff.  Indeed, these big companies may even be able further to reduce their employee costs, either by continuing to reduce staff or by holding– even lowering– wages and salaries.  Indeed this is what the Bureau of Labor Statistics suggests is happening: productivity up; labor costs down…  Not very good news for the economy as a whole, in which employment is a continuing concern; but OK for shareholders, right?

In the very short-run, maybe; but overall, not so much.  Companies that are focused on cutting costs, in which employees are fearful of their salaries or jobs, are not hot beds of innovation.  There are exceptions, like IBM under Gerstner; but they tend to prove the rule:  most often, companies in the Celerant boat are trying to figure out how to do the same things with less (or, like the airlines today, to do less with lots less).  Innovation in companies like these too often amounts to figuring how how to charge more for the same thing (c.f., airline “service fees”).  This is, as Gerstner knew, no way to build a profitable, growing future.

Clearly, big, incumbent companies should try to innovate.  Some (again, pace Gerstner) may get it right.  But, for all these reasons, many more probably won’t– if they even try.

So, if incumbent companies aren’t likely to create the innovation and employment that we’ll need to achieve sustainable growth in our economies, where will we find it?

It’s been long believed that small businesses, and the jobs they create, lead economies out of recessions.  Surely, they have historically played play an important role (a role threatened by the current contraction of capital available to them.)

But Paul Kedrosky argues that we should look more specifically to new companies.  Using the mathematical  idea of the “drunkard’s walk” (a version of the probability theory concept of the random walk), he illustrates the “inevitability” that new companies are key…

…the central thing about job creation from young companies is its inevitability. It is a species of mathematical certainty (one driven by initial simplicity and a wall) that young companies must create the most jobs (even without assuming particular skill on their part, or taking into account sectoral or economic growth, both crazily conservative assumptions).

“Crazily conservative assumptions” indeed.  Those new companies are– certainly not entirely, but largely– exploring the frontiers of the market.  They are innovating products, services, and processes– creating the “stuff” of real economic growth.  And they are giving their employees the opportunity to learn the skills and work habits that can achieve it.

So while cutting away the fat in incumbent companies and established markets is both necessary and useful to economic renewal, it doesn’t begin to be sufficient.  Real growth requires the creation of new value, in new ways.  And while there are some older, bigger companies that can pull that off, it is historically the role of small, new entrants– of the entrepreneurs and their start-ups.

How do we encourage new business, create the conditions in which it can help us out of the trench that we’re in?  There are detailed answers being developed in lots of spots, e.g., at the Kauffmann Foundation.   Here, let me suggest one very obvious theme:

If we want to encourage innovation and entrepreneurship, then we have to stop pursuing policies that pre-empt them by advantaging large incumbent companies and their desire to preserve– and milk– the status quo.  From obvious fronts like financial, securities, and anti-trust regulations, to corners as seemingly arcane as the patent process, the deck is stacked.

Indeed, these policies knit together to become a kind of “pro-consolidation platform”– one that both parties have adopted.  The results, we’ve already begin to see:  the financial crisis, the reduction in meaningful consumer voice and choice in an increasing number of arenas, the feudal concentration of income, wealth, and power in a big-bank, big-company elite…

source

Beware the Land of the Giants– it is a barren place.

As Adam Smith argued, markets can be a wondrous thing, they can lead to increased economic growth, increased welfare, and increased equality– but only if the governments that legitimize and police them work to be sure that they are actually “open” and “free.”

“Will Work for a Job,” Part One

Thursday’s mysterious Space Mountain-like stock market plunge aside, the domestic U.S. economic news last week seemed pretty good:  employment up, personal consumption expense up– sounds like a recovery.

And a recovery it may ultimately be.  But a peek underneath those number and a look out at the global economy each suggest that it’s premature to party…

My friend, anthropologist Grant McCracken, is an insightful observer of the American consumer.  Last year, as many were arguing that a new frugality– a “new normal”– was sweeping the nation, he begged to differ.  In The Harvard Business Review Blog, Grant argued that consumers would soon be spending again as though it were 1999. And indeed, in Q1 consumer spending added 2.6 points to GDP growth, following a strong Q4 last year.

But as Calculated Risk observes, the entire increase in consumption in Q1, and most of the growth in prior months, has been due to government transfer payments and reductions in personal savings.  That’s to say: Grant’s right, we’re continuing to spend…  we’re just not earning to support the expense.

click image to enlarge (source)

Perhaps that’s at least in part because we’re still not working.  This week’s report of 290,000 new jobs notwithstanding, the unemployment rate rose to 9.9%.  Add in the number of workers who are involuntarily on reduced hours and the number (U-6, as the BLS calls it) swells to 17.1%.  And then there is the record number of people unemployed for 27 or more weeks– 6.72 million, or 4.34% of the work force.  To put this in perspective, the recession of the early 80s peaked at 10.3% unemployment; but long-term (27+ weeks) unemployment never rose above 2.6%… to wit, the preponderance of transfer payments as noted above.

click image to enlarge (source)

There are lots of signs that can signal an economic rebound; but in the end, a sustainable recovery will be built on employment, on jobs.  In Part Two, a look at where those jobs might (and might not) be found.  But first, a quick look at the global context in which any U.S. recovery will have to make its way.  In a way that’s analogous to the domestic employment situation, underneath the good news of the moment, there’s trouble.

To wit, the news this morning of European-IMF agreement on a bail-out plan for Greece:  it’s encouraging…  But friend Peter Herford recently forwarded a terrific (albeit, mildly terrifying) piece from Der Spiegel, looking at the underpinnings of the European debt crisis: “The Mother of All Bubbles.”

Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it…

Here, too, we find ourselves returning to jobs as a– the– central concern…

As we think about the ways in which we in the developed world have lived beyond our means, we arrive quickly at the extraordinary accumulation of public debt that’s the “hero” of the European drama (which isn’t to say, of course, that it’s not an issue in the U.S. and elsewhere):

click image to enlarge (source)

…and at the kind of private debt– commercial, mortgage and consumer credit– that contributed so powerfully to the 2008 meltdown:

source

click image to enlarge (source)

But as we consider private debt, it’s worth calling out the corporate/commercial component– the bit that’s directly related to the businesses that provide jobs.  While there have been some bankruptcies among over-levered companies, corporate credit doesn’t seem, given the relative paucity of attention its gotten, to have played much of a role in getting us into our current pickle.  Indeed, most of the concern about corporate debt since 9-15-08 has been around whether there would be enough of it to support a recovery.

If governments are going to be reducing their services, then growth will have to come from new/higher incomes, from real growth… and that– the creation of those new jobs and of those higher incomes– is the role of business.   If we’re going to climb out of the trough we’re in (a trough that, if Spiegel is right, could be about to get deeper still),  business must create new (and new kinds of) value, and in so doing, create jobs.

And so, to Part Two…

I had this vision of the future…

It’s not this blog’s practice simply to reproduce other bloggers’ pieces; but a deserved exception is hereby made for this exceptional post from Fake Steve Jobs, on the subject of ATT’s recent lament that iPhone users are using their phones too much.

As FSJ observes, the issue is aggravating enough in its particulars; but its implications– the trends and tendencies it represents in the culture of America business today– are truly dispiriting…

A not-so-brief chat with Randall Stephenson of AT&T

So we set up a call with Randall this morning to discuss some of the profoundly stupid things his guy Ralph de la Vega said recently about creating incentives that would encourage people to stop using AT&T’s data network so much. Point of the talk was, when you’re lucky enough to create a smash hit product — when the stars align, and the hardware is great and the ecosystem is great and the apps are great and the whole experience is great, and everything you do just makes everything else better, and you’re totally on a roll and can do no wrong — when that happens, you do not go out and try to fuck it all up by discouraging people who love your product. What you do, instead, is you fix your fucking shitty ass network you fucking shit-eating-grin-wearing hillbilly ass clown!

First off, before we even start the call, we’ve got problems, because shithead won’t get on the phone unless I’m on the line first. Like, Ja’Red comes in and says we’re ready to go, and I go, You mean Randall is on the line, and Ja’Red says, No, his assistant is on the line and once you get on then they’re going to get Randall — so I reach down, hit the button then hit it again so the call gets terminated. I tell Ja’Red to explain to these motherfuckers that Steve Jobs does not get on the line first, ever. Ja’Red does this, but Randall’s assistant insists Randall always gets on last, and especially so in this case since AT&T is about three times the size of Apple, so this time I pick up the phone and tell the assistant that he should inform Randall that when he’s ready to get his pointy head out of his ass and call me, I’ll be here waiting for his call.

So fine. We wait a bit, and he calls. He doesn’t say anything about the standoff, but I can tell he’s pissed, which is fine by me. He launches into a mumbling spiel about how Ralph de la Vega didn’t really say what all the papers are saying he said, and he was misquoted, and it was taken out of context, but I’m like, Bitch, please, guys at our level don’t get taken out of context, we write the shit out in advance and we know exactly what we’re saying when we say it and every goddamn word has been vetted and gone over by a team of flacks. So please don’t sit there like a zoo monkey throwing your own feces at me through the bars of your cage, bokay?

Then I go, Look, Randall, you’re how old — about 50? He says he’s 49. I go, Okay, so you were born in 1960, so maybe you don’t remember Meet the Beatles. Or do you? Do you remember that album? Did they have record players out there in Arkansas?

He goes, I’m from Oklahoma, and I’m like, Yeah, same thing, so anyway did you know that album? Were you aware of it? Came out in the beginning of 1964. The one with the four guys in black and white, half their faces white, half in shadow? Just four faces against a black backdrop? He says he’s familiar with the album but he thought we were getting on the phone to talk about incentivizing heavy users in order to optimize the network resources blah blah and I’m like, Dude, if you ever use the word incentivize around me again I swear I will get in my Gulfstream and fly to wherever you are and I will smash you in the face with a rock.

He sighs and says, Okay. I’m like, I’m sorry, what did you say? He says, Okay. I go, I’m sorry, but I can’t hear you. What did you say? He goes, YES! and I go, That’s better. But back to the Beatles. Now, the thing about that album was, on the day it hit the U.S. the whole world changed. Like, before that day, the world was one way, music was one way, culture was one way — and then after that day the world was never the same ever again, and as soon as you heard that album you knew that, and even if you were only nine years old, which I was, you just knew. You knew. Sales were crazy. I mean nuts. The thing was a huge smash hit. By April, twelve weeks after that album came out, the Beatles had the top five spots on the Billboard chart.

Now there was a lot of demand for that record — so much that the plant that printed the records could not keep up. Now here’s the lesson. Do you think the guys who were running Capitol Records said, Gee whiz, the kids are buying up this record at such a crazy pace that our printing plant can’t keep up — we’d better find a way to slow things down. Maybe we can create an incentive that would discourage people from buying the record. Do you think they said that? No, they did not. What they did was, they went out and found another printing plant. And another one and another one, until they could make as many records as people wanted.

Randall is like, Okay, I get your point. I’m like, You know what, I don’t think you do, because if you did, we wouldn’t be sitting here having this conversation, would we? I mean if you did understand how to do things, your guys wouldn’t be standing up at Wall Street conferences and complaining about how much traffic you’re getting. Instead, you would be running around like a fucking maniac trying to build out your fucking network and make it the best network in the world — and the only reason you would ever need to talk to me would be to thank me for creating a phone that’s so amazing that it draws people to your shit network in the first place.

Randall, baby. we’ve got a hit on our hands. We’ve got the smartphone equivalent of Meet the Beatles. It’s not like that album was the first rock album ever. It’s not like nobody ever made a band with some guitars and drums before. But it was radical. It was new. They took old forms and made them new. Same with us. We didn’t invent the smartphone or the PDA or the music player or the Web browser. We just made them better. We made them new. We changed the fucking world, Randall.

And when I say that “we” have a hit on our hands, I’m really giving you way too much credit, because let’s be honest, the success of iPhone has nothing to do with you. In fact, iPhone is a smash hit in spite of your network, not because of it. That’s how good we are here at Apple — we’re so good that even you and your team of Bell System frigtards can’t stop us. You know what it’s like being your business partner? It’s like trying to swim the English Channel with a boat anchor tied to my legs. And yes, in case you’re not following me, in that analogy, you, my friend, are the fucking boat anchor.

So let’s talk traffic. We’ve got people who love this goddamn phone so much that they’re living on it. Yes, that’s crushing your network. Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity. Jesus! I can’t believe I’m explaining this to you. You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot.

While I’m ranting, let me ask you something, Randall. At the risk of sounding like Glenn Beck Jr. — what the fuck has gone wrong with our country? Used to be, we were innovators. We were leaders. We were builders. We were engineers. We were the best and brightest. We were the kind of guys who, if they were running the biggest mobile network in the U.S., would say it’s not enough to be the biggest, we also want to be the best, and once they got to be the best, they’d say, How can we get even better? What can we do to be the best in the whole fucking world? What can we do that would blow people’s fucking minds? They wouldn’t have sat around wondering about ways to fuck over people who loved their product. But then something happened. Guys like you took over the phone company and all you cared about was milking profit and paying off assholes in Congress to fuck over anyone who came along with a better idea, because even though it might be great for consumers it would  mean you and your lazy pals would have to get off your asses and start working again in order to keep up.

And not just you. Look at Big Three automakers. Same deal. Lazy, fat, slow, stupid, from the top to the bottom — everyone focused on just getting what they can in the short run and who cares what kind of piece of shit product we’re putting out. Then somehow along the way the evil motherfuckers on Wall Street got involved and became everyone’s enabler, devoting all their energy and brainpower to breaking things up and parceling them out and selling them off in pieces and then putting them back together again, and it was all about taking all this great shit that our predecessors had built and “unlocking value” which really meant finding ways to leech out whatever bit of money they could get in the short run and let the future be damned. It was all just one big swindle, and the only kind of engineering that matters anymore is financial engineering.

And now here we are. Right here in your own backyard, an American company creates a brilliant phone, and that company hands it to you, and gives you an exclusive deal to carry it — and all you guys can do is complain about how much people want to use it. You, Randall Stephenson, and your lazy stupid company — you are the problem. You are what’s wrong with this country.

I stopped, then. There was nothing on the line. Silence. I said, Randall? He goes, Yeah, I’m here. I said, Does any of that make sense? He says, Yeah, but we’re still not going to do it. See, when you run the numbers what you find is that we’re actually better off running a shitty network than making the investment to build a good one. It’s just numbers, Steve. You can’t charge enough to get a return on the investment.

Now there was silence again. This time I was the one not talking. There was this weird lump in my throat, this tightness in my chest. I had this vision of the future — a ruined empire, run by number crunchers, squalid and stupid and puffed up with phony patriotism, settling for a long slow decline.

“Okay,” I said. “Nice talking to you.” Then I hung up.

Main Streets or Mean Streets?…

Dark clouds have gathered over small business in the U.S.– and over the prospect that it can lead us out of our economic morass in the way that it has in the past.  Two charts from Calculated Risk tell the unfortunate story:

1) Job losses (from peak pre-recession employment levels) have been worse in this recession than in any since the Great Depression:

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2) Those job losses have come, in this recession, much more heavily from small business (45%) than in the last recession:

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… Which together suggest that there’s less chance than our recent experience might suggest that small business will lead a recovery.  As Dr. Melinda Pitts of the Atlanta Fed (the author of the second chart) suggests:

Looking ahead, it’s not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints [contraction in available credit; see here] are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

The implications of this hit to small business for the pace of a recovery are obvious and discouraging.

But in many ways more concerning are the the implications for the shape of a recovery.  As our economy begins to move up and out of the trough in which it’s mired, big companies will be playing a relatively larger role in the economy– and will be getting bigger (both relatively and absolutely).

Case in point: this morning’s New York Times reports that “Support Builds for Tax Credit to Help Hiring.”  But while one of the aims of the bipartisan sponsors of such a move is “to encourage small-business development,” it’s questionable whether it can.  Those tax credits will be useful only to companies that can find the cash to invest in new jobs that can generate profits to shelter… and in the credit-constricted environment in which we currently sit, that means companies that have either lots of cash or the “too big to fail” credibility that gives them access to debt.  In the current environment it does not mean small business.

Per “Beware the Land of the Giants…,” this is a dangerous situation; all growth is not created equal.  We live in a dynamic global market, where a nation must innovate or fall behind.  And we live in a nation in which wealth and incomes have polarized, and middle- and lower-class real wages have steadily fallen for over a decade.  Leaving aside the powerful arguments for fairness, considering only the economic, we live in a nation in which the lives of most must improve if there’s to be enough consumption to support all.

Which is all to say that, in the situation we’re in, it is not sufficient for the U.S. simply to stabilize its economy; we must reinvigorate it.  And if we’re going to re-energize, that means that we have to find ways to encourage small business, from main street shops to start-ups that aspire to grow into mega-corporations.

And that means that we need to rethink the ways that our government is “helping.”  As noted before, the one thing that the TARP funds did not do is the one thing they were meant to– re-start the flow of credit.   Thus, the continued decline in employment.

So, when the second round of “The Stimulus” comes (and it surely will, whether it’s acknowledged as that or not), it’s critical that it come with enforcement that assures that it is put to its intended purposes.

Similarly, as Congress looks to take steps that will be perceived as responsive to the pain that Americans are ever more widely feeling, it’s critical that those steps– from tax incentives to regulations– actually are responsive.

It’s not so complicated; but it’s hard.  It’s hard because the extraordinary tide of funding flowing into Washington to shape Congressional action– lobbying monies, campaign contributions– is flowing primarily from large, entrenched interests: the big, who want to get bigger.  The change that we need will come despite those efforts, not because of them.

We can, and we should, do our best to keep our Congresspeople honest and on mission.  And, given our not-very-encouraging experience of that effort, we should lean into effort’s like Larry Lessig’s Change Congress.

We are for sure going to continue to pay for the excesses of the past few decades.  The only question is whether we can convert that heavy penalty into the price of renewal.

Looking gift horses in their mouths…

“The Vine that Ate the South” (source: WolfeReports)

When is a “green shoot” not a “green shoot”? When it’s kudzu…

In yesterday’s New York Times, Andrew Ross Sorkin reports on two recent corporate mergers– Abbott’s purchase of a Solvay unit and Xerox’s absorption of ACS, each valued at over $6 Billion.  Good times are back, he suggests.

… taken in the context of what has been a merger drought — in the wake of the financial crisis, deal-making is still off by more than 50 percent from last year — the transactions suggest that the most senior ranks of corporate America may now have a more optimistic outlook on the economy than some people thought.

“Will you see us move with a lot of acquisitions over this next year? You betcha,” John Chambers, the chief executive of Cisco Systems, said in a recent meeting. “Especially if it plays out economically the way that I think.”

In fact, as noted here before, M&A activity has already run hot and heavy in the financial services arena, not despite, but because of the economic crisis and the bailout.  TARP and related funds, ostensibly meant to loosen credit for consumers and commerce, has instead been largely used to fund investments on the receiving banks’ own accounts– to help the favored “too large to fail”  banks buy up competition and expand their market shares.  (See the illustration here for a graphic– pun intended– depiction of your tax dollars at work.)

Now, Sorkin suggests, the imperial expansion moves to other arenas.

The greatest concentration of deal-making appears to be in the health care and technology sectors. Warner Chilcott made a $3.1 billion deal for Procter & Gamble’s drug business last month, for example, and Dell bought Perot Systems, a technology services company, for $3.9 billion. But deals are also being made in other sectors, like food; Kraft’s $16.7 billion unsolicited bid for Cadbury, which was rejected but remains a possibility, is the largest outstanding offer to date.

“If you’re healthy, it’s a great time to acquire inexpensively,” adds Ted Rouse, a head of Bain & Company’s global mergers and acquisitions practice. “But it’s an awful time for two weak companies to merge.”

The experience of the last several decades has trained us to see increased M&A activity as a sign of economic strength.  And indeed, when the economy is fertile– when every company that disappears via acquisition is replaced by two or three new start-ups with world-beating plans, it probably is a sign of economic health.

But when the companies that are swallowed up are not replaced– because funding/credit isn’t available or because IP laws are too restrictive or because oligopolists’ channel power freezes new players out or…  well, you get the picture– the prognosis is not so rosy.  At best, we get a return to the “gray flannel suit” 50s; at worst, a decline into the turbidity of the 30s.

As suggested in “Beware the Land of the Giants…“:

When oligopolies emerge, they do all they can to retard competition and innovation; it’s their self-interest.  But in a growing economy, their impact is measured in “decreases in the rate of growth,” “slowing rates of innovation.”  On balance, things are still trending up.  And to the extent that new entrants succeed, that innovation trumps defensiveness, the oligopolies fade.

But when oligopolies form by default in troubled times, their self-protection can salt the earth around them, can make it hard-to-impossible for ferment– for start-ups or disruptive innovation– to take root…  and it’s from those seeds that strong growth in a recovering economy can emerge.

We have a huge stake in making sure that the more concentrated economy with which we’ll emerge from this downturn is as “un-oligopolistic”– as free and open– as we can make it.

The problem is that it can be very hard to tell one kind of M&A activity from the other while in the midst of the deal stream.  A slide into oligopoly can feel, as it’s unfolding, just like the good old days of the 90s– one exciting deal after another– until it’s too late to do anything about it.  And when so many of the parties to the transactions are paid– and richly paid– on the transactions,  as opposed to the longer term outcomes of the deals (much less their utility to the economy as a whole), there is, to put it politely, no incentive for the actors to pause to consider.

But pause we should.  Vulnerable as we are in what may or may not yet be the trough of economic decline, We can ill afford an implosion of competition that resolves into a tar-baby of oligopolies.