One Peter Thiel Theme: Nonconformity

Tyler Cowen links to his conversation with Peter Thiel. I listened to the YouTube version.

If there is one constant theme, it is Thiel’s support for nonconformity or contrarianism. If you start a business, try to make it so original that it is a monopoly. If you want to start a non-profit, make it for an unpopular cause. Try to value substance over status, meaning you worry about being true to yourself, not about obtaining broad approval and support. The independent truth-seeking scientist is the opposite of the popular truth-bending politician.

Still, he wants contrarians, not misanthropes. Contrarians who can work in teams. I would add, and I imagine he would agree, that contrarians need to be particularly selective about who they team up with.

Subway Externalities

Paul Romer says,

If the only way to support Manhattan densities is with the subway system, then you’ve got to figure out how to finance the subway system. And, you know, part of what we’ve learned is that the value of the subway system will show up to a large extent in the value of the land. So that you can’t just think about sending out, giving out a contract for somebody to build the subway system and try to finance it based on the fare revenue. What you’ve got to do is somehow internalize the increases in the value of the land induced by the kind of access that the subway can provide.

This in a Russ Roberts podcast. Russ has had other interesting guests the last few weeks, also.

Scope and Banking

A reader recommended this post by Jeff Carter.

The days of the one stop shop that Sandy Weil envisioned when he built Citigroup ($C) are gone.

I have always believed that there are diseconomies of scope. Companies with many lines of business are difficult to manage effectively, in my view.

In the case of banking, I thought that the “financial supermarket” fad of the 1980s was silly. Consumers are fine having separate vendors for credit cards, checking accounts, and stock portfolios.

I have to say, though, that it is not just banks that defy my prejudice against multiple business lines. Amazon has branched into all sorts of unexpected businesses, such as renting Web servers. Google is another example of a company that is not strictly bounded in what it businesses it will try.

Some possibilities:

1. I am correct, and whenever you see a company with many lines of business, whether it’s a bank or a tech firm, it represents the CEO’s ego gain and the shareholders’ wealth loss.

2. I am somewhat correct, but the diseconomies of scope are actually quite small. Six lines of business can be managed almost as effectively under one organization as under six totally separate entities.

3. I have it wrong. There actually are tremendous fixed costs to developing a good decision-making structure, and CEO talent is scarce. These super-managers, or management super-cultures, can handle a sixth line of business more effectively than other managers can handle a first.

Capitalist Tentacles

From Fortune,

Founded in 2006, the company has grown to 1,200 employees and operates in 40 countries. With 11 billion page views, 25 million listings, and 8.5 million transactions per month, it is the largest marketplace in India, Poland, and, as of last year, Brazil. Funded by U.S. venture firms including Bessemer Ventures and General Catalyst Partners, OLX sold a majority stake to the African conglomerate Naspers in 2010.

This story made me feel good. I thought I would pass it along.

Technical and Communications Skills

Catherine Weinberger writes,

while math scores, sports, leadership roles, and college education are all associated with higher earnings over the entire 1979-1999 period, the time trend in the earnings premium was strongest among those individuals who participated in sports or leadership activities during high school and had higher levels of cognitive skills. Supporting evidence based on Census and CPS data matched with the Autor, Levy and Murnane (2003) job-task measures provides an independent observation also suggesting that the labor market increasingly favors workers with strong endowments of both cognitive and social skills. These findings, coupled with evidence of growing employment, suggest increasing complementarity between cognitive and social skills among young workers.

Pointer from Tyler Cowen, who sees the findings in an average-is-over context. Indeed, if cognitive skills and social skills are both somewhat scarce and imperfectly correlated, increasing complementarity would lead to greater inequality.

I would always tell my AP Statistics students that they were learning technical communications skills. I would say that communicators without technical skills end up as baristas. Those with technical skills but poor communication skills will end up as Dilbert, working for a boss who appears to be an idiot.

Joshua Gans on Apple Pay and Market Power

He writes,

So last week, in some of these stores you could use Apple Pay. This week in CVS and Rite Aid you can’t. The reason appears to be that a bunch of large retailers got together a couple of years ago to develop their own mobile payments solution — mostly to compete with existing banks and credit card associations. They are still doing that and will only launch their app, CurrentC, next year. In the meantime, they have acted to stop Apple Pay and Google Wallet from getting traction.

When a consortium of big legacy companies tries to take on a tech company in an innovative area, I expect an epic fail.

Matthew Yglesias on Amazon and Market Power

He writes,

What is indisputably true is that Amazon is on track to destroy the businesses of incumbent book publishers. But the many authors and intellectuals who’ve been convinced that their interests — or the interests of literary culture writ large — are identical with those of the publishers are simply mistaken.

Pointer from Jason Collins.

I agree that we should not be rushing to the barricades to defend the traditional publishing business model. Rooting for the book publishers to have strong negotiating leverage with Amazon is equivalent to rooting for the legacy music industry to have strong negotiating leverage with iTunes.

Thoughts on Two-Sided Markets

Lynne Kiesling writes,

the distribution wires firm can, and should, operate as a platform and think about platform strategies as the utility business model evolves. An electric distribution platform facilitates exchange in two-sided electricity and energy service markets, charging a fee for doing so. In the near term, much of that facilitation takes the form of distribution, of the transportation and delivery. As distributed resources proliferate, the platform firm must rethink how it creates value, and reaps revenues, by facilitating beneficial exchange in two-sided markets.

Until now, I have not thought much about this whole two-sided market concept. I am struggling to see what it buys you. Earlier in her post, she quotes from a Harvard Business Review article.

In the traditional value chain, value moves from left to right: To the left of the company is cost; to the right is revenue. In two-sided networks, cost and revenue are both to the left and the right, because the platform has a distinct group of users on each side. The platform incurs costs in serving both groups and can collect revenue from each, although one side is often subsidized

If I’m understanding this correctly, then a brothel is a traditional value chain, but a singles bar is a platform. In terms of that metaphor, Kiesling is suggesting that electric utilities could change from operating like brothels to operating like singles bars.

Some problems I am having:

1. I am not sure what, if anything, makes brothels the natural business model in one industry and singles bars the natural business model in another.

2. Suppose that a singles bar has to pay women in order to get them to show up. By my reading of the HBR excerpt, then it becomes a traditional value chain. Metaphorically, it becomes a brothel, although I assume that it can avoid legal difficulty as long as the beds are off premises.

3. To me, cable TV looks like a brothel, not a singles bar. And to me, electricity looks like cable TV.

4. Metaphorically speaking, taxi companies and hotels operate brothels. Uber and airbnb operate singles bars. What Uber and airbnb are tapping into is supply-capacity that taxi companies and hotels were not using, either because they didn’t think of it or because it didn’t fit their business model. Is there spare electricity-generating capacity that utilities could be tapping into? If so, do they have the know-how and flexibility to tap into it?

Textbooks, Venture Capital, and Pharmaceuticals

Timothy Taylor writes,

It is by no means obvious that a lower-cost book (yes, like my own) works less well for students than a higher-cost book from a big publisher. Some would put that point more strongly.

Yes, I know that professors do not care much, if at all, about the prices of the textbooks they select for their students, but that is not the only reason that prices are so high.

Another factor is that the industry is similar to venture capital and pharmaceuticals. The organizations that fund projects in these areas incur heavy expenses on failures. A lot of textbook projects fail. The author may not even finish the book. Or it will flop in the market.

For a VC firm to stay in business when most of the companies that it funds wind up failures, it has to earn spectacular returns on its successes. For a pharmaceutical firm to stay in business when a lot of its research fails to yield a marketable compound, it has to charge a lot for those drugs that do make it. And for textbook publishers to stay in business when many of their projects flop, they have to charge a high price for the books that do sell.

Advances in technology have made it easier to produce a textbook at low cost. However, by the same token, it has probably increased the probability that any given textbook will fail to get a toehold in the market. So the overall economics of the business still requires publishers to absorb a lot of failed-project costs.

Industrialization, Bureaucracy, and the Nation-State

Robin Hanson quotes from a subscription-only New Scientist article by Deborah MacKenzie.

hierarchical control structures ballooned, with more layers of middle management. Such bureaucracy was what really brought people together in nation-sized units, argues Maleševic. But not by design: it emerged out of the behaviour of complex hierarchical systems. As people do more kinds of activities, says Bar-Yam, the control structure of their society inevitably becomes denser.

In a sense, I began thinking about this fifteen years ago.

Consider two evolutionary processes that could lead to a winner at a particular business.

a) natural selection. Many small firms enter the market and make decisions, and one of them has the skill and luck to make the fewest mistakes, becoming the dominant firm.

b) bureaucratic filtering. A single firm with a large bureaucracy faces many of the same choice points, and it uses its resource-intensive planning processes to sort out the decisions. These processes minimize mistakes, enabling the firm to reach the same point that would be reached in the natural selection process.

My guess is that process (a) will increase in importance in the future, and that process (b) will be less productive. The challenge with defending this guess is the fact that large companies with bureaucratic management are so successful at present.

That particular essay did not deal with the issue of nation-states. But it is consistent with the idea that industrialization and the nation-state would evolve at the same time, because bureaucracy was more important and effective in an industrial economy than in a pre-industrial or post-industrial economy.