November 28th, 2008

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Link Harvest: Radio Fixes Wrong Problem, and How Is The WWW Like The Stock Market?

First, for professional reasons, I try to follow stats on radio. Radio to me is the classic case of a non-contestable government regulated monopoly that pretends it is a free market, getting the worst of all worlds. As evidenced, the "free market" radio programmers steadily driven their customers away in droves for the last ten years or so (i.e., ever since the consolidation kick off began after deregulation in 1996), but because the market is a government protected monopoly for the primary input (radio licenses), no one with a better idea on how to do radio can contest the market.

This NYT piece does a neat summary in a nutshell of the problems for the radio industry. They are producing programming that people generally do not want. As a result, the medium survives in a handful of markets such as automobiles (primarily for the traffic and weather updates at this point) and offices (where people want something as background noise that is acceptable to the general work area population).

The answer from the radio industry is to push digital technology to produce more crappy programming no one wants to listen to, but at higher fidelity. Digital increases cost, because the power cost for doing digital is extremely high, especially because you also need to broadcast analog signal for the vast majority of listeners that have analog only radios. I am therefore dubious of the success of the "crap at higher fidelity" strategy, because even if it attracts some new listeners, the increased cost is going to be monstrous and advertisers are going to pay less for digital channel advertising unless someone can prove that this smaller audience is more valuable.

But I can't do anything about this, because I can't get a radio license. In fact, the National Association of Broadcasters, which consistently reminds the FCC that it should be deregulatory and follow a free market paradigm, does it's absolute level best to ensure that broadcast radio licenses remain scarce, and that potentially competing services -- like satellite radio -- cannot offer local news, traffic or weather. So although I see a market opening for a radio network that produces something other than crap, I will not be able to test my theory in good capitalist free market fashion. OTOH, because the regulator charged with making sure radio stations operate "in the public interest" acts as if there were a competitive free market, it does nothing to prevent the increased concentration and homogenization of radio that are killing the industry. Rather like the financial markets, it will take such utter collapse that the incumbents beg for something to save them from themselves to change tha nature of the medium.

There is one possible way to contest this market. If VZ and the other wireless carriers with 700 MHz licenses (or those willing to aggressively use the white spaces) are smart, they will offer a product that acts as a simple, hand-held internet radio receiver for a modest fee. I expect they will figure this out eventually as the broadcasters are looking to mobile television to try to save their industry.

Second link: how is the world wide web like the stock market? Well, just as the world wide web is not the Internet, but a lot of people think it is, the stock market is not the economy, but a lot of people think it is. That was brought home to me in a Washington Post column by Charles Krauthammer called From Market Economy To Political Economy. It is entirely about how political events are shaping market volatility.

Krauthammer is probably right that political events are driving much volatility in the stock market right now. But political events and an obsession with perceived power figures always create short term volatility. Anyone remember when Alan Greenspan used to be able to drop the market by saying "irrational exuberance?" It is no surprise that in a period when the actual economic value of these companies depends entirely on federal action, that stock prices swing wildly in response to news from Washington just as they did on news from Silicon Valley in the internet bubble days.

But more importantly, Krauthammer has made a fundamental error in mistaking the market for the economy. The market is not the economy, although the belief that it is the economy drives a heck of a lot of bad policy. "The market," by which most people mean certain indexes tracking the trade in stocks, bonds, commodity futures, and other negotiable monetary instruments, is one segment of the broader economy. In absolute terms, it should not be a very important segment. It produces working capital for many companies. When working properly (whatever that means), it can serve as a proxy for what people believe about the future prospects for a company, an economic sector, a commodity, or a currency. But "the market" as we generally use the term does not actually produce physical goods or even the vast majority of services used by the bulk of the population.

Certainly the market has become a significant component of the economy, and not merely for its role in providing working capital for businesses and collateral for debt. We have hooked a great number of plows to this particular horse -- retirement savings, "wealth effect" to drive consumer spending, executive salaries of management -- so that when the market stumbles a great many things go off course. It is also the most watched set of indexes to get a general gauge of the health of the actual economy, largely because it is a few easy to understand numbers that go either up or down. (The actual value of various indexes, such as the Dow Jones or the S&P 500, is questionable -- particular for anything but really gross measurements -- is, IMO, rather questionable. But they are certainly widely monitored and this produces spin off effects.)

In telecom policy, I see a lot of people who believe that the world wide web is the internet. It is not. It is merely the most visible and easily understood aspect of a complex underlying structure. But this is why, for example, many regulators believe that peer-2-peer file sharing is a "threat to the internet," since it increases traffic that could be used for the "real" internet. It is also why so much internet policy and (proposed) regulation is driven by the concerns about web content without much appreciation of what happens to the underlying infrastructure.

We have seen a similar problem in our financial policy -- and by that I do not simply mean the recent bail out efforts that focus on Wall St. and financial services but leave bankruptcy reform and health care hanging -- despite the fact that the later two would have far greater impact on the actual economy. It has meant that for years, business strategy has focused almost exclusively on driving up short term valuations and cashing out. Government has facilitated this, because it accepted that a bull market meant a healthy economy.

As with so many things, curing the current downturn requires a proper diagnosis. As long as we mistake the market for the economy, we will never get our economic house in order. We will do much better overall if we let markets tank in the short term to fix underlying economic problems (which will ultimately prompt a market rebound) than trying to prop up "the market" with rate cuts and bail outs that utterly fail to address the underlying structural problem in the economy.