Why Microsoft and Yahoo tieup makes sense

Scott Anthony from Harvard Business has an interesting take on the Microsoft – Yahoo search tieup

Some pundits think that Microsoft should just admit it has decisively lost the search battle to Google. Instead, Microsoft is investing billions fighting against Google.  Research suggests that trumping a powerful, well-resourced competitor in its core market is incredibly difficult.

 

However, the search game is still in its infancy. While it is hard to see another company one-upping Google with superior search algorithms or better search-based advertising, today’s offerings are still pretty blunt instruments for information-seeking consumers or business-seeking advertisers.

 

When you reframe the issue around advertising instead of search, the competitive lens shifts completely. After all, Google isn’t really a search company. It is a company that sells advertising, with search as a proven, effective way to drive advertising revenue. However, search-based advertising still doesn’t really get the advertising job done for companies who remain frustrated by their inability to precisely target and track their advertisement, or predictably run campaigns that achieve their business objectives.

 

Through this lens, Microsoft’s basic strategy of investing heavily in new advertising technologies and acquiring means to capture eyeballs (in part through this deal with Yahoo!) makes sense. After all, Microsoft has the right resources and technological base to develop an integrated offering that perfects the still imperfect world of Internet advertising.

 

Microsoft and Yahoo could use brute force to gain increasing share in today’s search market. The better alternative is to redefine the market. While Google has done a great job making the information that is already on the Internet accessible, most information still resides within people’s heads. If Microsoft and Yahoo could find a way to truly unlock the collective wisdom around sticky problems like healthcare, shopping, and education, they could have a huge business on their hands.

 

The only tax that makes sense

“The Atlantic” in in latest addition has a few ideas to fix the world. One of them on taxes is very thought provoking …

In 1879, Henry George …blamed all economic ills on the private ownership of land. A staunch believer in laissez-faire economics, George found it perverse that we tax productive activities like work and innovative investment while letting landowners grow rich simply because they scooped up property at the right time. In that spirit, George called for a “Single Tax” on the unimproved value of land.

There’s a certain compelling logic to the Single Tax that stands the test of time. When you tax income, aren’t you punishing people for working hard? But when you tax an asset like land, you’re simply encouraging the most valuable use of that land. In the years since George faded from the scene, a number of economists, from Milton Friedman to Paul Romer, have found virtue in the Single Tax, not least because it creates the right incentives for government. Simply put, the better you govern, the more valuable the property. The more valuable the property, the more revenue you raise.

Should we worry about inflation in US?

The media is awash with stories about how the huge amount of money being printed by the US fed will result in hyperinflation in US.  Credit Suisse’s Bob Parler talks to Bloomberg on this topic and offers ome interesting insights

• The commodity inflation is definitely increasing
• The wage inflation component is actually negative due to massive unemployment
• The monetary inflation increases when there is no output gap. In the current scenario there appears to be a lot of output gap which would limit inflation pressures (according to Keynesian theory, when potential GDP is greater than actual GDP — when, for example, the unemployment rate is high and industries are operating well below capacity — the output gap provides a buffer against inflationary pressures.)

Overall, he expects 4-5% inflation by 2nd half of 2010.

However, it is timely to remember Milton Friedman’s quote “inflation is always and everywhere a monetary phenomenon.” If the central bank creates more money than the public wants to hold, the public will spend it, bidding up the prices of goods and services. When too much money chases too few goods and services, the result is a rise in the price level, or inflation.

It’s easy to lose sight of Friedman’s axiom nowadays. Central bankers often talk about higher oil prices and rising wages as if these price increases cause inflation rather than reflect it.

The other theory of inflation, popular among Keynesian economists and Phillips Curve advocates, is something called the output gap, or the difference between the economy’s actual and potential output.

More information on the problem with the output gap theory here.

Being Comfortable with Uncertainty

John Hussman in his latest market commentary, quotes a number of sources on the importance of getting comfortable with uncertainty. Good stuff.

In his book “On Being Certain”, neurologist Robert A. Burton quotes F. Scott Fitzgerald – “The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.”

Buddhist teacher Pema Chodron calls it “being comfortable with uncertainty” – being willing to take every aspect of reality as the starting point, without wasting energy wishing things were different, without denying reality as it is (even if your next step is to work toward changing things), and without needing to know what will happen in the future.

“The truth you believe and cling to, makes you unavailable to hear anything new. The best thing we can do for ourselves is to be open to an unknown future.”

Burton offers the same advice. Tolerating the unpleasantness of uncertainty, he writes, “is the only practical alternative to cognitive dissonance, where one set of values overrides otherwise convincing contrary evidence. Each position has its own risks and rewards; both need to be considered and balanced within the overarching mandate: Above all, do no harm. Science has given us the language and tools of probabilities. We have methods for analyzing and ranking opinion according to their likelihood of correctness. That is enough. We do not need and cannot afford the catastrophes born out of a belief in certainty.”

The Accidental Genius

NY Times has an interesting article today about the traits of a genius, which debunks its genetic relationship and claims that genius can be developed only through a deliberate, strenuous and boring practice routine.  There is no such thing as an “Accidental Genius”.

The key factor separating geniuses from the merely accomplished is not a divine spark. It’s not I.Q., a generally bad predictor of success, even in realms like chess. Instead, it’s deliberate practice. Top performers spend more hours (many more hours) rigorously practicing their craft.

By practicing in this way, performers delay the automatizing process. The mind wants to turn deliberate, newly learned skills into unconscious, automatically performed skills. But the mind is sloppy and will settle for good enough. By practicing slowly, by breaking skills down into tiny parts and repeating, the strenuous student forces the brain to internalize a better pattern of performance.

Then our young writer would find a mentor who would provide a constant stream of feedback, viewing her performance from the outside, correcting the smallest errors, pushing her to take on tougher challenges.

Importance of being the “little guy”

Have noticed recently that a key idea perpetuated in a number of movies, is that to be successful you should be the small guy.

“Devil’s Advocate” – Al Pacino

I’m the hand up Mona Lisa’s skirt. I’m a surprise, Kevin. They don’t see me coming: that’s what you’re missing.  Don’t get too cocky my boy. No matter how good you are don’t ever let them see you coming. That’s the gaffe my friend. You gotta keep yourself small. Innocuous. Be the little guy. You know, the nerd… the leper… shit-kickin’ surfer. Look at me. Underestimated from day one. You’d never think I was a master of the universe, now would ya?  ….. Vanity, definitely my favorite sin.

“Syriana”

most of my staff are sheep who think they are lions, maybe you are a lion everyone thinks is a sheep

“American Gangster” – Denzel Washington

That’s a clown suit. That’s a costume, with a big sign on it that says “Arrest me”. You understand? You’re too loud, you’re making too much noise. Listen to me, the loudest one in the room is the weakest one in the room.

Reasons behind the dollar’s upward move

The Economist examines the death of the carry trade and the reasons behind the recent rise of the US dollar versus other currencies.

1. Most currencies yield virtually nothing.Although that is true in nominal terms, there is still a difference in real yields. America is now officially in deflation so real yields on Treasury bonds are around 3%. That compares well with real yields in Japan, Canada and Britain and it may be attracting capital flows into the dollar.
2. The credibility of economic policy. In America the authorities have shown themselves willing to try everything to boost the economy. The European authorities have been more cautious. Running budget deficits and printing money tend to weaken a currency …But it may be a sign of the severity of the crisis that currency traders are willing to ignore
3. Most plausible reason appears to be that currencies are being driven by risk appetite

Emerging-market currencies have rallied alongside equity markets in recent weeks. And it makes a certain amount of sense. If rising stockmarkets are a sign that the world economy is stabilising, then export-driven emerging markets should be the first to benefit.

Love and Cholera

Watched the movie “Love in the time of Cholera” tonight … really liked a few quotes … very simple, profound, relaxing …

Age has no reality except in the physical world. The essence of a human being is resistant to the passage of time. Our inner lives are eternal, which is to say that our spirits remain as youthful and vigorous as when we were in full bloom. Think of love as a state of grace, not the means to anything, but the alpha and omega. An end in itself.

After 53 years, seven months and 11 days and night, my heart was at last fulfilled. And I discovered, to my joy, that it is life and not death that has no limits.

Problem with Banks and obvious solution

ET discusses the gist of the current crisis

The toxic assets-securities and loans with impaired values – of US banks are $2-2.8 trillion, while tangible assets are only $1 trillion. Technically, the financial sector is comprehensively bust.

It needs to recognise the losses, writing off trillions. But for that somebody must first inject trillions of new equity into the banks. Private investors will not do so. The market solution would be to force insolvent banks into bankruptcy, with shareholders and creditors taking a huge hit, and their good assets being auctioned (at bargain prices) to surviving financiers. Many titans of Wall Street will disappear, but others will rise to take their place. But while this will clean up the mess, the financial sector will collapse, perhaps converting the recession into a depression.

Politicians are unwilling to risk this. Their preferred alternative is to rescue insolvent banks to thwart systemic failure. So, they have provided billions to the very banks responsible for the initial mess. But the public has protested loudly that this helps horrible bankers rather than the economy, and is yelling for blood. A chastened Congress refuses to sanction additional rescue funds.

This has led to a troubling impasse. The government views banks as too important to fail. The public views banks as too plutocratic to be rescued with taxpayer’s trillions. Result: the US has a zombie financial sector, technically dead but kept on life support. It simply does not have the capital to increase lending and thus spark economic growth.

A plan last fall for the government to buy toxic assets at a premium was shot down as a gift to horrible bankers. Now, a private-public partnership is proposed to buy the toxic assets. This too has been widely criticized as a way of subsidizing private financiers to buy with little risk and huge potential gains.

Accounting norms have been tweaked to permit zombie banks to pretend they are alive and solvent. The hope is that the public will swallow this fiction, animal spirits will revive the economy, and the consequent growth of bank profits will eventually suffice to write of the toxic assets. Very optimistic!

The obvious option is for the government to temporarily take over the insolvent banks, examine their books, and segregate their toxic assets into a “bad bank”. This will clean up the balance sheets of the banks, which can start lending again, and then be re-privatized at a profit.

This will not be a slide into socialism, and actually makes market sense. It mimics bankruptcy procedures – the owners and creditors of existing banks will take a huge hit – without causing the systemic financial collapse that formal bankruptcy would. The government will aim not to run the banks but to restructure them (as in bankruptcy) and sell them.

Yet the Obama administration refuses to contemplate this obvious solution. Obama has been attacked by Republicans as a closet socialist, and the US public is leery of nationalization, even temporarily. Faced with this populist pressure, the Obama administration prefers half-measures to clean surgery of dead wood through nationalization. It has ordered stress tests to reveal the true weaknesses of banks. Yet experts agree that the tests have been designed to hide rather than reveal. Economist Nouriel Roubini says that the macroeconomic assumptions of the stress tests are out of date.

Dubai – Hope or Mirage?

Fantastic article on Dubai’s dark side in the Independent. Some excerpts:

• When I see Western journalists criticise us – don’t you realise you’re shooting yourself in the foot? The Middle East will be far more dangerous if Dubai fails. Our export isn’t oil, it’s hope. Poor Egyptians or Libyans or Iranians grow up saying – I want to go to Dubai. We’re very important to the region. We are showing how to be a modern Muslim country. We don’t have any fundamentalists here. Europeans shouldn’t gloat at our demise. You should be very worried…. Do you know what will happen if this model fails? Dubai will go down the Iranian path, the Islamist path.”
• You don’t think Mexicans are treated badly in New York City? And how long did it take Britain to treat people well? I could come to London and write about the homeless people on Oxford Street and make your city sound like a terrible place, too!

• The sheikh did not build this city. It was built by slaves.

• There is no concept of bankruptcy. If you get into debt and you can’t pay, you go to prison.
• This is a dictatorship. The royal family think they own the country, and the people are their servants. There is no freedom here.
• Dubai is a city built entirely on debt. Dubai owes 107 percent of its entire GDP. It would be bust already, if the neighbouring oil-soaked state of Abu Dhabi hadn’t pulled out its chequebook. Now Abu Dhabi calls the tunes – and they are much more conservative and restrictive than even Dubai. Freedom here will diminish every day.
• All the guidebooks call Dubai a “melting pot“, but as I trawl across the city, I find that every group here huddles together in its own little ethnic enclave.
• One theme unites every expat I speak to: their joy at having staff to do the work that would clog their lives up Back Home. Everyone, it seems, has a maid.
• All the people who couldn’t succeed in their own countries end up here, and suddenly they’re rich and promoted way above their abilities and bragging about how great they are. I’ve never met so many incompetent people in such senior positions anywhere in the world.
• Dubai is not just a city living beyond its financial means; it is living beyond its ecological means. Dubai drinks the sea. The Emirates’ water is stripped of salt in vast desalination plants around the Gulf – making it the most expensive water on earth. It costs more than petrol to produce, and belches vast amounts of carbon dioxide into the atmosphere as it goes. It’s the main reason why a resident of Dubai has the biggest average carbon footprint of any human being – more than double that of an American.
• An environmental problem that already exists – the pollution of its beaches
• One critical comment about Dubai in the newspapers and they deport you