McKinsey’s Offshoring Numbers

The following paragraph from a recent McKinsey study in offshoring seems to light people’s fires on the subject more than anything I know. Cite it at your peril — I mentioned it in a recent column and I’m getting positively venomous email.

Far from being bad for the United States, offshoring creates net additional value
for the U.S. economy that did not exist before, a full 12-14 cents on every dollar
offshored. Indeed, of the full $1.45 to $1.47 of value created globally from
offshoring $1.00 of U.S. labor cost, the U.S. captures $1.12 to $1.14, while the
receiving country captures, on average, just 33 cents.

Faces, Emotions, and “Handedness”

Most women instinctively clasp babies to their left side. Researchers have all sorts of guesses why, ranging from dominant right-handedness to the beating of the heart. New research, however, suggests it has do with how we processes faces, and which side of our brain handles emotion.

To see how your own brain deals with faces and emotions, today’s Nature has the following test: Which face do you think is happiest? Check below to find out what your answer means.

The faces are symmetrical. So if you think B looks happiest than that means you use the right side of your brain to process faces; if you think A looks happiest then you use the left side of your brain to process faces.

Which S&P Index is Correct?

What is the best way to measure an equity index’s movements, capitalization-weighted or equally-weighted? As the Wall Street Journal points out this morning, the former method is common and showed a loss on the S&P 500 over the last three years; the latter method is less common and showed a gain.

The answer, of course, is it depends. Both equally-weighted and cap-weighted indices can be useful, so it is good to look at both. While the latter is skewed by large-cap stocks, as happened in the late 1990s, it also underweights the performance of small-caps. Equal-weighted indices solve that problem, while creating the new problem of implicitly goading people into investing in smaller and less liquid stocks, which is also unrealistic.

The upshot: Nothing is perfect — look at both.

Posturing to Play Martha Pundit

To paraphrase Paul Simon, every public trial run a pundit up the pop charts. For example, it may be hard to remember now, but Greta van Sustern, among many others, sprang whole from the O.J. Simpson trial.

You can see business and legal sorts angling for the pundit post position in the current Martha Stewart trial. Everyone is trying to find the right mix of provocative and profound as they opine madly on the trial, all hoping, it would seem, for a few minutes on CNN.

The trouble is, there isn’t much there there. This is not a particularly interesting trial, celebrity aside. To the disappointment of legal sorts everywhere, insider trading is death to ratings, especially given how difficult such cases are to prove. The testimony is likely to be numbing, no matter how much fun name-calling goes on at this early stage. All the (correct) caterwauling now about how Martha is being unfairly treated won’t change anything.

Good versus Bad Free Trade

A Wall Street Journal story this morning gently but firmly makes the point that many erstwhile free trade supporters are hypocritical. They were fans of free trade so long as it meant blue-collar jobs going overseas, and cheap products coming back. That made sense to them.

But now that it means service jobs — like software and financial analysis — heading overseas, some supporters aren’t so sure any more:

So long as manufacturing jobs were at stake, opinion leaders didn’t take much note, said Dani Rodrik, a Harvard University economist. The alarm is being sounded now, he said, because “the opinion leaders are seeing their neighbors being displaced.”

There is an old saw in economics that a recession is when a friend loses his or her job, and a depression is when you lose yours. There is apparently something similar in free trade: Good free trade is when someone else’s job is sent offshore; bad free trade is when yours is.

But as the WSJ piece go on to point out, that is a short-sighted view to take:

If Indian programmers, for instance, produce software at lower prices than Americans can, that would reduce costs for the many users of information technology. As that lower-price software permeates U.S. and European companies, those companies would become more productive and more able to hire new workers. At the same time, as India and China develop economically, they would become more-lucrative markets for U.S. exports.

I said something similar in a recent CNBC appearance, and boy oh boy did I get nasty email. But the truth hurts: Trade is far from painless, but the benefits economy-wide almost always outweigh the costs, as Catherine Mann points out at the tail end of the WSJ piece:

[Mann] has estimated that U.S. companies were able to reduce the cost of computers and communications equipment by about 10% to 30% by making the equipment in factories around the world. That lifted U.S. economic growth by about 0.3 percentage point a year between 1995 and 2002, as more companies made use of information technology. She expects similar economic gains if computer software is produced in an internationally efficient fashion.

Business School Rankings

The latest business school rankings are out from the Financial Times. Two things:

  1. Nothing has changed where it counts — the top ten schools are still the top ten schools. No-one is mounting an assault on Harvard’s hegemony any time soon, which speaks volumes about the caste system in business schools; and

  2. Also-rans crowed about having done well at some cherry-picked obscure element of the FT survey. For example, Queen’s University in Canada is telling people that it ranked No. 1 in “the extent to which alumni felt they had fulfilled their goals in entering the MBA program”. And University of Alberta, ranked 97th, is bravely bragging that is in the top 100.

The close and immediate attention to the annual FT survey remains a sign of how fierce the fight is for place among business schools. Deans alternately pretend rankings don’t matter, and crow about how they have done in said rankings.

Dude, Where’s My Demographic?

According to the current Advertising Age, things were busy, if nervous, at this week’s National Association of Television Program Executives (NATPE — pronounced to (sort of) rhyme with “nasty”) conference in Las Vegas. TV execs can’t figure out where the heck viewers have gone en masse.

Here is a snippet:

The broadcast networks have been struggling, and all six — Walt Disney’s ABC; Viacom’s CBS and UPN; New Corp.’s Fox; General Electric’s NBC; and Time Warner’s WB — saw decreases in their viewing levels this past fall (when new shows debut), particularly among the advertiser-coveted demographic of adults 18 to 49.

Some are blaming the Internet, and some are blaming station group ad buyers who play it safe, “ordering formulaic programming that is creating viewer fatigue”. Gosh, is that possible?

But all of this smells like opportunity to Mark Burnett, visionary of “non-scripted” programming. The producer of Survivor and The Apprentice told a standing-room only NATPE crowd that he had answers:

…he was developing two sitcoms with NBC, one that will feature a central character who embodies a brand. “We are trying to pave new roads,” he said.
The other new series? Mr. Burnett’s journey from t-shirt salesman to wildly successful TV producer. In other words, it is an unscripted series in scripted sitcom format about a developer of unscripted content who makes good and begins created more scripted fare. The mind boggles at the embedded metaphysics.

Steve Jobs Doesn’t Get Network Effects

Judging by this interview in Business Week, Apple CEO/founder Steve Jobs still doesn’t understand network effects. The miscue is in his answer to a series of questions about Apple’s currently dominant position in online music retailing. Before I explain further, let’s go to the “tape”:

Q: Still, many companies are lining up in support of various standards. Aren’t you concerned that this could play out like the PC market, in which Apple had a superior product, according to many people, and a market share lead?

A: Whoever enters this market now, is going to enter a market that’s not in its infancy. And they’ll enter a market against a competitor that has a 70% market share — and surprisingly, that competitor’s name will not be Microsoft. It will be Apple. Now, I understand that there’s no guarantee we’ll stay on top, but that’s the situation.

Q: So you don’t believe the history of the Mac and PC is useful in looking at the music business?

A: It’s ancient history.

Q: But you must think about it. There must be lessons to be drawn.

A: [Pausing] Sorry, I don’t think of it that way. I just don’t. I got back to Apple six-and-a-half years ago. The hand was dealt [by then]. And we’ve done a really great job of building great products for the best 25 million customers any company ever had. Hopefully, more customers will decide they want the world’s best computers, too.

It is classic Jobs: combative, superior, and generally unconvincingly convinced that no-one else gets things the way he does. As usual, in other words, he is exuding that Jobs-ian reality distortion field. But while it’s as superficially appealing as ever — you feel obliged to buy it — it is an alchemical combination of delusion and chutzpah.

Here is the problem. By Jobs’ admission he has no more than 25 million customers, most of whom, almost certainly, are much less wedded to Apple’s iMusic than Jobs thinks they are. What is really holding them there, beyond the fact that Jobs was first to get online music reasonably right? Because if that’s all, the history of first-movers doesn’t exactly augur well for him.

On that point, the history of the Mac and PC is not only useful, it is crucially important for understanding network effects and lock-in. Jobs is, in effect, once again first to market with something that is better engineered than its predecessors, and that has been reasonably widely purchased by early adopters. It should sound familiar: it is not unlike what happened with Apple’s Mac — before Microsoft finally figured out how to slap a decent graphical interface on its Intel-based personal computers.

As was a puzzle to Steve Jobs then, however, and apparently remains one now, network effects do not spring solely from having the most customers, nor are they necessarily driven by having the best-engineered product. No, they come in equal (and arguably larger) part from having the most people reinforce your position by exploiting your sizable installed base for their own success.

All anti-Microsoft conspiracist cant aside, it was third-party software vendors writing to an open hardware/software architecture that locked Microsoft Windows in place. One assumes it will be something similar that locks an “iMusic” in place in the future, certainly not Steve Jobs’ revved-up reliance on discredited 1990s dogma like “eyeballs uber alles”.

Credit Card Security and Gas Pumps

How responsible should petrol stations be for how customers’ credit card information is collected & used? One would think, highly responsible. After all, it is their pumps into which customer insert their credit cards. If station owners fail to secure those pumps and crooks are able to install “skimmers” that collect card information, then I think the onus must be on said owners to demonstrate how it is that they are taking reasonable care. This Florida case, with more than 100 customers having been defrauded, raises some very interesting liability and security issues.

Reuters Has Soothsayers … Or Not

News that CNBC will no longer allow on-air staff to buy and sell individual stocks continues to be the catalyst for media navel-gazing. In this latest example, however, things get delightfully deranged.

A Reuters story lays out the CNBC trading restrictions, then surveys policies at other media outlets, before ending up with Reuters’ own policies. Unfortunately, Reuters reporter Martha Graybow got her employer’s policies wrong in a January 13th article, and the piece is now re-running with the following correction upfront:

In Jan. 13 NEW YORK story headlined “CNBC stock rules could spur trend in media-experts” please read in last paragraph … cannot trade in that security a month after the assignment … instead of … cannot trade in that security a month before or a month after the assignment … (corrects description of policy). [Emphasis added]

In other words, when Ms Graybow wrote the original piece she said that Reuters reporters couldn’t trade in a stock a month before they knew they would be assigned the story. Not to put too fine a point on it, but if Reuters reporters are so prescient as to know what stories they will be assigned a month before they are assigned them, then they should be trading stocks for a living, not writing about them.