In the summer of 2007, as I was finishing up my MBA, I was faced with a choice of where to work.  I had this job at Google, and was also considering spinning up a startup on my own.  I had spent the last several years studying entrepreneurship and wanted to put that training into action.  One thing that really pushed me to Google was some advice from a very wise friend who was also looking for a new gig.  He said something like this.

“So many people have adjustable rate mortgages, it’s ridiculous.  They’re going to reset and people won’t be able to afford to pay them any more.  I think a lot of people are going to default on their mortgages and lose their houses.  I bet that will drag the entire economy down.  That’s why I’m looking for a job in a nice big stable company.”

He went to Amazon.  Having tried to start a small venture in a recession previously, I decided that Google would be a great place to hide out.  I also figured (correctly!) that I could learn a lot about how an extremely well-run company works from the inside.

Bottoms-Up Management

I learned how bottoms-up management works.  The idea of giving as much control as possible to the individual contributors who are working on the problems themselves.  Google exemplifies the saying “let 1,000 flowers bloom” with teams seemingly running in every direction at once.  It’s worked very well for them, and I can see a lot of value in this structure.  But I also see its limitations.

Having spent a while working on building infrastructure projects at Google, I experienced first-hand the limitations of bottoms-up management.  Individuals are empowered to make their own decisions, and they optimize for what’s best for themselves, which means their careers and their projects.  It’s easy to optimize towards a local-minimum which is great for your project, but not necessarily ideal for the company as a whole.  Similarly, top-down directives are extremely difficult to enforce.  Executives can make decrees about how things should work, and it just doesn’t happen.  I remember walking out of a review with Larry, Sergey and Eric and hearing one of the Directors respond “well that’s Sergey’s opinion.”

I spent a bunch of time trying to encourage teams to standardize parts of their backend infrastructure on shared components.  Shared technology is rarely the easiest or fastest thing for an individual project, so let me tell you the road was challenging.  I’ll refrain from pointing out the holes in Google’s products that I was trying to plug which are still open.  (To be clear, I’m referring to missing features and UX annoyances, not security holes.)  But I also learned some important lessons in how to design such infrastructure so that it is a win-win-win for all the teams involved.

Alignment with Customers

The best thing about working at Google was the clear alignment with customers.  Because Google is so strong in web search, they can afford to invest heavily in primary demand stimulation.  Like Campbell’s paying for an ad campaign that says “Soup is good food”, it makes financial sense for Google to work very hard just to get people to use the web more.  It goes beyond the motto “focus on the user” — Google really does want whatever the user wants, at least 99% of the time.

This makes huge classes of problem solving so much easier, because there’s no cognitive dissonance trying to remember the difference between a great user experience and a sound business decision.  This particular aspect of the business was an extremely refreshing change coming from Real Networks.  I remember working hard on re-designing the Real Player installer experience and tackling that specific problem head on.  The company had become addicted to the pocket change they could scrape out of their unsuspecting customers by surreptitiously taking over their computers when the Player was installed.  None of that BS at Google.

Looking forwards

Google faces some serious challenges in the years ahead.  For many of the reasons I pointed out in 2007, Facebook continues to be a serious threat to Google’s primary business.  Android faces an uphill battle against Apple’s dominance in the all-important mobile space.  Amazon seems to be squarely in control of the hosted cloud computing space.  And Microsoft seems to be pulling their head out of the sand for office productivity software.  None of these problems will be easy for Google to solve.  But I’m confident the amazing folks I worked with there will put in very strong showings.

As for me, I’m going to work in social media.  I’m very excited about my new role which I’ll write more about soon.

In Walmart’s case, it’s generally suppliers who get squeezed.  Walmart demands that manufacturers of goods produce them at the lowest possible price so that Walmart can charge the lowest prices in their stores.  They really do try hard to pass the savings on to you.  Another case that is less well known is with so-called “interchange” fees for debit and credit cards, charged by the card networks like Visa and Mastercard.  Back in 2003, Walmart pushed hard on Visa and Mastercard to charge less for debit card transactions since they are both lower risk (because of pin-code use) and cheaper to process (verifying signatures is expensive).  The cynical will point out that with lower fees, Walmart just gets to keep more profit.  Which is true.  But they are genuinely motivated to lower prices for consumers, since that’s their main selling point.  So it’s a win-win – Wal-Mart’s motivations to lower costs are closely aligned with consumer’s desires to pay less.

Apple has similar desires for their network-connected gadgets like iPhones and iPads.  Apples wants people to be able to connect their devices to the network for as little as possible. Apple has clearly negotiated very hard with AT&T to demand low monthly rates on data plans for these devices.  Next month you’ll be able to buy an iPad with a 3G data plan for just $15 / month.  That is basically unheard of in the US.  For people on a limited budget, the iPad is the cheapest way to get online.  Compare this to other data plans available from major U.S. carriers:

The Apple / AT&T rates are the lowest in each of their categories, except Verizon’s smartphone data plan which ties the AT&T iPhone plan.  The iPad rates are extremely low compared to data plans for laptops, and also when when you consider that tethering plans or phone data plans require paying an extra $30/mo – $50/mo for a voice plan.  The unlimited iPad plan is literally half what it costs to get 3G on any other laptop, and it doesn’t come with the 5 GB limit that other plans do.  You might argue that the iPad can’t do as much as a full laptop, which is true.  So you might then argue that iPad won’t tax the network as much as a laptop, which I doubt considering the propensity to consume video on such a device.  So you can’t trade torrents on an iPad, which from an Intellectual Property perspective is just fine with me.

My guess (and this is pure speculation) is that Apple negotiated these rates by offering AT&T a share of the revenues generated through App Store purchases.

Again, the cynical will point out that Apple is just trying to grab the lion’s share of economic surplus for itself, which is true.  But nonetheless, this is a case where Apple’s desires and our desires as consumers line up well.  In a very real way, Apple is fighting on our behalf for lower prices from AT&T.

December is often a time of reflection, with good reason.  It's a natural opportunity to consider how things are progressing on a longer time-scale than we often do.  For me, 2009 was a year of making long-term commitments.  I made two huge ones, and I'm extremely happy with both of them.  The process of making these commitments kept me quite busy for almost the entire year.

Most significantly, I married the most amazing woman I know.  Maegan Ashworth and I permanently committed ourselves to each other on September 19th.  Our promises to each other were conversational, humorous, long-winded, personal and deadly serious.  We made them in the most public way we could manage, and were still sad to miss the company of many important people in our lives.  I could fill a book with everything I love about Maegan, but that's even more self-indulgent than I'm willing to be right now.  Suffice to say I am confident this will turn out to be one of the most important positive changes in my life ever.

The real planning for our wedding was compressed into just a couple months because it was difficult to focus on the ceremony while the other major event of the year was uncertain.  But in July we moved into a new house, ending 8 months of ambiguity about where we'd call home.  The process started in November 2008 when we first became interested in the house.  (Just before Maegan and I left for our bicycle tour across Vietnam, where we got engaged.)  It took months to reach agreement with the sellers and then months more to finish the process.  

I went in with a group of friends to buy the house together.  For years we had dreamed of living together in something like an "urban kibbutz".  I've liked that phrase ever since I read it applied to Barack & Michelle's early domestic life.  But for a more complete description of our situation, see our co-habitation blog.  (currently unpublished.  sorry.)

Getting a mortgage was particularly complicated.  The global financial crisis obviously did not help, but our situation was especially difficult.  Living comfortably with lots of good friends requires a big house, which means an expensive house.  In real-estate, expensive is also referred to as "jumbo" meaning that it's too much for any kind of government guarantee.  So banks would either need to make a long-term commitment to us themselves (a so-called "portfolio loan") or re-sell the mortgage to another bank on the secondary market.  We learned that the secondary market was "frozen" to use the popular vernacular, probably at about the same time as one particular bank which had all but committed to giving us a loan.  Another complication was that we needed 3 unrelated applicants to demonstrate our collective ability to pay back the debt, which was unusual enough to make many mid-crisis banks feel extra skittish.  I spent a large part of 2009 working on different aspects of how to finance this house.

Happily the stars aligned one evening when I was walking over to the house of my then-future, now-current roommates.  It was quite common for me at the time to walk those several blocks to sign yet another thick stack of papers to give to some agent or broker or other helpful professional.  Along the way I noticed a four-leafed clover in the grass, and picked it up.  In grade school I spent a surprisingly large amount of my recesses scanning the lawn for these botanical mutants, and once had quite an eye for finding them.  So it wasn't an unusual or significant event for me, but it had been years since I'd found one.  We taped the clover onto the application-du-jour which was going to a small local bank, in an act that signified frustration, exhaustion and powerlessness more than hope.  This bank ended up financing our house.

So that took up most of my year.  Trying to buy a house for about the first half, with moving and settling.  Then a wedding followed by a fabulous honeymoon.

Chrysler goes bankrupt

First some background.  Chrysler is being restructured under
bankruptcy.  This doesn’t mean they’re going out of business.  It means
that they owe more money than they have or will be able to pay.  So
with the help of a judge, they’re sitting down with everybody they owe
money to and telling them frankly “you’re not getting everything we owe
you.  Sorry, but there just isn’t enough to go around.”  So everybody
has to compromise.  The idea is that by striking some bargains to
reduce debt the company can get back in the game and become profitable
again.

UAW owns Chrysler

One of the biggest debts Chrysler has is to the UAW, the United Auto
Workers.  This is the labor union which represents all the
“blue-collar” workers who actually make the cars.  Chrysler owes them
benefits like pensions and health benefits.  Part of the settlement is
that the UAW will own 55% of Chrysler stock.  That’s a majority.  So
the workers will own the company.  Personally I think this is great and
makes a ton of sense, and I’ll tell you why.  But not everybody does.

If you’re lucky enough to be blissfully unaware of labor relations in
Michigan, this is downright bizarre.  Chrylser corporation is
“management.”  UAW is “labor.”  These two groups traditionally have not
gotten along.  I don’t think the word “hate” is out of place.  People
say the UAW will try to unwind this position as fast as they can.  I
heard one “expert” say that the UAW is placed in a position of conflict
of interest representing both Chrysler stockholders and UAW workers.
Why?  Because their responsibility to stockholders is to increase the
value of the company, but their responsibility to the union is to save
jobs, and these two goals are diametrically opposed.

Cooperation is the only way

Hold on.  The goals of the workers and the goals of the company are
diametrically opposed? This kind of adversarial thinking underlies how
Detroit got into trouble in the first place.  In truth the UAW’s goals
and Chrysler “management” goals are very strongly aligned.  This
painful truth of this fact is excrutiating today.  Chrysler and GM are
on the verge of ceasing to exist.  If and when this happens, the UAW
workers will lose their jobs.  What’s bad for management is bad for
labor.  But figuring out how to keep Chrysler building cars that can
compete with Japan and everybody else is a really hard problem.  Solve
it and both labor and management win.  If ever there was a time for
labor and management to come together and cooperate it’s now.  To be
extremely blunt for those still harboring grudges: if you two don’t
figure out how to play nicely together, you’re both doomed.

Historical tensions caused these problems and SUV’s too

Conventional wisdom cites two reasons for why Detroit is in this mess:

• They only built big gas-guzzling cars as consumer preferences shifted towards smaller, more fuel-efficient vehicles
• Union labor costs for things like pensions and health care are so
  high compared to foreign competition that the company just can’t compete

I believe both these are true.  But more interestingly (and something
I’ve never heard reported in the press) I believe there’s a causal link
here.  It is precisely because of these high labor costs that Detroit has focused on building gas-guzzlers. Smaller cars are cheaper and are subject to more intense price competition, meaning the margins are lower.  In business school
we learn about two basic types of product strategies: low cost and
high-end.  In the low-cost strategy you try to be more efficient than
your competitors.  You do things cheaper and still maintain a good
enough product.  This is what Japan did with cars.  But because UAW
kept labor costs high, Detroit couldn’t go this direction.  Their small
lower-end cars would just cost more because of the higher input costs.
So they had to go after a high-end strategy where they made bigger,
more expensive vehicles that came with higher profit margins.

Sophie’s Policy Choice

So UAW workers collectively bargained their way out of jobs.  That is,
they bargained up their salaries beyond what their labor is actually
worth in the modern economy.  So what should we do?  Let the market
correct itself so many of them lose their livelihoods?  Or sustain them
publicly somehow?

There is no easy answer to this question from a policy perspective.
China is facing this same question with hundreds of millions of
uneducated peasant farmers.  A relatively modest investment (on the
national scale) in farm machinery could replace a good fraction of
their output.  But the economically efficient choice comes with a high
human cost.  In this country we believe governments exist to serve the
people.  We’ll see how it does.

Open your fridge.  If you’ve lived with that fridge for a while, there’s a good chance it looks something like mine does.  Shelf upon shelf of half-used bottles and jars of long-lasting meta-foods.  Condiments, salad dressings, jellies, beverages, chutneys, nut butters, salsas, pickled vegetables, etc.  We expect our fridges to be full of food, so this doesn’t in itself challenge the evolutionary principal of selection.  But taking an inventory shows that there is a strong bias towards foods we don’t actually like.  In fact, the typical selection process for foods in our refrigerators tends to concentrate foods we don’t like, thus running backwards to what should intuitively evolve towards a selection of our favorite foodstuffs.  But for a couple very understandable reasons, that just doesn’t happen.

Consider salad dressings.  Most of us like to have some choices when we’re topping our raw vegetables.  So when we’re at the store, we don’t just buy the one salad dressing we like, but will often try a new variety.  There’s a documented psychological principal called Variety Seeking that encourages diversity in buying because people want to explore different choices.  But what happens when we buy a variety we don’t particularly enjoy?  Like that orange blossom vinaigrette or the honey mustard that’s just a bit too thick and sweet.  We try it once, form an opinion, and the next time we have salad we go for the old-reliable Goddess dressing.  So it lingers.  But we don’t throw it away.  Because there’s nothing WRONG with it.  Besides, one day when we have guests over they might prefer a syrupy honey-mustard dressing.  Or maybe we could dip chicken knuckles into it or something.  Plus the combination of preservatives, low-temperature and food that doesn’t promote bacterial growth in the first place means it can stay edible for years.  So their continued presence provides some small marginal benefit of choice.  The only real alternative is throwing them away  (which makes us feel guilty) since there’s no secondary market for used condiments.

Beyond choice, they do provide marginal benefit in terms of ballast for heat capacity.  Refrigerators run more efficiently when they’re full since there’s a larger thermal mass which is more stable.  But this assumes the fridge has ample space for the food that is being cycled through and consumed.  In many households the need to find space for food you’re actually going to eat creates a selection pressure to remove such undesirable foods.  But the door of the fridge is a niche environment that isn’t very well suited to large, short-lived main courses and thus things like eleven different varieties of mustard tend to thrive.

What’s the take-home lesson here?  How do we fight this scourge on our pallets?  Actually I don’t think it’s that big of a problem.  When we need space in the fridge, we find it.  But otherwise we collect things like Mang Thomas All Purpose Sauce, and pickled cherry peppers.   If clutter bothers you, resist the temptation to try something new and stick with something you know you’ll use.  Heck, get a really big bottle.  Or look for similar reverse-evolutionary processes in your medicine cabinet, liquor shelf, or office supplies, and be conscious that you have the power to change things.  Or just accept that sometimes human nature tends to concentrate our surroundings with things we don’t actually like.

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 a huge company, you have limited energy to expend buying your ads.  So rather than buying and managing separate ads from each Microsoft, Google and Yahoo, you’re likely to just deal with a single ad publisher.  The sensible ad buyer will choose the ad publisher which gives them the most value for limited effort. 

Right now the clear choice for an online advertiser is Google.  Because they have the most search traffic, they are best able to reach customers.  Combined with their adsense network, Google clearly has the largest inventory for an ad buy making them the natural choice for anybody not willing to spend a lot of energy managing their online advertising.  This logic underlies the recent acquisitions of Doubleclick, AvenueA/Razorfish/whomever, and now Yahoo!  Network effects in advertising mean that the largest network will be the most sucessful.  So the mergers will continue as far as the anti-trust regulators allow them to until a handful of bitter enemies remain.

This much might be obvious to some of my readers.  But I felt like sharing this analysis since I’ve read nothing in the common press that explains the basic economic motivation of this deal.

Wrinkles, twists

An irony of the network effect comes from the auction nature of keyword buys.  Advertisers bid for the right to get their message in front of customers.  When more advertisers are competing for the targeted eyeballs of consumers, the prices for advertising go up.  This means that prices will tend to be higher on the larger ad networks.  So bargain seekers can get more advertising for their dollar by seeking out smaller networks.  This appears to contradict the logic that bigger is better for ad networks.  But many advertisers are limited not so much by budget but by the ability to reach highly qualified customers.  If you are selling poodle tattooing services in the pacific northwest, odds are you will not hit max out your advertising budget on any of the ad networks simply because not that many people are searching for your services.

I could probably fill pages with speculation about the culture clash between Microsoft and Yahoo and other reasons why it will or won’t work.  But if you’re interested in that stuff, I’m sure you’ll have no problem finding it in the backwaters of the blogosphere.  I can’t help but drop a couple relevant ideas though.  First, from what I hear, the executive management at Microsoft is so dysfunctional right now, Yahoo will provide fertile new ground for their turf wars.  If the top bosses are adept, they will use the many iterations of re-orgs to sluff off ineffective execs to projects where their overall damage can be minimized.  Second, I think I hope Microsoft has evolved enough humility to understand that they’re better off simply shutting down Yahoo’s services than forcing everything to port over to NT servers.  Right, guys?

Disclaimer

I feel compelled to point out that the opinions expressed here are mine and mine alone.  In no way does this article reflect any official position of my employer.  This is my personal analysis of the economics behind the industry I work in.

I increasingly find myself facing a related problem: trying to allocate my finite time to seemingly unlimited desires to do stuff.  As I grow and learn there seems to be no limit to what I want to do.  Similarly, as I grow and learn and the world evolves around me, I seem to be genuinely able to accomplish more things in given amounts of time.  I think this feeds into my desires. 

How can I balance my time between all the professional goals, intellectual challenges, social activities, physical adventures, artistic pursuits, etc. that interest me?  The realization of this parallel between personal economics and classical economics gives me a hint that there are systems out there.  I’m going to think about market-based systems for allocating my time towards achieving my goals.  I wonder if I can do this without explicitly stating and prioritizing them.

Another tool that might be useful include meditation.  These unlimited desires often give me a short-attention span, maybe even A.D.D.  My good buddy Mez suggested some basic meditation as a way to help focus the brain.  I’ve been trying it for the last few days and I can already see some benefits.

Expectation Value of Money

A basic analysis looks at what your expected income will be over the next 3 years.  Big company will clearly pay $300k.  Startup will pay $150k in salary.  A 10% chance of $3m is worth $300k in terms of its "expected value" following standard statistical methods.  So by this logic, startup is a better bet at $450k over the 3 years.  This analysis is correct and totally appropriate for how a large institution would analyze the trade-off.  But it has a problem when applied to individuals: it ignores the differences between utility and money.

Utility != Money

Different quantities of money have different relative values to people.  Economists express this in terms of "utility."  Most people will find $20 about twice as useful as $10.  Because you can do twice as much with $20 vs $10, we say that $20 has twice the "utility" of $10.  My favorite econ professor refers to utility as "jollies."  Utility is in arbitrary units, but here let’s say $1 is worth about 1 jolly, more or less.  So far this should be totally intuitive.

Things get a little stranger when we’re talking about large quantities of money.  For example, most people would not find $2 billion twice as useful as $1 billion.  For me, getting a gift of one billion dollars or two billion dollars would have almost exactly the same effect on my life — either way I’d be rich beyond my dreams.  The marginal utility of that second billion dollars is worth far less than 1 billion jollies — maybe only another million jollies over the first billion?  So for me, the graph of utility vs. money becomes nearly flat at these extremely high dollar values.

The shape of this curve at "intermediate" dollar values varies a lot from person to person, as does what intermediate would mean.  For example, consider two people — one who is working a minimum wage
job and the other who just made their first million dollars.  A $1,000
bonus would be extremely useful to the minimum wage worker, and almost
ignored by the millionaire.  But to the millionaire, the difference
between $400k and $800k is much more meaningful than it is to the
minimum wage worker.  For them, that much money sounds more like a billion dollars would to me.  Most everybody has a range of money that is too small to matter to them
and a range of money which is so large that differences don’t really
matter either.  Here are some factors that can affect the shape of a person’s utility curve:

• How much disposable income they are used to having
• How much money they have saved
• What expectations they have about future earnings
  • Career growth path
  • Are they expecting inheritance?
  • Pension plan or 401k?
• How much money would be needed to reach financial goals that can markedly affect their quality of life, like
  • Buying a car or house
  • Getting out of debt
  • Putting children through college

As promised, figuring out the shape of this curve is extremely personal.  I’ll describe a technique for doing so numerically at the end, and then I’ll duck.  Here is a spreadsheet {link fixed} that unscientifically attempts to graph what a utility curve might look like for somebody who is financially comfortable, but not exactly wealthy — like somebody who might be considering such a career decision.  And here’s the graph:

Applying Utility to the job choice

You might think that the next step in the analysis is to figure out how many jollies you’d get for the $300k from Big Company and compare that to the $450k from Startup.  Using the above data, this works out to about 649 kilojollies for Big Company and 907 killojollies for Startup, and Startup clearly wins.  These values are the utilities of the expectation values of money, which sounds impressive, but really isn’t very useful.  For uncertain outcomes, you should figure out the utility value of each financial possibility before calculating the expectation value.

Using the above utility curve, the correct analysis involves figuring out how many jollies you would get for each of these three possible outcomes:

• Work at Big Company ($300k = 649 kilojollies)
• Work at Startup with no bonus ($150k = 351 kilojollies)
• Work at Startup with big bonus ($3,150k = 3.25 megajollies)

The appropriate comparison is between 649 kilojollies for Big Company and (0.90 * 351kj) + (0.10 * 3246kj) = 641 kilojollies for Startup, which is comparing the expectation values of utility.  Expectation values are calculated by adding up the products of the probability of each event with the utility of that event.  See how this is different from the utility of the expectation value of money?  You apply the utility transformation before applying the probability weights.  Because the utility transform is non-linear, the operations are not associative, and order matters.  So, the important question is how valuable would that $3 million dollar bonus be to you, and is a shot at it worth the loss of guaranteed salary?

By this analysis, it’s not worth it for our hypothetical job seeker to take the chance.  The 649kj from Big Company is slightly higher than the 641kj from Startup, although it’s really close.  The closeness shouldn’t invalidate the result though.  You might want to check the assumptions used to derive this, but ultimately we have to make choices based on limited information.  We can understand this result intuitively because the sweet-spot on the money-utility graph is in the hundreds of thousands of dollars, not the millions.  This is the order of magnitude of money that would change this person’s life in the most meaningful way.

Tautological Conclusion

This kind of "what if" exercise is an accepted technique for calculating the shape of a person’s utility curve.  Would you rather have $10 or a 10% chance at $100?  Would you rather have $100 or a 10% chance at $1k?  Maybe I’ll put together a spreadsheet that actually uses this technique to find an accurate utility curve.  But you can see that this entire analysis boils down to a realization that you must decide for yourself if the reward is worth the risk.

Haha!  ;^) 

/me ducks

(Hopefully this discussion gives a framework for thinking about such decisions.)