almost a diary, compulsory reading, oddly enough

The 16 most important events in world history.

Last week, while strolling down Les Champs Elysées, I entered the Virgin bookstore to have a look at recent French publications. I also wanted to have a look at the (in)famous French bestseller spreading the conspiracy theory that the Pentagon was not in fact attached by a plane. While that seemed to be as boring as expected, another one attracted my attention – a book that claimed to have identified the 16 most important events in world history: Les 16 majeures de l’Histoire : Les dates qui ont changé le monde by Pierre Miquel.

I think identifying the 16 most important events in world history would certainly be an achievement. I just doubt it is possible. And just by looking at the back of the book it became clear to me that this was just another attempt to benefit from the post 9/11 histeria: Miquel puts 9/11/2001 on par with the birth of Jesus Christ.

I think that – while I agree that nothing is quite as it was before 9/11 and it certainly was some sort of cataclysmic event for my generation – history’s verdict on the importance of the attack won’t be available for another few decades.

And one more thing – Paul Krugman, Princeton economist and NYTimes columnist – wrote back in February that, in his opinion, in ten years the Enron affair and its consequences for corporate governance in the US will be considered to have been far more important than the terrorist attacks. Now Miquel certainly does not appear to think that Enron is that important. And most people would probably agree that it will never be an event as important as the birth of Christ.

A friend of mine put the whole “nothing is quite as before” discourse in a very funny caricature, which you find below. The German caption reads: “… and even though nothing was as it was before September, 11th, Mr. Killian again had to run to catch the tube this morning…”. Quite right.

nothing as before

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almost a diary, cinema, compulsory reading, oddly enough

So much creative energy wasted. Unbelievable.

Yesterday evening I attended a regional short film award presentation ceremony. One of the winning films was about a Japanese couple eating Sushi on a date. Later that evening I had a chat with the female lead actress, a charming student of Political Science. So far, so normal.

But what do you reply once the person you talk to starts to explain to you that the real reason for the Nazi dictatorship was alien control? I am not entirely certain about the details of her argument due to linguistic difficulties. But the gist of it was that she had read about it in “a Japanese book“.

So what do you do? Well, I can tell you what I did: I changed the subject to something tastier and far less problematic with a slightly irritated – “anyway… so where do you get your Sushi here?”

Happy about my newly acquired knowledge about great Japanese restaurants in the area, I almost forgot about the irritating incident. But when I later checked my email, I could not resist to google for “Nazi Ufo”. The result was unbelievable. You should try that yourself.

The search yielded a countless amount of webpages determined to uncover and explain the “real” reality, as if we were all living in a “Matrix” [I am not going to discuss the ontological possibility this could actually be the case or any possible ethymological implications of such a possiblity. For our mind’s sake, let’s just assume it’s not the case.]. I am simply stunned how so many apparently at least modestly intelligent people are eager to waste their intellectual energy on blatantly nonsensical conspiracy theories.

Now you might reply that conspiracy theories can be valuable – some sort of intellectual modelling, an intelligent fictional exercise trying to identify fundamental causes behind the events that shape the world in our framed perception – even though evidently wrong, most of the times. But the important part of the last argument is intelligent – unintelligent conspiracy theories simply are pulp fiction. Moreover, unintelligent conspiracy theories are plainly dangerous, because they appear to be no longer checks and balances to a possibly framed official version of history but ot have become a “Matrix” themselves. Just clicking on some links on the first page of google hits I found the following extraordinary example about German moon bases in 1942. In case you don’t bother to click on the link above, here is a remarkable extract from that page:

“In my extensive research of dissident American theories about the physical conditions on the Moon I have proved beyond the shadow of a doubt that there is atmosphere, water and vegetation on the Moon, and that man does not need a space suit to walk on the Moon. A pair of jeans, a pullover and sneakers are just about enough. Everything NASA has told the world about the Mood is a lie and it was done to keep the exclusivity of the club from joinings by the third world countries. All these physical conditions make it a lot more easier to build a Moon base.”

No way to argue with that, I know.

And as you remember, I did change the subject when the Japanese girl started to explain the intricacies of the Nazi-Alien connection (which seems to be at the core of an astounding amount of conspiracies on the web). But the scary thing about her was that she did not seem to be a Mulder-like UFO freak, who “wants to believe”. The scary thing was that she seemed to quote not from a mailing list or web site run by “dissident scientists” but from an apparently accepted Japanese source.

It’s a strange world out there.

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almost a diary, traveling

Bonn. It’s scary

Actually, I had written this entry right after the last one on tuesday. But somehow it got lost in the digital Nirwana. So here is a shortened version. Don’t bother to complain qbout spelling mistakes as I am currently in Paris, typing on a French keyboard. But you’re actually not entitled to that piece of information until you have read the next entry. So for the time beig let’s imagine it’s still last Tuesday…

Bonn is scary. For those of you, gentle readers, who don’t remember, whqt Bonn is, here my brief executive summary: Bonn is a medium sized city situated on the left bank of the Rhine river, south of Cologne. But far more mportant than what Bonn is, is what Bonn was – the Capital of the Federal Rpublic of German (until 1991) and seat of the German Government (until 1999). I was there for the last time on the 27th fo September 1998. That was the day when Kohl was voted out, and Schroeder became Chancellor; that was in a time gone by, a time in which Bonn was the center of German politics.

When I jogged through the squre lile of doll-house-like abandoned I somehow sensed for the first time how much has changed since then. Actually, Germqn politics have not changed a lot, to be honest. But the atmosphere has. The difference cqn really be summarised in the difference between Bonn and Berlin. Just a few meters from the former Bundestag building there is well done museum about post WWII German history, the “Haus der Geschichte”.

And while it is not actually about Bonn, it somehow was. And while I think the permanent exhibition is going to be expanded as time moves on, it somehow feels indicative that the exhibition “current challenges” ends with the government moving to Berlin. History has left Bonn. It is now being made somewhere else. And Bonn is hurt by this probably more than by the governmental exodus (for which the town is being generously compensated).

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oddly enough

Are you sitting. Good. Don’t get up.

OK, it’s just a spam message I just received. But this one is actually really funny. I just wish I could believe. The message was:

fitbuch“Dear Friend, I hate to exercise, but, like anyone, I want to stay in shape and look my best. I was amazed to discover the Sit & Slim Workout Exercise From Your Chair! that’s right, you can get in shape without leaving your chair! I lost an Amazing 16 LBS! All because of the Sit & Slim Workout! An excerise for people who hate to exercise! Click Here to learn more about it!”

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compulsory reading, web 2.0

New Economy. Does it really look that old?

Sometimes I am simply depressed to which extent indirect perception, ie the way we think about the stuff out there which we can’t sense ourselves, is shaped by people whose perceptions are themselves shaped by the very same mechanism.

Let’s face it, it’s not really the case that the amount of possible interpretations of “reality” increase proportionally with the amount of people transmitting and reshaping them. Of course, it’s probably true that some interpretations are plainly wrong and proportionality should not be expected if those we rely on to present a fair picture are actually worth their price. But I would argue that instead of mutual control and even possible cross-fertilisation we can witness a lot of autocatalytic feedbackslopes.

As soon as one possible scheme of interpretation has become predominant, it becomes indeed very difficult to argue against it. This is as true for general media, as it is for scientific paradigms. This is basically what Thomas Kuhn said about scientific progress – it’s about being on the right side of the argument at the right time, not about being right. Because there is no truth apart from what we make true. Now consider the opportunity a general media hype presents for a scientific community in search of outlets for their vision of the world. What would happen?

One possibility is the “New Economy“. Whatever the possible economic content embodied in that concept, there was a time in the late 1990s when everybody wanted to believe that humanity had indeed reached “Business 2.0” (I’d say, if anything, it should have been business 4.0, version 1 being hunting and gathering, 2 the agricultural economy, 3 industrialisation). When the bubble burst, the public felt devceived by the prophets and turned to those whose opinion had been largely ignored just a little bit earlier, those who now sensed that bashing all about “new economy” was the right thing to do (now here you realise why stock market analysts are a high risk group for schizophrenia, being obliged to do bash now and justify their earlier recommendations). I’d say, we’re still in the latter phase of dealing with the recent economic past, as, eg, this article in this week’s Economist demonstrates.

The article reviews a book written by by Stan Liebowitz, a professor of economics at the University of Texas at Dallas, “and a long-time sceptic of the view that the Internet changes all the rules…“. And it seems to cover a broad range of issues –

“the exaggerated advantages of Internet retailing over conventional retailing; the false claim that the Internet’s lower costs would give Internet firms bigger profits; the inadequacies of the broadcast-television model of advertising revenues; the poorly understood questions of copyright and digital-rights management. But the crux of the book is two chapters devoted to attacking the theory of lock-in. This was the notion that caused the biggest mistakes – and the area where many economists were most at fault.

The Economist’s author clearly believes in the last notion as the rest of the article is devoted to an explanation thereof. But I don’t. Quite to the contrary, I’d argue that the argument was (and thus is) right and that all the other problems (of business judgement) have been far more serious.

It’s not that economists have been wrong to point out that network effects are crucial for a lot of information based business models and being first to market is thus a crucial element in a business strategy. Likewise, if that is case, there is a possibilty for customer lock-in because of high switching costs which will offset the losses incurred during the roll-out phase when getting to a critical mass of customers was the most important thing. There is nothing wrong with this argument.

Liebowitz’ argument is based on a distinction between weak lock-in and strong lock-in. In the Economist’s words:

As the story was told, Internet lock-in happens largely because of network effects. When the value of a product to consumers increases with the popularity of the product, that is a network effect. (A telephone is worthless if you own the only one; the wider the network, the more useful a phone becomes.) Given strong network effects, a company that gains a big share of the market will be protected from competition from late-movers. Even a plainly better product may fail, because people, much as they may prefer it in itself, will wait for others to buy it first. The implication for business is that moving first is all-important. In refuting this, Mr Liebowitz emphasises the distinction between two kinds of lock-in. The question of compatibility is central to both. One kind of lock-in arises simply because switching to a new product involves a cost beyond the purchase price: costs of learning how to use it, for instance, or the difficulty of using it alongside products you already own. Mr Liebowitz calls this self-incompatibility, or weak lock-in. But there is also strong lock-in. This arises if a new product is incompatible with the choices of other consumers – and if, because of network effects, this external incompatibility reduces the value of the product.

The point is that weak lock-in is very common, indeed pervasive. Many new products have to overcome self-incompatibility. People do not buy a new computer every three months even though the product is improving all the time. Learning to use a new word processor is a bore; for most users, a rival has to be much better, not merely a bit better, to be worth the trouble. Note that if slightly better products are rejected because of self-incompatibility, this is not inefficient: it would be inefficient to buy such a product, incurring all the costs, unless the improvement was big enough to justify it. To repeat, weak lock-in is nothing new.

Strong lock-in is different, because of the network aspect. Strong lock-in means that consumers won’t move to a new and much better product unless a lot of others jump first. If they could somehow agree to move together, they would all be better off. But they cannot. Strong lock-in reflects a failure of co-ordination, it causes economic losses, and in theory it does create opportunities for decisive first-mover advantage. But how common is it, even in the new economy? Mr Liebowitz is forthright on this. Strong lock-in is not merely uncommon, he says, there is actually no known instance.

The lock-in literature leans heavily on just two examples: the persistence of the supposedly inferior QWERTY keyboard (see article) and the triumph of the VHS video standard over the supposedly superior Betamax. Both examples, Mr Liebowitz shows, turn out to be bogus. The QWERTY keyboard is about as fast to use as the most plausible alternatives, and VHS had important non-network advantages over Betamax – notably, longer tapes. Neither case shows strong lock-in.

OK, now let’s see – there’s about a hundred different stories out there concerning the alleged efficiency or non-efficiency of the QWERTY keyboard (which was allegedly designed to reduce typing speed because of technical issues in mechanical typewriters). Pick and choose your preferred one. And VHS? longer tapes than Betamax? From a band-length perspective Siemens’ Video 2000 was clearly the best product. I still have an eight-hour-tape somewhere. VHS is a clear example of network effects, but the explanation is not technical superiority. It was content.

Don’t ask me why but there were much more films available on VHS than on Beta or any other system. So more and more people picked VHS to be able to benefit from that choice. The more people chose it, the more attractive it became to even more late adopters. VHS is a clear example of lock-in. Strong or weak? I don’t think that dichotomic distinction is useful. There are weaker and stronger lock-ins. VHS is an example for a stronger one. Microsoft is an example for a stronger one – one could say, one with a interperson compatibility issue, as opposed to an “intra-person” compatibility issue, as the word processor example used above.

And these aren’t common effects? Think of Amazon.com’s recommendations, a service I have often used. They are based on a system called collaboritve filtering, which relies heavily on a critical mass of consumers. Think of p2p applications – you need a lot of people in such a service to be able to find the stuff you want. The more people find the stuff they want, the more will use the service.

Now switching file sharing applications is not particularly difficult for most users. But there’s a reason only a handful of useful filesharing applications exist at a time, some in niche markets, like Edonkey, where a lot of (pirated) movies are swapped.

You get my point. It’s not the wrong principle. It has been the wrong application which has caused financial desaster in so many cases. Network effects/rising returns and lock-in (in whichever way) are a lot more important for information based businesses than for car manufacturers. They have very limited problems of collective action, most of which have been dealt with in a legal way.

But it is important to emphasise that neither network effects nor customer lock-in are the only conditions for success in the cyber space. For some businesses they may be sufficient, but a useful product or service is still what people pay money for. As long as it is free, a lot of people will consume a lot of stuff. If they have to pay for it, things are different.

But let me say it again. The failures are not about wrong economics. But about their misapplication.

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Economics, Germany

Bye, bye, Neuer Markt

poor baby

Deutsche Boerse, the main German stock market operator today announced that the Neuer Markt (new market) would be dumped by the end of the year. It’s a widely welcomed and probably useful decision to get rid of a market and respective index that has plunged for 2 1/2 years in a row. Fair enough, what goes up like a rocket, must come down once the boosters burn out. But I remember all the success stories back in 1999. I remember the days before those 2 1/2 years, when “going public” was the main subject in my business schools cafeteria. When the Neuer Markt was synonym with getting rich, fast.

There will be a new, more efficient trading system for tech stocks. I guess it’s a good sign that the market is being cleared from all those penny stocks, whose IPO was probably planned in a cafeteria just like mine. It’s not that the digital revolution is dead. It’s just that it is eating is children. Another revolution to prove that rule.

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Economics, music industry

The strange story of Vivendi Universal

It’s been a while since I’ve looked at my last case in business school. But I am pretty sure, my successors today will certainly, sooner or later, be looking at a case study concerning the making and breaking of Vivendi Universal. There might even be two solutions to that case, one written back in autumn 1999, the other written in spring 2002. One praising the former CEO Jean-Marie Messier for his alleged vision of the converging digital world to come, the other one bashing him and the company he assembled before being sacked this summer as an obvious mistake. It might have been different back in the good old time, but in these days the half-life period of a given “right” business decision is probably measurable in fashion seasons.

The problem at hand is that there is no theory of the firm which could possibly make sense of what Messier did in the late 1990s. From a theoretical (economic) perspective, the conglomerate he created does not make a lot of sense – back then a lot of decisions seemed to be “driven by … naive heuristics …, or the pure seductive power of Hollywood.” (Bane, William P.; Bradley, Stephen P.; Collis, David J (1994): Winners And Losers: Industry structures in the converging world of telecommunications, computing and entertainment, good article, written back in 1997, when people still dared to admit they did not have a clue about the future…) In the end, there has been not even been a real transformation. So far even the media businesses remain largely distinct. What happened was that Messier used one company as a bank/collateral to buy others and then get rid of the original one. This process will be completed once Vivendi Universal will have divested its remaining energy and water supply assets. Jean-René Fourtou, Vivendi’s interim CEO made this strategy pretty clear at a press conference in Paris yesterday, confirming once more that “Vivendi Universal is basically an entertainment company”.

Thus, looking at the results of Messiers conquest, one can see the following three things:

  • The collateral – 41% of a profitable French utilities company, known as “Générale des Eaux” since 1853, now conducting business as Vivendi Environnement.
  • The bet – synergies, economies of scale and scope. The future value of a vertically integrated content production and distribution empire. But so far the empire is merely a bunch of still largely unrelated communications and media assets, most importantly the previously Seagram-owned Universal Entertainment group. As most acquisitions were made by share swaps, the real result of those transactions is that direct ownership of these assets has been transformed into indirect part-ownership of Vivendi Universal. The price paid for by Vivendi was, in the end, paid for hierarchical coordination of the day-to-day business conducted by the acquired companies. Eg, Vivendi board hierarchical conrol in combination with Bronfman family control of Vivendi’s board vs complete Bronfman family control in the case of Universal. But running the conglomerate proved to be a lot more difficult than anticipated. The problem in the current CEO’s own words is that ” Vivendi Universal [has] suffered a lack of management under Mr Messier and [is] ‘chronically over-diversified’.” (LINK).
  • The price paid – currently 19bn Euro debt, piled up during Messier’s conquest. It was probably necessary to oust him. Some people are good are good at conquests bad at consolidation. But that is what the new company needs most now.

    • No wonder, there is no economic explanation for this – apart from capital market imperfections. No one would have invested the amount of money Mr Messier could use to acquire the businesses he wanted in a new company. To acquire assets on the scale on which Mr Messier operated, he simply needed hierarchical control over a significant amount of financial resources. His conquest was a very expensive operation. But back in 1999/2000, a lot of overpriced companies bought other overpriced companies with their overpriced shares. No one back then thought of the possibility to wait and buy cheap after the burst. That’s the nature of a bubble. You somehow feel it’s there. But then, you would not bet on it if no one else does, would you?

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    German Politics, Germany, Iraq, Political Theory, US Politics, USA

    A deeper rift? Some context…

    Firstly, a noteworthy article by Robert Kagan concerning the fundamental policy-style differences between Europe and the US, published in May in the Washington Post.

    Secondly, The Economist’s analysis of these differences. Thirdly, a paper called “Mutual Perceptions” by Peter Rudolf of the German Institute for Foreign and Strategic Policy (Stiftung Wissenschaft und Politik (SWP), Berlin), presented at a conference of the American Institute for Contemporary German Studies on Sept. 10, 2002.

    Some key quotes from the latter :

    “The American and the European publics, including the German public are also not so far apart in their view of the world. They do not live on different planets, the one on Mars, the other on Venus, as Robert Kagan`s now famous dictum says. Looking at the collective preferences on both sides of the Atlantic, we are no way drifting apart. In their majority, Americans and Europeans do share a positive view of international institutions, Americans are more multilateral than unilateral oriented; Europeans, even Germans, are by far less opposed to the use of military force, although they are inclined to support it for humanitarian purpose and for upholding international law. Although the use of military means for combating terrorism finds support among a majority of people across Europe, the preferred measures to combat terrorism lie – to a greater extent than among Americans – in the economic realm: in helping poor countries to develop their economies. Thus, Americans and Germans do not live on different planets but those neoconservatives do, those – to quote former President Carter – “belligerent and divisive voices” now seemingly dominant in Washington, those whose vision of America`s role in the world implies a basic strategic reorientation of American foreign policy. Using the dramatically increased perception of vulnerability to asymmetric threats and instrumentalizing the “war on terror” as the legitimizing principle, the hegemonic – or better: the imperial – wing of the conservative foreign policy elite effectively dominated the political discourse and left its imprint on a series of decisions..” (p. 2)

    “Should the neoconservatives succeed in turning the United States into a crusader state waging so-called preventive wars, German-American relations will head to further estrangement. If the current debate on Iraq is indicative of things to come, the expectation of American neoconservatives that their European allies will in the end jump on the bandwagon might be disappointed, at least in the German case. In their despise of their irrelevant amoral European allies and in their overconfidence in American hard power resources, they simply ignore the value dimension of the current transatlantic conflicts. It is a conflict about different visions of world order.” (p. 6)

    Lastly, for those who can read German, another SWP study – “Preventive war as solution? The USA and Iraq.” For those who don’t read German, the footnotes are a remarkable collection of mostly English language documents concerning the intra-US-administrative discussion as well as the international one. I’ll probably post some key references later.

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