Category Archives: power-laws and networks

IP Piracy – the business model

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Nice sophisticated article from the Business section of the LA Times about how it appears that they are very conscious that software piracy is good for Microsoft.

“They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.” — Bill Gates

I’ve written about that before both here to illustrate how exactly the pirate price appears to be set and about how some nations might prefer to enforce IP rights to as a form of classic home industry protectionism.

I particularly like this quote from an IP lawyer.

“Is widespread piracy simply foregone revenue, a business model by accident or a business model by design?” he asked. “Maybe all three.”

I love that because when your firm is executing on a model like that it becomes totally keystone cops inhouse with people running in all directions. The article outlines how the people who are chasing lost revenue managed to encourage adoption of free software in the Islamic world.

The effort even prompted Islamic clerics in Saudi Arabia and Egypt to declare fatwas, or religious edicts, against software piracy.

I have no doubt that if Microsoft could strictly enforce their software licenses that would be great for open source. It would raise barriers to entry high enough that the majority of users on the planet could not get over them. Given the necessity of regular security patches it is also clear to me that Microsoft is intentionally not enforcing their licenses.

Fungibility – the dark side

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If you give your child lunch money only later to discover they are buying candy with it you may discover your yearning for a special less fungible lunch currency. Not surprisingly there are micro-currency solutions for this problem in micro-managing your subordinates. If you give money to the local youth center earmarking your donation for youth basket ball and later find out it was spent to repair the roof the situation is less clear. When the green grapes appear at your grocer in January you can thank free trade and Chile; when there happens to be a black widow spider in the grapes you might question the wisdom of the making produce so fungible.

I used the word fungiblity a lot when I was working on Internet Identity. One of the many players in that standards making process are the firms that have huge amounts of account data about their trading partners. A strong identy system would allow them to make that data more fungible. If they could puzzle out a way to get permission to exchange that data with other parties they could convert static data in their vaults into dynamic data – a source of profit.

So I’m gobsmacked that I didn’t see this coming. The tax prep industry is seeking a rule change from the IRS that would allow them to resell the tax return data of their clients. Man is that evil! I paarticularly admire how this is framed as a clarification of tax payer privacy rights – indeed it is. Notice also how the industry is using it to protect themselves from foriegn competition. I guess this kind of thing happens almost automatically when the middlemen – in this case the tax prep industry – becomes sufficently concentrated.

Meanwhile, back on the lunch money problem. You could send you child to school with lunch already made. This would teach them valuable negotiation skills as they barter their lunch for better options. A wise parent might just send them to school with some highly fungible trade goods – cookies for example.

Payment Network Cost Trends

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The new issue of The Review of Network Economics has a pile of articles on payment networks. The last “A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?” (Abstract)of which takes a run at the question of how loyal the merchants are to these networks by looking into the puzzle of why they haven’t been dropping out of the networks in droves given the rapidly rising prices.

The number plotted on that graph is the price charged by the network to clear a transaction thru the network. It’s set by the network operators. This market is sufficently concentrated that those operators can signal to each other and as you can see their prices move in lock step. The only dip on the chart was do to a court case where two of the networks were accused of abusing their market power.

That chart does not show the prices merchants and consumers, the two sides of this network, actually pay since there are usually a number of intermediaries between them and that clearing house. When you add in those fees the question becomes yet more puzzling. It’s not just price that makes this an interesting question. Presumably Moore’s law and his friends have cause the cost of these networks to drop precipitously.

Clearly these merchants are extremely locked-in (or loyal if prefer that framing). These networks have accumulated a lot of market power.

I frame this up as a question of competition between various currency systems. In particular a competition between private currency systems run for the benefit of the currency system operator v.s. state run systems run for the benefit of those who govern the state. The question the paper is trying to puzzle out an answer to is actually asking the question why do merchants not abandon the private systems in preference for the state run systems? The short answer, at least in the US, is that the state run system isn’t even a player in the game anymore – i.e. it doesn’t compete. The second chart shows that in other regulatory environments the state has used it’s power to limit the power of the private systems to tax the system.

Both the private and state run currency systems have complex governance systems. An merchant or consumer (either individually or in groups) has a lot of options for how to negotate with these systems. Consider a consortium of giant merchants. They could go to Washington and lobby for more regulation so assure that the falling costs are passed thru which would increase their sales. They could go to the courts, as they did when some of the fees dropped in the first chart, and argue that market power is being abused. They could go, and i assume they do, to their banks and demand price breaks.

There are lots of different ways the reduced costs can be passed thru to the different players. Not suprisingly when the costs drop the first player to grab them are those closest to the place where the costs are falling – i.e. hub operator.

I use a credit card that pays me 1% back on all my transactions. That makes me much much more likely to pay with a credit card rather than cash. That’s a beautiful example of how these games are played. Technology gave the payment networks lots of options. When they took this one, i.e. offering cash back credit cards, they used their market position to shift costs from consumers to merchants in a way that increased the loyality of hard holders to the private currency system. That in turn made it harder for merchants to decline the cards. It took the payement network operators a few years to discover that 1% was sufficent to buy the loyality of most of their customers; there was a fun period when I had a card that returned 5% on all my purchases.

Interesting to me is how hard it is to get the benefits to spread to the small players; i.e. the corner stores run by small businessmen. Note that if the large merchants go put the squeeze on the network operators and negotate lower costs they actually prefer an outcome that creates a disadvantage for their smaller competitors. Examples like that are why I’ve become suspicious about claims that technology empowers small actors more than large ones. I’m coming round to thinking that it’s an important driver of the depressing shifts in the distribution of wealth.

Violence’s powerlaw, chapter 2

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This is another addition to my collection of data about things that have a powerlaw in distribution. This one shows major conflicts of the 20th century and uses deaths/conflict as a measure of their intensity. In a sense this is a continuation of the distributions shown in an earlier posting that display the intensity inside of two smaller conflicts. The paper behind that posting was making the case for conflicts have a fundimental nature which is reflected in the distribution.

I’m becoming more interested in puzzling out what the slight variations from a perfectly straight line have to say. This example is a good one for that because it really isn’t particularly smooth. Of course one possiblity is that they mean the distribution isn’t really powerlaw at all and it’s just an artifact of the sorting; but in those cases the variablity tends to be much higher than here. Sometimes the problem is that you just don’t have enough data; while this data is complete it is only for a single century. Rounding and other reporting bias is always a problem; the straight bit for conflicts with 1.5 million dealths is typical of that. Sometimes you see flat tops on these curves that reflect some regulatory effect; i.e. a physical or legal limit on size. That kind of shifting in the slope of the curve harkens back to the idea of a conflicts ahave a funidmental nature raised in the previous posting. In this case it appears to me that some of the conflicts toward the top were actually one larger conflict; i.e. the 2nd world war which have broken out into distinct theaters. It would be interesting to split the data by civil v.s. international conflicts and see what that reveals.

This data was pulled from Mathew White’s cool atlas of the 20th century. While that isn’t really a peer reviewed journal, he has certainly put a lot of work into the project.

His entire site is just too much fun. For example at his site you can discover the Bill Gate’s networth is aproximately 4.5 times greater than the damange rats do to crops each year.

“I can picture in my mind a world without war, a world without hate. And I can picture us attacking that world, because they’d never expect it.” — Jack Handy

Web Secret Card

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There is a surprising degree of competition for who’s going to run the currency system. There are at least four major currency systems in the US: cash, checks, visa, mastercard, and amex. Running a currency system can be quite profitable, and not just because you can tax people to particpate in your network. Once you start looking for them these private currency systems are extremely common. For example loyality award point programs and phone cards.

Gift cards are an interesing example. Look around in grocery, drug, stationary stores – there are hundreds of these cards! Today I was looking at the ones at CVS and Wallgreens, two drug store chain.

Gift cards let you convert highly fungible money into money with only some limited range of uses. You can spend $25 any where, but a $25 burger king gift card is more limited. But yeah – there are lots of Burger Kings. Some cards are more fungible that others, for example one of the cards I saw on recent visit can be used at any of six different resturants chains!

I find the gift cards that let you buy gift cards amusing. These let you move from highly fungible currency into semi-fungible; before you finally commit to marginally fungible. An online example of this are the gift cards from Great American Days. Those were on sale at the drug store today.

Of course if you have gift cards for one of those drug stores I was in today you can buy any of the gift cards they sell. Converting to another gift card is close to close to free. You will probably have to pay sales tax. I like to note at this point your taxes pay to keep the national currency system functioning.

And then there are the gift cards that can be used any place that those credit card networks reach. You can buy those at the drug store too; but your charged a fee of about 5% – think of it as the tax to regain some fungiblity. Though it looks like it might be possilbe to reduce that some using this vendor

Credit cards aren’t the same as currency though. Lots of authentic little vendors doen’t take them; and those that do pay a heavy lot of fees for access to those private currency networks. When you use them you loose your privacy. As they say in high school: it all goes on your permanent record.

So I was interested to see this gift card today Web Secrets Card. It’s really intended only for buying stuff online. Though it appears you can pay ten dollars and have then ship you a physical card which you could then use to buy offline goods. They charge five dollars a month until you drain the card.

So there you have it. The cost of fungible is around 5%, the cost of privacy is around $5 dollars a month.

Problem Cases

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Malcom Gladwell’s last two essays in the New Yorker (Troublemakers and Million Dollar Murphy) are both about power-law distributions; in fact I think you can make the arguement that most of his writing is about power-law distributions. It cheers me to see such a high profile discussion of the power-law distribution.

These last two essays are about problem cases; i.e. that in a large population of actors a small handful will own the responsiblity for the majority of the externalities the population creates. His examples include problem dogs, problem homeless people, poluting cars, and violent policemen. You’ll notice, the externalities he focuses on are negative externalities.

The more recent essay, which isn’t on line as yet, makes a point that oft goes under appreciated. One’s natural intuitions about how to handle the typical case need to be completely turned upside down when you’re dealing with the elite. If the societal cost of a high maintainance homeless person is a million dollars a year then you ought to be willing to drop a few hundred thousand to keep that cost in control. That’s a very hard pill to swallow when the current social services ethic is to dump a single mother of two off the welfare roles – presumably because you’re concerned about creating “dependency.” In the high cost homeless case you want to create dependency.

Dealing with the elite players in a population is just plain a different problem than dealing with the typical ones, even if it is hopeless hairsplitting to find the edge that distinquishes the elite from the middle-class or typcial members of the population.

I wish he’d found a way to draw more examples to two classes. His emphasis is over weighted toward bad actors which tends to encourage the readers to forget that the most overarching social power-law distribution is that of wealth and property. Similarly his set of examples, with the exception of the police, are all drawn from the poor – people with lousy cars, people without homes, isolated people with unsocialized dogs. This compounds the sin of diverting attention from the powerful elite by licensing the use of exceptional means only on the least powerful members of society.

But there are bad-actors in all populations. Emphasis on bad actors drawn from weak populations makes us forget that how this the same problem always arises. It arises with giant corporations, the ultra-rich, the politically well connected. Many of those actors aren’t bad; but their scale makes the harm they do far greater than a million dollar a year homeless person. Just as the elite in any population tend to, they require regulatory schemes that are entirely different than those used on typical actors.

Popularity Hashing

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As regulars know my favorite distribution is power-law.

I think there is a lot of system design that would play out a lot better if people admitted that one or another key statistic about the load on the system will be power-law distributed. It troubles me to read about system designs that implicitly assume that the traffic loads will be uniform. In most cases I suspect the designers haven’t thought this thru.

One way that plays out is that I suspect the folks that designed most of the internet just did not understand that graphs of communication links will condense into power-law graphs. So if you want to build a resilient network your going to have to take steps to make sure that the hubs don’t become single points of failure. Similarly I don’t think they understood that for similar reasons the only a few vendors would capture most of the DNS, most of the email, etc. etc.

I got to rant about this to Ben Laurie the other day. One example I was giving was that the distributed hash table designs all appear to assume that the frequency of looking up individual keys is uniform. I think that’s vanishingly unlikely. I presume that a handful of elite keys will get looked up a lot more than others – for example looking up Star Wars is a lot more common than looking up Julie London’s verson of Sway. Since I presume the traffic is power-law distributed then the elite keys will account for a disproportionate amount of the traffic. If your node in the peer to peer network implementing the distributed hash table happens to get stuck with one of the elite keys your reward is, in effect, a denial of service attack.

The obvious solution is to spray the popular keys across more nodes in the network. Ben had the clever idea that if you could look up the popular stuff one way and the regular stuff in the traditional way. In effect running 2 or more hash tables one for each tier of popularity. Clients of the distributed hash table would, of course, start by trying the popular table and then fall back on the less popular one. Servers of particular keys would monitor their traffic and shift load onto their neighboring tables as necessary.

Tricks like this would presumably be useful even for some simple single process in memory hash tables. A two tiered hash table is likely to get the elite entries densely packed into the fast cache memory where they are never paged out.

It pulls my cord that designers continue to ignore the prevalence of power-law distributions in the populations they are designing for. For example all the economics text books show the price/volume curve as a straight line. Setting aside my irritating I bet there are some really cool algorithms to be discovered that take this to heart.

Core Concerns

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Because it is proported to be about emotions I have been looking forward to getting my hands on the new book out of the Harvard Negotiation community Beyond Reason: Using Emotions as you negotiate by Roger Fisher and Daniel Shapiro.  It’s pretty good, which is a relief, since most books about emotions written by rational intellectual people are crap.

It is not without flaws. It is padded out with a review of the ground covered in the other books from their branch of the negotiation community.  I was surprised by a disconnect – emotions are very powerful but the advice the book gives is very temperate.    For example, it is good thing to find common ground with your partner. Discover shared hobbies!  Yes, might oak trees of good relationships from from such tiny seeds, but this kind of advice follows in the tradition found in most geek written books when they touch on emotion:  excessive distancing and reductionism.

Having gotten that out of the way – the structure of the book is just marvelous.  I was particularly delighted that they don’t fall into the tedium of enumerating a hierarchy of emotions.

Here’s the nut.  Humans have some very core concerns: to find a fulfilling role for example.  If these core concerns are not being met then strong negative emotions will follow.  If they are met, strong positive ones will rise.  Skilled negotiators entice the positive emotions out, and avoid baiting the negative ones.  Their reward: productive flexible creative problem solving sessions.

I particularly liked that they complement each core concern with a verb; so here they are:

  • Appreciation – which is expressed.
  • Affiliation – which is built.
  • Autonomy – which is respected.
  • Status – which is acknowledged.
  • Role – which is chosen and fulfilling.

While this book is written with negotiation in mind – i.e. an episodic attempt to engage in collaboration – these issues clearly arise across the spectrum of collaborative effort.  That list is universally actionable!

For example: a manager should keep a score card for every participant v.s. each of the five core concerns.  By participant I mean individuals and groups.  For example each of your suppliers.  Then act on that, encourage action to improve each item.  Do that using those verbs.  If you can’t answer the question “How is X chosing an fulfilling his role?” your not doing your job.  (I might add to that list: “What is the top idea in X’s mind?”)

All this has triggered a number of insights.  For example notice: if you struggle and win a particular role there is the risk that there will be negative emotions created – because winning is not choosing.  Fun, eh?

Notice how role and status are pulled apart here.  I hatz how often they are treated as synonymous. Notice that instead of using the term loyalty they use the terms affiliation and autonomy.  I’ve written before about the dual nature of assuming a role,  e.g. that there is something you do and something others do.  By example, you can’t lead if nobody follows.  By teasing out status from role they address that duality.

I’m pleased that they don’t talk about loyalty.  Loyalty is a outcome, and so it is built indirectly.  But also loyality is a term of hierarchical organizations; where roles are not chosen they are assigned and status is not acknowledged it is merely painted on the door.

Is affiliation just another name for what I call common cause in community dynamics?  A binding force of the collaborative effort, like gravity.  People get very emotional about it!  Which is why they guard the public goods of their communities so emotionally, with scolding, patriotism, loyalty oaths, etc. etc.

Autonomy sounds a lot like freedom, something people get emotional about.    Freedom depends on a rich pool of public goods.  Which are created thru communities of common cause.  Autonomy is to freedom like club good are to public goods.  This is a book about negotiation; as you negotiation your always attempting to frame up a new club.  Even if the  negotiation  is something as trivial as creating a link in the supply chain.

Business jargon likes to talk in terms of power: supplier power, consumer power.  It’s a pain to be a buyer when the supplier has all the power, and via versa.  If you have a single supplier for a key component, for example funding, then that supplier will be powerful.  All five of those aspects illuminate why that’s an emotional situation.  If you have billions of tiny customers then no one of them has much power and the emotions change, they become more alienated.  There is something deep running thru the dynamics of all exchange networks that these five issues can help to inform.

The Hedgehog and the Fox

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Here is a another really delightful metaphor for the power-law dialectic between the elite and the long-tail.

In his essay on Tolstoy’s philosophy of history, Berlin starts with the fragment of the Greek poet Archilochus, “the fox knows many things, but the hedgehog knows one big thing.” The conventional interpretation of this proverb is that the fox, for all her cunning, may be defeated by the hedgehog’s one defense. Berlin suggests the metaphor may also be used to highlight one of the important differences among basic vision of life held by different thinkers and writers.(4) On the one hand there are those who believe that there exists a single, universal organizing principle in terms of which alone all that they are and say has significance. On the other side of the divide are those whose beliefs are scattered or diffuse, moving on many levels, seizing upon a vast variety of experiences and objects for what they are without seeking, consciously or unconsciously, to fit them into any one unchanging, all embracing, unitary vision. The first kind of intellectual is like the hedgehog, the second, like the fox. Berlin suggests that Dante, Plato, Lucretius, Pascal, Hegel, Dostoevsky, Nietzsche, Ibsen and Proust are, in varying degrees, hedgehogs. Herodotus, Aristotle, Montaigne, Erasmus, Moliere, Goethe, Pushkin, Balzac, and Joyce are foxes.(5) Berlin readily acknowledges that, like all over-simple classifications of this type, the dichotomy becomes artificial, scholastic, and ultimately absurd.(6) Yet he argues that because the distinction captures an important insight, it provides a useful starting point for genuine investigation.

There is a small excerpt from Berlin’s essay here.

Idle Hands

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Recently I assembled a bridge in between my interest in business models and my interest in the wealth distribution. Business models span some space of actors, coordinating their actions, driving actions with motivations of all kinds. If we rope in other institutions (church, state, professions for example) we need to reframe these as institutional model.

The sum of these models creates the distribution of wealth. That’s the bridge, but the consequence is how this ties to ethics. In the search for interesting business models the holy grail is the business model that once added to the societal sum increases equity rather than decreases it.

Ethics permeates the work of those actors who labor to shape institutions: Entrepreneurs who labor to make new institutions that respond to observed institutional failures, critics who attempt to illuminate institutional failure, guerrillas who labor to undermine institutions they perceive as sufficiently failed as to be deeply illegitimate, professionals who strive to keep institutions vibrant, efficient, and away from the many dead-ends that lead to failure.

How an institutional model effects the income distribution is largely independent of how much activity in enables and coordinates. How much eBay, Microsoft, Google, all create large amounts of economic activity. How they effect the income distribution is another matter.

On my more cranky days I suspect that most internet business models are not on the side of the angels here.

In broad strokes the standard internet business model works by realizing that the internet gives the entrepreneur access to a vast pool of labor. The successful model discovers a means to engage those idle hands. Given them something to do. This works best when their motivation is intrinsic while the motive force for the business is more fungible.

None of this should be taken as dismissing either the magnitude of the effort the entrepreneur goes thru to construct the new institution or the magnitude of the social and economic value generated when one of these institutions come into existence. This is not an argument that Google, eBay, Microsoft, etc did not raise the economic boat overall. It is an argument that they certainly appear to have contributed to the shocking disparity between rich and poor.

Short of deciding to forgo the economic and social benefits of these network businesses we are left with a search problem. Can we find designs that get the benefits without the corrosive social consequences? How your institutional shaping actions effect the skew is part of the metric that guides that search. How much is, of course, up to you.