Learning from the economics of video games

So how can games provide insight into real life problems and politics?
The two groups don’t really realize this yet, but game designers and policy makers are doing exactly the same thing. Both groups have these giant populations that are so big that you can’t sit down and talk to everyone about exactly what they want, so you get this mass of information and opinions. And your job is to look out at this sea of people and figure out what would make them happier and then design a bunch of rules that does that. How do you handle player vs. player combat? How do you handle the market? How do you handle conflict between players? Those are all political problems. Many game designers function like lawyers or policy makers. The policies may be very different, but they are in the same business.

Do you think there are opportunities for each side to learn from the other? 
I think that the opportunities go in one direction. I think that game designers should not take anything from the policy makers, because policymaking is so bad. Think about this, we’re going to implement a change to health policy that is going to involve one sixth of our economy. No game designer would ever do something like that without testing it, but we go forward without tests all the time in real life. I think that real world governments have a lot to learn from the way that game designers develop patches, how they talk about that process, how they implement it, and how they do the actual work to figure out what that patch will be.

What about the economic world? How can big business use games to improve their business?
Well, you’re stepping over that live wire called Gamification, and I don’t want to give anyone the idea that Gameification is a reasonable strategy for businesses. The basic idea is that you have all these people doing data entry, and if you just give them badges every time they do something, then magically they’ll love their job. That’s not how human behavior works. I think that we can do a much better job of making the lives of everybody in the real world feel more meaningful, but that’s not Gamification, that’s a cultural change. Figuring out how to do that is the tough problem, but giving everyone badges is a weak attempt to make your company a more enjoyable place. What’s going on here is basic human motivation. The gaming industry knows more about engaging people than any other industry right now.
 

From an interview with Edward Castranova, a telecommunications professor at the University of Indiana.

We are still a ways off from the popular dystopian sci-fi scenario of being citizens of a corporation rather than a nation-state, but some companies are already arguably more powerful than many countries, certainly on the scale of economic throughput. That's why it's still valuable to debate and discuss the ethics of some of the largest companies in the world. The policy decisions technology companies like Facebook, Google, Amazon, Uber, Apple and other behemoths make have massive effects in society, and they've been under a lot of scrutiny. Some of the outrage is trivial and overblown, but in the grand scheme of things I'm glad people challenge and question these companies publicly. For the companies, the consequences usually just consist of PR headaches that blow over eventually when the energy of the initial fury dissipates.

Operating under the aegis of “maximizing shareholder value” isn't much of an ethical foundation.

kadryov_95

Ramzan Kadryov, the head of the Chechen Republic, has just under a half million followers on Instagram. A quick glance shows he's a frequent poster, up there with the best of this digitally extroverted generation.

So when he lost his iPhone at a wedding, recently, it turned into a big deal.

So what happens when Kadyrov's tool for using his Instagram, his iPhone, goes missing? According to Russian human rights group Memorial, Kadyrov misplaced his phone at an opening at the "Shira-Yurt" museum near the village of Germenchuk on Saturday. The museum, a model of a traditional Chechen village, was celebrating a wedding that day.

During the wedding, there was an announcement over loud speakers that Kadyrov had lost his phone, according to Memorial. After the guests went home, the human rights group says that over 1,000 people, including children, were called back to answer questions about the phone. Memorial says that most were only able to return home in the morning.

Kadyrov's office has denied the claims, but Radio Free Europe/Radio Liberty say they spoke to a number of local officials who were able to confirm the incident.
 

Someone needs to set Kadryov up with Find my iPhone.

I find the phenomenon of older famous people who are active on social media endlessly intriguing. It's not just the dissonance of older people using newer technology. Do these people need the incremental validation of their own popularity in the form of thousands or millions of followers? Or maybe Kadyrov is just really into photography?

Music economics in the age of abundance

Jay Frank of FutureHit.DNA notes that for music labels, a streaming music customer is “now worth nearly 15% more than the person who bought music either digitally or physically.” In this third industrial revolution, that's not surprising. Streaming music services are the logical service for this age of abundance while purchasing music made more sense in the age of scarcity, however artificial that scarcity was.

Frank recommends artists face facts about the economics of this new age.

IT TAKES LONGER TO MAKE MORE MONEY
As Ethan points out, it took an “indie pop/rock group” 34 months to make more money from streaming than they did from sales. Some artists will do it in less time, and others in more time. Either way, the artist has to take the long view. It’s certainly easier and much better to run a music business with the money coming in quickly with an up-front sale. However, if you believe in your music and have patience, the long run pays off. In this way, the recorded music business will quickly resemble its partners in publishing. In another way, with many artists being financially irresponsible, is it so bad for them to get their money slowly over a prolonged period?

THE MONEY GOES TO MORE ARTISTS THAN EVER BEFORE
A person buying $14 worth of CDs a year has the money going to 3 artists at the most (3 CDs x under $5). A person buying $14 worth of downloads a year has the money going to maybe 18 artists at the most (18 downloads x $.79). However, $16 worth of streaming revenue conceivably goes to as many as 3,200 tracks (3,200 streams x $.005). Even if you take an assumption that a person does 100 listens of one artist in a year, that’s still spread out over 32 artists in a year, or nearly double the max average for download sales. As I’ve reiterated before, the real issue facing artists with streaming is that the very access that allows them to make money means the pie gets sliced thinner. There’s more money, but it just goes to more artists.

THE SONG HAS TO LAST A LONG TIME
Disposability of a song only works if you work it extra hard while it’s hot. If an artist/song takes 34 months to make more money, then the song needs to be relevant for those 34 months. No longer can you stiff a consumer who buys something and only listens to it a couple of times. Now, those listens need to reoccur and do so over a prolonged period. This also means continually marketing content to ensure it stays relevant.
 

The first two are just reality. The last one is curious: how does one create a song for repeat playability across the years? What are the qualities of such a song? One can ask the question another way: do some artists knowingly create music that is disposable? That would only seem to make sense if it was easier to do so, otherwise why wouldn't one want to create something longer lasting? All things being equal, you'd prefer the longer cultural relevance and a revenue stream that more closely resembles an annuity.

Despite the great consumer experience that is streaming music, I'm less bullish on the financial attractiveness of that industry. Companies like Pandora, Spotify, and Rdio will all suffer from the wholesale transfer pricing problem. The labels have a unique asset, the digital streaming rights to millions of songs, that all those companies require to survive, and the labels will continue to adjust the pricing to squeeze all the margin out of the business.

There is a path forward. Video sites like Netflix, Hulu, and Amazon all suffered through the same problem as studios licensed back seasons of shows for exorbitant fees, often to multiple buyers who ended up with undifferentiated offerings on which to charge meaningful subscription fees. Still, all of them had to license a meaningful enough library, let's call it tonnage, to serve as a base for a service. From there, all three turned to financing original content that they'd own exclusively as a means of differentiation.

The music streaming services may have to take a similar approach and compete with the labels head to head in working with artists directly to handle the jobs further up the value chain like production and marketing. I've long thought Spotify, as the leading streaming service in subscribers, should become a music label of its own.

It's a costly road, and the payoff is not immediate, but at least it offers the possibility of future profits which might never materialize given the terms the music streaming services have to work with now.

Fast Fashion

Fascinating article on the phenomenon of fast fashion, much of it tied to the an area of downtown Los Angeles known as the Jobber Market.

In the 2000s, the first major wave of second-generation Korean immigrants— kids who had grown up around their parents’ showrooms—started hitting adulthood. They headed off to American universities to study business, or to schools like Parsons to acquire skills in design, marketing, and merchandising. “They are going to fashion schools everywhere—in Paris, London, Milan, L.A., and New York, all over the world,” says Tommy Choi, a 15-year veteran of the Jobber Market.

On their return to Los Angeles, the kids revamped their family businesses: re-branding, creating company logos, building out showroom spaces to make them appealing to American wholesale buyers, and setting up sleek websites. Their Americanized cultural identities and native English skills allowed Jobber Market businesses to communicate fluently with domestic department-store and retail buyers. And their design, marketing, and merchandising skills allowed companies in the neighborhood to start making clothes on the cutting edge of fashion.

...

Competing against retailers that were still observing the three-month fashion cycle, Forever 21’s buyers only needed to show up daily in the Jobber Market and choose from a smorgasbord of fashion-forward designs, all ready to be shipped that day. If the company’s buyers did not agree with one vendor’s price, all they had to do was go next door, where a similar design could likely be had for cheaper.

...

There’s one more important part of the picture: Fast fashion did not just arise from a new intergenerational division of labor within Korean fashion businesses. It also arose from a new distribution of risk in the industry, with much of it falling on the shoulders of the Korean and Mexican families near the bottom of the production chain. For the fast-fashion suppliers in the L.A. Jobber Market, consumer demands are unpredictable and the market is highly volatile. Wholesalers live at the mercy of retailers who set prices and squeeze profit margins; families must invest cash and put thousands of styles into production before knowing what will sell. Everyone in the Jobber Market tells me about the stress, likening the business to gambling at a casino.
 

So much to unpack in that story, well worth reading.

I had no idea cycle times for fashion could be so short. One more advantage of “made in the USA”: the ability to rapidly reduce cycle time in an industry where trends can be fleeting.

At some point, perhaps manufacturing shops in the Jobber Market move down the apparel value chain and start selling direct to consumers? I need to wander through that neighborhood the next time I'm back in L.A.

Should the U.S. government pay ransoms for journalists?

And then, earlier this year, some disappeared journalists began to emerge. Two Spanish journalists were released in March. The following month, four French journalists emerged from captivity. It was widely assumed that ISIS had demanded ransom, and that the European governments had agreed to pay. European governments generally agree to make, or facilitate, ransom payments, which are believed to have run as high as $10 million.

Neither the United States nor Britain makes payments of this sort, and sharply criticize European governments for doing so. But perhaps that's why no American or British journalists have been freed during this period. In August, of course, the United States began bombing IS positions in Iraq, further complicating any official attempts -- if they were made at all -- to free Foley and Sotloff. They were thus available to serve as punishment, and as blackmail.

This raises an agonizing question: Should states pay ransom to kidnappers? If you are a friend or loved one of the victim, the answer is obviously yes. But even a more remote observer could cite the moral argument that the obligation to treat people as ends rather than means -- what Kant calls the "categorical imperative" -- forbids one to place the life of the abductee in a balance with abstract goods, like "sending a message" that kidnapping doesn't pay. In any case, the consequences of capitulation are remote and hypothetical; the life is terribly real. Israel, the most hard-nosed of democracies, has been prepared to pay a terrible price to retrieve its captured soldiers; in 2011, the state handed over 1027 prisoners, a quarter of them serving life terms, in exchange for Gilad Shalit. Israelis understand that by doing so they may encourage further kidnapping, and thus further endanger their own security; it is a price they are prepared to pay.
 

More over at Foreign Policy. Not an easy decision to make, even if, as the article notes, "the consequences of capitulating to terrorist kidnappers are ruinous” (incentives matter, and the article points a NYTimes investigation that showed how Al Qaeda was financing its operations by kidnapping and then ransoming citizens to European countries).

This piece opened my eyes. American TV and movies have given me cultural blinders; in TV shows and movies, the standard operating procedure of the U.S. government was to never negotiate with terrorists, and I assumed that was the same everywhere.

More detail from the NYTimes piece:

While European governments deny paying ransoms, an investigation by The New York Times found that Al Qaeda and its direct affiliates have taken in at least $125 million in revenue from kidnappings since 2008, of which $66 million was paid just last year.

In news releases and statements, the United States Treasury Department has cited ransom amounts that, taken together, put the total at around $165 million over the same period.

These payments were made almost exclusively by European governments, who funneled the money through a network of proxies, sometimes masking it as development aid, according to interviews conducted for this article with former hostages, negotiators, diplomats and government officials in 10 countries in Europe, Africa and the Middle East. The inner workings of the kidnapping business were also revealed in thousands of pages of internal Qaeda documents found by this reporter while on assignment for The Associated Press in northern Mali last year.
 

With this level of money, the kidnapping business has grown in sophistication.

To minimize the risk to their fighters, the terror affiliates have outsourced the seizing of hostages to criminal groups who work on commission. Negotiators take a reported 10 percent of the ransom, creating an incentive on both sides of the Mediterranean to increase the overall payout, according to former hostages and senior counterterrorism officials.

Their business plan includes a step-by-step process for negotiating, starting with long periods of silence aimed at creating panic back home. Hostages are then shown on videos begging their government to negotiate.

Although the kidnappers threaten to kill their victims, a review of the known cases revealed that only a small percentage of hostages held by Qaeda affiliates have been executed in the past five years, a marked turnaround from a decade ago, when videos showing beheadings of foreigners held by the group’s franchise in Iraq would regularly turn up online. Now the group has realized it can advance the cause of jihad by keeping hostages alive and trading them for prisoners and suitcases of cash.
 

Incentives, as expected, seem to work. The piece notes that the two countries that don't negotiate, the U.K. and the U.S., have seen many fewer citizens kidnapped these past five years than countries that are known to pay ransoms.