Bring red flags, lots of red flags – part I: "the Tesla of education companies"

[This buzzword-filled and often somewhat patronizing (particularly at the beginning) New York Times Magazine account of entrepreneurs and Ivy League grads from the USA rescuing the poor children of Africa from poverty and ignorance is so filled with disturbing details, portents of disaster, and indications of general bullshit that we will need to take more than one pass at this.]

Occasionally in one of these hype-tastic articles, you get a moment of apparently unintentional truth so startling that you wonder if the author is winking at you. This piece has a number of these moments, but perhaps the most striking comes near the beginning:

Bridge operates 405 schools in Kenya, educating children from preschool through eighth grade, for a fee of between $54 and $126 per year, depending on the location of the school. It was founded in 2007 by May and her husband, Jay Kimmelman, along with a friend, Phil Frei. From early on, the founders’ plans for the world’s poor were audacious. ‘‘An aggressive start-up company that could figure out how to profitably deliver education at a high quality for less than $5 a month could radically disrupt the status quo in education for these 700 million children and ultimately create what could be a billion-dollar new global education company,’’ Kimmelman said in 2014. Just as titans in Silicon Valley were remaking communication and commerce, Bridge founders promised to revolutionize primary-school education. ‘‘It’s the Tesla of education companies,’’ says Whitney Tilson, a Bridge investor and hedge-fund manager in New York who helped found Teach for America and is a vocal supporter of charter schools.

In some ways, the analogy could hardly be further off. Tesla makes a product; Bridge provides a service. Tesla is a luxury brand; Bridge is supposed to serve the extremely poor. Tesla's strategy has been to establish a foothold by targeting a very small niche market; Bridge has always been broad-based. Tesla was notable for competing directly with huge, well established companies; Bridge is targeting an underserved market (and doing so with the cooperation of huge, well-established companies).

In another ways though, the comparison could not be more apt. With the possible exception of Uber, there is no company that has made more out of hype, buzzwords, and modern myths as has Tesla. [From the essential  Brent Goldfarb analysis]:

Silicon Valley investors love to talk about “disruption” — they are besotted with the storyline of small, scrappy, high-tech underdogs upending boring “legacy” corporations. And nowhere is this disruption fetish more evident than in the valuation of Tesla, maker of expensive, well-reviewed electric cars that bestow status on their owners.

Recently, Tesla’s valuation surpassed both Ford’s and General Motors’. BMW is among the other major carmakers in the rearview mirror. The logic of this is intriguing, given that Ford, for example, is coming off its second-best year in its 112-year history, earning $4.6 billion while selling more than 5.5 million cars worldwide. General Motors earned $9.4 billion selling 9.8 million vehicles.

Tesla, meanwhile, sold 76,000 cars while losing near $1 billion. Judged by the valuation, anyway, Tesla appears to be the first successful American entrant into the automobile industry since Chrysler in 1922.

Tesla's paths to profitability are murky. Its chances of justifying its valuation are virtually nonexistent. For all the fanfare, it doesn't even dominate the electric vehicle market. When you strip away all the smoke and mirrors, perhaps the most notable thing about the company is the $99 million in compensation it provides for its CEO.

Mr. Tilson is almost certainly trying to invoke the myth of Tesla, but I'm not sure the real Tesla won't turn out to be a better fit.

Murphy Apartments

[Actually, the bathroom analogy does a much better job making a similar point. Damn you, Joseph!]

The following is some combination of actual ideas, satiric commentary, and just me yanking people's
I was thinking about writing a post with the title "why aren't we seeing Murphy beds?" when I actually saw a store selling upscale, urban-chic Murphy beds.Rather than let events get a jump on me again, this time I'm going to throw deep and talk about applying the Murphy bed principle on a much larger scale.

I've noticed that a lot of advocates for things like zip car and rideshare services like to point out how little time per day the average car owner actually spends behind the wheel. Putting aside concerns with the hours-per-week metric, what's strange about this argument is the implication that it particularly applies to automobiles. With a handful of exceptions, how many things do you own that are actively in use more than a few hours a week?

One obvious exception is your residence, but what if we think in terms of individual rooms? Even the non-claustrophobic need a certain amount of space. Maybe in the near future, we can get around this with virtual-reality, but, for now, I don't think it's realistic to convince people to spend time in much smaller rooms than they currently find acceptable.

We do, however, have the technology to change the dimensions of rooms while they are not being occupied. Obviously, there would be some details to work out but Broadway set designers have been doing this sort of thing for years. With a combination of moving walls and furniture that collapses or moves out of the way like a Murphy bed, you could have an apartment where the space allotted to each room changes depending on the situation. For instance you could have a bedroom that goes from spacious to cramped to wall against wall.

Of course, this would allow you to get by with roughly the same lifestyle in a much smaller place, but the more interesting application lets us bring a market-based solution into the picture. What if you could set a price on how much space was worth to you on a day by day basis? When you need more space, pay the neighbors to let you move the walls out a few feet. When money is tight, squeeze in a bit. And when you're away for the weekend, reduce your floorspace to the absolute minimum.

I can't see any way around the monopoly/monopsony problem and clearly, there would be loads of other issues to work out with this but, it can't be any less practical than some of the other solutions we've been hearing.

chains. If some of these ideas actually pan out (stranger things have happened), I plan to claim that I knew it all along.]

With all the talk of insanely expensive housing prices in places like San Francisco and New York, I've been wondering when we would see an upscale, urban-chic version of the Murphy bed.




.

An analogy for self-driving cars

This is Joseph

I see this sentiment a lot with self-driving cars:

Many industry observers, yours truly included, believe autonomous vehicles have the potential to be far more disruptive than EVs, because they upend the logic of automobile ownership. Most cars sit idle at least 20 hours a day, which is incredible wasteful. But if you could simply summon a private, robot car at will, utilization would increase. This, in turn, has the potential to make mobility much cheaper — it’s public transportation on steroids!

I am not going to say that this idea is wrong.   But let's consider something else that is idle 20 hours per day, has both public and private versions, and there could be efficiencies in reducing duplication of facilities.  I speak of the restroom.

It is immediately obvious that we could make plumbing a lot more efficient if we had a public restroom building on each block and no restrooms in houses.  Or shared restrooms for hotels and apartments.  Restrooms spend a lot of time empty and we could make houses smaller/cheaper if we did not include them.

Why don't we do this?

1. Queuing -- people often want to use the shower or toilet at similar times of the day (say the morning before work)
2. Convenience -- even if the walk is short, it's shorter to have the toilet inside your own house
3. Upkeep -- who is responsible for cleaning and repairing the facilities, especially at 2 am when somebody gets sick
4. Privacy -- people like private spaces
5. Customization -- maybe you want a handicapped shower or a bigger mirror

This doesn't mean we don't have public restrooms.  We do.  But we are also in no danger of replacing the personally owned restroom with the public version.  And I think a lot of the same objection apply to this transition.  

Now this is an analogy -- it's not exact.  But I think we can immediately see that there are reasons that the robot car model might have issues with implementation.  Now, this doesn't mean people won't own their own robot cars -- they sure will.  But the public transportation fleet of robot cars is going to either be a company or the government (today's options).  

So maybe this innovation will happen.  But it would be most successful among income constrained urban dwellers.  These are also people most likely to share other things.  But the road to instantly summoned robot cars is not absolutely clear without a lot more coordination than I expect to see.  

A hump-day post from Charles Mackay

I'm rereading Extraordinary Popular Delusions and the Madness of Crowds and I am struck once again by what a fine novelist's eye Mackay had. As he himself puts it "Many other anecdotes are related, which even, though they may be a little exaggerated, are nevertheless worth preserving, as showing the spirit of that singular period.":

Law was now at the zenith of his prosperity, and the people were rapidly approaching the zenith of their infatuation. The highest and the lowest classes were alike filled with a vision of boundless wealth. There was not a person of note among the aristocracy, with the exception of the Duke of St. Simon and Marshal Villars, who was not engaged in buying or selling stock. People of every age and sex, and condition in life, speculated in the rise and fall of the Mississippi bonds. The Rue de Quincampoix was the grand resort of the jobbers, and it being a narrow, inconvenient street, accidents continually occurred in it, from the tremendous pressure of the crowd. Houses in it, worth, in ordinary times, a thousand livres of yearly rent, yielded as much as twelve or sixteen thousand. A cobbler, who had a stall in it, gained about two hundred livres a day by letting it out, and furnishing writing materials to brokers and their clients. The story goes, that a hump-backed man who stood in the street gained considerable sums by lending his hump as a writing-desk to the eager speculators! The great concourse of persons who assembled to do business brought a still greater concourse of spectators. These again drew all the thieves and immoral characters of Paris to the spot, and constant riots and disturbances took place. At nightfall, it was often found necessary to send a troop of soldiers to clear the street.

 Law, finding the inconvenience of his residence, removed to the Place Vendome, whither the crowd of agioteurs followed him. That spacious square soon became as thronged as the Rue de Quincampoix: from morning to night it presented the appearance of a fair. Booths and tents were erected for the transaction of business and the sale of refreshments, and gamblers with their roulette tables stationed themselves in the very middle of the place, and reaped a golden, or rather a paper, harvest from the throng. The Boulevards and public gardens were forsaken; parties of pleasure took their walks in preference in the Place Vendome, which became the fashionable lounge of the idle, as well as the general rendezvous of the busy. The noise was so great all day, that the Chancellor, whose court was situated in the square, complained to the Regent and the municipality, that he could not hear the advocates. Law, when applied to, expressed his willingness to aid in the removal of the nuisance, and for this purpose entered into a treaty with the Prince de Carignan for the Hotel de Soissons, which had a garden of several acres in the rear. A bargain was concluded, by which Law became the purchaser of the hotel, at an enormous price, the Prince reserving to himself the magnificent gardens as a new source of profit. They contained some fine statues and several fountains, and were altogether laid out with much taste. As soon as Law was installed in his new abode, an edict was published, forbidding all persons to buy or sell stock anywhere but in the gardens of the Hotel de Soissons. In the midst among the trees, about five hundred small tents and pavilions were erected, for the convenience of the stock-jobbers. Their various colours, the gay ribands and banners which floated from them, the busy crowds which passed continually in and out—the incessant hum of voices, the noise, the music, and the strange mixture of business and pleasure on the countenances of the throng, all combined to give the place an air of enchantment that quite enraptured the Parisians. The Prince de Carignan made enormous profits while the delusion lasted. Each tent was let at the rate of five hundred livres a month; and, as there were at least five hundred of them, his monthly revenue from this source alone must have amounted to 250,000 livres, or upwards of 10,000 pounds sterling.

 The honest old soldier, Marshal Villars, was so vexed to see the folly which had smitten his countrymen, that he never could speak with temper on the subject. Passing one day through the Place Vendome in his carriage, the choleric gentleman was so annoyed at the infatuation of the people, that he abruptly ordered his coachman to stop, and, putting his head out of the carriage window, harangued them for full half an hour on their "disgusting avarice." This was not a very wise proceeding on his part. Hisses and shouts of laughter resounded from every side, and jokes without number were aimed at him. There being at last strong symptoms that something more tangible was flying through the air in the direction of his head, Marshal was glad to drive on. He never again repeated the experiment.

 Two sober, quiet, and philosophic men of letters, M. de la Motte and the Abbe Terrason, congratulated each other, that they, at least, were free from this strange infatuation. A few days afterwards, as the worthy Abbe was coming out of the Hotel de Soissons, whither he had gone to buy shares in the Mississippi, whom should he see but his friend La Motte entering for the same purpose. "Ha!" said the Abbe, smiling, "is that you?" "Yes," said La Motte, pushing past him as fast as he was able; "and can that be you?" The next time the two scholars met, they talked of philosophy, of science, and of religion, but neither had courage for a long time to breathe one syllable about the Mississippi. At last, when it was mentioned, they agreed that a man ought never to swear against his doing any one thing, and that there was no sort of extravagance of which even a wise man was not capable.

Asking me not to overbill you means you hate children

I always like to preface these stories of education reform abuse with a reminder that the vast majority of people on both sides of this issue are motivated by a sincere desire to improve the lives of children. Unfortunately, this assumption of goodwill is often very much lacking in the reform movement. Instead, movement reformers all too often assume that people who oppose them are motivated by self-interest, fear of change, etc., while (and this is the really dangerous part) their allies are as dedicated and sincere as they are.

As a result, the movement has been defenseless against truly sleazy operators. In this recent case from Ohio, a major political donor set up an enterprise that allowed him to divert tens of millions of dollars to his side businesses. Then, when caught overbilling the state, he fell back on the human shield defense, running ads that suggested that attempts to make him pay back the money he owes are somehow attacks on Ohio's children (with added chutzpah points for doing it with taxpayer money).

From a report in the Columbus Dispatch by Bill Bush.

Even after ECOT announced that it will lay off 350 workers within weeks, the internet charter school continues to use taxpayer dollars for a barrage of television ads attacking the Ohio Department of Education’s decision to claw back $60.4 million because of the charter’s poor attendance records.

“The Ohio Department of Education wants to end school choice and stop parents from deciding what’s best for their children,” says a former student identified in the ECOT ad as Lionel Morales, a 2017 graduate, in an ad airing in Columbus. The end of the ad is signed “Ohio’s children.”

“That’s why I and the over 36,000 students and alumni of ECOT are hoping our elected leaders fix what’s broken and save our school.”

“Sadly, the Ohio Department of Education says many of us don’t count,” Morales says.

The department said it is ECOT that wasn’t counting how many kids actually participated in classwork after logging in. The department found that ECOT had overbilled the state, invoicing for more than double the number of students it could document.

...

Even before ECOT turned to the airwaves to fight the state over its funding, the school was a big advertiser. The Dispatch reported in 2015 that ECOT spent $2.27 million on advertising to attract students, about 2 percent of its state tax receipts.

But it is unclear whether a school district can legally spend tax money on political ads to urge the legislature to take action.

In the case of ECOT, if the ad campaign succeeds, the tax revenue spent on it could help protect the profit of ECOT founder William Lager via two for-profit companies, IQ Innovations and Altair Learning Management. According to ECOT’s latest audit, for the 2015-16 school year, the school paid the two firms almost $22 million, or about one-fifth of all the tax revenue the school received. Altair is paid to manage the school, while IQ Innovations provides curriculum software.

By comparison, it spent about $47.2 million on salaries, 43 percent of revenue, the audit states.

Lager is one of Ohio’s largest political donors to the GOP, having rained millions of dollars on Ohio politicians.

By the way, this is not our first post on the good people at ECOT or on Ohio's charter school issues.

The Goop criteria

There's a lot of good reporting by Beth Skwarecki in this long but never boring expose of the Gwyneth Paltrow pseudoscience empire (which is still respectable enough for New York Magazine). Difficult to single out the best part, but this exchange struck me as especially pertinent to some of our previous discussions of science journalism.

When Goop publishes something weird or, worse, harmful, I often find myself wondering what are they thinking? Recently, on Jimmy Kimmel, Gwyneth laughed at some of the newsletter’s weirder recommendations and said “I don’t know what the fuck we talk about.” I know Goop is Gwyneth’s brainchild, but I also know a woman of her status does not write a weekly newsletter by herself.

Luckily, there is an “Ask Me Anything” stop staffed with Goop editors. They lounge on white-cushioned chairs, under umbrellas for shade, and are dressed in light blue button-down shirts. The editors are mobbed all day. Whenever I stop by to eavesdrop, it sounds like attendees are pitching them products to feature.

I find the station quiet during one of the more popular talks, and end up speaking with editorial director Nandita Khanna. “You publish a lot of things that are outside of the mainstream. What are your criteria for determining that something is safe and ethical to recommend?”

Khanna starts by pointing out that they include a disclaimer at the bottom of health articles. This is true. It reads:

    The views expressed in this article intend to highlight alternative studies and induce conversation. They are the views of the author and do not necessarily represent the views of goop, and are for informational purposes only, even if and to the extent that this article features the advice of physicians and medical practitioners. This article is not, nor is it intended to be, a substitute for professional medical advice, diagnosis, or treatment, and should never be relied upon for specific medical advice.

Okay, but how do you decide that something is worth including in Goop to begin with? “We definitely do our homework,” she says, and insists that the team extensively discusses and researches the things that end up in the pages of Goop. She won’t go into detail about the process, but she points out that some of their sources are doctors. Do you ever ask the doctors to vet new ideas? I ask. Yes, she says, often.

But she says they don’t have any specific guidelines. Sometimes Gwyneth will say she doesn’t think this or that story is the right one to tell, or maybe it’s not the right time to tell it.

So I ask: “What responsibility do you believe you have to your readers?” Here at Lifehacker, I recently killed a post I was excited about—a trick for stopping kids from unbuckling and escaping from their car seat—after a car seat expert nixed it. I feel like if I’m providing information people might act on, I have a responsibility to make sure that information is reasonably accurate and that people won’t hurt themselves (or their children) if they take me at my word.

Goop’s editors don’t see it that way. “Our responsibility is to ask questions, to start the conversation,” Khanna says. Even if the product or advice doesn’t work? “I think it’s up to each person to decide what works for them,” says another editor sitting nearby. Khanna agrees. “Medicine is so subjective.”

(Medicine, actually, is not subjective in this way. The point of randomized controlled trials, a key concept in medical research, is to set aside subjectivity and figure out what’s useful and what’s a waste of time. Nobody here, staff or attendees, seems even the least bit interested in separating the worthwhile stuff from the garbage.) [I'm not crazy about Skwarecki's phrasing here (I would have mentioned double blinding, placebo effects and the need for well defined objective metrics), but the basic point is important -- MP]

I turn the conversation to Goop’s infamous jade eggs. They are for sale that day in the pharmacy shop, and I got to hold one in my hand. It was smaller than I expected, not the size of a chicken egg but more like a grape tomato. Both the jade and rose quartz eggs have a hole drilled through the smaller end, and at first I imagined a Goop acolyte taking the egg out of her vagina, rinsing it off, and hanging it around her neck. I learned later that the hole is the answer to the question in the jar: you can attach dental floss to give it a removal string, like a tampon.

The idea of the jade egg, or its prettier rose quartz companion, is to “cultivate sexual energy, increase orgasm, balance the cycle, stimulate key reflexology around vaginal walls.” The grain of truth here is that using a small weight for vaginal exercises can help strengthen the muscles in that area. You can do this without a weight, too.

But Jen Gunter, a practicing gynecologist who is one of Gwyneth’s most vocal critics, has explained that jade eggs are a terrible idea. Stones can be porous enough to grow bacteria, and she says the instructions for using the egg are incorrect and could harm people. For example, a Goop article suggests walking around with the egg inside of you. Gunter counters that overworking your vaginal muscles this way can result in pelvic pain.

The Goop editors remember the jade egg backlash, and they are unfazed. “Did you read the letter from Layla?” Khanna asks. Layla Martin, who sells jade eggs and a seven-week course on how to use them, wrote a 2,000-word “letter to the editors” defending the eggs. Goop published it in their newsletter, and underneath it, their disclaimer, and underneath that, a link to their shop.

Khanna says they “never considered backing down.” She points out, as if it were a defense, that the eggs were very popular and sold out right away. I ask her: Has there ever been a health article in Goop that you thought afterward, maybe we shouldn’t have run that?

No, she says, never.

The sad part is that New York Magazine would probably write a puff piece for it

Assuming Colbert could line up a celebrity business partner. [If you want actual journalism on Paltrow's pseudoscience, check out this excellent piece by Beth Skwarecki.]

An evergreen quote

This is Joseph.

I juts ran across this quote by Matt Yglesias while reading another article:

But it is entirely emblematic of America’s post-Reagan treatment of business regulation. What a wealthy and powerful person faced with a legal impediment to moneymaking is supposed to do is work with a lawyer to devise clever means of subverting the purpose of the law. If you end up getting caught, the attempted subversion will be construed as a mitigating (it’s a gray area!) rather than aggravating factor. Your punishment will probably be light and will certainly not involve anything more than money. You already have plenty of money, and your plan is to get even more. So why not?

And if  you think that this isn't the case, consider Wells Fargo:

These payouts are on top of the $3.2 million Wells Fargo has paid to customers over 130,000 accounts over potentially unauthorized accounts. That works out to a refund of roughly $25 per account.

Now any one case can be pretty nuanced.  Maybe this settlement is fine.  But does this really look like the sort of penalty that would really discourage any sort of future wrong doing?

There are several reasons to punish bad behavior in a white collar context -- mostly to make it possible to have a fair and free market.  But the punishments need to be at least severe enough that bad actions are discouraged.  Responsibility should not be only for the powerless and the middle class.  I am all for being compassionate about mistakes, but I would like to see compassion across the spectrum, and not isolated to large corporate actors.

This 2016 post on journalistic homogeneity has just gotten relevant again

[When reading the overheated coverage of the Whole Foods acquisition, remember that the chain's relatively few locations are heavily concentrated in the same areas where journalists are over-represented. And yes, Terre Haute is out of luck.]

Location continued

Dean Dad points us to something I wish I had seen before writing the other location, location, location posts.

But with the shift in production has come a shift in geography.  As Joshua Benton’s recent piece notes, jobs in the new journalism are much more concentrated on the coasts than jobs in the old journalism are.  In a recent survey, almost 40 percent of the digital journalism jobs in America were physically based in the New York City and D.C. metros.  That’s compared to less than 10 percent of the jobs in television journalism.  Terre Haute may have a local news team, but it probably doesn’t have a freestanding digital news provider of any size.

I can't really recommend the rest of the Benton piece (too much conventional wisdom for my taste), but he deserves credit for digging up that remarkably telling statistic.

Pretty much all of us news-junkies consume the product on at least two levels: local and national. Ideally, the second should reflect a broad awareness and understanding of the parts that make up the first, not to mention the social and economic strata that make up the parts. This is extremely difficult when the people covering national stories tend to be geographically concentrated, particularly when they also tend to be economically and culturally homogeneous.

Of course,  we have to be careful about overgeneralizing -- there are, for example, food bloggers who just write about local scenes – but digital journalists play a big role in the discussion of national topics like transportation, and those journalists are disproportionately located in those two cities, as are the major print publications that dominate the national discourse. All of this is contributing to debates where not only do all of the participants have the same frame of reference; they are increasingly unable to imagine anyone having a different one.

If I lived in NYC or DC or San Francisco, I could imagine giving up my car and relying on Uber and public transportation. And if I and everyone I associated with lived in NYC or DC or San Francisco, some of the more optimistic Uber business scenarios might strike me as credible.

Aspect dominance, competitive landscapes, and other reasons why the Amazon acquisition of whole foods may not be that big of a deal.

Also ran this one in the food blog.

First off, let's look at some numbers.
[From Wikipedia]

National chains
    Albertsons LLC - 2,400 stores; besides the parent company, some stores are operated under the banners: Acme Markets, Carrs, Jewel-Osco, Lucky, Pavilions, Randalls and Tom Thumb, Safeway Inc., Shaw's and Star Market, United Supermarkets and Market Street, and Vons
    Aldi - 1,401 stores;
    Costco - approximately 500 warehouse stores in the USA, plus 200 elsewhere
    Ahold Delhaize - 2265 stores under the following brands.
        Food Lion (1098 stores in Delaware, Georgia, Maryland, Pennsylvania, Tennessee, West Virginia, Kentucky, North Carolina, South Carolina, Virginia)
        Hannaford (188 stores in Maine, Massachusetts, New Hampshire, New York and Vermont)
        Giant-Carlisle (197 stores in Pennsylvania, Maryland, Virginia and West Virginia)
        Giant-Landover (169 stores in Delaware, District of Columbia, Maryland and Virginia)
        Stop & Shop (416 stores in New York Metro: Connecticut, New Jersey, New York, New England: Connecticut, Massachusetts and Rhode Island)
        Martin's Food Markets (197 stores in Pennsylvania, Virginia, Maryland, and West Virginia)
    Kmart Super Center - 624 stores
    Kroger - 2,460 stores; besides the parent company, stores operate under Baker's Supermarkets, City Market, Dillons Supermarkets, Food 4 Less, Foods Co., Fred Meyer (technically a hypermarket), Fry's Food & Drug, Gerbes Super Markets, Harris Teeter, Jay C, King Soopers, Owen's, Pay Less Super Markets, QFC, Ralphs, Roundy's, Ruler Foods, Scott's, and Smith's
    Schnucks - 100+ Stores
    SpartanNash - operates 167 retail stores in 44 states, Europe, Latin America, and the Middle East
    SuperValu Inc. - 1,582 stores (691 corporate and 891 franchised stores); the Save-A-Lot name is its most common banner; others are Cub, Farm Fresh, Hornbacher's, Shop 'n Save and Shoppers
    SuperTarget - 251 stores
    Trader Joe's - 457 stores (as of April 22, 2015)
    Walmart - 3522 stores + 699 Neighborhood Markets + 660 Sam's Clubs (as of January 31, 2017)
    Whole Foods - 430 stores (as of June 14, 2016)

Add in a ton of local and regional players and it becomes evident that Whole Foods is not that big of a slice. 



The distorting effects of aspect dominance
.
Whole foods is not just small in absolute terms; it is almost exclusively focused on a very narrow target market. Upscale, price insensitive, urban foodies credulously immersed in the world of health and culinary trends. By coincidence, this profile matches almost perfectly with the journalists currently reporting the story.

Whole Foods looms large in the lives of the kind of people who write for New York magazine or produced segments for CNN. This inclines them to lend this story an air of importance it does not merit. For example check out Matt Yglesias.


The post-peak problem

Even with its targeted demographic, there is considerable evidence that Whole Foods was already in danger of losing its dominant position. A decade ago, the chain largely had a lock on the organic and exotic market. If you wanted heirloom tomatoes and cage free eggs and pink Himalayan salt and those big bottles of Dr. Bonner's soap that your stoner friends used to read in the bathtub in college, you could either drive around various health-food shops and co-ops or you could go to Whole Foods.

Recently, though, the company has found its one time monopoly under assault from all sides. Old-fashioned retailers like Kroger's and Walmart have greatly expanded their organic and exotic selections. On the opposite front, small, nimble players like Trader Joe's and Sprouts have gone directly after the target market and have done so with far better prices and superior branding. This latter threat has gotten so bad that Whole Foods was forced to launch the Trader Joe's clone 365.

Before Amazon swooped in, the company had been facing one of the ugliest competitive landscapes in the industry.



"But we'll make it up with volume"

I know it seems a mundane point in this age of disruptors and economages, but Wal-Mart (and Krogers and Costco and ...) have mastered the art of selling groceries at a profit. Amazon appears to have gone into the business largely as a kind of loss leader and it's not clear they have any real plans to move beyond that model.

Wal-Mart, on the other hand, just might

This is an interesting idea, with some potentially big implications.



And finally, Jim Cramer predicts the possibility of great things.

There are few things scarier in the world of finance.

The scariest quote you'll see on antitrust this week

 For reasons I'll try to go into later, I'm not all that worried about the antitrust issues with the Amazon-Whole Foods merger, though that might change with new developments. The sale of a Kroger or a Safeway would certainly make me rethink this, as would a real (rather than all-hype) advance in food delivery systems. For now, though, I'm going to be more concerned by pretty much anything that comes out of Comcast, for example.

But when we do hit the next big antitrust case, this story by Gizmodo's Rhett Jones will worry me deeply. [emphasis added]

Makan Delrahim is Trump’s nominee to handle antitrust cases at the Justice Department. He made it through Senate Judiciary Committee hearings this month and should be starting work soon.
 

According to The Intercept, Delrahim has spent the last decade working in the private sector on merger deals and is considered to be very corporate friendly in such matters. As The New York Times puts it, he flippantly believes that “a monopoly is perfectly legal until it abuses its monopoly power.” For about 12 years, he has worked for the law firm Brownstein Hyatt Farber Schreck, which just happens to be registered to lobby on Amazon’s behalf.

Over at the FTC, Abbott Lipsky is the acting Director of the Bureau of Competition. Whole Foods has hired Lipsky’s former law firm, Latham & Watkins, to manage the proceedings with Amazon.

An alternate model for the rideshare business

One of the problems with hype-driven businesses and next-big-thingism is that it tends to drive investments and strategies in questionable directions. The best model for an industry might not be sufficiently hype-friendly or it might entail lots of small and medium players rather than one for to behemoth that investors can get excited about. (See the previously mentioned Ponzi threshold).

This got me thinking about the ridesharing industry. We have all largely accepted the Uber/Lyft  models as the only way to make the industry work: a huge number of employees (or subcontractors if you prefer) working for a big company that takes care of everything except for the car and the driving.

Instead, what if we thought in terms of something more like a franchise model? You have a national company that handles the branding, dispatching, routing, and billing while a middleman handles the inspection, driver recruitment, and dealing with local authorities.

This would insulate the national corporation from many of the labor issues currently besetting the industry. It could very well significantly reduce cost. It could even go a long way toward letting market forces determine where to grow. Rather than letting some corporate bureaucracy determine which region was suitable, the decision would be based on local entrepreneurs willing to put in the work and put up the money.

I know you've probably already seen this, but it's too good not to post.

Great work from XKCD. Of all the embarrassing sub genres of statistical pseudoscience journalism, there is not that beats the popularity and the obvious bullshit factor of the every-states-favorite-______. You inevitably start with a sample so inadequate that states like Montana come in with less than a dozen people. Worse still and defying all logic, each state somehow ins up with a different food, singer, or TV show.

The next time you see one of these what-each-state-thinks maps, send the people responsible a copy of this:

Keeping the Uber thread going

For those joining us late in the show, we've spent this week discussing some of the problems with Uber's current business model and some of the proposals for the future.

Even evil plans require a certain level of competence

Ponzi Thresholds

A follow-up to Mark's post


One of the issues we've brought up more than once is that some of the companies difficulties appear to run so deep that even achieving a monopoly would not be enough to resolve them. Over at LGM, Scott Lemieux has reached a similar conclusion:

But it should be obvious that the Standard Oil model won’t work. There are two fundamental problems facing Uber’s potential profitability:

    The inherent costs of entry are low
    Demand for cab service is highly elastic

The circle just can’t be squared. The reason it takes a lot of venture capital to compete with Uber is because it’s massively subsidizing riders and drivers. But if you assume that Uber can charge market rates and still make a profit, then it would be easy as pie for a competitor to enter the market. To assume that market rates are profitable and that it would be extremely expensive to enter the field is a Mnuchinesque mistake. If you share my assumption (and, apparently, the assumption of the companies themselves) that they would hemorrhage riders if they charged market rates, then it doesn’t matter if Uber achieves quasi-monopoly status — it’s still losing money.

And the problem is even more acute in smaller, less dense markets than NYC and SF. Some of the problems I identified — cars in poor condition, opaque pricing, forced ridesharing — are regulatory failures and/or cases of companies being incompetent. But there’s a reason why outside of the biggest cities cab service tends to be unreliable if it’s available at all outside of transportation hubs and major hotels. Basically, in cities where people don’t take cabs for most trips you face the choice of making it worth their while for drivers to stay on the road when they don’t have passengers, or you’re going to have cases where people want cabs and can’t get them. Given that demand is particularly elastic in places where people generally have cars and rarely use cabs, cab companies are probably going to choose the latter. But this creates a downward spiral — if you need a cab and can’t get one, you’re even less likely to use a cab going forward. I don’t see anything about Uber’s technology that solves this fundamental problem.

A follow-up to Mark's post

This is Joseph

I wanted to follow-up on Mark's recent posts. One thing that needs to be carefully thought about with disruptive technologies is whether the legal framework will remain static or not.  Consider the example of Amazon and sales tax: for a long time the company benefited from having lower costs due to rules about collecting sales tax in states where it did not have a physical presence.  However, success breeds interest in collecting this revenue and, eventually, a successful company can no longer make the argument that special treatment is needed in order to grow a new industry.

With Uber, the fault line is clear -- as long as the drivers are independent contractors that's fine.  But the new types of variable pricing are undermining that argument.  Felix Salmon:

I do think that it does bring Uber one step closer to being the drivers’ employer, since the drivers are effectively being paid a flat wage for generating a variable revenue stream.

The answer is supposed to be driverless cars, but it is unclear that anybody is likely to own this space enough to make it a monopoly.  Both traditional car companies and Google look like competitors, and it isn't clear that these companies can be simply muscled aside.

Now it looks like the CEO might take a leave of absence, which isn't a good sign.

The part of this that is most painful is that Uber is actually probably a very good company in terms of producing a needed product and the huge valuation is causing more harm than good.  A real time ride hailing device on smartphones really does add a lot of value by matching customers with cars in a way that used to be quite difficult with a taxi.  That's likely to be a product of enduring value.  What's harder to see is how it can ever dominate the transportation space enough to make the market capitalization, weighted for risk, seem reasonable.

Addendum:  After talking with Mark, he suggested breaking out the steps for the driverless car pivot as being:

1. Invent and perfect the technology
2. Build a car company or partner with an existing car company on favorable terms
3. Build the cars -- either by buying a fleet or selling them to customers
4. Link the cars to their current taxi service

Some of these steps may be quite challenging.  A car is an expensive asset.  It is pricey to build them in bulk and it might be hard to convince people to lend them out (unlike the taxi scenario where the owner is able to stay with the valuable asset.

This also suggests that regulatory and insurance issues are tractable.  Who is insuring the car and how does it work for periods where it is completely empty?  Is summoning an empty car an invitation to theft?  It's not that these issues aren't soluble, but there are a lot of steps before success.