Coyote Blog

Via Fox News

Hostess Brands — the maker of iconic brands such as Wonder Bread and Twinkies — is shutting down and firing 18,500 workers after one of its unions refused to end a strike even after being warned it would kill the company.

The privately-held company had reached a deal with the Teamsters, but a smaller union representing bakery workers refused to agree to concessions, prompting the mass layoffs and closing down of hundreds of plants, bakeries and delivery routes. That prompted harsh words from both the company and from Teamsters officials.

"We deeply regret the necessity of today's decision, but we do not have the financial resources to weather an extended nationwide strike," Chief Executive Gregory Rayburn said in a statement. "Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders."

I suppose Michelle Obama and Michael Bloomberg are celebrating

The world's most unproductive task is attempting to enforce self-awareness on someone else.  Keeping this one truism in mind, while shelving one's ego, seems the best approach to solving conflicts in my business, whether it be with partners, employees, or customers.

Rolling Stone Magazine has an good story on the conviction of a number of banks and brokers on charges of bid-rigging, specifically on contracts for short-to-medium term management of municipal bond cash accounts.  Apparently brokers were paid by certain banks to be given a look at all the other bids before they made their final bid.  The article focuses mainly on the ability of winning bidders not to bid any higher than necessary, though I would suppose there were also times when, given this peek, the winning bidder actually raised its bid higher than it might have to ace out other bidders.

This is classic government contracting fraud and it's great to see this being rooted out.  I am not wildly confident it is going to go away, but any prosecutorial attention is welcome.

But I am left with a few questions:

• It seems that government contracting is more susceptible to this kind of manipulation.  Similar stories have existed for years in state highway contracting, and the municipal bond world has had accusations of kick-backs for years.  Is this a correct perception, or is the rate of fraud between public and private contracting the same but we just notice more with the government because the numbers are larger, the press coverage is greater, and the prosecutorial resources are more robust?
• If government contracting of this sort is more susceptible to fraud, why, and how do we fix it?

The latter is not an academic question for me.  I run a company that privately operates public recreation areas.  I bid on and manage government contracts.  Frequently, a major argument used against the expansion of such privatization initiatives is that past government outsourcing and contracting efforts have been characterized by fraud and mismanagement.  The argument boils down to "the government has so many management problems that it can't be trusted with contracting for certain services so it needs to operate those services itself."

The only way to reconcile this view is to assume that private actors are more likely to act fraudulently and be dishonest than public employees.  If this were true, then the public would be safer if a public management process of questionable ability were applied towards public employees rather than outside private contractors, because those who were being managed would be less likely to take advantage.  And certainly there are plenty of folks with deep skepticism of private enterprise that believe this.

However, I would offer that only by adopting an asymmetric view of what constitutes fraud would we get to this conclusion.  Clearly, banks colluding to shave a few basis points off municipal asset returns is fraud.     As the author of the Rolling Stone piece puts it several times, the crime here is that the public did not get the best market rate.  So why is, say, elected officials colluding with public employees unions to artificially raise wages, benefits, and staffing levels above market rates not fraud as well?  In both cases insiders are manipulating the government's procurement and political processes to pay more than the market rates for certain services.

This is Bastiat's "seen and unseen" of the privatization debate.   Yes, the world is unfortunately littered with examples of government procurement fraud.  This is often cited as a reason for maintaining the status quo of continued government management of a diverse range of services.  But what we miss, what is unseen, is that these government services are often run with staffing levels, work rules, productivity expectations, and pay rates that would constitute a scandal if uncovered in a division of a corporation, particularly if the workers were spending a lot of money to make sure the manager handing them this largess was able to keep his job.

Yes, the public lost several basis points on its investments when it did not get the market rate of return from cheating bankers.  But it loses as much as 50% of every tax dollar sent to many state agencies because it does not get market rates (and practices) for state labor.

Most of you are familiar with the razor and blades strategy:  Give away or sell the razor below cost to ensure years of profitable razor blade sales.  We had a great example of this at AlliedSignal (later Honeywell) Aerospace where we pretty much gave Boeing the brake assemblies for the aircraft plus a free spare plus I think we put some cash in the box as well, all to get decades of guaranteed high price brake replacement business (courtesy in part to government regulation which made is extraordinarily difficult to the point of being impossible for anyone else to produce aftermarket parts).

So what I don't understand is, why is this company proposing to sell only the razors while inevitably leaving the blade sales to someone else:

The UK's biggest bookstore chain has announced that it will start selling Kindles alongside other digital services from Amazon. Waterstones stores will let Kindle owners digitally browse books in-store and link up with special offers, tying into the chain's plans for substantial renovations that would also include dedicated digital book areas and free WiFi.

One buys the books right from the Kindle interface.  I understand the issue that browsing books online is less satisfying than in a book store (but much more convenient), but I am not sure how they are going to make money.  Are Waterstone Kindle's coded to give Waterstones a share of each purchase?  I can't find anything like that in the media reports, but I would certainly demand that at Waterstones.  If not, this is like selling gift certificates for your competitor.

I will confess to being a book store free rider.  I shop airport book stores but if I see something I like, pull out my iPad at the gate and buy it.  Yes, I understand the appeal of physical books and it frankly pulled at me for years.  But having just gone on a trip with 100 pages to read in the third Game of Thrones book, the relief I felt in having both the third and fourth books on my iPad rather than carrying both physically  (think 800 pages or so each) was great.

It would be impossible to trace all the ways taxpayer money ends up in the coffers of solar manufacturers like First Solar.  Most of First Solar's money has been made selling panels in Germany to solar plants that, by law, can rape electricity customers with prices 10-15x higher than the market price for electricity.  First Solar also benefits more directly from direct subsidies, loan guarantees, "retraining" subsidies and even government Ex-Im Bank loans to sell panels to itself.  While First Solar vehemently denies it is a subsidy whore, it is telling that when Germany began to cut its solar feed-in tariffs, First Solar's stock price fell from over $300 to around $20.  Just watch day to day trading of First Solar stock, it does not move on news about its efficiency or productivity, it moves on rumors of changes in government subsidies.

Let's look at one subsidy.  In 2010, the Obama administration gave First Solar a subsidy of $16.3 million, ostensibly to help open a new plant in Ohio.  But it is interesting that this private company, which apparently could only raise the $16.3 million it needed by taking it by force from taxpayers, had plenty of money to pay its CEO.  In the 13 months leading up to its $16.3 million taken from taxpayers, First Solar paid its new CEO $29.85 million!  

Rob Gillette, the ousted CEO of First Solar Inc., earned more than $32 million in compensation from the struggling company for his two years of service, according to a regulatory filing Wednesday.

Gillette came to First Solar from Phoenix-based Honeywell Aerospace in October 2009 and was fired by the Tempe-based solar company's board of directors in October 2011....

Most of his compensation came in the three months of 2009 that he worked, when his total compensation, including salary, bonus, stock and options awards and other perks, reached $16.55 million. In 2010 his total compensation was $13.3 million, and last year he earned $2.46 million, which consisted of $763,000 in base salary and a $1.7 million severance.

Yep, they can't scrape up $16.3 million of their own money for a factory but they can find $30 million to give to an unproven CEO they eventually had to ride out on a rail.

By the way, I don't know Mr. Gillette, but I was once an executive at Honeywell Aerospace for several years.  I can tell you that it's a great place to find an executive who is focused on process to manage large complex organizations in a relatively stable business where manufacturing, logistics, and schmoozing large buyers is important.  It is a terrible, awful place to seek an executive for a fast growing business that needs to rapidly shift business strategies and where grinding through the process gets the wrong answer 12 months too late.

Apparently, the nose dive at Best Buy is accelerating.  Watching retail just as a consumer over the last few decades, it seems that whenever a retailer starts going down the drain, they never recover.  Calls are made for more visionary management to reposition the company, but I can't remember any such effort ever working.  The slide may be fast - Circuit City, CompUSA, Borders - or slow - Sears, A&P - but the nose dive never seems to reverse.  The only retailer I can possibly remember really executing a fairly large shift was maybe Gap from just being a Levi's outlet to whatever it is today.   And maybe Radio Shack, which is sort of this zombie you think has been outdated for like three decades but keeps hanging on.

From Tacocopter:

Flying Robots Deliver Tacos To Your Location

If this is an April Fools joke, I am going to cry.

OK, those of you looking for a business opportunity, Taylor dominates the soft-serve ice cream machine business.   Today one of our machines broke.  We got a quote for a refurbished machine -- with trade-in of our old macine - $14,000!  The brand new ones cost as much as a car.

So investors -- there is your flashing price signal.  There should be a big enough umbrella here to make some money with a good design and thoughtful sourcing.  And I can tell you everyone who uses these machines is eagerly awaiting such an entrant.

Love this story ... hope its not apocryphal

That got me to thinking about a wonderful story of how one of rock's legendary bands ensured that their shows were set up properly - and safely.  Van Halen's contracts would spell out any and everything that had to occur before they would go on stage.  Not surprisingly, since these contracts covered everything but the kitchen sink, it would be nearly impossible to make sure all the i's and lower-case j's were dotted.  So they came up with a smart way to make sure everything was followed to a tee.

In their contracts, they buried a rider in that said that the band would be provided with a jar of M&M's with all the brown ones removed.  The thinking was that if the contract were read thoroughly, the M&M's would be provided sans the brown ones.  If that was done properly, so, likely, would everything else.  So rather than checking to see if everything was taken care of, they simply looked for the jar of M&M's.  If there were brown ones inside, they'd have everything checked top-to-bottom

When you think about it, that's a nearly costless way to check for quality control.  So much for the dumb musician stereotype.

In our house, I am the milquetoast that accepts offers as presented and my wife is the one who challenges and negotiates.  But apparently that's not typical.

The most frequent customer service fail we have in our company is when an employee, thinking they are doing me some kind of favor, go nuts on a customer trying to enforce some trivial rule or trying to collect the last $5 our company might be owed.

It is astronomically hard to train people to use their judgement the same way I would in a customer situation.  This is particularly true when ego gets involved, when the employee feels like they have somehow taken a ego hit, with the customer "winning" and them "losing."  I once had an employee drive out of the park we were operating and chase a woman down the road over a misunderstanding about whether $5 had been paid correctly.  Incredible.  Unfortunately,  I have found no amount of training can fix judgement this bad, and the only thing I know how to do is fire them as fast as possible so they can't do any more harm.

I have always supposed this over-zealousness was a general human train, but in certain am-I-crazy moments, I wonder if somehow I am preferentially selecting for this kind of nuttiness.  Apparently not:

A Hawaii couple’s 3-year-old daughter was taken away from them for 18 hours after they were arrested for forgetting to a pay for two $5 sandwiches.

“This is unreal this could happen to a family like ours,” Nicole Leszczynski told Hawaii’s KHON.

The outing-turned-nightmare happened Wednesday while the family was shopping at a local Safeway.

“We walked a long way to the grocery store and I was feeling faint, dizzy, like I needed to eat something so we decided to pick up some sandwiches and eat them while we were shopping,” Leszczynski told the news station.

Leszczynski, who is 30-weeks pregnant, her husband, Marcin, and daughter Zophia bought $50 worth of groceries — but forgot about their two chicken salad sandwiches.

“It was a complete distraction, distracted parent moment,” Leszczynski told KHON.

As the family left, they were stopped by store security, who asked for their receipt.

“I offered to pay, we had the cash. We just bought the groceries,” Leszczynski told the station.

Instead, the expectant mother told KHON that the Safeway manager called police. They were taken to the main Honolulu police station where they were booked for fourth degree theft. Then Zophia was taken into custody by Child Protective Services.

I will say that I think the public agencies we replace in operating these parks are generally worse at this than we are, simply because so many of their employees have law enforcement certifications.  Dealing with customer service issues using law enforcement officers is often a recipe for bad outcomes.

Especially when the government is doing all it can to damp the forces of evolution and extinction.  Via Mickey Kaus

Dysfunctional–or at any rate, not-functional-enough–corporate cultures are hard to change. That would include both the culture of the Old GM and that of many of its suppliers. Obama should have been more skeptical about “New GM’s” ability to turn itself around with its same old workforce and same old union

I warned of something similar long before GM was rescued by Bush and Obama:

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM’s DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM’s of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM’s DNA has a less than one multiplier, then releasing GM’s assets from GM’s control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe’s productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe’s most productive human and physical assets into organizations with DNA multipliers less than one.

I have argued many times that private investors, over the long haul, will make better investment choices than the government, in part because they have better incentives and information to guide their decision-making.  The straw-man argument against this is to point out anecdotes of failed private investments.  Heck, I can do that.  Pets.com famously blew through $300 million of private capital with a corporate strategy that never made much sense to people.

The Pets.com investors were chagrined, and probably learned a lesson from their mistake.  Certainly most of us thought the blame, if blame existed, for the debacle rested on the investors for pouring money into a bad proposition.  Certainly no one accused the management of fraud -- I am sure they were diligently, honestly trying to make the company a success, even if they were misguided as to where that success lay.

As it turned out, everyone, not just the Pets.com investors, learned from the mistake.  The failure was an important driver in an industry-wide rethink as to what a successful Internet business model might look like.  This benefit only came because people were willing to acknowledge not just that the Pets.com investment was flawed, but that it represented a systematic mistake that was being made vis a vis Internet startup investments.

Now, consider solar manufacturer Solyndra.  It failed this week, likely taking with it most of $535 million in taxpayer money that the Obama Administration was so eager to give them that it short-cutted its internal processes to fork over the cash more quickly.

Many of us on the outside would love to see the government rethink such investments in a systematic way, and reconsider if it is even possible for the government to make such investments, and in particular whether "green jobs" investments make any sense at all.

But the likelihood of that kind of introspection happening in the public world is about zero, and my bet is that Obama is going to propose more of the same tonight in his speech.

In fact, the Department of Energy (the source of the loan) and the FBI have today sent armed agents into Solyndra looking for evidence of fraud.   While Zero Hedge argues that fraud would be bad for Obama, in fact I think it would probably be the best possible outcome and one he is hoping for.  If he can say, "wow, you and I both got tricked here by some evil folks we are going to put in jail" it deflects attention from the fact that he put a half billion dollars of taxpayer money into a business plan that never made a lick of sense.

Another me-too solar manufacturer with a factory in California of all places was never going to compete in a global commodity market.  This company's plan was always to sell dollars for 50 cents and to make it up on volume.  I don't see how any investor thought this was going to work.  My guess is that the private investors didn't know much about solar and invested because it had a certain hip-ness to it, or less charitably, they knew it never made sense but hoped that Uncle Sam, once it was already in for a half billion, would keep more money flowing or perhaps agree to buy out their production at above market prices.

There may have indeed been fraud, but as in the case of Pets.com, it is perfectly possible no real internal fraud existed and they ran through a ton of money against a stupid business plan that should never have been funded.  Obama would greatly prefer to call it fraud rather than his own failure of judgement.  As an aside, Fannie and Freddie are pursuing exactly the same course in suing banks, arguing that they were defrauded by the banks in buying mortgages, a fairly laughable proposition in the great scheme of things when one considers Fannie and Freddie were at the forefront of the industry in driving down lending standards and promoting the expansion of the mortgage market.

As GM was failing, I argued for the normal laws of bankruptcy to be allowed to work.  After all, valuable brands and manufacturing facilities were not just going to go *poof* -- someone would purchase them and employ them, and hopefully those someone's would to a better job than the previous owners and managers.

A big part of the "logic" for bailout and Presidential intervention in the auto companies was that auto purchases would halt if consumers were unsure whether their warranties would be honored and service would be available.

From an AP story, November 13, 2008

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation's largest automakers, which are struggling to survive the steepest economic slide in decades....

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

Well, it turns out that this was partially bogus.  The written warranties are still honored, but GM argues it left liability for any defects or design problems in the old shell company

General Motors Co (GM.N) is seeking to dismiss a lawsuit over a suspension problem on more than 400,000 Chevrolet Impalas from the 2007 and 2008 model years, saying it should not be responsible for repairs because the flaw predated its bankruptcy.

The lawsuit, filed on June 29 by Donna Trusky of Blakely, Pennsylvania, contended that her Impala suffered from faulty rear spindle rods, causing her rear tires to wear out after just 6,000 miles. [ID:nN1E7650CT]

Seeking class-action status and alleging breach of warranty, the lawsuit demands that GM fix the rods, saying that it had done so on Impala police vehicles.

But in a recent filing with the U.S. District Court in Detroit, GM noted that the cars were made by its predecessor General Motors Corp, now called Motors Liquidation Co or "Old GM," before its 2009 bankruptcy and federal bailout.

The current company, called "New GM," said it did not assume responsibility under the reorganization to fix the Impala problem, but only to make repairs "subject to conditions and limitations" in express written warranties. In essence, the automaker said, Trusky sued the wrong entity.

"New GM's warranty obligations for vehicles sold by Old GM are limited to the express terms and conditions in the Old GM written warranties on a going-forward basis," wrote Benjamin Jeffers, a lawyer for GM. "New GM did not assume responsibility for Old GM's design choices, conduct, or alleged breaches of liability under the warranty."

Of course, this happens all the time in bankruptcy  (and it is my experience, but I am not a legal expert) that GM may or may not succeed in this argument.  It is not always possible to leave liabilities behind in an old corporate shell, or else companies would reorganize every year.

But the point is that the special treatment of GM was supposed to be to protect consumers, and that turns out to be BS.  The warranties were likely always going to be protected in any bankruptcy, as such consumer benefits nearly always are in chapter 11 (the fact that you still hold any frequent flyer miles is proof of this, as nearly every airline in the country has been through chapter 11 in the last couple of decades and none of them disavowed their frequent flyer miles, despite the fact that holders are the most unsecured of unsecured creditors).

Via Tyler Cowen, here are some odd questions with snarky answers.

There are some themes here.  Several are sort algorithms (the horses and the balls) and a number are probability and distribution questions (e.g. the stairs and the stools). Several are clearly sales and customer service situations (e.g. the invisible pen).

And several are estimation problems (e.g. how many airplanes are in the air right now).  The latter type question was very popular when I was at McKinsey & Co.  Many interviews actually gave the victim interviewee some kind of business case.  The point was to see how well the person broke down the problem, considered facts they would need to obtain, etc.

A subset of these was the ever-popular market estimation game, such as "how many home windows are bought each year in Mexico?"  As an interviewer, one wants to see the person think "OK, there is new construction and replacement.  For the new construction market, we need the size of the home construction market, number of windows per home...."  That sort of thing.

We would also generally ask them to guess at numbers for all these and actually come up with a number.  This is not some test of trivia -- being able to look at numbers and reality check them is an important skill, so having a reasonable intuition about the proper scale of business and economic statistics is useful.  In fact, if there was one skill as a consulting manager I was constantly trying to hammer into younger consultants it was to look at the numbers coming out of their spreadsheets and ask them if they really make sense.

Ages ago, I was an executive at Mercata, an Internet store whose strategy was to sell items whose price would go down as more people agreed to buy the item.  In theory, this creates an incentive for viral marketing, as anyone who buys has a financial incentive to get their friends to join in.

The company died for a variety of reasons, in part just because like many startups in that weird era of the late 90's, we just built up too many fixed costs too fast to reach breakeven in any reasonable amount of time.  We were also ahead of our time in some ways -- the model makes a ton more sense in the Facebook / social media age.

But we also failed, as did many Internet stores, because order fulfillment, product inventory, shipping, etc was and still is expensive.

Glenn Reynolds notices that a lot of folks (including Amazon in his link) are selling coupons.  This may be a blinding glimpse of the obvious to all of you, but the appeal of a retailer of selling coupons online is that they are virtually free to inventory, to fulfill, and to ship.   Think of it this way -- you want to compete online on price.  You can actually sell the physical stuff at a discount.  Or you can sell the coupon, which gives access to the customer access to the same discount but is much easier to fulfill.  It also lets you "sell" things you normally can't provide over the Internet, like a restaurant meal.

The model is not that compelling to me, because I shop online for the convenience rather than the price.  I buy some Groupon type coupons, but generally for things like restaurants rather than products.

I am happy that my neighbors here in Phoenix are not allowed a hecklers veto to prevent grocery store chains, or any other business, from serving me at convenient locations.  I live walking distance from an intersection with three grocery stores (Whole Foods, Fry's, Albertsons) and I love it.

Megan McArdle responds to yet another call for government-enforced unbundling (or a la carte pricing) for cable TV.  I think she does a pretty good job in response, but I wanted to go in depth on a couple of issues.

First, it is interesting to me that the exact same people, typically on the Left, who want to unbundle cable TV are the same ones who angle for net neutrality, which in effect is government rules to enforce bundling of Internet services.  Which leads me to think this has less to do with consumer protection and more to do with the raw exercise of power to overturn free market solutions to problems.

Second, I think that unbundling would be a terrible solution for customers, particularly for those whose interests are focused and esoteric (e.g, they like the GLBT channel or whatever).  These folks think unblundling will get them cheaper rates for the one channel they want.  What it more likely will get them is fewer of those niche, esoteric channels.  I will simply repeat an earlier article I wrote four years ago on this topic:

I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again.  This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this.  In fact, supporters of this regulation argue just the opposite.  They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station.   This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime.  Let me explain.

Clearly the kite-flying channel serves a niche market.  Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it.  But despite this niche status, it may well make sense for the cable companies to add it to their basic package.  Remember that the basic package already attracts the heart of the market.  Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let’s say the cable company wants to add a channel to their basic package, and they have two choices.  They have a sports channel they could add (let’s say there are already 5 other sports channels in the package) or they can add the Kite-flying channel.  Far more people are likely to watch the sports channel than the kite flying channel.  But in the current pricing regime, this is not necessarily what matters to the cable company.  Their concern is to get more people to sign up for the cable TV.  And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers.  It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company.

But now let’s look at the situation if a la carte pricing was required.  In this situation, individual channels don’t support the package, but must stand on their own and earn revenue.  The cable company’s decision-making on adding an extra channel is going to be very different in this world.  In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel.  And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel.   Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority.

I think about this all the time when I scan the dial on Sirius radio, which sells its services as one package rather than a la carte.  There are several stations that I always wonder, "does anyone listen to that?"  But Sirius doesn’t need another channel for the majority out at #300 — they need channels that will bring new niche audiences to the package.  So an Egyptian reggae channel may be more valuable as the 301st offering than a 20th sports channel.  This is what we may very likely be giving up if we continue down this road of regulating away cable package pricing.  Yeah, in a la carte pricing people who want just the kite-flying channel will pay less for it, but will it still be available?

Dish Network is going to buy Blockbuster out of bankruptcy for $320 million.  I am frankly floored there is that much value.  I have found that one can make a surprising amount of money riding an obsolete business down over the years if it is managed correctly -- but this is generally for product businesses.  Retail businesses are really hard to ride down because you need to be closing stores every year and that is hard to do cost-effectively given typical lease terms.  Never-the-less, I expected the winning bid to be from a liquidation company, someone like the folks who took wound down Circuit City.

But the purchase by Dish Network implies that the buyer wants to continue operating Blockbuster in some form, and the identity of the buyer implies some sort of on-demand or streaming service.  But what does Blockbuster offer?  Is the brand valuable in this context, or a liability?   Does it have customer loyalty with a segment (old people?) who have so far shied away from Netflix / Hulu?  Does Blockbuster have favorable royalty / licensing contracts with studios that are transferable to other video delivery models?

If I had to guess, I would bet on the latter.  There have been examples of whole businesses built from legacy contracts.   One of the best examples is a little noticed contract Carl Icahn had with TWA, which spawned a huge new travel agency and later really helped to build Priceline.com.  Here was the story:

When TWA got a loan from Carl Icahn, an almost unnoticed part of the deal was that a certain travel agency owned by Icahn, small at the time, would be guaranteed TWA tickets at a healthy discount off the lowest published fares.  This agency, with this boondoggle, grew to enormous size as Lowestfare.com.  TWA, beyond the reasons listed above, therefore had a second reason for not wanting to publish their lowest possible fare.  Normal limitations that most airlines could set on how many seats would be available at their lowest fare could not be enforced by TWA.  If they offered a new $100 fare, Lowestfare.com could blow out an unlimited number of tickets at $80 or less and TWA would have to accept it.  Therefore, by offering discounts unpublished via Priceline, TWA prevented the travel agency from getting inventory even cheaper.  And so, a huge portion of the early Priceline inventory was TWA.  (ironically, after the American Airlines acquisition of TWA killed the deal, the Lowestfare.com URL was bought by … Priceline.

I wonder if Blockbuster has something of similar value in their royalty / licensing agreements?

Kevin Drum wonders whether the proposed $700 million bid by Farmers Insurance for naming rights on a prospective LA NFL stadium makes any economic sense.   It is an interesting question.  I wrote:

This has always struck me as one of those agency problems, where the executive's incentives are different from the shareholders. Executives get a ton of benefits personally from this -- higher profile for the company which improves their profile and marketability, they get a prime box for the games, parties, etc.

Before the audience here slips into a round of corporate executive bashing, my sense is that the same perverse incentives are working for municipal leaders who have a mismatch with taxpayer interests when they shove huge amounts of taxpayer funds to owners in stadium deals (deals which economists speak with one voice on -- they never pay off for the community in full). One of the dirty secrets of these deals is that they generally include a sort of kickback in the form of boxes and club seats for the Mayor and city council's use (and sometimes multiple boxes for leaders of other government agencies in the town).

I love it when progressive policy wonks who have never, and would never sully their hands with running an actual productive enterprise, tell me I must be running my business wrong.

Calling me with a robo-caller, and then putting me on hold for any amount of time other than about 2 seconds, is not going to reach me.  Today I actually was not busy and waited 30 seconds through such a hold before I hung up, and that is a record.  I know that you are concerned about the productivity of your workers, but I am concerned with mine as well.

This is probably the first ever inside reference to my novel. The funny part is that when I read TJIC's post, I thought "hmm, Preston Marsh, where have I heard that name?"  LOL.  By the way, the business idea Travis has is actually intriguing

Restaurants get napkins and linens as a service "“ every day, they trade huge bags of dirty whites for clean whites. They are in the business of cooking food and hiring wait staff, not in the business of knowing how to bleach things (or in the business of picking out linens that can stand up to bleach).

So what does clothing as a service entail? It could include cleaning, sizing, rotating wardrobes as fashions change, etc.

It removes some hassles, and bundles responsibilities in the place where there are economies of scale "“ people in the fashion industry can and will know more about sizing, cleaning, coordinating, etc. than consumers.

I and others have thoughts on the model in the comments.

By the way, for those who have not read my book, Preston Marsh is an entrepreneur who has made money in a series of sortof odd business models.  Years ago I used to get bored at parties (actually, I still get bored at parties but I no longer use this entertainment technique) and make up occupations for myself.  I remember convincing one woman who had recent evidence that I could not ski well that I was on the Olympic Ski Jumping Team  ("You don't have to turn in ski jumping!")

Anyway, all the business models in the books are ones I made up for myself on the fly at parties.  One involves building fountains in malls and then recouping the investment by harvesting coins from them.  Another, which is central to the book, is a sort of guerrilla marketing startup which does some lifestyle consulting with teens but makes its money placing products in the hands of the coolest, trendsetting teens at high schools (a model that has since been emulated by a couple of real-life companies).

By the way, the book is still on sale at Amazon and available on the Kindle for download.  Just search "BMOC."

For some reason, Phoenix is in the midst of frozen yogurt wars.  A few years ago a store opened with a new concept - they set up about 12 self-serve frozen yogurt machines so you could fill your own bowl, and then gave the customer direct access to heaps and heaps of toppings (e.g sprinkles, chocolate sauce, m&m's, gummie bears, etc).  At the end, you weigh your bowl and pay based on weight, exactly as one might do in one of those salad bar restaurants.

Over the last few years, the market has exploded with new stores in the same model.  We must have at least 10 different chains.  We have about 6 within a short drive of our house.  Already, the price per ounce they charge has fallen by over half.

I have learned from my out-of-town visitors that this is not a concept that is common in other parts of the country.  Which leads me to ask why so many restaurants with the same concept are piling into Phoenix.  Is it just people in the local market thinking it is a great idea and deciding to copy the idea in their neighborhood? I can sort of see the appeal - these stores were (initially) popular, had low barriers to entry, and probably elicit dreams of creating a franchisable concept.  Which leads me to two questions:

• Why is the tenth or twentieth incremental store being opened in Phoenix?  I would find some place like Georgetown or Harvard Square that has not seen this concept yet and open it there.  Or even better, open one on Sand Hill Road or wherever retail investors work.
• Seeing the low barriers to entry and the quick proliferation in this market, combined with sagging visitation as the novelty wears off and steeply falling prices, why is anyone attracted to this at all?  One guy will probably get out ahead on this and establish a national brand, and everyone else will likely get slaughtered  (and the first mover will probably go bankrupt anyway as many fast-growing franchise model from Jiffy Lube to Boston Chicken have).  Is it the lottery value?  Or am I too much like the joke about Milton Friedman, who refused to pick up a twenty dollar bill on the ground because he argued that the money couldn't be real since in a free market someone would have already picked it up.

When I was at HBS, a bunch of us who sat in the back row (the "skydeck" in HBS parlance) would play buzzword bingo based on the class discussion.

Google books has a way of querying their books database for word frequency.  I laughed when I saw this chart for "incentivize."  It's the hockey stick!