EQ Journal Archive 29

Filed under:

Development Economics and Entrepreneurship

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Bootstrap Capital

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Business Models

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Creativity and Value

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Elevator Pitch

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Guerrilla Marketing

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How to Make a Great Elevator Pitch

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Work/Life Balance

7 Comments

Work Less/Make More

Posted on
Sunday 13 September 2009

How the Chef at Le Naked Lunch and His Two Partners Learned to Work Fewer Hours yet Make More Dough

You can sometimes only learn things about yourself and your
enterprise in the course of actually running the operation. No amount of
pre-planning or initial business planning can actually replace what you
can learn in the day-to-day process of managing a business.

Here is the scenario that unfolded for the Chef at Le Naked Lunch and
his two partners while they were running their high end restaurant in
Montreal:

What: LeNakedLunch.com

Who: You are the Chef running a high-end restaurant at 4816, rue
Wellington, Montréal, Québec and you are trying to convince your two
partners to sell the restaurant to your employees and focus exclusively
on canning your recipes and selling them across the planet in specialty
shops and at trade fairs and shows like the Fête des vendanges in
Magog-Orford, Quebec.

You speak some English but like many Québécois, you feel more comfortable in French.

As you were leaving your accountant’s office, he offhandedly told you
that one unusual thing he noticed was that your deli counter made you
and your partners almost 80 grand last year. You didn’t think too much
about this but a few days later, you found yourself awake at 3 am with a
thought: “If we made $80k from our puny nine foot long deli counter
but only $55k overall from the whole enterprise, is there a message
here for us?”

What if you could work 1/3 fewer hours, travel the world selling your
stuff, visit fabulous places, meet cool people, sell online and in
specialty stores? What if you could actually make money by selling your
restaurant to your employees and make still more money by selling them
your products on an ongoing basis too? Is the fact that you made more
money from your tiny nine foot long deli counter selling take home
products than running a complex operation like a high-end restaurant
with its long hours, demanding clients, significant business, litigation
and health risks, needy employees and greedy landlord, is all this
telling you something?

Prof Bruce

Prof Bruce @ 9:52 am

Filed under:

and

Posted on
Saturday 12 September 2009

If you’ve got a great idea but need cash to make it go,
you’d better start working on your Elevator Pitch. Even if you don’t
need the cash or you have figured out how to use bootstrap capital, you
still need to be able to sell your idea to: clients and customers,
potential employees and your spouse!

What is an Elevator Pitch?

It’s the term used for a 2-minute presentation; the amount of time it
takes to go from the lobby to the investor’s office on the top floor
and to capture investor interest (your audience could, of course, be
someone other than an investor). Get it right and they’ll invite you
into the boardroom. It is also about the same time you need to convince
other stakeholders that they should get involved with your enterprise.

Who is your audience?

The scenario goes something like this:

• You find yourself, opportunistically, in an elevator all alone with
potential launch clients, possible future employees, VCs, Angel
Investors, Bankers, Business Mentor or Coach.
• You remember to introduce yourself.
• You don’t forget to smile from time to time.
• You tell them what you are working on. Example: “Hi, I’m Mat
Lafrance, President and CEO of a new service called GradeATechs.com. We
do fast, on-site computer and network repair for homeowners and
businesses.”
• You give it a short title. (“The title can’t be as long as the story,” Professor Max Neutze, Australian National University.)

What Makes a Good Elevator Pitch?

A good Elevator Pitch is made up of two key elements:

1. Lay out the pain statement. What problem is it that you are trying to solve?
2. Show the value proposition. How does your venture solve that problem?

Be specific—how exactly does your product or service benefit a single
client or customer? Can you show, on a spreadsheet, in a compelling
way, how by buying your product or service, a client will make money
from it or lower their costs or both. Did you introduce anything
innovative into your business model and what is the ‘pixie dust’ or
differentiated value in your model that will help you create a
sustainable enterprise with a long term competitive advantage that
results in some type of ‘franchise’ or ‘concession’ that you can
exploit.

Example: “You know people can either disassemble their PC, put it
in their car, take it to a local repair shop, be told it’ll take two
weeks and will cost $150 only to find out that it will really take three
weeks and cost 250 bucks and that their hard drive will get
accidentally wiped. Alternatively, they can log on to or call
GradeATechs.com, make an appointment and have a highly trained, Grade A
Tech come to their home or business and fix the problem in a couple of
hours for $120, guaranteed.”

Give them some idea of how big the opportunity is and who the
competition might be. Will this be an enterprise that will provide you
with more opportunity than if you just took a JOB? Will the enterprise
outlive the founder? Can it eventually continue without you?

Example: “The computer repair industry is huge and growing fast
and the industry is full of ‘mom and pop’ shops—it’s an industry that
the established players aren’t particularly interested in—in essence, we
are tackling the ‘last mile of service’. Plus, at any one time, about
30% of the PCs and laptops in the US and Canada aren’t working up to
their potential—that’s around 180,000,000 computers that need our
attention!”

Every great Elevator Pitch must meet four key tests:

1. Must be succinct. You’ve only got two minutes.
2. Easy to understand. Both your grandma and your grand kids have to get
it. Your product or service appeals to multi generations or, at a
minimum, you can explain it to multi generations.
3. Greed inducing. Investors want to make money. Clients want to know
that buying your product or service is a negative cost—the benefits
generated are greater than the cost.
4. Irrefutable. If your Elevator Pitch leaves the investor or customer
with more questions than answers, you’d better go back to the drawing
board.

Are there some other things you could usefully work into your pitch?

Sure. If you can do it, here are a few other things to include:

Talk about your business model, your team, your technology, whether
the opportunity is scalable and why you think you are going to be
successful—what you actually bring to this.

Example: “What’s neat about GradeATechs.com is that we have a
backend called GASnet, which basically matches our Techs with our
clients—clients give us a couple of windows when we can do a site visit
and then our Techs can log on to GASnet and take the jobs they want;
maybe, for example, the ones closest to where they live. Plus we have an
endless supply of workers too—there are engineering and CS or IT
students at colleges and universities in practically every major city
who want to make $25 per hour!”

Also, talk about cash. If your cash conversion cycle (CCC) is
negative or simultaneous, say so. This is a powerful advantage. For
example, GradeATechs.com gets paid online using GASnet as soon as they
complete a site visit—they simply run their customer’s credit card. They
have few receivables. They don’t pay their techies for up to two weeks,
so for, say, a house call, their cash conversion cycle will be, on
average, negative one week. If your CCC is negative or simultaneous,
then you can grow very quickly without a lot of external funding (bank
financing, VC money, etc.)

But if you are, for example, a consulting company that doesn’t ask
for deposits or retainers up front, doesn’t ask for progress payments
and only gets paid 30 or 60 or 90 days after you deliver your report,
you can run into trouble (i.e., run out of cash). In this case, the more
work you take on, the more cash you burn through—you still have to pay
your employees and suppliers while you wait to get paid. So this is an
important part of developing a sustainable business model.

We have an online spreadsheet to assist you with calculating your CCC: you can download it from: www.dramatispersonae.org/BusinessModels/CashConversionCycleMeasurement.xls.

Finally tell them how you intend to drive sales—opportunities are
useless if you have to spend $2m on a Super Bowl commercial before you
get your first client. If you can’t find a way to cost-effectively
market your products or services (i.e., sign up clients or customers
without heroic efforts), you are sunk anyway.

Always reserve your domain name (and make it exactly the same as your
company name) and print up business cards and hand them out like
confetti. Nothing is worse than having someone point out that the domain
for your proposed enterprise is already taken. If you are creating a
for-profit business in Canada, you need the dot-CA and dot-COM. If you
are starting a not-for-profit, you can probably make do with a dot-ORG.
Annual costs for each of these ranges from $6 to $15 so pretty much
everyone can afford to reserve their domains.

Is there a Role for Props, NLP and Theatrics?

Ultimately, the best sales presentation, the most convincing investor
presentation or the most authentic pitch to a potential employee, boss,
mentor or Board of Directors is one which becomes a conversation. No
one really wants to just hear you talk-what most sophisticated audiences
want is the opportunity to ask you questions. I consider a presentation
a success when it becomes a two-way conversation with plenty of
questions and comments.

I find that people have trouble remembering more than two or three
main points but once you enter a Q & A, the audience tends to better
remember what you are trying to get across. You need to keep your
answers fairly short.

So an elevator pitch is the opening gambit by you to get a conversation going.

You can use a prop or a chart (but not a power point slide show) as
long as these don’t become a distraction. Remember, VCs don’t invest in
an idea, they invest in you. Ideas are relatively abundant but people
with the passion, focus and ability to execute a plan successfully are
relatively rare. Plans and even ideas will change as the enterprise
takes shape, the person they are depending on to fight to the finish
(you) won’t.

NLP stands for Neuro Linguistic Programming. NLP plays an important part in your success.

Have you ever instantly disliked a person without having a reason for
it? Do you know that it takes the average male about 8.2 seconds to
fall in love (Journal Archives of Sexual Behavior, Telegraph Media
Group, March 25, 2009)?

When people make rational decisions, they use their prefrontal cortex
to do so. But if people think they are being treated unfairly, the
primitive part of the brain (the anterior insula) lights up similar to
when they smell a skunk or see a horrific sight. So if someone does not
like you or trust you or feels abused by you, they will not make
rational decisions. Their raw emotions overwhelm their rational
faculties. So if you do not establish rapport, you can not sell. People
will act against their own best interests if the primordial brain is
activated so trust is a key component of selling.

When you are trying to convince your boss to let you try something
new (i.e., you are being intrapreneurial) or when you are trying to
convince a mentor to take you on or when you are trying to find your
first pre-paunch client or pitching an investor or partner to invest in
your new enterprise, you are selling. And when you are selling, you will
be much more effective if you use NLP.

Top poker players do this all the time: they calibrate their
opponents (James Bond played by Daniel Craig in the 2006 film release of
Casino Royale does this to Le Chiffre); they do not play their cards, per se, they play their opponents.

People make decisions more based on their fear of losses than their
perception of gains. That is why in the prisoners dilemma, the police
always separate the co-accused. If neither confess, they both spend,
say, four years in jail: total jail time for two prisoners is eight
years. If one confesses and the other does not, the confessed criminal
spends two years less a day and the holdout spends ten years in jail:
total jail time is 12 years. If they both confess, they each get six
years: total jail time is 12 years. Obviously, the optimal solution is
for neither to confess but remember, the fear of loss (lost freedom) is
weightier than their perception of gain (optimal jail time), so there is
rush to see who can confess first and get the two year less a day
sentence.

So in terms of effective selling, you need to not only address the
upside of the deal, but show how their downside is covered. What is the
worst that can happen?

Here are 12 techniques derived, in part, from NLP that can help you
convince people, to bring them onside. For the full list of 36, please
see: https://www.dramatispersonae.org/NegotiatingSellingNLPNeuroLinguisticProgramming.htm.

1. Develop your BATNA: your Best Alternative to a negotiated
Agreement. If you figure you can live without this deal, you are right
away in a better position to negotiate successfully.
2. Someone once negotiated a long term office lease with me: he asked:
“Give me a nickel!” We thought nothing of it but a nickel was worth more
than $50,000 over the term of the lease so pay attention to details.
3. Always volunteer to write up the deal: he or she who holds the pen, hold a lot of power.
4. Calibrate the other party (that is how the top Texas Hold’em Poker players almost always come out on top).
5. Read lateral eye movements.
6. Read body language.
7. Synchronize your breathing with the other party.
8. Mirror them and their body movements.
9. Get on the same side of the table (see: https://www.dramatispersonae.org/ThreeLawsOfPowerSelling.htm)
as they are on (literally if you can). If for example, you are trying
to sell them computer equipment, talk about different solutions and
different vendors as if they were on the other side of the table and you
are in effect providing them with consulting services. Tell them if
they do not like any of the alternatives, you will work with them to
find one that works for them.
10. Listen to tonality.
11. Empathize with them.
12. Ask them questions, do not tell them stuff, ask first.

“I hate selling,” says Serence CEO Allan Wille, “but I love helping people buy.”

You can be somewhat theatrical in your pitch but don’t be over the top. This will get you noticed but not respected or trusted.

“People like to buy from people they like and trust,” Dr. Bruce M. Firestone, Ottawa Canada, April 2008.

For more about effective selling, see also: Secrets to Attracting (and Keeping) Clients, https://www.dramatispersonae.org/WhatDoYourClientsReallyWant.htm.

Leadership and Acting

Elevator pitches are meant to help individuals develop their
leadership skills. Entrepreneurs must be able to lead to be successful.

Leadership is different than management. Management skills are
necessary for the enterprise to function well on a day-to-day basis.
Entrepreneurs also need to be sound managers. Leadership is about the
ability to “Create and sell an alternative vision of the world, a better
one in which we are an essential part. Philosopher Isaiah Berlin wrote
that Churchill idealized his countrymen with such intensity that in the
end they rose to his ideal,” Warren Bennis in The Essential Bennis.

Bennis points out that leaders need:

These are pretty useful attributes to demonstrate when making an elevator pitch.

If you are in an Elevator Pitch competition, what are some of the things judges are looking at?

At the University of Ottawa, we use the following marking grid. You
can learn a lot from studying the grid—judges are usually experienced
professionals and know what VCs, bankers, customers or clients,
potential employees and others are looking for in you and from you:

Student Name: ___________________________________
Idea: ___________________________________________________

Personal Pitch—

Idea Pitch—

Grand Total ____/50

SOURCES:

Mr. Sean Wise:
https://www.youtube.com/watch?v=Tq0tan49rmc
https://www.insidethedragonsden.com

With input from Craig Schoen, Ryan Anderson, Bruce Firestone, University of Ottawa. Sept. 2009.

Assistance from students: David Huffman and Penelope Talbot-Kelly.

EXAMPLES:

See Craig Schoen’s 2-minute elevator pitch in the National Finals of the Wes Nicol Business Plan Competition:
https://ca.youtube.com/watch?v=4PahMY0CKMk

Wes Nicol Business Plan Competition Video:
https://ca.youtube.com/watch?v=flouYGq6S1E

Wes Nicol Home Page:
https://www.nicol-award.com/

Elevator Pitch Marking Grid: PDF format.

Prof Bruce @ 7:32 am

Filed under:

Business Models

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Elevator Pitch

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Ten Things that Startups Forget to Do

19 Comments

Posted on
Tuesday 8 September 2009

Of course, there are certainly a lot more than ten things
that startups often forget to do but for the sake of brevity, I limited
myself to ten*. So here is my list.

(* For a more complete list, please refer to: https://www.eqjournal.org/?p=2471.)

Startups forget to:

1. Select the right idea—if their idea is a bad one to begin with,
they are going to waste precious years of their lives for nothing. A
knowledgeable mentor can help here.
2. Create a business model for the 21st Century that produces great
results so that the harder they work, the more money they make—if their
business model is bad, they won’t be able to compete effectively with
hard charging entrepreneurs from China, India and other Tigers. Maybe
their business model can be easily duplicated or dislodged and doesn’t
give them a lasting, sustainable competitive advantage and concession or
franchise.
3. Add differentiated value, innovation and ‘pixie dust’ to their
business models. Create a compelling value proposition and learn how to
clearly demonstrate it to customers and clients.
4. The most important decision they make other than actually starting
their new enterprise is who they hire and who they surround themselves
with—so hire up. It’s people that produce income not assets or ideas,
per se, so hire great people that you also like and trust. Remember, don’t be a dilettante; you need real expertise in everything you do: https://www.eqjournal.org/?p=265.
5. Self-capitalize (bootstrap) the new enterprise so that a VC firm or
other investors, partners or creditors won’t end up owning it instead of
them.
6. Use smart marketing (guerrilla marketing and social marketing) so
they can acquire customers and clients cost effectively—if you have to
run Super Bowl ads to get your first clients, you’re probably dead
anyway.
7. Mass customize products and services using the Internet so that, for
the first time in history, they can get custom outputs from standard
inputs as well as reverse out some of the work to their clients,
customers and suppliers using the Internet so that they create a
scalable enterprise that can produce more value than if they simply had a
JOB.
8. Find pre-launch and launch customers and sell, sell, sell (or as Ben Affleck said in the film Boiler Room:
“ABC”—always be closing). If they have cashflow, they will probably
survive. Ever hear of a company with fast rising revenues folding?
9. Execute expertly, show leadership and become a trusted member of
their community and business ecology—if they can’t execute and they
don’t become a part of their community, it won’t matter how good the
idea and business model were, they’re sunk.
10. Make their own rules and set and achieve their goals—people are
excellent at achieving their goals if they remember to set some!
Successful, fast growing startups track their metrics and hold
themselves accountable.

Prof Bruce

Prof Bruce @ 12:52 pm

Filed under:

Internet– the Internet is Eating a Hole in the Global

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Bootstrap Capital

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Pre-selling, Finding New Clients, Keeping Existing Ones

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Insider Trading and Insider Knowledge/Expertise

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Why Businesses Fail

1 Comment

Posted on
Sunday 23 August 2009

My Dad, the late Professor O.J. Firestone, once told me that
the stock market heavily favored insiders. Stocks bought by insiders
tend to outperform the market by 7.5% in the year following insider
acquisitions (Nejat Seyhun, Investment Intelligence from Insider Trading, 1998.)

It is like so many fields of endeavour, inside knowledge counts. In
entrepreneurship, we tell our students that pretty much every business
has its ‘secrets to success’—buttons you have to push in order to be
successful. But you have to know that these buttons exist before you can
try pushing on them.

This type of knowledge comes from learning and long experience in the field.

Many of these types of expertise are unspoken ‘rules’ that even
business owners may not be aware that they follow and execute on them.
But they are key to success. That is why ‘How To’ books can only take
you so far—the rest you have to discover in the process of actually
executing the day-to-day tasks that go into building a successful
enterprise.

For example, Go Travel Direct (selling tours directly to tourists
without using intermediaries, such as Travel Agents, and avoiding hub
and spoke flights—i.e., tours are originated in a city and fly direct to
their destinations) initially thought that they could exclusively use
their website combined with low prices to attract and sell charters. It
turned out (as it did for so many Internet businesses) that people
wanted a 1.888 # to call and talk to a representative—they wanted to
hear a human voice, ask questions about the hotel accommodation, the
beach, nearby attractions, what have you…

After that, many clients were quite willing to hang up and book
online. Over time, more and more would develop trust in the service and
go straight to the website. But missing the call centre component not
only mucked up their initial budgeting (selling costs were higher than
expected), it nearly killed the business in its early stages.
(Unfortunately, they later got into trouble when they started their own
airline (Zoom) and fuel costs exploded on them, so to speak.)

Glen Sather, when he was coaching the Edmonton Oilers, discovered
three little words that would spur his team on to victory almost every
time he uttered them. They were ‘Out there Gretz’.

Seyhun found that companies underperformed the markets by 6.1% in the
12 months following insider selling. Interestingly, the
underperformance is somewhat less than the over performance. The
difference is probably due to the fact that some insider selling takes
place due to factors such as retirement planning, divorce or personal
needs that are not directly related to company performance. Of course,
one could argue that planning for your retirement or going through a
divorce could impact on company performance and thus the difference
between the 7.5% over performance margin and the 6.1% underperformance
is a bit of a mystery.

In any event, the difference is significant and simply underscores
the importance that before you become a stock market investor, you need
to put in the same level of study and work that you have to put in to
become an expert at practically anything. Malcolm Gladwell in his book, Outliers,
says that this takes a minimum of 10,000 hours of focused effort. Terry
Matthews (of Mitel, Newbridge and March Networks fame) says that it
takes 7 to 12 years to build a great business. There really is no such
thing as an overnight success.

Prof Bruce

Prof Bruce @ 9:04 am

Filed under:

Livable Cities and Neo-Urbanism

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and

Posted on
Monday 3 August 2009

There are reasons why the ‘little cabin in the woods’ (i.e., a suburban home) has cut grass around it:

1. To keep the bugs and rodents away;
2. To prevent trees from falling on the home in windstorms, ice storms or heavy snow falls.
3. To give the kids a place to play.
4. To keep up with the Jones’.

For people who live in Montreal and Ottawa who lived through the ice
storm of 1998, they understand the power of heavy ice and the damage
that it can do to trees and any structures nearby. Our ancestors also
understood this. The first thing they did when preparing to build their
cabins, was clear the land around it. They did it for sound reasons.

During the ice storm, my family and I were living in the rural area
of Ottawa. At about 3 am, I woke to the sound of heavy ice falling
around us at Dunrobin Lake. I put my hard hat on and my construction
boots on and went out into the most beautiful and terrifying
landscape—trees were bowed under enormous weight and one of them was
leaning on the power line leading to our home. I rigged up a pulley
system and used my wood saw to cut the tree leaning on the line.

Not quite through, I heard a crack and, stupidly, I looked up just in
time to see a 12 foot branch, 4 to 5 inches think, coated with more
than 400 lbs. of ice break off and plummet towards my head. I had enough
time to think how dumb it was that, even though I was wearing a hard
hat, I was now going to die because the thing was going to hit me in the
face rather than on the hat.

It thumped down right next to me but missed every part of moi. I
could hear trees and branches all around me breaking off and
ker-plunking to the ground or falling on things like our car port and
storage sheds. I realized this was happening all over the area and if I
didn’t get that tree off the power line, we would lose power and it
could be days (as it turned out, it was weeks in many sectors) before we
would have power. In the middle of a tough Canadian winter and in a
rural area where power drives everything, you can die of hypothermia or,
at a minimum, your house will freeze solid and you have to get out of
there.

I had no trouble from that point on getting the tree secured and
swinging it away from the lines. We had power for most of the storm and
its aftermath. (That Fall, I had installed a propane gas fireplace that
could be operated without power (I had spec’d that during our search for
a secondary heat source, fortunately). It performed flawlessly in the
basement and kept the place toasty. We had to keep our kids indoors for
four days because branches and trees kept falling during that time. It
also took us two full days just to clear the driveway of downed trees—it
was over 350 metres to the county road from the house.)

If you look at where North American Indians camped at any time over
the last 15,000 years or so, they typically colonized high bluffs near
water where the winds would blow the bugs away. Try sitting in the
Canadian bush on a warm summer evening; the bugs will have a choice
between eating you where you sit or picking you up and flying you back
to their nest before completing their mission.

Some have suggested the time has come to get rid of the lawn; but before we do, we need to remember why we have them.

Now having said this, lawns are big consumers of:

• water;
• gasoline or electricity (to mow them);
• time;
• fertilizers;
• insecticides;
• fungicides;
• herbicides;
• pesticides;
• money.

So I can understand why people who want to be on the right side of the equation wish to be rid of them.

In our former house in Kanata, I never applied any pesticides or
fertilizer and, frankly, it showed. We had more weeds than grass—what
the grubs didn’t eat, the weeds took over.

I never applied pesticides because of my concern over the possible
health effects on our five kids. I just couldn’t see my kids rolling
around on the ground in a bath of applied chemicals.

As a result, our lawn looked shabby compared to our neighbours’
manicured golf greens (it also hurt to look at the real golf green in
back of the home—the Kanata Lakes Golf Course.)

So the pressure was on to conform.

Finally, when the kids became teens and stopped playing on the lawn,
my wife and I decided to do something. We hired a brilliant garden
designer by the name of Charles Stackhouse who replaced our ‘lawns’
(both front and back) with a natural garden made up entirely of Ontario
species—plants that would delight for three seasons and that did not
require heroic efforts to keep alive.

We never watered the gardens. We occasionally weeded them.
(Charles had laid down a cloth to prevent most weeds.) We occasionally
had to prune them back.

We also left a fringe of lawn at the front to blend in with our
neighbours’ properties and to forestall any by-law complaints from them.

The gardens were a huge success and a source of enjoyment for the entire neighborhood.

But I must say, having a professional design them was a big help.
Charles knew what to plant, where to plant it and when to plant it so
that what we got was aesthetically pleasing, environmentally benign and
did not create any negative consequences. If you think just letting your
garden go wild is the same thing, well, it isn’t. If the weeds, bugs
and rodents take over, no one is going to thank you; least of all the
people living in your own home.

Prof Bruce

Prof Bruce @ 9:10 am

Filed under:

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Posted on
Sunday 2 August 2009

In his 2009 novel, The Accord, Keith Brooke describes a
metaverse where people can upload digital versions of themselves to
continue on after they die. These avatars have the memories,
intelligence and even physical characteristics and consciousness of
their progenitors. They also live ‘forever’.

One of the curious characteristics of this new ‘heaven’ is that it
does not appear to have any economic system. One might think that the
cost of running such a thing would be small (at least from an
‘individual’s’ point of view), but the energy and other costs of
rendering such an incredibly detailed e-universe would not be trivial
and, indeed, the author does refer to that. He declines to provide
answers to the question other than to somehow arrange to transport the
whole thing to ‘interstitial quantum space’ where everything is free and
limitless. Convenient but not too convincing.

An economic system is obviously one way of dividing the pie up
amongst competing interests without resorting to all the other systems
that could be used (and have been used) to perform that function like:
command and control systems (e.g., the Star Trek universe where money
does not exist (and is, in fact, scorned) and Star Fleet HQ makes all
the decisions), dictatorships (too numerous to mention), hereditary
(Kings and Queens), feudal (indentured serfs), mercantilist (handing out
of franchises such as the fur trade in NA to Hudson Bay Company in the
17th Century), religious (the Incas), slave ownership (Roman and Greek
empires), military regimes, cooperative, communal, anarchic (which is a
type of system; i.e., no system), pecking orders, and so forth.

If I had my druthers, I would rather stick with an objectivist
philosophy where money represents a method of dividing the spoils,
creating new enterprises, rationing capital and rewarding initiative.
Dollars are democrats and they don’t discriminate. In civil societies,
monetary systems are a way of organizing folks so that they can live in
relative harmony and peace with each other without the need for
draconian or arbitrary interventions by the ‘authorities’. It is a type
of miracle that civil societies exist and operate, without any
significant intervention by the state. This is because (probably) 95%+
of their citizens have bought in to the concepts underpinning these
civilizations. I would guess that if more than 1 in 20 people do not
voluntarily accept the unspoken (and sometimes) unwritten covenants,
civil societies can not exist. You can’t have a police officer in every
home or business and, if you did, it wouldn’t be a civil society.

So if I was designing The Accord or any other metaverse-based
society, you could do a lot worse than introducing a currency-based
system and structure.

Worse still for The Accord, there is no (or very limited)
communication between the New World and the Old World. This is a
convenient plot device in the book but terrible for any nascent economic
system.

Think what a boost to productivity The Accord could have been—you
upload a digital copy of yourself (or for that matter many copies) and
put them to work on problems you are trying to solve back here in RL
(Real Life). I am giving a speech at a CEED conference in Halifax in
October ‘09—no problem, get one of my digital selves to update my
“Entrepreneurship in the Age of the Internet” speech (https://www.dramatispersonae.org/EntrepreneurshipInTheAgeOfTheInternet.ppt) and, presto, I am good to go.

Think how impressed my clients would be if I could make 1,000 phone
calls a day—20 from each of my 50 digital copies living in The Accord.
They would be indistinguishable from the real Prof Bruce.

An architect could produce design drawings, that would normally take
50 person-days, in 24 hours. An IT specialist could create a new piece
of software in 1/50th the time it would normally take to develop it in
RL alone. (And you could never again blame the ‘help’ for your problems
since they are you.)

The Accord would be an enormous productivity tool and it wouldn’t
have to worry about the resources consumed by its creation and
operation—it would be a huge exporter of information, research,
development, software, entertainment, music and more. If you could speed
up its internal clock—ramp it up by a factor of 10 X—you could boost
productivity from 50 X to 500 X faster than RL…

And what a fantastic place to experiment—with new life-promoting and
life-saving drugs, new scientific theories and endeavours, Broadway
musicals, polling, behavioral theories, social mores, etc. I would
imagine that new ways to settle disputes would arise (your avatar and
mine, for example, could fight a duel with pistols or swords to settle a
legal dispute here in RL. It’d be a lot quicker than suing each other.)

The uses would be endless. Creativity would blossom.

With all due respect to Mr. Brooke, he missed out on a lot by not
giving any (or much) thought to the inclusion of an economic system in
his new universe or giving it the ability to communicate with RL.

Prof Bruce

Prof Bruce @ 2:40 pm

Future Vision and Technology

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Cheat Death

Posted on
Sunday 2 August 2009

Personal Artificial Intelligence, PAI

Years ago, I wrote about what I think could be the next step in
PC/human interaction. We haven’t done a lot with the GUI since the
introduction by Xerox, more than 25 years ago, of the traditional desk
top icons we are all used to.

Google prides itself on simplicity—they carefully watch the word
count on their homepage, Google.com. In fact, if you logged onto
Google.com tomorrow and they only had the search bar there and zero
words, it probably wouldn’t matter to most people.

When they released Chrome, they further simplified the browser—their
Universal Resource Locator is also a search bar, a calculator and much
more. So the desktop is moving to a browser and data and applications
are moving to the cloud. OK, this is evolutionary and pretty cool.

But the next leap could be and probably should be linking the search
engine/browser and cloud to an AI—an artificial intelligence and better
yet, a personal AI, one that is tuned to your needs.

What would your PAI (Personal Artificial Intelligence) be capable of doing:

• Organize your files;
• Access and search your files;
• Prioritize your emails and phone messages;
• Respond to some;
• Organize your schedule;
• Make travel arrangements;
• Place phone calls for you/send emails;
• Learn whatever you learn as you learn it;
• Assist you with writing, spreadsheets, presentations, legal documents, video creation and editing, etc.;
• Update your personal websites, your blog, your Twitter account, your Linked in profile, etc.;
• Organize your passwords;
• Do research for you;
• Help you prepare for exams;
• Correct your mistakes;
• Conduct and analyze polls;
• Download your favourite music and videos;
• Remind you of key tasks, appointments and dates;
• Manage your financial portfolio and assets;
• Translate foreign languages;
• Interact with other PAIs;
• Be a sounding board;
• Keep you company;
• Teach you;
• Send out your CV if you are looking for work/spot JOBs that you van apply for;
• See you through a video camera on your PC or laptop;
• Move around on your PC or laptop/look you in the eye or be unobtrusive;
• Be tech agnostic—show up on your mobile phone/laptop/PC or on a PC at an Internet Café/live in the cloud;
• Assist your heirs in the management of your affairs and IP after your passing.

This set of tasks is not a lot different from the personal executive
assistant (at one time called a secretary) that senior executives once
had assigned to them. If you have ever had the privilege of working with
a top notch EA, you will know that they can add a lot of value and they
give an individual leverage—effective use of their time is multiplied
many fold. (Your PAI could, for example, do some work for you while you
were sleeping or lying on a beach somewhere. Now that’s productivity
enhancement.)

A top EA can cost anywhere between $55k and $100k per year—a cost not
many people can afford. But if a Personal AI was available for
download—one that would accompany you on your journey through life and
your career—you might pay $100 per year, say, for that piece of
software. In fact, the longer it stays with you and learns your likes
and dislikes, your work patterns, your thoughts and ideas, the more
valuable it becomes. (100,000,000 downloads would make this a pretty
substantial business, wouldn’t you say? It could be an advertiser
supported platform but this might be one of the few instances where
user-pay would work; the value to the individual is so high and the
proprietary nature of the relationship and its data and intelligence
suggest that people would be very territorial wrt to their Personal
Avatar/PAI.)

A superb piece of programming, it could become your alter ego in the
metaverse (Neal Stephenson’s name for cyberspace) and live on beyond
your own lifespan. It has access to your data and your IP; after all, it
learned what you learned—went to school with you and to work every day
so it stands to reason it may have some value, at least, to your kids
and grandkids.

Imagine if creative types like A. A. Milne (creator of Winnie the
Pooh and Piglet and Christopher Robin and the 100 acre wood, for
example) had access to the Internet during his life? Maybe Mr. Milne
could have created value for his family after his passing instead of
just aiding the Disney Company and some others who now have control over
his work.

Prof Bruce

Postscript: to read a bit more on this, I wrote “Cheat Death”: https://www.dramatispersonae.org/DesignEconomics/CheatDeath.htm and “Your Personal Web Site”: https://www.dramatispersonae.org/DesignEconomics/PersonalWebSite.htm.

Prof Bruce @ 12:22 pm

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Good Corporate Citizen

Posted on
Saturday 18 July 2009

The City of Ottawa is yet again embarking on a planning
exercise for rapid transit in Canada’s Capital City. Based on LRT (Light
Rail Technology), the last initiative foundered badly, not because of
the technology, not because the financing wasn’t available, not because
the public interest wasn’t there in Light Rail but because of political
discord within Council.

The matter is now before the courts—the selected providers (mainly
PCL and Siemens) are suing the City of Ottawa for a few hundred million
for breach of contract.

The City has now decided to go a different way—starting with a rail
tunnel under the City core. The consultants who are engaged in the
analysis of different routes are now suggesting that instead of running
the tunnel under City-owned streets or other City-owned ROW (Rights of
Way), they say their preference would be to run the line on an
as-the-crow-flies basis. The shortest path between two points is a
straight line. This obviously reduces costs for the City: not only
capital costs but operating costs as well—running trains on a shorter
route with fewer turns leads to reduced power consumption and less wear
and tear on brakes and suspension. Faster average speeds also result,
reducing transit times, increasing capacity with a preset level of
rolling stock and saving valuable time for riders.

All to the good, no doubt. But the consultants also state that
getting the ROWs from private landowners should be no problem (read, NO
COST) because none of the landowners use their properties at the depth
that the LRT tunnel would be constructed so why wouldn’t they be good
corporate citizens and make those ROWs available for free?

Not so fast. Let me tell you a story about another good corporate citizen (moi) who helped the City out a few years ago.

The City was constructing a major sewer line in Bells Corners. To go
around the site I owned at that time (which was 4.5 acres) would have
cost the City an extra $500,000 or so. They would have had to go south
along Moodie Drive, east along Stafford Road and then head north and
then east again. The pipeline would have extra length (i.e, extra cost)
plus five significant bends of 90 degrees, which reduce flow and
capacity and also the City would end up with a pipe that would have a
greater chance of leaking in those extra joints.

So like a good corporate citizen, when the City asked for an easement
over our property (for free, of course), I rather naively agreed.

The City surveyed the easement, created it at the Land Division
Committee and put the pipe through our parking lot. They kindly repaved
and patched our parking lot.

The weather in Ottawa is pretty tough—temperatures range from –20
degrees Celsius to +30 degrees Celsius. The average temperature year
round is just 4 degrees!

Snow and ice, freezing and thawing, these cycles are a major cause of
damage to all human made objects—roads, buildings, vehicles, …
pipelines too.

So the next Spring, we notice there is huge sump hole in our parking
lot—this is a lot that had been stable since we built those buildings 15
(!) years before. But now there was a hole in the parking lot big
enough to eat two cars.

We call up the City and tell them to get out and fix the darn thing. They send a survey crew instead. What’s with that?

It turns out that the sump hole has formed just outside their
easement—they then claim that it is not their responsibility to fix
anything outside their easement.

Any civil engineer (like me, for example) would just look at that
report and laugh. To understand the process, think about a pipeline
buried in the ground—it makes a perfect conduit for movement in the
water table along its outer length. Any water infiltration from the
surface will carve a channel along the pipe and take with it sand and
gravel (engineered fill) that underpins all asphalt surfaces.

For anyone who has ever installed a membrane roof, trying to find
where a leak is, is a non-trivial task. Water has a nasty habit of
following the path of least resistance which can be quite random.

Anyway, trust me, a sump hole could form quite a piece from that pipe and still be caused by it.

The City refused to fix it—“Sue us!” they said.

Nice chaps.

The City said the same thing to PCL and Siemens—“Sure, we had a
binding contract but so sad, too bad, we just feel like repudiating it
so sue us.” And they did.

Now I don’t like suing people—it consumes a huge amount of time, resources and creates a negative energy.

Here is the ‘balance sheet’ on a lawsuit:

Dec. 17, 2008 City of Ottawa Sewer Pipe Lawsuit

Cost to Repair Parking Lot -$50,000

Cost to Sue City $30,000
Cost to Obtain Engineering Report $15,000
Management Time $10,000
Misc. Costs $8,000

Total $63,000

Award for Cost of Repair $50,000

Total Award $113,000

Probability of Success 66.67%

Expected Value of Award $75,333.71

IRR

0 -$50,000
1 -$30,000.0
2 -$25,000.0
3 -$8,000 -$63,000.0 Check
4 $75,333.71

IRR -13% pa.

What this tells you is that you spend $50k fixing your parking lot
(you can’t very well leave it with a hole that can swallow cars whole).

Then you spend the next three years of your life suing the City
during which time you spend $30k on legal fees, $15k on an independent
engineering consulting report to prove that the City’s pipe caused the
problem in the first place (which any reasonable person could see by
standing on the edge of the sump hole for five minutes), $10k of
management time stupidvising the whole process and another $8k of
various expenses that come up.

In my experience, even if you feel you have an open and shut case (of
which there is no such thing), you ALWAYS have a chance of losing
litigation. The judge might not like the way you part your hair. She or
he may be a bad mood (I lost one OMB Hearing when the Panel Member got
caught in Ottawa’s great ice storm and wrote his decision in a fury.
That decision was later reversed, BTW.) Who knows?

So I have put in a probability of success of 2/3. That means the
expected value of your award is just 2/3 of your costs. This leads to a
NEGATIVE Internal Rate of Return (IRR) of 13% p.a. You would be better
off to do nothing!

Dr. Bruce M. Firestone

Postscript: Even if you change your probability of success to 90%
(way too high in my opinion), you still have an IRR = -3% p.a.

And what happens if the City decides to appeal the award? They can,
you know. The City’s staff know they can win by delay—just exhaust the
other side both financially and emotionally. This is a set strategy
that the staff use on planning applications, for example.

I think the economics of litigation are terrible and would only get
worse. It would change if the courts would award you punitive damages
but Canadian Courts, in particular are hesitant to do that. So, sorry,
no big lottery win for you. You are just better off to fix it and the
net time the City asks you for a favour—just say ‘no’.

For clients of mine with property downtown, you can be sure I will be
bringing this to their attention. What happens if vibration,
undercutting, what-have-you, destabilizes an office tower downtown. If
the City was too cheap to fix our piddly problem just imagine how they
will react to a real crisis… They will run for the protections of their
lawyers…

Prof Bruce @ 11:52 am

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Posted on
Saturday 18 July 2009

One could be forgiven for making the assumption that weather
forecasting will just get better and better as more resources are
poured into the field by national governments, research organizations
and the private sector. But any pilot can tell you that he or she would
rather rely on reports coming from the tower than any number of richly
endowed weather forecast organizations.

In fact, a farmer with an observation tower, an anemometer, a
barometer and a thermometer plus a good pair of binoculars and
experience and wisdom, will probably do better than the National Weather
Service or Environment Canada. The NWS spent over $930 million in 2009
and EC more than $500 million but you wouldn’t bet the farm (actually
the value of your crop) on anything they have to say. Just ask a
professional farmer. I did.

A famer today is an entrepreneur who:

a) Understands pre-selling (typically, they will pre-sell 75% of a
crop in the winter to fix forward prices yet leave room for a spike in
spot prices that could generate a sharp rise in farm income);
b) Insures the crop against damage by weather, insects or other factors;
c) Applies the latest technology in terms of crop and seed selection,
soil preparation, irrigation efficiency, pesticide application, organic
farming practices, energy use and production, marketing and sales, etc.

Farm incomes are rising and farmers are doing clever things to
enhance the value of their properties including: land rent for cellular
towers, wind turbines, solar farms, farm gate marketing, ‘pick your own’
or ‘grow your own’ strategies and so forth.

There is a future in farming for experts; but it’s like every other
business—not for dilettantes. If you have been flying a desk lately and
decide to buy a farm to raise and sell organic veggies because you just
saw a cool show on the Discovery Channel about someone in Montana who
just quit his day job to do that, you won’t even get a loan. Farm Credit
Corp in Canada will ask you embarrassing questions like: “So you want
to be a farmer? What Agricultural College did you graduate from? How
many years experience in farming do you have?”

Before you go off to buy a farm, ask yourself this: ‘Why is weather
forecasting so difficult?’ The theory is that if we knew the position of
every molecule in the atmosphere, what its energy state is and what
forces are acting on it, that is, if we had a computer sufficiently
large and fast, we could exactly know the weather today, tomorrow and in
the future. That is hogwash in my view—the reason is the old ‘if a
butterfly flaps its wings in Brazil, there is a tornado in Kansas days
later’ and the reason behind that could be spooky action at the quantum
level.

Before we look at that, consider just some of the factors affecting the weather such as:

1. The Earth’s atmosphere is a big gas bag and gases are notoriously hard to model and predict.
2. The chemical composition of the atmosphere is incredibly complex,
made more complex by ingredients added to it through human activities.
3. There are massive amounts of liquid and vapour in the atmosphere as well.
4. Solar irradiation of the atmosphere and the warming and cooling of
the atmosphere by the earth’s crust and oceans, lakes and rivers are
compounding factors.
5. Centripetal forces and the Coriolis effect are due to the rotation of
the Earth (which itself varies) and obviously act on the atmosphere.
6. The Earth’s orbit wobbles and seasonal changes are enormous.
7. Ocean currents have an impact as does the shape of the planet.
8. Solar winds and the Sun’s strength vary significantly over time.
9. Land forms, mountain ranges, plant and tree coverage, ice formation, ice calving, all have an effect.
10. Meteors and meteoroids impact the atmosphere in huge volumes every year.
11. The Earth discharges energy to space.
12. The Moon creates tides and causes the Earth’s crust to rise and fall.
13. The Earth’s crust is still rebounding from the last ice age.
14. Energy discharges (lightning and northern lights), the Earth’s
magnetic field, volcanic eruptions, forest fires, snow coverage affect
the weather.
15. Complex interactions between the solar wind and solar irradiation at
the level of the exosphere are probably impossible to model accurately.

I am sure there are many other factors I don’t know about and
probably no one knows about that also affect the weather. But I was
wondering the other day if there might also be quantum effects at work
in the weather cycle. If these effects are significant, then it may be impossible to predict the weather.

According to Heisenberg’s uncertainty principle, one can accurately
measure either the position or momentum of sub-atomic particles but not
both. In fact, efforts to more and more accurately measure one, makes
the other more and more unpredictable. If you think for a minute about
the fundamental forces that underlie most of the factors I described
above that affect the weather, you can see quantum effects practically
everywhere.

Quantum mechanical theory suggests that there is no objective,
rational outside platform where an observer can stand impartially by;
there is no way the observer can independently observe and measure
phenomenon at the sub-atomic level without affecting the measurements.
And if we cannot know quantum states exactly and if they are inherently
unpredictable and if quantum effects on the weather are significant, we
then cannot predict the weather—our models are doomed to be gross
approximations, basically guesswork.

This concept requires far more science than I can apply to the theory
but policy implications could be profound. If we cannot predict the
weather, we certainly cannot predict the impact of climate change.

We are pretty certain that at one time, the entire planet
froze. How did that happen and why did it eventually unfreeze? No one
knows. By adding huge quantities of carbon and other chemicals to the
atmosphere, what will happen to our weather and climate? There could be
significant non-linearity and quantum effects in the forecast, so to
speak, so none of our models might work.

What that would mean is that action to fight climate change is more
akin to the Hippocratic Oath for medical practitioners—do no harm. That
is we shouldn’t fool around with stuff we don’t understand and reducing
emissions and the costs incurred to do that would really be an insurance
policy against unknowable phenomenon.

That seems to me a more powerful and rational argument than using
modeling behaviors that produce predictions that might not be reliable.
If your predictions prove wrong, it might not mean that your concerns
about climate change are misplaced. It just means that you can’t model
it.

Prof Bruce

Prof Bruce @ 8:36 am

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Negative Cost Selling: Jeff Hunt and the Ottawa 67s

Posted on
Friday 17 July 2009

Negative cost selling is one of the most powerful sales
tools I have yet to discover. It really just means that you understand
the revenue model of your customers or clients—i.e., how by buying your
product or service, your client can make more money or reduce costs or
both. Why you would ever go into a sales presentation without this in
your tool box, I don’t understand.

If you are trying to win a listing from an investor to help him or
her sell their investment property, you have to be able to show them
what their returns look like if they use your services. I wrote about
this elsewhere, viz: Looking Back—Using the IRR to Measure Real Estate
Returns for a Seller. See: https://www.eqjournalblog.com/?p=274.

Jeff Hunt has understood the concept for a long time and his success
with Canadian Major Junior Hockey team, the Ottawa 67s, is a fine
example of a master marketer at work.

One of his early initiatives when he became the new owner of the team
was to devise a new way of responding to the 500+ charity and community
requests the team received each year for assistance. Instead of turning
down 95% of them, he accepted nearly all of their requests. If someone
was looking, for example, to raise $500 for their minor hockey team to
go to a tournament, he might let them have 100 game tickets at around $5
each that they could resell for, say, $10. If you have 12 sets of
parents, that is only around 4 tickets sold per person. This is
eminently achievable for committed parents. If Jeff has 500 such
requests, this represents a new marketing channel which gets rid of
50,000 tickets per season for him and generates $250,000 in marginal
revenue for the Club and the same amount for charities and community
groups…

Jeff clearly understood the revenue model of his clients, which
turned out to be charities and community groups not hockey fans, per se.

Well he has done it again. Jeff is offering two season tickets and
one suite-night to eligible corporations for the upcoming 2009/10 hockey
season for $1,000. The neat thing is that for this investment, the
corporation also gets a raffle ticket in a draw to choose a new name for
Ottawa’s Civic Centre, where the 67s play.

If you are a SMEE in Ottawa, you could have the Civic Centre renamed
after your firm for a year if your name is drawn. Jeff expects to sell
30 to 100 entries and raise up to $100,000*. Imagine if you are, say,
national DVD club, Zip.ca, which is based in Ottawa, and you want to
raise your profile in Ottawa. Instead of paying naming rights fees of
hundreds of thousands of dollars per annum (for example, Labatt pays
$550,000 per year for the naming rights of the building where the London
Knights play, the John Labatt Centre), you could buy the rights to the
Civic Centre for an expected value of ($1,000/1%) or $100,000 of which
you only have to cough up one thousand dollars in cash.

(* You have to hand it to Jeff for his creativity. Apparently, the
City of Ottawa and the 67s have been trying to sell the naming rights
for the Civic Centre since 2000 with no results. Selling suites,
signage, sponsorship and naming rights allows team owners to offer
regular seats at (somewhat more reasonable) prices. For Junior teams,
these revenues are often the difference between success and failure,
profit and loss, continued existence or a sale and move to another city.
Private operators have to produce results—the Bell Sensplex, a four-pad
arena complex in Ottawa operated by Senators Sports and Entertainment
in a P3 arrangement with the City of Ottawa, does over $700,000 a year
in sponsorship and signage. Compare that to around $10,000 per year for a
typical city-owned and managed arena. The $690,000 difference would
have to be funded from the public purse if the City managed the place
itself. It would be like voting for an unnecessary property tax hike.)

By buying $550,000 worth of marketing exposure with a cash
expenditure of just $1,000, you are building the value of your brand and
the trust that goes with that. Beyond that, I would imagine there will
be a lot of earned media (basically, free coverage in all media) from
such a novel and shrewd marketing strategy.

Now, of course, you have to have the sales capacity already built so
that you can benefit from increased coverage, brand awareness, trust and
demand. Otherwise, you can damage your brand if you win and then can’t
perform or produce.

Prof Bruce

Prof Bruce @ 1:39 pm

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Michael Jackson—Astute Business Person

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Posted on
Wednesday 8 July 2009

Whatever else MJ was in life, he was an astute business person. He knew the difference between being rich and being wealthy.

Let me quote actor and comedian Chris Rock:
“Shaq (Shaquille O’Neal who plays in the NBA) is rich but the man who signs Shaq’s pay check is wealthy.”

Chris Rock got it exactly right. You can get rich by winning the
lottery, becoming a NBA Super Star, speculating, asset flipping,
gambling, picking the right parents or prospecting for gold, diamonds,
nickel, whatever, but you can’t become wealthy doing any of these things
(and often you don’t become rich either.)

Wealth derives from control over a factor of production, a license, a franchise, a territory, a concession*,
some IP (Intellectual Property like the hidden formula for Coca Cola or
the 11 secret herbs and spices that the Colonel uses to make fried
chicken), a competitive advantage, a comparative advantage, property
ownership (Location, Location, Location): anything that creates a
sustainable, repeatable and renewable income stream; it is your ‘pixie
dust’ (see: https://www.dramatispersonae.org/PixieDustDefinition.htm)– the magic that really makes your business work.

Let’s just look at some numbers that will demonstrate the difference between being rich and being wealthy.

Say someone controlled the early Beatles catalogue (say, someone like
Michael Jackson). Mr. Jackson was reputed to have bought the catalogue
in 1985 for $47m (and he lost his friendship with Paul McCartney in the
process. (They later made up.)) By 1993, MJ’s company was reportedly
earning $30m from it (albeit, MJ had added other songs by other artists
by that time but let’s ignore that for the moment) and the catalogue was
then estimated to be worth $300m.

This yields a cap rate (capitalization rate: NOI/SP, Net Operating
Income divided by Selling Price) of 10, which is pretty typical for this
type of privately held asset. No one knows what kind of income stream
he got from the catalogue by 2004 but it had a rumored value of $1
billion. MJ still owned 50% of it, the balance was owned by Sony.

With a cap rate of 10 and given that MJ owned half of the catalogue,
we can guess that MJ got $50m a year in income from his ownership. Plus
the Beatles were making a huge comeback in 2004. (My then 14 year old
daughter, Jessica, only wanted Beatles CDs for her birthday and knows
just about every word to every tune the Beatles ever recorded.) So it
wouldn’t surprise me if MJ’s income was going up every year from this
source. This is called wealth.

However, let’s say that MJ at that time was in need of some quick
cash and sold his remaining interest to Sony for $500m. Now MJ would be
rich (for a while) from selling his interest in the catalogue but he
would no longer be wealthy because he had lost the ability to renew his
wealth every year by producing an income stream from control over this
particular factor of production.

But what’s that you say? He could have invested the proceeds in
T-Bills, Muni Bonds and GICs (Guaranteed Investment Certificates). Sure
he could have, but they produce puny 2.7% to 4% rates of return. If MJ
had paid $100m in taxes, he would have been left with $400m, which would
have given him an income stream of $10.8m to $16m a year with no
inflation protection. I mean if MJ had continued to control the
catalogue, he could have increased the price (aka royalty) paid for each
tune if inflation had taken off and had started to bite into his
revenue stream. But even ignoring inflation, why would MJ want to trade
an income stream of $50m a year that makes him wealthy to become a
remittance man getting $10.8m to $16m a year? MJ already had turned down
offers to sell; presumably he understood the Chris Rock difference
between becoming rich and being wealthy*.

Prof Bruce

(* Somehow I doubt that Lisa Marie Presley had the benefit of the
same advice. In December 2004, it was announced that Lisa had sold her
father’s image and name as well as 85% of Elvis Presley Enterprises Inc.
to Robert Sillerman-controlled SFX Entertainment for a reported $100
million, which included some stock in a new SFX controlled business. So
not only does Lisa no longer own, control and direct a valuable
franchise (her father’s estate, which brought in $45 million last year),
she didn’t even get all her compensation in the form of CASH. As any
entrepreneur knows, cash is KING. (Pardon the pun, Elvis). Now compare
that with J.K. Rowling’s absolute and tight control over her creation
(the Harry Potter series): not only the publishing rights but also the
film rights and other media rights as well. It has made her the richest
woman in the U.K., worth more the Queen.)

Prof Bruce @ 8:35 am

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