America's New Endowment

Synopsis for the tight of schedule:
Universal health insurance is America's new endowment. Give it a few years. People will cry "Nazi" at those who would repeal healthcare reform, something you'll have to pry from their cold, post-death panel hands.

-----

The endowment effect (or divestiture effect) is the phenomenon by which someone values something more once he secures the right to it. This is not some fringe attitude, but a fundamental aspect of human nature proven by controlled experiment.

When I was in business school (and was reading about business school...in a book) my professor demonstrated the endowment effect with a little experiment (albeit an unscientific one). The students in one of her negotiations classes were presented with the hypothetical situation of owning a coffee mug and coming up with the lowest price at which they'd sell it. The students in her other class were presented with the same coffee mug and were asked to name the highest price at which they'd buy it. The students who were given the premise of coffee mug ownership ended up with an average price roughly twice that of the students who were prospective buyers.

The endowment effect can help explain why people are so averse to change. The underpinning of the endowment effect is loss aversion. If something new is proposed (like healthcare reform) we are so often afraid of losing the good parts of the status quo. While this is a perfectly rational reaction to proposed change, one must consider the possibility that we are mistaken in our personal cost-benefit analysis.

Take, for example, your choice of search engine. If you are with the 90% majority of Internet users, you use Google 90% of the time. Let's say that Microsoft's Bing became 10% better than Google. Would anyone notice? Would anyone care? Even if someone did care, would he switch to Google? Research has shown that it often takes people a perceived increase in value AND lower cost to switch to a new product or a competing brand. So, why would someone care enough to break his habits for a marginal increase in benefit, especially when such a benefit has not been proven? Most people won't bend over backwards to change the status quo unless they can perceive increase in benefits at less of a cost. As far as I can tell, Google.com and Bing.com are roughly equally easy to type into the address bar. Add to it the fact that Google is the default search engine for more Web sites and browsers, and it's apparent that the cost of using Bing is hardly lower than sticking with trusty Google. (OK, smartypants, you could say that Bing's cashback program could make Bing less costly for some consumers, but that only applies to people who partake in certain e-commerce transactions.)

So, even if Bing is 10% better overall than Google (which is an entirely hypothetical situation), people are unlikely to switch to it in large numbers.

The healthcare bill has faced similar challenges running up to its passing late this evening. While it's not my intention to tally up the costs and benefits of the new legislation, I will say this:

The American people will generally feel better about the new healthcare bill after it is put in place.

I believe this to be true for reasons beyond personal ones that have to do with human solidarity and all that mushy rubbish.

Reason #1: People don't like the way insurance companies sometimes deny valid claims and deny coverage altogether. Even if you have only dealt with honorable organizations to date, you won't want to expose yourself to the possibility of experiencing health insurance nightmares.

Reason #2: People who have insurance now will realize that someday they might not be so lucky.

This second reason strikes at the heart of the issue. Most Americans have health insurance, and many of these people are afraid of messing with the status quo. These people will rightly say, "why fix something that isn't broken?" This is a natural reaction, and is the main reason why popular support of healthcare reform isn't quite as robust as it might be--or will be in the future. But once universal insurance coverage is mandated, more and more people will realize as they change jobs--or get fired from their current ones--that guaranteed health coverage might just come in handy. Yes, even YOU may need it someday.

To wrap up, most people fail to see any direct personal benefit or personal cost reduction from the new healthcare bill. For this reason, many insured Americans have dragged their feet on supporting health care reform. However, once healthcare reforms are put in place, many of these same people who were torn between reform and the status quo will realize many of the indirect benefits and potential personal benefits of proposed reforms. This is where the endowment effect kicks in. Universal insurance is now America's new endowment, and She will sick Her death panels on anyone who threatens to take it away.

Apple Works Hard to Keep its Mojo

Home runs like the iPod and the iPhone have helped Apple gain computer market share without making big sacrifices on price. Now, with rumors swirling about Apple's new iSlate product, I wonder whether Apple has realized that it must do something drastic in the computing space to continue to have its cake and eat it too.

After learning of Google's anticipated foray into the operating system space with a lean, browser-based OS for netbooks (which I warned of when Google first launched its Chrome browser), most of the chatter I heard was about Google's impending face-off with Microsoft. Yes, the OS is the spot where Google can hurt Microsoft the most, but Microsoft is equipped to defend itself with its own lean, netbook-friendly Windows 7. The real story, in my mind, is whether Apple can continue to churn out relevant products in the increasingly commoditized computing space. There's no question about consumers' insatiable hunger for Apple's products, but is the intensity of that fanfare enough to keep customers coming back for premium-priced gadgets?

If Apple were a small, privately held company it could afford to scale back its ambitions a bit. However, the reality is that the company needs to fiercely defend and expand its market share to please investors. But how can Apple do that if Google and Microsoft are delivering decent products with sleek software in the $500 range? Posed a different way, how can Apple hope to grow while still selling computers in the $1,000+ range?

Well, this may be where products like iSlate come in. What is thought to be called the iSlate will likely sell just south of the ever-important $1,000 mark.

Does Apple expect to gain new customers who want a lighter, cheaper, more mobile computer, while hoping to hold onto its existing Macbook fan base? Does it expect to gain incremental sales from existing customers who use an iMac and just can't do without the pretty new iSlate for mobile purposes?

No matter how you slice it, Google and Microsoft are staging a game that Apple is reluctant to play. It will be interesting to see how Apple plays its new product launch, and to what extent it attempts to change the rules of the game in 2010.

Capital: Resource or Crutch?

When I was in the Peace Corps in Costa Rica, the program office gave nominal support of community-led, community-funded projects, but the de facto operations of my Peace Corps program often told a different story.

Volunteers were given access to $2,500 through CR-USA, a development partnership between the governments of the US and Costa Rica, to go toward community projects. While a great opportunity, the money appeared to be offered without condition, and our community counterparts (typically leaders of a semi-formal local government organizations called Development Associations) were well aware of this. Instead of thinking of the best projects for the community without prior knowledge of virtually guaranteed funds, the community leaders thought of ways to spend $2,500. In fact, the center director of our program said directly to the counterparts that the volunteers bring with them access to these funds.

Rather than being a useful resource for volunteers and their communities, to be called upon when needed, the CR-USA funding (or at least the idea of it) ended up being a crutch for many. I often felt lonely (and even angry) in my fight against our image as vessels whose sole purpose is to transfer $2,500. It seemed like a waste of young, talented people to put them in an environment that stifled hard work and creativity--not to mention a waste of roughly $40,000 (anonymous source, 2007) in federal funds per year to support a Peace Corps volunteer.

Many volunteers used CR-USA as a crutch. They held onto the idea of that funding, assuming it would be available when it came time to execute their big project. In my opinion, many projects were shaped solely around the CR-USA opportunity, with both the volunteers and the community limiting their possibilities to whatever they could get done with $2,500 (plus a smaller amount of matching funds from the community). The tragedy here is that even the projects that are successful may have the unintended consequence of complacency. Maybe the community could have done something much more profound, and with greater long-term sustainability, had the people banded together to do something without regard for seemingly guaranteed funds.

So, that's my take on the successes. The second part of the problem was demonstrated when the CR-USA organization started tightening up funds. It became harder to get funding, as money was set aside for a far smaller number of projects and funding came with stricter guidelines. Many people rightly panicked because they had put off applying for funding, assuming the silver bullet for their community projects would be there. Many of those same people were already too far along in their service to come up with a contingency plan for a project that appeared to be set in stone. Consequently, many of the projects didn't go through.

This example from the Peace Corps shows us how capital--or at least the idea of it--can be a crutch. In this case, the crutch often made people think too small, limiting themselves to a narrow set of opportunities. It was sad to see smart, capable people underachieve in this way, because I knew they could accomplish so much more if they opened themselves up to real local solutions to problems, powered by the locals themselves.

Not all examples of "crutch capitalism" demonstrate an underestimation of opportunities. Often when large amounts of capital are available to entrepreneurial start-ups, the companies become spend-thrifts out of the gate and burn money too quickly. In this case the "let's see how we can spend $X" attitude overestimates the business opportunity. A company might spend $100,000 marketing a product that's worth $50,000. (Just like capital, marketing should not be a crutch.)

So, whether you end up underestimating or overestimating your opportunity, available capital can (perhaps ironically) be a bad thing. I know this can be tough to stomach if you're a resident of the capital-starved developing world--or an entrepreneur looking at the devastated capital markets--but a dose of skepticism with regard to capital can be healthy.

Life beyond ticker symbols

I used to obsess over large internet businesses, especially publicly traded ones like Google, Yahoo, and Microsoft. I am genuinely interested in the search business as it relates to my own profession and to society as a whole, but I have also been interested in it because I used to find pleasure in trading stocks. While my trading added a decidedly personal twist to my blog posts, I didn't find the trading itself fulfilling.

In my posts Searchonomics and and It's Search, Stupid, I crafted my own big-picture view of the search industry and the "Internet's Winners and Losers", but I ended up finding myself tracking ticker symbols a bit too much...and I'm no day trader. In fact, I haven't bought or sold a single share in over four months. I no longer find tracking stocks exciting, so Yacrosoft will no longer cater directly to the investment crowd. So, you won't find me talking about stocks very often, but I will certainly continue to talk about companies as they relate to technology, business, and economics.

For these reasons I am dropping the moniker "The Internet's Winners and Losers". I am leaving it the title of the blog as just "Yacrosoft" for the time being until I can better define the direction I am taking.

In the short term I plan on writing more about sustainability in an effort to complement conventional thought on the topic.

Scalability as Sustainability

People view sustainable development from different angles and through different lenses. While I was in the Peace Corps, the prevailing wisdom held that sustainable development required the commitment of host country nationals to the particular development projects after the volunteer had left the country. While this is easier said than done, it doesn't necessarily say anything very profound. Of course, development requires commitment from the beneficiaries of that development.

While I was fighting to have Peace Corps Costa Rica expand or clarify its definition of sustainable development, I came across this Foreign Affairs article (sorry, the full text isn't available for free online) that discusses the origins of sustainable development. According to the article, the notion of sustainable development arose in the 1980s, thanks to an academic report called "Our Common Future," put together by the World Commission on Environment and Development. The report claimed that "boosting the economy, protecting natural resources, and ensuring social justice are not conflicting but interwoven and complementary goals." This line of thought paved the way for what many now know as Triple-Bottom-Line Sustainability.

Oddly enough, the Peace Corps (Costa Rica) definition of sustainable development lacked the environmental slant that characterizes much of the sustainability movement. Essentially, the Peace Corps' perspective focuses on the people who would sustain the operations of a project, whereas the triple-bottom-line perspective focuses on the social and environmental factors that would eventually prevent the continuation of a project's operations.

While both of these viewpoints are valid and entirely necessary, they often fail to highlight an important part of sustainability that can facilitate truly powerful ideas: scalability. An idea is much more impactful if it can serve as an example for other communities across the globe to emulate. Even further, I posit that scalability can be evidence that an idea is sustainable, at least in the more traditional sense of the word.

In the business world, the most promising business endeavors are the ones that exist independently of any one person's unique expertise. If a company has to rely on the creativity or management expertise of a single person, the continuation of that company's operations is at great risk. Perhaps more importantly, the growth and profitability of a business may be stifled by the inability of its model to scale to other regions when it is managed by different people in different cultural contexts.

The development world is similar in a lot of ways. Development projects that involve local people with unique talents may be quite advantageous in the short term, but what happens when the leaders move away, move on to something different, or retire altogether? One way to assess these risks is to ask yourself if a project could be scaled to include the neighboring community, the rest of the country, or the rest of the world. If this is the case, then the project probably has good prospects for sustainability. However, if the project doesn't pass this test, it probably will not be sustainable in the long term, or even in the short term in a disparate group of places.

I don't mean to belittle grassroots development that relies on talented, dedicated people at the local level who work for local benefit. In fact, I believe this to be the only form of develop that truly works. Ideas must first be tested for feasibility at the ground level. However, it would be quite wasteful for outside development workers to ignore the impact created by scalable ideas, models that can be adapted to a greater number of communities. In my experience, this broader perspective is often lost on grassroots development workers who are fighting tooth-and-nail to achieve objectives at the local level.

So, ideas pass important sustainability tests if they are 1) not unduly restricted to a small group of leaders and 2) scalable to other environments, thus proving their validity in a very powerful way. With a slight shift of perspective, we can ask ourselves important questions of sustainability and scalability to make a greater impact in our organizations and communities. These questions include--but are by no means limited to--the following:

What if Charlie gets hit by a bus tomorrow? What would happen then?

Would this new product sell in another country? If not, are there powerful attributes we must keep, or others we must do away with to adapt the product to a new environment. (See Four Actions Framework.)

What are some processes we can put in place today that could make this project work outside the confines of our own unique situation?

If we forget about scalability in our quest for sustainability, we can miss out on great opportunities to make small ideas big.

On Fair Use

Google just announced the expansion of its AdWords system to its Google News search results. While this may seem a natural extension of Google's primary revenue model, several newspapers are likely to raise arms over someone else making ad revenue on their content.

Recall the lawsuit that a Belgian newspaper slapped Google with, claiming the search company unlawfully used excerpts of its content. In particular, the newspaper had issues with excerpts that were kept from articles that had since been removed from its website and moved to the realm of paid archived content.

Google has faced similar scrutiny from critics of its popular image search service. For one, the service requires several clicks before the user can visit the actual web page where the image resides. All the while, the user is able to see the image and remains on the Google website. Some have also had an issue with the mere use of thumbnails in the search results. While most would argue that this falls within the realm of fair use, the debate certainly exists. Just check out this lawsuit threatened by an adult website.

Now that Google has taken the step to monetize its news search results, it invites newspapers to cite the first stated factor in determining violation of fair use:

US CODE: Title 17,107. Limitations on exclusive rights: Fair use

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.

I have no training in the law, but having seen the inconspicuous links on the right-hand side of the news search results, I don't see it as a breach of fair use.

Assuming the news excerpts are short enough, I think Google has the right to display them. (I love it when Google gives me free web traffic, but I respect a media company's right to be forgotten and irrelevant.) If Google has this right, I also think it has the right to make money for providing this service, just so long as the means aren't deceptive, clearly harmful to the market value of the excerpted content, or both.

Again, having seen the innocuous nature of the sponsored links on the right-hand side of the search results page, my initial reaction is to deem this new Google practice as fair.

I welcome anyone else's opinion on this matter.

Good Times for Entrepreneurs?

Entrepreneurship has become attractive...considering the alternatives

Entrepreneurship has been in style for quite some time here in the United States. Ever since the last stock market bubble at the turn of the millennium, people have learned to appreicate the fiery spirit of the agile, small-cap companies. The business atmosphere gave rise to new entrepreneurs, held accountable to provide real business models to support their valuations.

However, in recent years Web 2.0 start-ups had been creating a bubble for the risk capital that is so essential for entrepreneurial firms. Just browse some of the companies on TradeVibes and you get a feel for some of the frivolity that once again characterized the web space. Several millions in VC money were thrown at some also-ran concepts. I mean, how many video sharing websites can the market support? How many x's, v's, and z's do you need in your domain name? (If these entrepreneurs were pushing pills it would be one thing, but people actually have to type these domain names into an address bar.)

So, what happened to the Web 2.0 bubble burst? It was precluded by the credit crisis, making a few goofy VC-backed deals look like child's play. The end result, however, is the same. There's very little capital out there for start-ups. Even some of the most legitimate companies and most enticing deals are met with undue friction, if not all-out rejection. It's a simple supply problem: Trillions of dollars in capital were sucked out of the economy in the matter of a few months!

I have seen the consequences of this firsthand, although in a somewhat contrived format. When I was at the Venture Capital Investment Competition in Boulder last week, I was shocked at the low valuations offered by some of the MBA teams. Even more telling were the reactions by the vast majority of the VC judges. Our team ended up offering the highest pre-money valuation to the entrepreneurs than any other team. While I am limited in what I can say about the company in question due to an NDA, I will say that my instinct (and analysis!) told me that the company was worth much more than what the judges wanted to admit. However, I'm not one to fight the market. If capital is limited, valuations will be depressed. Period. Lesson learned.

To many of you this may be perfectly obvious. Of course, if the economy is doing poorly start-up capital is scarce and the market opportunity for most businesses is dwindling--if existent at all. However, I feel compelled to set the record straight because many people are now attracted to entrepreneurship, some even saying that it's a great opportunity to become an entrepreneur. While this might be the case, it could only be because of a lack of options.

Taking the rose-tinted glasses off for a second, one must realize that entrepreneurship is still about money. Cash flows are the lifeblood of entrepreneurial firms and there's currently very little cash to "flow" around. Start-up capital is minimal, and--perhaps more importantly--consumers have a lot less money to spend. It's true that an entrepreneur might be able to scale down for a few years of austerity and position himself for better times, but not everyone has that luxury. Many businesses are heavy on capital expenditures and hefty overhead costs. On a more personal note, many people have mortgages and dependent children.

Putting the rose-tinted glasses back on, one must also admit that these trying times could present opportunities to the most creative among us who can adapt to the changing times and innovate in product, process, or business model. I have no doubt that entrepreneurs will play a lead role in the turnaround of the (world) economy, creating value through innovative products and services, and creating jobs for the would-be unemployed.

However, it is dangerous to make a blanket statement in praise of the opportunities in entrepreneurship. It might seem attractive because of the recent dramatic decrease in opportunity costs, but the market is tough out there...people aren't getting fired because of a favorable business climate.

So, try your hand as an entrepreneur, but only if you have the huevos or the great fortune to withstand a bumpy ride. If you're doing it for quick money and fanfare, you might want to wait for the turnaround when there's some capital to be had.