Marketing Guinea Pigs

[Something on a lighter note today, for the lead up to Canada Day celebrations on Thursday. I have a longer post on globalization in the works (inspired by the recently-completed G20 summit) which may appear by the weekend.]

Last year I wrote an article complaining about, of all things, the price of bagels. More particularly, a 20% reduction in the weight (or content) of a particular brand of bagels -- Country Harvest, made by Weston Bakeries -- while leaving the price unchanged. Their objective appeared to be increasing profits by betting on consumers not noticing the drop in consumable content. (Possibly they were motivated by the rise in the price of grains, which is obviously a key input to producing baked goods, but the topic today is regarding marketing the change, not their specific motivation or justification to change.)

Subsequent indications (I have no direct evidence) is that shoppers did notice the change in bagel content. In addition to bagels they tried the same tactic with their breads, and it backfired on them. The obviously anemic-looking "premium" bread loaves turned me off and, going by observations of others I observed who picked the loaves up, weighed them in their hands and then returned them to the shelf, turned others off as well. Very soon Weston gave up on the experiment and the bread returned to the original weight, where it has stayed to this day.

Not so with the bagels. Unlike the bread, the package of bagels was not so obviously reduced in content. Even so, it must have had some impact (it did on my shopping choices) since they have been experimenting with prices for many months. What they are up to I am not sure, except that it is both bewildering and entertaining at the same time. Although it was fun for a while, it's getting annoying. I'm beginning to feel like a marketing guinea pig, and I don't like being treated that way for very long.

The regular prize for a package of six Country Harvest bagels around here is typically $3.29 at Loblaws, where I often shop. The pricing experiments are nearly weekly events, and are in the form of 2-for-1 sales. For example, two packages for $5.00, which is $2.50 per package (you don't have to buy two). Since this an approximately 24% price reduction is more than the 20% reduction in content which started this pricing game, this could be seen as a good deal. These sales are not contained to Loblaws since there are equivalent sale prices at other chains at the same times.

I have this picture in my head of teams of accountants and product managers at Weston's head office studying the sales figures during and outside of sale periods, and trying to figure out whether to hold to original price or perhaps lower it permanently. The difficulty of selecting the optimum price point must be a daunting one to explain their nearly year-long experiment with pricing: $3.29...$2.50...$3.29...$250...ad nauseum.

Recently this numbing price cycle was interrupted to try out some other novel ideas. These ideas are to experiment with prices between $2.50 and $3.29. Pricing innovation must be taken seriously by Weston that they would have eventually deigned to try a few other price points to see what would happen. I have to wonder about these people that they would seem to model their customers as such simple automatons that they would persist in believing that there is no intelligence within them (us) other than to test a price against some vague internal scale and then having our brains throw a binary switch to the "buy" or "avoid" position. It's getting both annoying and tiresome. Now, rather than having to ask myself if their bagels are worth $2.50, $2.75, $3.00 or $3.29, I have to wonder if Weston's products are worth purchasing at all.

Weston needs to stop poking consumers with needles and make a decision. The never-ending price experiments need to end since they are showing themselves to be incompetent business operators. Does anyone at Weston have any knowledge of the consumer business at all? The supermarket chains are also complicit since they agree to post these silly prices without pushing back on the supplier. They at least should know better.

Predicting the End of the Recession

Are the extreme tops and bottoms of economic cycles more alike than they are unalike? If you believe the former you are a candidate for investment strategies that rely on the pattern of previous cycles as predictors of future market behaviour and direction. For a recent, and messy, example of this consider this article.

My own opinion is that, regardless of the usefulness of previous cycle-bottom charts, articles such as this one are full of problems. The media and blogs this year are full of articles similar styles in style and content, so I do not mean to unreasonably this one in particular; it is merely the latest one to annoy me. That said, let's look at a few of the problems contained therein.

• Comparing dissimilar things - This is the old cliche about comparing apples and oranges. Notice how the author compares two different indices. S&P 500 and the Dow Jones Industrial Average. The first is a select group of 500 companies across a diverse set of business sectors, with a bias toward stability, large size and national scope (US). The second is a basket of 30 large industrial companies. The companies are not chosen according to a rigid algorithm, except that they are supposed to serve as good indicators of the financial health of the sector(s) from which they have been selected. Not only that, the companies in these and other indices change over time. There are few holdovers in these indices over the 70 year interval of the comparison in the article. Further, the industries represented are quite different (e.g. Microsoft).
  
  
• Time frames - The Great Depression began after the market crash of 1929, not long after the market peaked, and continued for well over a decade. In the present recession, the market peaked in 2007 (3 years ago this summer) and the economy, while still quite fragile, is showing strong signs of recovery. Of course one could argue that this recession will continue for many years to come, making the comparison more meaningful, but even a casual glance around the world shows that the two situations are not at all alike. Even if our recovery stalls for a while, it takes a lot of belief to say that the market charts can be so glibly laid atop each other.
  
  
• Selection bias - For a true believer in this sort of comparison exercise, there is a need for much data mining and chart-fu to come up with the perfect comparison to exemplify the original premise. That is, the search only ends when kinda, sorta, more-or-less similarly shaped charts are found; the multitude of charts which do not fit the premise are rejected and never presented. The author then has to engage in a lengthy and bewildering rationalization to justify why that one chart comparison is the correct choice.
  
  
• Technical vs Fundamental analysis - A chart comparison is pure technical analysis, where the chart alone is used as predictive indicator, and to therefore guide buy and sell decisions and money management. Except that in the types of articles we're looking at today, the chart itself is not considered sufficient by the author. They must delve into a range of fundamental economic indicators far outside the realm of the charts being compared to select those that buttress the premise. This is not only selection bias, but an admission that the author does not believe that the chart has any predictive power on its own merits, whatever those may be. No, they must then launch into a similarly disjointed set of fundamental analysis arguments. Presumably, they also believe that fundamentals alone are insufficient to prove the premise. In general, following multiple lines of evidence to prove a premise is appropriate and laudable, except that in this case the fundamentals of the 1930s and the 2000s are so different -- political, industrial, global connections, and industry mix among other factors -- that reading the convoluted arguments in these articles can twist your brain into a knot.
  
  
• Statistical significance - Said simply, the number of market peaks and valleys for which we have good data and where the economic landscapes are at all comparable is small. The population is so small that there is little confidence in the expected outcome of any one event sampled from that population, including the present recession. You might very well do better by flipping a coin.

I have to admit at this point that my analysis in this post falls short of the ideal since I have for the most part treated the author's arguments as example of broad generalizations rather than going in deep to refute specific points. That is intentional since, for my own purposes, I am merely attempting to draw attention to the danger of such articles, and I do not consider it worth the time to go any further. You can always read the referenced article and judge for yourself how close to or far off from to the mark I've come.

Infected

I am pretty rigourous when it comes to safe computing as I travel the internet. I keep special-purpose sandboxes with which I can safely visit unfamiliar web sites and inspect downloaded files. Never do I click on strange links, even going so far as to ensure the link really points to where it says it points, avoided URL shorteners and using a Javascript-disabled browser for peculiar links that I absolutely need to open. Downloads and attachments are at first handled like toxic waste until their contents can be reasonably assured to be exploit-free. Where possible I also avoid software that is most-frequently targeted by hackers and malware.

Imaging my surprise when, recently, several bit of malware, including a backdoor/trojan, infected one of my Windows machines. It was entirely my own fault since, in a rush to get a job done, I opened an unfamiliar site without taking any precautions.

I knew immediately that something had gone terribly wrong, although I wasn't quite certain what had actually occurred. It involved Adobe software and I had gotten complacent about compatibility errors because I was not current to the latest version of Acrobat Reader. It was about an hour later that I knew what had happened and that my day was about to be ruined. Afterward, when I reverse engineered the sequence of events that led to the infection, I was able to discern just how the exploit worked. It's interesting in a way so let me take you on a brief tour of the steps.

1. The server with the news story I wanted to read had been compromised to serve files that contained the malware.
2. The infected file was given a .pdf extension so that it called up the Acrobat Reader browser plug-in to process it.
3. The old version of Acrobat Reader has a security hole that allows remote execution of unvetted code.
4. Several pieces of malware were installed using this security hole, including at least one that it subsequently downloaded from a server that hosted malware.
5. The malware started running and phoning home, doing who knows what. I stopped this immediately by stopping the processes and disconnecting from the internet. Unfortunately, the malware kept starting up again. This is pretty typical.

The malware was clumsily built, which made it easier to deal with using only manual techniques. First, it corrupted Acrobat Reader to the extent that it would not run at all, except to restart two malware processes. I would have expected it to not call such blatant attention to itself. Second, one bit of malware attempted to run as System but did not have a digital signature that would pass Microsoft's most basic security checks. This is really, really amateurish.

It took a bit of digging, but it was possible to find and excise most of the malware component using nothing other than file searches. Where I hit a wall was with inside that pit of obscurity, the Windows registry. I knew the malware was still hiding in there, able to reactivate itself, but I could do little with the regedit tool without special knowledge. This step required one of those freeware tools for finding and surgically removing malware from the registry.

One tool that is absolutely useless in this regard is Microsoft's own MSRT software (Malicious Software Removal Tool). Never in my experience has MSRT found malware on my computers; it can identity only a small number of malware variants, and seemingly never those that are actually circulating.

In any event, the malware tool I selected had no trouble finding and repairing every infected registry entry, and even located an infected file that my own efforts had missed. That PC once again has a clean bill of health and is humming along ever so quietly, undisturbed by uninvited software.

It just goes to show that even someone with software expertise and safe computing practices can fall victim to malware. The many benefits of the internet are not enjoyed without continued vigilance against its bad actors.

Risks of Flying

Those in Ottawa are likely familiar with the incident last week when a landing airplane overran the runway at the local airport. Luckily there were no serious injuries. This brings to mind a similar incident where I was a passenger on an aircraft that did something eerily similar. It is one of those things that, if you fly often enough -- and I've done a lot of business travel over the years -- is bound to happen.

In the flight I was on the landing hazard was a low ceiling combined with a sudden snow squall. I was in a window seat so I got a pretty good view of the landing as it transpired. I remember the long descent through an unbroken cloud deck, knowing that we had to be getting close to the ground, when we did break through the low ceiling perhaps only a few hundred feet above the ground. The descent continued through the heavy snow fall for a few seconds until we reached the runway lights. Alongside a few dim, snow-covered lights was a flat expanse of white where the runway had to be.

At this point our descent slowed for a moment -- it could be that the pilot was assessing the landing conditions. Then down we went, kicking up thick clouds of snow as be bounced down the runway. The pilots were braking slowly, careful not to lose control as the plane tried to gyrate on the slippery surface. It brought to mind something that a pilot once told me about one of the difficulties of flying a two-engine versus a single-engine plane: you have to finely adjust the thrust of each engine to avoid spinning the craft on a slippery surface. That's one reason why piloting a single-engine airplane requires less training. I suppose modern avionics must simplify this task, but this particular incident occurred many years ago.

I was familiar enough with the airport to know that we were getting near the end of the runway and our speed was still much too high to turn. Then we came to the very last taxiway at the very end of the runway and the pilot made the attempt. It didn't work. The plane made a half turn and proceeded to slide sideways into the field in the angle between the runway and taxiway.

At this point it is worth mentioning just how tough modern aircraft are built. To an unpracticed eye they seem to be terribly fragile machines that are at the whim of the forces of nature. In actuality, the undercarriage of an aircraft, including the wing structure, are probably the strongest part of the whole. After all, we have to remember that the entire weight of the aircraft and dynamic loading due to turbulence are supported in flight by the wings. The small motions of the wing tips look misleadingly ominous while in the air, but really say nothing about the total assembly's strength.

As we slide sideways into the snow and ice-covered field there was a violent shuddering, yet we stayed almost perfectly level. Some of the passengers had just enough time to say "oh!" or to suck air into their lungs in surprise, and then the plane stopped. We weren't about to go anywhere fast, but there were no injuries. A few people wondered what had actually happened since, like many people who fly a lot, they weren't paying any attention during the landing.

The rest of the story is boring since it relates to security and bureaucracy, and much waiting around for things to happen, so I'll skip all of that. We turned out to be the last flight of the evening as the airport authorities, belatedly, shut down the airport and diverted incoming traffic elsewhere until they could get the runways in decent shape. In the media, it is said that "if it bleeds, it leads", so, absent any bleeding or even bruises, the incident got only minor news coverage. It gets one wondering how many more of these minor incidents are never noticed because of the lack of media interest.

Happily, that was the only borderline serious incident I've been directly involved in, and it did not put me off flying a bit. We do tend to remember the few horror stories about flying, but not the vastly greater number of flights where everything ran smoothly. It remains a great way to travel, if you can overlook the tedium of getting to and from the airport and navigating security measures.

Removing Uncertainty

I am surprising myself by writing about BP once more. This time I am motivated by BP's interesting offer to set aside $20B for reparations, and how that number plays against the company's finances. There is little doubt that they were pressured into agreeing to set up this fund, although it may work in their favour. They likely know this, which would explain their rapid compliance with the "request".

Perhaps the most important factor is to take some measure of control of the situation by demonstrating to the market that there is some possibility of limiting company losses. In actuality there is little reason to believe this too strongly since there is nothing in place to limit their criminal and civil liability.

There is some hope that even if their eventual payouts total higher that the company will survive and perhaps even thrive since there is now some indication that the government's international trade and political risk will motivate them to intervene if litigation spirals out of control. That is, they must keep BP healthy and viable to keep a major ally -- the UK -- happy, and they must not scare other exploration companies out of the domestic off-shore business by placing them, too, at infinite risk. The US cannot afford to let that happen. However, it may be many months before they take those steps, after the immediate crisis is over and the public outrage has dropped down a few notches.

Therefore, with some mitigation of the uncertainty surrounding BP's future prospects, the market is once again in a position to properly value the company. The stock price is stabilizing and may even be ready to bottom since the cost of the disaster to BP could be substantially lower than the impact on their market capitalization.

Investors welcomed the removal of uncertainty which has dogged BP ever since the Deepwater Horizon oil rig sank on April 22, sparking an enormous oil leak.

However that itself is insufficient since the immediate setting aside of $20B is no small matter. If we look at the latest financial summary for BP we see that their cash on hand only about one-third of this amount. In contrast their free cash flow is substantial, but much of that goes towards paying dividends. Like any petroleum producer, BP's cash flow is finely balanced between its quarter-to-quarter uncertainty due to the high volatility of crude oil prices, keeping dividends at a stable level, and retaining sufficient working capital to fund the exploration that will secure future revenue.

They could borrow the money, though perhaps at higher than preferred rates, which could hurt them in the long run unless crude prices climb higher. By instead suspending the dividend they immediately retain (if my calculations are approximately correct) about $10B per year. Therefore by temporarily stopping dividend payments they can recover the cost of the $20B fund by early 2012. This is not as painful for shareholders as it first seems since the dividend over two years is only about $6/share, which is small in comparison to the $30 that the shares have shed since the crisis began. In other words, by removing uncertainty with this reparation fund commitment the company stands to recover far more than $6 in their currently-depressed share price. This is certain to happen but it is likely.

“Overall, we believe this announcement is positive and provides some clarity for shareholders,” said Mr. Jackson [head of equities at broker Killik & Co].

“The stock will remain vulnerable until BP manages to block the spill,” he added.

Creation of the fund also goes some way to repair BP's image from poor behaviour both before and after the spill. All they now have to do is end the leak -- by relief well in August -- then hope for beneficial weather and ocean currents, and make good on the clean-up. There is now potential for substantial returns on BP's shares by year-end, although this is not my preferred type of investment.

More on the Disaster Trade

Capital, as it is often and correctly said, is highly mobile; in our global economy capital moves easily around the world to where it can generate the highest return. The disaster in the Gulf of Mexico shows just how real this maxim can be. Less liquid, physical assets can also move though not so readily, but they will move if the capital moves.

Capital held by the petroleum industry is likely to move from the Gulf and other deep, off-shore fields if new regulations (or proper enforcement of existing regulations) becomes fact in the Gulf and other areas. Questions are already being asked -- loudly -- about whether safety measures are adequate on the Grand Banks, the North Sea and in the Beaufort Sea. The questions are timely if many years too late since it is becoming apparent that safety measures and claims of their efficacy are problematic. The problem is not contained to BP, Transocean and other companies involved with Deepwater Horizon.

In the shadow of the disaster I doubt that many if any owners of SUVs are curtailing their use. This matters since if demand remains steady then petroleum capital and physical assets will be reallocated from the Gulf to other properties where supply, and profit, can be maintained. In fact, they are being re-allocated. Some drilling rigs are moving to Nigeria where, interestingly, the oil companies have decided that the relative risk is favourable. There are also fewer calls to forgo oil sands production.

Lower US domestic production will have two important impacts by year-end: increased imports and higher global oil prices. In the first situation, increased US imports could add to political instability as the US works to secure supply from Iraq and other even less desirable locales. In the second situation, the impact may be more positive since higher prices for petroleum products like gasoline will reduce demand. Indeed, this may be the only real effective consumption control until there is a change in culture and the introduction of new energy technologies, both of which will take some time even with cheerleading by Obama.

Mr. Obama also used his speech to call for legislation to break the U.S. addiction to fossil fuels, and shares of solar groups in Germany, a big supplier of cells, rose on hopes of higher alternative energy uptake by the world’s largest economy.

In Canada's case, the impacts will be a little more nuanced. There will be changes to regulation on the Grand Banks, but I suspect that the cost and delay impacts will be muted. While we don't need that oil for domestic consumption -- we're a net exporter -- it is a badly needed "cash crop" to support our economy. I would also bet that Newfoundland and Labrador's government will do what it can to keep the oil flowing. The same goes for Alberta and the oil sands.

While no one in the energy industry wants to be seen as profiting from the nightmare of BP PLC’s spill, MEG’s debut will benefit from the stability of the oil sands, which stands in contrast to the risks now associated with deepwater drilling. One investment banker working with the Canadian company said: “In the wake of what’s happened to BP’s platform in the Gulf of Mexico, investors are placing a premium on long-life oil properties that can be developed safely.”

It will be interesting to see how the federal government juggles domestic economic and environmental interests along with quiet encouragement from Washington to keep the supply stable and growing. The disaster trade will continue to pay for some time to come.

CRTC Cannot Control Content Consumption

The CRTC is beginning to fray at the edges as the government increasingly ignores it in its pursuit of opening up the telecommunications market to competition. The government appears to have the better understanding of what Canadians want -- more and better choices -- and is willing to do what it takes to make it happen, despite what its own regulatory arm is saying and doing.

I believe that it is good for the government to shake things up since we are decades past the time that ownership and Can-con (Canadian content) required draconian government intervention. I also believe that the government does have to move carefully to avoid disruption even if their direction is correct; rapid regulatory changes could cause unwanted volatility in the industry. A measured pace also allows for corrective action in case the wrong steps are taken.

However let's return to the CRTC and the latest statements by its head, Konrad von Finckenstein, which prompted me to suggest that that not all is well within the national regulator. Clearly he is feeling the pressure and wants to put the brakes on the coming changes. First on his agenda is foreign ownership.

The head of Canada's national broadcast regulator warned yesterday of the need for a "massive subsidization" of Canadian content by the federal government if Ottawa moves to allow foreign ownership of telecommunication operators.

This is very explicit and deserving of some scrutiny. Are Can-con and domestic ownership tied?

Failing such a subsidization regime, content created by the broadcasting sector and other culturally sensitive industries would wither to nothing under non-Canadian ownership of the country's distribution businesses, said Konrad von Finckenstein, chairman of the Canadian Radio-television and Telecommunications Commission.

Clearly he thinks this is the case. Not everyone else agrees.

"The fact that cable carriers don't carry the real HBO and do carry the [Canadian]W Network has nothing to do because they're Canadian and want to, it's because the CRTC has told them in both situations what they could and could not do," said Michael Hennessy, senior vice-president of regulatory at Telus Corp. "And it makes no difference whether it's a foreign owner."

Let's get back to the basics of just what the CRTC regulates. We can summarize these as follows:

• Compel or fund the production of Can-con
• Compel consumption of Can-con

The Telecommunications Act enables them to do both, and they have done so for a very long time. This is nothing more than intervening in the industry to manage both supply and demand, respectively, all in the service of Can-con. This has nothing to do with ownership -- as Hennessy says quite clearly -- but one of regulatory mandate. Where I believe von Finckenstein's argument goes off the rails, as exemplified by this recent article in Techdirt, is to confuse access and content. As von Finckenstein puts it:

"Our system right now is based on control of access. If you take that away because you let foreigners in, you run the danger of our broadcast industry being overtaken by foreigners and they would obviously produce as little content as they could get away with," he said. "If you want to get [Canadian content] sufficiently funded, would you then not have to have a scheme of subsidizing or financing in order to get the Canadian programming you get right now?"

What appears to have spurred this bizarre position is one that I covered recently: convergence. He sees that telecommunications (access) and broadcasting (access and content) are converging due to the internet, with its majority of easily-accessed non-Canadian content. There has also been a steady ramp upward in non-Canadian content availability via cable television. He is correct that Can-con is at some risk in the future, even the near future, and that the CRTC is losing control of supply and demand. Ownership, however, isn't the problem.

Unlike Hennessy's view, mine is that ownership won't matter since the internet changes everything. No, not instantly, but it will change. While I don't have a reference at hand, TV viewership is declining as people, especially the young, shift to gaming (alternative entertainment) and other media sources (video and other content). The CRTC's ability to regulate supply and demand of content over the internet is woefully poor, especially the demand side of the equation. This holds regardless of whether the access providers are domestically owned and controlled, unless the CRTC proposes to censor the internet with mandatory content filtering, which would be doomed both technologically and politically.

Yet Can-con isn't in the dire straits it was a half-century ago when, for example, Canadian musicians did have some difficulty getting air-time. The problem was that broadcasters believed that Canadians wanted foreign acts and many Canadians were not always aware of or supportive of domestic talent. It had nothing to do with broadcaster ownership. Further, the cultural issues that existed then do not exist now since, for the most part, Canadians do recognize and appreciate Canadian talent even as they pursue other content as well. However when it comes to television and Canadian programming there is a distinct preference for US content, and no amount of CRTC-mandated production funding and mandated air-time (including CBC's own tax-funded efforts) will make a large dent in the market. It's not as if we don't want Canadian content, just not quite of the type and quantity that the CRTC seems to prefer.

Not only will there be Can-con over the internet, there will be more since more content producers can reach an audience without requiring the broadcasters as a channel to their market. Even if the the CRTC does force the collection of content funds from broadband consumers (taxation if you will), it can no longer guarantee an audience since there is no longer a supply line that they can control. The current Conservative government, while it seems to understand this point, doesn't care anyway since they are biased against market intervention, including some animosity toward the CBC. CRTC Chairman von Finckenstein is trying to stem a technological and popular tide of overwhelming strength. No wonder he sounds so desperate.

I think it will all turn out well in the end. There will be convergence and an increase in Canadian content and consumer choice of content. CRTC will have to, eventually, restrict themselves to regulating access and promoting access competition, not obsessing about the ownership red herring, and playing only a modest role, if any, in funding content.

Toronto the Blue

With Toronto getting ready to host the G20 summit later this month there has been enormous attention given to the costs of holding it in Toronto, costs that are both direct ($1B) and indirect (unknown). Figuring out how much of the $1B of direct costs is truly one-time items is difficult to determine from the outside, but it is still going to be costly. It is of course money that is simply being reallocated from the general tax base to selected points within our domestic economy so the money is not being lost, though perhaps not used to best immediate effect.

The indirect costs are more interesting in that they fall almost exclusively on the shoulders of Toronto residents and businesses. These are potential risks of physical damage due to protests and official security measures, and the loss of economic activity during the summit due to both mandatory and voluntary shut downs of urban space and businesses. Even the Blue Jays are leaving town.

Questions are being asked all around as to the sense of holding this summit in any urban centre due to the excessive security requirements and economic disruption. It's especially curious since the summit participants and the media covering the summit will almost certainly pay no attention at all to the city, and indeed will find it difficult to exit the summit security bubble to see any of it, and of course residents and protesters will be kept quite firmly outside the bubble. This pretty much ensures that any damage caused by protests will fall on the citizenry and their livelihoods, not on the intended audience.

As the government insists that this is all good for Toronto by allegedly giving a boost to future tourism, they are also adamant that they will not cover any of the direct and indirect costs to residents and businesses caused by their activities or those of the protesters. There is no evidence to support that there will be any future boost to tourism, and certainly not that any such boost will compensate for the immediate cost of the summit. It is therefore reasonable to then ask why the government is so steadfast in its position that this summit must be held in Toronto, no matter the cost to taxpayers or to Toronto? I think I have the answer.

A quick perusal of the representation in Parliament for Toronto ridings, especially the more urban 416-area, is a sea or red and orange: Liberal and NDP. Perhaps the message is that if you don't vote Conservative they will gift your city an international summit, complete with their following horde of firebomb-wielding anarchists and malcontents. Consider yourselves warned.

Raising Government Revenue

With governments around the world running large deficits, there is one common reaction from some quarters: raise taxes. That is, cover the deficit with increased revenue and protect programs and public institutions; taxes are a government's primary source of revenue. This applies in Canada just as much as it does in other countries. Adding to public debt can only be tolerated while servicing costs are affordable and there are willing lenders; Greece and other countries are now testing those limits.

Assuming that additional debt must be avoided and program cuts are politically difficult, there remains the solution of increasing revenue through taxation. The questions then are: who to tax, what to tax, and how much? This is tricky since many people are quite comfortable when the tax burden falls anywhere other than themselves. Thus there are two always popular targets, corporations and wealthy individuals, since they either don't vote or are in the minority, respectively.

“Taxing the rich is never an unpopular slogan,” Maxwell [a KPMG partner in Zurich who follows global taxes] said.

“It’s awful easy to push a tax increase that affects a minority of the populace,” [Scott Pattison, executive director of the National Association of State Budget Officers in Washington] said.

Regrettably, neither approach to increasing government revenue works. Our political leaders -- who are not stupid -- know this, but when it suits their agenda or official party platform they do not hesitate to push these ideas. One perennial example that comes to mind is Jack Layton and the NDP.

Rather than refer back to my own writings on taxing corporations, let me instead direct you to an article that surprised me since it was written by none other than temporarily-disgraced Conservative ex-minister Maxime Bernier. Considering his political affiliation it is not a surprise that he'd be against corporate taxation. What did surprise me is how clearly he states his position in that opinion piece since, from this unfortunate public persona, I did not think him capable of it. Granted that the article is almost simplistic in its content, it is still in tune with my own position: taxing corporations costs taxpayers money today and tomorrow, and makes our economy uncompetitive on the global scene.

If we agree to put aside corporate tax increases, we next turn to wealthy individuals. Obvious targets are capital gains taxes, top-income bracket income taxes and wealth taxes (taxing assets rather than income). There are a few problems with these. First, in an economic downturn, the income of the wealthy declines precipitously because their income is closely tied to the profitability of the business sector. Second, they can shift their residency to jurisdictions with lower taxation rates. A number of European countries learned this lesson the hard way a few decades back by driving many of their most wealthy citizens to move themselves and their assets beyond their native government's reach. Third, despite some public misconceptions, the wealthy are not in a position to make the government whole; the large bulk of the wealth in developed western democracies is held by the middle class.

Whether we go after corporations or the rich, we have a problem since both personal and corporate incomes drop faster than the overall decline in economic activity (think profit, not revenue), and a large part of government revenue is derived from income, not transactions or assets.

“We don’t have a revenue problem,” Christie [New Jersey, Republican Governor] said. “We have a spending problem and a size-of-government problem. We have to start saying no.”

Or, instead of saying "no", the government needs to get the economy on the recovery track so that income and therefore tax revenue return to normal levels. That's why Canada and other countries have taken this route with short-term stimulus, and not taxed us more heavily. Studies of the Great Depression have shown that the knee-jerk reaction to maintain revenue in the face of the start of an economic decline is what pushed the world into that depression.

Stimulating ourselves away from a depression is a bit of an experimental approach, but so far so good. Hopefully, talk of tax increases by some pundits and politicians will remain just that: talk.

AT&T and Usage-Based Billing

I admit that I have been astounded at the amount of media attention and public ire directed at AT&T for its intention to eliminate unlimited wireless data plan. It is a significant development, but not earth shattering. Besides, their unlimited plan -- like those of nearly every carrier and ISP, including wireline broadband -- was never truly unlimited.

What seems to be fueling the media attention is that the often, though improperly, tied issues of network neutrality and usage-based billing are interpreted as a morality play. That is, the evil corporations versus the good people, or the evil file sharers and video addicts versus decent businesses just trying to earn a reasonable profit. This emotionalism is not only misplaced but very silly.

There is an enduring animosity by many towards the former telco monopolies (and their somewhat-oligopoly present) that breeds distrust. Although that distrust is often justified, or at least requires continued consumer vigilance, these are still simply business trying to both please their shareholders and their customers by offering services that are useful and valuable. Good and evil have nothing to do with it, except to distract attention from what I believe are the real issues: competition vs. regulation. I have certainly harped on this before.

Instead we get uninformed opinion about network engineering and the role of government in a (hopefully) free market. It seems there is an inverse relationship between expert knowledge and willingness to spout strong opinions. How many consumers really understand network engineering, engineering economics, law and regulatory process? Not many it seems if I can go by what I've been reading. This isn't surprising since they are complex and nuanced fields that can seem misleadingly accessible to non-experts.

I sometimes have to shake my head at some of the wrong-headed, off-the-cuff attempts by a few to tell the carriers how to engineer and build their networks. As with BP's woes in the Gulf of Mexico where there are newly-minted media "experts" assessing and making recommendations about junk shots, top kills and capping -- which is entirely pointless -- when their focus ought to be on the desired outcome of stopping the leak, AT&T subscribers and industry observers should be less concerned with dictating to AT&T's network engineers and business managers, and focus instead on the desired outcome of a vibrant competitive market for mobile and wireless data services.

However, my intent is not to lambaste those that are reacting to the AT&T announcement -- there are real concerns that deserve a hearing -- but to suggest that it is more worthwhile to focus on competitive market forces and recognize that businesses do deserve the opportunity to profit from their operations. In a free market no one is entitled to specific outcomes. If we can, all of us -- service providers and consumers -- should strive to keep the regulator at some remove since when they do get involved it typically only serves to distort the market and ultimately satisfy no one.

AT&T is not evil, just another old and perhaps venerable corporation adjusting to new market realities. They are doing a lot of things right and a lot of things wrong. That's their business, and it is in the hands of their shareholders and managers. If they stumble badly, consumers do have some alternative choices. Their primary dilemma is perhaps summed up by this point:

After this announcement AT&T is still a dumb pipe, and I think they’ve come to the conclusion that this isn’t going to change.

This is exactly right. As a dumb pipe they have little choice but to bill for use of their network since their ability to charge a premium for value-added services, even ordinary voice calls, is rapidly declining. Unfortunately they are not yet doing it right with their current price tiers since -- regardless of the specific data volumes and price points -- because you aren't warned when you cross a boundary. This unpredictability of mobile phone bills is already a major issue and it will only get worse now that the government's attention has been drawn by broad-based public outrage: pretty much everybody has a mobile phone and they vote. This is one area where I feel confident in predicting that carriers in the US will follow the European example of warning users when they approach rate boundaries.

Unfortunately the problem here in Canada is worse and is unlikely to be be resolved as quickly. Our prices are higher and will remain higher until competition takes hold. Even then the prospects are uncertain. Hopefully the US lesson that is about to be learned will influence the CRTC. But don't hold your breath.

Gmail Is Just Email

I hope this story is true. Out of necessity I have a few Gmail accounts, and apart from the large storage offered I have always hated it. It isn't that it doesn't work well (other than the occasional outage). It's that they went with an interesting set of ideas to reinvent the email user experience (UX) that I find so non-intuitive that this software geek finds it extraordinary irritating.

Feature like conversations (per the referenced article by Henry Blodget), tags and other peculiarities are very interesting ideas. They are also just not what most users expect or, in many cases, will accept. They gave way some time back by offering folders -- just like other email systems -- which I found to be a great relief. Google seemed to be so enamoured of search that they expected the insertion of a few key attributes (tags and keywords) and auto-linking of messages (conversations, or threads) would allow users to find what they needed via a search box.

It was all very interesting and worth the experiment, but apart from what seems to be a minority of enthusiasts for this approach, Gmail's peculiarities have been mostly tolerated, not appreciated. Google is slow if not resistant to user feedback, and I wondered if they would ever change Gmail's UX any further.

Even if this latest change bruises a few egos among their staff, it is worthwhile. I applaud them for doing it since it will most likely benefit them (and me). As they found with their mass storage offer, there are ways to differentiate their services other than adopting innovative, though non-intuitive, UX strategies.