Will Xbox Gold be Set Free? Doubt It.

This post today on Gizmodo, It’s Time for Xbox Live Gold to Be Free by Brian Barrett:

Why would I go to the club that has a cover charge when there are three right next door—each almost exactly identical—that'll let me in for free? Xbox 360 might offer great streaming, but it's also got a hell of a moat.
Yes, your Xbox Live Gold membership includes online gaming. And Microsoft is totally within its rights to charge for that; it's an added value experience unique to its ecosystem...
But the calculus has changed. Microsoft is so focused on making the Xbox the beating heart of your home theater, it's even convinced Comcast to stream its on-demand offerings through it. You can watch ESPN live, 24 hours a day, without ever signing out of your Xbox Live account. And when SmartGlass arrives later this year, you're going to route every piece of content you own through your Xbox.
All of which is wonderful. It's a beautiful future, and one that's never going to happen if Microsoft keeps a velvet rope up around all those wonderful services. It's frustrating enough to pay once for things that used to be free. Xbox Live Gold makes you pay twice.
So let's try this, Microsoft: Forget subsidizing a cheaper Xbox with a more expensive Xbox Live plan. Go ahead and charge a monthly fee for online gaming. Do it in Xbox Live points or yuan or mustard green bushels for all I care. But leave the services your customers are already paying good money for—and that every other set-top box serves up for them free—out of it.

A noble sentiment but not likely to happen. Looking at Microsoft's annual shareholder report tells the story.

In 2010, out of $62.4 billion in revenue, Microsoft took in $6.2 billion from their Entertainment and Devices Division, which includes the Xbox and Xbox gold. That same year, it was estimated that Xbox Gold subscriptions pulled in over $1 billion for Microsoft, or 1.6% of their overall revenue.

Sounds small in comparison to the total, but that Xbox Gold revenue matters a lot: operating and R&D costs to keep it running are relatively low compared to Microsoft's other divisions, I would guess. Also, revenue in the Entertainment and Devices Division grew by 40% between 2010 and 2011, much faster than any of Microsoft's other four divisions.

Don't expect Microsoft to kill the goose now that it's started laying golden eggs. Roku can try to compete with its cheaper offerings, but the Xbox still has a relatively slicker interface and better multimedia integration, so I don't think Microsoft is under much pressure.

Microsoft is also starting to offer Gold subscriptions at retail outlets rather than just online. All signs suggest that Xbox Gold is almost certain to stay a paid service.

Intrade and hedging your bets in life

The prediction market Intrade is a neat contribution to economics as well as everyday living. It offers odds on a variety of important world events occurring, and allows users to buy or sell "shares" in the occurrence of events (take a look at the site for details of how it functions).

If you're interested in knowing what the chance of some upcoming event is, go to Intrade and you can see what the market rates the odds as. It's better than listening to pundits because on Intrade, people are putting money where their collective mouths are.

The recall election of Governor Scott Walker is going on in Wisconsin as I type this. Ballots are yet to be counted and Intrade currently prices his chance of victory at 93.6%. I'm ignorant about the political climate in Wisconsin, but even so I can quickly see that it would be an extremely strange event for Walker to lose this recall.

There are more subtle benefits to be gained from Intrade besides just information. Mainstream economic models of consumer behavior predict that people want to equalize consumption across time; a stable income with minimal variance is most desirable. Another nice aspect of Intrade (although I suspect rarely taken advantage of) is smoothing consumption over time.

For people who are deeply concerned about the outcome of political events, this should be a great service.

For example: if you expect that a loss for Walker will cause fiscal crisis and collapse of civilization, you should bet against the possibility that he wins, so you'll have enough shotgun shells and canned beans to survive the oncoming apocalypse. If instead you think that Walker winning another term will bring about a neo-fascist corporate state and crush middle-class living standards, you should bet heavily that he wins so you can bribe your way out of the country. Either way, the option is there!

Realistically, few people likely think that the outcome of political contests will have such divergent results. If money was used to match political rhetoric, Intrade would have even more money and traffic flowing through than it does now (hopefully enough to keep the site open, unlike some past attempts at prediction markets).

Diablo III and the Newsvendor Model

How does a long-awaited sequel, which became the fastest selling PC game of all time, still end up with a 2-star rating on Amazon? Probably because so many people were excited to play it and then couldn't, due to Blizzard's "always online" anti-piracy strategy combined with shaky server support.

Diablo III has made tons of money, but still turned into a PR nightmare for its parent company. From an economic perspective, however, these two things are not necessarily in opposition.

The newsvendor (or 'newsboy') problem, popular in the operations management literature, gives some insight into this apparent contradiction. It models a retailer who doesn't know exactly how much demand there will be for his/her product in the next period, and has to decide on inventory levels now. The vendor knows quantity demanded will be pulled from some statistical distribution, and wants to maximize expected profits.

This situation isn't too different from a video game company trying to decide how much to invest in server capacity. Blizzard doesn't know exactly how many people will buy the game on its release date, although they probably have some estimate (based on pre-purchases or past sales totals for their games, for example). They ideally want to have just enough server capacity to let everyone play, and no more. Given uncertainty, however, that goal is hard to accomplish.

The newsvendor model would advise a firm to purchase the average quantity demanded, assuming the costs of over- and under-purchase are exactly equal. For Diablo III, costs aren't exactly equal: once someone has bought, they won't be able to return the game if servers are overloaded -- at worst, maybe they tell friends not to buy it. But, if Blizzard over-purchases in server capacity, they're stuck with those costs.

In this case, over-purchase costs are higher than under-purchase costs, so it's rational for Blizzard to buy less than the average expected demand for their server capacity... Much to the chagrin of their loyal fans.

Consumers have a right to be annoyed, but these opening-day server issues shouldn't be much of a surprise. Counter-intuitively, if everyone could play without any interruptions at all, that outcome would probably be even more inefficient, at least from Blizzard's perspective.

Fun with Twitter Metrics

Using tweepy I've been looking at the characteristics of my Twitter following. I found these histograms pretty interesting.

The first shows how many people my followers are following and followed by. (The x-axis is the relevant number, the y-axis shows how many incidences of that number of friends/followers occur).

Followers (Blue) and Following (Green).

Next is the number of status updates posted. Looks like lots of my followers haven't tweeted much at all! It's a dilemma: do I unfollow them for being inactive? But, because the inactives aren't tweeting, they aren't flooding my timeline with stuff I don't want to read, either... Twitter-vanity might make me keep them, just so that whatever bot is running those accounts doesn't unfollow me.

Status Count.

Finally, number of favorite tweets by user. Lots of people don't seem to use the "Favorite" function of Twitter at all. I probably have less than 10 tweets I've marked as "Favorite" (it seems like such a commitment). It's nice to be able to tag a link or something worth going back to later, so I'm glad Twitter has this feature... even though it is, apparently, hardly used.

Favorite Tweets.

Then there are a few accounts at the far right of the distribution with lots of favorites. What's going on here?

Generally the distributions resemble a power law, which is not surprising when looking at social networks.

Twitter metrics will be an ongoing project, so this is just the beginning. If you find this stuff interesting, check back in a few days.

Netflix original programming: trying to stay ahead of the competition?

Netflix has been through some hard times lately, and the industry is evolving in ways that will continue to challenge their core business model. A combined deal between Redbox and Verizon has been struck in order to offer streaming video. Redbox is also buying out DVD kiosks owned by Netflix' old rival, Blockbuster, to expand their on-the-ground presence.

Netflix is already in a market with big-name competitors for streaming video - Hulu, Apple, Amazon and Walmart, to name a few - as well new outfits such as Zediva (which offered rock-bottom prices, but ran into legal troubles due to avoidance of content licensing fees). Netflix sets itself apart with the DVD mailing program, but Redbox is now well-positioned to compete on that front as well.

How to stay ahead of the curve? Netflix just introduced their first offering of original programming, Lillyhammer, with more shows planned in the next year.  Now, with Netflix moving toward an "HBO model" of producing and distributing their own content, their core business will be changing.

There is some clear logic to this decision: instead of paying extravagant licensing fees to stream content (the deal with DreamWorks is estimated to place a $30 million price tag on each film) new shows can be produced internally. New exclusive content could also pull in subscribers drawn to a particular actor or show; this may explain why Netflix is rumored to be producing Arrested Development Season 4.

During the short-lived introduction of 'Qwikster', some speculated that Netflix was drifting away from its core expertise. It's not immediately clear how DVD mailing translates to streaming content. Now, the company is shifting its role once more, and one is left to ask whether film production is also part of the Netflix tool kit.

Vertical integration in the entertainment industry is hardly a new phenomenon. But, most television networks started off producing content, and then acquired more means for distributing it. Netflix got into the distribution business first, and now is trying to backpedal into producing as well.

It's unclear whether the few big-name offerings which Netflix will produce are enough to distinguish them from the other streaming services. But, facing stiff competition in both physical and online distribution channels, moving up the content production chain may be the only choice they have in order to stay relevant.

The American Entertainment Industry's Death Rattle

It's obvious that the circumstances which allowed so much wealth to be accumulated in Hollywood by major record labels have changed, but the people at the top don't want to change with them. The industry's demise (at least in its current form) is evidenced by the great efforts being made to legislate demand for their products - through the SOPA/PIPA legislation in Congress, which led to a blackout of many popular sites yesterday, and today's effort to shut down Megaupload.com as a copyright infringer.

Piracy is not really the problem here, but a symptom of a larger issue: the entertainment industry wants to charge more for their products than people are willing to pay. Maybe people used to be willing to pay $15-20 for a CD, but no more. With digital distribution, artists can sell their music to fans directly, without the entertainment edifice standing in between. This is a better deal for both musicians and fans, but makes most of the music industry obsolete. The same is not exactly true in Hollywood - someone has to finance big-budget action flicks - but digital services such as Netflix Watch Instantly are changing the game there too. Why would I go pay $12 to see a movie in a theater, when I can pay $8 per month for more streaming content than I can watch in a lifetime?

Even if online piracy were eliminated completely, it wouldn't address the bigger issue facing the entertainment industry: substitution. Consumers have an increasing variety of entertainment options to choose from, many of which are free or extremely cheap. Now that online distribution is easy, there's really no need for the big industry surrounding content distribution. They can kick and scream all they want, but the entertainment industry as we know it is functionally doomed. It just doesn't realize that yet (or is trying desperately to deny the obvious).

How to Gain Twitter-Fame for Penny Stock Advice, with no Skill, Knowledge (or Profits) Required.

Along with upcoming rappers, Bieber fans, and ad-bots there’s a rash of penny stock advice to be found on Twitter. At first I dismissed it as one of many eccentricities of the platform, but after seeing a few dozen assorted “penny stock” accounts I started to wonder. What could explain these accounts peddling advice on securities that most investors wouldn’t line a litter-box with?

So-called "penny stocks" may range in cost from a few dollars to a fraction of a cent. For example, instead of buying one share of IBM at $164.68, it would be possible to instead purchase 4,450 shares of Double Eagle Gold Holdings (DEGH) at $.037 per share (amusingly, both stocks are currently near their respective peak historical values). DEGH had been running at an average price of about $.003 for most of the last year. If an investor had a crystal ball and could foresee this recent ten-fold run up in price, there would have been a lot of money to be made; therein lies the temptation of penny stocks.

Of course, anyone who actually had that crystal ball and put it to use in the market would be far too rich to bother with running a Twitter account. So why are there hundreds of penny stock tweeters out there? To explain, here is a theory of how ANYONE can appear blessed with penny stock clairvoyance.


The Five-Step Guide to Achieving Twitter-fame with Penny Stock Advice:

Step 1: Pick out 100 penny stocks at random, and buy $10 worth in each of them for a total cost of $1,000 plus brokerage fees (or, if you’re cheap, just consistently follow the prices of 100 penny stocks).

Step 2: Wait. As is normal for inexpensive and highly volatile stocks, the price of some will go up dramatically and others down equally dramatically.

Step 3: Ignore the stocks that go down. Out of the 100, by random chance you’re almost assured to see one go up every now and then. Get on Twitter and brag about how well your picks in the stocks that went up are going.

Step 4: Construct self-promotional statistics to describe how well an investor could have done if they had known exactly when these volatile stocks would move up and down, then tweet about anyone can generate “POTENTIAL 237% PROFITS!!!” based on your expert advice.

Step 5: Bask in fame and adulation. If you are lucky, people will buy a subscription to your newsletter. Or, if they follow your advice, it will drive up the price of penny stocks you own. Then sell off the penny stocks that went up due to your “wisdom” and leave your followers to eat the losses as the stock shifts back down. 


I can’t verify that every penny stock tweeter uses this self-serving strategy. However, it’s the only way I can think of making money off penny stocks, so I’d guess that a large ratio of those Twitter accounts have something like this in mind.

In the time it took me to write the above, DEGH – which I noticed as a result of a penny stock tweet – has dropped 35%. IBM, on the other hand, changed 0.30% in that hour. In a nutshell, this is why investing in penny stocks is probably not a good idea: you get all the risk of stock market speculation without much stake in any real value (or else why is the stock so cheap?). Markets tend to be efficient and integrate available information into stock prices, so when a stock costs a fraction of a cent, it’s probably because many people rate its investment value somewhere near a lottery ticket.

The DEGH rollercoaster, courtesy of Google Finance. Notice the peak, then sudden drop at the end.

To make matters even worse, even if you successfully buy low and sell high with penny stocks – a difficult proposition, given how quickly the values change – you’ll be eaten alive in brokerage fees. For the example above, even if one used a discount brokerage like Scottrade, the cost of each purchase would be a $7 flat fee – making a $1,000 investment cost a total of $1,700. It would take a crystal ball, extraordinary luck, or loads of self-serving information delivered to a mass audience in order to generate enough returns to cover that cost. When you see someone giving investment advice on Twitter, mentally ask which of those three categories you think they fall into.



Note: for entertainment purposes only. I’m not dispensing investment advice; the stocks named were solely for example purposes, not as endorsement. If you’re reading this and run a penny stock service I’m sure you’re the exception to the above, and love children, flowers, kittens and your advisees all equally and would never pull such a scam on them. I’m just writing about your competition. But I would awfully like to peak at your crystal ball sometime when you get a chance.

Why won't the U.S.P.S. just go out of business? Oh wait, they're not allowed to.

Ah, the Postal Service. Famous for friendly service, reasonable fees, and murderous rampages. In spite of birthing the saying "going postal" the USPS has still taken the coveted "most trusted government agency" for the last five years (probably because you have to give them your things before they break and steal them, unlike most other federal agencies). What I wonder is, if everyone trusts them so much, why can't they turn a profit? Let's find out.

Retrospective on ShortTask vs. Predictify. Only the strong survive!

Internet business bears some resemblance to the law of the jungle, or perhaps Lord of the Flies -- the strong survive and eat the tattered remains of the weak (OK, so maybe I only read the beginning and the end). As a case study, let's compare ShortTask, which is still in business, with Predictify, a website that has closed its doors. Along the way, there are some lessons for other online entrepreneurs on how to avoid pitfalls of the past.

Both ShortTask and Predictify harnessed the power of the web for commercial purposes. A brief background: