Slow blogging on fast innovation

What's wrong with silly love songs?

2010-11-20T20:23:00.000+09:00

I like Paul McCartney. I once listed my favorite Beatles songs, and they were more likely Paul's songs than John Lennon's.

I also like his attitude (or philosophy) towards music. In the 1970's, John Lennon and other music experts criticized Paul's songs. They said Paul make light and silly love songs.

Paul seems to have considered changing his style. "I listened to him for a few years," said Paul, "and used to think, 'I can't write another of those soppy love songs. We've got to get hard and rocky now.'"

But then he said, "In the end, though, I realized that I just had to be myself. It's bolder, you know, to say, 'What's the difference? I like it.'" (source: http://www.superseventies.com/1976_6singles.html)

His ultimate answer was his song in 1976, 'Silly love songs.' See the lyric below.

[Paul McCartney & Wings - Silly Love Songs - Del album de 1976; Wings at the Speed of Sound.]

You'd think that people would have had enough of silly love songs.

But I look around me and I see it isn't so.

Some people wanna fill the world with silly love songs.

And what's wrong with that?

I'd like to know, 'cause here I go again

I love you, I love you,

I can't explain the feeling's plain to me, say can't you see?

Ah, she gave me more, she gave it all to me

Now can't you see,

What's wrong with that

I need to know, 'cause here I go again

I love you, I love you

Love doesn't come in a minute,

sometimes it doesn't come at all

I only know that when I'm in it

It isn't silly, no, it isn't silly,

love isn't silly at all.

How can I tell you about my loved one?

(I love you)

How can I tell you about my loved one?

(I love you)

Yes, Paul! I agree with you. The same can be told about the visual art. If I like a piece of art, I don't need a deep meaning. I may like one because of the meaning or the historical importance, but not always. If I don't like a work of Andy Warhol, I don't like it however high the work is viewed by experts. It is not that someone has better eyes for appreciation and others don't. We just have different eyes.

What's wrong with silly love songs?

Intramodel competition vs. intermodel competition

2010-08-25T19:11:00.001+09:00

There are two kinds of competition.

One is intramodel competition, which is competition in the same business model or industry. It is Hyundai car against Toyota car, and IE vs. Chrome browsers.

The other is intermodel competition, which is competition between different business models that target (or happen to address) the same needs. It is book vs. ebook, or even wrist watch vs. mobile phone (for the needs of telling time).

People tend to look at only intramodel competition, or look at both with the same perspective. They need different perspectives.

An innovation inevitably generates an intermodel competition, though the potential competitors may not be aware of it for a long time.

Slow information

2009-10-31T12:01:00.000+09:00

(Originally written as a comment at http://www.avc.com/a_vc/2009/10/slow-capital.html)

I am a slowblogger. I tend to know about a news later, and tend to make my opinion about it much later after the stormy initial debates have gone, when the topic has been outdated. Even at AVC.com, I find myself leaving comments days after.

But why do fast blogging/twitting dominate?

One reason is that the world is becoming more complex and moving faster, and the average shelf life of information has to become shorter. There are more and more new information, and a piece of information gets outdated after even newer information arrives. This is natural.

So, this explains all why we don't see much slow information (generation, distribution, discussion)? Probably not. There are topics that deserve longer thinking and discussing. I think the other reason must be that we made it easier and cooler for fast information.

Blogging has made information faster. With Twitter, even blogging looks slow now. Average shelf life probably being 1-2 hours vs. 1-2 days. All the marketing and journalism encourage you to join the wave. So we get rapid progress in the fast side of the information, which is good. But the other side, the slow, is left undeveloped. The fast information is likely be more popular as the world, which is the ultimate source of information speeds up, but not this much.

The ebook is showing some hope, but it has not fully utilized the advantage of the Internet. It is just substituting the tree paper with the electrononic paper, an old model using new technology. I am not saying old models are bad, but there must be other new possibilities.

More than any other areas, we need innovation for slow information.

Net Neutrality issues

2009-10-31T11:50:00.000+09:00

(Originally written as a comment at http://www.avc.com/a_vc/2009/10/net-neutrality.html)

I am interested to see where this goes in the US, as Koreans tend to benchmark the US when it comes to regulation. They demonize the US ("The age of wall-street capitalism is over!") when they don't like it, and praise they like it ("Hey, even the US did it.").

There may be other issues, but it comes down to two questions to me.
1. Should the ISPs be allowed to charge differently based on network usage?
2. Should the ISPs be allowed to block certain dada (or applications)?

I think the answer to #1 is easy. Yes. The freedom to pricing is probably the most important freedom after freedom to entry (that is, to start a businss that you like). When you cannot determine how much you want to charge for your product, you are not much different from a bureaucratic government service. Plus, price regulation will distort the resource allocation. For example, it will benefit heavy loaders, whether their contents are popular or not.

#2 is a bit more tricky. My sense is that when consumers don't have alternatives than the an ISP, the regulation of not allowing blockage may be justified. But when consumers have alternatives, it should be left as a businss decision. Theoretically, there could be different ISP business models purely based on such discrimination. One hypothetical model I can think of is a child-friendly ISP, of which value proposition could be "No more worries. We block porn contents." For parents who are not techy, this could be a very good solution.

If the competitive situation differs by regions, perhaps #2 decisions could be delegated to states or below? Just an opinion.

Chris Anderson: 'Maybe Media Will Be a Hobby Rather than a Job.'

2009-08-15T22:55:00.001+09:00

Chris Anderson on the Economics of 'Free': 'Maybe Media Will Be a Hobby Rather than a Job' - SPIEGEL ONLINE - News - International

Maybe it won't. What he said has some truth, but I wouldn't go as far as to compare journalists to blacksmiths. I think journalists are more like photographers. Thanks to developments in production (digital cameras and PC) and distribution (Internet) tools, anyone can show off their photographs. But it does not make every photographer part timer or hobbyist. The most talented and devoted ones remain full-time.

The business model (or job description) may change, but not like automated machines replacing blacksmiths. The participation of amateurs will increase, but the better ones among them will become pros. Actually, we are already seeing them. Is Michael Arrington an amateur or a part-time hobbyist? You could say that he is a blogger, not a journalist. But I believe Chris Anderson shares my view, which is "what's the difference?".

My assessment of some key freeconomics arguments

2009-08-12T11:45:00.002+09:00

(Originally written as a comment on Fred Wilson's blog. http://www.avc.com/a_vc/2009/08/some-serious-freeconomics.html#comment-14635342)

Rather than commenting on 'another' perspective, here are my key points on free, which I have been repeating over and over here and there. I think there are too many fuzzy (and sounding fancy and deep) statements when it comes to discussing freeconomics. So, I stated using 'right' and 'wrong' to make it as clear as possible.

1. Ever decreasing marginal costs naturally lead to free. (Wrong)
First, the marginal cost is never zero. Unless you invented a perpetual motion machine, there will be costs of electricity, network, computers, storages, etc. Small price times many units, which is necessary if you want to make profits, are still a lot. Most importantly, living expenses of people involved, whether you classify it marginal or not, is substantially over zero.

Second, even if we assume the marginal cost was really zero, it does not justify zero price. There is always the economic cost, which is called opportunity cost, cost of capital, etc. Put simply, you don't want to do a business just because you are not making loss. Unless you make certain level of income, you have no reason to do it over a long term.

2. You should give away contents, and make money giving services, consulting, lectures, performances. (OK, if it's your philosophy. Wrong, if it is your logic.)

I think those who argue for this are generally against the idea of 'idea being sold at any price'. Because it's their value and philosophy, we cannot discuss it analytically. You cannot say I am wrong, because I like rock music more than jazz. So, if you don't like paid contents, you don't have to justify it analytically.

But if you are saying 'that's the only way to make money with contents', that's an analytical statement. And a wrong one. When you have two things to sell, you can make one loss leader and the other profit leader. Assuming piracy is reasonably controlled, it makes as much (or often more) sense to give lectures/consulting for free and make money with contents.

3. Free can be a powerful element to have in a business model. (Right)
First, as someone commented quotating Dan Ariely (though I think it is too obvious to quote an economist), free seems to have a powerful psychological appeal. So it will bring more than usual increase in demand.

Second, free actually saves costs other than the price itself, namely transaction costs. By pricing a product as free, you don't need payment process, which costs time and money. So it is possible that free is economically better than a really low price.

4. Freemium is the best business model for many content and web services. (Not much to comment)

I generally agree with this statement, but there is little to argue for or against. Free samples are almost necessary and have existed always. And it is very efficient to give away free samples on the web. I think the statement should be more concrete, like having some quantitative threshold or distinguishing between what's just tradtional free samping and what's new freemium. For example, is HBR freemium or just traditional paid model with some free samples?

5. You should make contents free for occasional reader and charge niche contents consumed by heavy users. (Not sure, yet.)

This is difficult for me, as it appears to conflict with loyalty economics. In my view, loyalty economics is more solid and lasting management theory than RMS-ROS, BCG matrix type of scale-based strategies. Loyalty says loyalty of your customers, not scale per se, makes your business grow and healthy. And many problems of modern companies occur from the fact that they are nicer to new customers and focus too much on sales. You are treated best when you are a new subscriber, and they milk you over time.

I like loyalty economics, not only because it is analytically solid but also because it's morally high-road. Basically, you give back to whom you owe your living.

On the other hand, it is probably necessary to give away some samples to non-users. And when you have very innovative products, the ones who do the most favor to you are the ones who dared to use your products initially. I think in this situaltion, they are the loyal ones who deserve your special treatment. However, the problem is that, when you distribute your most popula contents for free, most of the users are not the brave early adopter who risked their valuable time and efforts.

My hypothesis is that this is a problem of degree or subtle business model design(free which content to whom and how much). Just like how much focus on sales and how much on caring loyal customers are a subtle degree issue.

I hope Fred Reichheld, Bain partner who started Loyalty Economics, to think about this from loyalty perspective. He seemed to find it interesting, but it would be really nice to listen to his perspective.

Dilemma of free (and freemium)

2009-08-07T16:29:00.003+09:00

Defined too loosely, Freemium is pointless. I wonder whether that's not what some people are trying to do, by arguing that News Corp's move is Freemium. Maybe true, but then what's not so Freemium? Free samples existed forever and everywhere.

Freemium was the savior of the original (more radical) Freeconomics, which had too much intellectual flaws. (Near zero marginal cost naturally leading to zero price?) People seemed excited, but some in the free camp seemed to realize its ground was weak. Then came Freemium, which was reasonable, and did not have much controversial arguments. We all know it worked, even before Internet. It just has a more aggressive, modern, and digital feel. However, there is one problem. It is not as controversial as the original radical free. And because free samples were with us forever, Freemium was there to be defined. As a special and new way of using free or as a new terminology for an old practice.

Make the concept sharp and the camp looses Rupert Murdoch, who everyone knows is tough and smart, or make the concept loose (thereby boring) and you still have him as an ally. Dilemma?

Is Freemium against loyal customers?

2009-07-05T12:57:00.005+09:00

In addition to economic problems I have with freeconomics, the loyalty aspect came to my attention recently. This time it is with freemium, a business model which I view as rather reasonable unlike other more extreme free arguments, and so the issue is more subtle.

I was a business strategy consultant at Bain, and 'customer loyalty' is one perspective of Bain that I really like and agree. I even translated Loyalty Rules by Fred Reichheld into Korean edition while working at Bain. (You may think this is obvious for an ex-Bainee, but I have not always been very enthusiastic about perspecitives that came out of Bain. For example, I do not fully agree with 'profit from the core'.)

So, why do I think at least some variation of freemium conflicts with customer loyalty? First of all, loyalty economics says that if you care more about your loyal customers you are better off. Sounds too obvious? Maybe. But this has a very strong warning against focusing too much on acquiring new customers. Typical businesses spend too much money on marketing and sales, and too little on caring loyal customers. So what happens very often is you give discounts and all those benefits to new customers, while claiming full price to your loyal customers. Loyalty economics, as argued by Fred Reichheld, says that this is economically destructive as well as morally low-road.

Let's have a look at freemium. Some argue that you should give away your most popular contents for free and make money by making niche contents paid. This model has a strong possibility of compensating free riders (apparently not your loyal customers) with your loyal customers' money.

In theory, the free users may not be free riding. They may be contributing a lot as marketing agents, linking to your sites and talking about your contents. But the issue remains, if majority of free users are just free riders. And I am guessing that is the case.

I have not thought through this yet. So, let me just ask some questions.
- Does this freemium model have conflicts with customer loyalty as I described? Why or why not?
- If yes, is this conflict inherent and common among all freemium models or just some kinds? To put differently, is customer loyalty in conflict with 'free for a month and paid afterwards' model? What about 'free for limited features and paid for full features' model?
- How can we make (freemium or not) change the business model so that we compensate loyal customers better?

Freeconomics or Freeligion?

2009-07-05T12:30:00.000+09:00

There are discussions about freeconomics, triggered by the publication of Chris Anderson's book. I have already written quite a few times about why its economic logic is flawed. See them here.

I cannot help asking this question. Do advocates of freeconomics think that free is the most economically effective price, or that free is the most morally right price?

I hope the former is the case. But price being determined by supply and demand, they seem arguing too passionately for for the only ultimate price. If they believe strongly that it is morally (or socially or by any viewpoint) right to price at free, they can say so. But it's different from saying 'free' is inevitable because of economic forces.

Let me step back a bit. You can be excited to find a truth that confirms your philosophical or religious beliefs. In those cases, however, you should be especially careful not to be too confident with insufficient logic and evidence.

Why aren't hedge funds failing as fast as banks? | Chris Dillow - Times Online

2009-04-30T17:51:00.001+09:00

Why aren't hedge funds failing as fast as banks? | Chris Dillow - Times Online

Key sentence: "state ownership, for all its obvious faults, can be less dangerous than dispersed private ownership."

I don't know well how the hedge funds are performing recently or whether hedge funds have a better owner-manager structure. But I agree in theory, except for the last part about Shiller. I am not sure how it is consistent with the less dispersed ownership.

Division of a state could make people happier

2009-04-25T09:52:00.013+09:00

Visalia Journal - Farmers Lead a Bid to Create 2 Californias - NYTimes.com

I came to believe having more choices in the type of government to live under is the way to go. This applies to Korea, and probably many countries, where people with differing views fight all the time competing for the single prize of the central government.

In the current democracy, you basically take turns. We live happily for some years, and complaining for the others. Imagine how painful you will be if you are required to use Apple or Windows, whichever is not your preferred OS, based on a poll. Is having a government whose policies you don't like less painful than using an OS that you don't prefer?

A big and powerful country have been a desirable thing, just like a large corporation has been. But the reality is that the advance of technology and the way people work together is making it much less so.

Actually, if politics reflects the underlying economic reality, I think this, more choices of government, will happen following what's happening in the market.

Whether it is delegating more authorities to the local provinces or spliting jurisdiction, we need to figure it out.

Artpoli Gallery for iPhone (and iPod touch)

2009-04-03T12:46:00.006+09:00

Artpoli Gallery+ for iPhone (and iPod touch) has just been launched. With + version, which is priced at $1.99, you can save the images to use as wallpapers, etc. The no + version, priced at $0.99, does not allow saving outside the app.

We have some promo codes, with which you can download Artpoli Gallery for free. If you like to have this, let me know. You can have either + or no + version, but I guess the + dominates when both are free.

Lala has it all - paid music, cloud storage, streaming to mobile

2009-03-29T12:50:00.003+09:00

Lala - Where music plays

I have been against the idea that paid music (or any digital content) does not work. I have written many posts. Here they are.

I believe one of the significant obstacles is micro payment, which I have mentioned here, in terms of both price level and payment system. And according to Techcrunch, Lala allows you to buy web-only versions of songs for 10 cents. When you want to 'own' the file in your iPod, you pay extra 80 cents.

Another pro is that they will lanch streaming to iPhone. One thing innovation does is to reduce waste. There are guite a lot of waste around music: Many people storing the same songs, storing the same song in multiple devices, songs stored but not being played often, etc. Chris Anderson seems to believe that because we have abundant storage, it is fine to 'waste' it. See his blog or Wired article. (However, he has refined his theory and became much more reasonable, focusing more on freemium.) But I am not sure if those waste is negligible given the abundance we have. Those small wastes add up.

I have not used it. In fact, they are not offering the service to people outside the US. But with their business model, I think Lala may have a chance in the crowded music market. Let's see how it does.

Pay Me for My Content - New York Times

2009-03-28T21:17:00.000+09:00

Pay Me for My Content - New York Times: "Affordable turns out to be much harder than free when it comes to information technology, but we are smart enough to figure it out. We owe it to ourselves and to our creative friends to acknowledge the negative results of our old idealism. We need to grow up."

Mr. Jaron Lanier, I agree with you.

Self-interest and altruism (or empathy)

2009-03-28T09:28:00.008+09:00

What Is Altruism? - Freakonomics Blog - NYTimes.com

I left a comment:

One thing many economists, or whoever doesn’t believe in voluntary giving (as opposed to forced taxation), seem to assume that one needs to sacrifice one’s self-interest to contribute to others’ wellbeing. Therefore it won’t happen easily. Therefore we need forced contribution.

I don’t agree. Whether you call it self-interest or greed or utility or whatever, people pursue happiness. And very often people feel happy when seeing others happy. Plus, people feel proud and happy when they have helped others.

I don’t know academic distinction between altruism and empathy, but I am certain that contributing to others’ happiness is not inconsistent with pursuit of one’s own happiness.

Does a firm need to be like the market?

2009-03-12T18:09:00.001+09:00

Should a firm act like the market to survive through changes?

Some people seem to think so. I have not read it, but “Creative Destruction”, a book by McKinsey consultants, had such remarks. I cannot argue about the book, as I have not read it. But the sentences that I read certainly made me think a lot about what companies should do to survive.

Do you think a firm should act like a market? How much should you diversify to qualify as acting like a market?

There is another question, which might be even more fundamental. Does a firm need to last long? Or, is built to last a good thing for every firm?

The first English version of Artpoli is up

2009-03-06T19:37:00.002+09:00

We at Innomove Lab opened the first English version of Artpoli. You can see it at www.artpoli.com.

Artpoli is an open community and marketplace for arts. We are based in Korea, and it was quite natural that we started with Korean artists. And because established artists have relationships with art galleries, it was also natural that we attracted artists who are not known. So, in principle we are an open space for any artist, but for now we have Korean artists who are mostly young and not famous.

We plan to add features like commerce, commenting, and community that Korean version has, but at the moment we have the only the most basic feature for an art site, that is to display arts. But we wanted to open earlier and build incrementally with feedback, while letting you enjoy the artworks of Korean artists.

Most of the user generated texts, including title, artist nicknames, and descriptions, are translated using Google Translate. It is better than nothing and sometimes does a good job, but we may need to have humans translate the content later.

Anyway, it is a start. Please enjoy and let me know if you have any feedback.

Which economics to bet on?

2009-03-04T17:05:00.002+09:00

Greg Mankiw's Blog: Wanna bet some of that Nobel money?

If Dr.Krugman takes it, it wil be the gamble of the Obama era.

Fair use of Obama photo

2009-02-26T21:05:00.002+09:00

myartspace>blog: Integrity Lost: Lawrence Lessig helps Shepard Fairey

This is a very interesting and important issue. I believe that idea, not capital, is the defining factor of the free market (or capitalism, a misleading word in my opinion). If that is true, rules and agreements about intellectual properties are at least as important as those about physical properties.

I don't think there is a natural answer to 'what is fair'. It is arbitrary one way or the other. However, the goal must be to let the original creators sufficiently motivated and compensated, yet make it possible for people to make valuable works using the original. From this perspective, fair must be 'balancing'.

Bastiat: The Broken Window

2009-02-25T12:52:00.006+09:00

Bastiat: Selected Essays, Chapter 1, What Is Seen and What Is Not Seen | Library of Economics and Liberty: "What would become of the glaziers if no one ever broke a window?'"

That's the question that Bastiat questions. And he says...

"Society loses the value of objects unnecessarily destroyed," and at this aphorism, which will make the hair of the protectionists stand on end: "To break, to destroy, to dissipate is not to encourage national employment," or more briefly: "Destruction is not profitable."

Breaking and rebuilding, or digging for digging's sake won't produce any good. We will be wasting resources. I hope government leaders of the world to keep this in mind.

Why become a big company?

2009-02-21T23:35:00.002+09:00

Fred Wilson had a very good blog post, When Talking About Business Models, Remember That Profits Equal Revenues Minus Costs.

He says that Facebook and Digg could make more profits by doing the same (or more) with fewer people. His own portfolio companies and Craiglist cited as good examples of doing a lot with a little. He is talking from financial and business model perspectives.

I would add another perspecitve. I think the main reason why people want to become a big company was not just because we were focused more on revenue side of the equation, but also we want to look big. That's true at least in Korea.

I think that's because all the successful companies that we have known were large. Theoretically, you could make $1M with $2M revenue, but all the companies we knew who made $1M had $20M revenue.

I think somehow this pattern (and some other historical human memories) in the mass production era left the impression that big means strong and successful. People went as far as believing that the size is actually more important than the profit itself. People respect you more if you make $1M profits with 200 people than if you make the same with 20 people. Especially if you have a big ego, you would rather like to say "I have 100 employees and we are not profitable." than "I have 10 people and we make some profits." Bigger means more real business-like. You lead more people, and you look more like a real leader.

This should change, because it is simply irrational. If you have fewer people, you have less revenue risk. Even in terms of ego, which urged you to look big, I would be more proud if I made the same profits with fewer people. Being big could be a sign of stupidity.

Will being big turn into a sign of stupidity from a sign of success? Yes. When? Maybe not very soon. But at least we begin to have people thinking like that. I am one, proud of building artpoli.com as a company of 2 full-timers. My goal is to remain as small as possible.

How I would monetize YouTube

2008-12-15T07:37:00.001+09:00

Mark Cuban has a blog post, in which he discusses YouTube monetization. He talks about how much it costs for Google to operate YouTube (just upoading, downloading, storing costs), and thinks that it might be significant. I don’t know the numbers, but I am sure Google spends a lot of money to this free service now that they have to do some screening (of porn and piracy) as well.

I have criticized the extreme version of ‘freekonomics’ before, in which it is argued that a lot of online service including contents like YouTube should be free because the marginal cost is almost zero. See:

The marginal costs can go very low, but never to zero. And there are other costs that may not be directly marginal, but very real. They are fixed costs and upfront investments. You can read my posts above if you are interested.

So, how should YouTube monetize? At the moment, they are doing all kinds of advertisings. OK, do that. But I think they are missing more direct opportunities. Here are my ideas.

Charge viewing over certain amount

I suggest this, because I sometimes feel sorry to YouTube. I enjoy YouTube a lot, and sometimes use it as a background music player not even watching the video.

They can charge some dollars above certain threshold, and that will be reasonable to everyone. I am sure they have done some analysis, and my bet is that 80/20 applies here (a small % of users consume a significant % of the network and storage).

Enable priced contents

Again, I am suggesting this because I feel sorry to the content creators. I watch (or listen) music videos a lot, but I don’t think I pay back to the creators in any way.

So, give the content owners the option of making a content priced. YouTube can share certain % margin for this option. I have experienced some music videos disappearing, and I guess some of this may have to do with copyright issues. Right now, the only options for the content owner are either making it available for free or making it unavailable. I think if YouTube gives another option of making it available for a price, there will be more good contents.

Charge embedding copyrighted content

Some YouTube videos have embedding disabled. I don’t know for sure, but I guess they do this to preclude copyright infringement. But often they were the contents that I wanted to share. So, how do you make this work? Let me do it, but at a price.

There are some different ways to do this. First is to charge me (the embedder) directly. YouTube can charge a fixed fee, or they can invoice based on viewership.

Another way to do this is to charge the viewers. This needs integration with the priced-content model that I suggested above. Basically, YouTube can use me as the content retailer. In this case, I may be free to embed or even be paid to do it.

That’s about it now. I don’t know if Google has not thought about these direct models or not. But I hope Google to do now.

Good luck.

If everyone free-rides, free market may free-ride, too

2008-12-14T21:50:00.001+09:00

A post at Marginal Revolution covered an interesting issue: http://www.marginalrevolution.com/marginalrevolution/2008/12/a-remarkable-qu.html

Here is a related question I have been thinking about the art market.

If people buy an artwork as a speculation, to sell later at a higher price, then they must be making the assumption that there will be people who ‘like’ the artwork.

But, if everyone thinks that way, that is they buy based on ‘other people’s preference’, how can the price be determined?

This seems similar to Keynesian beauty contest, in which entrants are asked to choose a set of six faces from photographs of women that were the "most beautiful" and those who picked the most popular face are then eligible for a prize. (source: http://en.wikipedia.org/wiki/Keynesian_beauty_contest)

My hypothesis is that the market will be unstable, prices swinging widly together. Because everyone is waiting for a signal that shows other people’s perception, a tiny fraction of people that moves before other people can influence the great majority. These early movers are buying based on their own aesthetic preference, unlike others. How few these independent buyers are, they are the total sample of the market and their influence can be huge.

Let’s say there is only 1 buyer who really likes a painting, and she is willing to pay $1000. Then the price that a speculative buyer would pay should not be higher than $1000. These are people who would not pay even $100 to buy the painting, without the speculative opportunity.

However, when there are a lot of speculative buyers, it does not seem to work like that. Speculative buyers guess what the price would be, based on their knowledge about people’s preference. Furthermore, it is also possible for some to try to ‘move’ the market.

Then, the voice of ‘real’ demand is mixed up with the voice of these ‘experts’. And the majority of free-riding speculators will put more weight on the experts’ opinion, because the experts represent the market, not just one buyer.

So, when things are good, they overshoot. And there is no ceiling in rising price. B hears from A that the price will go up, and tell C the same thing. C tells A that people are saying the price will go up. And it goes on. When there is few buyers buying for their own enjoying, this bubble grows itself.

When market turns pessimistic, things look opposite. When there is a real buyer, he could stop the decline of the price. He will buy when price has dropped sufficiently. But if there is no real, as opposed to speculative, buyer, there is no natural stopping of the fall. Only until the experts get bullish again.

The key difference between speculative buyers and real buyers is whether the price one is willing to pay is reasonably fixed or vary widly according to external influences. Not to make this post too long, my conclusion is that unless there are enough real buyers deciding independently the market will be very unstable.

There is another topic related to this, which I would like to write about later. That’s about ownership premium (or call it distributed ownership discount). I think distributed ownership of an asset or a business lowers the value of the asset. A company owned by many small % shareholders will be manages worse than one owned by a few large % shareholders, other things being equal.

I wish Bolt had done his best, for the Olympic 100 meter

2008-08-17T03:11:00.001+09:00

I was very excited to see the news that Bolt had set a new record, amazing 9.69 seconds, for the 100 meters. See here.

But when I watched the game, I felt uncomfortable. He was fast, and it was apparent that he was a great athelete. But it was also clear that he did not do his best for the last 20-30 meters. Isn't the spirit of the olympics, and more generally sports, about doing one's best much more than deciding who is better?

I admire him for extending a human limit. I praise him for his speed. But I wish he had done his best, so that I could praise him wholeheartedly.

Wrong - Paul Krugman, Chris Anderson, Lawrence Lessig, Mike Arrington. Contents should not always be free.

2008-06-17T10:19:00.001+09:00

(My first attempt at writing about the idea as the central element of the capitalism. Next time, I will write about the freedom of entrepreneurship as the defining freedom of the market economy.)

"Creative contents should be free, especially when they take a digital form." That seems to be the most popular thought these days.

I thought it was a fad that would go away. But now that Paul Krugman, a highly respected economist whom I never thought I would dare to argue against, has joined the group, it seems serious. See http://www.nytimes.com/2008/06/06/opinion/06krugman.html?_r=1&oref=slogin.

When I went to college, Marxism was very popular among Korean students. However, I was not attracted to it. I thought something was missing about the theory. The classical economics sounded reasonably, but it also lacked something. The text book did not convey the excitements and pains and discontinous and volatile changes. The theory depicted the market as smooth, misleadingly smooth. After years of pursuit for the nature of business and innovation, as a student, consultant, and an entrepreneur, I reached a conclusion.

So, here it is. To deliver my still rough thoughts clearly, I will say it in several different ways.

Capital, as defined in classical economics, is not the defining element of the capitalist economy. Entrepreneurial idea is.
Idea is the most essential source of profits, not the capital or labor.
If idea is not compensated well, a free-market economy won't be much better off than a socialistic economy.
Capital, material, and labor create value only when they are aligned with a good idea.
Compensation for an entrepreneur is primarily compensation for his/her ideas.
Profits from car sales are essentially the same as profits from Beatles album sales. They are margins attached to a unit of a product, which is an idea materialized and replicated.

Let me explain the last point. A car is nothing but an idea + materials. (And labor and capital. I am simplifying.) A Beatles CD is an idea + materials. So, a Beatles music file is essentially an idea only. So, idea = content.

(Again, I am simpifying. There are ideas that are not strictly the ideas that go into a song, a narrowly defined content. For example, the title of the album, the accompanying photos, the jacket design, etc. Similarly, there are "contents" that are more directly associated with a car, like design and engineering, and less direct ideas like marketing messages and management methods.)

As I said, the entreprenerial profits (which is the main source of economic profits) come from ideas. So, a car is nothing but ideas applied to materials (via work and capital). The way an entrepreneur is compensated is by replicating the idea many many times. There is nothing different between a Ford car in a dealer shop and a beatles CD sold at Amazon.com.

Now, what is different about a digital content? None. Well, there is some difference. It 'looks' different, because it does not have 'materials'. It is very deceiving to people. How can you charge some price to something that does not have any material? You would ask.

But, if you realize that the profit margin going to the entrepreneur was mainly for their creative ideas, i.e. contents, you know that there is nothing special here. Henry Ford is a content creator, as much as the Beatles is.

How would you erode their profit margin? The surest way is to allow other people to replicate their ideas. In the car example, it would be like giving outsiders an exact recipe to make Ford cars. In the music, it would be to let others copy Beatles songs freely. A song is much easier to copy, but you will be surprised how well some companies in certain countries can copy manufactured products.

In both cars and music, content creators have been making money by charging a small idea/content/creativity margin at each product and replicating the product many many times. That worked well. It was efficient and seemed pretty fair.

Is this the only way to make money from contents? Of course not. There are less straightforward ways. GM and Ford used to make more money from financing than from selling a car. Essentially, it is charging their idea margin indirectly. For music, a similar thing can be done. You give your music away for free, become popular and make money from concerts.

The thing is, no other business model is as efficient as the direct charge model. To use non-direct model, you should have other creative ideas. You need to create a new business model, and you need to make a good concert. With the direct charge model, you only need one good idea. What would give opportunities to broader people, having one good idea or two?

Also, there is a fairness issue. If your idea is loved by many people, you will sell many replicated units. If not, you won't. However, with the non-direct model, it may not be so. You created a great song, and it was downloaded millions of times for free. But you are a bad live performer, you don't look good, and your concert does not attract many people. On the other hand, there is a sexy female singer. Her songs are popular, but not as much as yours. However, people love her concerts because she looks hot. As a musician, which world looks fairer to you?

I don't reject non-direct model. We use it ourselves. But we should make the direct charge model, which is the most accessible and the fairest, a viable option for the content creators.

If you argue digital content should be made free and musicians should make money performing, it is like you are arguing that anyone should be allowed to copy Ford or Toyota cars freely and they should make money servicing. I don't see much logical difference.

I say, give the digital content the right to be protected from copying, when the creators want (not even always), like the Ford car is protected from copying. Idea is the life blood of the free market economy.

By the way, capitalism is not a very good name. We should call it marketism, or entrepreneurialism. Marx did a poor naming job.