Category: Economics

  • BitCoin, Chastened

    The wannabe economist in me has been following the BitCoin phenomenon with great interest during the last few months. The algorithmic side of bitcoin is fascinating, but a few things bugged me about the system. One of them was that the maximum number of bitcoins that can ever exist is limited to 21 million.

    Most of the coverage on bitcoin has been bubbly-positive even though it’s not certain you can reliably convert bitcoins into real currency.

    Adam Cohen took a wonderfully lucid stab at bitcoin on Quora recently, focusing on the built in deflation that is a result of the hard limit on the number of coins that can exist. He makes the point that early adopters holding bitcoins will automatically get richer and it smacks of a scam.

    While scam is clearly not the intention of the creators, deflation is any economists worst nightmare and built-in deflation will probably result in bitcoin being stillborn.

  • Where's the Disruption from the Change in Startup Economics?

    It’s been a year long break from blogging and getting back to writing and getting a so many new visitors this soon is cool. [Thanks HN!]

     

    This blog runs on the smallest available Linode 512 instance for $20/month. It runs several sites including family blogs and hobby sites. I run nginx on the front end and reverse proxy to 5 Apache children which saves me having to run roughly 100 Apache children to handle the brief spikes of around 20 hits per second I saw yesterday.

     

    Technologies like event-servers (Nginx, node.js, etc) and cheap and reliable virtualization may seem like old hat, but in 2005 Linode was charging $40/month for a 128Meg instance (it’s now $20/month for 512Megs, 88% cheaper) and Nginx was only going to hit main-stream use two years later. In fact Nginx only hit version 1.0 last month.

    Five years ago many companies or bloggers would have used a physical box with 3.5 Gigabytes of memory to handle 100 apache instances and the database for this kind of traffic. About $300/month based on current pricing for physical dedicated servers from ServerBeach which hasn’t changed much since 2005.

    With the move from hardware and multiprocess servers to virtualization and event-servers, hosting costs have dropped to 6% of what they were 5 years ago. A drop of 94% in a variable cost for any sector changes the economics in a way that usually causes disruption and innovation.

    So where is the disruption and innovation happening now that anyone can afford a million-hits-a-month server?

     

    Footnotes: An unstable version of Nginx was available in 2005/2006 and Lighttpd was also an alternative back then for reverse proxying. But it was for hardcore hackers who didn’t mind relatively unstable and bleeding-edge configurations. Mainstream configuration in 2005 was running big memory servers on dedicated machines with a huge number of Apache children. Sadly, much of the web is still run this way. I shudder to think of the environmental impact of all those front-end web boxes. I also don’t address the subject of Keep-Alive on Apache. Disabling Keep-Alive is a way to get a lot more bang for your hardware (specifically you need less memory because you run less apache children) while sacrificing some browser performance. The norm in 2005 was to leave keepalive enabled, but set to a short timeout. With Keepalive set to 15 seconds, my estimate of 100 apache instances for 20 hits per second is probably way too optimistic. With Keep-Alive disabled you would barely handle 20 requests per second with 100 children when taking into account latency per request for slower connections. Bandwidth cost is also a consideration, but gzip and running compressed code, using CDN versions of libs like jQuery that someone else hosts and running a stripped down site with few images helps. [Think Craigslist] With a page size of 100K, Linode’s 400GB bandwidth allowance gives you 4,194,304 pageviews.

     

  • What an Instant-Edu machine might do to Education

    The last two scifi novels I’ve read coincidentally both had a machine that can upload several years of education to your brain in a matter of hours. I was ruminating on what the effect would be on education if we invented the instant-edu machine today.

    Imagine you could instant-edu the Harvard Business School syllabus in a few hours. HBS’s 2010 revenue was $467 million. The 2011 MBA program has 937 students.  My HBS graduate friends tell me that it’s not about the education, it’s about the networking opportunities. So in the case of HBS, the instant-edu machine would not replace the experience, because really the HBS MBA program is quite possibly the most expensive and time consuming business networking program in the world.

    So how would HBS adapt to the instant-edu machine? They might revise the $102,000 tuition fees down slightly since all data contained in textbooks will simply be uploaded in a matter of hours.

    Since all documented parts of the syllabus will be instantly absorbed by all students, networking will be the core activity. But students won’t spend the time helping each other retain knowledge because it will already be retained. Instead they would focus on innovating using the knowledge they’ve gained. Throughout the 2 year period, they could innovate in different settings. One class might drop LSD and see if a new interpretation arises. Another might use debate to provoke innovative arguments or solutions.

    Or perhaps institutions like Harvard will disappear over time and we will revert to the 17th century Persian coffee house scene where thinkers are free to gather for the price of a cup of coffee and share and debate ideas and come up with new ones. Perhaps each coffee shop could have their own football team…

     

  • The DOW 10K priced as opportunity cost

    Economists love the concept of opportunity cost because it gives you a the real long-term value of an investment or purchase in relative terms – which is really the only way to calculate value. On Wednesday the DOW hit 10,000 again. The US financial press did their part to ring the bell while the banking community celebrated the boost in perceived value and the increased likelihood that the public would buy their wares.

    Fox News, like clockwork, has given former asshole president Bush credit for the recovery. (Skip to 3:00 in the video) “He took the bold moves and look where we are today..”.

    John Authers in the Finanial Times is almost embarrassed on Thursday as he delivers the news of what a DOW 10K means in real, opportunity cost terms. If you invested in the DOW in 1999:

    • Relative to emerging markets you’ve lost 80% of your money.
    • Relative to gold you’ve lost 75% of your money.
    • And even in dollar terms corrected for inflation (using the CPI) you’ve lost around 23% of your money.

    dow10k

  • Great interview with Columbia's Bruce Greenwald on value investing

    There’s a spectacular interview on ft.com today with my favorite FT journalist John Authers with Bruce Greenwald who teaches Ben Graham’s value investing course at Columbia.

    Bruce talks about behavioural finance and the irrationality of investors, the often ignored mathematical realities of the market, the brutality and danger of short selling (all short sales are treated as short term capital gains), the power and value of franchise and much more!

    I love his constant reminder of what value actually means: First look at the balance sheet, then current earnings ignoring growth.

    He does a great fast analysis of why even value investors got caught with Fannie and Freddie because they misanalysed the balance sheet.

  • 7 Reasons why it's a great time to be a Tech Entrepreneur!

     In 2002 Warren Buffet sent this stark warning to his investors:

    “In our view […] derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

    Bill Gross was rumbling about the looming crisis in November last year.

    Marc Andreessen predicted the “oncoming nuclear winter” on April 18th in Ning’s D round announcement when they raised $60 Million.

    And here we are. Our biggest banks are failing. California (the worlds 5th largest economy) is running out of money. Two weeks ago our economy did almost collapse. Valley layoffs are starting. And every entrepreneur I know has that thousand yard stare.

    All is not lost. If you, like me, run a technology startup, then you are in a better position than most to weather, and even profit, from the coming recession. Here’s why:

    1. No more false economy!

    For years there has been a false economy created by VC backed companies giving their services away for free to “go for growth”. The money gets consumed, the company goes away. But ten other promising startups in the same sector didn’t have the same runway and could not generate revenue to survive because the VC backed startup had forced everyone to give away the service for free.

    As Wall St profits dry up and losses are incurred, many VC fund partners are unable to deliver the money they committed to their funds. So the amount of money sloshing around the Valley and other tech hotbeds will decrease.

    With the venture capital glut removed we now have something closer to a free market among tech startups.  Bad ideas will be given less runway. Good ideas will get their just profits because pricing will be market driven by realistic supply and demand curves. At the end of the day the same number of startups may actually make more money.

    2. Efficiency of execution will matter again

    This false economy has caused an entire skill set to be ignored. There are many folks out there who are very good at running a high traffic website or a complex business with very little money, people and resources. In the false economy their skill has counted for diddlysquat. If you are one of these people, your time has come. If you’re competing in the same business side-by-side with an old school false economy entrepreneur who needs his team of 50 and and his 200 server cluster just to get off the ground, you’re going to eat them for breakfast and ask for seconds.

    3. The relative risk of investing in a startup has decreased

    The problem on Wall St and the global banking industry right now is one of trust. An economist will tell you that asymmetric information has led to adverse selection. That means that people lied so people got screwed and now no one trusts anyone lest they too get screwed.

    If you’d like to know exactly how bad this problem is in real-time, check out the TED spread on Bloomberg. It tracks the inter-bank lending rate. It’s the closest way of tracking the credit crisis in real-time. Notice how the “bailout” has had zero effect on the bank lending rate. It did nothing to improve trust. In the week before the bailout the Fed injected roughly an additional $300 Billion into the global economy and that also had zero effect. Apparently you can’t buy trust.

    Startups were just as risky before and after the credit crisis. Investors are still investing in a great idea and a great team and nothing more. In our world we don’t have credit rating agencies who have lied about bad CDO’s in order to drum up more business from other banks. Our credit worthiness started of as really bad and it’s still just as bad. And our potential return on investment is still just as enormous as it was.

    While VC funds may have less money sloshing around from sources they’re accustomed to, this relative decrease in risk may attract new investors who now see us as far less risky since the alternatives are so much more risky.

    4. It’s going to become easier to recruit great talent

    Large companies are already shedding huge numbers of staff and many of them are talented people who were simply underutilized. With jobs being scarce and now that even large established companies aren’t a sure bet, it may also persuade risk averse folks who would not normally work for a startup that we’re not such a bad bet.

    5. We don’t need credit anyway!

    The commercial paper market is a huge credit marketplace that very stable, well capitalized companies with huge asset bases use to borrow money for short periods of time. They use the money to pay their staff and for their day to day operations. Unfortunately the commercial paper market has just about frozen. It’s become very difficult for even reliable companies to borrow the money they’re accustomed to have access to. Even the state of California is going to have to borrow from the government because they can’t raise money for their regular operations from the commercial paper market.

    If you’ve ever tried to get a line of credit as a loss making startup with no history, you’ll know it’s near impossible. We didn’t survive on credit then and we don’t need credit now. And anything that causes the incumbents to struggle when we don’t have to is a competitive advantage for us.

    6. Times of change create a greater need for innovators

    As costs increase and spending decreases the incentives to find a way to do something better or cheaper become huge. If you can give Coca Cola a way to figure out that only 10,000 of their 30,000 people who have Microsoft Office licenses actually use the product, then you’re in the money. And if, because of inflation, the price of MS Office has gone up from $300 to $400 then  you’re saving them an extra $100 per user and you can charge more for your service.

    7. A weaker dollar means you make more money

    If the US economy truly is toast, that probably means the value of the dollar will fall. That means that every Pound, Yen and Euro your website earns either in direct payments or via ad clicks will be worth more. If 25% of your website traffic is from the USA, that means the net result is more money without you lifting a finger.

    Now that you know how good you’ve really got it, and while everyone else is still crying down at the bar, go get caffeinated up and grab yourself a piece of this great opportunity!

    ~Mark

  • Why Free?

    A great article on wired about the free web economy.

    Interesting quote:

    “Anything you can consistently convert to cash is a form of currency itself, and Google plays the role of central banker for these new economies.”