The Decision Strategist

A significant amount of my profession involves working with small towns to examine economic issues. These are issues that are probably familiar to all of you because they are the same for every small resort town:

• Youth leave because there are few economic opportunities and the big cities are more exciting, or to attend college in the big city.
• Real estate is priced far beyond anything that is affordable to local residents. Only wealthy immigrants can buy houses.
• Costs are extremely high.
• Arts and tourism are a significant, if not the main, source of income for residents.

The result of these issues can generally be described in terms of two major trends. First is the demographic shift brought on by the emigration of youth and the immigration of aged populations.

With the median age getting older, the towns focus naturally shifts to fulfilling the desires of older population and away from providing a better and more enticing environment for the younger up and coming generations.

The second major trend is the gentrification of the community. As the median income increases, low wage earners become more and more marginal, and end up relegated to the role of providing services for wealthier tourists and residents. These are jobs almost exclusively located in food services, accommodations and retail. The problem of residents not being able to buy real estate only intensifies.

The parallels with so-called “third world” countries are alarming.

Pursuit of Economic Growth

The strategies for economic growth are not qualitatively different except in minor aspects: pursue tourist-funded and export-led growth.

Depending on tourist spending as an economic engine has worked out fantastically for some countries and towns, but never without the problems mentioned above and what amounts to the institutionalization of a very poor working class that serves very rich tourists. I’ll leave it for others to argue whether this is an improvement over their earlier lifestyle.

A tourist-based economy is undesirable for at least two reasons: tourism is extremely fickle and dependent on economic fluctuations, and it locks the town’s economy into a single track that cannot be left without significant consequences.

As the world approaches a recession, small resort towns are clamoring to find out why their real estate sales are slowing and their tourist numbers are down. They think that it is a problem they can fix if they just market themselves more, or make the town prettier and more friendly, or (insert random improvement here).

What they don’t realize is that the last 8 years of tourism have been funded by first a tech bubble and second a housing bubble caused by extremely low interest rates financed by our tax dollars.

In essence, much of tourists’ perceived wealth was imaginary, and now it is leaving (I’m talking about house and stock-based wealth here, not true wealth).

Few small US towns export anything of significance except their youth. Export led growth usually makes people think of China. In some areas crops are a major export, and in others arts and crafts may be somewhat important.

The real truth being, of course, that America itself isn’t a net exporter of anything but marketing and design. It hasn’t been more than this for years, though the severely weakening dollar will likely change that somewhat.

But the real problem with tourism or export-led growth is that they are based on the same thing: inequality.

A Simple Sustainable Strategy for Growth

There is really only one way to sustainably increase the economic well-being of a community, and that is to increase the productive capability of the area.

I don’t mean this in the industrial sense of destroying the surrounding environment to build manufacturing ability, but rather to take steps to develop both the infrastructure and the productive ability of the workforce.

This is a slow process in which a community must consume less than it produces and invest the excess in greater capacity. In the US this is a completely foreign concept. Instead we focus on getting people to spend as much as they can.

In other words, we have unequivocally adopted a strategy of short term growth at the expense of long term sustainable gains.

This is the tragedy of democracies in general, but especially strongly pro-corporate democracies. Politicians are under pressure to produce immediate gains, and so sacrifice future gains to do so. Bush has pursued this strategy to perfection by both cutting taxes and spending an outrageous amount of money, ensuring that the economy stays afloat for a while, but the consequences when the party is over will be that much more painful.

Those of you who work in sustainable community development in small towns, I’d be interested in hearing your thoughts about how communities can pursue a general strategy of sustainable development. I’ll post your responses next week.

-zot

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By now you must have seen the news discussing Radiohead’s new album and their decision to shun record companies and release their record by themselves. In fact, they’ve decided to release it online and let people decide how much money to give them. Here’s the link.

Trent Reznor’s doing the same thing.

And then there’s things like Songslide, which lets bands add their music and users pay whatever price they like.

It’s more evidence of changes in the music industry and the failing tactics of the RIAA.

But what I find really interesting are the ways in which bands releasing their music for free are making use of referencing and priming to encourage people to spend money. Radiohead puts an empty price box in which you can put how many GBP’s you want to pay for the album and very little else. Not a lot of an attempt to make people pay more, but other artists do things differently.

There is one artist’s website I’ve seen that lets you pay a price you choose, but explicitly puts the ‘average’ price as one of your options, and tells you what that average is. It’s a great idea for two reasons.

First, having the average that people have given changes the reference point from $0 to a much higher value (I think it was usually around $10). Whatever you were considering paying gets referenced to this average, with the accompanying feelings of guilt (or getting a good deal) when you pay less and the possible pride in paying more. I could see the average backfiring by causing people who would pay more to just opt for the average, but my suspicion is that people not paying much of anything is more of a problem.

Second, it explicitly engages moral self judgment. If you pay significantly less than average, you are more likely to feel cheap or selfish. This self-watching, like pictures of watching eyes, has real effects on peoples behavior.

There isn’t any data on how much people pay for albums in this kind of setting yet, but it’d be very interesting to look at differences in payment based on how the interface for downloading is set up.

I’ve been trying to remember which artist does this, so if any of you know please tell me.

-zot

ps - I really like In Rainbows so far.

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Most of you know by now that the RIAA just won a $220,000 settlement against Jammie Thomas for sharing a slew (thousands?) of music over the Kazaa network. This is (I think) the largest settlement to date and one of the first against someone accused of sharing music instead of just downloading it.

At this point technology and the music market have essentially aligned the RIAA against consumers. I say consumers here because an overwhelming number of people download music. And though the RIAA is winning cases, there are also important precedents being set in cases that it is losing.

RIAA Strategy

The RIAA’s motivation is several years of declining record sales. A problem it views as almost solely caused by the availability of music online (pdf link), but which many people argue is due more to releasing bad music(pdf link). Sales have been declining since at least 2001, but part of me can’t help but wonder if it isn’t because of the record-breaking sales of pop artists in the late 1990’s and 2000. If all industries experience bubbles, maybe that was the big music industry bubble. I’ve been trying to find a good data source on record sales but have yet to do so, if you know of one, let me know.

The RIAA’s response has been to use a carrot and stick method, heavy on the stick, to try and change downloading behavior. On the stick side, the main strategies have been:

• Spread FUD (fear, uncertainty and doubt) using a combination of high profile lawsuits and advertising.
• Attempt to develop sympathy with the public for people working in the music industry, particularly artists who they portray as being cheated out of their money.
• As a last resort, allowing for restricted legal downloading through a variety of services including itunes, rhapsody and others. By the way, a non-sponsered plug for emusic, which features a variety of unDRM’d music. You can also now download music from Amazon with no restrictions.

Downloader Strategy

There has emerged a coherent organized resistane among music downloaders, but several different strategies seem to be shared by most proponents of downloading music. Among them,

• Disputing the assumptions put for the by the RIAA, namely that downloading music,
  • leads to less sales or
  • hurts the artists.
• Developing or co-opting anonymous ways of downloading content such as using tor or free wifi spots.

Among the arguments used to counter the RIAA’s statements are that the artists see a tiny percentage of each record sale, that most downloaded songs wouldn’t be purchased if buying was the only option, and that record sale declines are a result of the poor quality of music rather than it’s availability for free online.

Why the RIAA Cannot Possibly Win

Notice any similarities to the US in Iraq, the War on Drugs, prohibition, or any other enforcement of an unpopular law on a population? Unpopular occupations or laws cannot hope to achieve their agenda by increasing costs of disobeying. You simply cannot criminalize a majority of the population.

During prohibition crime rates increased drastically. The drug war has had a similar effect with the result being the extreme cost to the public for hosting people arrested for possession of marijuana.

The pattern is familiar enough that we should be able to map it out fairly easily:

1. An unpopular law or occupation takes effect.
2. Initial resistance is met with increased penalties.
3. Resistance is driven further underground, but due to it’s popularity it still extracts a heavy costs on the oppressor (which may be it’s own government or corporate organizations).
4. Eventually the cost becomes too great, and the occupier leaves or the law is repealed.

That said, I know there are some examples of foreign powers (often the U.S.) overriding popular will to instill a benevolent dictator. However, these cases are different in at least two ways:

1. The local power base was co-opted. It is absolutely necessary that a powerful segment of the population is allied with the occupying force to help enforce the occupying agenda. This was specifically rejected early in the Iraq War, with the result that local power bases resisted U.S. efforts.
2. A segment of the resisting population fractures and begins turning resisters in to the authority.

To the music industry, neither of these options is currently available. The distribution of music over p2p is by design decentralized, and so there is no local power base to co-opt. The closest might be bands themselves, and Metallica for example has done just that. But more and more you have bands rejecting the music industry entirely, including big names like Prince, Radiohead, and others.

A scary possibility, and one the RIAA has no doubt considered, is developing a core group of sympathizers who could turn in their friends for downloading music. For this to happen though, the music downloading issue needs to be reframed as a moral issue in which the RIAA is a victim. The RIAA knows that it will never be seen as the victim, and so instead has tried to shift it to portraying artists themselves as the victim.

But in a world where music superstars are glamorized and idolized, there are precious few tangible pains to be seen.

Until the RIAA can shift public perception so that downloading music is seen as a moral violation similar to being a Jew in Nazi Germany or being against the state in mother Russia, this is not likely to happen.

As always, I’ll post responses in an article next Sunday.

-zot.

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As what is essentially a research consultant, I run into a fair amount of joking, nudging, and winking when I start to talk about ’surveys’ and ‘focus groups’.

Fortunately I work with data and statistics, so I get to claim a little bit of distance from the more laughable methods.

Regardless, it has me thinking about how consultants are generally perceived and very expensive and ineffectual. I think the idea of hiring someone to research and evaluate a problem or policy, though it has it’s issues, isn’t inherently bad. The methods themselves are terribly bad. It really comes down to one thing:

A few consultants are exceptionally good and the rest spend a lot of time surfing the web.

It’s true of any industry that there are a few exceptional people and/or businesses and the rest are mediocre, but with consultants the mediocrity is easily visible. The problem then isn’t that all consultants are hacks, but that it is difficult to tell whether a consultant has done a good job.

In other words, the signal to noise ratio (Paul Graham) is poor.

There are copious examples of situations with a poor signal to noise ratio (SNR). Consider the employer trying to figure out if the employee is working, the lender evaluating a potential borrower, regulators eyeing a company and any application process such as for school, work, Ycombinator, Peace Corps, or hiring a babysitter.

If you have a background in Game Theory, you might notice that poor SNRs tend to exist in a principal-agent situation. A principal-agent situation is one in which one person/organization has something and the other person/organization wants it. The possessor (the principal) has to decide whether to give it to the desirer (the agent). A poor SNR exists because the agent is always motivated to present themselves in the best light possible, and so the principal has to do their best to see through the presentation to determine actual quality. In other words, the agent is actively reducing the SNR.

So back to consultants. The mediocre consultant will choose to purposely increase the amount of noise in the presentation of their work because they realize that 90% of perception is how you look and not what you say (to cite an irrelevant and entirely made up statistic). Further, it is easier to increase the value of your work by making it look spiffy than by doing better quality work (to a point).

From the point of view of the person who hired the mediocre consultant, they have little incentive to attack the consultants work unless it is obviously shoddy. The hirer doesn’t want to be the person who hired a bad consultant, and so will only attack the consultant’s work if it is obviously shoddy.

Is it any wonder that the industry as a whole is a joke?

The consultants holy grail is to discover the aspect that separates excellent consultants from mediocre ones and make that the center of their work. It also has to be easily discernible but not easily faked.

Somehow I think the only thing that qualifies is thorough hard work.

-zot

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