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Netflix Circles the Drain

By Taylor Marvin

Netflix is splitting itself in two. From CEO Reed Hastings:

“So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. It’s hard for me to write this after over 10 years of mailing DVDs with pride, but we think it is necessary and best: In a few weeks, we will rename our DVD by mail service to ‘Qwikster’.”

It’s easy to understand why Netflix felt like they had to break up their company: content providers have been making it increasingly clear that they won’t keep licensing their products at the low price Netflix customers have become habituated to. But it’s hard to see how dissolving Netflix into a streaming and DVD-mail order business is going to help. From Megan McArdle:

“But regardless of whether you think the content providers are wrong, the fact is, they own the content, and Netflix can’t stream it unless they pay for it.  That meant that prices were going to go up, or quality (measured by availability of content) was going to go down–and in fact, both of those things happened.  Unfortunately, users had been conditioned to expect unlimited free ice cream; they didn’t like having to pay for it.  Subscriptions dropped instead of rising, as analysts had been conditioned to expect.  And analysts didn’t like that.  Netflix stock went into the sort of rapid decline that usually only plagues the heartbroken heroines of Victorian novels.

So I understand that Netflix was in a bad place.  But I don’t understand how Qwikster solves any of these problems.  It doesn’t improve their bargaining position with the content providers (though contra Tim Lee, I don’t think it makes it any worse, either.)  It doesn’t soothe angry customers who don’t like having to pay for stuff they used to get for free–indeed, if some critics are right, and the websites don’t inter-operate, it just makes those customers madder.”

I really don’t understand what Netflix’s plan here is. They’re behaving like they’re a business without substitutes, which is partially right: as Kevin Drum notes, over the last decade Netflix has been remarkably good are underpricing and bankrupting all of its direct competitors:

“Oh well. Nothing lasts forever. But with Blockbuster gone, Redbox mostly limited to newer releases, and streaming services offering only a tiny selection, where am I going to go if I want to watch some movie made more than a decade ago? I guess I’ll just wait for them to show up on cable until the content providers figure out what to do.”

But this isn’t true — for a large portion of its market, Netflix faces a massive direct competitor that can continually under price it: pirating. The difference between my Dad’s and my TV watching habits is a good example of this. Despite being very computer literate, my Dad doesn’t stream pirated content: he streams the shows he likes on the network’s websites, and rarely uses Netflix to rent or stream movies. Though he probably could learn to stream pirated content if he wanted to, my Dad’s willing to accept the networks’ streaming services’ ads and limited selection in return for their convenience. I’m different. I prefer to watch content on Neflix, but if it isn’t available there I’m prepared to put up with the hassle of steaming it on a pirated site. I think this is a pretty normal generational differentiation. The real question is how Netflix’s customer base breaks down. Younger Netflix customers comfortable with pirating content are likely leave the service entirely in favor of pirating movies that they intend to watch alone on their computer, and taking advantage of Redbox’s expanding selection for DVDs they want to watch on a TV with friends. Older customers are likely to either continue to pay for Netflix’s convenience, or like Kevin Drum switch over entirely to cable. If a enough of Netflix’s customer base is the former, they’re in trouble. I can’t imagine any way this divide won’t decimate Netflix’s market share.

I understand Netflix and content providers are in an impossible situation: over the last decade they’ve habituating internet customers to massively underpaying for content that’s increasingly expensive to produce. But the dissolution of Neflix places the content providers in the same position the music and newspaper industries were a decade ago: once people have become accustomed to consuming your product for free its very difficult to convince them to start paying the market rate for it again, especially if there’s an illegal competitor waiting to steal customers willing to put up with some inconvenience. Interestingly, today’s media companies are in an even worse position than the music industry, because unlike music consumers have been generally habituated to thinking that TV is naturally consumed for ‘free’. This is only anecdotal, but though I personally don’t have a problem illegally streaming TV I don’t pirate music: it feels too much like stealing from artists. Of course, this is ridiculous: networks and movie studios deserve to be compensated for their work, and if I want to consume it I should have to pay a price they dictate. But I can’t help wondering how many media consumers are like me. If many are media companies are in for a rough decade.

Web comic The Oatmeal has a more succinct explanation of just how much is wrong with Netflix’s plan.

Friday’s Reading List

By Taylor Marvin

Oedipus and the Sphinx, Gustave Moreau, 1864.

Oedipus and the Sphinx, Gustave Moreau, 1864.

The best links of the week:

The agony of the Bunga Bunga.

The American justice system is broken.

The Onion’s devastating look at what the last decade might have been.

Rio de Janeiro’s crack epidemic.

How tall is Jake Gyllenhaal?

In defense of geekery: Why society needs SF/F (Via Alyssa Rosenberg).

Felix Salmon has fun with legos, Euro crisis edition.

The Defense Department has franchises all over the world (some of which are more valuable than others).” I think you mean ‘some of which are more voluntary than others’.

The American Jobs Act, No Luck for 2012

By Saad Asad

President Obama unveiled his $447bn American Jobs Act last Thursday in another attempt to invigorate a waning economy (that produced a net zero jobs in August). Mark Zandi, of Moody’s Analytics, claims it would create 1.9m jobs and the economic consulting firm, Macroeconomic Advisers, claims it would create 1.3m over the next year. However, predictions are only predictions as we learned with the American Recovery and Investment Act in 2009.

Image via James Pethokoukis.

Image via James Pethokoukis.

The current proposal includes the following measures to stimulate the economy:

  • Cutting payroll taxes in half for employees in 2012-$175bn
  • Cutting payroll taxes in half for employers in 2012-$65bn
  • Transportation improvements-$50bn
  • Unemployment insurance and reform-$49bn
  • Teacher and first responder rehiring-$35bn
  • School Modernization-$30bn

Reducing payroll taxes for employees is an extension of last year’s tax deal, but there is little evidence to indicate it would have an immediately simulative effect. The tax break hits those already employed and many high-earners who have a higher likelihood to save. Saving is fine for the long-term, but the economy needs the consumer demand now. Further, money that isn’t saved is used to pay down debt which is important but will produce nil economic benefits for 2012.

Also, since this is touted as a temporary tax break, many people won’t even bother to spend the extra money. Few will decide to buy a $35,000 car instead of $25,000 one, nor will someone move in to a new apartment with higher rent if the extra income they earn will be gone next year.

Next, the employer tax break will have little effect without consumer demand to back it up. Labor costs aren’t the reason employers won’t hire; hence, reducing the cost from $40,000 to $38,800 won’t incite much additional employment.

Pundits frequently cite a Congressional Budget Office (CBO) study to prove its effectiveness claiming for every $1 spent on employer tax breaks, the economy will produce $1.2 in output. However, 1.2 is the higher end of a large range, and at the bottom of the range is 0.4 meaning for every $1bn spent, only $400m would be created in output. This reflects economists’ general uncertainty about the effectiveness of this measure.

Moving on, infrastructure projects, transportation or school-related, can certainly boost employment, but the primary problem is implementation delay. President Obama famously quipped about the 2009 stimulus that “shovel ready wasn’t as shovel ready as we thought.” There’s no reason to believe this will be any different, and we may not see the fruits of this labor until 2013 or later.

Additionally, $50bn on transportation infrastructure is simply too small and is a 40th of what the administration says is needed to fix our declining roads, highways, and rail systems. Admittedly, Republicans would balk at anything higher (and are already balking at this number), but this is meager help for the unemployment problem.

Unemployment insurance is touted as one of the most effective stimulus measures since those who receive it have an immediate incentive to spend now and not save. Conservative economists like N. Gregory Mankiw argue that it discourages people from searching for jobs. However, no amount of desperation on the part of the unemployed will increase hiring as there is just insufficient consumer demand. However, the President intends to include the following reforms: work-sharing, a “Bridge to Work” program, and wage insurance.

First, work-sharing encourages businesses to reduce the hours of everyone and take a pay cut instead of firing people. Dean Baker from the Guardian explains:

“The way the system works in Germany, a firm will cut back the hours of its workers by 20%. The government then replaces 60% of the lost pay (12% of total pay). The firm is expected to kick in 20% of the lost pay (4% of total pay) and the worker ends up taking home 4% less pay.

In this scenario the worker ends up working 20% fewer hours for 4% less pay.”

Senate Majority Leader Harry Reid’s office claims that if all 50 states adopted work-sharing programs, 400,000 to 500,000 jobs could be saved a year. However, Ramesh Ponnuru from the National Review notes a few problems:

  • “A mid-level IT manager writes, “In the real world, reducing X hours worked to 0.75X, but reducing pay to 0.95X, is called a RAISE.  It’s a payout of more compensation per unit of work.  Absent a commensurate increase in output, this is a net economic loser – a permanent reset of the pay and productivity expectations of that workforce.  What happens, pray tell, when le bon temps roule again – are good workers going to accept a 25% increase in work hours for a 5% raise?  Or will they take advantage of scarcity to make those productivity reductions permanent? (Based on human nature over the last, oh, 5,000 years, I’m going with option 2).”
  • Getting rid of an employee lets the company save on wages and benefits; cutting hours will not lead to a proportional reduction in benefits.
  • Work sharing would prevent the firm from optimizing its productivity: It is, after all, being bribed to handle the reduction of its labor needs in a way it would not otherwise handle it. It might also demoralize the most productive workers, who would be taking cuts to prevent the layoff of less productive ones. Writes one reader: “People doing jobs are seldom interchangeable and it is hard enough to find one right person for any given job. The task of finding two, who can then work together as efficiently as one, may impose cost, coordination, and accountability problems that make work sharing more expensive in a lot of jobs, and completely unworkable in others. Would someone else be able to finish your columns just as well as you could?” (Don’t answer that!)
  • Its potential is limited. In industries where the work is not going to come back after the recession, work sharing would just retard the adjustment the economy needs to make.”

Ponnuru’s arguments note its application may be constrained and could actually harm long-term productivity gains by interfering in the firing decisions of firms.

Second, Obama’s ‘Bridge to Work’ program is modeled after GeorgiaWork$ which places unemployed people with firms for eight weeks like an internship and a chance for a job at the end. However, only 12 people enrolled in Georgia’s program in August and only 92 since February. Mark Butler, the labor commissioner running the program, admitted it was “fraught with problems” and virtually bankrupt when he took over.

Third, the wage insurance program would supplement the incomes of those who took lower paying jobs after being unemployed (usually 50% the difference) so as to incentivize them to immediately pick up jobs instead of waiting it out for one with similar pay. The opposition to this is that it encourages firms to offer lower salaries since the government will make up the difference.

Finally, preventing teacher layoffs and rehiring them is argued to be cost-effective since the teachers would not have to rely on unemployment benefits, food stamps, etc. Further, the population at-large would benefit in the future from a potentially more educated populace, though the amount of teachers saved is not large enough to significantly affect the student-teacher ratio. Also, consider K-12 teaching is not one of the worst hit industries of the economic downturn, so arguably, it could be better spent elsewhere.

Image via Marginal Revolution.

Image via Marginal Revolution.

There is little hope the American Jobs Act will significantly affect unemployment in 2012 due to lack of consumer demand and the inability of this bill to spur it. Household debt is still dragging down the economy and citizens have even less faith in the government to restart the economy ever since the 2009 stimulus failed to meet expectations. Over the long-term, extra tax breaks to pay down debt and infrastructure spending will establish growth, but President Obama may still be saddled by 9% unemployment during the 2012 election. In the worst of ironies, we may see another president economically benefit from this bill because Obama was unable to reduce unemployment numbers in his own term.

Friday’s Reading List

By Taylor Marvin

Shipka Pass, Bulgaria. Image by WikiMedia user Psy guy.

Shipka Pass, Bulgaria. Image by WikiMedia user Psy guy.

The best links of the week:

Slate’s excellent series on 9/11 truthers.

The Atlantic collects haunting photos of 9/11 (warning: graphic).

Abuses and low pay in the modeling industry.

Something is rotten in the state of Iraq.

The end of WikiLeaks.

Photos from the first days of the War in Iraq (warning: graphic).

Fascinating research that shows that though different languages are spoken at different speeds, the total volume of information that can be conveyed per second is largely constant (h/t: Brad Plumer).

Vieux Farka Touré – The Secret (feat. Ali Farka Touré)

Celebrating Death

By Taylor Marvin

Americans celebrating the death of Osama bin Laden. Photo by Josh Pesavento.

Americans celebrating the death of Osama bin Laden. Photo by Josh Pesavento.

Glenn Greenwald has a provocative post arguing that liberals should be as disgusted over the public celebration in the wake of Osama bin Laden’s killing as they are over Republicans’ enthusiastic cheers for Texas’ 234 public executions under Governor Rick Perry:

“I agree with all of that, and that’s why this morning’s orgy of progressive condemnation made me think of very similar death-celebrations that erupted at the news that the U.S. military had pumped bullets into Osama bin Laden’s skull and then dumped his corpse into the ocean.  Those of us back then who expressed serious reservations about the boisterous public chanting and celebratory cheering of executions were accused by Good Democrats of all manner of deficiencies.”

I’m sorry, but these two events just aren’t comparable. Inmates on Death Row are contained and controlled, and if not executed the overwhelming majority spend the rest of their lives in prison. These prisoners aren’t a threat to society, and their executions is nothing more than an explicit an act of state-approved public vengeance.

On the other hand, “pumping bullets into Osama bin Laden’s skull” removed a direct threat to American society. This isn’t debatable — while the operational capabilities of al Qaeda have drastically shrunk since 2001 and the allure of radical Islam has declined, Osama bin Laden remained the head of a violent international organization with extensive experience killing American civilians. There are many reasons to argue that capturing bin Laden alive was not a feasible option — the SEALs’ uncertain exit from Pakistan, for example, and how easy it would have been for al Qaeda affiliates demanding bin Laden’s release to begin executing US citizens abroad — meaning that killing him was the only practical way to remove this threat. Killing bin Laden was partially an act of vengeance, and was certainly perceived as such. However, it also was a very practical measure necessary perceived by US policymakers and the public as increasing American security. Of course, this may not be the case — it’s entirely possible that popular anger stirred in Pakistan by repeated and obvious US violations of Pakistani sovereignty have empowered violent rhetoric and decreased US security. However, this calculus isn’t a part of American popular thought (though it should be). In the minds of nearly all Americans, killing bin Laden made them and their families safer, and signaled the dramatic end of a long and difficult war. Speaking from the perspective of a 22 year old, if 9/11 was my generation’s Pearl Harbor the death of bin Laden was the closest we’re going to come to V-J day. Of course, this is a non sequitur — nearly all of the War on Terror was at best irrelevant to combating Islamic extremist violence, and at worst criminally wasteful and counterproductive. However, perceptions do matter, despite their validity. Killing bin Laden was perceived as a shared cathartic closure marking the end of a very traumatic episode of US history, and unlike last night’s revelatory embrace of America’s cult of vengeance, I’m not prepared to condone it.

The Price of Suicide Bombers

By Taylor Marvin

Japanese suicide attacker, 1944.

Japanese suicide attacker, 1944.

Spencer Ackerman has a very interesting report up today on the fluctuating prices of various IEDs and delivery systems used by insurgents in Iraq and Afghanistan. One of Ackerman’s most interesting findings is that “the going rate on suicide bombers appears to have risen, from $5,966 in 2006 to nearly double that in 2009.”

Matt Yglesias expands this point, pointing out that the rise in the cost of Iraqi suicide bombing operations is roughly equivalent to Iraq’s robust GDP growth:

“Students of economics will note that this is a pretty typical Baumol’s Cost Disease scenario. Over time, a committed insurgency gets better at making bombs, either through improved skills or improved supply chains, leading to higher costs. But suicide bombing is an inherently labor-intensive enterprise with essentially zero range for productivity growth. Consequently in a country like Iraq that’s experiencing very rapid GDP growth, you see skyrocketing costs. And in the suicide bombing case, the problem is particularly severe since the marginal worker dies on the job, leaving the would-be mastermind of the plot always needing to move up the value chain.”

Of course, this isn’t a robust finding — there’s no information on what proportion of the cost of suicide bombing are personnel costs, and if these costs have been rising with improving Iraqi economic conditions. But this does make intuitive sense: insurgent organizations typically compensate the families of suicide bombers, and this compensations is likely a strong motivation for individuals deciding whether to take part in suicide operations. A motivated suicide bomber is much more effective than one who is being coerced, especially in organizations unable to enforce a high level of social discipline. The families of Japanese kamikaze pilots in World War II were not compensated, because pilots in the Imperial Japanese military were placed in a position where they often couldn’t refuse suicide missions. Iraqi violent groups likely face more limitation in controlling and influencing their recruits. Accordingly, the value of compensation paid to an Iraqi bomber’s family should be expected to rise as the value the family would otherwise receive from the bomber increases with rising national GDP.

This highlights just how bad in the long-term Israel’s policy of isolating Gaza is. This blockade policy is arguable justified in the short term — Hamas is a real danger to Israeli security, and Israel has few means of effectively combating it. But the Israeli blockade has had a hugely negative effect on the Gaza economy. While unemployment in the West Bank is roughly 17%, it’s a staggering 40% in the Gaza. GDP per capita in the two areas is equally differentiated. This means that extremist groups in Gaza likely face much less financial constraints on mounting suicide attacks than those in the West Bank, and Israeli’s Gaza blockade policy — strategically rational in the short term — is creating an economically non-functional society that likely directly enables violent groups.

Friday’s Reading List

By Taylor Marvin

Burst, by Jen Stark, 2007. Via

'Burst', by Jen Stark, 2007. Via

The best links of the week:

Asia’s lonely hearts.

The decade’s biggest scam.

In the end, Petraeus really was that good.

No, civil conflicts are not directly associated with weather. “As long as Science magazine continues to run articles of doubtful quality applying simplistic mathematical models to social science, the APSR should run silly articles by political scientists proposing new theories of biology, physics, etc.

The lost plague – London graveyard suggests that the Black Death strain may be extinct.

Libya’s ‘precarious’ transition ahead.

If Hurricane Irene was a sign of God’s anger over government spending, should we give in to God’s demands? After all, we don’t negotiate with terrorists.

US war crimes in Iraq.

10% of American Muslims think President Obama is a Muslim.

Ever wonder where the Windows XP default wallpaper came from?

Bored UCLA student joins Libyan rebels. This is not a joke.

Brazilian Girls – Me Gustas Cunado Callas.

Girls Are Smart, Follow International Affairs and Like Prospect

By Taylor Marvin

Recently I was playing around on Prospect’s Facebook page [shameless self-promotion: like Prospect!], and I noticed something interesting. Facebook actually does a fairly good job of providing analytical tools to page owners, and includes in its reports the gender ratio of Facebook users who ‘like’ Prospect:

Nearly two thirds of Prospect’s student-age ‘likes’ are female. This is on the surface puzzling: an interest in international affairs doesn’t seem to be a trait that would skew heavily female.

However, there are some interesting clues in the data. The overwhelming number of Facebook ‘likes’ are from 18-24 year olds in the United States. This suggests, unlike the overall readership of Prospect, that the nearly all of Prospect’s Facebook ‘likes’ are by UCSD students or recent alumni, which briefly skimming  our Facebook page seems to confirm.

Does the gender demography of UCSD explain this skew? Not quite. UCSD does skew slightly female, but not nearly enough to explain the magnitude of Prospect’s male/female imbalance. Additionally, female students at UCSD average slightly higher GPAs than their male peers, possibly suggesting that female students are more likely to be intellectually curious enough to spend their free time reading an international affairs magazine. However, like UCSD’s gender imbalance this disparity is small enough to be insignificant.

However, we’re not interested in all students at UCSD — only those who might be reading Prospect. It makes sense to assume that a large portion of the UCSD students who read Prospect and ‘like’ it on Facebook are at least somewhat interested in international affairs. While not all of these internationally-minded students’ majors necessarily reflect this interest, it’s likely that a high proportion do.

With this theory in mind, I talked to Dr. Nancy Gilson, the Director of Degree Programs at UCSD’s Intentional Relations/Pacific Studies professional school, who also oversees the International Studies Program. Dr. Gilson was able to give me detailed statics about the demographic makeup of the program. This information largely corroborates the theory that Prospect’s ‘likes’ is largely due to the gender ratio of international studies students.

International studies is a growing major at UCSD:

While the International Studies program at UCSD is a fairly small percentage of the total student body, UCSD is large enough for it to plausibly account for the large majority of Prospect’s Facebook ‘likes’. Additionally, UCSD’s international studies program is fairly flexible, allowing students to concentrate in a variety of academic fields with an international outlook. However, despite having a number of choices the large majority of ISP students choose to take classes in two areas: political science and economics.

ISP students’ overwhelming favorite concentrations — political science and economics — closely mirror Prospect’s favored topics, again suggesting that a significant portion of our student readership at UCSD are International Studies majors. How related is this to Prospect’s Facebook gender imbalance? It turns out a lot:

International Studies is overwhelmingly female. Dr. Gilson attributed at least part of this striking gender imbalance to the International Studies program’s language requirement. International Studies requires at least a year of a foreign language, and UCSD’s language classes tilt heavily female. This, and International Studies students’ assumed propensity to gravitate towards an international affairs magazine in their free time, seems sufficient to explain why the majority of Prospect’s fans are 18-24 year old women.

However, there’s likely more going on here. While the average Facebook user has 130 friends, students average much more than that — they’re likely to use the site more heavily than older people, and being in school gives them exposure to potentially much larger social networks than the average user. Similarly, females are likely to have more friends and interactions on Facebook than males — something my entirely anecdotal experience supports —  suggesting that they are more likely to disseminate ‘likes’ more quickly through their wider social networks. Another, entirely unscientific theory is that 18-24 year old women are more socially supportive than the male peers; that is, female friends of Prospect’s female staff members (Prospect staff skews slightly female) are more likely to ‘like’ Prospect as a show of social support than their male counterparts.

However, it’s important not to read too much into Prospect’s Facebook statistics. Prospect’s admittedly anemic 319 Facebook ‘likes’ aren’t an accurate representation of its readership, rather, they’re a representative of Prospect readers who have a Facebook and choose to take the time to click the like button, and likely non-readers who want to support their friends on Prospect’s staff. Facebook ‘likes’ are a subset of a subset, and have less analytical value than pageviews, despite  their admittedly interesting demographic content. Facebook is a hugely important marketing tool, and one that Prospect has failed to fully utilize. But it isn’t everything.