The Daily Cow

After years of diligence and perseverance, multinational team invented an algorithm for movie-recommendation that improves upon Netflix's current algorithm by over 10%, beating the many other teams that vied for the same achievement. But this is all part of a contest: The team that accomplishes the goal (10% improvement in accuracy) and maintains their lead for a month wins one million dollars. The rest have just wasted their time.

Crowdsourcing is like an all-pay auction. One person benefits, and everyone else loses. In this case, even the team that "wins" isn't necessarily winning. Think about it: Netflix is a 2 billion-dollars-a-year business. If you start a competing company whose product recommendations are over 10% better than that of the leading competitor (Netflix), don't you think that you will get at least 0.01% of the 2 billion dollar business? That's 200,000 dollars, every year. If you don't think you can get even 0.01% of the business, then your algorithm isn't good enough.

Speaking of algorithms, I am curious how they determined the 10% rate, and how efficient the algorithm is. If it takes twice as much computing power to produce a recommendation that's 10% better, perhaps it does not make business sense (to double the cluster size). If it's an NP-hard algorithm that works only on small samples, then it's obviously not going to scale to all of Netflix. The semantics of the competition are important--so what are they?

I do wonder though: For those who participate in Crowdsourcing projects, do they expect to win? If so, how do they react to losing? If not, then are they participating just "for fun" or the experience? Really--what's the incentive?

Half a year ago I warned of the potentially grave consequences of the EU pursuing its aggressive "anti-monopoly" policy against profitable American firms, particularly Microsoft.

Unfortunately, last week Microsoft voluntarily made the first step in that direction by offering to only sell Windows 7 without Internet Explorer in Europe--ostensibly to give consumers "choice." Unsurprisingly, the European Union rejects this offer and insists on fining Microsoft for being a bad competitor.

Punishing a company from leveraging its competitive advantage is like punishing Baskin Robbins for selling BR ice cream! Microsoft's offer to sacrifice its own natural position and begin at ground zero is extremely courageous. Why is Google allowed to advertise Chrome on its home page? Why should Microsoft IE be a distinct entity from Windows when Safari is obviously an integral part of Macs? Doesn't Apple have a broader control of the entire hardware-software stack than Windows? After all, Microsoft doesn't build the laptop chassis.

Obviously there's a non-business reason behind the EU's aggressive pursuit of Microsoft. It needs the money. It is effectively forcing each working American to "donate" 100 bucks to Europe.

Europe must stop its abuse of foreign companies. It's forcing companies like Microsoft into dangerous directions where there will no longer be software suites or packages, just single-function programs that are completely non-uniform and disintegrated.

What do you say to that?

Today, we see another demonstration of the European Commission collecting money for its general funds by preying on American companies. The EU decided to fine Intel 1.5 billion dollars for "abuse of monopoly power." Apparently Intel offered volume discounts to retailers and computer manufacturers (a rebate if you bought a lot from them), and apparently that's illegal. The EC believes bulk discounts hurt consumers, and that is its basis for the fines.

Just in January, they fined Microsoft 2 billion dollars for a similar assertion, except it was for including Internet Explorer and Windows Media Player with their operating system. Neither pay exorbitant executive packages, so their revenues are recycled back into research and development (Intel has pretty nice chips now), given out as discounts, and used to pay their 3% dividend. The 3.5 billion dollar fine is 3.5 that R&D, consumers and investors aren't getting. That's 12 dollars for every American, 110 dollar for every Californian and 300 for every working Californian adult!

It's unfair that the EC can force money transfer from us to them. They are obviously desperate for money to fund their recession programs. We are too, so why don't we fine their IT firms? Oh yeah, they don't have any that are worthy of fining. SAP comes closest, but even it cannot remain independent.

This sucks. I don't like the idea of a foreign commission collecting money that is ours, either in more R&D, consumer discounts, investor rewards, or more employment. Since when was it OK to force successful foreign companies to pay for our general services? Never? Good. So the EC shouldn't do it either.

Comcast told investors that it costs under seven bucks a home to double the capacity of an entire neighborhood (I don't mind paying an upfront cost of $7 to double my Internet speed for the rest of eternity!) and that "the hardware to provide 50-megabits-per-second service costs less than it had been paying for the equipment for 6 megabits per second." (I don't mind getting a free upgrade to 50 mbps Internet!) According to the same article, "JCom, the largest cable company in Japan, sells service as fast as 160 megabits per second for $60 a month." The disparity is clear. The reason is exactly as the article claimed: The lack of competition.

Here in Berkeley, Comcast's only competition is its lesser rival, DSL by AT&T, and the fastest plan the latter offers is 1.5 MBPS down (and much less up), so if customers are not satisfied with 1.5 MBPS, they have no other option. I have been waiting for Verizon to expand its FiOS coverage to Berkeley but alas, they are in no hurry to do so.

Verizon is used to being a monopoly. They are used to being at the top of the hill, fighting would-be competitors as they climb ever-steeper slopes against Verizon. They aren't used to being the ones fighting an uphill battle against a monopolist, so they are taking their time. In fact, the slow pace may be a form of monopoly signaling--basically a way for AT&T and Verizon to have cartelization (by dividing up the market) unofficially to avoid FTC scrutiny. Although I am a strong believer in the right of natural monopolies to exist without competition (simply because it's the most efficient and cost-effective arrangement), I understand that efficiency will not be impeded by wise government regulation of prices, just as we do for the utilities industry.

That's exactly what we need: If companies refuse to compete with each other, the government must step in to impose a well-calibrated price ceiling on broadband access, simply because it is more efficient to do so in terms of aggregate social utility. Get to it--I want faster Internet, and I bet so do everyone else--for a price closer to what it costs Comcast.

So much for the plan to expand affordable broadband access nationwide!

General Motors lost more money than its total revenue for the year--that is, its costs were more than twice its revenue. That's completely unsustainable. Even if the government pays it 30b per year, it will still be losing money. If you don't understand, take this example:

Suppose I have a store that sells widgets that cost me 61 cents to buy, and I sold a million of them for 30 cents apiece last year. That makes my revenue 300,000 dollars, but my cost 610,000 dollars, making my loss (negative profit) 310,000 dollars, which is slightly greater than my revenue. Yes, that means my net profit margin is negative 103%. (That's bad, by the way)

GM fails. It needs a complete restructuring. It needs better management. And most importantly, it needs free workers--not brutal Unionized workers

Legendary investor Warren Buffet's Berkshire Hathaway corporation reported that its entire portfolio value fell 25% last quarter, which is a significant amount. Contrary to his own assertions in the New York Times about how now is the time to buy stocks (a philosophy I believe he follows for his personal portfolio because, let's admit it, he can afford to lose some money), his firm is buying fixed-income securities: Preferred shares and debt at various firms such as Goldman Sachs, General Electric, Tiffany's, Harley-Davidson (etc) each paying his firm 10%, 10%, 10% and 15% a year.

Those are immense return rates from solid American firms (except maybe for Harley-Davidson) that only he can negotiate (the rest of us are lucky to get half of that). The fact that he's going for 10-15% safe return vs. potentially 40-80% (if the economy recovers in a reasonable amount of time) suggests that he thinks the chances of a fast recovery are extremely low.

I don't know what that says to you, but to me, if Buffet believes that recovery will be delayed and slow, I am inclined to believe him. For those of us with lots of money in equities (stocks), it might be time to shift to fixed-income.

Pelosi denies that the stimulus bill is a cry for protectionism, even though it stipulates that everything must be contracted out to domestic suppliers. She asserts that "we want [the people] to be assured that we're looking out for their interest as we look to grow the U.S. economy." She then asserts, "I don't think that's protectionism." How is she looking out for "their interests" by "protecting" them from foreign suppliers? What she described is the definition of protectionism, and we mustn't fall prey to that selfish, ignorance-derived mentality.

International trade protectionism brought the whole world to its knees in the Great Depression of the previous century and triggered the ultra-competitive nationalism (economic self-interest) that pulled millions of the most desperate and destitute behind the most destructive war machines of human history. In a vain effort to protect its domestic industries and workers from international competition, each country enacted exorbitant and punitive trade restrictions that strangled the global economy, making recovery that much more difficult to achieve. It was only with the resumption of favorable trade (albeit done out of desperation) between the Allied nations involving foodstuffs, commodities, and war supplies that the full effects of the Depression began to recede.

I am relieved that the countries of the G7 assured the world that each is committed to open trade, even if just in word. But the "Buy American" provision of the American Stimulus Package is a step in an extremely dangerous direction. I hope Congress amends that provision before the bill is signed.

The stimulus package was meant to be over a trillion dollars, and spent mostly on ready-made infrastructure projects that pay for future growth, but instead it's become a package that's 20% smaller and is half saturated with tax cuts. Right now we need public transportation systems. We need subways, high speed rail, buses. We need investment in green energy. We need the complete nationalization of banks like Bank of America and Citigroup and the resulting elimination of their shareholders.

In short, we need to start anew and invest in it.

We can't have a half-assed program that will only saddle us with more debt; we need a big stimulus package that can be quickly spent on important projects that we've been neglecting: Fixing bridges, building infrastructure, supporting research and development. If we look to Japan, we will see that its lost decade is not what we want to simulate--but unfortunately we're doing just that. The US won't go into a depression like in the 1930s, but it will not resume normal growth for a long time unless prompt action is taken now.

If people don't want to spend, tax cuts won't help much. Instead we need the government to take initiative and put people back on work doing things that should've been done long time ago.

"The Obama administration is expected to impose a cap of $500,000 on the compensation of executives at companies that receive large new infusions of federal bailout money." What is large, and does that include stock options/grants? Either way, that's a good start. How about 100k + 100k options at 10 bucks above current market price?

Last week it was announced that our economy contracted 4%, a sharp decline from the 3.7% growth in the 4th quarter of 2007, and I'm sure many of us know the reason why: the mistakes of banks who made bad loans and called them AAA-quality assets. Sure, they made mistakes due to lax oversight, but is the blame all theirs?

For English and History of Economic Thought, two classes I'm taking, I am learning that interest (or "usury") was a sacred thing that can be requested only in special economic circumstances, and only up to the lender's opportunity cost. But if the interest was part of the deal, the borrower was required to pay--even with flesh (or otherwise by the repossession of personal assets) if need be. Isn't the true fault of our current credit crisis Americans' acceptance of taking out loans they cannot possibly repay?

Instead, if they're running low on money, they can just file for bankruptcy. Sure, it hurts their credit, but credit is a much weaker incentive than the social incentive that disappeared with the creation of credit. People stopped becoming socially motivated to maintain good credit and good reputation (Not just money-wise) when electronic credits replaced that motivation.

That needs to change.

Just as how imposing a late pick-up fine at a daycare increases the number of kids who are picked up late because the economic incentive replaces the social (and much stronger) incentive, simply making people who can't afford things already pay more for loans and credit is not going to work. Instead, Americans need to be taught that they should refrain from taking out loans they cannot afford, and to put their full assets at the mercy of repossession should they lose the ability to make their payments. Bankruptcy laws shouldn't be so lax that everyone gets an infinite amount of "Let's try that again."

Individuals know more about their living circumstances than even the smartest banks. Let's make the judgment of personal solvency the responsibility of the borrower. If people only took out loans they could afford, we would be at a stable, non-bubble economy with real growth, and we wouldn't have lost trillions of dollars in wealth and capital.