Archive for the ‘General Business’ Category.

The Death of Honor

When my company screws up, one of the steps we take to try to make customers happy is to give them a refund or some free future services.  For example, last weekend we had a customer who reserved a boat and apparently our staff in the rush of the holiday weekend lost the reservation, so that when the customer showed up there was no boat ready for him.  He was understandably angry and we offered him a free boat rental any time in the future and he felt that we had done our best to make things right.

Unfortunately, we have one campground were word has gotten around that if you make up complaints and threaten bad reviews, you can get free camping.  It started a few years ago when I offered a customer there a couple days free camping to ameliorate a complaint that frankly I don't even remember.  Apparently, this person told all their friends that complaining was a path to free goodies.  This morning, I had a call that one customer from this friend group was not even pretending any more.  They were fine with their stay but were essentially holding us hostage by saying that she wanted free days of camping or she and her friends would cover Trip Advisor with bad reviews.  Obviously we had to bring a halt to this whole thing so we told her to bring it on.  Now we have a policy that no one in that campground gets free camping for any reason, and thus in this one location, at least for a while, I have lost one of my best tools for resolving customer satisfaction problems.

This is obviously frustrating, since the folks involved clearly have no personal honor in the matter, and they are taking advantage of my sense of honor in wanting customers to leave satisfied when they have paid me money.

I Have The Cover Story In Regulation Magazine -- How Labor Regulation Harms Unskilled Workers

I have written the cover story for the Summer 2018 issue of Regulation magazine, titled "How Labor Regulation Harms Unskilled Workers."  The link to the Summer 2018 issue is here and the article can be downloaded as a pdf here.  I meant to be a bit more prepared for this but it was originally slated for the Spring issue and it (rightly) got kicked to the later issue to add a more timely article on tariffs and trade.  The summer publication date sort of snuck up on me until I saw that Walter Olson linked it.

FAQ  (I will keep adding to this as I get questions)

How did a random non-academic dude get published in a magazine for policy wonks? This piece started well over  a year ago, back when my friend Brink Lindsey was still at Cato (he has since moved to the Niskanen Center).   I had told him once that I was spending so much of my personal time responding to regulatory changes affecting my company that I had little time to actually focus on improving my business.  I joked that we were approaching the regulatory singularity when regulations were added faster than I could comply with them.

Brink asked that I write something on small business and regulation.  After about 10 minutes staring at a blank document in Word, I realized that was way too broad a topic.  I decided that the one area I knew well, at least in terms of compliance costs, was labor regulation.  After some work, I eventually narrowed that to the final topic, the effect (from a business owner's perspective who had to manage compliance) of labor regulation on unskilled labor.

Once I finished, I was ready to just give up and publish the piece on my blog.  I sent it to Brink but told him I thought it was way too rough for publication.  He told me that he had seen many good published pieces that looked far worse in their early drafts, so I buckled down and cleaned it up.  My editor at Regulation took on the heroic task of getting the original monstrosity tightened down to something about half the length.  As with most good editing processes, the piece was much better with half the words gone.

The real turning point for me was advice I got from Walter Olson of Cato.  I "know" Walter purely from blogging but I love his work and had been a substitute blogger at Overlawyered in its early years.  At one point, I was really struggling with this article because I kept feeling the need to address the broader viability of the minimum wage and the academic literature that surrounds it.  But I am not an academic, and I have not done the research and I was not even familiar with the full body of literature on the subject.  Walter's advice boiled down to the age-old adage of "write what you know."  He encouraged me to focus narrowly on how a business has to respond to labor regulation, and how these responses might effect the employment and advancement prospects of unskilled workers.  As such, then, the paper evolved away from a comprehensive evaluation of minimum wages as a policy choice (a topic I have opinions about but I don't have the skills to publish on) into a (useful, I think) review of one aspect of minimum wage policy, a contribution to the discussion, so to speak.

Update:  Eek, I forgot since I started this so long ago.  I also owe a debt of gratitude to about 8 of our blog readers who own businesses and volunteered to be interviewed for this article so I could make sure I was being comprehensive.

There are many positive (or negative) aspects of labor regulation you have excluded!  Yes, as discussed above this paper is aimed narrowly at one aspect of labor regulations -- understanding how businesses that employ unskilled workers respond to these regulations and how those responses affect workers and their employment and advancement prospects

Everyone knows employer monopsony power means there are no employment or price effects to minimum wage increases.  Some studies claim to have proved this, others dispute this.  I would say that this statement has always seemed insane from my perspective as a small business owner.  It sure doesn't feel like I have a power imbalance in my favor with my workers.   I address this with a real example in the article but also address it in much more depth here.  The short answer is that for minimum wages to have no employment or price effects, a company has to have both monopsony power in the labor market AND monopoly power in its customer markets.  Without the latter, all gains from "underpaying" a worker due to monopsony power get competed away and benefit consumers (in the form of lower prices) rather than increase a company's profit.

The costs of these regulations are supposed to come out of your bloated profits.  Perhaps that is what happens at Google, where compliance costs are a tiny percentage of what their highly-compensated employees earn and where the company enjoys monopoly profits in its core businesses.  For those of us in highly-competitive businesses that employ unskilled workers, our profit margins are really thin (as explained in more depth here).  When profits are close to the minimum that supports further investment and participation in the business, then labor regulatory costs are going to get paid by consumers and workers.

Then maybe the best thing for workers is to create monopolies.  Funny enough, this idea was actually one of the centerpieces of Mussolini's corporatist economic model, a model that was copied approvingly by FDR in the centerpiece New Deal legislation the National Industrial Recovery Act (NRA).  The NRA sought to create cartels in major industries that would fix prices, wages, and working conditions, among other things.   The Supreme Court struck the legislation down, a good thing since it would have been a disaster for consumers and for innovation and probably for most workers too.  As a bit of trivia, this year's Superbowl winner the Philadelphia Eagles was named in honor of this law.  More here.

So do you think minimum wages are a good policy overall or not?  Hmm, mostly not.  For a variety of reasons, minimum wages are a very inefficient way to tackle poverty (and also here), and tend to have cronyist effects that help one class of worker at the expense of other classes (this latter should be unsurprising since many original supporters of the first federal minimum wages were explicitly hoping to disadvantage black workers competing with whites).

Why are you opposed to all these worker protections?  Or, more directly, why do you hate workers?  This is silly -- I am not and I don't.  However, this sort of critique, which you can find in the comments below, is typical of how public policy discussion is broken nowadays.  When I grew up, public policy discussion meant projecting the benefits of a policy and balancing them against the costs and unintended consequences.  In this context, I am merely attempting to air some of the costs of these regulations for unskilled workers that are not often discussed.  Nowadays, however, public policy is judged solely on its intentions.  If a law is intended to help workers (whether or not it will every reasonably achieve its objectives), then it is good, and anyone who opposed this law has bad intentions.  This is what you see in public policy debates all the time -- not arguments about the logic of a law itself but arguments that the opposition are bad people with bad intentions.  For example, just look in the comments of this and other posts I have linked -- because Coyote points out underappreciated costs to laws that are intended to help workers, his intentions must be to harm workers.  It is grossly illogical but characteristic of our post-modernistic age.

I will retell a story about Obamacare or the PPACA.  Most of my employees are over 60 and qualify for Medicare.  As such, no private insurer will write a policy for them -- why should they?  Well, along comes Obamacare, and it says that my business has to pay a $2000-$3000 penalty for every employee who is not offered health insurance, and Medicare does not count!  I was in a position of paying nearly a million dollars in fines (many times my annual profits) for not providing insurance coverage to my over-60 employees that was impossible to obtain -- we were facing bankruptcy and the loss of everything I own.  The only way out we had was that this penalty only applied to full-time workers, so we were forced to reduce everyone's hours to make them all part-time.  It is a real flaw in the PPACA that caused real harm to our workers.  Do I hate workers and hope they all get sick and die just because I point out this flaw with the PPACA and its unintended consequence?

I've heard that raising the minimum wage increases worker productivity so much that businesses are better off.    I know there is academic literature on this and I am frankly just not that familiar with it.  I can say that I have never, ever seen workers suddenly and sustainably work harder after getting a wage increase.  What I see instead is employers doing things like cutting back employee hours and demanding the same amount of work gets done.  This could result in more productivity if there was fat in the system beforehand but it also can result in things like lower service levels (e.g. the bathrooms get cleaned less frequently).   Without careful measurement, these changes could appear to an outsider to be productivity gains.  In addition, as discussed in the article, with higher minimum wages employers can substitute more skilled for less skilled workers, which can result in productivity gains but leave unskilled workers without a job.

Workers are human beings.  It is wrong to think of them as "costs" or "resources".  The most surprised I think I have ever been on my blog is when I got so much negative feedback for writing that the best thing that could happen to unskilled workers is for someone to figure out how to make a fortune hiring them.  I thought this was absolutely obvious, but the statement was criticized as being heartless and exploitative.  My workers are my friends and are sometimes like family.  I hire hundreds of people over 60 years of age, people that the rest of society casts aside as no longer useful.  They take pride in their ability to continue to be productive.   You don't have to tell me they are human beings.  Just this week I have helped modify an employee's job responsibilities to help them manage their newly diagnosed MS, found temporary coverage for a manager who needs to get to a relative's funeral, found a replacement for a manager that wants to take a sabbatical, and loaned two different employees money to help them through some tough financial times.  From a self-interested point of view, I need my employees to be happy and satisfied in their work or they will provide bad, grumpy service.  But at the end of the day I can only keep these people employed if customers are willing to pay more for the services they provide than the employees cost me.  If the cost of employing people goes up, then either customers have to pay more or I can hire fewer employees.

You probably support child labor too.   Child labor laws are an entirely reasonable zone of government regulation.  The reason this is true stems from the definition of a child -- a child is someone considered under the law to lack agency or the ability to make adult decisions due to their age.   We generally give parents, rightly, a lot of the responsibility for protecting their children from bad decisions, but I am fine with the government backstopping this with modest regulations.  In other words, I have no problem with the law treating children like children.  Instead, I have a problem with the law treating adults like children.

Aren't you just begging to get audited?  Hah!  That's what my wife says.  To me, the logical response of a regulator should be, "wow, this guy knows the law way better than most of the business folks we deal with, so he probably is not a compliance risk" -- but you never know.  Actually, we have been audited many times on many of these laws.  So much so that practically the first series of posts I did on this blog, way back in the blog pleistocene era of 2004, was 3 part series on surviving a Department of Labor audit.  Looking back on the series, everything in it (which included experience from a number of different audits) still seems valid and timely.

Fraudulent Caller ID

You guys know me, I am not calling for some new law or government program.  But I would like to see the telephone companies exercise a little bit of basic professionalism.  The last several spam marketing calls (50/50 it is either for toner or credit card processing) have had legitimate-looking caller IDs that have caused me to actually pick up the phone when I would have normally let it ring through.  This morning's call from a credit card processor showed up as "Pediatric Urology" in Phoenix.  Really?  I guess they are pissing on my time, but other than that I think this is BS.  I don't think it is too much to ask that the caller ID match the business name or individual who is paying for the phone line.  I have this problem even more on calls to my cell phone where spam businesses have somehow obtained caller IDs that are just for individual's names.

Postscript:  It is amazing to me, given the sheer volume of calls I get for merchant (credit card processing) services that there actually seems to be an expectation someone might actually say, "wow, I never ever thought of accepting credit cards, tell me how it works?"  I find this super hard to believe but it must happen or else people wouldn't be paying a lot of real money to make these calls.  So PLEASE, all you business people out there, do not buy things from cold callers.  I promise you can just google whatever they are selling and likely find a better deal online.

Also, if you are starting your own business, do not -- whatever you do -- put any personal phone in your state business registration files.  These are the files all these spammers mine for prospects.  I finally had to change my home phone number because I made this mistake and we could not stop getting 5 phone calls a day from toner and credit card processing sales people.

Book Review: Bad Blood

Over the weekend I read John Carreyrou's book Bad Blood, which is a narrative of the fraud at blood analyzer startup Theranos that Mr. Carrreyrou broke in the WSJ.  To save me summarizing the story, here is the Amazon description:

 In Bad Blood, the Wall Street Journal’s John Carreyrou takes us through the step-by-step history of Theranos, a Silicon Valley startup that became almost mythical, in no small part due to its young, charismatic founder Elizabeth Holmes. In fact, Theranos was mythical for a different reason, because the technological promise it was founded upon—that vital health information could be gleaned from a small drop of blood using handheld devices—was a lie. Carreyrou tracks the experiences of former employees to craft the fascinating story of a company run under a strict code of secrecy, a place where leadership was constantly throwing up smoke screens and making promises that it could not keep. Meanwhile, investors kept pouring in money, turning Elizabeth Holmes into a temporary billionaire. As companies like Walgreens and Safeway strike deals with Theranos, and as even the army tries to get in on the Theranos promise (there’s a brief cameo by James “Mad Dog” Mattis), the plot thickens and the proverbial noose grows tighter. Although I knew how the story ended, I found myself reading this book compulsively

In short, I really enjoyed the book and found it hard to put down.  Carreyrou has made it an interesting narrative, that gets bogged down only slightly by the fact that there are just so many people's names that pass through the narrative, an unavoidable problem given the huge employee turnover at Theranos.  There is a meta-narrative that repeats over and over:  new employee shows up full of passion, new employee starts seeing bad stuff, new employee reports bad stuff to visionary founder, visionary founder fires employee on the spot, employee gets harassed for months and years by Theranos lawyers.

I will warn you that a book like this was always going to be catnip for me.  I love business craziness and disaster stories (e.g. Barbarians at the Gate and the Devil's Candy).  Possibly this is just schadenfreude, or possibly it was from my personal brush with another one (I worked for Jeff Skilling briefly at McKinsey & Co. on the Enron study).  But I think many will enjoy it, if for no other reasons that while Skilling at Enron or Johnson at RJR were not well known to the average person, Elizabeth Holmes was a household name, almost a pop culture figure.  She was  on the cover of every magazine and on every talk show.  She was both admired and envied, both as a young female billionaire and as someone who had a real vision to help humanity.  How did she go so far off the rails?

I followed this story originally in the pages of Carreyrou's WSJ articles, and as it unfolded I was asking, like most everyone, could this be true?  As he continued to report, it became steadily clearer that there was real fraud involved.  So I wanted to read the book and see where the fraud started.  I assumed that the central mystery of the book would be when that fateful step over the line occured.

But it turned out that Holmes was going over the line almost from the very beginning.  The real mystery became:  when and how is someone finally going to blow the whistle on this?  And also, given that I knew the whole thing doesn't start to unravel until 2016 or so, how is it going to take that long for this to come out?  Part of the answer is the insane security and non-disclosures put in place in addition to borderline-unethical legal pressure brought on potential whistleblowers by lawyers like David Boies.  But there are other causes as well, including:

  • People wanted her vision to be true.  My wife is a borderline diabetic who has to give a lot of blood -- she was very passionate about this technology.
  • Companies like Walgreens operated from a fear of missing out.  They had a lot of clues there were problems, but if they didn't pursue it, what if it really did work and their competitors did the deal instead?
  • The oddest cause of all (and one Carreyrou does not really dwell on) was that rich older men fell for Holmes hard.  Hardened, seasoned business people time and again fell under her sway and followed her almost like a cult leader and helped protect her from accountability.  The list is like a who's who:  Larry Ellison, Steven Burd (CEO of Safeway), Rupert Murdoch, David Bois, James Mattis, George Schultz, Henry Kissinger -- the list goes on and on.  She had the highest power board I have ever seen at any company ever and she completely dominated them.  On the other hand, I don't think there is a single young female in the story who fell for her BS for more than a few months.

One other note that I think is worth mentioning:  Rupert Murdoch gets a lot of cr*p for being the poster child of destructive corporatization of media.  In this story, he was the single largest investor in Theranos with $125 million of his money in the company.  He was one of the older men who fell totally for Holmes.  But when Holmes came to him several times asking him to shut down an out of control reporter at Murdoch-owned WSJ, Murdoch said no, despite the fact that this reporting would eventually make Murdoch's $125 million investment worthless.

Postmortem on SolarCity

Two years ago, I wrote about the acquisition of SolarCity by Tesla.  I thought this represented near-criminal self-dealing at the time and there has been little since to convince me otherwise.  As I wrote then:

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?

I went on to discuss several possible reasons for the deal but settled on this one as the best explanation:

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

Essentially, I saw the SolarCity deal as a bailout of Musk's and his friends' and family's investments in SolarCity by Musk-controlled Tesla.  Nothing that has happened since has convinced me this is wrong.  The most prominent evidence has been the dog that never barks -- SolarCity, or Tesla Energy as it is called, is almost never mentioned in conference calls and investor communications by Tesla any more -- certainly the rooftop business is not.  The only thing that ever seems to get a mention are a few big standby battery installations in Australia.   Turns out there was a reason (via Seeking Alpha):

This was a dying business when Tesla bought it an insiders all knew it.

Disclosure:  I tend to short Tesla when it reaches the 350/360 level and cover when it drops into the 200's.

Update:  Here is a great timeline of the whole sorry history of the SolarCity acquisition by Tesla.  This paints an even worse picture than I was aware of.

The Interesting Parallel Between Pop Music and Sex Work

Based on a Tyler Cowen pointer (who else), I thought this Twitter thread on how the Internet was changing sex work was really interesting.  This in particular caught my eye:

And now let's get to a third point: the internet has changed the economics of porn by gutting the industry through piracy, which means 3) there's increasing amounts of overlap between porn performers and escorts.

She makes this observation as part of a larger point that the Internet is breaking down some of the opposition to sex work (in addition to making it safer).  This would be a welcome change.  Sex work should be legal, and it has always been a weird thing to me that one of the stronger opponents of legalization has been parts of the keep-your-laws-off-my-body feminist community.

Anyway, what I found interesting was how parallel this is to the modern music business.  Piracy and streaming enabled by the Internet have killed the profits of the vast majority of the music recording business, meaning that top artists make a lot of their money in other ways, particularly from live performances.  In this business model, the published music is merely an advertisement and brand-building to encourage people to pay for the live performance.  If you consider pornography to be parallel to recorded music, and the escort business as the live performance, then the business models look surprisingly similar.

Businesses That Probably Did Not Expect to be Dis-aggregated By The Internet

This business in San Diego was probably just minding its own business, smug in the confidence that Internet companies like Amazon were not going to threaten a local rental business when, bam:

Bikes and scooters suddenly show up literally just sitting there on every corner, ready to be rented via smartphone app for prices starting at a dollar an hour.  Interestingly, even in sunny healthy California, I saw more than 100 people riding rental scooters and about 1 riding a rental bike.  This was not just tourists -- though it was certainly popular with visitors -- but I saw many young locals riding the scooters downtown to work.  In the morning they piled up in front of office buildings (from which they would presumably disperse at the end of day to apartment buildings).

Below is another business that could be in trouble, charging $7 (rather than $1 on the street bikes) an hour for a rental and requiring the bike be returned to a defined location, rather than dropped anywhere (I see these in many cities -- I wonder how much investment the government has in these or if it is a concession where all the investment was private).

Of course, in the long run this may work out better from an operational standpoint because it seems to take a lot less labor.  Re-positioning scooters and picking them up and dropping them off for recharge struck me as labor intensive and costly (particularly in California).  I am not sure how it is sustainable at the rates that are charged.  Fortunately, that is not my problem and I tried both the bikes and the scooters and enjoyed both.  Despite my doubts about their profitability, I hope they are making a fortune because it seems to be a fun a popular service and I would like to see it last.

IHOP And Modern Marketing

The International House of Pancakes announced the other day that they are changing their name to International House of Burgers, or IHOb.   I am 99% certain that this is just a marketing gimmick, a way to get social media buzz, after which they will "as a result of public pressure" go back to the old name.  A sort of intentional version of what Coke did years ago by accident with New Coke.

So far, I would judge it to be successful.  They were talked about on several national radio shows that I listen to (on sports talk radio, no less) and got a day's worth of media coverage (and presumably another day's worth when they change back).  This is a LOT of free advertising for a brand I have heard absolutely nothing about for years (except from my 21-year-old daughter who still makes me take her there from time to time for funny face pancakes.)

Brand strategy has really evolved a lot from when I was in B-school.  In the 1990's my wife was a brand manager at Frito-Lay and brand management at the time seemed incredibly conservative.  There were very defined, tightly-spaced rails that circumscribed what you could do with a brand.  But that is so boring it gets nowhere on social media.  "Fritos! They are... uh... everything they always have been."  This IHOP gimmick (and Budweiser's temporarily changing its name to America) demonstrate a lot less risk-aversion with core brands in a social media era where one has to be outrageous to get attention.

Postscript:  I was in Santa Monica the other day and saw something where they had a really lame, forgettable tag line for the city.  I wanted to help them with some catchier phrases.  Like, "Santa Monica:  World's Nicest Homeless Shelter" or "Santa Monica:  Watch Out For That Scooter!" or "Santa Monica:  You Want HOW MUCH for Rent??"

Consider a Personal Umbrella Insurance Policy, And The Art of Handling Bad Reviews

My agent has always signed me up for a persona umbrella policy, pretty much without even discussing it much.  The costs have always been nominal compared to my other insurance and I got it to handle liability issues that might exceed the limits of other policies, like a really bad car crash or a slip and fall suit around my house.

It turned out that I got a lot of value out of the policy, but not in the way I had planned.  I was once sued, pretty hard and seriously, by a company over a negative review I wrote.  I won't talk about the details but if you are really interested Mr. Google will help you find it pretty quickly.   But here is an example of a similar case in the news:

A Manhattan woman has found herself in a world of legal troubles after posting a bad review of a local doctor online.

Michelle Levine tells CBS2 she’s already spent close to $20,000 fighting the million-dollar suit which accuses her of defamation, libel, and causing emotional distress.

The plaintiff is Dr. Joon Song, a gynecologist Levine says she visited once in August for an annual exam.

“After I got a bill for an ultrasound and a new patient visit, whatever that means, and it was not billed as an annual I wrote a review about it,” she told CBS2’s Lisa Rozner.

I was determined to fight my case in the name of all those (like Ms. Levine) who could not afford to fight these overt attempts to suppress and intimidate perfectly legal speech.  I was ready to take a substantially loss in legal fees to defend myself but it turned out I was covered for all my defense costs by my personal umbrella.  Note, I am not an insurance expert nor a lawyer, so before you buy such a product I would be sure you know what it does and does not cover.

Postscript, to all you businesses who keep suing over bad reviews:  GET OVER IT.  I get dozens of reviews every day on multiple platforms.  Most of our locations sit at an average rating just over 4.5 stars out of five so perhaps one in 20 are negative and maybe one in 100 are grossly, absurdly unfair.  Sure, all of us service business owners gripe about unfair reviews when we get together, but we all deal with it.  Every review platform has ways to respond to bad reviews, and most have a way to challenge reviews that violate their terms of service.   Often times if you actually do have a good business, the best defense is to encourage all your customers to review so all the good reviews drown the bad ones.  This is not 1996 when customers have never seen a review site.  Customers know EVERYONE gets bad reviews.   The Mandarin Oriental in Bangkok had some of the best service I have ever experienced, but it gets 1-star reviews.  The movie Casablanca has one-star reviews on Amazon.

Sometimes the bad reviews are perfectly understandable.  For example, at one beach we run there used to be a high place where kids would jump off into the water.  Despite having a lifeguard there, we had too many close calls and too many kids did not heed the lifeguard, so the jumping area was closed.  We got bad reviews for months about how awful it was the kids could not jump.  Each time we took the opportunity to explain that yes the jumping wall was closed and if that is the experience customers are looking for, they need to explore other options.  Eventually we got customer expectations to match the services we provided and things improved.  As much as businesses hate to have bad reviews, these were useful to us because they communicated changed services to the public and helped make sure that customer who come are coming for the right reasons.   Having people expecting the Ritz show up at Holiday Inn Express does not help the Holiday Inn Express at all.

Sometimes one does get totally unfair reviews and there is an art to writing responses to bad reviews.  You want to explain why many customers might consider the review unfair without seeming defensive or seeming to throw the customer under the bus, which will lose you a lot of sympathy in the community.  I am still learning.  Here is a tough one we had:

I will need go back to Juniper Spring it not the forest or the camping grounds but the workers are really not friendly at all I’m black and I hope people who’s from my race trust me it not a good place to take your family you can feel the eyes and I know please know racism is strong in Ocala and I’m sorry to bring a nasty review but I owe it to myself if I was to read this I would know what to expect if I choose to go. But the camp grounds are very clean tho and the bathroom have hot water but the works are very nasty ways I see so to all people other then whites Ijs check it out and be sorry like I did. The water looks great but it cold ass ever but when you get used to it you would be ok I guess.

Obviously that is horrible, it makes us out to be a bunch of racists.  This customer did get special attention, but more because we had to work hard -- and often -- to get compliance with a number of rules we are required by the government to enforce.  After a lot of thought, this is the response I finally went with:

We are really sorry you did not have a good visit. We have a racially diverse group of employees in our company and all of them are trained and motivated to provide quality service to everyone. However, given that this is a campground in the Forest Service and adjoining a Federal Wilderness Area, we are tasked by the Forest Service to enforce a number of rules which are different than those in private campgrounds and can sometimes be surprising to new visitors. In this case, I am really sorry we obviously did a poor job of trying to courteously explain the rules.

For other readers considering a visit, I will take the opportunity to highlight some of these rules:

  • Firearms are not allowed in the Ocala National Forest (except in hunting season)
  • Dogs are not allowed in the day use area or at the canoe run
  • Alcoholic beverages are not allowed in the day use area or on the canoe run
  • Food and food waste must be properly stored in campsites when not actively being consumed (in order to avoid attracting bears)

Thoughts on Anna, the Millennial Sociopath

This article about Anna, the millennial sociopath, has been linked all around but it is a good yarn and I recommend it as an interesting read if you have not seen it.  I have a couple of thoughts.

I told me wife that I was unlikely to be fooled by Anna, because I have known a lot of rich and successful people and almost to a one they don't engage in this sort of name-dropping behavior.  Where I grew up we called that "all hat and no cattle."  I have met people with some of the same sorts of shticks as Anna and they have always been full of sh*t.

My wife, who used to live in Manhattan, said that from her experience things were different in New York and even successful people felt compelled to make a public spectacle of their success.   As much as I would like to believe there is a difference so we flyover country folks can feel a warm sense of superiority, this may be more a function of her having lived there in the 1980's.  I know successful New Yorkers today and they don't act this way, the one in the White House notwithstanding.

I actually think this may be more of a function of people without business experience building up their understanding of business from watching fictional shows on TV and in movies.  I call this the Dynasty effect, where everyone thinks big business works just like on Dallas and Dynasty (sorry, dating myself here).  Actually, business life is EXACTLY like fictional accounts on the screen, but you have to watch Office Space and Silicon Valley rather than Dynasty.

I want to add that there is something oddly compelling about this story for folks like me who are introverts.  When one starts a role playing game, one has a character sheet with different qualities.  Typically increasing one characteristic means decreasing another.  I think I found Anna compelling because her character sheet was filled in so differently from mine.   And I don't mean that in a self-serving way like she is dishonest and I am honest.  Sure, at the end of the day Anna is an unlovable parasite, but its hard as an introvert not to secretly admire so much daring, a willingness to walk up to pretty much anyone anywhere and ask them for almost any favorNext time you are playing your fighter in that RPG, wonder a bit -- as he wades through an ocean of blood with his sword and constantly takes near-fatal damage that has to be healed while watching you mage stand in the rear and just nuke creatures from a distance with spells -- whether that fighter might wish that you had specc'd him with just a bit of magic.

Volcanoes and Home Ownership

I have seen several web sites where folks looked at the neighborhoods getting devastated by lava in Hawaii and asked "why did the government let them build their homes there?"  I have three responses:

First, nature is hard to predict.  And even if it were, it tends to operate on really long cycles that are longer than most of our attention spans.  This style and location of eruption  has not happened in recent memory so folks treat it as impossible.  For a good example of this phenomenon see:  stock market.

Second, I laugh when I see the "why does the government allow homes built in dangerous areas" question.   In fact, in many cases, the government subsidizes construction of homes in dangerous areas.  Federal flood insurance is notorious for continuing to rebuild people's homes practically for free on dangerous coasts and in known flood plains.

Third, there are private entities who do take a hand in preventing construction in dangerous areas:  mortgage lenders and insurers.  Lenders do not want a lien on an asset that is underneath 20 feet of new rock, and insurers do not want to take on expensive risks in known danger areas (particularly if there are no federal guarantees as in #2).

I actually own some land on the Big Island, a long way away on the Kohala Coast.  And in the process of getting a mortgage and insurance, we had to go through a lava risk review.  There are apparently maps of risk zones similar to flood plain maps.   Obviously, these neighborhoods that are being consumed slowly (see:  Deadpool Zamboni scene) likely cleared this hurdle.  I am not sure how.  Perhaps the developer used pull to get the maps changed.  Perhaps the people who made the maps just predicted risk incorrectly (see #1).  Perhaps lenders ignored the maps and took on the mortgages anyway despite the risks (see: 2008).

Uber Drivers Just Killed All the Parts of the Job They Supposedly Liked the Most

At the behest of a group of Uber drivers, the California Supreme Court has ruled that Uber drivers are Uber employees, not independent contractors, under California law:

In a ruling with potentially sweeping consequences for the so-called gig economy, the California Supreme Court on Monday made it much more difficult for companies to classify workers as independent contractors rather than employees.

The decision could eventually require companies like Uber, many of which are based in California, to follow minimum-wage and overtime laws and to pay workers’ compensation and unemployment insurance and payroll taxes, potentially upending their business models.

I believe that this will pretty much kill Uber (though it will take some time to bleed out) for reasons discussed here.  Rather than discuss consequences for the company (everyone is finally doing this, following the general media rule I have stated before that it is OK to discuss downsides of new government regulations only after the regulations have been passed and become essentially un-reversible).

People don't always seem to have a good grasp of cause and effect.  I don't know if this is a general problem programmed into how humans think or one attributable to the sorry state of education.  My favorite example is all the people who flee California due to the high taxes, housing prices, and stifling regulation and then  -- in their new state -- immediately start voting for all the same things that caused them to flee California.

One of the aspects of being an Uber driver that supposedly attracts many people to it is the flexibility.  I summarized the advantages in an earlier post:

Here are some cool things about working for Uber:

You can work any time you want, for as long as you want.  You can work from 2-4 in the morning if you like, and if there are no customers, that is your risk

You can work in any location you choose.  You can park at your house and sit in your living room and take any jobs that come up, and then ignore new jobs until you get back home (I actually have a neighbor who is retired who does just this, he has driven me about 6 times now).

The company has no productivity metrics or expectations.  As long as your driver rating is good and you follow the rules, you are fine.

This all ends with the California decision.  You drivers are all thinking you won this big victory because you are going to have the same job you loved but you will just get paid more.  This is not going to happen.  As I implied above, in the long-term this job will not exist at all, because Uber will be dead.  But in the near-term, if Uber tries to make this work **, Uber is going to excercise a LOT more control of your work.

That is because if Uber is on the hook for a minimum cost per hour for your work, then they are going to damn well make sure you are productive.  Do you enjoy sitting around near your suburban and semi-rural home at 3AM waiting to get some business?  In the future, forget it, Uber is not going to allow this sort of thing now that Uber, rather than its drivers, is carrying the risk of your being unproductive.  They are going to take a lot more control of where and when you can drive.  And if you do not get with the program, you are going to be kicked out.  It won't be three months before Uber starts tracking driver productivity and kicking out the least productive drivers.

Congratulations Uber drivers, in the quest to try to use the power of government to extract more money for yourselves from the company, you just killed your jobs as you know it.  You may have had freedom before but now you are working in Office Space like the rest of us.

This whole case just goes to support my frequent contention that the only labor model the US government will fully accept is an hourly worker working 9-5 punching a time clock.  Every new labor model that comes along eventually runs head-on into the government that tries to pound that square peg into the round hole of a time-punching factory worker.  The Obama administration even did its best to force a large number of salaried workers into punching a time clock.


** If I were the leader of Uber, I would announce today that we are exiting California.  This is an existential issue and the only way to fight it is right now on your home turf.  Any attempt to try to muddle through this is going to lead to Uber's death, and would thus be a disservice to its shareholders.   Whether this happens will be interesting.  Uber is owned by a bunch of California VC's who generally support exactly this sort of government authoritarian interventionism.  It will be interesting to see if a bunch of California progressives let $50 billion in equity go down the drain just to avoid offending the sensibilities of their fellow California progressives.

The Dangers of Trying To Reinvent An Industry, And A Few Notes on Tesla

I am often critical of Elon Musk and Tesla, and will be again later in this post, but I wanted to start by sympathizing with Tesla's plight.  As you may know, Tesla set out not only to produce a leading electric car (which it did) but also to reinvent automobile manufacturing (which it is struggling to do).  One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.  Musk even recently admitted it may have gone overboard on factory automation.

I don't agree with all the conclusions, but I thought this was an interesting article on Tesla vs. Toyota production practices and the industry lessons Tesla may have been too quick to ignore.  One quote I liked, “Machines are good for repetitive things… but they can’t improve their own efficiency or the quality of their work.”  I sympathize with Musk on this one.  You CAN"T upend an industry by copying everything it does -- you have to go off in a different direction, at least on some things.  It may be that Musk eschewed the wrong bits of industry practice, but this is an understandable mistake.

What is not understandable is Musk's lack of transparency, his self-dealing, his wild and unfulfilled promises, and his unprofessional behavior.  Some notes:

  • A few months ago, at the Tesla truck launch, I wrote:

But Tesla needs to stay hot. California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket. Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year. So out came Musk yesterday to yell SQUIRREL!

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3. The factory appears to be in disarray and out of production and inventory space. They can't produce enough batteries yet for the cars they are already making. So what does Musk do? Announce two entirely new vehicle platforms for tiny niche markets.

I saw the truck launch as a cynical ploy to distract from Tesla's operating problems and perhaps to get a bit of financing in the form of customer deposits (a growing percentage of Tesla's available cash is from customer advance deposits).  There was no way it could do anyting with this truck, given its operating problems and lack of capital.  It seems that I was on target, because not even 6 months later Tesla has tired of pretending the truck is going anywhere.  After Telsa did not even mention the semi in their earnings conference call, Musk said in answer to a question:

I actually don't know how many reservations we have for the Semi. About 2,000? Okay. I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort, so sales – orders for Semi are like opportunistic, really companies approaching us. Yeah, it's not something we really think about much.

  • Elon Musk proved himself on the same conference call to be a spoiled brat who has spent too much of his time having people kiss his feet and compare him to Tony Stark.

One week ago, Elon Musk entered the history books for his unprecedented, petulant handling of "boring, boneheaded" questions from two sellside analysts, who merely wanted more details about the company chronic cash/rollout issues.  And no phrase captures Musk's descent better than "These questions are so dry. They're killing me."  That's what Musk told RBC analyst Joseph Spak in response to a question about Model 3 reservations.

My older readers will know that my dad was President of Exxon from the early 70's (a few weeks before the Arab oil embargo) until the late 1980's.  In that job he never had to do analyst calls, but he did about 15 annual shareholders meetings.  I don't know how they run today but in those days any shareholder with a question or a rant could line up and fire away.  Every person with a legitimate beef, every vocal person who hated oil companies and were pissed off about oil prices, every conspiracy theorist convinced Exxon was secretly formulating chemtrail material or whatever, and every outright crazy would buy one share of stock and show up to have their moment on stage.  My dad probably fantasized about how awesome it would be to just get asked dry financial questions about cash flow.  And through all the nuts and crazy questions and outright accusations that he was the most evil person on the planet, dad kept his cool and never once lost it.

If you asked him about it, he likely would not have talked about it.  Dad -- who grew up dirt poor with polio in rural Depression Iowa -- was from that  generation that really did not talk about their personal adversity much and certainly did not compete for victim status.  He probably would just have joked that the loonies at the shareholder meeting were nothing compared to Congress.  My favorite story was that Scoop Jackson once called him to testify in the Senate twice in 6 months or so.  The first time, just before the embargo, he was trying to save the Alaska pipeline project and Jackson accused Exxon of being greedy and trying to produce more oil than was needed.  The second time was just after the embargo, and Jackson accused Exxon of being greedy and hiding oil offshore in tankers to make sure the world had less oil than it needed.

Through all of this, the only time I ever saw him really mad was when Johnny Carson made a joke about killing the president of Exxon (he asked his audience to raise their hands if they thought they would actually get convicted for killing the president of Exxon) and over the next several days our family received hundreds of death threats.  These had to be treated fairly credibly at the time because terrorists were frequently attacking, kidnapping, and bombing oil company executives and their families.  We had friends whose housekeeper's hand was blown off by a letter bomb, and I was not able to travel outside of the country for many years for fear of kidnapping.  (For Firefly fans, if you remember the scene of Mal always cutting his apples because he feared bombs in them from a old war experience, you might recognize how, to this day, I still open packages slowly and carefully.

This is a long way of saying that Elon Musk needs to grow the hell up.

Why Branding Has Value

I have written about this before, but critics of all things capitalism are usually particularly critical of branding, arguing that building brands has no value except to somehow beguile customers into overpaying for things or buying things they do not need.  Now, I can be sympathetic to this when I see folks who have paid a fortune for certain fashion items (*cough* Louis Vuitton bags *cough*), but in generally branding actually has real consumer value.  One important value of branding is predictability.  McDonald's was traditionally a classic example of this -- walk into any McDonald's in the world and you will be pretty sure what will be on the menu and what it will taste like.

I wrote about this before when travelling in Europe.  I know that I like some orange juice brands and don't like others.  I know for sure I like Tropicana and so I buy that because I am confident I will get something I will like.  In Europe, I had no idea what to buy -- I might pay for something I would enjoy, but I might also find myself having paid for something I really did not like.

I was reading a travel blog and thought that this quote really represented the epitome of why brands matter

I’ve been to Hyatts all around the world within every brand of the chain’s portfolio, and I don’t recall ever staying at a property which was miscategorized. There’s no mistaking a Park Hyatt for a Hyatt Regency, or a Grand Hyatt for an Unbound Collection. When I pick a property within the Hyatt portfolio, my expectations are met and the experience is standardized around the world. Hyatt Houses and Hyatt Places are almost identical properties regardless of where in the world they pop up.

I cannot say the same for the expansive Marriott portfolio. Just last month I stayed at the JW Marriott Copacabana in Rio, and nothing about that property represented the other JW’s I’ve visited. Certainly not all generic Marriott hotels are created equally, and I’ve found a very large variation in property conditions, common spaces, room sizes and other factors at Marriotts.

For example, let’s look at Courtyard properties. Within the last year I’ve stayed at the Courtyard in Durham, North Carolina, which resembled an updated Super 8. Then, not two months later, I visited the Courtyard in LaGrange, Georgia, which was more akin to a full Marriott hotel branded property. Compare those two with the Courtyard Seoul Times Square, which has an executive lounge with a rooftop patio, and I don’t know what to expect when booking a Marriott property, even within a single brand.

Our Double Standard on White Collar Fraud

Nobody really liked Jeff Skilling of Enron and he sits in jail for 20 years.  We think Elizabeth Holmes is attractive and cool so that despite the fact that she committed serial fraud in lying about her company's technology and financials (far more baldly and egregiously than Skilling) and actually put people at risk through faulty medical testing, she got only a slap on the wrist.

And then there is Elon Musk.

I am not sure how I got in the role of fact-checking Elon Musk, but given the company's stated results to date and announced operating plans and strategies, there is simply no way for the Tesla to be profitable and cash flow positive in Q3, barring some deus ex machina like a massive energy credit or California subsidy windfall.  It's possible I could go in there and shut down R&D and model 3 production and milk the Model S and X for cash and might make this be true, but that is certainly not their announced business plan.  On their current path Tesla has to continue to burn cash through the rest of this year.  I am not even sure that if you stated their gross margin the same way that other automakers state their numbers that even it would be positive right now -- there is an argument to be made they are still losing money at the margin on every car they produce**.  I would add that in this point of their ramp, if you want to see Tesla the huge success that is baked into its current stock valuation, you don't want Tesla to be cash flow positive in the third quarter, you want it continuing to invest.   Amazon rules the world because it deferred profitability for years in favor of growth.

Tesla pretty much never ever lives up to Musk's promises, at least for the dates he promises them.  That is probably OK with things like deliveries of new products -- people understand he is pushing technology and new products can be delayed and they forgive entrepreneurs for being -- shall we say -- overly enthusiastic about such things.   But on financial stuff like this his statements are bordering on fraud.  But he'll never get called on it, because we like him in a way we didn't like Skilling.

I will add that if Musk wants to get snippy about the media's guesses about his company's prospects, and thinks we are all getting it wrong, he could sure be a lot more transparent about Tesla's financials and plans.  Go watch an Exxon-Mobil analyst presentation and compare it to Musk's quarterly arm-waving.  Also, one final memo to Musk:  responding to your critics on Twitter emulating Trump's style is not recommended.  Though it might be interesting to compare the irrational populist wave behind Trump with the populist wave behind Tesla.  Though the two Venn diagrams of supporters probably do not overlap much, the whole relationship feels similar to me.

Disclosure:  I have been short TSLA in the past but right now have no position.  To be honest, I am going to let Musk urge his fanboys to pump the stock a bit further before I short again.  The fanboy effect makes TSLA a dangerous short, as TSLA stock holders will defy reality for far longer than will holders of say GE or XOM.


** gross margin at TSLA is interesting because TSLA has no dealer network, something I like them for.  GM discounts its cars to their dealers (10% or so?) but in turn they offload a bunch of selling and support costs to the dealers.  In their gross margin, TSLA banks in their gross margin the extra 10% from not having to discount their cars but in turn does not charge gross margin for a lot of the extra sales and support costs they have to take on -- instead they drop these costs into SG&A overhead. The situation with gross margin is even more complicated because Tesla not only has to build out and operate its own warranty service, sales, and delivery network to replace traditional dealers, it is also building out its own fueling service to replace gas stations.  Here is one guy who thinks Tesla gross margin is really negative.  I have zero idea who he is but for the last year his predictions about Tesla have been a lot more reliable than Musk's statements.

Business Lesson From the Vietnam War

I just finished watching the PBS series on the Vietnam War and found the experience powerful and educational.  My only disappointment was that every soldier they interviewed and followed through the war ended up in the anti-war movement (or in the case of one POW, his wife did).  I agree with their perspective, and see the whole war as a giant waste, but unlike most people on campus nowadays, I like hearing from people with points of view that are different than mine.  I get nervous just having my expectations reinforced.  Surely there are veterans who thought the war was winnable and the US largely honorable -- I know some of these folks -- but we really do not get to hear their voices very often.   But with this proviso, the series was terrific.

One of the most important -- and hardest -- lessons of business is to think at the margin.  Perhaps the toughest corollary to this is: Sunk costs are sunk.  I don't care how much we have already spent on that factory -- that money is gone -- if it is going to take another $100 million to finish, are the benefits of the factory worth that $100 million? If not let's stop work on it no matter how much has already been spent.   I have worked to teach this to my wife.  I don't care how much the tickets for the show on Sunday night cost -- that money is gone -- isthe enjoyment we expect to get from the show worth the remaining costs we face (getting in the car, fighting for parking, etc)?

Transit projects thrive on the sunk cost fallacy.  Agencies explicitly try to get some money, spend it, and then claim the rest of the money has to be spent because we have already "invested so much".  Here is an example:

But what is really amazing is that Chicago embarked on building a $320 million downtown station for the project without even a plan for the rest of the line -- no design, no route, no land acquisition, no appropriation, no cost estimate, nothing.  There are currently tracks running near the station to the airport, but there are no passing sidings on these tracks, making it impossible for express and local trains to share the same track.  The express service idea would either require an extensive rebuilding of the entire current line using signaling and switching technologies that may not (according to Daley himself) even exist, or it requires an entirely new line cut through some of the densest urban environments in the country.  Even this critical decision on basic approach was not made before they started construction on the station, and in fact still has not been made.

Though the article does not mention it, this strikes me as a typical commuter rail strategy -- make some kind of toe-in-the-water investment on a less-than-critical-mass part of the system, and then use that as leverage with voters to approve funding so that the original investment will not be orphaned.

It amazes me that no politician in California has shut down the insane California high speed rail project, but I will bet you any amount of money that when they do the rail agency will be screaming that it can't be shut down because they have already spent billions of dollars and shutting them down would waste all that money.  Sorry, but that money has already been wasted, the point is to avoid all the additional money that will be wasted going forward.

The government decision-making around the Vietnam War seemed like nothing so much as a series of sunk cost fallacies.  We can't give up now, not after so many brave men have already died!  That last sentence could be the title of about half the episodes.   But sunk costs shouldn't matter in a go-forward decision -- but they do matter to ego and prestige.  Politicians talk about things like "the nation's honor" but what really matters at its heart is their own ego and perception.  Abandoning sunk costs, for the real humans making decisions (whether Presidents or CEOs) is about confessing past errors of judgment.  Its a hard thing to do, so hard a lot of extra people had to die in Vietnam before it could happen.  I can't find a transcript but Kissinger had some amazing quotes in Episode 9 that pretty baldly outline this problem.



Why Tesla Agreed to Pay Elon Musk So Much

Tesla agreed to give Elon Musk what is potentially the richest executive compensation package ever.  I will give my (*gasp*) cynical reason why I think they did this.  I can show you in one chart (Tesla Model 3 production, from Bloomberg):

I would argue that Elon Musk is the only one in the world who can run a company with so many spectacular failures to meet commitments and still have investors and customers coming back and begging for more.  A relatively large percentage of Teslas get delivered with manufacturing defects and their customers sing their praises (even while circulating delivery defect checklists).  Tesla keeps publishing Model 3 production hockey sticks (apparently with a straight face) and consistently miss (each quarter pushing back the forecast one quarter) and investors line up to buy more stock.  Tesla runs one of the least transparent major public companies in this country (so much so that people like Bloomberg have to spend enormous efforts just to estimate what is going on there) and no one is fazed.  Competitors like Volvo and Volkswagon and Toyota and even GM have started to push their EV technology past Tesla and actually sell more EV's than does Tesla (with the gap widening) and investors still treat Tesla like it has a 10-year unassailable lead on competition.

All because Elon Musk can stand up at a venue like SXSW, wave his hands, spin big visions, and the stock goes up $3 billion the next day.   Exxon-Mobil has a long history of meeting promises, reveals its capital spending plans in great detail, but misses on earnings by a few cents and loses $40 billion in market cap.  GE lost over half its market value when investors got uncomfortable with their lack of transparency and their failures to meet commitments.   Not so at Tesla, in large part because Elon Musk is PT Barnum reincarnated, or given the SpaceX business, he is Delos D. Harriman made real.

Disclosure:  I don't currently have any position in TSLA but over the last 2 years I have sold short when it reaches around $350 (e.g. after Elon Musk speaks) and buy to cover around $305 (e.g. when actual operational or financial data is released).  Sort of the mirror image of BTFD.

The Best New Technologies Don't Just Unseat Incumbents, They Grow the Market

I love Mark Perry's blog but I think he missed an opportunity to point out something awesome in this chart:

We spend a lot of time discussing how Uber and its app-based peers are upending the traditional taxi monopoly.  And no one enjoys seeing a government enforced crony monopoly overturned more than I.  But let's not miss the other story here, which is the tremendous increase in customer well-being and mobility.  Forget the mix for a second and add the two lines.  Monthly passenger rides, which were stuck in the 12-13 million a month range for years, have almost overnight doubled to about 25 million rides with the advent of ride-hailing and the entry of many ordinary folks without taxi medallions into the drive-for-hire business.  This is amazing!

Markets in Everything: Pizza Ordering Sneakers

Since I have not seen Marginal Revolution do this feature for a while, I will try to fill in.  "pie tops" -- sneakers with a button for ordering a pizza.

My New Favorite Entertainment

Reading dueling analyst reports on Tesla.  I can't think of another high-profile stock where there is so little consensus, where the range of opinions covers the whole spectrum.  With their quarterly earnings call tomorrow, it should be a most entertaining day.

Automation, or Perhaps Not (At Least for a While)

I thought this letter from Dan Hanson to Tyler Cowen was really thought provoking:

I wonder how many of the people making predictions about the future of truck drivers have ever ridden with one to see what they do?

One of the big failings of high-level analyses of future trends is that in general they either ignore or seriously underestimate the complexity of the job at a detailed level. Lots of jobs look simple or rote from a think tank or government office, but turn out to be quite complex when you dive into the details.

For example, truck drivers don’t just drive trucks. They also secure loads, including determining what to load first and last and how to tie it all down securely. They act as agents for the trunking company. They verify that what they are picking up is what is on the manifest. They are the early warning system for vehicle maintenance. They deal with the government and others at weighing stations. When sleeping in the cab, they act as security for the load. If the vehicle breaks down, they set up road flares and contact authorities. If the vehicle doesn’t handle correctly, the driver has to stop and analyze what’s wrong – blown tire, shifting load, whatever.

In addition, many truckers are sole proprietors who own their own trucks. This means they also do all the bookwork, preventative maintenance, taxes, etc. These people have local knowledge that is not easily transferable. They know the quirks of the routes, they have relationships with customers, they learn how best to navigate through certain areas, they understand how to optimize by splitting loads or arranging for return loads at their destination, etc. They also learn which customers pay promptly, which ones provide their loads in a way that’s easy to get on the truck, which ones generally have their paperwork in order, etc. Loading docks are not all equal. Some are very ad-hoc and require serious judgement to be able to manoever large trucks around them. Never underestimate the importance of local knowledge.

I’ve been working in automation for 20 years. When you see how hard it is to simply digitize a paper process inside a single plant (often a multi-year project), you start to roll your eyes at ivory tower claims of entire industries being totally transformed by automation in a few years. One thing I’ve learned is a fundamentally Hayekian insight: When it comes to large scale activities, nothing about change is easy, and top-down change generally fails. Just figuring out the requirements for computerizing a job is a laborious process full of potential errors. Many automation projects fail because the people at the high levels who plan them simply do not understand the needs of the people who have to live with the results.

Take factory automation. This is the simplest environment to automate, because factories are local, closed environments that can be modified to make things simpler. A lot of the activities that go on in a factory are extremely well defined and repetitive. Factory robots are readily available that can be trained to do just about anything physically a person can do. And yet, many factories have not automated simply because there are little details about how they work that are hard to define and automate, or because they aren’t organized enough in terms of information flow, paperwork, processes, etc. It can take a team of engineers many man years to just figure out exactly what a factory needs to do to make itself ready to be automated. Often that requires changes to the physical plant, digitization of manual processes, Statistical analysis of variance in output to determine where the process is not being defined correctly, etc.

A lot of pundits have a sense that automation is accelerating in replacing jobs. In fact, I predict it will slow down, because we have been picking the low hanging fruit first. That has given us an unrealistic idea of how hard it is to fully automate a job.

Based on this I can still think of some labor-saving, but not labor-eliminating, automation roles in trucking.

  • Convoying, allowing one driver to lead multiple additional automated trucks
  • Reduction in team driving.  Currently Federal rules (e.g. for rest breaks and maximum driving times) have created incentives for teams of two drivers to move priority freight that needs to be moving constantly and not parked while the driver sleeps.  Automation might allow one person plus the automated driver to keep trucks moving continuously and safely.

One thing not mentioned by Mr. Hanson is the role of regulation.  Safe automated trucks will likely exist LONG before Federal regulatory changes will occur to allow them much use.  This is not just because there is some delay with regulators getting comfortable with the safety aspects, but because affected groups with political pull who wish to keep the status quo will use safety concerns, real or imagined, to hold up the regulatory process.

If you think I am being too pessimistic, here is a story.  The typical steam engine of the 1930's needed a driver and a fireman -- the latter's job was to make sure the furnace was correctly fueled and operating well.  When diesel locomotives came along, one benefit among many was that the fireman was no longer needed.  Seeing this on the horizon, the fireman's union was ready to dig in their heals.  They actually, boldly, took the position NOT that a diesel locomotive needed a fireman, but that it should be required to have 2 firemen!  This was partially a subject for union negotiation, but in the dysfunctional world of railroad labor regulation, it also required some regulatory changes  (as the first industry with large workforces, the government took its first shot at labor regulation in a railroad-specific manner and the result was largely dysfunctional; fortunately for the rest of industry it did a better job with labor regulation later for everyone else).  It took years to totally eliminated fireman from diesel engines.  In fact, nearly every railroad labor saving technology like this (e.g. automatic brakes rather than men on roofs turning break wheels) led to regulatory foot-dagging that allowed the new technology but resisted the reduction in personnel.

Politics, Peer Virtue-Signalling, And the Agency Problem

The other day Megan McArdle wrote an article entitled "The CFPB Fight Is Completely Pointless...Why is either side spending political capital for brief control over this agency?"  In short, the the folks on the Left who mostly populate the Elizabeth Warren / Barrack Obama created agency argue that deputy director Leandra English should become acting director after the current director stepped down.  President Trump argues he should be able to appoint the acting director (as the President would for any other agency) and appointed CFPB critic Mick Mulvaney.

My heart thrills as readily as anyone’s to the sight of a doomed soldier playing Horatius at the Bridge. But at least Horatius Cocles had a purpose: He secured an orderly retreat, allowing the army to live to fight another day. What, exactly, do [Leandra] English and her supporters hope to achieve, other than a spectacle for wonky Washingtonians?

The most they can get is a brief period of business as usual, during which it will be hard to enact binding decisions because the legitimacy of her leadership will be in doubt. At worst, they get a humiliating smackdown from the courts, cementing their place in history as elitists who thought they were above petty restraints like elections or the Constitution.

And in the broader political picture, if you think Mulvaney is a bad, dangerous man who will privilege the interests of rich bankers over those of ordinary Americans, you’d probably rather have him running the CFPB than in his current job -- overseeing the entire federal budget. Even if English wins and sends him back to OMB, this seems like a Pyrrhic victory for the left.

While most everyone else on the Internet seems to be able to automatically intuit everyone else's internal motivations, I don't claim to have that ability.  So I will offer one possible motive why Leandra English might see personal benefit from this otherwise pointless struggle.

It is no news to say that the US has arrayed itself into multiple tribes that hate each other.  The election of President Trump has only accelerated this.  Trump is so disliked by those on the Left that folks on the Left can score major points with their tribe by publicly opposing him, even when their effort is doomed and ultimately pointless.   Wendy Davis is a good example of a politician who greatly increased her status in the Left-tribe with an ultimately doomed filibuster of an abortion bill in Texas (so much so that a hagiographic movie is being made about her).  I have wondered whether several of the judges who have temporarily halted controversial but probably legal executive actions by Trump were not motivated as much by playing to the audience in their tribe as they were by making a thoughtful legal decision.

Which brings me to the agency problem, which Wikipedia defines thus:

The principal–agent problem, in political science and economics, (also known as agency dilemma or the agency problem) occurs when one person or entity (the "agent") is able to make decisions on behalf of, or that impact, another person or entity: the "principal".[1] This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Common examples of this relationship include corporate management (agent) and shareholders (principal), politicians (agent) and voters (principal), or brokers (agent) and markets (buyers and sellers, principals).[2] Consider a legal client (the principal) wondering whether their lawyer (the agent) is recommending protracted legal proceedings because it is truly necessary for the client's well being, or because it will generate income for the lawyer. In fact the problem can arise in almost any context where one party is being paid by another to do something where the agent has a small or nonexistent share in the outcome, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs

I think too often people define the agency problem only about economic incentives, e.g. my broker only recommends the stocks that pay him the highest commission.  But most of us are motivated by many things in addition to money.

Consider the example of a media conglomerate with multiple cable channels.  The managers of this media conglomerate are mostly of the Left.  One of their channels is called the shooting channel and focuses on gun reviews and the shooting sports.  The channel needs a new president, and it hires Hannah Progressive, either internally or from another successful media company.  Hannah is a talented media person with a proven track record of building cable channels and a perfect fit in every way except that she is disdainful of the shooting sports and groups like the NRA.  But let's say that Hannah is a true professional and can put that aside.  But what may be harder to put aside is the reaction of her peers.  She is going to get teased, maybe even bullied, by folks in her social circles.  Her peers are going to look down on her, even if she is successful (maybe especially if she is successful).  There is going to be tremendous pressure on her, both from her social circle as well as well as when she thinks about future job prospects an the industry dominated by the Left, to virtue-signal to others on the Left.  She could be tempted to shift content, alliances, advertisers,etc. in ways that signal virtue to her tribe but might alienate her current viewers and actually hurt the financial results of her company.

I frequently think about this in the context of how university presidents respond to protests, or how the NFL does so, or when seeing ESPN programming changes.  I have even seen it with programmers, working harder to impress their peers with the elegance of their code than to try to actually write things that serve the company and the customer.

Ethics Discussion

Is it ethical to pay a vendor in cash in order to get a substantial discount (e.g. 25%) even when one has a pretty good guess the vendor is accepting the cash and giving the discount in order to cheat on taxes and perhaps other laws?  Ignore the business reliability questions this raises (e.g. if one thinks the vendor is cheating Uncle Sam, doesn't this make it more likely he will also cheat me?).   Just pure ethics -- how responsible might one be for this vendor's illegal actions, and if one is, how sure would one have to be that the vendor has illegal intentions for this responsibility to cut in.

Elon Musk Is The Master of Yelling "Squirrel"

It is hard not to be conflicted about Elon Musk.  On the good side, he is pursuing fabulous and exciting goals  - space travel, high speed transportation, cheap tunnels, ubiquitous electric cars.  Listening to Musk is like riding through Disney's various Tomorrowland visions.  As a consumer, I love him.

As a taxpayer, I am not so thrilled.  Many of his companies (SolarCity and Tesla in particular) seem designed primarily as magnets for government subsidies.

But it is his shareholders I really have to wonder about.  I can't remember anyone in my lifetime who was so good at serving his shareholders Spam and convincing them they were eating filet mignon from a Michelin three star restaurant.  He announces quarter after quarter of failed expectations and greater-than-expected losses and then stands on stage and spins out all new visions and his fan-boys bid the stock to new all-time highs -- in fact to market valuations higher than GM, Ford, Nissan, or Honda.  Tesla's debt priced in the last offering well above what it should have given its rating and risks.   I thought his purchase by Tesla of his near-bankrupt other company Solar City had no strategic logic and was borderline corrupt, but my brother-in-law who is arguably a more successful entrepreneur than I thought it was brilliant, an example of Musk playing chess when everyone else is playing checkers.

So last week Tesla announced a really bad third quarter.  They lost a lot more money than they said they would, and produced a lot fewer of their new Model 3 cars than they promised.  Their manufacturing operations are in disarray and they are burning cash like crazy, such that the billions of funding they just raised will get burned up in just a couple more months.

But Tesla needs to stay hot.  California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket.  Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year.  So out came Musk yesterday to yell

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3.  The factory appears to be in disarray and out of production and inventory space.  They can't produce enough batteries yet for the cars they are already making.  So what does Musk do?  Announce two entirely new vehicle platforms for tiny niche markets.

A workhorse truck and a new super car are in the works for Tesla, after founder and CEO Elon Musk introduced his company's latest effort to widen the U.S. market for electric vehicles Thursday night. Musk called the Roadster "the fastest production car ever made, period."

Musk unveiled the Roadster toward the end of an event that was supposed to be all about Tesla's new Semi trucks. Taking a page from Apple and other tech companies in using showmanship to wow crowds, Musk surprised the crowd by announcing there was one more thing to add — and the new car rolled out of the truck's trailer.

After touting the utility and efficiency of what he called a game-changing truck, Musk welcomed the Roadster to cheers from those attending the event at the Hawthorne Municipal Airport near Los Angeles.

You have to hand it to Musk -- no other car company could get a good bump in their stock by displaying what essentially are two concept cars with infinitesimal revenue potential.  Expect Tesla to have a bond or stock offering out soon while everyone still has stars in their eyes from these new vehicles and before anyone can refocus on production and profitability issues.


Stone Cold Lead Pipe Lock Prediction: Equifax Will Be Changing Its Name Within 18 Months

Whether it be via bankruptcy, a merger, or just an internal rebranding, I am pretty sure the Equifax name will not exist in 18 months**. I had a class in business school that studied cases from a number of corporate PR emergencies -- J & J's aggressive handling of the Tylenol poisoning cases is frequently studied as the gold standard for how to handle such a crisis.  However, most of the cases involved companies repeatedly firing additional rounds into their foot.  Equifax seems to be working from this latter script: (via Zero Hedge)

“Today, Equifax ended up creating that exact situation on Twitter. In a tweet to a potential victim, the credit bureau linked to, instead of It was an easy mistake to make, but the result sent the user to a site with no connection to Equifax itself. Equifax deleted the tweet shortly after this article was published, but it remained live for nearly 24 hours.”

Further research revealed three more tweets that had sent potential victims to the same false address, dating back as far as September 9th. These tweets have also since been deleted.

“Luckily, the alternate URL Equifax sent the victim to isn’t malicious. Full-stack developer Nick Sweeting set up the misspelled phishing site in order to expose vulnerabilities that existed in Equifax's response page. “I made the site because Equifax made a huge mistake by using a domain that doesn't have any trust attached to it [as opposed to hosting it on],” Sweeting tells The Verge. “It makes it ridiculously easy for scammers to come in and build clones — they can buy up dozens of domains, and typo-squat to get people to type in their info.”

I recently froze my credit history at the four major credit monitoring companies.  I was super paranoid about making sure the domain I was entering my personal data into was a subdomain of company's domain. would probably be safe.  But would very likely be a phishing site.  As would be or  I know from training our employees on subdomains we use in our own company's web site that 99% of my employees do not understand the differences between these addresses.


** Because I can be a jerk but in generally harmless ways, for several years after the Valujet crashes in the Florida swamps I told my friends -- who were flying AirTran to save money -- that they should consider flying Valujet, which I claimed was even cheaper on those routes.  They said no way they would fly Valujet after Valujet had two crashes in a row that were ascribed to lax safety standards.  AirTran at the time was Valujet with the name changed.