Nobody knows if HFT is good or bad

The publication of Michael Lewis' new book Flash Boys: A Wall Street Revolt has pushed discussion of high frequency trading (HFT) to the fore.

Noah Smith opines that nobody knows if HFT is really good or bad.

Do market-makers increase or decrease liquidity? Do front-runners increase or decrease it? What about informational efficiency of prices? What about volatility and other forms of risk, at various time scales? What about total trading costs? Good luck answering any of these questions. Actually, Stony Brook people are working on some of these, as are researchers at a number of other universities, but they are huge questions, and our data sets are incredibly limited (data is expensive, and a lot of stuff, like identities of traders, just isn't recorded). And keep in mind, even if we did know how each of these strategies affected various market outcomes, that wouldn't necessarily tell us how the whole ecosystem of those strategies affects markets - after all, they interact with each other, and these interactions may change as the strategies themselves evolve, or as the number and wealth of the people using each strategy changes. 

Confused yet? OK, it gets worse. Because even if we did know how HFT affects markets, we don't really know if it's good or bad on balance. For example, HFT defenders often say HFT provides "liquidity". Is liquidity good for markets? How much is liquidity worth, are there different kinds of liquidity, and does it matter when the liquidity comes? If I have a bunch of totally random trading, that certainly makes markets liquid, but is that a good thing? Actually, maybe yes! In lots of models of markets, you need random, money-losing "liquidity traders" in order to overcome the adverse selection problem, thus inducing informed traders to trade, and getting them to reveal their information. But HFTs don't lose money, they make money - is their liquidity provision worth the cost?

To know that, even if we knew the impact of HFTs on informational quality of prices, we'd have to know the economic value of informational efficiency. Suppose the true worth of GE stock. according to the best information humanity has available, is $100. Suppose the price is $100.20. How bad is that? How much is it worth, in economic terms, to push the price from $100.20 to $100.00? Is it worth $0.20 per share? It depends on how GE's stock price affects the company's investment decisions. To know that, we need an economic model of corporate decision-making. We have many of these, but we don't have one over-arching one that we know works in all circumstances. Corporations are way more complicated than what you read in your intro corporate finance textbook!

(And this is all without thinking about weird things like behavioral effects of the humans who interact with HFTs...)

I don't know much about HFT other than a few articles I've read here or there, so count me among those who have no idea if it's positive or negative.

Modern movie studio economics

A really fantastic three part analysis by Liam Boluk of modern movie studio economics as it pertains to blockbusters.

Future of Film I: Why Summer 2013 was Destined for Losses

Much has been said about the growing role of ‘tent-pole’ filmmaking, where the superlative performance of a major blockbuster supports the rest of the studio’s portfolio (including failed blockbusters). In practice, however, the strategy doesn’t ‘hold up’. Over the past decade, the Summer Blockbuster season has delivered a net theatrical profit only three times and the major studios have lost nearly $2.6B on $34B in production and marketing spend.


The Summer 2013 season was so jam packed with “blockbusters” that the industry seemed destined for historic losses containing:

  • 18 blockbusters – A historic high and 41% increase over the ten year average
  • 15 back-to-back weekends of blockbuster releases – A third more than ten year average and 25% more than a decade ago
  • 5 weekends with two blockbuster releases – 317% more than the average, 2.5x the previous record and 5x the number in 2003

Future of Film II: Box Office Losses as the Price of Admission

For all its glamour, theatrical entertainment is simply a rotten business to be in.

Though its products are not commodities, many of the industry’s competitive dynamics and characteristics suggest they could be:

  • Past success is not a predicator of future performance. Last year’s box office receipts do not influence current-year performance and year-to-year momentum translates into little beyond high spirits
  • Talent doesn’t ensure success. The most “valuable” stars, brand-name directors and veteran producers routinely produce box-office bombs
  • Hollywood brands are irrelevant. Aside from Pixar (whose brand is arguably in decline), consumers don’t pick films based on whether they were a Universal or Paramount production. Indeed, consumers rarely even know
  • All products are offered at the same market price. Regardless of the film’s production costs or target customers, end consumer pricing is largely identical


Why then, do executives continue making films? They have few (if any) levers they can reliably play with, the success of individual films causes massive disruptions in annual performance and in the long run, performance is unlikely to break-even, let alone outpace market returns.

The answer: ancillary revenue. In 2012, box office receipts represented only 52% of revenue for the average film, with the remainder comprised of home video sales, pay-per-view and TV/OTT licensing, syndication fees and merchandising. After appropriating for related costs, as well as backend participation (Robert Downey Jr. took a reported $50M from Avengers) and corporate overhead, the average Internal Rate of Returns (IRR) for the majors jumps to roughly 80%.


Since silent films first appeared on the silver screen, motion pictures has been primarily a B2C business, with film studios sharing revenue with theater operators. But over the past decade, the majors have transformed into an increasingly diversified B2B partner. Their job is not to bring eyes to their theatrical products, but to enable NBC to drive Sunday advertising revenue, ABC Studios to create a high-margin television series, HBO to collect monthly subscriber fees or Mattel to sell Cars toys. Entertainment, in short, has become both a platform and a service.

Future of Film III: The Crash of 'Film as a Platform'

More important, however, is the impending ‘Film as a Platform’ implosion. Looking at 2016′s dense release schedule, theatrical losses per blockbuster are likely to increase considerably. Not only will increased competition drive down average attendance, it could push studios to invest even more into their film properties in the hopes of standing out. This itself isn’t a fatal exposure – studios will simply need to rely more heavily on ancillary revenues. However, the real issue is that further audience fragmentation will make it even harder to achieve the critical mass audience needed to support ancillary revenue streams. Worse still, the growing number of franchise films may end up flooding ancillary channels.

Ancillary markets such as home video, merchandising and children’s television can only absorb so much content. A child, after all, will not want a Christmas comprised of various X-Men, Star Wars and Avatar paraphernalia and parents are unlikely to purchase multiple bedroom sets. Television audiences, can support only so many series in a given genre (the Marvel Cinematic Universe will have 7 in 2015 alone). Though themed sets have been a strong sales driver for the Lego Group, optimizing marketing and inventory investments will limit the number of franchises they will support – especially in the holiday season. As a result, the deluge of ‘platform films’ is likely to significantly reduce the ancillary revenues studios rely on for film profitability. To make matters worse, it would take at least two years for studios to emerge from this crunch due to the fact films are released 1-2 years after investment/production decisions are made.

I love my occasional summer blockbuster movie, but I already feel like I have pop movie diabetes. The latest Captain America movie has not one, but two extra scenes during the end credits, each previewing a different future Marvel movie. One day soon, after the credits of the latest Marvel movie, the extra scene will just be a house ad for the theme park ride based on the movie, and on the way out of the theater there will be a booth set up to sell toys from the movie. Theaters already make most of their profits on concessions, using the blockbuster movies as a loss leader, it's not all that different for the studios themselves.

Is giving directly best?

I've written before about effective charity, specifically focusing on optimal strategies for doing the most good. GiveWell still ranks GiveDirectly as its top charity right now.

In the Stanford Social Innovation Review, Kevin Starr & Laura Hattendorf express their doubts.

But is GiveDirectly’s model, as Slate put it: “the best and simplest way to fight poverty”?

No. It’s an experiment—an important one, but an experiment nonetheless. We hope we’re wrong, but our hunch is that it is more of a 1-year reprieve from deprivation than a cost-effective, lasting “solution to poverty.”

Poor people are poor because they don’t have money, and so we think unconditional cash transfers should be judged primarily by how much money recipients are making a few years out from the windfall. GiveDirectly’s work in Kenya is too new to know that, but cash-transfer enthusiasts like GiveWell point to other studies of other cash-transfer programs and predict a slam-dunk.

We looked at those studies, and we’re puzzled as to why GiveWell’s analysts, who rightly prize impact and cost-effectiveness, chose GiveDirectly as one of their “Top Charity” trinity. In the most relevant, longer-term study that GiveWell cited—a program working with unemployed youth in Uganda—recipients of an initial $382 grant had a 41 percent greater monthly income 4 years out. This sounds like a big return on the donor’s dollar.

It’s not. Working out the cost-effectiveness of income-generating funding can be confusing, and we at Mulago find it useful to benchmark grants by calculating the amount of additional income over 3 years, divided by the amount of grant money it took to generate it: the income bang for the donor buck. Of the baseline income of those youth, 41 percent turns out to be $11 per month. By that calculation ($11 per month x 36 months ÷ $382), the unconditional cash grant produced $1.03 of additional income over 3 years per donor dollar, essentially a wash.

Chris Blattman responds with several points, two of my favorites being the following.

1. Victory! If it’s becoming standard to judge interventions by their cost effectiveness, then I can’t be more thrilled. Same goes for GiveDirectly. You can think of cash transfers like the index fund of development (making GiveDirectly the Vanguard). If the NGOs (money managers) of the world can outperform the index funds, then the world becomes a better place.


3. Scalable? Whether these other interventions prove as scalable or replicable as cash is another question. Too many NGOs search for solutions to help 1,000 people a year not 1,000,000. But I’m confident some alternatives to cash will prove promising. Some already are, from vaccines to election monitoring, if only because they solve the problems cash cannot. I’m more skeptical we’ll see better alternatives for pure poverty-alleviation, but we’ll see.

I'd never thought of cash transfers as the index fund of charity, but it's a useful analogy. If you can't do better than giving someone cash, then give someone cash.

In Asian cultures, the most common wedding gift is cash. When I was younger that seemed like a gift for the creatively deficient, but at its heart is also a genuine pragmatism that signals the unselfish nature of the giver.


It's a phenomenal success story for the Danish firm, which almost went under less than 10 years ago amid dropping sales and dire predictions that digital-savvy kids would no longer want to play with plastic building bricks – even when they come in 51 colours.

But Lego is seeing a massive resurgence in popularity. There are now 86 Lego bricks for every person on earth, with around seven sets sold every second, while the 400 million tyres that are produced each year for them makes it the world's biggest tyre manufacturer. The Chinese are catching the bug in such numbers that a Lego factory is to be built there this year. Adults are returning to their childhood favourite in droves. They even have a name, "Afols" (adult fans of Lego).

More on Lego here. I saw The Lego Movie last weekend on the recommendation of many people who'd seen it, and it was more fun than I'd expect from ostensibly a kids movie. It both pokes fun at product placement (at times the real life part numbers of individual pieces flash on screen as they're being assembled into something) and yet revels in being a movie-length commercial for Lego toys. It may be the longest and most effective native advertising I've ever seen. The kids in the audience at the showing I attended were practically foaming at the mouth they were so ready to leave the theater right at that moment and snap up any and all of the Lego sets shown on screen. That contradiction at the heart of the movie is so brazen I was both uncomfortable and duly impressed.

Though I'm no expert on the subject, I believe that Lego is the most successful toy of all time. I know many children who have yet to see the Star Wars movies who are rabid fans of the mythology purely through their interaction with Star Wars Lego sets. Lego has become not just a toy but a conduit of mythologies, and that's just one reason it's survived to entertain several generations of kids.

Despite its patents having expired years ago, Lego still dominates in market share and commands a healthy price premium. If you ever wanted to understand the economics of intellectual capital, like the value of licensing franchises like Star Wars or Batman, look no further than the gross margin on your average Lego set:

Thirteen sets themed around the movie are in shops now. Lego is not cheap and prides itself on a reputation for quality, although Robertson points to the fact that the cost of the plastic used is under $1 a kilo, while, once it reaches a Lego set, it is worth around $75 a kilo.

75X value creation! That's before you start counting the boatloads of cash from the movie (and all the inevitable sequels to come).

The digitization of signaling

Another factor chipping away at teenage retailers may be the shifting priorities among young people. Where clothing was once the key to signaling a teenager’s identity, other items may have become more important and now compete for their dollars.

“Probably the most important thing a teenage boy has is his smartphone,” said Richard Jaffe, an analyst at Stifel Nicolaus. “Second, is probably his sneakers. Third, maybe, we get to his jeans.”

From the NYTimes on the struggles of clothing retailers focused on the teen market, like Abercrombie and Fitch.

It makes sense that if we spend more of our time immersed in the world of information that we'd shift some of our signaling efforts from the physical world to the digital one. From purely a leverage perspective, shooting, editing, and posting one photo of yourself to Instagram or Facebook or carefully crafting one tweet or Facebook status update might reach more of an audience than, say, the outfit you choose to wear that day.

It both amazes me and doesn't surprise me at all how many people choose a custom cover photo for their Facebook timeline. Think about how many otherwise modest people you know who retweet tweets that are complimentary of themselves. In the shift to digital signaling new norms have formed. 

Localized crowdfunding

A new proposed method of distributing grants and funding to researchers in the science community:

The new approach is possible due to recent advances in mathematics and  computer technologies. The system involves giving all scientists an annual, unconditional fixed amount of funding to conduct their research. All funded scientists are, however, obliged to donate a fixed percentage of all of the funding that they previously received to other researchers. As a result, the funding circulates through the community, converging on researchers that are expected to make the best use of it. “Our alternative funding system is inspired by the mathematical models used to search the internet for relevant information,” said Bollen. “The decentralized funding model uses the wisdom of the entire scientific community to determine a fair distribution of funding.”

The authors believe that this system can lead to sophisticated behavior at a global level. It would certainly liberate researchers from the time-consuming process of submitting and reviewing project proposals, but could also reduce the uncertainty associated with funding cycles, give researchers much greater flexibility, and allow the community to fund risky but high-reward projects that existing funding systems may overlook.

Interesting. I love Kickstarter and Indiegogo and have backed a lot of projects, but they are very general in nature. I wonder if we'll see more vertical plays sprout up in the crowdfunding space, much like we have in the sharing economy sector (Airbnb, Uber, Dogvacay, etc.). This would be one alternative method of lowering the transaction cost of fund allocation within such verticals.

America risks becoming a Downton Abbey economy

Via Tyler Cowen, this Lawrence Summers' article on income inequality in the United States (behind a required Financial Times account registration, but it's free).

It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.

Good point, it can be infuriating to look at the money being made on Wall Street and wonder how anyone can justify making so much money, no matter how many sleepless nights they spend in Microsoft Excel, but as Summer notes most reform proposed their just moves money from one group of wealthy people to another.

Is the answer in tax policy?

It is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play. The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor. For example, last year’s increase in the stock market represented an increase in wealth of about $6tn, of which the lion’s share went to the very wealthy.

It is unlikely that the government will collect as much as 10 per cent of this figure. That is because of a host of policies that favour the rich, such as the capital gains exemption, the ability to defer tax on unrealised capital gains, and the fact that gains on assets passed on at death are not taxed at all. Similarly, the corporate tax system allows value to flow through it like a sieve. The ratio of corporate tax collections to the market value of US corporations is near a record low. The estate tax can be more or less avoided with sophisticated planning.

Closing loopholes that only the wealthy can enjoy would enable taxes to be cut elsewhere. Measures such as the earned income tax credit can raise the incomes of the poor and middle class by more than they cost the Treasury, because they give people incentives to work and save.

What's more interesting is to ask why we worry about the uneven distribution of income instead of just focusing on improving the financial lot of the poor. Isn't getting them out of poverty a worthwhile goal regardless of what's happening to incomes of the 1%? It turns out there's a name for this school of thought: prioritarianism. It's an alternative to egalitarianism.

Whether income inequality is inherently wrong is a question many people smarter than myself have already contemplated. Some of the arguments against income inequality that are most persuasive to me:

Extreme inequality ruins democracy

It's no secret money rules politics in America. Team Obama spent $1.1 billion to win the 2012 presidential race. When inequality becomes extreme, it undermines democracy, as the late philosopher John Rawls and others have argued, because it creates unequal access to the political system and to positions of power.

One person, one vote -- yeah. But one person with millions to spend has much more influence. "What is problematic in the United States is the political system ... is one that is quite substantially dominated by those people that have money," said Pogge, the Yale professor. "They can, in the American system, yield a substantial amount of influence on the legislation through lobbying and therefore expand their advantaged position."

That is, income inequality can become self-perpetuating because the wealthy wield such political and media power in the U.S. democracy that they make it impossible, for example, to pass tax reform like the type outlined by Summers above. That, in turn, can damage economic mobility. The rich continually redefine the rules of the game.

Inequality isn't a moral problem; opportunity is

In this school of thought, it doesn't matter if the mayor of New York City is worth $27 billion (he is) as long as everyone in the city has an equal chance to succeed. That's the view of Brooks, from the American Enterprise Institute. I asked him about that city, which is more unequal than any other metro in the U.S.

"The truth is there are a lot of really, really wealthy people there. Great! That's a morally neutral concept," he said. But not all of them have an equal opportunity at success, he said, in part because schools don't perform well in all neighborhoods. That's morally bankrupt. (Check out this wild map that shows the chances a kid at the bottom of the income ladder would have of climbing to the top. In Atlanta, where I live, a kid in the bottom fifth of income earners has only a 4% chance -- 4%! -- of making it into the top fifth of income earners.) Fix economic mobility, Brooks said, not inequality. And let the rich do their thing.

Is there an optimal level of wealth inequality?

The size of the rich-poor gap matters

Some inequality is acceptable to pretty much everyone these days. No one is arguing for a fully equal society. But the degree of inequality really does matter when you're trying to determine whether inequality is moral or amoral, said Pogge, the Yale professor. When extreme inequality sets in, that's when social and political problems follow.

His best estimate for a fair distribution is the Palma Ratio, which measures how much income the top 10% earns compared to the bottom 40%. Ideally, those amounts would be equal, meaning the country would have a Palma Ratio of one. According to a calculation cited by the Danish Institute for International Studies, the United States has a 2010 Palma Ratio of 1.852, which is about the same as Burkina Faso but not as bad as China or South Africa. (In an earlier version of this column, I incorrectly estimated the U.S. Palma Ratio based on wealth instead of income. I should have let the experts handle that, and I regret the mistake). By Pogge's assessment, that means inequality here is too high. Negative consequences for our society will result.

At some level of inequality, why would the poor or even middle class choose to play by the rules as defined by the wealthy? Is there a Palma Ratio beyond which we see a sharp increase in social unrest, crime, and other indicators of people opting out from the system?

On a recent Philosophy Bites podcast Nigel Warburton interviewed Harvard philosopher TIm Scanlon on this topic. It's well worth a listen. One passage from Scanlon that stuck with me.

Adam Smith famously said in The Wealth of Nations that it's an objection to a society if it forces some people to live in such a way that they can't go out in public without shame. Now that happens when the standard of acceptable dress, acceptable appearance, acceptable house, or whatever, is set at a certain level by the way most people live so it's humiliating for people to have to live in a different style.

The Wealth of Nations contains multitudes, so many of which I've forgotten.

It's difficult not to contemplate the moral dimension of income inequality everyday living in San Francisco. I've never lived any place where the difference between the lot of any two people confronts me more on a daily basis. I can't remember the last time I walked around San Francisco without walking past many homeless people. It's difficult not to feel that something is not just wrong but deeply broken.

This brings me back around to the moral dimension of income inequality. When it comes to this issue, as the Atlantic notes, the giant is economist John Rawls.

Rawls argues that when we think of how to create a just society, we need to imagine that we are all placed under a "veil of ignorance," where we don't know anything about the various advantages - social or natural - that we are born into. What principles of society would we then agree to? Rawls builds a strong case for two:

Principle 1: "Each person has the same indefeasible claim to a fully adequate scheme of equal basic liberties, which scheme is compatible with the same scheme of liberties for all."

Principle 2: "Social and economic inequalities are to satisfy two conditions: first, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least-advantaged members of society."

Optimal configuration for innovation

A lot is happening in the media world. Is it meaningful?

Spinning out from the media behemoths are experiments like <re/code> and Ezra Klein's new venture, which the Washington Post decided to pass on but which found a home at Vox Media, which itself was already hosting some new media brands like The Verge, Eater, Curbed, and SB Nation. The Washington Post, of course, is now owned by Jeff Bezos. Andrew Sullivan went from the Atlantic to The Daily Beast, then spun out as an independent entity, turning entirely to his readers for direct financial support. Glenn Greenwald and Pierre Omidyar's First Look Media looks to be rounding into shape. Jessica Lessin's The Information has been up and running for a short while now, and I've long grown accustomed to getting pieces of tech news from sites like Techmeme, Techcrunch, GigaOM, Mashable, PandoDaily, and dozens of others.

Another class of new media enterprise is one that's joined at the hip to more traditional brands. Grantland and Nate Silver's soon-to-be-relaunched FiveThirtyEight draw support and resources from ESPN but stand alone as brands.

On the one hand, it's somewhat hard to tell all of these apart. If I were to describe one of these ventures as a new type of newsroom, armed with the latest technology to allow rapid publishing of both original content and curated content, with an emphasis on original voice, deeper data analysis, and beautiful design and visualization, which of these would ventures would I be pointing the finger at? If you chose All of the Above, perhaps this is a glut in which brands just take the same readers with them from one place to another.

Another daunting challenge is the economics of digital advertising. We're in a world where the supply of digital advertising space is effectively infinite, and so each time you take your batch of user attention to the bank to exchange it for cash, you get less back per eyeball. In an environment where it's not clear that your particular ad unit is markedly superior to that of another property, everyone's attention is valued the same, in a currency that's in a deflationary spiral.

And yet I'm heartened by the activity. The proliferation of smaller enterprises is transforming the media sector into a structural configuration that has proved more conducive to innovation in the past across a variety of industries. Rather than a few behemoths slugging it out, we now have added many media startups experimenting in a number of directions. I still believe the extinction rate will be high, but that's also a characteristic of highly generative environments.

The importance of having a high volume of startups failing quickly in order to lead to innovative breakthroughs is one reason I suspect the Asian giants will need to foster a more supportive startup environment if they're to evolve from being amazing fast followers to surfing at the front of the wave.

In Korea, a massive percentage of the GDP is accounted for by Korean Chaebol, massive business conglomerates. From the time the Korean War ended until now, South Korea has been an economic miracle, transforming from one of the poorest countries in the world (its GDP per capita following the Korean War was $79!) into a modern industrial powerhouse. Government support of a few Chaebol allowed it to rapidly evolve into an export giant. Concentrating resources in the hands of a few companies likely accelerated South Korea's economic rebound in its post-War reconstruction.

Now, however, that structure may be an impediment. Can meaningful innovation occur if it must occur within the Chaebol? I have my doubts. This has nothing to do with my feelings about the Chaebol, for which I have both awe and admiration. Seriously, look at the GDP per capita growth of South Korea from the Korean War until now. That is unbelievable.

Granting all that, the suppressive power of large institutions on innovation is also a powerful force. Many of my Korean friends who want to do startups in South Korea end up having to raise capital in the U.S. before heading back across the Pacific to start their company.

Even once they secure funding, competing against the Chaebol is difficult, as it often is competing against larger companies who have scale and can also subsidize any business with profits from another.

This is not to say large companies can't innovate. Some do so because they happen to be led by an innovator. Others try to set up independent teams who have a mandate and support to try lots of crazy things with a big budget, a long time horizon, and plenty of room for failure.

However, some fraction of innovators will always want to travel alone, not just to be free of corporate overhead but to own more of the profits and/or fame if they develop a product or service of world-changing proportions. Some people just reach a stage where the only voice they want to hear is their own. That's healthy for the overall ecosystem.

The world of journalism is fracturing, and it's exciting. However, what I hope most of these ventures devote ample attention to is innovating on their business models, whether that involves advertising or not. I say that not because I am partial to one model or another but because I'd like to see journalism of all forms continue to thrive. It's a critical institution in well-functioning society, one we've been spoiled by in the U.S., and it only takes traveling to some less fortunate parts of the world to see the impact of not having a healthy Fourth Estate.

Whatever Nate Silver or Ezra Klein or Bill Simmons produce, I'm sure I'll read it, wherever it appears. The problem of making that a profitable venture, on the other hand, is not a trivial one. Journalism has always run on a healthy dose of subsidies, whether from classified or other ads. The separation of that side of the business and the reporting side of the business is a healthy Chinese wall from the standpoint of journalistic integrity, but cleaving the revenue generation from the actual production side of a business and a service has its downsides, too. When the economic environment and market forces turn against you and the subsidies disappear, many of your top employees (in this case the writers/reporters) aren't thinking about how to keep the lights on. For most other businesses, not having your key product people thinking about how to pay the bills would seem like a terrible idea (an example of an exception is filmmaking, where the director, crew, and actors worry about the budget while line producers on set enforce budgetary constraints, but that's not an ongoing concern like a newspaper or magazine).

Ironically, it's entrepreneurial one or two person shops who've never had the luxury of subsidies who've shown that breaking down that Chinese wall need not be a disaster. Many famous bloggers and podcasters have turned to interesting advertising models to support their craft. I remember when Daring Fireball had no ads. Now I'm used to seeing regular sponsor shoutouts in his blog. To ensure the ads are seen by people accessing his content in a variety of ways, he integrates the callouts directly into his stream, ensuring the ad appears in his RSS and Twitter feeds.

Likewise, when I first started listening to podcasts years ago, most were labors of love. Now it's the exception when I listen to a podcast that doesn't include in-stream sponsor callouts (especially and Squarespace, who have either figured out that there is a temporary market inefficiency and have cornered the podcast sponsorship market or are just the only ones buying this ad medium. Or both.). Unlike sports broadcasters who try to feign a modicum of enthusiasm when they share that the latest broadcast is brought to you by Budweiser, the king of beers, many podcasters will spend a few minutes extolling the benefits of their sponsors in their own unscripted voice.

Just doing some back of the envelope math, I wouldn't be surprised if these independent bloggers or podcasters actually have the potential to make a lot more profit doing what they do than a journalist at a larger enterprise, like Ezra Klein's upcoming venture. They probably have much lower cost structures because they don't do traditional reporting which involves a lot of travel and phone calls and networking and many of them can work from home. They don't have a lot of corporate overhead they have to subsidize.

While it's not fun to hear about some of the most esteemed journalistic institutions struggling to survive in this shifting environment, the stormy weather has shaken more than a few seeds loose from the oldest trees in the forest. I'm curious to see what sprouts up on the forest floor.