The most interesting company in tech: Valve

You hear it in technology companies all the time, especially at firms that have survived from their days as a startup to become a bigger firm: we want to remain entrepreneurial. To feel like a startup. Nimble. A place that entrepreneurs want to work. A place for builders to build (a phrase Jeff Bezos always used to describe what he wanted Amazon to be as a company).

But it has always felt a bit disingenuous. You couldn't fully escape the top-down corporate imperative, though they might have wanted to provide the illusion that you had.

[The Google 20% idea in recent history sounded like the most promising attempt, perhaps a more practical evolution of a earlier incarnations, for example research divisions like Xerox PARC or Microsoft Research]

But then I read about Valve Software, and it sounded like a company was actually taking all this lip service to heart and pushing this concept to its most logical extreme. What Valve has implemented as their "corporate" structure makes them, to me, the most intriguing company in technology, if not in business.

Here is the Valve Employee Handbook (PDF) which had the Internet buzzing a while back. In summary: Valve is a completely flat company, with no hierarchy, and everyone has to find their own project or start their own project and recruit other employees to the cause. You have no boss, no one can tell you what to do. Some companies have occasional hackathons or hack weeks; Valve is run like a perpetual hackathon. Google had 20% time; Valve Software lets every employee have 100% time.

As the Valve Economist-In-Residence Yanis Varoufakis explains in this long and fascinating blog post, the way Valve is organized is an attempt to turn corporations into more responsive, efficient entities by introducing real market forces.

Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism. In this context, the management structure that typifies Valve represents an interesting departure from this reality. As I shall be arguing below, Valve is trying to become a vestige of post-capitalist organisation within… capitalism. Is this a bridge too far? Perhaps. But the enterprise has already produced important insights that transcend the limits of the video game market.

Varoufakis refers to Valve as a spontaneous order firm. What replaces market price signals in the Valve model is individual time allocation. That is, every employee can freely choose how to spend their time, which project or projects to devote themselves to (the Google 20% time model taken to its extreme). Contrast that to the traditional corporation, with people's work allocation imposed from the top down, through the organizational hierarchy.

He concludes his blog post:

Whatever the future of Valve turns out like, one thing is for certain – and it so happens that it constitutes the reason why I am personally excited to be part of Valve: The current system of corporate governance is bunk. Capitalist corporations are on the way to certain extinction. Replete with hierarchies that are exceedingly wasteful of human talent and energies, intertwined with toxic finance, co-dependent with political structures that are losing democratic legitimacy fast, a form of post-capitalist, decentralised corporation will, sooner or later, emerge. The eradication of distribution and marginal costs, the capacity of producers to have direct access to billions of customers instantaneously, the advances of open source communities and mentalities, all these fascinating developments are bound to turn the autocratic Soviet-like megaliths of today into curiosities that students of political economy, business studies et al will marvel at in the future, just like school children marvel at dinosaur skeletons at the Natural History museum.

A few reactions...

I'm not sure why intrinsically a time allocation model would be superior to a market-price driven model, but at the very least it would only seem to have an advantage if the individuals were very smart. My hypothesis is not that this model is inherently superior, necessarily, but that it provides a critical recruiting edge which, in a market with constrained talent, is a massive advantage. That in turn provides Valve with the necessary star talent to make the time allocation model flywheel spin. The innovative games (e.g. Portal and Portal 2, Half-Life) and business models (Steam) Valve has produced may simply come from that superior labor pool.

Secondly, spontaneous order firms may work best in a business like Valve's, the videogame business, which, like the film business, is a hits driven business in which every incremental game creates its own new market. They compete in a far less zero-sum game market than, say, Apple does in mobile phones. When you think about the coordination it would take for Apple to shift itself to a twice a year release schedule for iPads and iPhones, coordinating its product development, supply chain, marketing, and retail efforts across hundreds of countries globally, the concept of them becoming a spontaneous order firm seems impossible.

Third, I can think of many companies where a model like this wouldn't work because in those companies, people who are more senior in the hierarchy genuinely believe in their own superiority over the folks beneath them on the org chart. They'd likely be exasperated by the day to day work decisions coming out of a spontaneous order firm. This is not an indictment of the Valve model, just a check on the realistic speed with which such a model might realistically spread to other companies.

Fourth, at all the tech companies I've worked at, which are all more traditionally hierarchical, I wouldn't characterize them as strict Coase-ian "islands of conscious power [corporation] floating in an ocean of unconscious co-operation [market]". Most tech companies I know are obsessed with gathering price signals from the marketplace, and that data permeates the firm.

My first job at Amazon consisted of assembling, every month, a 100+ page report called the Analytics Package which had metrics, external and internal, on every aspect of our business. It would take me almost the entire month to compile, I'd have to translate each of them into graphs Tufte would approve of, and then I'd write prose analysis to accompany each package to highlight the most interesting signals. I had to generate hard copies of this, and every month I'd make good friends with the copy repairman as one copier after another broke down under the load of cranking out hundreds and hundreds of pages of information. Nowadays, most startups I know of have reporting portals that can generate such data in beautiful manipulatable charts on demand.

Lastly, a model of time allocation might be more susceptible to the cult of charisma? In my experience charisma and competence or intelligence are not always tightly correlated. The most dangerous person in a company is the charismatic fool.

Within the confines of a more traditional firm, though, I suspect there's much to learn from the Valve Software experiment, and so I'm really curious to see how they evolve over the next five to ten years. How much larger can Valve grow with this business model? Is it a more efficient model for gathering price signals from customers? How well does the model hold up against bad eggs, like the mythical brilliant asshole or just someone incompetent?

Let's examine one issue in more detail.

In companies, politics often crop up. This is especially common as companies grow larger. Politics are damaging to companies because they can lead to local instead of global maximums (wins for a local fiefdom or manager instead of for the company as a whole).

My experience is that politics is rooted in perceived mismatches between a person's own sense of worth and external signals of that worth, from explicit signals like one's title and salary to softer signals like the time spent with the CEO.

When a company is small, the politics tend to be minimal since many startups either are completely flat or have little to no hierarchy, everyone gets lots of time with the CEO, and everyone's marginal contribution is massive and easy to detect. In a larger company, the pathways for recognition get clogged. Suddenly the CEO you used to see  all the time you only see once in a while. Hierarchy is put in place to try to minimize coordination costs, but suddenly everyone is judging their self-worth against where they're positioned within that org. chart which is inherently a ranking system generally tied to compensation.

Valve's model has the potential of upending those political costs. There's so little hierarchy that mismatches between internal evaluations and external markers of value or less common. Since the company's surplus is divided up each year based on contributions, theoretically compensation is more closely and efficiently tied to value generation rather than getting out of synch purely based on factors like seniority or tenure.

In the end, it may be that all of Silicon Valley, rather than Valve Software, is the most interesting spontaneous order unit to study. The common complaint about Silicon Valley is the competitive labor market, with the average tenure at less than 2 years. California does not look kindly on non-compete agreements, it's a labor-friendly state, and so people carry ideas with them from company to company all over the region. They are all putting the time allocation model to practice, and while it makes recruiting and retention a pain in the ass, it leads to the region being among the most generative business ecosystems in human history.

No Hall of Fame for you

No baseball players were elected to the Hall of Fame today. Jonah Keri has one of many refutations of the logic, or lack thereof, of the Hall of Fame voting body. I don't want to get into a debate about the silliness of the BBWAA, but I think it's illustrative, in the lightest way possible, of one of the more pernicious and annoying forces in this country: anti-intellectualism (and the musty moral codes it produces).

Nate Silver did a great job of exposing much of the anti-intellectual punditry that masked for mainstream political reporting this past election. We shall see if it has any lasting effect. The world he left behind, baseball, is still largely dominated by reporters who don't know even the most basic of mathematic or statistical principles. Thankfully the market forces that drive winning have pushed some smarter people into MLB front offices so at least the product on the field is run more rationally, but much of the smartest media coverage of sports still exists on the fringes.

One of the reasons I've gravitated towards the technology sector is that it has always seemed to me to be one of the most intellectual-friendly of industries. When people criticize Silicon Valley for not engaging more in politics, what they fail to understand is that most people in technology study politics and see a rigged and inefficient game, dominated by intellectual hostility. Why would they want to waste their life playing a game that's tilted against them?

The tech world may not be perfect, but it aspires to be a meritocracy, and when companies fail, they just cease to exist. There are no government bailouts (yes, that's you Wall Street) because you're too big to fail. I can't remember who posted a link to this article in my Twitter feed, but the first line is astonishing.

When I worked at high profile companies like Amazon and Hulu, I'd be upset when various reporters covered us in a lazy way. When reporters did not just legwork but critical thinking, it always comforted me, regardless of whether it was positive or negative coverage, because it showed a healthy press at work. A smart, independent, and dogged press is one of the core strengths of this country, like white blood cells against the spread of lies and half-truths. It's one reason I still derive a certain perverse pleasure whenever Gruber at Daring Fireball ridicules some of the silliest of Apple media coverage.

When anti-intellectualism is allowed to clog up our communication channels, it reduces the gains that we could be reaping from the Internet's single greatest strength, it's ability to transmit information cheaply and quickly.

How did I get off on this tangent from the baseball Hall of Fame vote? I think this Mucinex is making me loopy.

Why so few knuckleballers?

Another article asking why there aren't more knuckleball pitchers in baseball given the recent success of R.A. Dickey who won the National League Cy Young award last season. Watching animated GIFs of Dickey's knuckleball is mesmerizing, the animated GIF being the perfect form with which to fetishize the almost sorcerous movement of the pitch. Perfected, the pitch puts much less strain on your arm, allowing pitchers to go deeper in games and later into their career at near peak effectiveness. Seems like a market inefficiency waiting to be exploited, doesn't it?

I played organized baseball when I was younger, and I suspect the reason it's so rare is that it's really an all or nothing skill in both technique and results. That is, if you decide you're going to become a knuckleball pitcher, the results will be binary. It's putting your entire career in one basket.

The types of players who play organized baseball at the high school and college level are almost always the most promising players, the best athletes, and at that level, none have had to throw a Hail Mary with their career. So for any of them to suddenly try to throw the knuckleball, to take an all or nothing gamble with their baseball life, is unnecessary.

The types of people you see throw the knuckleball typically are much older, already in the minor leagues, or about to be cut from a MLB roster, and so at that point they have nothing to lose. Then the idea of trying a knuckleball doesn't seem so crazy.

The distribution of results if you have a more conventional pitching repertoire, maybe a fastball-slider combo, is less binary. There's a chance you could end up just a mediocre or situational reliever with that, but with a knuckleball, you're probably either a starter or out of baseball.

Mastering the knuckleball tends to be an all or nothing endeavor, too. It's extremely difficult to throw (I tried to learn one) and takes a ton of work to learn, let alone master. It's not thrown like any other pitch in baseball so you have to learn a lot of the technique from scratch. A poorly thrown knuckleball, to a major league player, is like tossing a softball underhand to the plate: the end result is usually the endangerment of your life, that of one of your corner infielders, or that of some spectator in the bleachers. In R.A. Dickey's first career start he gave up 6 home runs and was immediately demoted to Triple A.

That said, I do think more players who can't even make the cut for their high school team, or even fringe pitchers, should try to learn the knuckleball much earlier in life. Their career is essentially already over at that point, the risk reward ratio makes sense then, and they give themselves a headstart on learning the pitch. Even then, they'd likely have to still throw a conventional baseball alongside it for many years just to maintain enough arm strength to throw it at a useable velocity in the major leagues. R.A. Dickey's knuckleball is the fastest I've ever seen in baseball, he throws it harder than probably any of you reading this can throw a regular fastball.

A question more people should ask of professional sports is why more NBA players don't shoot free throws underhand. Given how poorly some of the key stars in the NBA shoot them (among regulars, Dwight Howard is last in the NBA right now shooting .508), the question of swallowing your pride and machismo and shooting a style that would likely improve your team's record in close games by a non-trivial number of games is one that should be asked ever year until someone does it again.

Free throws are one of the most boring parts of basketball anyhow, and I bet the first player to do it would be a huge fan attraction.

Attacking the Miami Heat trap

I finally caught the condensed replay of the Bulls Heat game from Jan 4 on my DVR.

With a lot of fast, active defenders, especially Lebron, the Heat love to attack the primary ballhandler with double teams. Recall the first time they played Jeremy Lin last season and how they unleashed a barrage of double teams high and forced him into a ton of turnovers.

The Bulls, surprisingly, won this game, and I noticed a few things that might point the way for future success against the Heat, whether it's the Bulls or another team. You can follow along with the two examples below in this highlight reel.

At 0:16, you see the Heat trapping on the strongside against the sideline with Lebron and Udonis Haslem. This is an example of a case where the Heat's attack succeeded in forcing the turnover and triggering the Heat's fast break, where they are nearly unstoppable.

One way to succeed against that trap which the Heat often employ is a tactic the Bulls used a few times in this game. First, you have to be able to recognize it as a team. The man whose defender has left can move to an open spot near the top of the circle or the high post to serve as a safety release for the ballhandler. If you get the ball to that player quickly, the defender can't recover in time to mitigate your man advantage, and another defender will have to rotate to try to protect the basket. Then the player that rotating defender was covering can cut to the basket, and if you hit him with a pass it's often an easy dunk or layup. Easier said than done, but the Bulls pulled it off several times in this game with Joakim Noah when he was setting the pick on the pick and roll.

You can see one example in this clip at 2:04. Bosh and Wade show a soft double team on Hinrich, and Noah sneaks away towards the basket to take the release pass, then turns towards the basket, at which point the zone defender on Boozer cuts towards Noah. In that instant, Noah quickly hits Boozer for a layup. It's easier said than done, but Noah, who's having a great year, is an ideal big man to be the hub of such an attack because of his passing ability and increased willingness to attack the basket this season. I saw this happen a few times in this game, but this is the only example I could find in this highlight clip. The Bulls ballhandler would be trapped up high, above the 3-point circle, they'd quickly advance the ball to the next level towards the basket, somewhere along the top of the key or free throw line, then that ballhandler would feign an attack to the basket and then drop the ball down behind the defense near the basket for the easy bucket.

The other option, of course, is to conclude that attack not with a pass to a big man cutting to the hoop but to swing it to a 3-point shooter in the corner when their defender rotates to defend the basket. The Bulls have a shortage of 3-point shooters this season so it's not surprising they usually opted to go to Gibson and Boozer on backdoor cuts instead.

Where the Heat are deadly is when they can attack the ballhandler without a double team, and they almost always do that when times get tough with Lebron, whom they unleashed on Derrick Rose the last time the two teams met in the playoffs. Also, it's worth noting that the Heat don't seem to be exerting themselves as hard as they can on defense right now. They're certain to ratchet it up in the playoffs, and all of the above is standard playbook fare against the overplay. Still, it's odd to see it working so well in the regular season.

Legal monopolies

Matthew Yglesias on the absurdity of professional sports team owners treating profits as a fundamental right:

Owning a pro sports franchise is pretty awesome and it's something that high net worth sports fans ought to be doing as a costly hobby. The relevant financial fact is that it's a costly hobby you can exit from by selling your team to the next guy. But the web of municipal subsidies, labor market cartels, and barriers to market access that have been spun around the conceit that it should be a lucrative hobby flies in the face of all kinds of common sense. After all, you look at the people with great season ticket packages to any of these teams. Who are those guys? Not savvy investors. They're rich fans dropping a lot of money on indulging their hobby. And the owner is the richest and most indulgent fan of all. Except somehow he expects to get paid for it? It's nuts.

If you're a fan of a sports team and the owners turn out their pants pockets and shed a few tears to justify trading away some of your favorite players, don't fall for it. The fact that teams make moves to avoid a tax that is named the "luxury tax" is hilarious.

If I were immensely wealthy I'd buy the Chicago Cubs. Not because I'm a Cubs fan and would love to get them a World Series but because owning a professional sports team is one of the few legal monopolies the U.S. holds sacred. What a great racket.