Thursday, February 20, 2014

Mobile carrier SMS pricing created the messaging lottery - and WhatsApp won it

If mobile carriers priced MMS/SMS messaging as a dumb pipe data service, there'd be no WhatsApp. But mobile carriers wanted short term revenues, and lack of competition and contract lock-in (inflated switching costs) meant individual carriers could generate enormous margins on simple texting. Network effects and Prisoners Dilemma (game theory) meant that if a significant number of carriers could make money that way many could do it.

Which in turn drove the creation of a data-only messaging service industry, and made WhatsApp the winner of the alt-MMS lottery (feels very late 90s, which ends in tears).

Markets are weird.

I wonder when Facebook's Messaging service will interoperate with WhatsApp's service - and if iMessage would ever play along. I've always assumed Apple used the threat of iMessage Unleashed to keep its mobile partners in line, but that may be less useful now.

Saturday, February 08, 2014

Vanguard and Fidelity: When did civilization collapse again?

I must have been asleep when civilization collapsed. Anyone know the date?

I say this because I haven't done much with our mutual funds for a few years -- just tweaked 'em periodically. Most of the purchases have been through my employer -- 401K, ESPP, and so on. 

Recently though I decided to do some realignment and cleanup at Vanguard and Fidelity. The results were ... interesting.

At Fidelity I discovered two of our larger funds were now in some kind of semi-frozen legacy mode. Sometime in the past few years Fidelity switched from managing mutual funds to managing only brokerage funds. Our mutual funds can be sold and we can do exchanges, but I don't think we can buy new shares (or at least it's not obvious). We have to move them into new brokerage accounts -- presumably without a tax event.

I'm sure Fidelity sent us some kind of notification, and I'm sure it was intentionally obscure. Why did they do this? I presume to avoid regulation or increase fees. I'm very sure they didn't do it for our benefit.

Ok, over to Vanguard. I'll see if I can get some olf-fashioned deposit slips ... 

The page you're trying to reach is currently unavailable

Oookaayyy. I better report that ....

... hang....

Hmm, let's see what happens when I try to deposit ...

Screen Shot 2014 02 08 at 2 32 32 PM

Ahh, yes. The world financial collapse and the Zero Lower Bound. Vanguard (and Fidelity) don't earn any interest on US Treasuries, so they don't want me to buy any more. The "protection" is to prevent them losing so much money they have to "break the buck" and return less than $1/share.  That's probably what induced the non-reportable bug with deposit slips.

Between them Vanguard and Fidelity manage $3-4 trillion. A trillion isn't what it used to be, but it's still a fair amount of money. Enough money that our family investments are just noise. The megafunds don't work for us any more.

I guess we'll just have to wait for hackers to use our stolen credentials to empty our accounts. At least then we won't have to beg Vanguard and Fidelity for some attention.


Thinking about this, I think it's a tiny artifact of the huge wealth concentration of the past thirty years.

When Emily and I first started putting money in mutual funds there was a market of self-managed investors. I'm guessing 5-10% of the population could put non-retirement money into mutual funds and wasn't wealthy enough to hire a full time professional money manager.

Flash forward to 2014. 0.5% of the population now holds most of our wealth -- and they almost all have professional money managers. About 98% is going to have money in home and retirement and cash. The fraction of the population that manages its own non-retirement mutual fund money is very small -- too small to be a market.


It's not the focus of this post, but for reference here's Fidelity's response on their reorg. Their response is not inconsistent with the hypothesis that ending their mutual fund accounts let them raise more fees (trading is a bad way to invest, but a good way to pay fees) and perhaps dodge regulations.

Fidelity started offering brokerage accounts, so customers can trade Fidelity and non-Fidelity mutual funds, stocks/ETFs, precious metals, CDs, and other fixed income products within the same account. In a mutual fund only account you can only trade Fidelity mutual funds.

You will not lose any benefits by moving your assets into a brokerage account, there are no fees to do that. There are also no account maintenance fees for brokerage accounts. Moving your assets in-kind from a mutual fund only account to a brokerage account is not a taxable event. We will continue to keep the cost basis of your positions.

FWIW, we decided to move the Fidelity US Treasury MM funds to a Vanguard Prime MM account -- mostly for sake of simplification and because the Treasury MM accounts look like they won't come back. We'll either move the S&P or liquidate and pay taxes. Overall we're continuing to slowly shift to Vanguard as the (slightly) lesser of the two evils.

Sunday, February 02, 2014

21st century market failure: what the rise and fall of Guitar Hero teaches about gamification

My oldest wants to learn to play drums. Learning is difficult for him, and the Smart Music program his school uses is obviously too sophisticated. We need something simpler, something more accessible, more like a game ...

Something like the Guitar Hero music education program I remember from a few years back. Fun, teach the basics, work with our Wii ... perfect!

Ok, I'll just Google that ....


Guitar Hero is gone. There is nothing like it any more.

Why Guitar Hero died News • News • (Feb 2011)

As the dust settles on Activision's decision to put an end to its world-famous peripheral-based music franchise Guitar Hero and the difficult work of sacking those who helped create it begins, one question remains: where did it all go wrong?

Only three years ago Guitar Hero shot through the $1 billion revenue mark – in the US alone.

Now, in what can only be described as a spectacular fall from grace, Guitar Hero is no more. Why? Why did Guitar Hero die?...

... "Guitar Hero was a victim of its success," said Wedbush Securities' Michael Pachter. "The game was incredibly well-conceived, the peripherals were great, and the music offering was deep and broad. All of those factors led to unprecedented success, and each contributed to its demise."

For Pachter, the fact gamers could play new Guitar Hero games with the peripherals they already owned proved to be the killer blow.

"Once people bought the band kit, for example, they didn't feel compelled to upgrade, as the one they bought was high quality and did the job well," he said. "Once people bought a game, they had 60 - 80 songs to master, and few mastered all of the songs offered...

... "There is absolutely nothing Activision nor anyone could have done to save the music genre. We should remember Guitar Hero for what it was, not where it's at now."...

... "It is possible that Guitar Hero will return, but a re-launch would have to be managed on a far smaller scale. Production costs would have to be minimized to enable profits on unit sales in the hundreds of thousands rather than in the millions."

Pachter's conclusion? "The franchise can support sales at the $200 million level annually, so it will still generate profits, but with license fees and manufacturing costs, margins are not that great, and certainly not enough to keep 200 - 250 people employed working on a new version each year."

So to recap - about 5-6 years ago we had a mini-cultural phenom -- a low cost high fun solution for music education. The Wikipedia article on gamification is written in 2010, around the peak of the Guitar Hero story. A few years later and it's all gone - the game, the console, the hardware, everything. In 2014 some replacements may slowly emerge on the iPad, but we're basically starting over again.

What's going on here -- besides our 21st century penchant for rapid cycles of creation, destruction, and recreation?

Maybe the root problem with gamification is that education doesn't have the economics, or the life cycle, of entertainment. Entertainment has visciously short lifecycles with massive floods of money. That can bring great products out quickly, but this amphetamine fueled growth has a cost. The entertainment products wipe out the weaker educational market -- and when Guitar Hero burns out there's nothing left to replace it. The education market has to be slowly grow back -- only to be wiped out again by the next cycle of the entertainment market.

Ultimately, the entertainment bubble is destructive, and the end result is a peculiar form of market failure.

PS. Garage Band is an interesting exception. It was clearly driven by Steve Jobs passion rather than any kind of business logic. It endures as a monument to Jobs, and because Apple doesn't have to put much money into it. It works, it's done, and the Mac platform is far more stable than entertainment-oriented consoles.

See also: