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).

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.

Light bulbs and implied discount rates

What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.

An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.

Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.

Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.

People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.

There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.

If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.

I Have No New Years Resolutions.

The New Year is a nice time, symbolically, to make a big change in life but practically it almost never works out that way. From a Boston Globe article, I learned that 80% of New Years resolutions are broken. Frankly, I'm surprised that as many as 20% are accomplished! People don't change much on the eve of December 31 to the morning of January 1 (perhaps except for the addition of a hangover) so I suspect much of the 20% accomplished are trivial ("remember to call my mom on her birthday this year") and require single actions, not sustained effort.

Resolutions are puzzling from both an economic and psychological perspective. To an economist, there's no reason why one day should be intrinsically more favorable than another to make a positive life change. If drinking less or exercising more would be a good idea, why wait until January 1st to start doing it? On the other hand, a psychologist might wonder why people set themselves up for failure so often. If 80% of resolutions ultimately amount to lying to yourself, why persist in encouraging such a mentally unhealthy activity?

The real question: if most resolutions would be good things to accomplish, why are people so bad at keeping them? It's easy to just dismiss New Years resolutions as "cheap talk" which people utter in order to sound socially acceptable and make themselves feel better, with no intent of actually following through. But, I think there's a little bit more to it than that.

In their book, Willpower: Rediscovering the Greatest Human Strength, Roy Baumeister and John Tierney offer a pretty good explanation for why New Years resolutions have such a short shelf-life. When someone creates a list of challenging self-improvement tasks, they are probably very optimistic about their future state of mind. But, realistically, we only have so much willpower to divide between different goals that require self-control. Willpower, in this regard, is somewhat like a muscle: when it is used lots in a short span of time it becomes fatigued, so later acts of self-control are more difficult. Creating a list of resolutions is like weight-lifting beyond the mind's capacity; it can't dedicate enough mental power to accomplish all the goals at once, so in the end none of them are met. As a result, creating a big list of dramatic changes is one of the least effective ways to actually modify your own behavior.

A better strategy is to choose one area that seems most important and focus on moderate improvements. Also like a muscle, willpower can become stronger when exercised. Picking reasonable goals gives a sense of accomplishment when they are completed, making it easier to stick with other changes in the future. In other words, build up capacity slowly to avoid a painful sprain of the willpower muscle (although if I stretch this analogy much further, I might suffer a tear in my credibility). Introducing the concept of willpower to economic thinking means we don't have to dismiss failed self-improvement projects as mere cheap talk, and can instead look more realistically at the human mind and its practical limitations.

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: