Embracing Chaos

This last week there was a lot of news coverage of a “daring hostage rescue in Columbia.” Fifteen people were freed from the FARC. Many had been held captive for years, including politician Ingrid Betancourt, and three Americans. The press has been celebrating the victory along several lines. How wonderful it is for these people to be set free after years of captivity. How the US military helped plan and support the operation. How the guerrillas were fooled into giving the hostages up without firing a single shot. (Aren’t we smart! Aren’t they stuipd?) But there’s a dark side to…

...full article

Amazon has a history of facilitating disruptive change. First by selling books online, they demonstrated the advantages of a well-run online store. Then with music, movies and just about everything else, they have shown that centralizing inventory and customer experience allows for reduced costs and an improved experience over a traditional distributed retail model. Today, Amazon Web Services is starting to disrupt IT operations similarly by providing a higher quality service at lower cost than most companies can manage themselves. They achieve these scale economies through centralization. With Kindle Amazon is attempting another disruptive change, this time in the way…

...full article

[I wrote this for my excellent class on Open Innovation. With mere weeks to go until I finish my MBA, I haven't found much time to write original stuff for this blog, so I'm recycling a bit.] The music recording industry is in trouble. Disruptive changes in music playback technology have seriously reduced demand for their mainstay business, physical CD sales. CD sales comprise 80% of the industry’s total revenue, but have dropped sharply in recent years. Last year sales dropped by 19%, and the channel is in danger of freefall as retailers start to re-allocate store space currently assigned…

...full article

Although most corporate mergers fail (often due to mis-aligned incentives on the part of the deal-makers) there is a solid economic foundation for the proposed Microsoft + Yahoo! merger. Most of their assets will work no better combined than separate. But the merged Microhoo ad network would be significantly more valuable than the sum of two ad networks alone. Why bigger is better for online advertisers The reason lies in network effects of the online search + advertising industry. Imagine you’re an ad buyer which is to say you have a service you want consumers to find online. Unless you’re…

...full article

Revolutionaries are idealists. They have to be. They risk their lives to fight for what they believe in. Lenin, Mao, Castro — they all truly and deeply believed that they were fighting for a better way of life for their people. And to a varying degrees, they accomplished that. In fact in all three of these cases — Russia, China and Cuba, the early years after the revolution were relatively good for the people. Wealth was redistributed and poverty decreased. The second world is generally better than the third world. When I was living in communist China, I found it…

...full article

Many times I’ve been asked about the possibility of Apple offering a subscription music service for iPods and iTunes. Here I’ll lay out why I think this will happen, what the timeline is for it, how that relates to the future of DRM, and what impact it would have on the competitive landscape. First off, I am confident Apple will launch a subscription music service. As every Rhapsody fan and many industry analysts agree, subscription services are the best way to consume music. Just like Hotmail moved email into the sky, and Google Docs are doing the same for office…

...full article

My 14-year old Subaru is on its way out, and since I’m commuting to Kirkland almost every day I really need a new car. Primary criteria for me are safety and fuel economy / ecological impact. Safety seems to correlate very strongly with model year so I’m looking at new cars. In theory running on bio-diesel gives your car essentially zero net carbon impact. Also, many new renewable organic fuel sources seem to be more like diesel than gasoline. So I looked at what diesel cars can be purchased new in the US these days. I was amazed at how…

...full article

After months of rumors about companies trying to buy Facebook, yesterday a deal was announced. In a sense the deal is quite small because Facebook sold just a 1.6% equity stake to Microsoft. But by paying $240 million, the deal values Facebook at about $15 billion! What’s going on here? This surely can’t be based on rational economics, can it? Let’s analyze how these deals should be valued and take a few steps back through recent internet acquisition history for context. In trying to keep this post focused, I wrote a separate article about why mergers and acquisitions rarely work….

...full article

When thinking about the recent Microsoft, Facebook deal, I couldn’t help but talk about mergers generally. So are some general thoughts about what makes mergers work or not. Research consistently shows that most corporate mergers are unsuccessful. That is to say, when two companies combine the value of the merged company rarely even equals what the individual companies were doing by themselves. The reasons for this are numerous. Organizations face diseconomies of scale as they grow. A simple example of such a diseconomy of scale is increasing communications overhead — the number of possible communication paths grows as N^2 for…

...full article

I’m going to try applying some economic theory to a classic career decision. Imagine that you must choose between two possible jobs, let’s call them “Big Company” and “Startup.” Big Company will pay you $100k per year. Startup can only pay you $50k per year, but with a 10% chance of paying you a $3 million bonus in 3 years. Which one do you take? I’ll present an analytical economic framework for making this decision which shows why this decision is ultimately very personal. For the purposes of this discussion, I’m going to ignore the time value of money –…

...full article