MattMaroon.com

I just saw something in Wired Magazine’s print edition that gives the value of various human parts on the black market. Here are the listed ones:

Cornea (pair): $30,000

Kidney: $62,000-$65,000

Liver: $98,000-$130,000

Heart: $130,000-$160,000

Pancreas: $150,000-$170,000

Complete Cadaver: $200,000

Now your reaction to that may be “gross”. Or it may be shock at the price tags, or the fact that there even is a black market for organs. But if you’re an entrepreneur, your first thought, like mine, was “hey there’s an arbitrage opportunity there.”

A whole cadaver costs $200k. At the low end of the range, split up into the pieces Wired lists you’re looking at $470k. That’s a pretty big ROI for what can’t be more than a couple hours of work for a skilled butcher. Not to mention whatever the unlisted organs fetch. Throw in the extra 100 pounds of bologna you’re left with after that, and you might be talking 3x your money.

At Blue Frog Gaming we spend a lot of time on metrics. One of the unique aspects of high-volume online businesses is that you have access to a wealth of data and ways to use it that a lot of traditional offline establishments don’t.

One of the best examples is the ability to track your advertising spend. John Wanamaker famously once said “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” He obviously wasn’t making websites. Giving customers who view ads a special URL, then using that to set a flag in the database and make special reports detailing exactly how much Revenue Per User (RPU) one gets is de rigueur online. You’d be hard pressed to find any web-based business spending more than $10 a day in ads that doesn’t know how much revenue they’re generating with that money to the cent.

But what about offline businesses who advertise online while doing all of their sales from a brick and mortar establishment? I was recently talking to the ad director of a local chain of tire shops who mentioned that they need to find ways of tracking the customers who click through their ads and end up buying tires from the store.

Customers who come in via email or the contact form on the web aren’t too hard. You’d simply track them up through the point of contact the same way any online business would, then make sure whoever handles them in store puts the appropriate flag in the user system. But what about the surprisingly large number of people who still make their first contact the old fashioned way, via telephone?

That’s where Google Voice comes in. Google Voice (formerly Grand Central, which I was an early user of) allows anyone to get a second phone number which forwards to their original one. It has great built in message handling and call tracking, which would help an offline business track customers through that portion of the sales funnel.

Here’s how it would work:

Bob’s Tire Shack gets one Google Voice number for each of their stores. Bob purchases Facebook ads pointing to a special URL which then stores a session variable indicating that the user came from a Facebook ad. When a user clicks through to the contact page, it gives them the Google Voice number, given only to customers who came to the website through the special URL, rather than the store’s normal number.

When someone calls to set up an appointment Bob can then tell which number they called, and therefore whether or not they came from a Facebook ad. It will be much more accurate than simply asking people “how did you hear about us?”.

This could work across a variety of channels simply by getting different numbers, which Google sells fairly cheaply.

I often read articles supporting the free market these days with a grin on my face. For instance The Audacity of Doing Nothing by Philip Greenspun, whose blog I enjoy, in which he opines that the government should more or less let our current financial woes work themselves out.

I don’t know enough about economics to really have a strong opinion one way or the other there, but what really made me smile was this paragraph:

What did these guys want the government to do?  Nothing, basically.  “Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly.”  What’s different now?  The government is a lot bigger and more powerful.  Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).

The circular pattern there is astounding. The government is choosing bold action over free capitalism because they’re being lobbied to do so by big corporations and extremely wealthy individuals, who are themselves the inevitable byproduct of capitalism. If Greenspun is right, the market is preventing itself.

Our nation has been locked for decades in a never-ending argument of big government vs. free capitalism. Is it possible that the latter must always lead to the former? Wouldn’t a free market always spawn corporations and robber barons who would then use lobbying bucks to influence government to create regulations in their favor? Anti-lobbying regulations are nothing but market regulations, since they effectively control where a corporation can or cannot invest. Perhaps a free market is a self-defeating concept, destined, in the event one should ever form, to wink out of existence in a few nanoseconds like a tiny black hole in a particle accelerator.

I’m reading this story about the New York Times possibly charging for online access to their newspaper in the future and I’m nodding my head. This is what I’ve been saying for years. There’s a difference between traffic and profit, and when it comes to business the latter makes a much better scoreboard than the former.

Already I’m seeing comments pop up that “this will be the death of the Times”. No, it won’t. Not doing this will, their results over the last couple years have essentially proven that. Selling content online may not save them either, but it may, and if it doesn’t it won’t be what killed them.

The problem in many people’s thinking is the belief that there’s always a magic business model lurking around the corner that will circumvent the normal laws of capitalism just because the internet’s involved. There isn’t. Reducing marginal costs certainly opens up a few doors to businesses, but it doesn’t mean that any product can suddenly be profitably supported by advertising alone.

“Let’s find a way to do Class A journalism on such a low budget that we can profit off of advertising” might just be equivalent to “Let’s find a way to have an online shoe store where we give the shoes away and make money off of advertising.” It may not be possible, and a lot of the people I know in the tech world really need to open their minds to that. I’m not saying I’m certain for news in particular, though the evidence is certainly pointing in that direction, but there’s some chance that the expense of providing high quality journalism (for which there is always high demand) or video or social networking or whatever else is simply greater than the reward for any business model other than charging customers directly.

And if I’m right and it’s not possible, then what’s going to happen is one by one every free content site that tries to go the quality route (rather than the blog-style breaking news with little or no real insight one) is going to shut down. NYT realizes this, and that their quality comes with a price tag that ensures they’d be among the first. So they’re trying something different.

I pray for us that it works.

My last post about the automobile industry was inspired by some comments I had left in response to Cuban’s post on Hacker News, a tech-themed site I often read. The comments weren’t well-received, largely (I think, given the well-received responses to it) because they implied that innovation, at least in terms of improving the product, couldn’t solve this particular dilemma. Now that I think about it, I’m not surprised. A hacker (as the term is meant there) is almost by definition an innovator, so the people there tend to value innovation above all else.

And not just innovation, but a certain sort of innovation, the sort the user sees. Y Combinator’s mantra is "make something people want", with the theory being that if you do that, all else will fall in line. While that’s largely true with software, it’s not the same in the manufacturing world because what people want, often more than the product itself, is to pay less money for it.

Don’t get me wrong, I value innovation as much as anyone else. I think humanity can solve almost all of our problems with science and reason. In fact, the automobile industry, including the American car companies, has knocked out more than their fair share of woes. The price of transportation as a percentage of overall income has been dropping for a long time.

But I came to realize that innovation means different things in different industries. In much of the tech world, especially on the web, innovation means nothing more than making a better product from the end user’s perspective. It’s clear that even if it cost Google 2x as much per search to operate as it does Yahoo, they’d still be making a lot more money. The same is true of most any web startup.

The reason for that is twofold. For one, the apparent cost to the user is $0. Technically users are paying to use both services, and more on Google than on Yahoo, but they’re doing it in a circuitous way by clicking advertisements and then purchasing things on the pages on which they land. It’s sort of a happy payment, since those Google or Yahoo ads are taking you to pages you wanted to spend money on. They’re scratching an itch. The fact that users "pay" more to use Google actually makes them happy. Nobody wants to pay more for a typical mid-sized sedan.

The other reason is that two times zero is still zero, and the cost of serving up a page is, for most web companies, effectively zero. I know a lot of people who run a lot of startups, and not once has anyone ever mentioned to me what it costs for them to serve up a page view. With the exception of the startups that primarily serve up large files (YouTube for instance) most have probably never checked. Hardware and bandwidth are so cheap when sending mainly html and a few images that until you’re serving millions of customers per day it wouldn’t even be worth the man hours it takes to find out.

Because of that, most startups don’t really worry too much about optimizing in terms of hardware costs. They just try to get to a point where scaling is just slapping in more boxes, which granted, is often a hard point to get to but only costs man hours. The marginal cost of a page view is still nothing.

In fact, marginal cost doesn’t even make sense as a metric for most web-based businesses. The vast majority of the expense comes from the engineering it takes to get to where you can slap in more servers. The time spent figuring out how to shard your database costs orders of magnitude more than the hardware you do it on. It’s an industry that’s almost entirely fixed costs.

In manufacturing, marginal cost means everything. That was the primary source of innovation for Henry T. Ford exactly 100 years ago. He didn’t invent the car, and he didn’t even make a higher quality one. He made a cheaper one by perfecting processes, such as the assembly line, that reduced the marginal cost.

Let’s say, for instance, that a Toyota Camry costs $50 million per year to engineer, but sells 1 million units. That’s a cost of only $50 per unit worth of engineering for a car that retails for something like $25,000 on average. The product innovation expense is trivial. It’s a tiny fraction of a percent, essentially a rounding error. For a car that costs $15,000 to build, the labor and raw materials are the overwhelming concern.

Innovation in the automobile industry has, for a century now, been more about reducing marginal costs than improving the product. They’ve been essentially doing the real world equivalent of rewriting your whole website in C, which every startup would be doing if serving up a page view cost them even $1 worth of processing.

So I think that’s the primary difference between the automobile and software industries. One is primarily about making the product better, the other primarily about making it cheaper. Both require innovation, just two very different kinds.

But even with both types of innovation, in an efficient marketplace, one company can’t be expected to significantly out-innovate another because it’s too easy to copy. You can’t patent the concept of an SUV. You can’t even usefully patent something like rain-sensing wipers (presumably, since multiple manufacturers offer them) because someone can trivially improve upon them or anything else you do. It’s not like a drug, where a precise chemical compound could have wild variations from one that was only 90% the same. (Pharmaceuticals are another industry in which the marginal cost is considerably less a factor than research and development.)

And really, I don’t think we’ve seen a discrepancy in terms of product innovation occur in the automobile industry. It’s hard to say because it hasn’t been a fair fight, but Americans have clearly had their share of hits. The largest trend in cars over the past decade would be the SUV, and they’ve led the charge there. Of the top 15 best selling, they produce all but numbers 2, 9, and 15. They own the pickup truck market just as well. The Mustang has been the top selling sports car for 22 years. And GM still has the world’s largest market share, though just barely. They’ve clearly been making cars people want for a long time, even while doing so at a tremendous cost disadvantage.

I view innovation in any competitive industry a lot like Olympic running. You would never expect a runner to finish 10% faster than the second or third best. For instance in this year’s 100m final, Usain Bolt set the world record of 10.2 seconds. Second place was 10.24, or 0.39% behind. The reason for that is simple, you’re taking a selected group of the best runners, all of whom put everything they have into it, all of whom have access to the same technology and practices. Is it therefore surprising that they all tend to perform similarly?

Humans are like that. There’s a lot of variance in a random sample, and Bolt might be able to finish in only half the time I could. But when you take the best tiny fraction of a percent, you find that they’re all pretty damn close to each other in ability. That’s no less true of automotive engineers than it is runners. Unless you believe in some sort of genetic superiority, you can’t expect the best American engineers to perform significantly better than the best Japanese.

What we’re doing to our automobile industry, in forcing upon them such a tremendous cost basis, is taking the second best guy in Usain Bolt’s record-setting race and giving him a 2 second head start. And when we do that, it doesn’t matter how bright our guys are, or how hard they work, or how well they execute, because the competition is going to be at least 99.5% as good. It’s human nature. Our team might finish less than two seconds behind, and in fact I think they have, but the other guys are really fast too.

Even if we’re a little better, and we might be, it’s not by much, and it shouldn’t be, and no matter what we do it never will be. To think otherwise is simply racist, and it’s provably wrong. The Japanese and Germans have their fair share of brigh
t, hard working people (hell, a lot of them are Americans) and we just can’t expect to beat them in a race while starting that far behind the line.

That’s why the Detroit bosses want to level out the playing field. They want everyone starting from the same place. Unless the competition just gets lazy, in the global economy it’s the only way they have a fighting chance. And if we’re going to bail them out and invest American tax payer money into their future, we owe it to our citizens to stop letting our opponents jump the gun.

Great quote from Mark Cuban today:

Entrepreneurs who create something out of nothing don’t care what tax rates are. Bill Gates didn’t monitor the marginal tax rate when he dropped out of Harvard and started MicroSoft (btw, it was a ton higher than it is today). Michael Dell didn’t wonder what the capital gains tax was when he started PC’s Limited, and then grew it into Dell Computer.  I doubt that any great business or invention started with a discussion or even a consideration of what the current or projected income or capital gains tax was or would be.

The impact of tax rates on productivity and development is something economists masterbate about,  enterpreneurs don’t waste their time thinking about it. We have business to do.

Exactly. When I started my first company I’d never even heard of capital gains taxes, and had no clue what I’d be paying even at the personal rate. All I knew was that I had an idea for a web site that I thought would be pretty successful (and it was) and I wanted the corporate veil for protection.

Which is not to say that I think taxes are irrelevant. Taking more from companies and entrepreneurs in good times gives them less to work with in bad. Taking a higher percentage for the government when an entrepreneur has a successful exit narrows his options for future startups, and we have a higher rate of recidivism than crack fiends.

Unfortunately the capital gains tax does little about this. For one, most entrepreneurs pay taxes at the personal rate. Even many successful corporations, whose owners may pay at the reduced rate, started out as LLCs or some other pass-through entity.

And for another, what capital gains taxes really do is favor the ultra-wealthy who live off of their investments, rather than those generating wealth directly. The man with $5 million in investments earning him 10% (or $500k per year) pays taxes at a rate of 15%. The brain surgeon or restaurateur making $500k per year the old-fashioned way is paying more than twice that.

As Paul Krugman points out:

In reality, only a few middle-class families received a significant tax cut under Bush. But every wealthy American — especially those who live off of stock earnings or their inheritance — got a big tax cut. To picture who gained the most, imagine the son of a very wealthy man, who expects to inherit $50 million in stock and live off the dividends. Before the Bush tax cuts, our lucky heir-to-be would have paid about $27 million in estate taxes and contributed 39.6 percent of his dividend income in taxes. Once Bush’s cuts go into effect, he could inherit the whole estate tax-free and pay a tax rate of only fifteen percent on his stock earnings. Truly, this is a very good time to be one of the have mores.

If anything, that’s the opposite of what we as a society desire. While I won’t say that the ultra-wealthy aren’t valuable to society (they’ve certainly created a large financial services industry) I think we all wouldn’t mind replacing them with brain surgeons and restaurateurs. If we were truly worried about stimulating the economy and furthering America’s entrepreneurial spirit, we would focus more on cutting the top tax rates and taxes on businesses directly than on saving the ultra-wealthy from estate taxes.

It’s for that reason that I support increasing capital gains taxes beyond $250k. What I’d really like to see is capital gains taxes tiered up to the point where they match income taxes, which can then be lowered as a result. Of course, it’s possible that no politician could get elected on that platform but maybe we can hope for it in Obama’s second term. We certainly won’t get it from McCain or any other Republican at any point.

I’ve been reading more about this nutbag Patrick Byrne’s war against naked shorting. I’d heard about it from Mark Cuban’s blog long ago, but didn’t realize how crazy this dude really is. He believes there is a vast, market-wide conspiracy wherein people are using naked shorts to drive down his company’s share price. So he spends what would appear to be the majority of his time fighting against the “Dark Sith Lord”, as he calls him, who is orchestrating it all. His use of that term in this particular context isn’t really surprising, given that he apparently has a hard time distinguishing between bad fiction and reality. He’d make a great Scientologist.

I’m no expert on what corporate executives should be doing with their time. My corporation only consists of three people, so though I am actually a CEO, it’s mainly just a technicality. My actual job is as unexecutive as they come. Today I even printed some business cards from my little inkjet. I bet a lot of people at the helm of Fortune 500s do that, right?

But if I were a real CEO, I would be going about his problem in a very different way. Naked shorters are betting that your stock will sink, and I really can’t think of any better way to make it do so than to expend a significant portion of your energy fighting Sith Lords. I’d just work to make my company make more money. If Overstock managed to crush analyst estimates for the next few quarters, everyone involved in the conspiracy would lose their mortgages. It’s not possible for a group of people to hold down the price of a company that’s on fire. The market is just too overwhelming, they’ll just get steamrolled.

So I’d just do everything I could to double my company’s profits in no time. That has the added benefit of making yourself and your shareholders a boatload of money too, which, in reality, is what you’re supposed to be doing anyway. So if there was a conspiracy it would be destroyed, and in the more likely case there wasn’t, well, I’d at least get some CEO of the year awards. And I would have the honorable distinction of running the first publicly traded corporation to have the line “Suck it, bitches” in their quarterly statement.

As someone who considers capitalism his primary spectator sport, I watch the goings on amongst private equity firms with interest. Not because I have anywhere near enough money that any of them would meet with me if I were interested in participating, but because, well, it’s kinda fun. You enjoy football, I enjoy mergers and acquisitions. The only difference is that one day, I might make some money off of mine.

Anyway, one of the bigger firms, Blackstone Group, boggled my mind not too long ago by filing for an IPO. A private equity group, that uses private money to buy public companies and take them private in hopes of fixing them up and taking them public again, is about to go public. I’m not really sure because most of my physics knowledge comes from the Back to the Future trilogy and a really bad Jean-Claude Van Damme movie called Timecop, but I’m pretty sure they could tear a hole in the space-time continuum with this one. So I’m going to have downgrade that one from a “Buy” rating to a “Don’t Buy Because It Might Unravel The Fabric Of The Universe.”