I think Matt should be sad

Yglesias:

Personally, it would make me very sad to have a job that was more about explaining who was perceived to be right about important arguments than a job that's about trying to explain who is in fact right

 I really do have to agree with this sentiment.  It is true that there has never been an ideal world of informed voters.  But to raise the idea that perception trumps reality as a defense of reporting seems to be a new low.  I'd almost rather hear "I was taken in by the Democratic/Republication/Your choice of Party spin" as an explanation.  It happens from me as well, and it at least keeps the goal of the activity clear. 

“I didn’t like Nixon until Watergate”

Still on limited bandwidth blogging. I was planning on weaving this pair of quotes into a couple of our ongoing threads (particularly this one), but that will have to wait. For now I'm just going to present them without comment and let you very capable readers draw your own conclusions:

From a Rick Perlstein piece on Mitt Romney and the conservative movement:

M. Stanton Evans, a legendary movement godfather, stood up. He said my invocation of Richard Nixon was inappropriate because Richard Nixon had never been a conservative. He proceeded, though, to make a striking admission: “I didn’t like Nixon until Watergate”—at which point, apparently, Nixon finally convinced conservatives he could be one of them.

And from a recent (February 2nd -- post-scandal) story on Governor Christie:

“We are very excited to announce that New Jersey Gov. Chris Christie will speak at CPAC 2014," American Conservative Union Chairman Al Cardenas told Yahoo News. "At this year's CPAC — and through our theme 'ACU's Golden Anniversary: Getting It Right for 50 Years' — we will celebrate how conservatism has shaped our past and look to the future with excitement. This will be the year that conservatives begin pulling the nation back from the brink of Barack Obama's disaster with a movement that inspires, unites and discovers new solutions to our current challenges.”

An invitation to speak at the conference, held near Washington each spring, is traditionally a prime opportunity for aspiring Republican presidential candidates to make an impression on some of the party’s most active supporters, as well as the national media.

Last year, the ACU, which organizes the three-day confab, made the controversial decision not to invite the rising GOP star. The group withheld its invitation as punishment for what some in the movement viewed as Christie’s insufficiently conservative record the year prior, Cardenas said. Christie lost favor with some Republicans when he gushed over President Barack Obama’s response to Superstorm Sandy just weeks before the November presidential election. His sharp criticism of House Republican leaders who delayed recovery funding after the storm also created tension at the time.

Talking Points Memo misrepresents the Washington Post's Answer Sheet

As mentioned before, this is the busy season here at West Coast Stat Views so a full discussion of the problems with Conor P. Williams' recent TPM post on charter schools but this one point is worth addressing separately.

The upshot: it’s unproductive to treat charters as the source of public education’s problems or as the answer to its prayers. Instead of asking “Are Charter Schools Making a Difference?” we should be asking what charters’ heterogeneity tells us about improving schools’ effectiveness. If charters in some states work much better than others, we should be looking to scale the policies that support this success.

And there’s no reason to limit this reflection to the sector itself. Ask teachers and administrators in traditional public schools what they think about a new district oversight program and you’ll hear plenty of hunger for more professional freedom. Ask them about charters, and you’ll often hear that traditional public schools are often hamstrung by needless conformity, that so much of its problems would be solved if we got out of the way and “let teachers teach.”

There's something really odd about that last sentence. Given that the biggest and best known charter chains are known for requiring both students and teachers to conform to extremely specific standards, why would teachers single out the "needless conformity" of public schools when asked about charters?

When a quote seems to be a non sequitur, it's usually a good idea to click on the link. In this case, that click takes us to a rather surprising place, Valerie Strauss's Washington Post blog, The Answer Sheet. Strauss is one of the best reporters working the education beat but she's a bit of a muckraker and a considerable amount of her time is spent uncovering questionable practices in the education reform movement.

So is this Answer Sheet article, a guest post by LouAnne Johnson, a teacher's response to being asked about charter schools? No.

Does the post suggest that we should be looking for ways to "scale the policies" of successful charter schools (particularly, as Williams suggests earlier, of making those schools more accountable)? Hell, no.

Here's the opening of Johnson's piece:

We don’t have to wait for Superman to save our public schools. We can save our schools ourselves. Right now. Without firing the teachers or disbanding their unions. Without creating more standardized tests. Without pitting schools against each other in a race for dollars which should rightfully be divided equally among the school-age children of this country.

As with many complex problems, the answer is a simple one -- so simple that it is overlooked.

The answer can be stated in seven words that even a child could understand: Train teachers well -- then let them teach.

The problem with public schools isn’t lack of parental support or computers or equipment. It isn’t an overabundance of television or junk food or violence. Those things contribute to the problem. No argument. And money is helpful. But throughout the world, there always have been students who learned to think and read and write with very limited supplies, sometimes without a classroom or textbooks, without standardized tests, without merit pay for their teachers. Those students learned because their teachers were permitted to teach.

Most American teachers are good at their jobs -- when they are allowed to do their jobs. And that is the primary problem with our public schools. Teachers are not allowed to teach.

Or rather, they are told how to teach in such great detail and required to document what they are teaching in such great detail and expected to spend so much time teaching students to pass the tests that will prove the teachers have paid such great attention to detail that the teachers don’t have time to teach the information and skills their students need.

First, you'll notice that charters are only alluded to tangentially in the 'Superman' reference. In no real sense is this what a teacher said when asked about charters. More importantly, though, Johnson pretty much says the opposite of what Williams implies. She proposes fewer tests, less standardization, less focus on accountability for schools and carrot/stick approaches to motivating teachers, in other words, moving 180 degrees from the standard charter school model.

There are numerous other problems with Williams' piece, some more substantial than this from a policy and statistics standpoint, but for a piece that decries the lack of "productive conversations." this sort of misrepresentation deserves special mention.

Inequality

The issue of inequality has been around for a long time:

James Madison, the Constitution's main author, described inequality as an evil, saying government should prevent "an immoderate, and especially unmerited, accumulation of riches." He favored "the silent operation of laws which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigents towards a state of comfort."

There really does seem to be some intellectual confusion about disliking inequality versus disliking private ownership.  The classical model of a healthy society had small farmers and wealth concentration has been an issue going back to Rome:

The system of small estates developed during the Republic gave way to the system of the great imperial private estates. The growth of the large estate was a catalyst to the general decline of Rome as a symptom.

So I don't think it was an accident that classically trained men worried about the issue of inequality and how it could be poisonous.  But I think that a confusion arose between "confiscate everything" (aka 20th century totalitarian communism) and "redistribute" (aka 20th century Sweden or Denmark).  It's like conflating surgery with lethal duels, because both involve a blade.  There are real differences of scale.

In the same sense, a healthy system is balanced and this point of balance is unobservable with the macroeconomic data we have.  I do not think that it is even predictable in theory (happy to be proven wrong).  But difficulty in finding the optimal point of leverage doesn't mean we should lose sight of the goal of balancing competing objectives (incentives versus equality) nor does it suggest either extreme is optimal. 

Andrew Gelman opens a couple of cans of worms

Over at the Monkey Cage, Andrew Gelman has some kind words for West Coast Stat Views and our recent post on nepotism. I have to admit I was less pleased with this comment (though for a somewhat perverse reason):

Good question. As a political scientist, my question is: Can this be studied empirically in some way? I’m not quite sure how, but I think it could be worth looking into. It fits into some of our general questions about political discourse and economic perceptions.

It's not the topic I object to. Quite the opposite, this opens up a couple of big questions that I've been wanting to discuss in depth for a long time:

Are we adequately tracking the attitude and perceptions that need to be in our models?;

Are the standard technique of data collection and analysis up to the job?

For example, in the 2012 election, we spent a lot of time asking whether Obama had successfully painted Romney as a plutocrat but perhaps not enough asking how people felt about plutocrats and, possibly more importantly, how those attitudes have shifted over the years (and whether attitudes in the media have stayed in alignment).  We analytic types also relied heavily on polling data rather than other sources like text mining, non-verbal response data and implicit association tests, to name a few, Of course, the standard approaches proved more than adequate for the purpose of prediction but did they give us what we needed to understand the underlying dynamics? And will these standard approaches continue to provide reliable data in the future?

So what was my problem with Gelman's comment? It was the timing. I've set aside most of January and February for other projects and now I don't have the bandwidth to jump into this debate in a serious way.

So much to blog about, so little time.

Legal uncertainties

It is well known that in any functional justice system there will be problems.  It is a sad truth that false positives are inversely correlated with false negatives.  Fewer of one will get you more of the other, and in any system with actual uncertainty there will be plenty of both.  A traditional approach has been:

It is better that ten guilty persons escape than that one innocent suffer

The modern approach has drifted more in the direction of public safety, but the general principle of there being an unpleasant trade-off remains intact. 

So the Amanda Knox case has been in the news and it is a perfect example of when these principles come into conflict.  What seems clear is that that there was at least one killer, Rudy Guede, who left a lot of forensic evidence (bloody handprint, for example).  So the real question is whether this was a group killing or the act of a lone killer. 

But here the evidence gets tough.  She clearly lied to the police, was convicted of this crime, and spent three years in prison for it.  Witnesses, of possibly dubious reliability, seem to contradict her story which isn't good but also doesn't prove much, either.  The evidence seems mixed, with the question of additional weapons needing to be raised to make the case work and the lack of a motive for Knox and Sollecito to work with a complete stranger is ambiguous.

The latest comments from the judge also worried me:

Judge Alessandro Nencini also suggested in an interview with Corriere della Sera published Saturday that the decision of Knox's ex-boyfriend and co-defendant, Raffaele Sollecito, not to testify may have worked against him.

"It's the defendant's right, but it certainly deprived the process of a voice," Nencini was quoted as saying. "He limited himself to spontaneous declarations. He said only what he wanted to say without letting himself be cross-examined." Knox did not appear at the trial, but sent a letter to the court saying she feared wrongful conviction.

This is getting awfully close to forcing testimony, which is a deadly game when open-ended questions can be asked, people are nervous, and perjury is a crime.  Or this:

"At the moment I can say that up until 8:15 of that evening, the kids had other plans, but they skipped them and an opportunity was created," Nencini was quoted as saying. "If Amanda had gone to work, probably we wouldn't be here."

Which I am hoping is a bad translation from Italian, or that it means that Kercher would still be alive and thus there would be no case. 

So obviously I am not an expert on this case nor have I followed it in great detail.  But I remain confused by why the prosecution isn't putting forth their best case.  As it is we have ambiguous DNA evidence (with the girls being housemates), another party clearly involved in the crime (at some level) with every reason to lie, and a lot of complex theories. 

So far, what I see, is pretty good evidence that Amanda lied to police and that she served time for that offence.  I am a little unclear why the better evidence isn't being presented publicly, as the public nature of criminal proceedings are a great way to inspire confidence in the justice system.  The courts appear to be very worried about false negatives in this case, and perhaps they should re-evaluate just what trade-offs they are willing to make. 

Principles?

Matt Yglesias has a great reframing of a key political issue in modern America.  Zachery Goldfarb pointed out:

As they cast about for ideas, Republicans are struggling to find policies that match the simplicity and gut appeal of such Democratic proposals as raising the minimum wage without violating core conservative principles by increasing spending or interfering with market forces. Many lawmakers are turning to conservative think tanks, such as the American Enterprise Institute.

Matt then applied this thinking to another area of modern life:

Many of us in America are struggling to find weight loss strategies that don't require us to spend more time at the gym or eat less food. It turns out to be challenging.

I think this analogy is even more penetrating than pithy.  For example, I personally have never lost a lot of weight without exercise.  But exercise is unpleasant.  Still, it would be a mistake to have a personal policy that I will never, ever increase my amount of exercise.  That would be foolish.

It makes a lot more sense when you realize that an economy is a constructed object.  The rules seem so fundamental that we forget that there is a lot of social consensus that goes into it.  Other cultures have organized economic activity differently.  So it is an odd thinking that we just happened to get it all correct around the end of the twentieth century and there is no optimization left . . .

 

DON'T SEND FLOWERS -- NOT DEAD YET

Apologies for the silence. I've got a big project wrapping up while, based on the word from Seattle (via a bad cell connection), Joseph is experiencing some of the more vivid aspects of business travel.

Draft posts are accumulating at an alarming rate. Here are some of the topics:

A marketing statistician's take on on these two articles on the rise of direct marketing in the conservative media bubble (the first is worth reading just for the quotes “I didn’t like Nixon until Watergate” and "An Oilfield in the Placenta");

The important but little discussed question of intellectual property in agriculture;

Resegregation;

The ways that the social circles of elite journalism inhibit the profession from honest self-criticism;

More on how Katrina was the best thing to happen to the schools of New Orleans.

And much more soon.

Take care and thanks for the patience.

Mark

33 freaking degrees

[As you might guess, I wrote this post this summer and never got around to posting it.]

Today while driving from my home in North Hollywood to Santa Monica, I experienced either a 30 or 33° drop in temperatures. (There was a brief pocket of 110° temperature according to my car's thermometer but I have more confidence in the 107°).

A 30° change is admittedly very rare, however a 20° drop is not that unusual. Furthermore, you can get those 20° to 30° deltas without even leaving the Los Angeles city limits, let alone leaving the county.

All of this goes back, though admittedly in a roundabout way, to our long-standing thread about the difficulty of generalizing from city to city and the danger of having one region dominate the pool of journalists and pundits.

Not only are there sacrifices that are relatively minor in Los Angeles but which would be devastating in some other parts of the country (like making do with space heaters), there are sacrifices that would be devastating in one part of town but not that big a deal in another part of town (like doing with air conditioning).

[postscript: I was in Santa Monica a few weeks ago. It was 79° -- four degrees warmer than it was in North Hollywood.]

Are we becoming more tolerant of nepotism (and other perks of privilege)?

The New Republic has a very good profile by Julia Iofee of  Michael Needham of the Heritage Foundation. The whole thing is worth reading, but there's one paragraph I'd like to single out both because of its content and its placement deep in the article.

After [Michael] Needham graduated from Williams in 2004, Bill Simon Jr., a former California Republican gubernatorial candidate and fellow Williams alum, helped Needham secure the introductions that got him a job at the foundation. Ambitious and hard-working, he was promoted, in six months, to be Feulner’s chief of staff. According to a former veteran Heritage staffer, Needham is intelligent but “very aggressive”: “He is the bull in the china closet, and he feels very comfortable doing that.” (“I consider him a friend,” says the college classmate, “but he’s a huge asshole.”) In 2007, Needham, whose father has given generous donations to both Rudy Giuliani and the Heritage Foundation, went to work for Giuliani’s presidential campaign. When the campaign folded, Needham followed his father’s footsteps to Stanford Business School and then came back, at Feulner’s bequest, to run Heritage Action.

You'll notice Iofee goes out of her way to suggest that Needham got his first rapid promotion by being "ambitious and hard-working," and there is, no doubt, some truth in that, but pretty much everybody who goes to work for a big-time D.C. think tank is ambitious and hard-working. These are not traits that would have set Needham apart while being the socially well-connected son of a major donor very well might have.

My question is: would this angle have been handled differently a few years ago? Obviously nepotism and advancement through connection have always been with us, but until recently I get the impression that this career path was seen as somewhat suspect; people who obviously got their positions thanks to string-pulling were put on a kind of public probation until they had proven themselves.

Now, the public (or at least the press) seems to me much less likely to discount the accomplishments of the well-connected children of the rich and powerful. Along similar lines, though you can certainly still find jokes about the boss's son/nephew/brother-in-law, but they don't seem nearly as pervasive as they were through most of the 20th Century. Anyone else see a trend here?

Second order effects

There has been a lot of discussion about inequality lately, some of which could use some careful thinking about distributions and effect order.

I think the easiest way to describe what I am thinking about is an example.  Consider two groups, call them A and B.  At the beginning A and B have the same number of people and the same average share of some sort of measure of wealth.  So A has 50 people and 50 income units, as does B. 

Now consider a policy that added 20 wealth units to B and subtracted 10 wealth units from A.  Call it free trade.  Now the size of the wealth pool is 110 units (higher) but group B is 50% wealthier than group A.  This could happen if you opened up competition for factory workers but no lawyers (as a random example). 

The good outcome has group B giving between 10 and 20 units of wealth to group A (redistribution) so everyone is better off.  But imagine group B thinks they worked hard for their 60 units of wealth?  So they argue for letting people keep what they earn.  But they also think opposition to these policies by group A is an anti-growth stance.  Yet group A is worse off.  They also lose political power (less wealth) and so have less opportunity to fight for redistribution, making a "trust me, we'll share" argument less than convincing. 

Now any real example will not have these simple inference available.  But it does make a big difference when you think about why people might oppose a policy that increase aggregate wealth for the society as a whole. 

Now consider first versus second order effects.  Let us pretend that Group B grows wealth faster than group A.  Under the old system (even division), the pool would grow by 5 wealth units per decade.  In the new system, wealth grows by 6 units, but it is proportional to the pool of wealth that the group has.  This is the efficiency harvested by the new policy (it increased wealth and increased the growth rate). 

So under the old system, groups A and B grow at 5 wealth units and end up with 55 units.  In the new system, Group A has 42.4 units and group B has 63.6 units.  The gap between A and B is actually larger even if both groups grew by a faster rate.  For group A to reach 55 units, this fast growth rate would have to be sustained for many iterations (4 or 5, by my calculations).  So just speeding up the growth rate doesn't mean that everyone is better off, if the intervention has distributional effects.

So I think that this leads to two important policy conclusions.  In any ordered society, the rules will help some groups and hurt others groups (even a lack of rules will have a differential impact).  Just saying that a policy increases average wealth can be quite misleading.  The second is that second order, like higher growth, have to be really large to overcome first order effects.  Now, if you are completely neutral as to distribution (the size of the pool is all that matters) then okay -- but is anybody really neutral given they will be advantaged or disadvantaged by any actual policy?

Now, I re-emphasize that you can't actually get clean numbers in the real world.  Macroeconomics has measurement error, noise, confounding, and many groups with a vested interest in obscuring actual associations.  But it does mean that very simple narratives may not fully engage with the complexity involved in real world problems.  These are very simple thought experiments and they already make ideas like "target the maximum growth rate" seem to be less deadly obvious than you might expect them to be. 

The often dubious "not" in not-for-profit

I previously suggested that the education reform movement was unusually vulnerable to conflicts of interest. This would be an example:

The Pearson Foundation, the charitable arm of one of the nation’s largest educational publishers, will pay $7.7 million to settle accusations that it repeatedly broke New York State law by assisting in for-profit ventures. 

An inquiry by Eric T. Schneiderman, the New York State attorney general, found that the foundation had helped develop products for its corporate parent, including course materials and software. The investigation also showed that the foundation had helped woo clients to Pearson’s business side by paying their way to education conferences that were attended by its employees.
...
“The fact is that Pearson is a for-profit corporation, and they are prohibited by law from using charitable funds to promote and develop for-profit products,” Mr. Schneiderman said in a statement. “I’m pleased that this settlement will direct millions of dollars back to where they belong.”

...
The inquiry by the attorney general focused on Pearson’s attempts to develop a suite of products around the Common Core, a new and more rigorous set of academic standards that has been adopted by 45 states and the District of Columbia.

Around 2010, Pearson began financing an effort through its foundation to develop courses based on the Common Core. The attorney general’s report said Pearson had hoped to use its charity to win endorsements and donations from a “prominent foundation.” That group appears to be the Bill and Melinda Gates Foundation.

“Pearson Inc. executives believed that branding their courses by association with the prominent foundation would enhance Pearson’s reputation with policy makers and the education community,” a release accompanying the attorney general’s report said.

Indeed, in April 2011, the Pearson Foundation and the Gates Foundation announced they would work together to create 24 new online reading and math courses aligned with the Common Core.

Pearson executives believed the courses could later be sold commercially, the report said, and predicted potential profits of tens of millions of dollars. After Mr. Schneiderman’s office began its investigation, the Pearson Foundation sold the courses to Pearson for $15.1 million.

The attorney general’s office also examined a series of education conferences sponsored by the Pearson Foundation, which paid for school officials to meet their foreign counterparts in places like Helsinki and Singapore.

The trips were made public after a series of columns in The New York Times, which detailed the expensive hotels and meetings with corporate executives that were staples of the experience.

Several school officials who went on the trips represented education departments that had contracts with Pearson. The investigation did not determine whether those officials had awarded any new contracts based on any improper influence. But the report found that executives from other companies were not invited to attend, giving Pearson’s corporate side a clear advantage.

The attorney general portrayed a culture at Pearson in which the lines between business and charity were often blurred. Pearson remains the largest donor to the Pearson Foundation, and the staff of the foundation included several Pearson employees. The board was made up entirely of Pearson executives until 2012.

As part of the agreement, the foundation said it would alter its governing structure by appointing three board members to review any financial transactions that might benefit the business side. The foundation also pledged to bar Pearson executives, in most instances, from attending its education conferences, and said it would not feature Pearson products at such meetings.

Mercedes Schneider does some more digging here.

An optimistic take on Netflix

Megan McArdle:

That’s both good and bad for Netflix. On the one hand, all those warehouses are expensive to maintain and staff, compared with a website. On the other hand, they have a phenomenally high barrier to entry. You can imagine an upstart coming in and beating Netflix at streaming. But it’s hard to imagine another movie rental company building a parallel network of massive distribution centers on the off chance that it might be able to knock out the incumbent.

This is basically the "copyright issues are so bad they might strangle an emerging new industry that would otherwise greatly enhance consumer surplus making the outdated warehouses suddenly look valuable".  It seems implausible, but it is true that if streaming video falls apart then those DVD warehouses are going to look awful clever. 

It would also be a case where the success business strategy was the one that the owners completely ignored until success happened by mistake.  I wonder how often that has actually happened?

A slightly creepy letter from the CEO of Exxon Mobil

The education reform movement and Common Core in particular have never had a lack of corporate friends for a variety of reasons, but even in that crowded field, Exxon Mobil has always stood out. We'll spend more time later on why the company would line up so strongly behind standards which, according to their chief mathematical architect, aren't really designed to prepare kids for STEM (at least one possibility being that the CEO hasn't actually read the standards).

This post is concerned with just how far the company will go to promote this position. Here's a letter the CEO recently sent to the governor of Pennsylvania:

Dear Governor Corbett:

Exxon Mobil applauds and shares your commitment to ensuring that every child in Pennsylvania is prepared with the skills to compete in today’s workforce.  I also appreciate your strong support for the Common Core, including changes to reflect a “Pennsylvania Common Core,” and the potential it has to help your state’s students and teachers.  Your counterparts in New Jersey and Wisconsin, Governors Christie and Walker, and many other leading policymakers have been equally supportive.  However, I was disappointed to learn of the misinformation opponents of this critical effort are advancing, which subsequently led your administration to delay its implementation.  I urge you to make the necessary clarifications quickly and move forward with the Pennsylvania Common Core.

Like you, I believe the Common core will help ensure our students develop the skills and knowledge they need for success in college and careers.  This voluntary state-led effort developed by educators, parents and business leaders [actually, not so much -- MP] has the potential to turn around our underperforming public education system and produce the workforce that businesses need to remain competitive in the global marketplace.  The standards stipulate what all students should know, but leave it up to Pennsylvania to determine how it teaches its students.

Exxon Mobil has significant operations in Pennsylvania, and we are committed to enhancing the quality of life for all your citizens.  Last year, we contributed $3.3 million to Pennsylvania universities, hospitals, environmental research efforts and arts and civic organizations, but I believe there is nothing more important than improving the quality of education.  The Pennsylvania Common Core will go a long way to achieving that goal, and it gives Exxon Mobil the confidence that the educational standards we require for employment will be met by your state’s graduates.  Furthermore, it sets the groundwork for students to be prepared to compete globally for 21st century careers and help Pennsylvania prosper.

Sincerely,

Rex Tillerson

Of course, businesses are constantly trying to pressure state governments, but there's something about that line about Exxon Mobil's contribution that sounds a bit like "Nice little charitable institutions you have here. Be a shame if anything happened to them."

A belated fact check of an old Felix Salmon Netflix post

In the course of researching an upcoming post replying to this piece by Felix Salmon on Netflix, I followed this link to an earlier post and came across something that slipped past me the first time, probably because I was just starting to dig into the Netflix story.

But what Ball misses, I think, is that Netflix is playing a very, very long game here — not one measured in months or quarters, and certainly not one where original content pays for itself within a year. Netflix doesn’t particularly want or need the content it produces in-house to make a profit on a short-term basis. Instead, it wants “to become HBO faster than HBO can become Netflix,” in the words of its chief content officer Ted Sarandos.

Most importantly, the thing that Netflix aspires to, and which HBO already has, is an exclusive library of shows. If everything goes according to plan, then the Netflix of the future will be something people feel that they have to subscribe to, on the grounds that it’s the only place where they can find shows A, B, C, and D. That’s what it means to become HBO — and Netflix is fully cognizant that this is a process which takes many years and billions of dollars.

If Netflix gets there, then it becomes a license to print money, just as HBO is today. Shows like Arrested Development and House of Cards may or may not pay for themselves over the short term — in fact, they almost certainly won’t. But that doesn’t matter. In the long term, they will become part of a library which has massive value on two fronts: the shows can be licensed out in jurisdictions where Netflix doesn’t want to compete, and they will also help make Netflix a service that can guarantee you a great show that you want to watch, whenever you want to watch it.

The "Netflix is the new HBO" narrative has resonated powerfully with both investors and financial journalists, but it has always been shaky and the part you see here about Netflix building a content library around shows like House of Cards is simply, factually wrong. Despite the huge checks being paid to producers, Netflix doesn't own these shows.

 Rocco Pendola fills in the details:

First, Netflix guarantees 13 episodes right off the bat. Sometimes it will even give you a two-season commitment before the first season even airs. And, in terms of rights, it doesn't demand exclusivity. Outside of the first-run window, you are free to place your show anywhere you wish and, unless it cuts another deal with you, Netflix doesn't receive a cut of this action. Plus, there's very little, if any, creative development from Netflix.

In other words, the folks who output the content -- in this case, Sony -- are simply robbing Netflix blind. It's the type of deal that's too good to pass up.

Put another way, Sony doesn't care how many subscribers watch these shows on Netflix. They're more than happy to collect a fat (likely way too big) check, which subsidizes their risk, as they retain rights to sell the programming in markets where Netflix doesn't operate and in all other markets -- geographic and delivery -- after whatever the relatively short first-run window happens to be.

That's not how HBO, for example, plays the game. Never has been. And HBO sees no reason to start, given the franchise it has built and the enormous success it continues to have.

HBO doesn't give the world to studios and creators because it's not so desperate that it has to. It maintains exclusive rights to the programming it licenses. Unlike Netflix, it routinely produces programming in-house. And it almost always involves itself in the creative process. From what I understand, producers and directors actually appreciate this input, as HBO has a track record of making stars and producing huge hits.

You can find me covering similar ground here and here. Particularly in the second post, I go into quite a bit of detail about the HBO2.0 narrative. The only point I'd like to add: when one of these narratives takes hold, things that should be true according to the narrative start being treated like facts and even the smartest and most clear-eyed observers (like Felix Salmon) may not be immune to the effects.

The irony is that, in principle, Salmon's analysis is entirely sound. There are points I might disagree with -- I'd be more likely to advise Netflix to license out its content more freely. Licensing not only brings in money but also keeps your product in the public eye and cultivates new fans (welcome to the strange world of non-rival goods). I think it's safe to say that syndicating Sex in the City didn't hurt its revenue stream -- but on the whole, Salmon pretty much nails it. If Netflix really wanted to become a major, stable, free-standing media company, it would probably have done pretty much of all of what Salmon suggests.*

The only trouble with the analysis is that the company isn't doing what Salmon thinks it's doing.

*  Of course, there is always the possibility of being acquired by a company that doesn't mind having subsidiaries that lose money.