Don't let your VCR strangle you

Stanford Law prof Mark Lemley has written a brief and entertaining paper about the content industry's ongoing "Chicken Little Syndrome".  One particularly purple passage is good for a chuckle.

 

The content industry warned us that the VCR must be stopped.  Here was Jack Valenti of the MPAA, speaking to Congress: 

 

"the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace.  We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages of this machine"

 

If that were not enough, he went on to say, "I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone."

It's also remarkable to read how many times music, television, and film producers have been saved from themselves by the slimmest of Supreme Court margins, and how badly it has gone for them in the few cases they have "won" -- remember DAT tapes?

We did, however, successfully shackle next-generation audio technology in the early 1990's with the digital audio tape.  Here the perceived threat was the same as audio cassettes but worse.  Audio cassettes turned out not to have shut down the industry, true. But if you gave customers digital audio cassettes, content owners warned, if you allowed them to make a digital-quality copy, then they had no reason to buy our better quality copy, and we will be shut down.  That argument carried the day in Congress.  Digital audio tapes were then subject to a compulsory licensing scheme and were never heard from again by mass-market consumers. The technology flopped once it was put under the control of the content industry. 

No, I didn't think you did.

As I think about these problems of property, which range from patents to copyright to net neutrality to agricultural production, the basic pattern becomes more and more clear to me.  Create just enough private property to encourage people to engage in non-zero sum games.  Maybe 500 years ago, when the king owned everything, we erred on the side of too little, but we are rapidly getting bogged down in having too much.  The default presumption is not that property should be collective until otherwise stated -- I'm not arguing that all private property is theft from the common hoard.  The default presumption is that there is no such thing as property until its absence stymies activity or we get into enough of a row over it that makes both sides worse off at the same time.  Plenty of cases fall under that heading.  Just not many from the media world.

Debt not "Privatization"

When I hear the word "privatization" I reach for my revolver; everyone has a different definition invented to fit their ideological leanings, and they react without examining the economic substance in question.
So you see debates like this in the WSJ.

Cities and states across the nation are selling and leasing everything from airports to zoos—a fire sale that could help plug budget holes now but worsen their financial woes over the long run.

California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs

"Privatization"—selling government-owned property to private corporations and other entities—has been popular for years in Europe, Canada and Australia, where government once owned big chunks of the economy.

In many cases, the private takeover of government-controlled industry or services can result in more efficient and profitable operations. On a toll road, for example, a private operator may have more money to pump into repairs and would bear the brunt of losses if drivers used the road less.

While asset sales can create efficiencies, critics say the way these current sales are being handled could hurt communities over the long run. Some properties are being sold at fire-sale prices into a weak market. The deals mean cities are giving up long-term, recurring income streams in exchange for lump-sum payments to plug one-time budget gaps.

That passage muddles the entire issue.  Privatization, as an economic movement, was intended (in theory at least) to take a government run monopoly, break it into pieces, sell each to a different investor, and then let them compete.   The break-up of AT&T into the baby bells would be an example of this.  This type of privatization makes a fair amount of sense in my opinion, as you substituting competition for a monopoly.  There are certainly instances where the magic of market competition fails to deliver the outcome you were looking for better, faster, and cheaper, but competitive markets are an awfully powerful tool in many cases.  I still rate markets up there with language and duct tape in the pantheon of humanity's greatest achievements.

When I first moved to Latin America, I remember espousing this point of view to friends and future blog audience members, and broadly defending the concept of privatization.  Fireworks.  I don't know if anybody said yanqui go home, but that was the basic idea.  After a while though, I realized that we were talking about completely different things when we used the word "privatization".  In Latin America, the only privatization they ever saw was one where the government sold a monopoly intact to some friend of the President.  They were entirely right to see this sort of "privatization" as essentially synonymous with "theft".  Unfortunately, this wonderful version of the concept appears to have migrated north.

The most popular deals in the works are metered municipal street and garage parking spaces. One of the first was in Chicago where the city received $1.16 billion in 2008 to allow a consortium led by Morgan Stanley to run more than 36,000 metered parking spaces for 75 years. The city continues to set the rules and rates for the meters and collects parking fines. But the investors keep the revenues, which this year will more than triple the $20 million the city was collecting, according to credit rating firms.

After the deal, some drivers complained about price increases as well as meter malfunctions caused by the overwhelming number of quarters that suddenly were required.

Based on the new rates, the inspector general claimed the city was short-changed by about $1 billion.

"The investors will make their money back in 20 years and we are stuck for 50 more years making zero dollars," says Scott Waguespack, an alderman who voted against the lease. A spokeswoman for Morgan Stanley declined to comment.

So I read this, and I can't even tell what's happening.  It's clear that the city sold a monopoly on the collection of parking meters to MS.  Is this a regulated utility now though, or can MS charge "market" rates?  In one breath it sounds like the city retained control of the pricing and the parking laws, and in the next we hear about how rates went up so much that there's a shortage of quarters (sound familiar?)  Honestly, I haven't looked at the deal, so it sounds like one of two things happened.  Either they really did just sell the whole monopoly to a private group and let them gouge to their hearts content (I assume that meter rates are (or were) significantly lower than parking garage rates in the same neighborhood).  Or, they just sold the rights to collect the money, in other words, they outsourced the operations of the meter readers for an upfront payment.  That is what you call debt, albeit maybe with an equity kicker if MS enforces the rules like a real asshole.

The problem is that either of these possibilities sucks.

In the first case I suppose it's possible in theory to auction the thing off at a high enough initial price that the average taxpayer is no worse off.  Clearly, MS is going to jack the rates once they get going.  But if they are made to pay so much up front for the rights to this extortion, and this money is somehow returned to citizens via lower taxes or low rider jeans subsidies or what have you, then what you in effect get is a transfer of wealth from parkers to non-parkers.  Hooray.  It kinda reminds me of the riddle about selling your vote.  Why don't we allow votes to be sold?  The government that purchases your vote may be awful, but isn't there some price at which you are compensated for how awful they might be?  Wouldn't you rather get this money directly than have candidates blow it on advertising?  While a theoretically interesting case, in practice it's really hard to price the thing high enough to limit the returns you might extract from this sort of "privatization".  So if the city does not control the rates, I would suggest that practically speaking this is just Chicago going Latin American stylee -- the transfer of a public monopoly intact to private hands for a paltry sum.

On the other hand, it's possible that they will not allow MS to set rates and rules, which makes this look more like a regulated utility.  We would need more details to know whether the agreement gives MS any incentive to reinvest, as in the case of a utility which is offered a decent fixed rate of return on capital.  I'm not sure how you profitably invest in parking meters though, unless you control the rules.  And without the potential for reinvestment, this deal stops being a privatization at all.  It becomes debt, pure and simple, no different than Greece "privatizing" the revenues from the Acropolis by letting Goldman Sachs collect the entrance fee in exchange for paying now.  That's a bond.  Stop calling it "privatization".  It's just a bond.  All we need to know about it is the maturity and the effective interest rate (including any changes in meter rates that were agreed as conditions of the sale).  Don't confuse the issue.  Don't claim that you have done anything besides go into hock in a way that moves the debt off your balance sheet so as not to scare your existing bondholders.

Given the figures in the article ($60m in revenues on $1.16b upfront), the rate is only a little over 5%, which doesn't seem outrageous given that the 30 year US treasury is at 3.5%.  Of course, we don't know if there are escalators (for inflation or otherwise) in the meter fees, so we can't tell whether Chicago is getting screwed or putting one over on whoever Morgan Stanley is flogging these off to via securitization/private equity fund/derivative contracts only a particle physicist can parse -- you didn't think they were rolling out of here naked did you?

Those wacky Germans

There is a short and very interesting story in Der Spiegel about an academic study regarding the effect of copyright differences on publishing volumes and industrial development in 19th century Germany and England.  

Indeed, only 1,000 new works appeared annually in England at that time -- 10 times fewer than in Germany -- and this was not without consequences. Höffner believes it was the chronically weak book market that caused England, the colonial power, to fritter away its head start within the span of a century, while the underdeveloped agrarian state of Germany caught up rapidly, becoming an equally developed industrial nation by 1900.

 

Even more startling is the factor Höffner believes caused this development -- in his view, it was none other than copyright law, which was established early in Great Britain, in 1710, that crippled the world of knowledge in the United Kingdom.

 

Germany, on the other hand, didn't bother with the concept of copyright for a long time. Prussia, then by far Germany's biggest state, introduced a copyright law in 1837, but Germany's continued division into small states meant that it was hardly possible to enforce the law throughout the empire.

 

The peanut gallery would like to shout something about anarchism and decentralization here, but are afraid certain (sorta) German blog readers would probably take issue.  Anyhow, back to our story ...

Höffner's diligent research is the first academic work to examine the effects of the copyright over a comparatively long period of time and based on a direct comparison between two countries, and his findings have caused a stir among academics. Until now, copyright was seen as a great achievement and a guarantee for a flourishing book market. Authors are only motivated to write, runs the conventional belief, if they know their rights will be protected.

Yet a historical comparison, at least, reaches a different conclusion. Publishers in England exploited their monopoly shamelessly. New discoveries were generally published in limited editions of at most 750 copies and sold at a price that often exceeded the weekly salary of an educated worker.

 

London's most prominent publishers made very good money with this system, some driving around the city in gilt carriages. Their customers were the wealthy and the nobility, and their books regarded as pure luxury goods. In the few libraries that did exist, the valuable volumes were chained to the shelves to protect them from potential thieves.

 

In Germany during the same period, publishers had plagiarizers -- who could reprint each new publication and sell it cheaply without fear of punishment -- breathing down their necks. Successful publishers were the ones who took a sophisticated approach in reaction to these copycats and devised a form of publication still common today, issuing fancy editions for their wealthy customers and low-priced paperbacks for the masses.

One of these days people are going to wake up and realize that vast chunks of intellectual property should be done away with because they represent a major intrusion by the state into the free market.  That's right, the true free market liberal should only grudgingly allow for the existence of copyright at all, and only in those cases where the market has demonstrably failed to produce stuff we all benefit from.  While you can make some legitimate argument that no one will spend billions getting a drug approved without some guaranteed property at the end, the same argument is much much weaker when it comes to the time invested in writing a book, coming up with a new programming idea, or recording your new hit single.  After all, we have an awful lot of the latter three, despite the fact that most of the creators don't make spit.  If the market ain't broke, don't let the government fix it; the whole idea is to design a system where, as Einstein put it, we have as simple a definition of property as necessary, but not simpler.  Potentially, this means a principled free market will involved dramatically less private property.

The whole thing reminds me of another juicy tidbit out of an entertaining interview with Robert Laughlin that JEA recently recommended (you can download the audio if you don;t want to read the transcript):

Q. So you are suggesting that the increased scope of patent laws is a response to the flow of jobs and knowledge overseas? 

A. Yes. 

Q. Why are you worried about that? 

A. That was my take on it. And also I read it. The same goes for the patent laws. Knowledge for the sake of itself is not very useful to us; we want things that are owned by us; that someone else learns them and takes them and we can prosecute them, it's against the law. Now what's the problem? What I figured out is that it's actually quite fundamental and obvious--it's elementary economics. If you live in the world where knowledge is the currency, there must be less of it. Why? Because no one will pay for something you get for free. So, in the Jeffersonian ideal world, everybody's a farmer and they write letters to each other--they exchange information but they charge you for corn. The world we have increasingly grown into, is where we have to have secrets. That's how you make your living. Making a living is not nice--I'm not going to give you the thing unless you pay for it. My measure of of success is whether I can shoehorn a very large amount of money out of you for this thing. The way economics works is that process isn't solid unless you really want to give me the money. The amount of pain you have to pay is a measure of how valuable the thing is that I'm giving you. So, in the information world where information is the economy, there has to always be paying in exchange of information; has to always be money exchanged. There has to be something scarce. That means that strewing the world with enlightenment can't be. So, knowledge can't be free any more. Not only that, but the sense of the law is it's not just acquiring knowledge--it's if you go and acquire it yourself, you are violating the law. In some cases that is a criminal act. Learning things of technical value is theft, and that means that the whole idea of just learning stuff and bettering yourself doesn't make any sense if the thing itself is valuable, owned by someone else.

Create artificial scarcity, aka control the supply, is the first rule of almost every business.  And it's the only rule the State Apparatus ever has.

 

Downhill as fast as you can run

I guess presidential elections are coming next year so el gobierno KKK feel they need to pull out all the stops.  Now they've decided to nationalize the largest manufacturer of newsprint.  

Para evitar un nuevo "pacto", el Ejecutivo enviará al Congreso un proyecto para declarar como servicio público la producción, distribución y comercialización del papel para diarios. El objetivo central de esta normativa buscará darle un trato igualitario a todos los diarios del país. A su vez, buscará ampliar la capacidad de producción de Papel Prensa para que no haya más importación. Con esta jugada, la Presidenta obligará a todo el arco opositor a discutir sobre un proyecto esencial "para la libertad de prensa", tal como fue definido por la propia mandataria. También se propondrá la creación de una comisión bicameral de control.

I almost get the feeling that with each move the excuses are getting deliberately more and more far fetched.  I guess this is a good strategy.  First you get people used to being lied to by changing technical little numbers like the inflation rate.  Then you move on to things that are arguably legal and even sensible, if controversial, but that at least play to popular issues, like the fight with the farmers over export tariffs a few years ago (I for one sided with the government on that question).  But, finally, you just make shit up as you go, like claiming that the fact that 40 years ago they strong-armed the paper company means the market today is incapable of providing newsprint.  I can't think of anything more ridiculous than this one, though I feel sure they've got something else up their sleeve.  In all of these cases there is an argument to be made for what they're doing.  Some justification can be invented that paints them as crafty fighters of the people's fight.  After a while though, you have to pick your head up and see the pattern, to reflect on where you've seen similar chains of justification lead.  At some point you have to quit trying to salvage the motives of government by fiat and realize that this turns the government into a political and economic weapon available to the highest bidder.  It's no secret that the Kirchner's have already mysteriously turned themselves into millionaires.  They might not be Boli, but they sure seem like garcas to me.

In the end it doesn't matter whether you think you're moving to the left or the right in these cases -- there's really nowhere to go but down into corruption.

A Hacker's Paradise

Today the FT finally let the cat out of the bag.

Brokers who allowed high-frequency traders to have access to the markets without undertaking proper checks on them face potential fines as part of a clampdown following the "flash crash", the head of a US watchdog said on Sunday.

The Financial Industry Regulatory Association is undertaking a "sweep" of broker-dealers that offer market access to high-frequency traders to find out if they allowed these firms to run computerised trading programs – algorithms – without undertaking proper risk-management controls.

"The brokers should be satisfied they know who's really operating these systems," Richard Ketchum, chairman and chief executive of Finra, told the Financial Times. "The sub-custodian chain can bury the identity of high-frequency traders in Eastern Europe and elsewhere who raise serious regulatory concerns."

If I had any coding skills I would be spending all my time trying to hack the high frequency trading market.  If all of your buy and sell decisions occur within microseconds of one another, you eliminate a substantial portion of the uncertainties inherent in investing.  At those time scales you can essentially eliminate the humans and compete entirely against other peoples trading algorithms.  A little good old fashioned ex-Soviet reverse engineering could make stealing lists of credit card numbers look like high school hi-jinks.  

The only remaining question is how much of it was funded by Putin, and whether that makes it cyberwarfare.   Or maybe the state has already effectively privatized this industry and just rents the botnet for a few hours.

UPDATE:

The NYT apparently hasn't heard about the exciting new possibilities in interactive erotic trading yet.

According to the Secret Service statement, Mr. Horohorin managed Web sites for hackers who were able to steal large numbers of credit card numbers that were sold online anonymously around the globe. Those buyers would do the more dangerous work of running up fraudulent bills.  

Underscoring the nationalistic tone of much of Russian computer crime, one site featured a cartoon of the Russian prime minister, Vladimir V. Putin, awarding medals to Russian hackers. “We awaiting you to fight the imperialism of the U.S.A.” the site said, in approximate English.

Computer security researchers have raised a more sinister prospect: that criminal spamming gangs have been co-opted by the intelligence agencies in Russia, which provide cover for their activities in exchange for the criminals’ expertise or for allowing their networks of virus-infected computers to be used for political purposes — to crash dissident Web sites, perhaps.

Times Change Quickly

But I will eat my shorts if there are really 165 decent broadband providers in Capital.

En el documento elaborado por el Ministerio de Planificación se destaca que en el país hay 489 prestadores de acceso a Internet distribuidos en todas las provincias. Por ejemplo, en Capital Federal figuran 165, en la provincia de Buenos Aires 116, Santa Fe 64 y en Córdoba 55. El gerente general de Cablevisión, Carlos Moltini, aseguró el viernes a este diario que "casi todos son revendedores de ADSL de las telefónicas". En una solicitada publicada hoy en los principales diarios del país, el Gobierno busca refutar la afirmación de que esas firmas venden por cuenta y orden de las telcos al señalar que "muchas pequeñas empresas y medianas, como así también cooperativas, tienen sus propias redes (incluyendo centrales, softswich, cableados, antenas y otros).

Looks like Team K is at it again.  I'm sure there's some merit in breaking up a Fibertel-Cablevision monopoly.  But given that the result will be slower broadband (ADSL being technologically inferior to cable for high speed) provided by a different monopoly, namely Telecom, you have to suspect that this is an entirely political move that has nothing to do with economics.  Hopefully this will turn out better than Chavez, I guess even Saddam wouldn't be that bad.

CARACAS, Venezuela — Some here joke that they might be safer if they lived in Baghdad. The numbers bear them out. In Iraq, a country with about the same population as Venezuela, there were 4,644 civilian deaths from violence in 2009, according to Iraq Body Count; in Venezuela that year, the number of murders climbed above 16,000  Even Mexico's infamous drug war has claimed fewer lives.

If el gobierno KKK really wanted to do something for the gentuza they'd make fiber a wholesale government regulated utility like they do in France or Japan.  This looks like something else entirely.

The end of squeaky voices

Sometimes I wonder how capitalism can work with natural resources.  Looking at these businesses, you always assume that the price of the commodity falls to the marginal cost of production.  If a bunch of companies go out and dig mines, then the cost of those mines are, literally, sunk.  Once they wake up to their position,mine owners will change their calculations and keep pulling the stuff out of the ground as long as the price pays for the cost of marginal extraction (plus maintenance, the occasional corporate jet and Latvian hookers, etc ...).  So for a while, nobody invests, until finally growing demand or shrinking supply creates a pinch, prices skyrocket, someone gets optimistic, and we dig another hole. 

Lather, rinse, repeat.

It's a bit miraculous to me that anybody invests in this stuff, which implies that it's miraculous that we actually have any of it, which I guess defeats the miraculousness of the first clause.  The whole idea that you get this promising looking hole dug just in time to watch prices fall, and are then obliged to sit there waiting for the next, likely brief, spike in order to try and recoup your capital just seems so ludicrously speculative.  Obviously people do it, but I have to say that I'd be curious to see a calculation (adjusting for survivorship bias of course) of net industry return on capital over the last 50 years,  I suspect (without proof) the mining industry might be like the airline industry -- a public service.

Which actually brings me to the part of the post where I completely change my mind about what I was writing.  I was going to suggest that digging up the commodities necessary to make the economy function seems like a reasonable place to wonder whether the government shouldn't be involved in at least coordinating the amount produced, so that we have enough and at the same time assure that prices don't spike out of control and create shocks.  Naturally though, I was assuming that the government would treat this sector as a regulated monopoly and assure people putting up capital some sort of stable, though modest return on investment.  Alternatively, I guess you could run the whole thing as Big Brother Mining Inc. and just allocate some of the federal budget to digging stuff up, and then set the prices so as to break even.  Now, however, I realize that the system we currently have is much much better.  We can convince these saps to invest even though on balance as an industry they will lose money, at least if it's anything like the airlines.  As a taxpayer, this is better than break-even.  So I say let them drill baby drill.

As it turns out, this whole rant was inspired by one of the extraction industries where the government is already dominant.  We taxpayers own most of the world's helium supplies, it turn out.  In the case of helium, the government apparently took care of this problem for us ... by making it dramatically worse.

Surely industry must be paying more and more for helium if it is in short supply.

 

No, the price is dictated by a calendar. The US government established a national helium reserve in 1925, and today a billion cubic metres of the gas are stored in a facility near Amarillo, Texas. In 1996 Congress passed an act requiring that this strategic reserve, which represents half the Earth's helium stocks, be sold off by 2015. As a result, helium is far too cheap and is not treated as a precious resource.