Amazon's "Monopsony"

I almost never agree with Paul Krugman about anything when he's talking politics. But the man has a Nobel Prize in Economics, so when he talks about the institutional forces affecting commerce, I do at least pay attention.

Krugman wrote an editorial for the New York Times on the Amazon-Hachette feud, and, wonders never cease, I agree with every word.

"So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down.

And on that front its power is really immense — in fact, even greater than the market share numbers indicate. Book sales depend crucially on buzz and word of mouth (which is why authors are often sent on grueling book tours); you buy a book because you’ve heard about it, because other people are reading it, because it’s a topic of conversation, because it’s made the best-seller list. And what Amazon possesses is the power to kill the buzz. It’s definitely possible, with some extra effort, to buy a book you’ve heard about even if Amazon doesn’t carry it — but if Amazon doesn’t carry that book, you’re much less likely to hear about it in the first place."

Krugman does miss one crucial point, which surprises me given that it's a purely economic one. It's not just that Amazon can kill the buzz surrounding a new book. It's that driving product prices down constricts the ability to make profit, and most authors and publishers' already have very thin profit margins. In fact, most authors (myself included) don't make a living through writing. Writing is something we do on the side, either before or after our day jobs.

To be fair, Amazon has proposed a deal it claims will pay authors more; maybe so. But there's only so much profit to be squeezed out of a single copy of any book, so when Amazon tries to reduce the amount of profit-per-copy, somebody gets less. It's simple math, and you can bet Amazon doesn't want that "somebody" to be Amazon. So either authors will get even less money, or publishers will get less and then either publish fewer books by new authors or pay authors even less in advances and royalties. It's really that simple.

The Imitation Game

It's about time someone made a feature film about Alan Turing and the British project at Bletchley Park during World War 2 to break the German Enigma system.

IN CINEMAS NOVEMBER 14-- Based on the real life story of Alan Turing (played by Benedict Cumberbatch), who is credited with cracking the German Enigma code, THE IMITATION GAME portrays the nail-biting race against time by Turing and his brilliant team at Britain's top-secret code-breaking centre, Bletchley Park, during the darkest days of World War II.

If you're not familiar with the story, the Germans started using Enigma in 1932 to encrypt  their sensitive military communiques and the Poles cracked it later that year; but the Germans kept refining the device and improving the cryptography. By 1939, the Poles had been overrun by the Nazis and were out of the game and Enigma's encryption was practically unbreakable as long as the German operators were using the machine correctly. The British took up the charge but couldn't decipher more than a tiny trickle of German Enigma messages.

The British Government launched a top secret effort, later codenamed "Ultra," to beat the machine. Turing was one of the mathematicians recruited from Cambridge University for the effort and developed much of the "bombe" technology that ultimately defeated Enigma. Sir Harry Hinsley, official historian of British Intelligence in World War II, said that Ultra's success in breaking Enigma shortened the war "by not less than two years and probably by four years." Sir Winston Churchill was even more definitive about Ultra's contribution, telling King George VI that "It was thanks to Ultra that we won the war."

In the process of developing the technology to defeat Enigma and helping save the free world from the Axis, Turing also made several breakthroughs that made modern computers possible. That desktop/portable device you're using to read this post? You can thank Alan Turing for it.

But Alan Turing was also gay. Homosexual acts were illegal in the UK in the 40s and 50s, and Turing was prosecuted for gross indecency. He accepted chemical castration as an alternative to prison and the British government stripped his security clearance. He was found dead in 1954 at age 41, and the autopsy ruled that he had committed suicide by ingesting cyanide. In 2009, UK Prime Minister Gordon Brown issued a formal apology for "the appalling way he was treated"; and Queen Elizabeth II granted Turing a posthumous pardon on Christmas Eve 2013...an especially meaningful gesture when you realize that Turing was charged the very same month that Elizabeth began her reign (yes, she's has been on the throne that long).

It's a fascinating story and the movie is receiving rave reviews at pre-release screenings – Benedict Cumberbatch as Alan Turing and Keira Knightley as Joan Clarke? Yes, please. If you're a fan of espionage thrillers or movies like A Beautiful Mind, go see this one on opening day, 14 November 2014.

Alas...

And then, after my brilliant post about assumptions and sports broadcasters'  flawed methods of prediction about who will and won't make it into the new NCAA football tournament – my beloved BYU Cougars lose 35-20 to unranked Utah State University. These in-state rivalry games are killers.

My personal vow against profanity prevents me from using some pretty choice terms to express my feelings about now. BYU will be lucky not to fall right out of the Top 25But congratulations to USU for a well-deserved victory.

That said, I do note that the Utah Utes beat #8 UCLA yesterday 30-28. So don't think that my comments about assumptions are somehow invalid. Anything can happen. That's why we play the games, instead of just looking at a bunch of stats at the season's start and deciding who the national champion will be right then and there

Amazon vs Hachette: The Latest Move

Authors United is a group of 1,100+ writers who signed their names to a full-page New York Times ad calling on Amazon to abandon its tactic of blocking sales of authors' book in its negotiations with publishers. Amazon has pressed on, so the literary coalition has posted this open letter to the Amazon Board of Directors.

"[Amazon] has stated that the company was 'forced to take this step because Hachette refused to come to the table.' He has also claimed that 'authors are the only leverage we have.' As one of the world's largest corporations, Amazon was not 'forced' to do anything...Amazon chose to involve 2,500 Hachette authors and their books. It could end these sanctions tomorrow while continuing to negotiate. Amazon is undermining the ability of authors to support their families, pay their mortgages, and provide for their kids' college educations. We'd like to emphasize that most of us are not Hachette authors, and our concern is founded on principle, rather than self-interest.

We find it hard to believe that all members of the Amazon board approve of these actions. We would like to ask you a question: Do you as an Amazon director approve of this policy of sanctioning books?"

I signed.

Update: AuthorsUnited didn't just post the letter to the Internet. They've also sent copies via FedEx directly to each member of Amazon's board of directors, so nobody can claim ignorance on this one.

Analysis 101: Make Your Assumptions Explicit

My younger brother is a big college football fan, far more than I. Today, he spotted an argument made by some ESPN football analysts about my beloved BYU Cougars that I thought would be a good springboard for talking about another fundamental principle of analysis — Make Your Assumptions Explicit.

First, watch this. My apologies for that and what follows if you're not a football fan.

A bit of context: the analysts were discussing BYU's chances of getting into the new NCAA College Football Playoff (CFP) tournament which replaces the deeply flawed (and deeply corrupt) Bowl Championship System that, for 15 years, picked who got to play for the NCAA college football championship. Here's the kicker — there's no mathematical formula for picking who gets invited to play in the CFP. Instead, a panel of 13 experts will choose the teams.

Now, after watching that 2.5-minute clip, my brother's immediate reaction to the analysts'  comments was: 

"...BYU can't go undefeated because the teams it has left are too tough. But if BYU does go undefeated, its schedule was weak. ???"

To understand his complaint, you have to understand the concept of strength of schedule. The idea is that beating a strong team should count for more than beating a weak team. Okay, fair enough. The guy who beats Goliath should get more glory than the guy who stomped on a weakling. If BYU only plays weak teams and goes undefeated, should it get into the tournament over a team that played some strong teams and lost a few games? Arguably not.

Here's the problem — strength of schedule can't be settled until the season is finished. At season's end, the 13 experts will have the benefit of reviewing the full season records of all NCAA teams to evaluate . But those ESPN analysts? Despite only being three weeks into the season, despite BYU being so-far undefeated, with a 41–7 butt-whoopin' inflicted on the Texas Longhorns, a perennial #25 team, they've already concluded that BYU can't get into the tournament. "So sorry. Strength of schedule."

On to the analytical lesson.

Sooner or later, everyone gets asked which possible future outcome seems most likely in a given situation; but the world is so amazingly complex, with so many different events occurring every single second, that it's impossible to be aware of them all, much less figure out how to factor them in properly to any prediction. Any and every prediction of a future outcome is based on wildly incomplete information.

For our football example, none of those analysts predictions is worth anything because no one can know how hard a team's schedule really was until the season ends and they can see the final tally of all NCAA games played and see who lost to who by how much. The evidence doesn't exist yet. Sporting events are exercises in chaos theory and any one random event can destroy the delicate foundation on which any given prediction rests. One-hard-tackle-and-a-compound-fracture later and a team's Heisman candidate is in traction, with the analysts' pick-to-win-it-all collectively praying it can go 4–4 for the rest of the season.

So, lacking hard facts, we make assumptions. We assume, consciously or not, that X will stay constant and therefore Y will occur...or that X will not stay constant and therefore Z will occur. Those ESPN analysts are assuming that strong teams are going to win the games they're supposed to win and no key players will end up in the hospital.

Making assumptions isn't a bad thing to do. In fact, we couldn't function on a daily basis if we didn't do it. We can't prepare for the future if we can't depend on some degree of predictability. But some things are so random or complex (or both) that all we can do is flat-out guess that things won't change or will at least change in at a constant rate and act on that guess.

So how do we handle assumptions? By doing the following:

1. Identify your key assumptions and declare them up front. Key assumptions are the ones so critical to your argument that if they fail, your argument collapses. Not being aware of your assumptions is a recipe for surprise. Not being aware of your key assumptions is a recipe for disaster. Being aware of them but not making your audience aware of them is a recipe for watching your credibility get gutted when your analysis doesn't pan out. So tell your audience. As Colin Powell liked to say, "Tell me what you know. Tell me what you don't know. Then tell me what you think. Always distinguish which is which." Your audience will usually forgive an "I don't know" answer. An audience will be less forgiving of an "I know" answer that proves false. They'll feel misled.

2. Review your key assumptions regularly. You have to revisit your assumptions regularly to see if they're still valid. The world changes. Yesterday's solid assumption might fall apart today. Good assumptions become bad assumptions.

So if the ESPN talking heads really wanted to be "analytically correct," the best they could say is, "If there are no major upsets or injuries for the remainder of the season and our current assumptions about how all NCAA teams will finish in the standings hold up, BYU's strength of schedule would not compare favorably enough with other likely candidates to secure a tournament berth."

But I'm sure that wouldn't be nearly as entertaining as yelling "BYU HAS NO CHANCE! NO CHANCE AT ALL!"

Where I Was

Two months before 9/11/01, an office colleague and I attended a business meeting in the World Trade Center. When the meeting was finished, our hosts asked whether we'd like to go up to the WTC observation deck to look out over lower Manhattan. We checked the time and realized that catching our Acela train back to WDC was already going to be iffy. "We'll check it out it the next time we're back in town."

There never was a next time.

Two months later, on 9/11/01, thirteen years ago this morning, I was on an airplane flying to Pittsburgh. Some colleagues and I took off from Washington National Airport around 0745 and I distinctly remember how the Pentagon filled my window as we banked over it. I've never thrown away the boarding pass stub.

My wife worked in the fitness center of FDIC, across the street to the west of the White House complex. I almost had a panic attack when I saw the White House being evacuated...my mind blanked and I couldn't remember whether it was her day on the early shift or the late shift. It was the latter. She was still at home. Small blessings. We'd been married for all of four months. Had I been on a different plane, she might've been left a widow.

My colleagues and I drove back to WDC in a rental car that we managed to get before they all disappeared once all flight over US airspace were grounded. It took us five hours. We turned on the radio and just listened to the news reports. Nobody said a word.

A week later, my wife and I stood in the dark on a knoll across I-395 across from the Pentagon. We stared at an unfurled flag and a massive hole in the largest building I've ever seen. It was evil made tangible in a way I'd never seen outside of the Holocaust Memorial.

There truly are evil men in this world. It's been one of the great privileges of my life to help fight them. But someday, somewhere, someone else will manage to do something just as horrifying on US soil. Don't live your life in fear, but don't ever think for a minute that we're entirely safe. Evil never truly surrenders...you either destroy it or it falls back to lick it wounds and wait for another day. Just be grateful that there are men and women who've made it their life's work to stand between you and such evil. They have protected you and those you love more times than you'll ever know.

Amazon and Hachette: The Dispute in 13 Easy Steps

A great piece in the LA Times explaining why the Amazon-Hachette dispute matters. The best quote:

"What's ultimately at stake is whether Amazon is going to be able to freely and permanently bully publishers into eventual nonexistence." -- John Green, author of The Fault in Our Stars.

BTW, #10 explains why Hachette is in Amazon's crosshairs, and why the other four major publishing houses can expect the same treatment if something doesn't change.

Update: my literary agent tells me that I really need to turn on the commenting feature in my blog. I'd kept it turned off because I've had some really bad experiences with Internet trolls. But, at his behest, I'm going to give it a test run and turn on comments for a few selected blog entry just to see what happens. Please justify my tenuous faith in humanity's capacity for civility.