Friday, December 10, 2010

Collective Buying Power: The Effect on Small Businesses

(Post by Douglas Hwang, Esther Tan, Mansoo Park, Joy Koh, Jason Costa)

The landscape for collective buying platforms is growing tremendously. In this two-sided network, the service providers receive revenue on every deal, and the consumers receive deals on businesses, services, and restaurants in their local area, often 50% or greater.

Then what about small businesses?

In our study, when local businesses try to advertise to their small community, they often go through local newspapers, spending thousands of dollars without clear metrics on their advertising returns. In contrast, these collective buying platforms offer numerous benefits to small businesses:

  • · 90% new customers
  • · Opportunity to up-sell
  • · 20% return rate on customers
  • · Up to 40% un-unused rate on deals
  • · Customer relationship management (CRM) opportunities

For businesses with small marginal costs [fitness classes or memberships], even if a deal is 50% off, most deals are still profitable. Even for businesses with high marginal costs [services or restaurants], this still creates exposure, as long as the deal is priced not to take a loss.

One of the biggest benefits to small businesses is cash flow. Once the deal is finished on the platform’s site, they immediately receive the cash. Essentially, they’re borrowing the cash until the buyers use the deal, which many do not use at all. Further, it is not uncommon for many of these small businesses to sell number of deals equal to their units sales of the previous year!

In conclusion, everyone wins in this 2-sided network. The platform and their business model, the consumers with their deals, and the small businesses with their “better than free” advertising, exposure, and with clear customer segmentation.

What are your thoughts? Is this always true?

Wednesday, December 8, 2010

Whither the Contactless Payment?

(Posted by Michael Plasmeier, Maya Bustan, Iulian Pogor, Tal Snir)

RFID-enhanced contactless cards might be the future of payment, but they certainly are not the present. Credit card companies have faced continuous challenges in the United States when introducing contactless payments methods. In 2006, the major card associations agreed to standards for use in the United States and cards were rolled out.

Unfortunately, the cards provided weren’t satisfactory in terms of protecting the identity and credit card information of the user. This led to negative publicity for contactless picked up by mainstream media. Consumers’ concern that thieves would be able to capture their payment information outweighed the potential benefit of faster check out times for small purchases.

Regardless, contactless payment systems are currently seeing a resurgence in popularity. In addition to start ups like Bling Nation that is focusing on smaller businesses and communities, many banks and card issuers are developing/offering cards with contactless capability.

In spite of the growing buzz and opportunity for contactless cards, the authors of this post have found that it is actually quite difficult to obtain a contactless card in the US. We were unable to even find, much less apply for a Chase “Blink” credit card. Searching for “Blink” on Chase’s site led to a dead link. While attempting to apply for a PayPass MasterCard, we could see a selection of several cards, but we ran into errors when attempting to apply. Applying for a Visa PayWave card was partially successful. One bank told us that the offer was no longer available, but Wells Fargo appeared to be issuing PayWave cards.

Are standards and technology to blame for the slow adoption? Or are their other issues at play?

Tuesday, December 7, 2010

The Net-Neutrality battle heats up with online video

(Post by Edwardo Sackey, Andrew Lei, Liza Gutina,Emmanuel Badoo)

There is a battle brewing between Comcast Corp and Level 3 Communications. This spat arose because of Comcast's demands that Level 3 Communications pay exorbitant fees to deliver Netflix content to Comcast subscribers. Below is a snippet from a Bloomberg article on Dec 3rd

“….Level 3 Communications Inc., accusing Comcast Corp. of setting up a “toll booth” for Web traffic, said the cable carrier is trying to protect its TV business by charging Level 3 for delivering video to its customers.

“Online distribution of movies, TV shows and other content threatens Comcast’s traditional ‘closed’ video distribution model,” the company said. Broomfield, Colorado-based Level 3, which provides broadband services to customers including Netflix Inc., made the statement in a 19-point public letter today….”

Do you feel Comcast by charging Level 3 Communication a fee will protect its TV business?

Monday, December 6, 2010

A new market for reselling digital goods

(Post by Bryan Drake, Leo Espindle, Eddie Liu, Hai Liu, Steve Yoshida)

Imagine a marketplace where consumers are able to sell used digital goods to each other. The envisioned marketplace essentially allows for increased price differentiation, which decreases deadweight loss caused by rigid pricing.

In this marketplace, Mary Moneybags is able to purchase a movie at the original price of $$$ from the retailer, and later has the right to sell the movie to Charlie Cheapo after a specified blackout period for a price of $$. To allow this capability, a small amount of money ($) is paid to the retailer as a fee to provide the clearinghouse, and, importantly, to the original content producer as well.

Under this framework, retailers benefit from charging a fee to provide an internet clearinghouse for resale content, and content producers benefit through the introduction of “droit de suite” for digital content, a rights law currently used in the European marketplace for fine art. We also anticipate that this system will reduce piracy, which costs an estimated $6 Billion a year in lost movie sales, and may introduce a type of social networking component to the marketplace so popular in physical used music stores.

The digital content marketplace is expanding in terms of offering content at various price points. The rental market, dominated by Netflix in the United States and including niche offerings in other countries such as eHit in Korea, allow consumers to spend less to consume content, but ultimately they do not own it. On the other end of the market, announced the ability to for users to “lend” eBooks via the Kindle marketplace for free to friends for a limited time. In light of these developments, the time certainly seems right for a full fledged digital resale market.

Thursday, December 2, 2010

What is the best way to find a new employee?

(Posted by Michelle Livengood, Batu Oncul, Derek Lyon, Melissa Spencer, Michael Connolly)

A few years ago, the answer may have been to post your job description on one of the big online boards--Monster, CareerBuilder, or HotJobs--but more and more, the answer is to turn to networking and the ever-increasing number of social media solutions for finding the right employees.

Many of the major online job boards are moving more and more towards using social media as part of the job search experience that they are trying to sell. Monster has its Social Recruiting Solution, CareerBuilder has its Social Media Brand Management tool. Monster recently acquired Yahoo! HotJobs in an effort to reach even more job seekers.

But when the major job boards are charging hundreds of dollars to employers to post a job description versus the much cheaper (and increasingly more visited!) posting options on LinkedIn, Twitter, Facebook and Craigslist can the giants of the job-board world keep their prices so high? Or are announcements of job openings, like so many other digital information artifacts, trending towards free?

Does the prevalence of social media channels put more of the onus on the job seeker to get out there and push their information , instead of waiting for the right job to find them?

Research shows that usage of social media for job searches will increase in the near-term, grabbing significant market share specifically from online job search websites. Some traditional recruiting channels, such as local posts and headhunters, will be less affected by recent social media trends.

Many recruiters say that they are moving away from websites such as Monster and Dice, because it is becoming more and more difficult to find good people at a good price. Many recruiters report that they are now using LinkedIn to find ‘real’ people within their network, for free. Especially for small firms, research shows that 60-70% of new hires are partially or fully driven by social networks. 62% of recruiters say that social networks are either significant or primary way of direct sourcing.

Some implications of this shift from traditional hiring sources to social networking is that job boards will need to change their business model or they will be forced out by social media avenues and recruiting through social media will continue to increase.

Tuesday, November 30, 2010

Experiment, Evaluate, & then Experiment again

From pricing to finalizing a user interface, experimentation can play an important role in helping a firm navigate a new market or offer a new product.

This engadget report followed Netflix as they experimented with the right pricing formula for its new streaming-only service.

Netflix's experimentation was not only limited to pricing, the firm also experimented with several UIs for the PS3.

Tuesday, November 23, 2010

Struggles with user adoption

This blog post covers the weak adoption of some SharePoint implementations.

According to a recent survey of over 300 business e-mail users, 80% of email users with SharePoint access continue emailing documents back and forth, instead of sending document links and using library services for check in, check out, and version control. This is consistent with the overall population of email users surveyed. 83% of email users prefer to email documents back and forth, instead of uploading the document on a public folder, shared drive, or workspace.

Getting users within the enterprise to adopt a new software tool can be difficult. Can the weak adoption rate be attributed to the company culture or is there a need for better software?

Friday, November 19, 2010

What would Buffett say for Garmin's future?

(Posted by: Kostis Chlouveraki, Nadia Tan, Florent Degates, Thomas Annicq, Erdin Beshimovs)

What would Buffett say for Garmin's future?: "A very interesting article states that the econofinancial future of Garmin may be predicted, if we apply the Buffett's stock-picking strategy. Some of the criteria that are stated in the article and are fulfilled by Garmin are given below:

1. Market Capitalization should be at least $250M (for Garmin is $5.7B)
2. Current Ratio should be at least 1.5 (for Garmin is 4.2)
3. EPS for the latest annual period should be above the EPS in the prior year and 5 years ago
4. Long-term debt must not be higher than 10% of working capital. This is equivalent to a low Quick Ratio, and for Garmin this ratio is close to 3.

Wednesday, November 17, 2010

Pricing digital textbooks – and how versioning could increase profits

(Post by Jinho Suk, Jungmoo Park, Sangouk Kim, Allan Jaenicke, & Arkajit Dey)

The market for digital textbooks is expected to grow exponentially over the coming years, but we see the current approach to pricing as a significant barrier to rapid growth.

In particular, we have focused on the effect of the strong 2nd hand textbook market. A survey conducted at MIT Sloan shows that 60% of textbooks are purchased 2nd hand. Through mining pricing data, we conclude that the presence of the 2nd hand market has a significant impact on pricing. On the one hand, it has the effect of raising prices through indirect appropriability: Books can be resold at around 70% of the original price. We also see less price competition and less variation in pricing across new, used and digital formats then e.g. in the ‘fiction’ category, which has a weaker 2nd hand market.

Below is an example of our findings:

Sunday, November 14, 2010

Data Hoarding In The Social Age

The social war is heating up. Facebook has long had a feature that permitted its users to import their GMail address book to help link friends.

Last week, Google changed its Terms of Service agreement requiring any service that imports Google Contact lists to allow Google the same type of access. But Facebook won't 'share' contacts with Google's GMail service.

In response, Google attempted to block Facebook, but Facebook has seemed to find a workaround.

Google's Response:
We’re disappointed that Facebook didn’t invest their time in making it possible for their users to get their contacts out of Facebook. As passionate believers that people should be able to control the data they create, we will continue to allow our users to export their Google contacts.

It will be interesting to see how this battle unfolds. If you were at Google, how would you respond?

Tuesday, November 9, 2010

Consumer surplus in the digital economy

This blog post by Matthew Yglesias has an interesting perspective on the economic impact of producing information goods.

"The gap between what a given sector contributes to measured GDP and what it contributes to human well-being has always been with us. But the ways in which digital technology makes the non-commercial production and dissemination of information goods viable opens up vast new horizons of consumer welfare. Whether or not someone would 'enjoy' manufacturing automobiles in his spare time as a hobby and distributing them to hundreds of thousands of people for free, it’s not possible to do. The marginal cost of building a car is pretty high, distributing cars is difficult, and the start-up costs of building a car factory are enormous."

Is this reasoning entirely true?

Sunday, November 7, 2010

Personal Pricing aka First Degree Price Discrimination

Here's an example of firm hoping to put personalized pricing to work.

Is this incentive compatible?

It would be interesting to see how Meineke consumers respond in practice -- I suspect there may be a variety of forces as work.

HT: Dan Sills

Tuesday, November 2, 2010

Another take at Net-Neutrality

This interesting opinion-article from The Tech argues against Net-Neutrality.

The article states:

Younger, wealthier, and better educated users are being subsidized by the old, poor, and less educated. As our holdover pipe from the dot-com bust gets utilized, and bandwidth becomes scarcer, the extent of that subsidy will increase. The ISPs, noting that they will lose customers if they raise rates uniformly, would like to pass the cost of revitalizing our network infrastructure onto those who are burdening it the most. The internet adepts, seeing the end of their free ride, now rail against the “un-neutrality” of this proposal, and seek to make it illegal for ISPs to perform such price-discrimination.


Tiered services work, and work well. They allow providers to better tailor services to customer needs, and bring the price of services in line with the cost of supplying them. With proper oversight to prevent monopolistic abuses, pricing innovation will improve the fairness of the system and ensure that future investments in network infrastructure are made optimally. Tiers are an encouragement — not a hurdle — to innovation, and will better allow end-use consumers to decide, through the free market, what they want their internet experience to be.

Should the telecoms be permitted to prioritize and price discriminate their data delivery services? Why or why not?

Wednesday, October 27, 2010

The Freemium model comes to Amazon EC2

Amazon will offer free cloud services developers starting this November.

Jarrod Phipps, a student in this course, has wrote a blog post giving his thoughts on Amazon's new pricing model. He asserts:

"The main reason I believe Amazon would go this route is that cloud services are moving closer towards commodity as the cloud vendor marketplace continues to crowd. This pricing model is likely an attempt to grab customers early and hope that high intra-vendor switching costs cause them to remain loyal to EC2. We know computing cycles, bandwidth, and storage are only getting cheaper, is this the first step towards a perpetually free cloud-hosting environment for web applications?"

What are your thoughts on Amazon's new pricing?

Saturday, October 23, 2010

Microsoft moves deeper into the clouds with Office 365

Microsoft just announced its answer to Google Apps, Microsoft Office 365.

Microsoft Office 365, the company’s next generation in cloud productivity that brings together Microsoft Office, SharePoint Online, Exchange Online and Lync Online in an always-up-to-date cloud service.

Google has gained a lot of traction with small businesses and educational institutions with Google Apps. But it appears that Microsoft's packaging and pricing was designed to directly challenge Google's assault on this market.

Pricing Scenarios

Microsoft Office 365 (e-mail only) $24 / user account / year

Microsoft Office 365 Small Business $72 / user account / year

Microsoft Office 365 Enterprise $288 / user account / year

Google Apps Standard Free ( 50 user limit)

Google Apps Premier $50 / user account / year

How should Google respond to the introduction of this new suite?

Thursday, October 14, 2010

Search is turning 'Social'

Microsoft just got a bit cozier with Facebook a new search deal.

Now when you search with Bing, you have the option of using Facebook and Twitter to enhance search results.

Instead of partnering with Facebook, Google appears to be enhancing its social presence by leveraging its current products and with acquisitions.

Which firm is in the best position to win the battle for social search?

Wednesday, October 13, 2010

MIT Sloan's Dean Schmittlein at the Huffington Post

A fourth theme is understanding big changes in business models as organizational strategy. MIT Sloan takes a unique perspective on what most people think of as strategy. Among our faculty, insights into the kinds of things that determine which organizations will succeed or fail is actually fundamentally an understanding of the role of innovation and the role of transformations in business models that come from outside as the drivers.

That's from Dean David Schmittlein's interview at the Huffington Post.
Read the whole thing.

Tuesday, October 12, 2010

Nanodata at work: the Google Price Index

Google is creating a Google Price Index using the vast data they have on prices of goods and services available online. This provides a daily measure of inflation.

Hal Varian, Google's Chief Economist, says that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since last year. In contrast, the GPI rose during the same period a year ago. Meanwhile, the official government "core" consumer price index shows a small 0.9% increase since last year.

When I met with Ben Bernanke last fall, I encouraged the Fed to rely more heavily on the vast amounts of "nanodata" and "nowcasting" available via the web and other sources to get more fine-grained and timely information about the state of the economy. Given the damage that deflation can cause to an economy, I have no doubt he's looking closely at the GPI as he thinks about how to manage monetary policy.

Friday, October 8, 2010

Susan Athey on Online Experimentation

Susan Athey is a professor at Harvard and Microsoft's Chief Economist. She just did a short radio commentary about online experiments. Here's how it starts:

Did you know that every time you do a search on Google or Bing, you are improving the quality of the search engine? The more people click on a search advertisement from a clothing company or on a link on an online news story, the more prominently it is displayed for the next consumer. And the firms constantly experiment to get things right. They watch what consumers do and adapt their products in response to the results of their experiments.

You can listen to the rest via the Marketplace website.

Thursday, October 7, 2010

Another layer in Google's Infrastructure: Google Chrome OS

Here is video of how Google's Chrome OS fits into their overall web strategy. This is just another example of how Google uses its internal technology as a competitive advantage. Since Google has decided to keep this platform completely free, what challenges could they encounter in the next 2-5 years?

Tuesday, October 5, 2010

Friday, October 1, 2010

Should Apple give away the Apple TV for free?

Apple is clearly using the razor/razor blade model for it's latest version of the Apple TV. The new device offers instant TV show rentals, Netflix and more from the comfort of your living room.

Apple chose the aggressively low price of $99 for this new product. Can you make a case of offering the device even cheaper? or free?

Tuesday, September 28, 2010

Is social media a fad?

Saturday, September 25, 2010

How much would you pay to watch a new movie sooner?

Time Warner will begin testing a new video-on-demand service that will allow consumers to watch movies at home 30 to 60 days after the initial theater release.

Pricing this service will be a challenge. The CFO estimates that customers would be willing to pay $20-$30 to watch a newly released movie at home.

How should Time Warner price this new service to capture as much consumer surplus as possible?

Tuesday, September 21, 2010

Reducing your costs with “Clicks, not Bricks”


Interesting article from the NYTimes, “Why Bricks and Clicks Don’t Always Mix” . This article illustrates how Netflix is competing with Blockbuster in the video rental business with a cost and operational advantage. With Netflix moving toward streaming movies over the Internet, they are aiming to reduce their costs even further. Will Blockbuster be able to keep up?

Monday, September 20, 2010

Unlocking the economic value of TV Reruns

Broadcast TV shows once commanded a hefty premium for reselling their content on cable networks. With more and more cable networks producing their own original content, broadcast TV can turn to the Internet to monetize their content. After all, broadcast TV has already spent a significant sum to produce original content.

Can broadcast TV unlock the value of old TV shows on the Web?

If yes, should they redistribute this content by building their own online distribution platform or partner with existing online networks (e.g. Hulu)?

Thursday, September 16, 2010

Dynamic pricing startup Amie Street acquired by Amazon

Amazon recently acquired this startup that sells music online using dynamic pricing. What are some of the advantages/disadvantages of their pricing strategy? What type of pricing would you prefer if you were a music artist? Amazon?

On Amie Street, the community determines the price of music. Every song starts cheap (or even free!) and increases in price up to 98 cents as more and more people purchase it.

Tuesday, September 14, 2010

The explosion of digital information has provided many opportunities for data driven startups

We’re producing data at an amazing rate. In fact, humans generated more data in 2009 alone than in the entire history of our species up to that year, according to Amazon’s former chief scientist Andreas Weigand. And IT firm EMC projects the quantity of digital information we produce will grow by a factor of 44 between 2009 and 2020.”

Ken Elefant of Opus Capital outlined three market trends that startups are using to enter what he calls the "big data" markets:

  • Data Accessibility
  • Data Control
  • Better Tools, Better Business Insights (Analytics)

Startups have recently gained ground by providing a business model that uses at least one of these three methods. Although this is the current trend of monetizing vast amounts of data, what does the future hold for data driven startups?

Saturday, September 11, 2010

Did you know these digital trends?

Have five minutes? Here's the latest "Did you know" video with some interesting stats and trends.

Friday, September 10, 2010

How Apple Uses Pricing

Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: "Nope. What Steve Jobs sells is pricing."

Pricing? You bet.

Jobs is a master of using pricing decoys, reference prices, bundling and obscurity to make you think his shiny aluminum toys are a good deal. Apple's Sept. 1 announcement of new products was a classic example.

The popular iPod Touch media player has been revamped at three price points - $229, $299, and $399 - all costing more than the iPhone, which does everything the Touch can plus make phone calls.

What gives? Watch Apple, and you can learn pricing tricks for your own business.
Thus begins a fascinating article at Bloomberg Business Week. Pricing strategies like these are especially important for information goods and in a world of well-informed consumers. In fact, if anything, the article overemphasized the psychology of pricing and underestimates how these strategies can be very effective even when consumers are entirely rational.

Is Adobe’s Flash Platform one step closer to the iPhone?

Apple recently reversed its earlier decision to restrict third-party developer tools to be used to build iPhone applications. Now, software developers can use Adobe’s Packager for the iPhone, which helps software developers transform Flash applications to the iPhone format.

It is interesting to note that while software developers can now use the Adobe Packager, they are still restricted from delivering pure Flash applications for the iPhone. Why is Apple restricting the Flash Platform from the iPhone? Is this decision technical, political, or just business?

Wednesday, September 8, 2010

Google's Instant Search

Google has just announced a new search enhancement that promises to “change the way you search”. Will this new enhancement fundamentally change the way we search? Or is it just a small feature enhancement with great marketing buzz?

Wednesday, September 1, 2010

Facebook vs. Apple

Was the new and improved Apple TV the most interesting announcement that Apple made today, or what it something else?

Yesterday, I wouldn't really have considered Facebook and Apple competitors, but today's announcement of Ping may change that.

Facebook has a huge social network platform, but has been struggling to monetize it. Apple has a powerful payment and content platform, but no significant social network.

Which position would you be rather be in?

Friday, August 27, 2010

Creative AI vs. Mad Men

“’s true that it generates fun ads. [But] after this first reaction, they get a little scared,” he said, “when they see that a software program can create the same (mediocre) results in just 10 seconds as several hours of strategic meetings and production.”

That's how the President of Xiberras describes the response to his new "Creative Artificial Intelligence" software that can generate hundreds of thousands ads like the one above. The user gives it a few basic parameters like they demographics of the target audience and the intended benefits of the product and the software does the rest.

It may not compete with Don Draper's creativity (yet) but maybe the more mediocre talents on Madison Avenue should be getting nervous.

Wednesday, July 28, 2010

Better teachers and smaller classes make a huge difference

Mr. Chetty and his colleagues — one of whom, Emmanuel Saez, recently won the prize for the top research economist under the age of 40 — estimate that a standout kindergarten teacher is worth about $320,000 a year. That’s the present value of the additional money that a full class of students can expect to earn over their careers. This estimate doesn’t take into account social gains, like better health and less crime.

That's from a New York Times article summarizing impressive new research by Raj Chetty, John Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Schanzenbach and Danny Yagan.

Here's a graph of their key results:

Students were randomly assigned to classrooms over 20 years ago, making this a valuable experiment. The results reflected a combination of teacher quality, smaller classrooms and peer effects.

We would be better off if we paid our teachers a lot more, and attracted more of the best and the brightest to this profession.

Tuesday, July 27, 2010

More Evidence of the Great Restructuring

Dave Altig at the Atlanta Fed provides more evidence that the Great Recession is also the Great Restructuring:

Specifically, even though the number of job openings is increasing, the number of unemployment workers remains unusually high. There appears to be a mismatch between the new jobs and the skills of the existing workforce.

As the New York Times puts it:

"Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed."

Part of the story, in my opinion, is the reorganization of work catalyzed by the increasing use and power of IT.

Thursday, July 22, 2010

A Plan for Long Term Growth

A proper US investment recovery plan has five parts.

The first is a significant boost in investments in clean energy and an upgraded national power grid. ...

The second is a decade-long programme of infrastructure renovation, with projects such as high-speed inter-city rail, water and waste treatment facilities and highway upgrading...

The third component is more education spending at secondary, vocation and bachelor-degree levels, to recognise the reality that tens of millions of American workers lack the advanced skills needed to achieve full employment at the salaries that the workers expect. The unemployment crisis is largely a structural crisis of job skills. It is hitting young workers – many of whom should still be learning – and older workers who lack a degree....

That's from the five part economic recovery plan of Jeffrey Sachs which is squarely focused on long term growth, even as it helps us out of our current slump. Click on the link to learn parts four and five.

Tuesday, July 20, 2010

A Tipping Point: E-books Outsell Hardcovers at Amazon

The WSJ reports that e-books now outsell hardcover books at Amazon.

Since the marginal cost of reproducing and delivering e-books is close to zero, we are reaching a tipping point for new revenue models.

We already see some scattered examples like subscriptions, bundling, ad-supported books, subsidized or even free books that drive sales of complementary products, etc. It's also a sure bet that a lot more books will be simply given away the way authors donate articles to Wikipedia or bloggers blog. Digital music, software, videos, and news all offer possible glimpses at the future of book pricing.

The biggest barrier to these new models is not technological. Instead, it is in the myriad contracts and implicit culture that links together publishers, authors, distributors, retailers and consumers. For instance, Amazon would have trouble offering an all-you-can-eat subscription or bundle to its titles without the agreement of all the parties expecting royalties which are typically based on per-unit sales.

Over time, these institutions can and will evolve. In 10 years, will the traditional a la carte pricing model be the most common way books are distributed, or will an alternative model dominate?

Merle Hazard on the Greek Debt Crisis

My college classmate has a new song about the Greek debt crisis:

Friday, July 16, 2010

The Great Restructuring

This is not just the Great Recession. It's the Great Restructuring.

As growth resumes, millions of people will find that their old jobs are gone forever. The jobless recovery is one symptom.

I think one of the causes is a fundamental reorganization of work catalyzed by information technology.

Sunday, July 11, 2010

Deflation, Recession and a Simple Cure

In his speech to the National Economists Club in November, 2002, Ben Bernanke said
"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted."

Unfortunately, despite widespread concerns about inflation, it looks like we may now be trending toward deflation. Paul Krugman summarized data from the Cleveland Fed showing the downward trend in inflation for each month since January, 2008.

Similarly, Menzie Chinn looks at a set of other metrics and also sees a downward trend:


Meanwhile, there remains enormous slack in the economy. Recovery from each recession since 1981 has taken longer and longer. Since the current recession is the worst one since the 1930s, it looks like it will take years to recover:

A possible solution for both deflation and recession

Ben Bernanke has studied this situation, and in that same 2002 speech noted that we have the policy tools to cure deflation and stimulate the economy:

A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. … A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

For instance, in the current situation, a $5,000 tax cut or credit for every U.S. household could be financed by the Fed printing money. This would not only stimulate consumption and investment, but it would also counteract the current deflationary pressures. In periods of full employment, such a policy would be justly criticized as inflationary, but in the current situation, a bit of inflation would be welcome. If there are concerns about inflation growing too rapidly, the tax credit could be delivered in monthly installments and ended early if inflation rose above a pre-specified target.

Regrettably, having the tools does not mean that we will use them. For instance, Japan suffered through a lost decade or more of slow growth and deflation, and though they had the same tools we have today, they never solved the problem.

Let’s turn the microphone over to Bernanke for a final caution about Japan, and a hopeful thought about how our experience may differ:

I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate… [P]olitical constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.

Deflation is here: The CPI is down 0.1% this month and 0.3% in past 6 months. The gap between the yield on 5-year nominal Treasuries and Treasury Inflation-Protected Securities has decreased, implying lower inflation expectations over the next five years.


Monday, June 28, 2010

Roubini on how to fix the financial system

Nouriel Roubini's has a new book, Crisis Economics, where he makes a few simple suggestions for fixing the financial system. Since he predicted the crash back in 2006, he's got some credibility on this issue.

The New York Times Book Review has a nice summary.

1. Put traders and i-bankers bonuses into a pool held in escrow for several years.
2. Require credit rating agencies to be paid by investors in securities, not bond issuers.
3. Removal of the credit rating agencies’ certification by the Securities and Exchange Commission as “nationally recognized statistical rating organizations" so anyone can compete.
4. Identify and ban a few of the most dangerous derivative (e.g. like credit default swaps), just as we ban people from insuring their neighbors' houses against fire.
5. Force financial conglomerates to retain capital relative to all the risks posed by their various units, which would discourage overly large financial institutions (like Citi) that have to be repeatedly bailed out.

Another thoughtful analysis is provided by the Squam Lake Group, including many similar ideas.

What do you think? Is this unreasonable? Is it infeasible?

Monday, June 14, 2010


Thursday, May 13, 2010

Can News Be Saved?

Hal Varian, Chief Economist at Google, has a fascinating new blog post on the economics of newspapers.

He writes:
[N]ewspapers have never made much money from news. They’ve made money from the special interest sections on topics such as Automotive, Travel, Home & Garden, Food & Drink, and so on. These sections attract contextually targeted advertising, which is much more effective than non-targeted advertising

In the past, advertising from the profitable sections cross-subsidized the news operations, since everything was delivered as a bundle. But online, users interested in the special interest sections bypass the news pages and go to focused websites.

So how will news be supported in the future? Unfortunately, Hal doesn't have a clear answer and neither do I, but I'll endorse his recommendation of experiment, experiment, experiment. In time, a business model will emerge, though it will almost surely look very different from what we have now.

Sunday, May 2, 2010

Would a “Drain America First” strategy significantly lower gas prices?

In the New York Times today, Jad Mouawad argues that the United States “needs” more offshore drilling in the Gulf of Mexico.

I don’t think the numbers support his claim. Instead, any additional oil would mainly a) lead to increased consumption in other nations, and b) lead to decreased production in other nations, with little net effect on American consumers. This is because oil is a fungible global commodity.

According to his article, Mouawad reports that Gulf of Mexico oil production amounts to 1.7 Million bbl/day. This is just 2% of the 85 million bbl/day produced globally. James Hamilton has estimated that the long run demand elasticity of oil is about -0.2 to -0.3 (although there’s evidence of less elasticity recently). If crude oil accounts for half of the cost of gasoline, then even a 50% increase in Gulf production would lead to only about a 1.5% to 2.5% decrease in U.S. gas prices.

In addition, we must also consider supply elasticity, which further limits the effect of increased drilling on gasoline prices. Bringing more Gulf oil to market would reduce incentives for other nations to bring as much oil to market. Furthermore, it would decrease incentives for investments in alternative energy like wind, solar and nuclear. Thus every additional barrel we drain from our Gulf oil reserves would net less than an additional barrel of oil or its equivalent coming on to the market.

Factoring in both demand and supply effects, it appears that a major increase in Gulf production would have barely a 1% effect on gasoline prices for American consumers. That's less than the average monthly change in prices.

On the other side of the ledger are the risks of more catastrophic oil spills like the BP rig, and the inevitability of negative externalities from increased oil consumption, such as pollution and congestion.

America does not “need” more offshore drilling. On the contrary, an energy strategy focusing on demand and speeding the development of alternatives is likely to be much more effective.

The Official U.S. Energy Information Administration appears to agree:
"Because oil prices are determined on the international market, however, any impact on average wellhead prices [from additional drilling on the Outer Continental Shelf] is expected to be insignificant."

Saturday, May 1, 2010

Solving Email Congestion

Email costs zero to send but it consumes the attention of the recipient. The cost of attention is not charged to the sender, which can lead to too many messages being sent and inbox congestion. This is a kind of information pollution that is especially visible in the billions of spam messages sent each year.

In his blog today, Greg Mankiw argues that charging senders a small price to correct this externality is an appealing "Pigovian" solution. For instance, a reader of his blog writes:
[A] penny tax (say) on email would probably generate large amounts of revenue, mitigate an important negative externality, and have minimal inefficient disincentives. Since email servers are necessarily centralized and networked and all email senders are ipso facto connected to an ISP who is charging them for access the transactions costs and evasion problems seem low.

I agree that charging senders is the ideal way to solve the email congestion problem, especially spam. It is superior to technical solutions like filters because it helps align the sender and recipients' incentives and thereby harnesses the knowledge that the sender has about the content.

Unfortunately, the issues are a bit more complicated than he describes in his brief posting and thus this solution requires some new standards and infrastructure. Along with Marshall van Alstyne and Jon Koomey, I wrote an Op-Ed in the WSJ explaining some of these issues and proposing a way forward.

See "You've Got Spam" (WSJ, Sept 6, 2007).

Update: [Here's an un-gated version]

Saturday, April 24, 2010

Congrats to Esther Duflo

Congratulations to my MIT colleague Esther Duflo on winning this year's John Bates Clark Medal. The Medal is awarded to "that American economist under the age of 40 who is judged to have made the most significant contribution to economic thought and knowledge."

She has been a pioneer in Randomized Field Experiments, which is a powerful way to test the impact of new policies. She helped found the Poverty Action Lab, which conducts experiments to learn which types of anti-poverty programs work best. I predict we'll see a lot more use of field experiments by academics, policy-makers and especially business managers to understand the causal effects of various policies. It's something I encourage my students to do as much as possible and advocate in my lecturing and advising to business executives.

Here is a list of her papers with the most citations in Google Scholar.

Saturday, April 17, 2010

Web Coupons Know Lots About You

From the New York Times:

A new breed of coupon, printed from the Internet or sent to mobile phones, is packed with information about the customer who uses it. While the coupons look standard, their bar codes can be loaded with a startling amount of data, including identification about the customer, Internet address, Facebook page information and even the search terms the customer used to find the coupon in the first place.

Although this concept has been discussed for over a decade -- I almost started company based on it in the 1990s but decided that we were too early -- it is still far from fulfilling its potential. In the coming years, companies will do more and more true experiments, with treatment and control groups, to understand which marketing methods are most effective for different types of consumers and even specific individuals.

One effect is that we'll have more targeting communications and products that fit better for each consumers tastes and preferences. This makes is a win for both buyers and sellers, making the pie bigger.

Another effect is that sellers will better understand the how much each consumer is willing to pay for a given item in a given situation. They can use this knowledge to improve price discrimination. This increases sellers profits at the expense of consumer welfare. However, in most circumstances, the net effect is an overall gain in welfare even for this use of these coupons.

Thursday, March 18, 2010

Platform war!

Two sided markets in action: Apple/iPad vs. Amazon/Kindle

Amazon appears to be responding to the Apple threat by waging a publisher-by-publisher battle, trying to keep as many books as possible out of Apple’s hands, while preserving as much flexibility as it can to set its own prices.

But if Amazon tries to enforce its demands by removing “buy” buttons from some pages again, some believe it could harm its reputation in the eyes of customers and the publishing industry.

Tuesday, March 2, 2010

Reinventing the Book

The book is a venerable invention for sharing knowledge and entertainment. It's now being reinvented, via the kindle, other e-book readers and soon, the iPad.

Here's Penguin's vision for ebooks:

At the same time, the business models will be reinvented. Massive Bundling and Subscriptions become will be much more profitable because the marginal costs of e-books is so much lower than paper books.

Saturday, February 27, 2010

End of Geography and Ignorance as Competitive Advantages

Two of the biggest barriers to price competition for traditional retailers have been geography and ignorance: it was a hassle for customers to physically travel to another retailer to comparison shop and as a result they were relatively ignorance of prices even for identical or very similar products. This creates a bit of monopoly pricing power for retailers, boosting profits. From the beginning , online competition has been very different (although far from frictionless).

The Rise of the the Shopperphone

Mobile apps are now eroding these two traditional barriers to competition in the physical world as well. For instance, the NY Times describes emerging tools like ScanLife that let you snap pictures of items in stores and order them online. RedLaser photographs the bar codes so you can find cheaper vendors online.

I confess that I even used plain old Google on my iphone last time I bought a pair of pants. In that case, I found that the online retailers were not significantly cheaper, so I felt comfortable buying them in the store.

These tools mean that even traditional retailers must now match worldwide competition for the products they want to sell, or else deliver unique benefits that can't be matched.

Sitting out the emerging Battle of the Retail Channels is not possible. Both online and traditional retailers have some unique advantages over their competitors (e.g. immediate gratification vs. broader product selection, to name one for each channel) They'll need to identify and cultivate them aggressively in the coming years or find another line of business.

Wednesday, February 24, 2010

Internet and Old Media: Substitutes or Complements?

Time spent on the Internet was assumed to crowd out time spent on old media like newspapers and T.V. and to a large extent that's true.

But it can also be a complement, increasing the value of existing media. For instance, the NY Times as an article describing how Twitter and Facebook have helped drive record TV ratings for the Vancouver Olympics.
"The Internet is our friend, not our enemy,” said Leslie Moonves, chief executive of theCBS Corporation, .... “People want to be attached to each other.”
In research that Jeffrey Hu, Duncan Simester and I did, we also found that their could be significant complementarities across different channels, e.g. Internet & catalog sales. In a controlled field experiment, most customers responded to increased catalog mailings by also increasing their purchases via the company's Internet channel. Interestingly, the effect was reversed for the very "best" customers. They were already saturated with information from the company and additional communications actually had a negative effect on profits.

Wednesday, February 17, 2010

NY Times execs debate $30/mo vs. $10/mo for iPad edition

According to Business Insider, the print circulation execs want the iPad edition of the NY Times to be priced at $20 to $30/month, while the digital operation is pushing for $10/month.

Which is right?

Arguably, both numbers are much too high. The direct marginal costs are almost zero for delivering the NY Times electronically. On the margin, the main costs are the print subscribers that will get cannibalized, but many of them are being, and will continue to be lost anyway to other electronic publications that charge zero. The Times is a differentiated product, but not that differentiated for most customers.

On the other hand, advertising revenues will increase with each additional reader. With the large form factor of the iPad, the NYT could devote up to 1/3 of the screen to customer-specific, location-specific, context-specific ads. Coupons, which were a mainstay of local newspapers could be reinvented in this medium with a dramatic increase in effectiveness (and value). Advertisers would pay a lot to get in front of the NY Times customer base every morning, and again throughout the day. Done properly, online ads and coupons could easily be worth more than the foregone revenue from subscriptions.

Furthermore, by pricing aggressively from the start, the NY Times can head off competition and foreclose some entry. Last, but not least, the publishers may care about their influence, and that also grows with greater circulation, even beyond the profit-maximizing levels.

So the optimal price for the iPad edition may well be zero, or less.

Tuesday, February 9, 2010

Four ways that IT is changing innovation

Sloan Management Review interviews me (video).

Thursday, February 4, 2010

Productivity is up 5.1%, unit labor costs down 2.8% in 2009

Today, the Bureau of Labor Statistics reported that productivity in the U.S. was up 5.1% for 2009, the largest increase since 2002. Meanwhile unit labor costs are falling rapidly, since wage gains have been muted.

I just met recently with a business leader who used the downturn to layoff 10% of his workforce. He said he did not lose 10% of his productive capacity when he did this, since he kept the best workers. Efficiencies, driven by process reorganization and new technologies, make it possible to run leaner than before.

Throughout the economy, many firms are finding that they can increase output without hiring more workers. This portends more strong productivity growth in 2010, but also a relatively jobless recovery.

Sunday, January 17, 2010

Advertising share doesn't match time spent for Internet and Newspapers

(HT Business Insider via Tod Loofbourrow)

If advertisers are paying for "attention" then they don't seem to be allocating their dollars very efficiently across different media. The news is not good for newspapers.

Saturday, January 16, 2010

How much would YOU pay to read a newspaper online?

(Posted by Mikhail Turilin)

According to Fast Company
Harris asked one simple question to 2,000 adults who regularly surf the Web: "How much, if anything, would you be willing to pay per month in order to read a daily newspaper's content online?" Before you read on--have a think about that yourself, and come up with a figure you'd find acceptable.
Click through to see what the survey says.

This survey has some weaknesses. A more relevant comparison audience for subscriptions vs. advertising would be newspaper readers, not all web surfers. Also, it would have been useful to report some more disaggregated numbers than the $1-$10 category per month. How many people would pay $2 a month? How about $0.75/month? Is that more than they generate in ad revenue from that person?

Nonetheless, the data are a warning for the majority of newspapers who provide relatively undifferentiated content.