Bush on income inequality and CEO pay

President Bush finally recognized the rising income inequality of the US in his "State of the Economy" speech today. From the NY Times article on the speech:

''The fact is that income inequality is real. It has been rising for more than
25 years,'' the president said. ''The earnings gap is now twice as wide as it
was in 1980,'' Bush said, adding that more education and training can lift
peoples' salaries.

He also cited concerns about CEO pay that have been making headlines for a while now:

''Government should not decide the compensation for America's corporate
executives,'' he said. ''But the salaries and bonuses of CEOs should be based on
their success at improving their companies and bringing value to their
shareholders.''

The skyrocketing increases in CEO compensation have become a focal point of economic research in past years, with many different explanations posited and many different thoughts on how good (or bad) it is. I can't summarize all of the research (both because I don't have the time and because I don't know it well enough), but I'll point you to Carola Frydman, an assistant professor at Sloan, who has been looking at the CEO compensation over a nearly 70-year period, rather than just focusing on the past few years.

The graph below is taken from the New York Times, and comes from a joint paper (with Raven Saks): (click for a better look)

It's interesting that this discrepency did not get worse than it was in the pre-WWII era until the mid-90s, but has really exploded in recent years. And, of course, it's not just the level of executive compensations that's exploded, but the variance, as the most-highly paid executives now have salaries that are out of whack from anything we've seen before. If you're interested, I'd start with the Frydman (and Saks) articles, and go from there....

Exclusive Dealing

Well, this sucks.

Word on the street is that MLB is close to assigning the rights to its "Extra Innings" package, which allows fans to watch out-of-town games on a nightly basis, to DirecTV on an exclusive basis, similar to the deal that DirecTV has with the NFL and its "Sunday Ticket" package. As a Red Sox fan living outside of New England, who doesn't and won't have DirecTV, this is terrible news.

Fans without access to DirecTV will still be able to purchase the mlb.tv package which delivers the same set of games to your computer desktop for $79 for the season, along with all the problems associated with streaming video (low quality, freezes, drop-outs, etc.).

Now, this is clearly an anti-competitive move, as most (all?) exclusive-dealing contracts are, as it restricts the capability of cable companies and other satellite providers (as well as phone companies, which are now starting to deliver TV) to compete with DirecTV. That said, it's not clear than anyone will do anything about it, as DirecTV's exclusive deal with the NFL has been around for a long time and was renewed with little fanfare or investigation recently, although Gregg Easterbrook, the Tuesday Morning Quarterback, regularly complains about it. (Side note: reading TMQ implies that he has seen every game each weekend, yet he regularly complains about not having DirecTV and thus not being able to see the games he wants. How does this work?)

Recently, however, Arlen Specter has threated the NFL with legislation stripping it of its antitrust exemption as a means of getting it to get rid of its exclusive deal with DirecTV. I wonder if Mr. Specter is as big a baseball fan as he is a football fan? I hope so, because absent something like that, these types of deals will continue. As Joe Sheehan points out at Baseball Prospectus (gated):

You simply don’t go from being such a big fan of baseball that you would
purchase 1200 games a year on satellite to a non-fan based on one decision.

That is, if DirecTV can make up the extra payment in new subscribers (because people who subscribe to these things are, almost by definition, fanatical enough to switch TV providers to get the games), then it's a win-win for them and the leagues. Because the leagues get increased revenue, and only piss off fans who are going to be fans no matter what, which carries very little loss. I'm a big enough Red Sox fan to pay for Extra Innings, which means I'm a big enough Red Sox fan to remain one even if the games are only available on my laptop, or not even available at all.

Fortunately, US lawmakers are all living outside of their home team's braodcast zone, and so any Senator or Representative that wants to watch their local team plays either needs DirecTV or to threaten these deals with legislative action. I guess we'll see how many fanatical sports fans there are in Congress...

David Pogue pokes fun at the RIAA

David Pogue, the New York Times' main technology writer, has written a tune about the RIAA, to be sung along to the tune of, what else, "YMCA". Here's a link to his post. Based on the lyrics, I'm guessing that he won't mind my presenting his work here:

“R.I.A.A.”

Young man,

You were surfing along,

And then, young man,

You downloaded a song,

And then, dumb man,

Copied it to your ‘Pod,

Then a phone call came to tell you:

You’ve just been sued by the R.I.A.A.!

You’ve just been sued by the R.I.A.A.!

Their attorneys say, you committed a crime,

And there’d better not be a next time!

They’ve lost their minds at the R.I.A.A.!

Justice is blind at the R.I.A.A….

“You’re depriving the bands! You are learning to steal,

You can’t do whatever you feel!”

Know what?

They’re a lawsuit machine.

They say so what

If you’re only thirteen?

And you know what?

They were equally mean

To an 80-year-old grandma!

CD

Sales have dropped every year,

They’re not greedy-

They’re just quaking with fear,

Yes, indeedy-

What if their end is near,

And we download all our music?

They’d all freak out at the R.I.A.A.-

No plastic discs from the R.I.A.A.!

What a way to make friends! It’s a plan that can’t fail:

Haul your customers off to jail!

And who’ll be next for the R.I.A.A.?

What else is vexing the R.I.A.A.?

Maybe whistling a tune? Maybe humming along?

Maybe mocking them in a song-!

(The sound of jackboots bursting into the room…handcuffs…muffled cries…a columnist being dragged away… repeat and fade.)

What did 37 million people do on Tuesday?

They watched the season premier of American Idol, with over 37 million total viewers and 41 million people watching the final half-hour, according to overnight numbers reported at Zap2It. What is most amazing is that the season finale last season had only 36 million viewers.

Those ratings numbers are just outstanding. There are so many TV programs these days, and so many other entertainment options, that American Idol's continued (and growing) ratings success is just incredible. Personally, I watched season 3 fairly regularly and was totally addicted, so I've tried not to get too into the subsequent seasons, though I admit to following the show even when not watching regularly.

I'd guess that the "family-friendly" nature of the show is what leads to its large numbers, but that wouldn't really explain the 9:30-10:00 success. I'm guessing (hoping) that parents aren't keeping their kids up until 10 just to watch the first round rejects trying out in Minnesota.

What's more, the fact that there are so many entertainment options available should actually diminish the importance of being family-friendly. The classic example is that of apple pie, which for years was America's favorite desert. (Note: this analogy is someone else's, but I can't remember where I heard/read it, despite the vast resources of the internet.) One story for the decline in popularity of apple pie is that with advancements in refridgeration techniques, apple pie declined in popularity because while it was everyone's second or third favorite desert, it was not the #1 desert for many people.

Thus, when refridgeration techniques were less advanced, and it was only possible to store one desert for the whole family, apple pie was king. It was a great compromise. But once it became possible to keep 3 or 4 different types of deserts ready to eat, apple pie dropped off because everyone was able to choose their #1 desert. TV is not really any different.

In the days when families had one TV and no computers and video games, families watched whatever was best for the group as a whole, but now that there are so many different options available to everyone, the advantage of being "family-friendly" is gone. If you are the #2 option for everyone in the house, no one watches you. Before, if you were #2 for everyone in the house, there was a good chance that everyone watched you, as long as there was sufficient disagreement about what was #1.

So we can't explain American Idol's success as it being enjoyable for everyone in the house, but not everyone's favorite. With so many options and outlets available today, there's little need for compromise. If 37 million people watched American Idol on Tuesday night (and probably about the same number last night), then that tells me that over 10% of Americans think that's the #1 thing to do between 8pm and 10pm.

An Inappropriate Metaphor

The current issue of Sports Illustrated has a short article on the coach of the boys' ice hocey team at Catholic Memorial High School, Bill Hanson. CM is a top-ranked Massachusetts high school program and routinely wins the MA state title. They have also produced a large number of NHL players. They are the Mt. St. Charles of Massachusetts, making Bill Hanson the Bill Belisle of Massachusetts. (Mt. St. Charles won the RI state title for more than 25 years in a row, and has also produced several NHL players, including two #1 overall picks. When I was growing up, the games between CM and Mount, despite being exhibition games, were always some of the best high school hockey you could see anywhere.)

Anyway, the article is nice and all, but a quote for one of Hanson's players had me rolling on the floor laughing at the misuse of its metaphor. Not to pick on a HS student, and I'm sure he's a great kid and a good player, but this (talking about Hanson) is just funny:

He cares about everything: what you wear, how you stand during the national
anthem. If he tells you to skate around a circle in practice, you'd better not
cut corners.

Buying Gift Cards

Over at the Freakonomics blog, there's the normal cyptic preview of their upcoming NY Times Magazine piece, including a link to some background research. Included in that is an excel spreadsheet with recent ebay auctions in which gift cards were sold (.xls), which I found fascinating. Some stats:

• The average gift card included (there are 100), sold for a total cost (price + shipping) equal to 87.2% of the face value of the gift card. (The average card had a $200 value, though it varies greatly by store.)
• Of course, there's quite a range there as well. The least successful sale (62.1%) was for a $2.09 Macy's card. (There's also a $436 Pottery Barn card that went at 64.2%, so it's not just a small number thing.)
• Four cards went for more than the face value of the card. The "winners" are a $25 Old Navy card that went for a total cost of $26, and a $50 Wal-Mart card that went for $52. Two others went at 100%
• There's very little correlation (.09) between the feedback of the seller and the percentage of face value that the card went for, and also very little correlation (-.06) between the size of the card and the percentage of face value it sold at, though bigger cards did tend to fetch a lower %.

More E-Voting Concerns

We've often pointed to concerns raised about other about e-voting systems. Generally, the amount to someone showing that a machine could be hacked and that there would be no way to know. Then the makers/administrators says "it's not a problem" or "trust us", and as economists we know what to make of that. But today the NY Times is reporting that "trust us" means even less than we thought:

A laboratory that has tested most of the nation’s electronic voting systems has been temporarily barred from approving new machines after federal officials found that it was not following its quality-control procedures and could not document that it was conducting all the required tests.

....

Experts say the deficiencies of the laboratory suggest that crucial features like the vote-counting software and security against hacking may not have been thoroughly tested on many machines now in use.

“What’s scary is that we’ve been using systems in elections that Ciber had certified, and this calls into question those systems that they tested,” said Aviel D. Rubin, a computer science professor at Johns Hopkins.

Really, e-voting seems nice, but let's defer to Plato on this one: Quis custodiet ipsos custodes? Fortunately, as noted last month, all the increased attention to this has people expecting wholesale changes in the e-voting movement. Is it really that wrong to want a paper receipt that we can check and dump into a back-up ballot box, in case something goes wrong with the e-machines?

Happy 2007

Happy 2007 to anyone still checking Econball.

The end of 2006 was very hectic for me, and as you can see, resulted in a scarcity of posts. I'm hoping that in 2007, I'll be able to maintain a more consistent scheudle of 2-3 posts per week. There's still plenty of crazy IP stuff going on out there (see the post below about the RIAA's damage claim against AllofMP3.com, for example), so there should be plenty to say.

If you are interested in continuing to check this place out, please go ahead and add the Econball RSS feed to your favorite reader:

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Again, I hope everyone has a happy new year.

$1.65 Trillion

As found in Zero Paid, it appears that the RIAA is finally suing AllofMP3.com, the Russian website which has, for a while now, offered MP3 downloads of songs and albums for pennies per track.

The RIAA is citing approximately 11 million songs, and is asking for $150,000 in damages per song, for a total of approximately $1.65 trillion. That's a lot of money.

It's also an absurd damages claim. (I understand that the $150,000 per song is statute-based. It's still crazy.) The claim covers June to October 2006, and cites 11 million downloads. No information is available for the amount of revenue AllofMP3 has earned, but if we imagine that the average song is on the order of 6 megabytes, then at $0.03/megabyte, that is $0.18 per song, or about $1,980,000. Even if you assumed no costs, so that all of that was profits, an unjust enrichment-based claim doesn't quite get you to $1.65 trillion.

Oh, so maybe that $1.65 trillion accounts for lost profits by record labels. Well, of course not. In 2005, the RIAA reports music shipments valuing $10.5 billion (pdf), so if one assumes even distribution throughout the year (not the case, since December has more sales) and no change from 2005 to 2006, then shipments from June to October of 2006 would be about $4.4 billion. So, if $1.65 trillion was a lost-profits based damage claim, then it would be 375 times larger than actual revenues (not profits!) during that time period. Assume a 50% profit margin (from here, another pdf) and that would mean that each downloaded song would have to lead to the loss of 750 albums for the lost-profits angle to work out.

So, it's just really goofy. And it can't possibly put the RIAA in a good light, which is strange, because the RIAA seems to have no claim to stand on, since AllofMP3 is a Russian company that does not operate in the US, and seems to abide by Russian law. So I'm not really sure what the RIAA is shooting at here.