tag:theconversation.com,2011:/columns/joshua-gans-399The Disruptive Economist – The Conversation2015-05-01T17:51:34Ztag:theconversation.com,2011:article/411172015-05-01T17:51:34Z2015-05-01T17:51:34ZIs climate policy compatible with Tesla’s battery-fueled dreams?<p>Many of the targeted behavioral responses to climate change involve reducing energy consumption. This makes sense as the majority of energy consumed (pretty much throughout all history) has involved burning of fossil fuels, and this, in turn, is responsible for the ridiculous buildup in greenhouse gases, notably CO2. </p>
<p>So the main thrust of smart climate change policy (in all its forms) should be to raise the cost of fossil fuels so that they will be used less and that there is a disincentive for innovations that use more fossil fuels. The problem is, from an economy-wide perspective, taxes or other instruments used to do so will raise the cost of energy across the board. That’s fine if the only way to cut emissions is by reducing energy consumption. But what if that isn’t the best way to go?</p>
<p>Consider this: you are building a new house. You care about the environment (but you’re also a bit stingy), so you could design it so that it is more energy-efficient. If the future cost of energy is going to be high, that is a good plan, from a cost perspective. </p>
<p>But you will likely have to make trade-offs. If you want more natural light to cut down on power use during the day, you will have to accept a less weatherproof house. If you don’t want that trade-off, you will have to install better windows, making the cost of the house more expensive. Still, this may work out economically for a future world contingent on a higher energy price.</p>
<p>Suppose this all works as planned. We put a tax on carbon. Energy prices surge to a new high. And houses are converted to be long-term energy-efficient. That sounds like good news except for one thing: it is a disaster for those currently investing to make solar power more cost-effective.</p>
<p>Why is this so? Well, those investing in solar power are going to make more money if other people’s homes use lots of energy. If, instead, most of them have converted to a low-energy architecture, then the willingness of consumers to pay for solar power goes down. </p>
<p>Subtly, a carbon tax has dueling effects. Yes, it pushes people to substitute away from fossil fuels for electricity (a plus for solar and the environment), but at the same time it drives up the cost of energy itself thereby creating an incentive for consumers to economize on energy (a negative for solar). </p>
<p>When fossil fuels are a large share of current energy, the negative can outweigh the positive, creating risk for solar energy innovators. (Still skeptical? The math is <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1395547">here in a paper</a> I published a few years back in the American Economic Journal: Economic Policy.) </p>
<p>This week this actually became more relevant. On Thursday, Tesla <a href="http://www.reuters.com/article/2015/05/01/us-tesla-motors-batteries-idUSKBN0NM34020150501">announced</a> a <a href="http://teslaenergy.com">new division</a> to invest in battery technology to be installed in dwellings and businesses and even grouped in power facilities. The batteries would store any excess energy from solar panels and use it to power a home at night or charge up an electric car. This could also help existing electricity grids manage peak-load issues by allowing consumers to draw in power when it is cheap and draw it out of the battery when it is expensive. </p>
<p>More critically, it is a complement to solar. One of the big issues in solar energy is that it is dependent on the daily cycle. So if most of your power needs are during the evening, you have a problem. The battery is intended to solve that issue. </p>
<p>In the process, it makes solar power more valuable to consumers. Couple this with the <a href="http://blogs.scientificamerican.com/guest-blog/2011/03/16/smaller-cheaper-faster-does-moores-law-apply-to-solar-cells/">forecasts of Ramez Naam</a> that solar panel costs are falling at their own <a href="http://www.mooreslaw.org">Moore’s Law</a>-type rates, and the outlook is quite favorable. Tesla founder Elon Musk believes it is technically possible to convert all of our current power production (and by “our” I mean for the entire Earth) to solar within decades.</p>
<p>To do this, Tesla will be building lots of factories, but the company has also opened up its <a href="http://www.teslamotors.com/blog/all-our-patent-are-belong-you">patents</a> so that others can invest more in batteries as well. </p>
<p>The bulk of the capital needed to roll out the battery and solar solutions Musk is promoting, however, has yet to be spent – by Tesla or any other company. Herein lies the risk. If we act too quickly to raise the costs of carbon, pushing up the price of energy, it may be that we harm private-sector efforts to promote solar power, which in turn will make innovations in battery technology less rewarding. </p>
<p>I raise this point not to diminish the efforts to put a price on carbon. There are many reasons why this is a sensible direction. But I believe that we need to acknowledge the real risks to private-sector innovation if we substitute fuel sources that themselves promote energy use. Solar power is such a fuel and its return is contingent on a healthy demand for energy that may be at risk if people pre-emptively economize on that energy. </p>
<p>I suspect that this means that as we put a price on carbon, we will need to consider public or other collective measures to ensure that innovations such as Tesla Energy are able to be diffused. In other words, a carbon price is not a “set it and forget it” policy but part of a suite of measures that we will need to effectively manage our energy issues – including more government aid for the solar sector.</p><img src="https://counter.theconversation.com/content/41117/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Joshua Gans is an academic associate with the Brattle Group, owns shares in Tesla and lives on the planet Earth.</span></em></p>Many of the targeted behavioral responses to climate change involve reducing energy consumption. This makes sense as the majority of energy consumed (pretty much throughout all history) has involved burning…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/406182015-04-21T20:43:48Z2015-04-21T20:43:48ZThe last two digits of a price can signal your desperation to sell<figure><img src="https://images.theconversation.com/files/78838/original/image-20150421-9008-181q238.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The last two digits of a product's price sends signals about how badly you hope to sell. </span> <span class="attribution"><span class="source">1.99 via www.shutterstock.com</span></span></figcaption></figure><p>While someone’s bargaining position can be shaped by competition, we economists know that there is a big gray area in our ability to predict negotiated prices. </p>
<p>Competitive options for buyers and sellers can define a limit beyond which they will not go, but there is still a range of prices that fall within those limits. Within that range, clearly sellers would like a higher price, while buyers would like a lower one, so each has an incentive to signal to the other their willingness to be a tough negotiator.</p>
<p>Sometimes, however, you might want to send a signal that you might be willing to be less tough. Why? Because negotiations take time, and you might want to get a deal done quickly. For instance, you may be moving to another city and wish to sell your house in a hurry. </p>
<p>The usual means by which such a signal could be sent is to simply lower your starting price. But for some goods — where quality is hard to observe, such as real estate — lowering the price may be difficult to do, at least in small increments. This is the traditional asymmetric information or adverse selection story, where if a seller has a product of high quality, they can’t use higher prices to convince the market that they are still not a low-quality seller in disguise. </p>
<p>So how else would you signal your willingness – or unwillingness – to be “flexible?” When there are sellers around with differing levels of patience, both signals are desirable for those who know how to use them.</p>
<p>In <a href="http://faculty.haas.berkeley.edu/stadelis/round.pdf">a new paper</a>, Matt Backus, Thomas Blake and Steve Tadelis look at this issue within the confines of eBay’s structured negotiation platform. While we often associate eBay with auctions (rather than straight out sales), that hasn’t been eBay’s main business for about a decade. Instead, most trades are listed for a specific or “buy it now” price, and the seller may give you the option of making them an alternative offer. </p>
<p>So a seller of an iPhone may list a price of $1,000, and someone might come back with a counteroffer of $800, to which the seller could then accept or make a new offer. This could go on for about three rounds (eBay rules) and may last about a week. </p>
<p>But if the seller wanted a quicker negotiation, what could he do? Backus, Blake and Tadelis discovered an interesting way to do just that, which is summarized in the following chart. </p>
<p>The chart shows that when the posted initial price is of a round number (the red dots), like $1,000, the average counteroffer is much lower than if it is a non-round number (the blue circles), like $1,079. For example, the graph suggests that you can actually end up with a higher counteroffer if you list $998 rather than $1,000. In other words, you are better off initially asking for a lower price if price was all you cared about.</p>
<p>Backus et al postulate that what is going on here is “cheap talk” – that is, an easy-to-make statement that may be true or untrue with no consequences for dishonesty – and not an otherwise reliable signal. There are some sellers who don’t just care about price and, absent any other way of signaling that to buyers, they set their price at a round number. Alternatively, you can think that the more patient sellers are using non-round numbers to signal their toughness. Either way, the last two digits of the price is cheap talk. </p>
<p>The rest of the paper does the econometrics to back all this up and is (except for one really interesting thing that I’ll get to in a moment) as robust as the graph suggests. End your price with “00” and you receive offers that are 5% to 8% lower, more likely to finish six to 11 days sooner and 3% to 5% more likely to sell at all. This is pretty interesting because the last two digits of a price essentially tell you nothing about anything else. Nor do they make much of a difference to the price. This is the first paper I am aware of that uncovers a plausible cheap talk equilibrium; that is, where people use a simple unverifiable statement and it is believed as intended. </p>
<p>But wait, there’s more. The authors wanted to see if their analysis would work in other markets and whether they could guess what the cheap talk prices would be. </p>
<p>While we know that round numbers seem to be the focal point, we don’t know that for sure. And so they checked. And what they found was that while the effect they observed didn’t happen for all other prices, it did arise for prices that ended in 99! These days, those prices are the “normal” ones used at any grocery store or shopping mall and, as it turns out, send the same type of signal as the “00” prices. If you look at the graph closely, you can kind of see that.</p>
<p>Does this arise elsewhere? The authors grabbed some real estate data and here are the results:</p>
<p>There is it again. So if you want to sell your house quickly, pick a round number. As it turns out, real estate agents then understand the signal. Alternatively, if you want to sell for a higher price and are willing to wait, your agent will advise you to pick an odd one. </p>
<p>This is one of those things I certainly didn’t know about, but it is clear that enough people in the market did. One wonders what other cheap talk signals lie in our economics future.</p><img src="https://counter.theconversation.com/content/40618/count.gif" alt="The Conversation" width="1" height="1" />
While someone’s bargaining position can be shaped by competition, we economists know that there is a big gray area in our ability to predict negotiated prices. Competitive options for buyers and sellers…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/396142015-03-31T22:40:28Z2015-03-31T22:40:28ZAmazon Dash finally brings sense to the Internet of Things<p>Amazon just announced a new product called the <a href="https://www.amazon.com/oc/dash-button">Dash</a> button. Basically, it is a button with a label like Tide or Cottonelle, connected to the internet and available only to Amazon Prime members (you know, the subscription that gives you free shipping). When you need to buy the thing associated with the button, you press the button and a fresh supply turns up at your house a couple of days later. </p>
<p>Its usefulness to the consumer is obvious. You are sitting on the commode, notice you are running low on toilet paper and rather than having to fiddle with your phone (even if you have it there), you press the Cottonelle button and you are done. The same applies to all manner of products, from laundry detergents to sparkling soda. Currently, 255 products <a href="http://www.amazon.com/b/?ie=UTF8&node=11267118011">are available</a> with a button, and Amazon didn’t reveal what criteria determines which items will get one.</p>
<p>What’s in it for Amazon is also obvious. This is yet another reason to join Prime and another reason to order stuff without thinking too hard about it. For instance, it will appeal to people who don’t shop around for toilet paper deals. Amazon likes those people. Moreover, it seems to be closely related to Amazon’s core business, unlike recent failed efforts like <a href="http://www.amazon.com/oc/echo/">Echo</a> and <a href="http://www.amazon.com/Amazon-Fire-Phone-32GB-Unlocked/dp/B00OC0USA6/ref=sr_1_1?s=wireless&ie=UTF8&qid=1427836003&sr=1-1&keywords=fire+phone">Fire Phone</a>. </p>
<p>What is more interesting about all of this is what it means for the so-called Internet of Things. This phrase has been around for a few years and was supposed to be the next big thing – connecting physical objects to the internet and allowing unspecified wonders to take place. </p>
<p>There has long been envisaged a WiFi-connected fridge that would work out what you are low on, or what has expired, and relay that information to you without the need to open the door. Then there were the connected toasters or coffee makers than could automatically ensure your breakfast is ready when you get downstairs. Suffice it to say, this new connected world hasn’t quite happened.</p>
<p>Where it has been more successful is in cameras you can place somewhere in your house and occasionally look in on pets or children. It has also been successful for things like thermostats (most notably <a href="https://www.amazon.com/oc/dash-button">the Nest</a>, which was bought by Google for around US$3 billion last year) that can learn your behavior and preferences and adjust the temperature depending on the weather and other factors. </p>
<p>Unlike the connected toaster, these devices have something important in common: they don’t require you to do much. Specifically, they don’t require you to change your routine or “homeflow” (a word I’m coining here that is the equivalent of workflow in software development). The idea is that people have routines as to how they juggle tasks. Software can slot into that routine (like checking your email or twitter). The same is true of home routines.</p>
<p>The Dash will, I believe, become the main example of this. It is homeflow-oriented and designed to cut out a ton of stuff. Consider what we have to do now with regard to toilet paper:</p>
<ol>
<li>notice that toilet paper is low (in the bathroom)</li>
<li>do your business</li>
<li>remember to go and order more toilet paper or put it on a shopping list</li>
<li>remember the list.</li>
</ol>
<p>With dash, the homeflow turns into:</p>
<ol>
<li>notice that toilet paper is low</li>
<li>press button to order more.</li>
</ol>
<p>It is simple and time efficient (you can press the button while taking care of business), and then you don’t have to spend any more cognitive energy on the rest. In this way, you’ll always have “<a href="http://en.wikipedia.org/wiki/The_Stall">"squares to spare</a>.”</p>
<p>To those developing products for the Internet of Things, this is an important lesson. The thing is not what is critical but how it will fit into the homeflow. Amazon has found a way to crack that. Others will hopefully follow.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/NMacTuHPWFI?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Will invitation-only Amazon Dash catch on?</span></figcaption>
</figure><img src="https://counter.theconversation.com/content/39614/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Joshua Gans owns shares in Amazon.com but can't use this product because he is in Canada and that is just sad.</span></em></p>Amazon just announced a new product called the Dash button. Basically, it is a button with a label like Tide or Cottonelle, connected to the internet and available only to Amazon Prime members (you know…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/394052015-03-26T17:04:40Z2015-03-26T17:04:40ZWhat Meerkat v Periscope battle means for live mobile streaming<p>If you have been on Twitter this past month, you have heard of <a href="http://meerkatapp.co/">Meerkat</a>. This is an app that allows you to stream video from your mobile phone. </p>
<p>It’s barely a month old and already it seems there’s a “Meerkat killer.” Apparently everyone has suddenly realized there might be value in live mobile streaming. More on that later. </p>
<p>First, how it works. Basically, you open the Meerkat app, push a button and you can broadcast. Simultaneously, your Twitter followers learn you are broadcasting and can watch. They can also comment (well, more accurately, tweet), and you can see that happen in real time as you broadcast. That means you can react to it. Suffice it to say, it is interesting.</p>
<p>You may wonder whether and when this might be useful. I can imagine that the next time a disaster or other news event occurs, we will get some interesting “Meerkating” (yes, it is already a verb). I also saw a journalist from The Economist schedule a video interview on Meerkat, but I have to admit that I spent more time worrying about the “portrait” aspect ratio than the content. But who knows? This may become a thing.</p>
<p>One thing to note about Meerkat is that it isn’t exactly a new idea. For instance, a few years ago, a Toronto-based start-up launched <a href="http://www.raur.co/">RAUR</a>. RAUR is like Meerkat but is a) audio-only via podcasting, b) actually saves your “work” so that people can listen whenever they want, and c) has a social aspect to it that is familiar to those using social networks. </p>
<p>Because it is not transient, you can actually listen to the output long after it has been broadcast. Here is <a href="http://www.raur.co/joshgans">my channel</a> (for instance) and here is my recent <a href="http://raur.co/joshgans/248981">broadcast on Meerkat vs RAUR</a> (the topic of the post you are reading now). If you listen, you will see that it is clear but not exactly “good,” in that I don’t have a radio voice and haven’t really prepared. Other people on the network are better. For instance, my own 14-year-old son does prepare and has <a href="http://raur.co/ariel.gans.7">his own channel with his own following</a>.</p>
<p>Meerkat, however, with its video and very simple app, has been absorbing all the attention since its launch in February – as well as <a href="http://www.ft.com/cms/s/0/a65bdbb4-d359-11e4-a792-00144feab7de.html#axzz3VVIv1i6S">the money and a US$40 million valuation</a>. Well, at least until this morning.</p>
<p>This morning, Twitter launched <a href="https://www.periscope.tv/">Periscope</a> (an app by a company that it purchased last year). It is the same as Meerkat, although it seems to work a little more reliably and also has an option to store your videos for 24 hours. (Meerkat does allow you to download and then do whatever you want with your broadcasts now but doesn’t do it within the app.) What that means is that you can find stuff to watch on Periscope just as you can on RAUR. </p>
<p>This has provoked much discussion as to <a href="http://www.theverge.com/2015/3/26/8293353/periscope-live-streaming-twitter-meerkat">whether Periscope is a Meerkat killer</a> (which, let’s face it, sounds far more cruel than the usual Facebook killer tagline). </p>
<p>Who knows and frankly who cares? For starters, we don’t know if streaming is important. Also, both these companies are in a position to copy the best features of the other so, in the end, we will end up with something that is the best.</p>
<p>The interesting thing to me is that it is another example of the theory of multiples. This is something that historians of science are familiar with: the tendency for many big ideas to emerge simultaneously (think the <a href="http://www.uiowa.edu/%7Ec22m025c/history.html">co-discovery of calculus</a> early in the 18th century or so). </p>
<p>It also happens for entrepreneurial ventures. A few years back both Hipstamatic and Instagram had the idea to apply filters to mobile photos to make snaps from your phone look good. Instagram won and is now part of Facebook. What is more, it won by matching a better strategy to this idea than did Hipstamatic. Instagram gave away its app for free and emphasized social sharing, while Hipstamatic did neither. Interestingly, initially, Hipstamatic had more users and more hype – just like Meerkat does today.</p>
<p>I talk more about this notion <a href="https://www.youtube.com/watch?v=CgiOylmT6OA">here</a>. But the key takeaway is that we don’t know who is going to win in this new streaming fight and, moreover, there still may be better and more compelling ways of commercializing the streaming idea that are yet to come. As usual it is fun to watch and, indeed, these days you can watch it on your phone.</p><img src="https://counter.theconversation.com/content/39405/count.gif" alt="The Conversation" width="1" height="1" />
If you have been on Twitter this past month, you have heard of Meerkat. This is an app that allows you to stream video from your mobile phone. It’s barely a month old and already it seems there’s a “Meerkat…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/388742015-03-17T09:51:54Z2015-03-17T09:51:54ZThe $10k Apple Watch is more than a product, it’s an HR policy<p>A lot has <a href="http://www.theverge.com/2015/3/9/8177197/apple-watch-gold-macbook-luxury-fashion-brand">been written</a> about the Apple Watch Edition and its price tag of more than $10,000, all the way up to $25,000. Many have decried it’s super luxury status, <a href="http://stratechery.com/2015/apple-make-wearable-market">while others</a> see it as shrewd strategy.</p>
<p>I initially didn’t think it would be priced so high. It’s out of character for Apple, whose identity is more mass market than exclusive, with its technology being widely accessible to most consumers. To be sure, Apple products were never cheap, but they weren’t ludicrously expensive either.</p>
<p>There was always something different about the positioning of Apple versus that of Rolex and the like. Most of us can afford Apple products, while Rolex is exclusive. </p>
<p>Indeed, it is so exclusive that Rolex takes out billboard ads not to convince passing commuters to buy one but to sell them on the idea that whenever they come across a person wearing one, they know they are encountering someone who is friggin’ rich. Put simply, if you wear a Rolex and no one knows it costs a ridiculous amount of money, there goes your value proposition. What are you going to do with a $20,000 watch? Tell the time? Give me a break.</p>
<p>Which brings us back to the Apple Watch Edition. </p>
<p>Robert Frank argues Apple released a high-end watch to help with price discrimination, or what he calls differential pricing. He <a href="http://www.vox.com/2015/3/11/8190093/apple-watch-gold">wrote in Vox</a> that the Apple Watch Edition should be celebrated by the rest of us because it spreads fixed costs around. The high-end watch, with much higher profit margins, thus subsidizes a lower price point for the cheaper models the rest of us can afford. </p>
<p>That price discrimination argument sounds great for things like business class travel, but it does not hold up for the Apple Watch. Why? Because to make sense, it must be that the presence of the Apple Watch Edition actually lowers the price of the other versions. But I just don’t believe that is the case. </p>
<p>Instead, if it does have an impact, it is to raise the stature of all Apple Watches and, for that reason, <em>increase</em> their prices. In other words, it is more <a href="http://en.wikipedia.org/wiki/Veblen_good">Veblen</a> (the demand for a luxury product increases as the price goes up) than <a href="http://firstmonday.org/ojs/index.php/fm/article/view/473/394">Varian</a> (an array of price points help companies cover fixed costs). </p>
<p>So how should we look at the Apple Watch Edition? </p>
<p>First, I don’t think it exists to make money and, therefore, does not exist to help defray the costs of developing the Apple Watch. Second, given this, I do not think that it is there to have any impact at all on Apple’s image of having accessible technology. </p>
<p>Put these two things together and we see a plan. The Apple Watch Edition is most likely there for Jony Ive – the company’s chief designer And arguably most important employee – so that he can play in the major fashion designer leagues.</p>
<p>I know that he seems like such an affable guy and a man of the people, but he has a Bentley and a knighthood. So it is a very British sort of person made good. You want to keep him interested, you have to throw him a bone, and that bone is the Apple Watch Edition. </p>
<p>This is why on the Apple site they talk about $10,000-plus and put that out to the press when, in reality, if anyone buys one of these they will be paying twice as much to get the “good red one” – the version with the red leather buckle. After all, the $10,000 comes with a sport band. A sport band! No one is going to get that. No one.</p>
<p>But the other clue we have is that the guts of the Apple Watch Edition are precisely the same as the Apple Watch Sport. There are the same two sizes with the larger one costing more (in the case of Edition, $2,000 more, but still). The Edition models are enclosed in 18-karat gold and crystal Sapphire, but the technology is the same. The insides are the same.</p>
<p>The rich person with the Edition will not be able to do one thing more than someone with a Sport. Not one thing. This is unprecedented in price discrimination. Whenever different versions arise, they typically can do more. This time around, you don’t even get extra storage. It would have been so simple for Apple to have differentiated on some feature. Yet they chose to do none of that. Why? The company wanted to err on the side of not compromising its identity.</p>
<p>In summary, the Apple Watch Edition is possibly the most commercially irrelevant product ever launched (certainly by Apple) and should be viewed as an expense on the human resource management ledger.</p>
<p><em>This is a modified version of a post that first appeared on Joshua Gans’ Digitopoly blog.</em></p><img src="https://counter.theconversation.com/content/38874/count.gif" alt="The Conversation" width="1" height="1" />
A lot has been written about the Apple Watch Edition and its price tag of more than $10,000, all the way up to $25,000. Many have decried it’s super luxury status, while others see it as shrewd strategy…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/382052015-03-06T14:57:09Z2015-03-06T14:57:09ZWhy Apple and its iPhone confound disruption theorists<p>Nokia, Motorola, Sony-Ericsson and BlackBerry-maker Research in Motion were all victims of disruption. During the 1990s and 2000s, they shepherded the cell phone during its period of takeoff into ubiquity. Then in the last five years, they all lost their leadership positions and are now on the verge of irrelevance. The common culprit was the 2007 launch of Apple’s iPhone. </p>
<p>Why has the iPhone confounded both industry rivals and proponents of disruption theory alike? Because they have had a one-sided view of disruption – enough to make them blind to its true nature.</p>
<p>The main proponent of disruption theory is Clay Christensen, who invented the term. His theory is that disruption (that is, the failure of otherwise successful companies) comes when those companies miss important innovations precisely because they are unappealing to their primary customer base. That provides an opportunity for new entrants to leap onto those technologies, ride them through improvements until they actually end up competing head-to-head for the customers of established firms.</p>
<p>With regard to the iPhone, Christensen made an initial assessment that he later admitted was incorrect. He missed that the iPhone represented one of these worrisome technologies and instead saw it as a sustaining innovation: an innovation that improved upon the phones of Nokia and the like rather than appealed to a different sort of customer. </p>
<p>As it turns out, he was wrong about that. As both Nokia and RIM realized, the iPhone actually performed worse on things their customers cared about. It is hard to remember, but the initial iPhone was an awful phone, so Nokia dismissed it out of hand. Moreover, it didn’t have a physical keyboard, the primary thing that had attracted RIM’s customers to the Blackberry – and, actually, still does. What’s more, the iPhone, by making smartphones a sexier commodity, actually boosted Blackberry sales in the late 2000s. So they all could be forgiven for thinking perhaps Apple had missed the boat.</p>
<p>Obviously, Apple was on the right course, as we now know. Christensen admitted that a few years later, saying that his mistake was to consider the iPhone as disruptive to phone makers when, in fact, it was disruptive to laptops. </p>
<p>Now lots of people have recognized that the iPhone is more of a handheld computer than a phone, but when you take this notion seriously, it is clear that it wasn’t disruptive to laptops. That isn’t even clear for the iPad. Instead, the companies that were disrupted were all handset makers. So it is pretty clear that if the iPhone was disruptive to anything it was disruptive to them.</p>
<p>The Christensen-style theory of disruption cannot handle the iPhone because the iPhone did not follow the path of that theory. To be sure, it was a poor performer on traditional metrics and then improved. But the path by which that disrupts is because the poor performance leads to lower-priced products that then improve and attract away the most price sensitive of established firm customers. But that never happened with the iPhone. It was high priced from the start and remains so today. To be sure, those who adopted the iPhone-like approach to smartphones (Samsung, HTC and LG) were cheaper, but they were still more expensive than traditional handsets.</p>
<p>Some have taken this high price point to formulate a theory that the iPhone was <a href="http://stratechery.com/2013/clayton-christensen-got-wrong/">disruptive from above</a> (the high end) rather than the low end as Christensen has emphasized. Andreessen Horowitz’s <a href="http://ben-evans.com/benedictevans/2015/2/25/in-mobile-disruption-comes-from-above">Benedict Evans</a> goes further and suggests this is endemic in mobile. Now it might be that entry in mobile comes from superior, higher-priced products. But that cannot cause disruption – the failure of incumbent firms. </p>
<p>This is because it is only by having low-priced products that incumbent firms can be wiped out rather than just stung. And that is an important element of the demand-side theory of disruption. Put simply, there is no such thing as high-end disruption, only high-end entry.</p>
<p>Instead, the way to think about this disruption is not to look to the demand-side (where the customers touch the firms) but the supply-side (what goes on inside the firms). Nokia, RIM and the like were extremely good at producing well engineered, cheaper phones that did a limited range of functions but did them well. </p>
<p>The iPhone never competed on those functions and instead offered people things that weren’t otherwise available — desktop-like web pages, a large screen and an intuitive but new user interface based on touch. The iPhone was made from traditional components but put together with what might be termed a different “architecture.” That architecture was designed around a completely new way of interacting with a handheld device. Traditional handset makers either dismissed that as a power-hungry luxury people would not pay for or tried to replicate it but ended up with something decidedly clunkier and not feeling quite up to what Apple had produced.</p>
<p>Academics like Rebecca Henderson and Kim Clark long recognized that this supply-side mechanism for disruption based on new architectures could trip up otherwise successful firms. And that is really what appears to have gone on with the iPhone. It was a new architecture, and to replicate it required essentially a clean slate for innovative teams. </p>
<p>Established firms rarely want to give up development teams that have worked well. This is what leaves the room open for entrants and, in the case of smartphones, we saw disruption on a large and long-term scale. And the only way to see it is to understand that there is more than one path to disruption. To do otherwise is to often try and drive a square peg in a round hole.</p><img src="https://counter.theconversation.com/content/38205/count.gif" alt="The Conversation" width="1" height="1" />
Nokia, Motorola, Sony-Ericsson and BlackBerry-maker Research in Motion were all victims of disruption. During the 1990s and 2000s, they shepherded the cell phone during its period of takeoff into ubiquity…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/383282015-03-03T15:17:10Z2015-03-03T15:17:10ZCan competition fix net non-neutrality?<figure><img src="https://images.theconversation.com/files/73630/original/image-20150303-31829-zqzg5a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tim Harford got it wrong on net neutrality. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/poptech/7466343832/in/photolist-cnLXU5-cnLYfY-cnLz7A-cnVijU-cnLYo3-eKqaWc-qjKZBo-pqhjhV-pAg16c-8HxD1U-o7FV9a">Poptech/flickr </a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Short answer: it isn’t obvious that it can.</p>
<p>Let me back up a second and explain why I am revisiting this issue. Tim Harford <a href="http://timharford.com/2015/03/battle-for-the-webs-last-mile/?utm_source=dlvr.it&utm_medium=twitter">published an article</a> a few days ago that took his masterful econsplaining skills to the issue of net neutrality. But in providing his characteristically clear exposition, he crystallized where many economists (including Tim) slip up on the issue of whether broadband competition would get rid of net non-neutrality and make net neutrality regulations redundant.</p>
<p>Tim points out first that price discrimination — allowing ISPs to charge fees to give different data higher or lower priority – might be actually of value to consumers:</p>
<blockquote>
<p>… it is also easy to think of good reasons to treat different kinds of content differently. An online back-up service for big data sets might prefer a discount for a connection that will run only at quieter times of day. Stream the World Cup final and you’ll want to guarantee uninterrupted coverage; sell the highlights as a download and you might accept a cheaper, more volatile connection if it saves money.</p>
<p>With a mandatory uniform price, the online back-up might be too expensive to operate, the live stream too slow to satisfy customers, and the video download getting a faster connection than it really needs. (There is a formal economic model of this effect courtesy of Benjamin Hermalin and Michael Katz but it seems intuitive to me.)</p>
</blockquote>
<p>This is important. The argument suggests that when network management is an issue (and let’s just take that as an assumption here), then consumers might have a better experience if a broadband provider managed it for them to ensure that live streams are uninterrupted while less essential stuff is not. I can only agree, although I have to add <a href="http://www.digitopoly.org/2014/05/20/is-netflixs-place-in-the-slow-lane/">that it is not at all clear</a> that live video streaming is what we would give priority to, but that is another matter.</p>
<p>But the claim follows that if there is sufficient competition amongst broadband providers, then fast and slow lanes would not arise:</p>
<blockquote>
<p>Fast lanes and slow lanes are a symptom of this market power, but the underlying cause is much more important. The US needs more internet service providers, and the obvious way to get them is to force cable companies to unbundle the “last mile” and lease it to new entrants.</p>
</blockquote>
<p>The problem here is that we believe that competition is designed to provide consumers with more of what they want. So if your claim is that they want fast and slow lanes to manage network traffic, then moving from monopoly to competition won’t stop that from happening. It will likely enhance it even if, at the same time, it delivers lower prices to consumers. Indeed, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2439360">in my own work</a> (that just appeared in the Journal of Regulatory Economics) I found that it could be a vehicle for such behavior even if net non-neutrality is not just about network management but something more sinister — like content provider hold-up.</p>
<p>The broader argument that <a href="https://theconversation.com/net-neutrality-should-apply-to-mobile-networks-38149">I have made many times</a> is that, in fact, solving the main problem with net non-neutrality — content provider hold-up — can be done with net neutrality while using less intrusive pricing schemes and product design to solve network management issues. In other words, I think we can have our cake and eat it too, and net neutrality regulation is a good place to start.</p>
<p>On the issue of broadband competition, there is a political economy reason why net neutrality regulations might turn out to be bad for this: they now provide an excuse to allow things like the Comcast-Time Warner merger to proceed on the basis that net neutrality regulations curb a negative side effect of that. My argument here is that I am far from convinced that the two things are related. However, I guess we will see if the political economy issues assist the merger’s regulatory chances. As Tim Harford noted, cable company stocks rose after last week’s announcement by the FCC, so things are not looking too good on that front.</p><img src="https://counter.theconversation.com/content/38328/count.gif" alt="The Conversation" width="1" height="1" />
Short answer: it isn’t obvious that it can. Let me back up a second and explain why I am revisiting this issue. Tim Harford published an article a few days ago that took his masterful econsplaining skills…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381492015-02-26T18:59:01Z2015-02-26T18:59:01ZNet neutrality should apply to mobile networks<figure><img src="https://images.theconversation.com/files/73239/original/image-20150226-1828-14qh2uo.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mobile shouldn't escape the net of net neutrality.</span> </figcaption></figure><p>As Internet service providers – both wired and wireless – continue to lose ground in the net neutrality debate, they have retreated to engineering requirements rather than economic arguments. Where previously it was all about incentives to invest in infrastructure – <a href="http://www.voxeu.org/article/net-neutrality-goals-and-challenges">arguments that don’t hold up by the way</a> – or the sufficiency of competition – <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2439360">for which the arguments are even weaker</a> – now it is about “network management.”</p>
<p>In <a href="http://www.vox.com/2015/2/26/8114493/against-wireless-net-neutrality">Vox today</a>, Timothy B Lee put forward what he regarded as “the best case” as to why net neutrality shouldn’t apply to cellphone networks. This argument was that capacity on wireless networks is highly variable and congestion is possible. For that reason, cell phone carriers should be allowed to restrict demand at high-volume times, especially for bandwidth-heavy applications. That means that what you want to do is de-prioritize applications for which time is not of the essence. So if you are downloading a video, you can surely wait a little longer, while if you are on a video or audio call, you can’t. </p>
<p>This isn’t unusual in congested industries. For instance, when electricity networks become congested, since it is hard to ration usage at the dwelling level, sometimes customers get cut off. However, larger customers – who can be given notice and instructed to reduce their demand – often sign contracts with electricity companies that give them lower electricity rates overall in return for being interruptible.</p>
<p>The same could apply to certain applications or websites. A mobile carrier may want to give them lower carriage charges with the caveat that they can be interrupted. That would be all well and good except that the content providers, as they are called, are not the mobile carrier’s customers. Users are. So what you want to do is give users lower data charges for bandwidth-heavy applications on the understanding that they can be interrupted if there is congestion.</p>
<p>Here’s the rub. There is nothing in the <a href="http://www.wsj.com/articles/fcc-approves-net-neutrality-rules-setting-stage-for-legal-battle-1424974319?mod=WSJ_hp_LEFTTopStories">net neutrality rules passed today</a> by the FCC that would stop this sort of congestion management contract. What the rules stop is a carrier going to one particular content provider and asking them for blanket payments to ensure that they are not interrupted and their consumers have a better experience. But they don’t stop you going to consumers and saying that they can nominate certain applications that they don’t mind having some interruption on. </p>
<p>For instance, you might like to watch Netflix when you are out and about, but what constrains you now is the overall data charges. Your carrier could say: how about I reduce those charges for Netflix, but, if there is congestion, I will interrupt it. </p>
<p>Notice that, in this situation, Netflix doesn’t really lose if it is the cause of that congestion. This is because it will be interrupted anyway – capacity is capacity, right? However, the deal allows some consumers to find it more affordable to use Netflix when it isn’t likely to be interrupted. Consumer demand shifts around and there is more efficient usage. </p>
<p>The principle here is that the mobile carrier shouldn’t dictate which applications should receive priority. That decision should be delegated to consumers, and, to them, you will have to give them an incentive to change their behavior to assist in network management. </p>
<p>The power of the net neutrality argument comes from its removal of the ability of carriers to dictate specific behavior on content but opens it up for them to provide consumers with the tools and incentives to manage congestion issues should they arise. In the end, the engineering requirements will be met – because they must be – but the power of how they are met will not be concentrated.</p><img src="https://counter.theconversation.com/content/38149/count.gif" alt="The Conversation" width="1" height="1" />
As Internet service providers – both wired and wireless – continue to lose ground in the net neutrality debate, they have retreated to engineering requirements rather than economic arguments. Where previously…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/378692015-02-20T17:48:17Z2015-02-20T17:48:17ZThe Apple Car will be really different … if it exists<figure><img src="https://images.theconversation.com/files/72638/original/image-20150220-21916-10kizk6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Could CarPlay be the precursor to an Apple Car? </span> <span class="attribution"><span class="source">Apple</span></span></figcaption></figure><p>It has been a week and the Apple Car rumor hasn’t been denied by Apple. (<a href="http://www.vox.com/2015/2/16/8043673/apple-car-icar">Here’s the background</a> in case you have been living under a rock). So what are we to make of all this?</p>
<p>Much of what has been talked about is complete speculation. That it will be electric, autonomous, a mini-van (!) all seem obvious or mis-communicated hearsay. Thinking about cars is the wrong way to approach thinking about the Apple Car. Instead, you have to think about Apple’s identity and how it approaches new markets. And let’s face it, a car would be a new market.</p>
<p>First, Apple does not introduce incremental product improvements. This won’t be a car with an Apple logo or something that Tesla is doing. Instead, it will be something at least ten times better (you pick the metric) than anyone else is doing. It did that with the Apple II, the Macintosh, the iPod, the iPhone, the iPad and, possibly, the Apple Watch. Apple TV was ten times better than your TV or cable box, but it wasn’t ten times better than everyone’s product, which is probably why Apple deemed it a hobby.</p>
<p>This means that if the company is working on something, whether it is electric or what have you, is unlikely to be the point. It is going to solve some problems that are major ones – so major that no one else has really tackled them. And guess what? I have no idea what those might be and neither likely does anyone in the car industry. The car industry has identified only two next-generation technologies of importance – electric motors and autonomous vehicles. Tesla leads the former, and we guess that Google leads the latter. </p>
<p>Second, when Apple release these products, it envisages them as part of its hub of products. For the iPod, it was part of the personal computer as a hub concept. For the iPhone and iPad, that became the cloud as a hub. I suspect we are back to the iPhone as a hub with the Apple Watch. The question is, in five years’ time, what will be the device that is the hub for people. If you can answer that question, you may be able to guess what the Apple Car might do that will be new.</p>
<p>Third, design and user-interfaces are where these new products come from. Looking good happens, but after function. So thinking about what a new Apple Car might look like is crazy. As crazy as thinking about whether the company will ship the car for US$29,999 for the 16GB model and $39,999 for the 64GB one. Instead, think about the designers. In this case, Jonny Ive. As the <a href="http://www.newyorker.com/magazine/2015/02/23/shape-things-come">New Yorker profiled</a> (in what seems to be an article preparing us for his retirement in six months), he commutes to and from San Francisco – that’s two hours at least in total – in a chauffeur-driven Bentley. That’s lots of time to think about what’s wrong with cars. In other words, the Apple Car is likely to be something that is important for commuters. Moreover, Apple devices tend to be familiar and not require explanation. What would a car that is obvious to use look like?</p>
<p>That said, let me just throw another possibility into the mix. I wonder if the Apple Car is more about Disney. You know where it would be great to have a set of autonomous, mini-van style cars? Disney World. In Disney World Florida, there is a fleet of buses designed to get people around. Lots of people spend lots of time waiting for them. Imagine instead that the whole area was turned over to autonomous vehicles with no other ones in sight. Think about how they could make that type of “community of the future” work. And to do it, think about what would happen if Disney partnered with Apple on that (as Apple and Disney have historically close ties). </p>
<p>Anyhow, I am boldly going to say right here, right now, and for the record, that I have no idea what the Apple Car will do even if it is exists. But if it does happen, the chances are it will be very, very new.</p><img src="https://counter.theconversation.com/content/37869/count.gif" alt="The Conversation" width="1" height="1" />
It has been a week and the Apple Car rumor hasn’t been denied by Apple. (Here’s the background in case you have been living under a rock). So what are we to make of all this? Much of what has been talked…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/372622015-02-05T21:51:57Z2015-02-05T21:51:57ZA search for the unreal America<figure><img src="https://images.theconversation.com/files/71249/original/image-20150205-28594-1629m14.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>There is often lots of talk in American politics about the “real America.” Suffice it to say, implicit in that is that everyone wants to be real and so even an assertion to the contrary is an insult. </p>
<p>Truth be told, however, what many regional and local governments are interested in is whether their location is unreal. That is, do they perform or have the potential to perform in ways that vastly outstrip other areas.</p>
<p>A new method developed by MIT’s Jorge Guzman and Scott Stern (and <a href="http://www.sciencemag.org/content/347/6222/606.full">published in Science today</a>) promises to add some science into the search for the unreal. The authors’ idea was to combine business establishment data – often used as an imperfect measure of entrepreneurial activity – and use history to understand what factors led new establishments to really grow, generating equity value and, of course, jobs. Once they have those factors, they can look at new businesses and then predict their growth potential. Finally, in the search for the unreal, they map their outcomes.</p>
<p>So let’s step back and see whether what they found leads to business growth. On the one hand, if a firm is incorporated, that indicates future growth. That isn’t too surprising given that incorporation takes some resources but also is only undertaken if there is some commitment to longevity. Firms that have patents also have growth potential. Again, hardly a surprise given that those firms are likely to be technology companies rather than another cafe or dry cleaner. </p>
<p>But the more surprising result was that the firm’s choice of name could tell you something. Short names are good as are names associated with technology. I guess moving from “The Facebook” to “Facebook” is correlated with a customer-orientation that makes a firm poised for growth. The idea here is not that the name itself matters per se, but that thought into a name that is short and to the point indicates other good qualities about the business, including its strategy and positioning. </p>
<p>Armed with that, Guzman and Stern could then look at businesses established more recently and project their growth potential. They did so and then they mapped it. Here is the San Francisco Bay Area.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=631&fit=crop&dpr=1 600w, https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=631&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=631&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=793&fit=crop&dpr=1 754w, https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=793&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/71246/original/image-20150205-28615-brss8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=793&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Entrepreneurial Activity in the Bay Area.</span>
<span class="attribution"><span class="source">Science</span></span>
</figcaption>
</figure>
<p>Looking at the map you can see the concentration of activity around the South Bay. Despite all the talk of Silicon Valley migrating north, there it is clustered around Stanford University and the Google/Facebook/Apple tech giants. You can also find it near Berkeley on the other side of the Bay.</p>
<p>The study hasn’t searched the whole of America yet; there is <a href="https://www.dropbox.com/sh/ybiz9cqlhqfbjag/AAAS5e1WBdOc4-QMKeKgA3Jta?dl=0">a Massachusetts study here</a>. The authors looked for where they thought they would find unreal stuff and did. But who knows what gems of unreal activity will emerge elsewhere as the method is scaled up? This is certain to be an important tool for policymakers for years to come.</p><img src="https://counter.theconversation.com/content/37262/count.gif" alt="The Conversation" width="1" height="1" />
There is often lots of talk in American politics about the “real America.” Suffice it to say, implicit in that is that everyone wants to be real and so even an assertion to the contrary is an insult. Truth…Joshua Gans, Professor of Strategic Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.