Here in my fair city of Chicago, the a 75-year franchise for the operation of 36,000 parking meters was recently sold to “Chicago Parking Meters, which is part of a joint venture led by the financial services giant Morgan Stanley” for $1.2 billion dollars.

But the plan has gotten off to a rocky start.

Chicago is sending out its own mechanics–and billing the private company now responsible for operating parking meters in the city–in a belated effort to catch up on a torrent of problems that include broken meters and inaccuracies in signage about parking rates and enforcement, officials said today.

I’m not a fan of selling off infrastructure or future cashflows for those sorts of time periods, but I guess Mayor Daley couldn’t find my number when he was asking around for opinions.

Regardless, I’d noticed that the meters in front of my house had gone from being basically 100% utilized, 24-by-7 to 25% utilized or less. I didn’t think too much of it until I noticed the new stickers on the front which informed me that the price to park had been quadrupled from $0.25/hour to $1.00 an hour. Hey, I thought, The demand curve is real after all. I should blog about that. Good Econ 101 example there. But I never got around to it.

Then something funny happened. I tried to park at a couple of meters and noticed that they were flashing “Out of order.” I didn’t think too much of it. Then, I had a couple of experiences where I saw that every meter around an intersection was “Out of order,” with either a quarter or other object jammed in them. Perhaps I’m showing my pessimistic/security paranoid side, but I thought, What are the odds that every meter at this intersection is out of order? I wonder if someone is sabotaging them?

Now, though, I find that this is just Hanlon’s Razor in action

The concessionaire is working “as quickly as possible'’ to fix meters that are jammed with coins because they were not emptied, Ed Walsh, spokesman for the Chicago Department of Revenue, said Wednesday.

They quadrupled rates, and even with the decreased demand, they still can’t keep them emptied. I wonder if they even considered the risk of having meters knocked off-line due to inadquate coin storage capacity?

Clay Shirky has a great essay up, “Newspapers and Thinking the Unthinkable.”

Back in 1993, the Knight-Ridder newspaper chain began investigating piracy of Dave Barry’s popular column, which was published by the Miami Herald and syndicated widely. In the course of tracking down the sources of unlicensed distribution, they found many things, including the copying of his column to alt.fan.dave_barry on usenet; a 2000-person strong mailing list also reading pirated versions; and a teenager in the Midwest who was doing some of the copying himself, because he loved Barry’s work so much he wanted everybody to be able to read it.

One of the people I was hanging around with online back then was Gordy Thompson, who managed internet services at the New York Times. I remember Thompson saying something to the effect of “When a 14 year old kid can blow up your business in his spare time, not because he hates you but because he loves you, then you got a problem.” I think about that conversation a lot these days.

Gives new meaning to “Killing them with kindness.”

Obviously, there’s the Business Risk aspect of this all–when your biggest fans are the worst enemies of your business model, you’ve got a serious problem. The problem with the model is probably that it’s based scarcity, and scarcity is no longer the basis of a business model for anything but physical commodities.

Now, I’m starting to wonder what the next business model to succumb to the Marginal Cost Of a Copy Approaches Zero. I’m going way out on a limb, but I think the next model will be basic IT services.

What?!, you’re probably thinking. Work with me here. The incremental cost of adding a row to a database has been essentially zero for some time. When I was working in online dating, the cost of adding a new user was close enough to zero that it almost wasn’t meaningful to try to accurately measure it (too many variables to wind up with a value that was both meaningful and accurate except at the highest aggregate levels). We effectively had a fixed cost which we then distributed across our subscriber base.

Gmail, Yahoo mail, and Hotmail email all brought a similar cost model to email. As the cost of adding an account fell, the variety of options for generating enough revenue fell with it. I think I pay less than five dollars per year for email hosting of my domain, and that’s for something like 25GB of storage and unlimited inboxes. The key is that email hosting is no longer costs enough that I consider it worth tracking.

The challenge today is not about finding the next digital asset or service whose marginal cost-per-copy is zero at one copy. It’s about determining how to manage the risk that it happens in some way that your firm is not well-positioned to adapt to (or, more honestly for most firms, attempt to prevent), either because it’s taking money out of your pocket as a provider or costing you competitive advantage because your competitors are better able to take advantage of the situation than your firm.

Extra credit to all of those who know where “][” comes from, even if it has only the most tenuous relationship to this post.
Photo from Boston Globe’s “Big Picture”

Mozilla is worried about life when Google no longer needs them

Google accounts for more than 88% of Mozilla’s revenue, which totaled $75 million in 2007. And as Mozilla wins over users of Internet Explorer, it helps Google grab share in the lucrative Web search market. Firefox has about 22% of the browser market, making it by far the strongest competitor to Internet Explorer, which maintains a 67% share, according to Net Applications.

How much longer this pairing can last has been called into question since September, when Google introduced its own Web browser, Chrome.

Now I’m guessing that Google won’t walk away from owning the default search option on 22% of browsers (as are most of the people the story talked to), but if you’re Mozilla, you still have to have a contingency plan in place for losing 88% of your revenue overnight.

A revenue monoculture is just as risky as any other kind of monoculture.

William Gibson wrote that, and I’m pretty sure this was not what the designers had in mind when they put a bar code scanner in the G1 Android Handset:

Now imagine that was a video store or friend’s house rather than the developer’s room. This is what real innovation looks like. It’s not more efficient ways for companies to separate people from their money, but rather how people can seize the moment in whatever way works for them.

John Robb theorizes that the current global depression is a stress test for nation states:

Nation-states are now caught between two irresistible and strengthening forces:

1. A dominant, turbulent, and uncontrollable global super-network, that is pressuring/weakening/buffeting nation-states from above.
2. Super-empowered individuals/groups rising up from below that are ready to pounce on or exploit any demonstration of nation-state weakness.

So far, the vast majority of thinking re: the response to the stress test has been a revival of early 20th Century methods/theories of activist government. I’m fairly sure that this is a sterile response to the challenge.

From an Information Risk perspective, corporations are like nation states here. The overall economic situation is pushing companies down and driving budget cuts and weakening the companies’ ability to act from above. Meanwhile, poor morale and accumulated/earned disloyalty is pushing up in the form of ignorant/unconcerned, negligent and malicious employees.

Crisis of Credit is one of the most accessible explanations I’ve seen yet of the current credit crisis. In eleven minutes, it explains leverage, CDO’s, risk layering, and how they all interacted to create the Credit Crisis in a clear, concise manner.

I wish I was this good at accessibly and succinctly explaining complex concepts:

The Crisis of Credit Visualized from Jonathan Jarvis.

I will freely admit to enjoying the SEC’s management getting berated in this video. I am not a fan of incompetence at any level, but especially at senior levels.

Back ten years ago now, I worked in Risk Management for a now-infamous investment bank writing the software that actually calculated our risk (and I wrote the risk models themselves, ironically the part of the system that no one else in the IT group was interested in). Initially, I did market risk (attempting to predict how well or poorly our trading positions would do as market conditions changed) and later counterparty credit risk (calculating our net exposure to other banks, private bank customers, hedge funds, etc. so we could ensure that collateralization agreements were being met). I loved calculating net positions, by the way. Something about distilling down a huge pile of seemingly unrelated trades into a set of concise, useful information was (and still is) beautiful to me.

Occasionally, I would sit down to talk to the regulators as they did their scheduled audits and what were essentially inspection tours. I would get called in to explain exactly how this number or that number came to be on the computer screen, once because it was a bug but usually just as some sort of gotcha game to make sure we could prove that the computere was saying what we wanted it to say.

They were universally the most under- and un-qualified people I interacted with in a professional capacity during my tenure in investment banking. We would routinely find ourselves explaining not just intricacies but fundamentals of how the business of foreign exchange worked–to the people who were supposed to be able to regulate us!

I asked one of the Directors if this was a normal level of regulatory competence, and he assured me it was. To paraphrase his response, “Why would anyone who understood this stuff be working for the government at a fraction of what they could make actually doing it?”

As this video demonstrates, even an activist SEC wouldn’t have caught Madoff. The Director of Enforcement doesn’t even know how they failed. While his scam delivered returns that anyone qualified to be in the business knew were impossible, there were enough people unqualified to be in the business at the brokerages, banks and regulators that he could keep the party rolling for years.

h/t to Blah3 for the video.

The former President of the MIT Blackjack Team has weighed in on the current financial crisis, and it’s a doozy.

The mathematics of probability that govern the trade-offs of risk and reward are fundamentally counter-intuitive.

The reason that societies ban pyramid schemes outright, instead of relying on the market to make them unprofitable, is that most people trust their intuition, and their intuition leads them astray. If you were to wait for the market to run its course on a pyramid scheme, the losses could devastate a whole country, as Albanians found out a few years ago.

I don’t know that I necessarily agree with his conclusion–I think it’s impractical as well as politically infeasible. But I strongly suggest you read on, if only for his supremely eloquent explanation of what a Martingale is and what the implications are for the current financial crisis around the globe if he’s correct.

I’ve been meaning to post this for a while. From the Economist, it’s the definition-ish of Recession vs. Depression:

THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?

A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months.

I include this for reference since, as the Economist notes, the word “depression” keeps popping up and, from what I can tell, most people have nothing more solid than half-remembered black and white photos of bread lines from History or Economics 101 to define depression in their own minds.