Sunday, January 26, 2014

It Was My Party, And I'll Deny Its Demise If I Want To

You are in the cocktail party business. In this business you throw parties every Friday and Saturday night. There are two characteristics of this business that would have probably surprised those who originated the "industry" 150+ years ago: it is highly profitable and tends to have a natural monopoly aspect. These are self-reinforcing phenomena. Upstart competing party suppliers face strong headwinds namely because the first mover advantage is high--who wants to risk going to the new party if most of the desirable partygoers still attend the incumbent party. Further, being at the right party is everything. It is a who's who of the local scene. Being there exposes one to all the good gossip, but more importantly it is a status-establishing and trust-creating event. Business partnerships and marriages come out of the encounters the gatherings foster.

It is also not cheap to enter this business or do it well. Startup costs include building a facility large enough and entertaining enough to sustain the business, which means accommodating nearly all tastes. Running the business means straddling a delicate balance between indulgence and moderation. Know thy customer is paramount as what will fly at a San Francisco party might be verboten at a Bible Belt party.

The on-going costs are steep as well: music, drink, food, performers, etc. require scale operations done efficiently. Here good supply-chain management has strong rewards.

Thankfully the locals tend to be fairly loyal and almost defensive about their party supplier. When travelling to other cities, people tend to long for the hometown party and feel out of place navigating their way through another town's party.

The typical revenue model holds across the industry. To wit, there is a membership fee that is low on a per-party basis but is high in absolute terms because there are so many parties in a given year (~150 when the special holiday parties are considered). Added to that are the many locals from businesses to individuals who actually pay to have special privileges at the party. These range from reserving/sponsoring rooms some of which are invitation only to being the bartender in a choice corner which grants exposure to desirable partygoers to having a charismatic escort introduce them to interesting attendees and even to having people paid to spread whatever news the sponsor wants spread.

As one can imagine, this is a complex business with a deep and wide book of both accounts payable and accounts receivable. Although it is highly profitable, what actually drives the profits is poorly understood. The salespeople believe that nearly every patronage deal makes not just a profit but a high profit at that. Likewise, the regular staff including performers, waitresses, bartenders, et al. believe the membership fee covers almost all of the revenue the business brings in--this is a false belief as it is nearly the reverse that is true. Additionally, the regular staff is virtually in the dark about how profitable the business actually is suspecting it is only moderately profitable. But although it is highly profitable, nearly all of the profit is driven by just one business line--room sponsorship. What's more these sponsorships are more "bought" than "sold"; in other words there is little the sales staff can do to drive this business, but this truth is poorly understood. Sponsors tend to be large, national companies. If sponsors are interested, they buy across many markets--hopefully yours is included.

Now, the naive interpretation, that this means many business lines can be cut so as to grow the bottom line, is patently false. The party is a bundled good. As such there are many loss leaders when looked at on an individual basis. But these all tend to contribute to being in the business of cocktail parties. It ain't a party unless A, B, C, . . . X, Y, and Z are there. Even if only Z is truly profitable. So if you properly build "it" (a thriving cocktail party), profitable factor Z will come. The rest is necessary but insufficient (for business-sustaining profitability).

Everything is going great until one day someone introduces the world to commercial websites on the Internet. Most importantly businesses who currently are buying room sponsorships now have a new, much lower cost alternative--rooms not just sponsored by a firm but owned and maintained by that firm and open all the time. At the same time individuals are realizing they can have cocktail parties at their homes as well as afternoon parties in the park and get togethers in a large variety of venues that include only their select friends or associates and cater specifically to their tastes and desires. These parties are as small and limited as the industrial cocktail parties were big and open.

Suddenly the cocktail party industry is subject to competitive threats like never before. The business is eroding quickly. Because it was misunderstood, the business's adaptation is clumsy. Efforts to shrink run into threshold problems--you can only get so small until you are no longer truly in the cocktail party business. Efforts to break up into small, nimble units (small parties for select partygoers) falter because efficiencies from economies of scale are lost. Everything the business was good at is now working against adaptation. No one element of the cocktail party was the best in class. It was the whole party itself that was great--value of the whole exceeded the sum of the parts. But that synergy is now gone.

Questions like "Who will supply parties?" are misguided distractions. People will always find ways to get their party on. They don't need the cocktail party industry to do it for them. At least not anymore.

This is my analogy for the newspaper industry. Specifically, cocktail parties are newspapers; memberships are subscriptions; the entertainment and refreshments are journalism; patronage deals are advertising; the Internet is, well, the Internet. In six years as an internal financial analyst learning the business inside and out, top to bottom, I think this analogy best encapsulates the dynamics at work. One thing I learned from my own efforts was that four relatively distinct business units exhausted all the sources of profit--employment ads, national-firm ads, preprint insert ads, and color newsprint or run-of-press (ROP) ads. There was no amount of "feet on the street" that was going to drive this business. My understanding of the business's sources of profit was overwhelmingly met with dismissal. I understand why. It was an awkward thing to hear--that most of the things you as a business are doing are just means to an end. And generating and sustaining a profitable business is a complex process filled with nuance.

The things you do as a business are not necessarily the business you are in. For decades most of McDonald's profits have not been from selling hamburgers, et al. per se. They have been from the real estate fees from franchisees. Newspapers were no more in the profitably selling content business as they were in the putting ink on paper business. It was simply a necessary but insufficient (for business-sustaining profitability) part of the process. I am not saying they didn't do content well. They definitely did. They also were very efficient in running press and delivery operations and great at relationship management with businesses seeking advertising. But ultimately they were cornering the market on an invented commodity--access to eyeballs. The newspaper bundle was a great medium for a very long time with strong competitive advantages. And the culture of the industry was rightfully resistant to change--don't rock the high-profit boat. But add this to the list of advantages that became hindrances.

Journalism (more broadly defined than the very important people would like) will go on. Advertising will go on. Newsprint in some fashions will go on. But the newspaper industry is on the back nine of a decade-or-so-long process of ceasing to exist for all practical purposes.

Denying that the party is over doesn't change the fact that the guests have gone home.

Saturday, January 25, 2014

Highly linkable

Don't look now, but there are chemicals, CHEMICALS!, in our bananas, eggs, and other "natural" foods. Chemistry teacher James Kennedy alerts us to this unreported problem. Panic now!

Snowden technically committed many crimes. Therefore, he should be punished? I agree with this disagreement.

Don Boudreaux is not going quietly into that "energy efficient" fluorescent night. I too hope to rage against the dying of the freely-chosen light.

Perhaps Notre Dame can use some of these proceeds to purchase some indulgence forgiveness. $90,000,000 over 10 years, huh? Let's assume a very conservative 25% labor share of that revenue. That's $2.25MM per year for those scoring at home. Spread across 85 scholarship football players comes to about $26,000 per player per year. Of course I'm ignoring in this analysis the opposing argument, "But that would mean less money for us! (everyone involved who is not a football player)"

Here is something that will not be a fulfillment of my 2014 New Year's resolution (i.e., I won't have to change my mind about this, which I've been advocating for over a decade).

I heard this NPR bit and had the exact same reaction as Mungo.

Tuesday, January 21, 2014

WWCF: Balls/Strikes Called by Machine or Professionalized College Sports?

Which will come first?

Pitch tracking technology in baseball displaces umpires as caller of balls and strikes


Separation of college sports into professional and truly amateur

Don't tell the traditionalists we are even discussing this. I believe we are headed to a brave new world where consistency in baseball's fundamental point of interaction is equalled by honest treatment of college athletes. Many sacred cows are nervous. And some time-honored institutions will change and in some cases they will crumble. 

Supporting the baseball half of the question are recent developments in furthering the use of technology such as this. The demand for and acceptance of instant replay shows in baseball as it has in other sports that true and rightful outcomes matter to sports fans--even above the cost of tradition, even above the cost of delay of play. If the technology is highly accurate (it is but there are flaws such as in tennis and when human eyes and judgment are involved such as in football) and reasonably quick, seeing an inconsistent outcome on the television replay is seen as unjust and intolerable. Notice that a call by a ref isn't necessarily unjust if it is wrong. It takes it being sufficiently bad for it to be unjust. 

Giving the baseball side some pause is this article in Grantland. It seems the accuracy isn't quite there yet, but I expect it could come pretty quickly. More likely the hold up will be fan/owner/player approval. The article points to how robot and man could team up. That is probably the first step. Yet I am interested in where the machine is making the calls and a human can only intervene to overrule in specific instances--think today's challenge system in football and soon to be baseball. For the baseball part to have come first, this is the threshold.

The article does discuss a point I find important. Namely that standardization of the strike zone would remove a nuance of the game that might be more important than realized at first blush. 
However, standardizing the zone would remove a level of interplay between batter, pitcher, catcher, and umpire that many fans find compelling. No longer could a savvy pitcher with pinpoint command annex extra territory off the corners, like Tom Glavine or Mariano Rivera, or learn how to tailor his approach to each umpire’s personalized zone. And catcher receiving skills — the impact of which has only recently been recognized — would become obsolete overnight...
While these changes might make the batter-pitcher confrontation fairer, they would also sap it of some of its nuance, leaving less to analyze and discuss...
McKean offers another argument in support of keeping umpires around: Removing them, or reducing their role, might make baseball more boring. The former umpire makes the case that the controversy generated by incorrect calls — or at least the perception of incorrect calls — generates excitement.
These are important considerations.

For the other side of the question, it should come as no surprise to readers that we at MM favor a major overhaul in the structure and nature of college athletics. We optimistically believe it is inevitable. There are two changes here under consideration either of which would constitute success for this side of the question: separation of amateur sports from professional, revenue sports (perhaps tennis, rugby, field hockey, etc. from football and men's basketball) and separation of amateur college-level football from professional college-level football (perhaps Harvard, Air Force, Tulsa, et al. from Oklahoma, Notre Dame, et al.). The which comes first threshold here will be once most current NCAA institutions make the first change or the current FBS football and D-1A men's basketball schools make the second change.

There has been a glimmer of hope for change in this direction from within the castle, but it is overwhelmingly likely that this change comes from without. The discussion on this evolution continues. And for good reason.

There are two driving forces for this side of the question at hand: there is too much money involved for the charade of amateurism to continue and there is too much money involved threatening the institutional integrity of the parent organizations.

My take is that technology is ready for umps to be replaced 5-10 years before baseball is institutionally ready while those challenging the institutions of the college sports' status quo are 5-10 years away from being legally and culturally capable of forcing change. Reading between the lines, it is just the technology in baseball that is different. I give the edge to the separations in college sports and say both changes (baseball and college sports) come within a decade.

Monday, January 20, 2014

2013's Resolution Fulfillment

My ever on-going resolution was fulfilled twice over in 2013. In the first case I blogged about it here. That is where I changed my mind that there is potentially an economic case to be made for state action to encourage or even mandate recycling.

The second case came from this EconTalk involving among other things The Code in sports. I was rather naively opposed to something that seemed so brutish and reasonless as The Code. To me it was a ridiculous way to justify violence in hockey and promote silly traditions in baseball. I was wrong.

You might notice that Dr. Mike Munger is at the center of both resolution fulfillments. I guess great minds are open-minded and listen to other great minds and when those other great minds make a convincing case the former great minds adapt their views . . . or something like that. In any case it shouldn't be too many resolutions from now that I've finally got my mind right.

Dr. Munger will be the keynote speaker this week at the CFA Society of Oklahoma's Annual Forecasting Dinner. If you're in the Tulsa area Wednesday night (Jan. 22nd), come join us at the DoubleTree downtown.

Sunday, January 19, 2014

Debatable Points of View

Let me ask a straightforward question with a little setup:

  • I work on the eighth floor of a building. 
  • There is a lower level below street level, and the levels from the lowest are called: Lower Level, Lobby (this is the street level), 2nd-floor, 3rd-floor, etc. up to the 8th-floor.
  • The stairwell in the building is a standard reversing pair with a landing in the middle (i.e., there are ten stairs and then a landing at which point one must do a 180-degree turn when walking up to then go up ten more stairs to reach the next floor).
  • There is extra distance between the lobby level and the 2nd level such that in the stairwell there is a complete additional set of stairs (as if there is a story between them) one must climb when traversing between these levels.
  • My question: If I begin on the lower level and walk up the stairs to my floor (the eighth floor), what is the halfway point?

Based on the first and second pieces of information, you'd calculate eight flights of stairs from the bottom up and answer "at the fourth floor". This corresponds to point A on the illustration.
If you believe that the distance matters more than the ordinal numbering, then you'd answer "at the middle landing between the third and fourth floors". This corresponds to point B on the illustration. 
If you're thinking like an economist, you'd realize that as I walk up the stairs I grow more tired. The first stair is much easier than the last. In that case you would be wise to answer something like "two-thirds or three-fourths of the way to the top". This might correspond to a point like C on the illustration.

I'm not saying any of these are the right answer, and clearly a case could be made for any. But it underscores how reasoning through an answer is as important as the answer itself--even in a seemingly straightforward, "simple math" question like this. 

So if you're standing at the Lower Level with me and I challenge you to a race "to the halfway point to my floor", you may want some clarification on the finish line. Just don't ask me where the stairs go. They go up.

Wednesday, January 15, 2014

What's On My DVR--listed in a very particular order.

Here is a list of comedic TV shows I am currently recording/watching listed from best to worst with commentary where I feel compelled to offer it:

  1. New Girl - This show is excellent. I laugh out loud at this more than just about all the others combined. I think this show is more in the tradition of Seinfeld, the penultimate sitcom, than anything else on TV. That shouldn't necessarily be the goal for every sitcom, but that is largely because most shows cannot play in that realm. This show is definitely sponge worthy.
  2. Modern Family - The ability of this show to have such a great cast of characters who have such amazing chemistry together is why it is an easy pick at the Emmy's every year. Because one should consider such things, I am 2 parts Jay Pritchett, 1.5 parts Phil Dunphy, and .5 parts of each Mitchell Pritchett and Cam Tucker.
  3. (tie) Parks and Recreation/The Big Bang Theory - Both of these compete well in the Modern Family style of great chemistry among characters. If I had to break the tie, it would be tough. There is a little Sheldon in all of us; he just dares to fully express what we are all thinking. There hasn't been a stronger secondary character than Ron Swanson in decades. He is the Norm of this generation. Parks & Rec would have to get my nod to break the tie simply because it doesn't have a laugh track--I don't need to be told when to laugh . . . ironically, I am channeling Sheldon Cooper in that response. 
  4. [stupid Blogger makes me do this to keep the numbering consistent]
  5. Comedians In Cars Getting Coffee - Seinfeld himself couldn't out Seinfeld New Girl, but he comes close with this show. It only loosely fits in the category with these, but blurring the lines of traditional TV is what great TV has always been made of. It is Internet only, so I'm sure to get disapproving looks from Big TV. The hell with it; this one is awesome. My preferred method of viewing: with the wife, drinking bourbon, smoking cigars, in the backyard, after dark.
  6. Community - I'm worried about this one. A few seasons back this would have been competing for the top slots. That said, it will have to burn me good to turn my back on it (see HIMYM below). If I know Jeff Winger, he'll have this one back challenging for that tied-up three spot by season's end.
  7. Louie - About to start its fourth season in May, this one is edgy and on FX for a reason. And all that is what makes it great. This is an adult's sitcom. Grow up and watch it. It is great. Once it is in season, I may very well be reminded that it should be rated higher on this list. 
  8. Family Guy - As opposed to the next show but parallel with the prior show, this one is boundary breaking. If they weren't animated characters, the very serious people wouldn't put up with such insolence. This show makes me cringe occasionally, but it makes me laugh much more often. 
  9. The Middle - This is a very solid show. I'm sure it rings a bit hollow for those who aren't parents; although, I see my own parents in the characters quite a bit. As a parent, it is ridiculously on the mark. It is also fairly wholesome--add a laugh track, and this show could be right out of 1990. The fact the writers can pull this off while being consistently funny is impressive. 
  10. The Simpsons - This show is still funny, but it is not laugh out loud funny any more. It is still important. Many shows on this list are. Modern Family is disarming those opposed to same-sex marriage. Comedians In Cars Getting Coffee, Louie, and Family Guy is telling it like it is. The Simpsons has been doing all that and more for 25 seasons. I'm seeing this one to the end. It has earned it and continues to deserve it.
  11. How I Met Your Mother - This show has jumped the shark. No doubt about it. Do not start it unless you're going back to the beginning, in which case it is probably worth your time. It was amazing once. It is humorous still but tedious now. The flashbacks within the flashback was brilliant and well executed. The magic's gone. The veil has been pierced. We know too much and care too little. I think they let it slip when they made Barney a real person--put him on the straight and narrow. The problem is they sent him there and then brought him back and then sent him again, which is where he needs to go eventually with Robin. But there has been a little too much misdirection. This is true of Ted and the quest to meet the mother as well. We've been too close one too many times. I feel like I have whiplash. The twists and turns were great and made the show, but at some point I just want off the rollercoaster. 
In the non-comedy category I am almost caught up with the epic Boardwalk Empire. I can't say enough about how good this drama is. I've been reading Daniel Okrent's Last Call coincidentally during this time. The TV show's ability to capture the history and the drama of the era is remarkable. While I didn't see it from the beginning but may go back and start, I have been watching Mad Men recently. If they gave awards for really good dramas, it would probably win a lot . . . oh, wait.

Shows I plan on starting from the beginning:

  • Downton Abbey - actually I have seen the first two episodes
  • Breaking Bad
  • The Americans
  • The Goldbergs - actually I might only pick it up where it lies

Tuesday, January 14, 2014

Highly linkable

One of the great contradictions of America is that as we aspire to be a truly free and civilized country we continue to have such totalitarian edicts carried out in barbaric ways.

Jeff Jarvis makes some great points here arguing that the primary issue with the NSA is not privacy but government overreach and oversight--knowledge is not the problem. 

Maybe if they followed common core, we could get those horrible private schools to do better.

Bryan Caplan puts forth a powerful parable questioning why there isn't tremendous support for open borders. In response to those raising concerns from survey data and a recent paper that increased immigration might be threatening to libertarians, Hansj√∂rg Walther basically says, "I do not think it means what you think it means."

I've said it before, and I'll say it again: The three most powerful, promising, and productive ways we could advance mankind would be to get the state out of running the education business, end the prohibition and war on drugs, and open the borders to people and things. 

Wednesday, January 8, 2014

Ranking College Football Programs

If nothing else, sports enthusiasm is great for generating passionate debate about esoteric topics and hypothetical arguments. Within this realm lies the ever popular, hair-splitting activity of determining who is the greatest of all time. And college football is perhaps the most well attended of these masters of the universe feuds--for there can be only one.

You don't have to search for long to find many lists each with there own methodology. Here is one. Here is another. Here yet another. These all came from a quick Google search and all happen to have the Sooners at the top, but you probably can find lists with different results. 

Thinking about this topic myself but trying not to take too seriously any particular method of ranking (including my own), I have developed a ranking that is different from any I've ever come across. However, I believe it is more elegant and more defensible. My method uses historical average margin of victory to determine who's better, who's best. 

The reason this method may have a lot of credence is margin of victory (MoV) is a powerful determinant in predicting college football outcomes. In fact a simple MoV model adjusted for field neutrality can explain about 63% of the outcome in a typical FBS college football game. Keep in mind that this is not just predicting who will win but also by how much.*

So what did I do? Using the amazing data source from James Howell's page along with some supplemental data from the NCAA and College Football Stats, I compiled all the scores from all the college football games involving a Division I-A school for the past 43 years. Why start in 1970? Because that is when I started . . . but there is some foundation as that is around the beginning of the modern era of college football. Around that time saw the evolution of dynamic offensive strategies, the rise and proliferation of black athletes, the end of one platoon football (1966), and the beginnings of a more intrusive NCAA in the name of competitiveness. 

The results:

Since 1970, Nebraska is the clear leader. 

I include it through the top 26 since some would want to exclude Boise State from the rankings due to limited games played in the top level of college football.

Since 1998 (the BCS era):

Check out the workbook for yourself tweaking the constraints as you see fit. You can change the time period examined, the minimum number of games played to be included in the rankings, and the statistic you wish to sort by. 

*The out of sample prediction accuracy falls off some and the magnitude of the variance of outcomes matters such that the ability for such a model to beat Vegas (>~53% necessary prediction accuracy against the spread) is low (actual prediction accuracy ATS of between 51%-58%). 

Saturday, January 4, 2014

WWCF: Self-Flying Plane or Self-Driving Car

Which will come first?

Self-flying aircraft commonly used over American airspace
Self-driving cars commonly used on American roads

This post is inspired from conversations with a colleague. We agree that these innovations are coming and that it will probably be in stages. I believe our ultimate predictions are in alignment as well.

The technology will likely be out in front of the legislation as is commonly the case, and the legislation will probably be waiting on public and special interest opinion as it commonly my contention. Yet encouraging signs have been seen. The FAA has approved test sites for aerial drones (a step toward but still shy of the subject here since today's drones are piloted albeit remotely). Similarly, Nevada, Florida, California, and to some extent Michigan have approved autonomous car testing on their public roadways. 

As for advancement coming in stages, my thinking is that regarding both public opinion and legislation there are fewer hurdles for package transportation than there are for human transportation. The first stage will be the delivery of cargo via self-guided vehicle. This might mean one method paves the way for the others and the other three follow suit together (e.g., a self-flying plane delivers packages for FedEx and then sometime after that self-flying planes for commercial passengers comes about just as self-driving delivery cars and personal cars/taxis are made available). 

That last example lends itself to my ultimate prediction on WWCF. Large-scale cargo shipments via plane have perhaps the most to gain with the least to risk in the self-guided future to come. Among the advantages are the economies of scale offered (routes no longer limited to pilot availability and scale in both vehicle and network), the limited natural enemies (taxi unions and personal-injury lawyers are more formidable than are the pilots potentially displaced), and the concentration of benefits (a few package delivery firms). 

I think self-flying planes will be with us to some significant extent within a decade and cars will follow ten years after that. The planes will carry cargo only for the first five years. 

So I predict we will soon be saying, "Look! Up in the sky. It's a bird! It's a plane! Yup, that's exactly what it is. A plane that self flies like a bird."

Update: I am reminded by the colleague mentioned above that there is another facet of self-flying planes that might in fact precede cargo delivery. That would be crop dusting. Search and rescue would be another use. The low risk of danger to bystanders might help these types of uses be the first mover.