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).

Are Twitter Lists another social network?

Twitter has a "List" feature, which allows users to organize their followers, or view tweets from only a select group. Until recently, the number of lists following each Twitter account was visible on that person's homepage, but that changed in the most recent overhaul of the Twitter interface.

Lists are now much less visible in the average Twitter user's experience. This leads me to wonder, do Twitter lists follow the pattern of other social networks? Did the change even make any difference? With NetworkX and some fiddling around on the Twitter API, I was able to answer that question.

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.

Promoted Accounts on Twitter, the Great Enigma

For a class project (CSS692/ECO895, Social Network Analysis) my group - Kevin May, Echo Keif and I - took on a project a almost bigger than we could chew: identifying astroturf on Twitter. It turned out to be more ambitious than we realized, but even starting with a low level of technical sophistication we were able to find some interesting results.

What is astroturf? While most social movements are said to resemble a "grassroots", sometimes wealthy organizations will attempt a "cashroots" strategy instead - paying for people to spread a pre-chosen message. This has been a problem since the dawn of democracy, but social media has given many more opportunities for astroturfing.

The Truthy Project is one attempt to track how online memes spread, and distinguish authentic movements from fabricated ones. However, there still isn't much agreement on what an astroturfer looks like, compared to a genuine grassroots movement.

We focused on Twitter for our project. The recently unveiled Promoted Accounts feature, used by Twitter to generate revenue, might uncharitably be described as a tool for astroturfing. Promoted Accounts are put at the top of the "Who To Follow" list shown to each Twitter user, but otherwise not tracked or recorded in a publicly accessible way. Our goal was to identify common characteristics of Promoted Twitter accounts, and thereby develop a profile of what an astroturfer might look like.

First Textbook in Social Media Marketing

Blatant self-promotion, but I can't resist.

(c) Cengage Learning 2013.

The book that I helped write is now in print. Find it here. Many thanks to my co-authors as well as the professionals at Cengage Learning for making this possible.

While intended to accompany a college- or graduate-level marketing course, I think this text does a pretty good job of encapsulating the advice that can be found in other prominent trade books, in addition to presenting some original and innovative material (I'm especially proud of Chapter 3). As far as I know, it's the most thorough treatment of social media marketing that can be found in one place. A boon to students and aspiring professionals alike. A magnum opus indeed.

Hyperbole aside, I'm very pleased with how the book turned out. I hope that some other people are able to derive utility from it as well.

The Durable Goods Problem in Software

Being a monopolist isn't all it's cracked up to be. Produce a durable good, and you're functionally competing against yourself.

For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?

Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?

Big players in the software industry have found various ways to overcome this durable goods problem.

1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.

2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.

3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.

Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.

Fun Facts about Microsoft Co.

Why would anyone bother reading shareholder reports? They're dry, long-winded, and functionally outdated by the time of arrival, so there's no way to profit from the information. Reasons for reading would have to include boredom, duress, or idle curiosity. It was the latter which led me to the Microsoft Annual Report for 2011. A few interesting facts pulled from that document:

• Microsoft is divided into five segments. The Windows & Windows Live Division gets 75% of its revenue from selling Windows to computer manufacturers, to be pre-installed for end users. The remaining 25% comes from sale of miscellaneous hardware products and online advertising on Windows Live. 
• In the Windows Division, most growth over the last year was business sales (+11%) while consumer purchases went down (-1%). A substantial part of the drop in consumer PC sales was from netbooks (-32%).
• Employee severance expenses were $59 million in 2010 and $330 million in 2009. Why the huge change? Microsoft: "In January 2009, we announced and implemented a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures."
• Research and Development costs took up 15% of Microsoft's revenue, or $9.0 billion, in 2011. That investment is well-protected -- by 26,000 U.S. and international patents, and another 36,000 pending.
• Kinect for Xbox 360 is the fastest-selling consumer electronics device; confirmed by Guinness World Records. 
• If you'd bought $100 of Microsoft stock in June 2006, six years later it would be worth $122.71 (compare to $115.61 for the S&P Index, or $157.48 for the Nasdaq Computer Index). 

What, if anything, does this say about the corporation and its future? Microsoft's product focus is split between entertainment/gaming and business services, while the company's prior breadwinner - bundling software with new PCs - is taking a back seat. As stated in a note from their CEO, Steven Ballmer: "increasingly, we will view ourselves as a devices and services company." It sounds closer to Mattel than the Evil Empire. Regardless, Microsoft's diverse selection of both patents and products provides a foothold to compete against intimidating rivals like Google, Apple, and Salesforce.com.

Fermi Paradox makes discovery of new habitable planet a good news/bad news situation.

In the latest science news, a planet has been discovered which could potentially support life. A neighborly 20.3 light years away, Gliese 581g has liquid water and enough gravity to maintain an atmosphere -- making it a fairly good imitation of earth.

Great news, right? Homo sapiens now has the potential to spread across the galaxy, leaving the barren rock of Terra behind as we forge into the great empty unknown. Unfortunately, the actual "getting there" part is still a ways off. Even worse, this discovery may not bode well for the future of humanity.