Posts tagged ‘economics’

We’ve Got it All on VHF

| Gabriel |

The Obama administration recently demonstrated that it knows the Coase theorem through a proposal for “incentivized” spectrum auctions to get buy-in from incumbent television licensees. I’m not completely sure why this proposal is part of the jobs bill but it strikes me as a great idea, albeit one that is aimed at a pragmatic solution to the long-standing terrible idea that is spectrum licensing.

The fundamental problem is that spectrum is a scarce resource that is currently allocated in a highly inefficient way. The best spectrum, VHF, is allocated to television, even though most people have cable or satellite and some of those who don’t may not watch broadcast tv. (My own digital tuner broke a few months ago and I haven’t bothered spending $30 to replace it since I mostly watch Amazon and Netflix on my Roku and Hulu on my Mac).

In contrast, there is a real scarcity of spectrum allocated to wireless telecom. This is the root cause of why people hated AT&T’s now defunct iPhone exclusivity and why a voice and data phone plan costs upwards of $60 a month. So basically, you’ve got a scarce resource being allocated to an activity which (because of good substitutes) is low valued and a real demand for the resource in another activity. In a free market the price signal would cause resources to flow from the low value activity to the high value activity and the problem would solve itself. Similarly, an efficient regulator would also strive to maximize welfare by this reallocation. The problem is that spectrum is subject to neither a free market nor an efficient regulator but a mixed regime of regulated allocation whose incumbent stakeholders have effective veto power and this provides the worst of both worlds.

Since the Radio Act of 1927, we’ve had a licensing regime for broadcasting. In principle this means that spectrum is public property that is licensed to private actors so long as they use it to serve the “public interest.” Although the licenses are theoretically short-term, they are habitually renewed except in extreme circumstances. In practice our regime is that the broadcaster has a restricted but perpetual property right to spectrum that grants the right to use the spectrum for a particular purpose but not to use it for other purposes nor to sell it to others who would use it for new purposes. This means that broadcasters can derive value from their spectrum but only so long as it is used for broadcasting as they have no right to sell it to telecoms.

Broadcasters thus have an incentive to squat on it no matter how much over-the-air viewership declines or how much cell phone rates go up, because, hey, why not?* Certainly the National Association of Broadcasters has taken an approach of kicking and screaming about any allocation of VHF to wireless telecom, while hinting that they do have a price at which they’d be willing to sell their spectrum if allowed to do so. Most notably, NAB raised hell about “interference” when the FCC proposed using “whitespace” between broadcasting signals. Given that such interference is likely to be minimal this is insane from the perspective of maximizing social welfare, but why would the broadcasters care about a massive opportunity cost given that the value created by utilizing whitespace goes to telecom providers and consumers and not to them?

Hence the administration’s recognition that the broadcasters need to be bought off in order to move forward. The administration’s understanding was effectively confirmed when the National Association of Broadcasters commented that “NAB does not oppose incentive auctions that are truly voluntary.” In other words, NAB supports a proposal that lets them alienate their property but would oppose a policy that merely revoked licenses to allow the state to reallocate them. Hence incentivized auctions, which effectively split the difference between the de jure “licensee” and de facto “property” understandings of what spectrum is. This grand bargain is exactly what law and economics folks have been proposing for decades and we’re now seeing it come into play.

Personally, I’m just hoping that we radically deregulate spectrum allocation one way or another and if compensating the incumbent stakeholders is what it takes, then I’m fine with that, especially since I never believed that they were just “licensees” rather than de facto property owners in the first place. More broadly, let this be a lesson as to why feudalism sucks. We’re only in this mess in the first place because since 1927 we’ve treated spectrum as public property to which broadcasters are granted contingent but effectively perpetual usage rights, much like a hereditary fief granted to a vassal. This is roughly equivalent to private ownership except that it makes medium (as compared to content) innovation illegal. If we’d auctioned off VHF as freehold property in the first place, a free market would have reallocated much of it to wireless voice and data usage ten or twenty years ago.

The reallocation of VHF to wireless would be a very good thing. In the short-term, it would mean cheaper cell phone bills and better cell phone reception, particularly indoors, which means that in a few years I will cease to be the last person in America who has good credit and is not a drug dealer but nonetheless uses a $20 pre-paid cell phone. But me personally finally getting a phone that can play Plants vs Zombies is less important to me than my country permanently shifting to a fully private property regime in spectrum. First, this means that the next time an innovative technical application for it comes along we won’t have to go through this nonsense again. Second it means the end to a few pernicious legal doctrines. One of the issues with a licensing regime is that  it provides a pretext for censorship. Do a Google search for the phrase “public airwaves” and almost every search result is somebody attacking freedom of speech, usually with some variation along the lines of “I believe in the first amendment, but we shouldn’t be effectively subsidizing lies/stereotypes/immorality through allowing them on the public airwaves.” This is such a familiar rhetorical trope that you sometimes see idiots people applying it to cable, which is private property and so isn’t relevant to the “public airwaves” argument on its own terms. I would love to see us make Red Lion a dead letter, and radical spectrum deregulation would accomplish this.

Moreover, VHF deregulation would solve the same problems as net neutrality but to do so with less potential for abuse by an overreaching and/or captured state. I have mixed feelings about net neutrality. On the one hand, I am extremely sympathetic to its goals of supporting content provider business model innovation and I’m a great cynic about Comcast’s long-term strategy to suppress this innovation. On the other hand, I worry a lot about this being the camel’s nose under the tent for an intrusive and/or cumbersome regulatory regime and in particular the structural problems with the FCC that Wu articulates in The Master Switch. (The first two-thirds of the book is a rather Stigler-esque history of how during the 20th century NBC and AT&T captured the FCC and used it to create barriers to entry, then in the last third of the book he argues that this same regulatory agency should expand its scope to regulate the internet. WTF Professor Wu, did you read your own book?) However I think we can have the upside of net neutrality without the downside simply through having more viable options for broadband such that if you don’t like your ISP screwing around with your access to Skype or Netflix then you can change ISPs. The reason this would work is that the broadband market is characterized by a last mile problem, which means natural monopoly (actually duopoly for largely historical reasons), which means telecom market power over consumers, which in turn provides the rationale for net neutrality. However abundant wireless spectrum solves the last mile problem which cascades through the argument to mean that net neutrality is superfluous in a world where ISPs on VHF compete with those on coax and fiber optic.

Cheaper cell phones, undermining dangerous extant and developing legal doctrines, and long-run openness to efficient resource allocation — what’s not to like?

———–

* You can get even more cynical and say that broadcasters are opposed to ubiquitous broadband because they worry that streaming video is a disruptive innovation, but I’m not sure if they’re thinking that far ahead and in any case such a supposition isn’t necessary to see why they’d want to hold out for a better deal.

September 20, 2011 at 5:16 am 3 comments

Peak screens

| Gabriel |

Apparently Creature , a god-awful exploitation monster film, opened on 1,500 screens with no marketing and made no money whatsoever (h/t Jonathan Last). My initial reaction was (and I apologize if you can’t follow the abstruse technical jargon) what the fuck?

1,500 screens is no Spiderman 2, but it’s still a reasonably wide opening. When Jaws (which as coincidence would have it was also produced by Sid Sheinberg) opened on 409 screens in 1975 that was considered “opening wide” on an unprecedented scale for a highly anticipated major studio film which was based on a novel that had been on the NYT bestseller list for almost a year. And yet here we are with an obscure turd of a film opening on over three times the scale of one of the biggest films in Hollywood history.

This seems like the kind of thing that simply can not happen, but I checked Variety, and yup:

Monster movie “Creature” also bellyflopped. The film, self-distributed by Sid and Jon Sheinberg’s Bubble Releasing, had an unusually aggressive rollout for an indie title but a paltry per-screen average of just $220 from 1,507 locations. Total was an estimated $331,000.

At least I can take some comfort in the collective sanity of Hollywood in knowing that neither the majors nor LionsGate were involved in this fiasco but there’s still the puzzle of what the exhibitors were thinking.

Most likely they were thinking in terms of vacancy chain / opportunity cost issue. September is something of a dumping release date. For instance, Fox notoriously buried the brilliant satire Idiocracy in September of 2006. We can see this more formally in Figure 1 from Sorenson and Waguespack ASQ 2006 (emphasis added).

Big movies tend to open on big weekends. This wasn’t a big weekend and so it’s not surprising that weren’t a lot of big movies opening this weekend. To a first approximation, we can say that exhibitors probably played Creature because it was that or keep dark. (Though at $220 per screen they probably would have been better off staying dark).

Another interesting thing is that opening wide isn’t cheap (which is why until the blockbuster era studios preferred to make just a few prints). It costs about $2,000 to make a print of a film, which (if we assume prints rather than digital) implies about $3 million for prints for Creature , which is about the same amount as the production budget. The rule of thumb is that prints and promotion cost about half again the production budget, but Creature seems to have economized on this through the simple expedient of not having any marketing. This doesn’t really make sense though since marketing and prints are complements, which is why they are usually budgeted together. If I had a crappy movie and only $3 million to self-distribute it, I’d probably spend less than a million on prints and the rest on promotion. So we’ve got to figure out what was going on with the (self) distributor. Here are a few non-mutually exclusive speculations as to what was going on with the distributors:

  1. They’re idiots (more specifically, they drank the “social media” Kool-Aid)
  2. They planned on marketing the film but ran out of money
  3. They relied on digital projection
  4. They offered exhibitors better points on box office than the industry standard

Note that any of these stories are bad news for exhibitors. #1 implies that exhibitors didn’t think to check if the distributor understood the film industry. #2 implies that the distributor booked the exhibitors with an explicit or implicit expectation of a certain level of marketing then didn’t follow through and the exhibitors didn’t notice this. #3 is one of many issues in the film industry where distributors have a conflict of interests against exhibitors. Digital projection implies large fixed costs for theaters but allows distributors to radically lower their marginal costs, which (Coase theorem notwithstanding) is not a good recipe for a happy outcome. The conflict is especially acute when you realize that digital projection makes it easier to open wide which means most of the box is in opening weekend when the theaters get very little of the ticket sales and basically only make money on popcorn. (On the other hand, digital does open up some pretty cool possibilities for using theaters for things other than movies.) That leads us to possibility #4, which is that the distributors might have gotten creative and offered the exhibitors an unusually good deal, like an 80/20 split on opening weekend box or something like that, so as to treat the theatrical release as a publicity-generating loss leader for ancillary revenue streams (DVD, tv, streaming, etc.). If we also assume digital distribution this largesse wouldn’t have even cost the distributor much up-front. This would have been a good precedent for the exhibitors if it worked, but it didn’t and so they’re stuck with back-loaded revenue sharing models that were worked out back when there were fewer screens and movies stayed in theaters for more than two weekends.

Long story short, I’m putting this in my “theatrical exhibitors are fucked” file, along with 3D fatigue and the Comcast/Universal merger.

September 13, 2011 at 6:52 am 5 comments

TV Party Tonight!

| Gabriel |

A month or so ago bloggingheads had Alyssa Rosenberg and Peter Suderman (mp3 only), my two favorite politically-informed-but-not-hacks culture bloggers. In the course of their conversation they talked about “recapping” culture, which is where a blogger reacts in about 1000 words to each episode of a tv show, usually the day after it airs. I’m sure there were earlier precedents on Usenet forums, but I associate the development of this genre of criticism with Television Without Pity. TWOP recaps are almost Talmudic exegesis that take as long to read as the show itself takes to watch. There are currently many other recaps sites, most notably The Onion’s tv club, and other bloggers do just one or two shows, as Alyssa is currently doing with Breaking Bad and True Blood. It’s a very interesting genre of writing and helps illuminate some theoretical issues with the superstar effect and the demand structure for entertainment.

The superstar effect is of course Sherwin Rosen’s observation that cultural products and cultural workers have a truly ridiculous level of inequality. Rosen first noted that a scope condition is technology for infinite reproducibility and this has held up. However his theoretical mechanism was ordinal selection that was hyper-sensitive to infinitesimmal quality differences and later research has pretty definitively discarded that mechanism. Rather, most everybody now agrees that the superstar effect reflects some kind of cumulative advantage mechanism and the only question is exactly how it works. We know for a fact from Salganik’s music lab work that information cascades are a part of this, but that doesn’t mean that there aren’t also other cumulative advantage mechanisms at work.

Probably the first article to propose a cumulative advantage mechanism for the superstar effect was Moshe Adler’s “Stardom and Talent.” Adler is often cited as synthesizing network externalities and the superstar effect, that is, people read him as articulating a model of “watercooler entertainment” where entertainment is a mixed coordination game (aka, “battle of the sexes“) consumed mostly or entirely for its utility in providing topics of conversation. When you see people citing Adler they are usually arguing that cultural consumption is a means to an end of socializing. For example, imagine that (like any sane human being) you find watching golf on tv to be incredibly tedious but you force yourself to watch it so that you have something to chit chat about with your boss, who is a big golfer.

This is a compelling model, but it’s not actually the model Adler proposed, in part because he’s coming from a theoretical background that emphasizes demand (i.e., micro-economics) rather than a tradition that emphasizes homophily (i.e., sociology). What Adler actually wrote is that chit chat is a means to cultivating taste in entertainment addiction goods. Adler starts from the premise that many art forms function as addiction goods (aka, acquired tastes). However it is often difficult to consume enough of the art to get you into a place where the addiction good has positive expected value and so we use discourse about the art in order to heighten the addiction and thereby increase the utility of arts consumption. That is, I discuss a tv show with you because it helps me develop my relationship with the tv show, not because it helps me develop my relationship with you. We can see this in a formal setting when people take “[wine / opera / painting] appreciation” classes, where (in price theory terms) the class increases your addiction to the good even more so than simply consuming the good.

Adler’s model seems a bit on the aspy side and, like I said, people often get it backwards when they cite it, perhaps because they are forgetting how weird it is and one’s memory’s reconstructs the article’s argument to be more intuitive. Nonetheless, I think that Adler’s original model is also pretty compelling. Notably, there’s no reason why the causation has to go one way. It could be endogenous or it might even be contingent, with “watercooler” for some types of art and “addiction good” for others.

These are subtly different models and provide theoretical implications that are in theory distinguishable (though may be hard to disentangle in practice). In particular, I’m thinking that we can use Omar Lizardo’s argument about the different types of network ties supported by high culture versus pop culture. Omar argues that since pop culture forms a more universal social lubricant it should be (and in fact is) associated more with weak ties whereas high culture is tricky enough that it requires more strong ties.

If we extrapolate this out, we can interpret it as meaning that the “watercooler” network externality effect (ie, the common misreading of Adler) is a mechanism that supports cumulative advantage for shows that are very accessible and not terribly nuanced. That is, you might watch American Idol in order to have a bunch of 2 minute long conversations with acquaintances and strangers whom you normally come into contact with anyway. An important corollary is that you wouldn’t normally seek out fellow fans of crap but just make sure that you’re sufficiently familiar with crap to hold your own in a conversation with random people.

In contrast, we can use the “addiction goods” model (ie, Adler’s actual argument) to explain consumption of less accessible cultural objects of the sort that might sustain an entire dinner’s worth of conversation. The objects might even be so inscrutable that they are difficult to consume without having an interlocutor to help you make sense of them and so you might either seek out strangers who already consume the object or try to convince a close friend to consume the object as well so you can discuss it together. For instance if you read the first paragraph of this post and said “I don’t know or care about this Alyssa person but I’m going to click the link because I’m hoping somebody can help me understand what’s the deal with Hank’s mineral collection” then that would be an illustration of the addiction good model at work. Now if it’s just people who already consume a show finding each other that’s not cumulative advantage but homophily. However there is cumulative advantage if you start watching a show because your favorite blogger is recapping it or if you read a book to participate in a book club or if you buy your best friend a box set of the first season of Battlestar Galactica so you have someone with whom to discuss the downward spiral of Gaius Baltar. In this sense recapping is a complement to the increasing narrative complexity of popular entertainment and one way to see this is that people tend to recap shows with a serial rather than episodic structure.

August 4, 2011 at 3:04 pm 2 comments

Misc Links

| Gabriel |

  • Useful detailed overview of Lion. The user interface stuff doesn’t interest me nearly as much as the tight integration of version control and “resume.” Also, worth checking if your apps are compatible. (Stata and Lyx are supposed to work fine. TextMate is supposed to run OK with some minor bugs. No word on R. Fink doesn’t work yet). It sounds good but I’m once again sitting it out for a few months until the compatibility bugs get worked out. Also, as with Snow Leopard many of the features won’t really do anything until developers implement them in their applications.
  • I absolutely loved the NPR Planet Money story on the making of Rihanna’s “Man Down.” (Not so fond of the song itself, which reminds me of Bing Crosby and David Bowie singing “Little Drummer Boy” in matching cardigans). If you have any interest at all in production of culture read the blog post and listen to the long form podcast (the ATC version linked from the blog post is the short version).
  • Good explanation of e, which comes up surprisingly often in sociology (logit regression, diffusion models, etc.). I like this a lot as in my own pedagogy I really try to emphasize the intuitive meaning of mathematical concepts rather than just the plug and chug formulae on the one hand or the proofs on the other.
  • People are using “bimbots” to scrape Facebook. And to think that I have ethical misgivings about forging a user-agent string so wget looks like Firefox.

July 20, 2011 at 3:46 pm

Misc Links

  • Lisa sends along this set of instructions for doing a wide-long reshape in R. Useful and I’m passing it along for the benefit of R users, but the relative intuition and simplicity of “reshape wide stub, i(i) j(j)” is why I still do my mise en place in Stata whenever I use R. Ideally though, as my grad student Brooks likes to remind me, we really should be doing this kind of data mise en place in a dedicated database and use the Stata and R ODBC commands/functions to read it in.
  • The days change at night, change in an instant.”
  • Anyone interested in replicating this paper should be paying close attention to this pending natural experiment. In particular I hope the administrators of this survey are smart enough to oversample California in the next wave. I’d consider doing the replication myself but I’m too busy installing a new set of deadbolts and adopting a dog from a pit bull rescue center.
  • In Vermont, a state government push to get 100% broadband penetration is using horses to wire remote areas that are off the supply curve beaten path. I see this as a nice illustration both of cluster economies and of the different logics used by markets (market clearing price) and states (fairness, which often cashes out as universal access) in the provision of resources. (h/t Slashdot)
  • Yglesias discusses some poll results showing that voters in most of the states that recently elected Republican governors now would have elected the Democrats. There are no poll results for California, the only state that switched to the Democrats last November. Repeat after me: REGRESSION TO THE MEAN. I don’t doubt that some of this is substantive backlash to overreach on the part of politically ignorant swing voters who didn’t really understand the GOP platform, but really, you’ve still got to keep in mind REGRESSION TO THE MEAN.
  • Speaking of Yglesias, the ThinkProgress redesign only allows commenting from Facebook users, which is both a pain for those of us who don’t wish to bear the awesome responsibility of adjudicating friend requests and a nice illustration of how network externalities can become coercive as you reach the right side of the s-curve.

May 31, 2011 at 10:22 am

Farming the Rails

| Gabriel |

The current issue of Sunset has a full-page pictorial of a concept for a dining foodie car in an LA-SF bullet train. Let’s put aside the fact that the route doesn’t make any sense. (Current plans are to build a short proof-of-concept track in a very rural part of the San Joaquin valley, later to be extended all the way from Fresno-Bakersfield. Getting the rest of the way from Bakersfield to LA requires going under or around the Tehachapi mountain range. That or transferring to a three-hour bus ride on the 5).

Instead, let’s think about the dining car itself. The pictorial shows a dwarf citrus tree in the car for passengers to pick fruit either to eat out of hand or for juicing. (As the owner of an orange tree, I can tell you that the pictured dwarf tree would make about two carafes of orange juice). Similarly, there is a “Self-Harvest Salad Bar. Snip and dress your own organic greens from a hydroponic vertical garden and choice of on-tap vinaigrettes.” Because, you know, there is no more efficient way to grow lettuce and oranges than to put a farm on a rail car and rocket it up and down the state at 150 mph. Similarly, it shows solar panels on the roof to, I kid you not, power the espresso machine and “grow lights” for the aforementioned dwarf citrus tree. I’m not an engineer, but I guarantee you that the extra weight and/or drag implied by the solar panels (and changes to the fuselage necessary to accommodate them) would imply fuel costs at least an order of magnitude greater than the power generated by the panels. I mean, who comes up with this shit?

[click the image for full size]

I guess I should be grateful they didn’t describe plans for an aquaculture car or a composting car. It’s one thing to talk about putting hydroponics in a moon base, but that’s because the transportation costs for getting food to the moon are millions of dollars per pound. Transportation costs in getting food onto a train means sending a van from the train station to the supermarket. That or you could just not eat for the three hours you’re on the train and have dinner when you get to San Francisco, which I’ve heard has restaurants in it.

As I fumed about this, I realized that this isn’t just a really stupid idea for a train’s dining car, but a reductio ad absurdum of the whole idea of locavorism. Just as it is much cheaper and ecologically sound to grow food on a farm and have it loaded onto a train at the station, or to generate power at a power plant and transmit it to a train via overhead lines than to produce the food and power on the train itself, to a lesser extent it is more efficient to grow food in a rural farm and truck it into a city (accepting the trivial carbon emissions implied by a few “food-miles”) than it is to devote extraordinarily valuable urban or suburban land to agriculture, thereby increasing the commute times (and by extension, the carbon emissions) of people who might have made denser commercial or residential use of that land.

Gains from specialization and trade people, gains from specialization and trade.

May 11, 2011 at 4:28 am 1 comment

Fashion is danger

| Gabriel |

Dear Senator Feinstein,

I am writing to you both as a constituent and as an expert on creative industries. I want to thank you for your opposition to the IDPPPA (S. 3728) bill that would extend formal (and actionable) intellectual property rights to the fashion industry.

As you know, the Constitution authorizes Congress “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” That is to say, intellectual property rights are meant to correct a market failure of insufficient creativity. The idea that an industry that releases hundreds of creative designs every spring and fall has a shortage of creativity is frankly absurd.

Not only is it implausible to imagine that we would see more fashion in a world with the IDPPPA but to the contrary we should see less. Fashion is currently the only creative realm where one can create freely without worrying about concepts like infringement, clearance, or licensing. IDPPPA would end this and create a world where (much like biochemists or musicians) fashion designers would spend less of their time at the drafting table and more of their time with lawyers. This would both imply a deadweight loss and increase barriers to entry. One need only look at the decline in creativity in hip hop music following Grand Upright and Bridgeport to see how the extension of IP rights to fashion would create gridlock effects that would completely swamp whatever marginal incentive effects IP would provide.

Please have your staff contact me if I can be of any assistance on this issue.

Gabriel Rossman
Assistant Professor
Sociology, UCLA

March 2, 2011 at 3:06 pm 2 comments

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