Politicizing gun control

I felt the sadness that all Americans felt on hearing the news of the shooting this morning. It is a deeper sorrow because anyone old enough to comprehend the news was once a child and feels how terribly unjust it is for people still so young, still trying to grapple with the world and become a citizen of the world to be murdered just as their journey is beginning. For children to be shot down in school, a place where they should be learning to live alongside other people in the world in a protected environment is particularly tragic.

The debate about politicizing the issue is an important one, because political maneuvering is precisely how systematic change has been accomplished on this issue. It's why I was heartened to see many people who are advocates of gun control pushing back hard on those demonizing them for politicizing the issue. As Jill Lepore reported in her overview of the evolution of gun control in America, and as Jeffrey Toobin covers in two chapters on the Second Amendment in The Oath, the assassinations of President Kennedy, Robert Kennedy, and Martin Luther King in the 1960's spurred the passing of strict gun control laws. Tragedy plus politicking led to law.

But in the 1970's, the NRA began shifting the interpretation of the 2nd Amendment from one about guaranteeing the people's right to form a militia for defense against the government to one about an individual's civil liberties, specifically the right of one person to own a gun. In the past decade, that shift has been completed with astonishing success, culminating in the Supreme Court's ruling in the District of Columbia versus Heller. In writing the majority opinion, Justice Scalia wrote:

The Second Amendment protects an individual right to possess a firearm unconnected with service in a militia, and to use that arm for traditionally lawful purposes, such as self-defense within the home.

The 2nd Amendment advocates have been much better organized and politically effective at both a national level and a state level for many years now. So for gun control proponents to try to politicize an issue is exactly the right tactic; playing the political game will be far more effective on an issue like this than, say, expressing indignation on Twitter, as cathartic as that might be.

[This is not to say the collective opinion on Twitter can't make a huge difference on some issues, like pressuring corporate brands to change their behavior to take one example. However, on this particular issue of gun control in America, it has shown minimal political and legal impact. Sadly, we have had multiple instances to serve as evidence in recent history.]

The most important way to win on gun control is to make it a make-or-break voting issue for your political representative. 2nd Amendment defenders have always done this, and that has made it politically expedient for politicians to be on their side in elections. Perhaps you couldn't start with an outright ban, where the majority of Americans (though not a majority of people I follow on social media) still support their own right to bear arms, but you could start to attack at the margins, as with assault weapons. It's no guarantee of victory, but it has also never meant a loss. As with every powerful special interest, the gun lobby works longer and harder than its opposition, who shout loudly on days like today, then forget about the issue after a short period of time. This issue will not shift overnight, it will take time, and beating the gun lobby at their own game means matching their endurance and will. That's something that hasn't happened in decades.

If the gun control proponents were able to pass some federal or state laws, the legality would still likely end up landing at the feet of today's Supreme Court, where Roberts, Alito, Scalia, and Thomas seem entrenched in their support of the modern interpretation of the 2nd Amendment. With Justice Kennedy being the swing vote that shows few signs of leaving their side, the odds would seem stacked against such laws standing up, especially in light of District of Columbia versus Heller. But it would be a start, and, since the Supreme Court has tended to lag public opinion on issues, a necessary one.

The other thought that strikes me in all this debate is that the Right has won, as they often do, in framing the terminology of this debate. "Gun control" as a term is framed as a negative, as a federal impingement on something. If the debate were about "disarming potential homicidal maniacs" it would feel more difficult to be in the opposition. How we name these issues has an underrated impact on how we perceive them. We need to name our indignation and sorrow more accurately. We are not trying to control guns, we are trying to protect our children.

Amazon, Apple, and the beauty of low margins

[As always, I preface any discussion of Amazon and Apple by noting that I own some stock in both companies, and that I worked at Amazon from 1997 to 2004]

A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins. It must be frustrating to compete with a company like that. But to call their strategy irrational or to believe they want to be a non-profit is a dangerous misreading of what they're all about.

It's been years since I worked there, so this is largely speculation on my part, but I believe Amazon is anything but irrational when it comes to how they think about margins. I believe it's a calculated strategy on their part, and anyone competing with them had best understand it.

As with people, I think companies can be more comfortable playing certain styles, much like certain players are more suited for a particular style of offense, like Mike D'Antoni's in the NBA or Chip Kelly's in football. Amazon's low margin strategy is one they are comfortable with because it sprung from the company's very origin. Amazon began in the bookselling business, and some of its earliest and most crucial advantages against incumbents like Barnes and Noble were best expressed with thinner margins.

One of online retail's main advantage was, of course, being able to forego expensive physical storefronts. With one and then two distribution centers total in the early years, Amazon essentially just had two "storefronts" to stock with book SKU's, whereas Barnes and Noble had to guess how to allocate SKU's across hundreds of stores all over the country, all necessitating long leases. A few Amazon editors could recommend books to all Amazon customers, whereas Barnes and Noble had to staff each of their individual stores with sales clerks. 

More importantly, Amazon's inventory flow was drastically more efficient than that of Barnes and Noble. Amazon didn't have to carry inventory on really slow-selling SKU's, they could wait until a customer had ordered it and then drop-ship it from the distributor. If Amazon wanted to ship one of those SKU's themselves, customers generally had the patience to wait longer for them since those slow-turning SKU's didn't earn shelf space at the local Barnes and Noble anyway.

Almost all customers paid by credit card, so Amazon would receive payment in a day. But they didn't pay the average distributor or publisher for 90 days for books they purchased. This gave Amazon a magical financial quality called a negative operating cycle. With every book sale, Amazon got cash it could hang on to for up weeks on end (in practice it wasn't actually 89 days of float since Amazon did purchase some high velocity selling books ahead of time). The more Amazon grew, the more cash it banked. Amazon was turning its inventory 30, 40 times a year, whereas companies like Barnes and Noble were sweating to turn their inventory twice a year. Most people just look at a company's margins and judge the quality of the business model based on that, but the cash flow characteristics of the business can make one company a far more valuable company than another with the exact same operating margin. Amazon could have had a margin of zero and still made money.

At Amazon we were ruthlessly focused on squeezing inefficiency out of every part of the business, especially the variable ones that affected every purchase. How could we get a book from the shelf into the hands of the customer more cheaply? How could we reduce the number of customer contacts per order for our customer service team? Could we offload some human customer service contact to cheaper online self-service methods while improving customer satisfaction? How could we negotiate steeper discounts on the books themselves? For each book SKU, was it more economical to purchase ahead of sales in bulk for steeper discounts and faster shipping or to purchase only when a customer placed an order and risk a longer delay in shipping? How could we allocate inventory among our distribution centers to increase the likelihood that all items in an order shipped from the same distribution center, minimizing our shipping costs? How could we organize all the Amazon shipments ready for delivery in a way that made lives easier on our shipping partners like the USPS and UPS, and then how could we use that to negotiate cheaper shipping rates? Did we need so many human editors reviewing books, or were customer reviews sufficient?

The type of operational efficiency Amazon rose to in those days is not something another company can duplicate overnight. It came on top of the inherent cost advantages of online commerce over physical commerce. So much of Amazon's competitive advantage in those days came from operational efficiency. You can choose to leverage that strength in two ways. One is you match your competitor on pricing and just earn higher margins. But the other, the way Amazon has always tended to favor, is to lower prices, to thin the oxygen for your competitors.

If you have bigger lungs than your competitor, all things being equal, force them to compete in a contest where oxygen is the crucial limiter. If your opponent can't swim, you make them compete in water. If they dislike the cold, set the contest in the winter, on a tundra. You can romanticize all of this by quoting Sun Tzu, but it's just common sense.

I worked on the launch of the Amazon Video store, Amazon's third product after books and music. At the time of the launch, DVDs had just launched as a product category a short while earlier, so the store carried both VHS tapes and DVDs. The day Amazon launched its video store, the top DVD store on the web at the time, I think it was DVD Empire, lowered its prices across the board, raising its average discount from 30% off to 50% off DVDs.

This forced our hand immediately. Selling DVDs at 50% off would mean selling those titles at a loss. We had planned to match their 30% discount, and now we were being out-priced by the market leader on our first day of operation, and just before the heart of the holiday sales season to boot (it was November, 1998).

We convened a quick emergency huddle, but it didn't take long to come to a decision. We'd match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.

After a few weeks, DVD Empire blinked. They had to. Sometime later, I can't remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.

Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market. Study disruption in most businesses and it almost always comes from the low end. Some competitor grabs a foothold on the bottom rung of the ladder and pulls itself upstream. But if you're already sitting on that lowest rung as the incumbent, it's tough for a disruptor to cling to anything to gain traction.

An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesn't have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

Because technology, both hardware and software, tends to operate on an annual update cycle, every year you have to worry about a competitor leapfrogging you in that cycle. One mistake and you can see a huge shift in customers to a competitor.

Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines, and you can focus your management team on offense. In contrast, most technology companies live in constant fear that they'll be disrupted with every product or service refresh. The slightest misstep can turn a stock market darling into a company struggling for its very existence.

Amazon's core retail business is, I'd argue, still very secure. I can't think of a tech retail competitor that is a legitimate threat to Amazon in selling most physical goods. Where Amazon is most vulnerable in retail is those areas where the game shifted on them, and that's in the media lines where physical books, CDs, and DVDs are being digitized. Since no physical product must be transported through a distribution system, Amazon's operational efficiency advantages there are less effective against competition. But in the arena of buying something online and having a box delivered to your doorstep, who really scares Amazon?

Another advantage to low margin models is increased customer loyalty. Most of the products Amazon sells are commodity items. It's not like buying one brand of car versus another, where you a variety of subjective judgements affect the consumer's choice. The Avengers Blu-ray disc you buy from Amazon is the same one you'll find at Wal-Mart or Best Buy. In that world, the lowest price tends to win. In the early years, Amazon routinely lowered either product pricing or shipping pricing. Very few companies lower their prices permanently as time goes by except on depreciating goods, like computers whose value decreases as newer, faster models hit the market.

If you're the low-cost leader, customers will forgive a lot of sins. That margin of error, like the competitive moat, buys you peace of mind. I could spend time price-shopping every item on Amazon, but these days, I don't really bother. Amazon's website design is not going to win any design awards, it's a bit of a Frankensteinian assemblage thanks to distributed design decisions, but it's fast, the shipping is cheap or free, the customer service is fantastic, and oh, did I mention, their prices are great! There is value in being the site of first and last resort for customers.

If you want to jump into competition with Amazon, you can't just match Amazon, you have to leapfrog them. But they've left almost no price umbrella for you to sneak under, so you have to both match them in price and then blow them away on the user experience side to even get customers to think about switching. Who has the capital and wherewithal to play that exceedingly unpleasant, unprofitable game? You can only win that game at scale, and Amazon already achieved it.

Smart companies compete first by playing to their strengths, but Amazon also cleaves to a low margin strategy, I believe, because it's demonstrated the advantages noted above. Amazon could try to build a high margin tablet to compete with Apple, but why would they? How have companies that have tried to challenge Apple with design and build quality fared these past few years? Why would you try to challenge Apple in the areas it is strongest at?

In a recent interview, Reed Hastings claimed Amazon was spending $1 billion a year on licensing streaming video for Amazon Instant Video. Hastings is negotiating for much of the same content, I know he knows what that content costs, and since I used to work at Hulu, I can vouch for how easy it would be to burn through a billion dollars building up a substantial streaming video library. I do think Amazon may have overpaid as a consequence of wanting to come in strong and make a big play without as much pricing information as Netflix and Hulu have accumulated over the years, but it strikes me as a classic tactic out of the Amazon low end disruption playbook.

[In this world of digital video, this strategy is much more difficult to execute because there is no fixed price on licensing episodes of TV shows and libraries of movies. The information asymmetry works in favor of the content providers. Netflix had a great advantage when First Sale Doctrine permitted them to buy DVDs at the same wholesale price as any retailer since it capped their costs. But in the TV/movie licensing world, the content owner can constantly adjust their price to squeeze almost every last drop of margin from the distributor as you can't find perfect substitutes for the goods being offered. Ask TV networks if they make any money licensing NFL, NBA, and MLB games for broadcast. Hint: the answer is no. Ask companies like Apple and Spotify if they're making healthy margins selling digital music. Ask Netflix or Amazon if licensing TV shows and movies for digital streaming is more or less profitable than the days of selling or renting physical media. In the digital world, transfer pricing can be even more of a cruel mistress. 

Most companies building profitable ecosystems in the digital world are making their profits elsewhere using the digital media as a loss leader. Apple on its hardware, for example, or TV networks trying to use sports contests to cross-promote their other TV programs.]

Apple took some grief last quarter for seeing some margin depression, but in and of itself, I don't see that as a bad sign. In fact, I was disappointed that Apple didn't price the iPad Mini lower out of the gate. Of course, they're largely sold out through the holidays, so pricing it lower means leaving money on the table in the conventional microeconomic analysis.

But in the long run, if you look at every iPad purchaser as a new subscriber to the Apple ecosystem of hardware and software services, there's value in fighting for every additional user versus Google or Amazon in the low end tablet market. Most customers who buy a low end tablet will stay in that producer's ecosystem for a while, at least a year. Graph the low end market and you see it trending towards zero, to that day when an Amazon or a Google will likely offer you a low end tablet for free, perhaps as part of your Amazon Prime subscription or if you agree to pay for Google Drive.

That's a world in which the switching costs are set by the software ecosystem of each of those companies, not the hardware. It's why Apple lovers are right to fret about iCloud and its underwhelming mail, storage, and calendaring services and substandard reliability, why Amazon might spend a billion dollars licensing videos, why Google tried so hard to switch people over to Google+. They're all looking for a path to software lockin, a more defensible moat.

Apple still is the margin king among those competitors in the mobile phone and tablet spaces in which they compete. But if they decided to start using their low-end priced SKU's in mobile phones and tablets to press down on Google and Amazon, and if their margins declined as a result, I, as a shareholder, wouldn't necessarily find that to be a negative. I would love to find the sales mix data on their different SKU's in the iPhone and iPad verticals, though I have yet to see that data shared publicly anywhere. The shape of that curve will tell us a lot about where those markets are in their lifecycle, but Apple has some control over their shape as well.

Some might say that Apple doesn't have the right mindset to play low-margin offense, that it's against their nature. But they've effectively dominated and wrung every last drop of money from the iPod market using pieces of this strategy, and they have the operational expertise and vertical integration to achieve it. In fact, Apple now turns its inventory more times a year than Amazon, by a healthy margin, a staggering fact.

I haven't mentioned Google much, but like Amazon they will continue to attack Apple at the low end with their strategy of subsidizing businesses with their core ad revenue. For the forseeable future, Apple will have these two giants snatching at their feet. It's a high pressure, high stakes game. Wouldn't it be nice to trade some margin for higher castle walls, just for peace of mind? 

Most people don't appreciate them, but low margins have their own particular brand of beauty.

Why the Lakers are playing so poorly

I enjoy Zach Lowe's basketball analyses on Grantland. He's delves a bit more into X's and O's than some of the pure statistical analysts, and I find that mix more illuminating considering the complex interaction effects in basketball.

His latest article is one of the best explanations yet as to why the Lakers are doing so terribly this year. Since I hate Kobe Bryant, I take perverse pleasure in reading chronicles of their shortcomings, especially when Kobe's poor defense is one of the Lakers problems.

But what's more interesting to me, in a way, is all those short YouTube video clips Lowe uses to break down plays from games. Who is uploading these videos of single plays? Is it Lowe himself, or someone else? If it isn't Lowe, how does he find the right clips of the right plays to use given the scarce metadata? Is it legal to upload these short clips from NBA games?

In the NFL you have to pay to watch NFL Game Rewind, but Lowe relies exclusively on these short YouTube clips which don't appear to have an NBA-sanctioned equivalent.

However these clips are produced, and however Lowe finds them, they're turning into the best option for play by play analysis of the NBA.

The Oath

I just finished The Oath: The Obama White House and the Supreme Court by Jeffrey Toobin. it's his follow-up to his best-seller The Nine: Inside the Secret World of the Supreme Court. Both are great.

I'm generally not too interested in law, but Toobin is covering only the most interesting cases of the highest court in the land, and I found both books engrossing. For this layman, what's eye-opening and somewhat shocking is just how powerful the nine Supreme Court justices are and how politicized the appointment process has become. In many ways, which nine people make up the Supreme Court should matter much more to the the average American citizen than who is elected President. A President can serve only up to 8 years in that office, but Supreme Court justices have decades to shape American life in the most fundamental ways. In fact, one of the ways it really matters who we elect President is that they get to appoint new Supreme Court justices as previous ones retire or pass away.

I've spoken to some of my friends who work in law, and some disagree with Toobin's legal assessments, but for someone without a deep knowledge of law, the book is written at the perfect level. Call it the "New Yorker" level of insight into a topic, as Toobin is one of their writers and an exemplar of the New Yorker idea presentation style.

Related: Critical Legal Studies

Compensation market inefficiency - sports vs. tech

Here's a mystery: in sports, some players on a team make more than their coach, but in the tech world (and the business world, for the most part), almost no employees make more than their manager. Which of the compensation distributions is more equitable?

First, there is a similar inefficiency in both markets, and that is that salaries for those fresh out of school tends to be bounded. In sports it's because of the agreed-upon arrangement between owners and players in each sport. In MLB, for example, a player is under team control for the first 6 years until they become free agents and can hit the open market. They have three years before they can even start to go to arbitration if they don't like the team offer. All of this is a huge suppressor for player salary. Albert Pujols will be paid more over the final 10 years of his career than the first 10, but it's almost certain that he produced more the first half.

In the tech world, most employees come out of school and get slotted into rough salary bands. In the beginning, that's largely fair. You can't tell how someone out of school will work with others or adjust to the more relentless rhythm of corporate life as opposed to the more lumpy work distribution in college.

But young developers, to take a group of people I think are particularly underpaid, typically produce a ton very early in their career, certainly more than they're paid for. It's not always evident right away, but within a short period the best quickly rise to the top. A lot of this has to do with the amazing leverage one software developer's code can have in the marketplace. Code can be made almost infinitely scalable. Even the greatest sports player can only have so much impact. The maximum is probably either a sport with few players on the floor at once (like basketball) and enormous marketing power in the global marketplace, or an individual sport where the player is responsible for nearly all of his/her performance (coaching being the other factor in an individual sport).

A huge difference between sports and the technology industry is thatInformation transparency on the true worth of a tech employee is much lower. Companies have a huge information asymmetry advantage over employees. In sports, the contracts of players are public knowledge, you know how much the guy in the locker next to you makes. Everyone's performance is highly visible, analyzed by thousands of professional and amateur analysts and fans.

In the business world, information about what different people are working on and how productive they are is not publicized that well within a company, and it's even less discoverable outside a company. You are typically limited to what you can put on your resume and who you can list as references if you take yourself on the open market.

[Incidentally, the lack of easy ways to quantify an employee's impact with much objective precision is exactly the reason that tech companies, who love to preach the virtues of transparency, can't be transparent with things like compensation. The disparity between one's compensation and one's impact, which will vary widely depending on who's judging, would cause way too much friction and gridlock. Imagine employees, like sports player unions, going on mass strike every so often.]

My sense is that both the sports world and the tech world are inefficient in their compensation schemes, but in different ways. In sports, I suspect many coaches are paid too little. Bill Barnwell makes a strong argument for Jim Harbaugh as a highly underpaid asset. In this article behind the ESPN Insider paywall, Bradford Doolittle makes a similar argument for the value of Tom Thibodeau to the Bulls.

In the tech world, I suspect the opposite, and that is that many employees are underpaid relative to their managers. Hiring great developers straight out of college and owning them during their equivalent of their pre-arbitration or pre-free agency years (to use a sports analogy) is one of the most important things a tech company can do, and Google, in particular, was the first to really exploit this inefficiency by quickly raising compensation and perks across the board. They drove the compensation bar up towards what is likely a more equitable equilibrium.

It's difficult for young developers to really assess their true worth because they typically have a very limited view on their impact. Even if they had a more global view, the ability to quantify the impact of a young developer versus a hypothetical replacement, to calculate the equivalent of WARP (to use a baseball term meaning Wins Above Replacement Player), in other words, remains very difficult. Will things like Github change this? Perhaps over time, we'll have more quantitative measures on something that will serve as a replacement for a resume, something more like the statistics on the back of a baseball card.

A related inefficiency that many claim is rampant in Silicon Valley compensation markets is age discrimination. It feels like some reporter needing to file a story will write a story on this once a year. Some recent examples include this one in Reuters and this one in the Mercury, but you can go back a few years and find earlier articles that say the same thing. This phenomenon is not unique to technology, you'll see it in sports, too. The brutal truth is It's partially the number of hours a young, single worker is willing to put in versus a married, middle-aged worker with kids, but it can also correlate to the willingness or familiarity of young developers with newer programming languages and techniques. Given how ruthless the technology recruiting battle is and how valuable great developers are, I suspect this inefficiency, if it exists at scale, will be ruthlessly exploited by some tech companies and closed over time.

Employees have some recourse for getting closer to market value. One way is to shop around frequently, like a free agent in sports, to determine true market value. Since there isn't an equivalent of a team's exclusive rights to your pre-arbitration or pre-free-agency years as in sports, you are essentially always a free agent. The downside is the increased stress from spending time selling yourself. Another option is to go do a startup, where, in a smaller team, you earn more visibility and credit for your output than you would within a giant corporation. One downside is that the nature of the work can be much different than in a larger company. Also, it's a much higher risk proposition, and it's not for everyone, but for entrepreneurial, risk-taking folks it's usually worth trying at some point if for no other reason than self-education.

Today we have headhunters in the tech world, or placement agencies, but at some point I wonder if we'll have the equivalent of a CAA in tech, with some knowledgeable agents representing the strongest developers and finding the most interesting work and highest compensation for them.