Lessons From the Harry Potter Income Statement

Posted on by David Wright

First of all, here it is (source)

-167m net income from 612m gross revenue. What can we learn from this? Well here is some of the original analysis:

In that statement, you’ll notice the “distribution fee” of $212 million dollars. That’s basically Warner Bros. paying itself to make sure the movie “loses money.” There are some other fun tidbits in there as well. The $130 million in “advertising and publicity”? Again, much of that is actually Warner Bros. paying itself (or paying its own “properties”). $57 million in “interest”? Also to itself for “financing” the film. Even if we assume that only half of the “advertising and publicity” money is Warner Bros. paying itself, we’re still talking about $350 million that Warner Bros. shifts around, which get taken out of the “bottom line” in the movie accounting.

Here’s another example:

Here’s a hypothetical example of how this could work in practice, using round numbers just to make the point (these aren’t directly accurate numbers, but the concept is). A studio funds A Movie with a production budget of $100 million. It sets up AMovieCo Inc. and gives it the production budget money. The studio then spends another $50 million on marketing and puts that down as an expense as well — though, with some of the big studios, some of this money involves paying itself for advertising on its own properties. Still, even if we assume that’s real money spent, you might think that AMovieCo now needs to make back $150 million to be profitable. But… the studio (which, again, controls AMovieCo completely) then tacks onto all of that, say, a $250 million “distribution fee.” Now, while there may be some money spent on actually distributing the film, the number is almost completely bogus, and much higher than the actual expense for the studio. Very little actual money needs to change hands here — it’s just a fee on the books (a fee they are effectively charging to themselves). And it’s not just “distribution” but a variety of additional charges. On top of that, the studio may then charge “interest” on that money, even though it’s really just lending money to itself. What it all means is that rather than becoming profitable at ~$150 million (the actual money spent), AMovieCo now needs to earn over $400 million before anyone with a cut of the profits sees an additional dime from the movie, thanks to completely imaginary accounting entries on the books.

Distribution is control. That’s true in insurance, too.

One More Step And The Barbarians Are In

Posted on by David Wright

I’m immersed in the history of insurance regulation these days. What was that? Oh, yeah, it’s hilarious and stuff. Good one.

Anyway, know what’s striking about the history of insurance regulation? Let’s quote Bastiat:

The State is the great fiction through which everyone endeavours to live at the expense of everyone else.

Insurance is brutal: everyone thinks that they can screw someone else over indefinitely. Consumers do it, insurance companies do it, the government does it.

Take the National Flood Insurance Program. Here’s a report from the Government Accountability Office:

Why GAO Did This Study

The National Flood Insurance Program (NFIP) has been on GAO’s high-risk list since 2006, when the program had to borrow from the U.S. Treasury to cover losses from the 2005 hurricanes. The outstanding debt is $17.8 billion as of June 2011.

17.8 billion with a ‘b’. All because nobody will bother to do either of these things:

1. Move out of flood zones.

2. Pay enough for insurance to cover the cost of repairing flood damage.

Realistically this is a risk that is too costly to insure for most. If your house costs $100,000 and you annual insurance policy is $10,000, what’s the point?

But how did the government get involved? Get this: FANNIE And FREDDIE! A timeline from my notes:

1973: Flood disaster protection act is passed for owners of properties who had mortgages from federally regulated lenders.
1994: National Flood Insurance Reform Act strengthened mandatory purchase requirement for owners of properties in flood zones and with mortgages from federally regulated lenders.
2004: Bunning-Bereuter-Blumenauer Flood Insurance Reform Act authorized grant programs to mitigate properties that experienced repetitive flood losses. Owners that did not mitigate *could* face higher premiums.

They vacillate between statist coercion and open market reforms. But we’re at 17.8bn now and private capital is the only way out of the mess.

It’s a dizzying spiral of interlocking regulations and market distortions that press down on our economy. If only, like before, it were strong enough that we didn’t care.

Life Coach Spurs QE3?

Posted on by David Wright

One of the most remarkable teaching moments in organizational behaviour is perhaps coming to a close. For years now Bernanke has been in the odd position of implicitly denouncing his life’s work.

Bernanke spent his academic years studying the great depression. His conclusion? That occasionally recessions are bizarre demand-side beasts that monetary policy can mitigate. There may well only be a few of these episodes in history: the depression, Japan in the 90s and… today.

It’s some kind of cosmic miracle that a man with his background is in charge of the fed. He’s the Chosen One, in the right place with the right skills at the right time. If only someone with his understanding were in charge of the fed in the 30s! Or running the BOJ!

Well maybe not. What we’ve seen instead is a man forced by organizational politics to abandon what he (probably) sees as the truth. Publicly Bernanke’s job is to be the voice of consensus, no matter what his private beliefs are. He has the odd distinction of being someone whose private beliefs are extremely well known. How… inconvenient.

Enter a mystery man:

Mr. Robinson, the managing partner of Vantage Leadership Consulting, a Chicago strategic talent-management firm, has been a frequent visitor to the Fed chairman’s office this summer.

Though Mr. Bernanke’s schedule is generally crammed full of gatherings with staff, other policy makers and prominent figures in academe and finance, the Fed chief met four times with Mr. Robinson between May 9 and July 20, according to Mr. Bernanke’s monthly calendars of appointments, obtained through public-records requests. He also met twice with the Fed chairman in 2011.

A 58-year-old licensed psychologist, Mr. Robinson specializes in helping companies foster leadership, both in working with firms to select leaders and through executive coaching, according to the Vantage website….

While his work varies with each organization, Mr. Robinson said three decades in the business have underscored a few basic principles.

“We spend a lot of time trying to help people understand organizations don’t function like individuals,” he said. Workplace politics and an employee’s reputation, for example, can play a part in company dynamics.

And Mr. Robinson emphasized the importance of getting the right people in charge.

“Leaders cast long shadows,” he said. “You cannot overestimate the impact of a leader.”

And perhaps such leadership has been taught?

Brain Drain Ain’t So Bad

Posted on by David Wright

Here’s a survey paper:

This paper reviews four decades of economics research on the brain drain, with a focus on recent contributions and on development issues. We first assess the magnitude, intensity and determinants of the brain drain, showing that brain drain (or high-skill) migration is becoming the dominant pattern of international migration and a major aspect of globalization. We then use a stylized growth model to analyze the various channels through which a brain drain affects the sending countries and review the evidence on these channels. The recent empirical literature shows that high-skill emigration need not deplete a country’s human capital stock and can generate positive network externalities. Three case studies are also considered: the African medical brain drain, the recent exodus of European scientists to the United States, and the role of the Indian diaspora in the development of India’s IT sector. We conclude with a discussion of the implications of the analysis for education, immigration, and international taxation policies in a global context.

I’m a brain drainer myself, moving to the US from Canada for a high-skilled job. I did it because I felt that the opportunities for professional growth were better here and I haven’t been disappointed.

On the other hand, I totally understand why people return to their homelands (bringing those skills back), someday I probably will, too. The abstract of the paper doesn’t mention this factor but I’m sure it plays a big role.

THUMP [PG’s head into the sand]

Posted on by David Wright

There’s this old joke that I really like:

One night a police officer sees an economist looking around a park bench near a light.
“What happened?” asks the police officer.
“I lost my keys but I’m having a really hard time finding them” replies the economist.
“Here, let me help” and they look for the keys awhile.
After not getting anywhere, the police officer asks, “where did you drop them?”
“Oh, replies the economist, way over there” and he gestures vaguely towards a nearby park, drenched in darkness.
“Well, then why on earth are we looking here?” asks the police officer.
“Because this is where the light is”

A powerful lesson. Sometimes we are so desperate for an answer we look for it in a very unlikely place and try to extrapolate back to the thing we want. Sometimes this works, but it can be devilishly hard. And it can also be stupidly useless.

Meanwhile, the one thing you can measure is dangerously misleading. The one thing we can track precisely is how well the startups in each batch do at fundraising after Demo Day. But we know that’s the wrong metric. There’s no correlation between the percentage of startups that raise money and the metric that does matter financially, whether that batch of startups contains a big winner or not.

…I don’t know what fraction of them currently raise more after Demo Day. I deliberately avoid calculating that number, because if you start measuring something you start optimizing it, and I know it’s the wrong thing to optimize.

That’s the inestimable Paul Graham. Perhaps economists should spend more time thinking about what they should and should not be measuring.

In a related discussion he says this:

The counter-intuitive nature of startup investing is a big part of what makes it so interesting to me. In most aspects of life, we are trained to avoid risk and only pursue “good ideas” (e.g. try to be a lawyer, not a rock star). With startups, I get to focus on things that are probably bad ideas, but possibly great ideas. It’s not for everyone, but for those of us who love chasing dreams, it can be a great adventure.

And we also get this interesting tidbit:

thaumaturgy: Off-topic, but something I’ve been chewing on lately: what’s it like to have your every written (or spoken!) word analyzed by a bunch of people? Esp. people that you end up having some form of contact with. It seems like it would be difficult to just have a public conversation about a topic. Do you think about that much when you write?

PG: It’s pretty grim. I think that’s one of the reasons I write fewer essays now. After I wrote this one, I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads. The whole of footnote 1 is such armor for example. I essentially anticipated all the “No, what I said was” type comments I’d have had to make on HN and just included them in the essay. It’s a uniquely bad combination to both write essays and run a forum. It’s like having comments enabled on your blog whether you want them or not.

Profile Of A Gentrivolution

Posted on by David Wright

I moved to the city of Hoboken, NJ (a Manhattan bedroom community) from the big city a few months ago. It’s tiny at just a bit more than a square mile, bordered by waterways on the North, South and East and a big honking cliff to the West.

It’s much more distinct from the local social and urban geography than the map below suggests and it’s one of the most densely populated municipalities in the US.

It’s also a town whose socioeconomic makeup has changed radically since the 90s. Consider some stats:

2000 2010*
Population 38,577 50,005
Median Age 30.4 31.2
Median Household Income 62,550 101,782
Median Income Males Only 54,870 90,878
Elementary School Enrollment 1,781 2,156
Bachelor Degree or Higher 59.4% 71.6%
Currently Married 31.1% 32.5%

*The population is a 2010 figure and the rest are 2006-2010 averages. Here is a link to the 2000 data. Here is the 2006-2010 American Survey data. Here is Wikipedia.

In the early 90s, Hoboken boasted two communities: students (of the local Stevens Institute of Technology) and recent graduates fueled a big drinking scene while a ‘townie’ population of mostly blue collar workers and residents of a ‘projects’ in the bottom corner of the town were holdovers from the town’s industrial roots. It’s got Northeast college town written all over it to this day.

But the table above shows where things are heading. High-income, educated families with good jobs in the city, young children and stable marriages are filling the new ‘luxury condominium’ developments going up everywhere.

What’s interesting about this is that the boom has been projected many, many times in the past. During the West Village and Brooklyn renaissance of the 80s and 90s everyone was ready for the gentry to cross the Hudson. It’s been such a ‘sure thing’ that when it came the boom has been a horribly disappointing overdevelopment. Building projects abandoned (expecting a far larger boom), developers going bust, retail locations empty.

I’m sure the coincidence with the nation-wide housing bubble didn’t help. A lot of people in the area have lost a lot of money on housing developments. This is one town, though, where the units will eventually be filled.

The Angry Birds Era Is Over

Posted on by David Wright

I mean that in a commercial sense. The game will obviously live on.

Buying a game is a thing of the past because developers have figured out the revenue model that lets games be free.

Right now, 18 of the top 25 grossing of all apps are Free To Play Games (72%).  Also, it should be noted that 22 of the 25 top grossing apps are in the games category (88%), confirming the fact you need to be into games if you want to have the biggest potential payout.  The reason for this is people have a stronger emotional attachment to games than any other type of app, therefore they are more likely to spend money.

How are these Free to Play games crushing it?

After digging deeper in these top grossing apps, you can see they consist of nearly every free to play genre there is… Social games, click games, gambling games, turn based games, card games, etc but all of these have TWO things in common:  They each have lots of in app purchases and they encourage the user to buy stuff (a call to action).

This is the basics, but it’s SUPER IMPORTANT, here’s how:

A very small percentage of people buy stuff in games.  Of this small percentage you have people who will spend a LOT.

More here.

As many note on the HN discussion, this is really really annoying. But so are television commercials.

Hardware Fantasy Links (hey hey hey, keep it clean)

Posted on by David Wright

I am a big fan of computer programming but deep in my heart I’m a frustrated electrical engineer. I am captivated by the fundamentals of computing and hardware interaction.

Here are some things I’ve enjoyed.

Code (by Charles Petzold, published in 1999). This book winds up in all kinds of “best programming books” lists and what a revelation it is. Mostly it’s concerned with answering the question: “how would you build a computer with 19th-century technology?”. The rest is an extremely detailed look at what computer hardware actually DOES and how software interacts with it. Far more readable than it sounds.

Once you get through the basics of how computers work, Petzold machine-guns you with a quick explanation for just about every acronym, file format, compression technique and common technology in 1999. What is a bitmap? How do scanners work? What is an analog signal and how is it converted to digital? Where did MS-DOS come from? How do modems work? Just about every paragraph of the last 20 pages gave me an “ah-HA!” jolt.  I haven’t put a book down and wished for more in a while but an update on Internet technologies and perhaps a chapter on mobile hardware/software are surely in the works!

Programming Throwdown podcast – Specifically the ones on Assembly and C. I’m throwing C into the low-level programming boat because I can. Not that I really understand this link (yet?), but you can write linux device drivers with it!

Technometria (podcast). These guys are doing a series on the “Internet of Things”, discussing trends in hardware programming, specifically as it connects to the web.

Personal data ecosystem (podcast). This is an interesting series on ways that personal data is being collected and used. Some of it has to do with business models, much of it has to do with privacy, which is boring.

One interesting aspect of the Internet of Things phenomenon is that it is most closely associated with home automation but home automation as a business idea died a long time ago. Nobody will pay for it. People in this field are constantly trying to distance themselves from those applications.

The real advances in the Internet of Things are typically concerned with automating processes that already are fairly well automated, squeezing the last few drops of human input (cost) from things like building cars or monitoring traffic. The revolutions in these fields happened a long time ago

So the Internet of Things is a very 20th century pursuit. A 21st century engineering challenge would be about cracking the human to human economy (ie beating Turing tests). If you can make computerized social workers you’ll change the world.

Coca-Cola’s Value: Still Marking to Model

Posted on by David Wright

Three people have been arrested for allegedly attempting to sell Coca-Cola(Charts) company secrets to PepsiCo (Charts), according to the Department of Justice.

Two residents of Georgia and one resident of New York City are purported to have participated in the scheme to sell the Coke secrets to rival Pepsi for $1.5 million.

In May, PepsiCo told Coca-Cola that it had received a letter from a person calling himself “Dirk” offering “very detailed and confidential information” about Coke’s products for a fee, according to the DOJ press release.

More here.