Money Talking

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—Small computer hardware stores close.
—Game creators optimize for one video card over another.
—Music lovers want to see the RIAA destroyed.

Do they all have something in common? I think so.

They all demonstrate the power and effect of money.

Stores: Big Is Usually Better

In the Internet era, “big” has rarely been “in.” The motto has usually been more like “Small is in.”

Ideology has one thing; reality says another.

The reason for this discrepancy is a misrealization of what the Internet does for businesses.

The Internet does one and only one thing for businesses: it reduces the cost of visibility and transaction costs. A Mom-and-Pop store in New Hampshire can find and get customers in New Mexico far easier and less expensively over the Internet than they could otherwise.

However, this does not mean a level playing field between small and big. What it has effectively meant is that niches that previously weren’t financially viable now become viable. If you have a food product for lactose-intolerant guinea pigs, the Internet makes this a going proposition.

However, if it turns out that there is in fact a much bigger profitable market for lactose-intolerant guinea pig food products than previously thought, rest assured that you’re not going to be left alone. Those with a lot more wherewithal will move into the marketplace, and if they can use economies of scale to offer such products cheaper (and maybe better), they’ll have a pretty good chance of knocking off the pioneer. Not necessarily, but usually, and usually, the exceptions prove the rule. It is only the little fish who grow to be big fish that survive long-term.

This process was described quite well by the owner of 2cooltek:

“Since I began way back in January of 1999 when there were only two other stores on the internet for cooler gear, ComputerNerd (folded in 2001 or so, redone in 2003, I think) and 1CoolPC (real good people, definitely throw them some business when I am gone), things have grown immensely. More and more people opened online case mod stores, and finally the big players noticed the market and jumped in themselves. Now several of my distributors run their own stores, and I just can’t compete unfortunately.”

That describes it in a nutshell.

Bigger fish have lower costs due to economy of scale. They can get lower prices by buying in bulk. They can then take the money saved, and use it to both lower prices, improve the delivery infrastructure, and publicize/advertise more than the little fish.

You may think that is terrible and awful, but if you damn the results of overbearing capitalism, then turn around and buy something from a Newegg or Zipzoomfly (or, for that matter, Walmart), you’re effectively campaigning for Kerry, then voting for Bush. And in business, it’s how you vote with your wallet, not with your mouth, that matters.

That’s because bigness does bring benefits: it could be lower prices, it could be better service, it could be simply more awareness and familiarity with Big Guy A rather than Little Guy B.

For instance, a company like Alienware is putting its money into ads. There certainly have been specialty PC stores before Alienware; the only real difference between them and Alienware is the advertising budget.

Bigness is relative, though. Today’s big fish can be tomorrow’s shrimp if a whale shows up. A company like Alienware may be able to go “Fe-fi-fo-fum” to a mom-and-pop computer store, but if Dell ever got interested in overclocking, Alienware would barely leave a smudge on the road.

Whatever it happens to be, it works.

Gaming: Something Or Nothing

It appears that we are entering the age of corporate gaming. Doom 3 is effectively “the nVidia game.” Half-Life 2 is expected to be “the ATI game.” This is highly inconvenient for those who would like to play both.

Why is that?

Well, what has been happening in the gaming world? It’s become big business on the hardware end, and it’s beginning to shift that way on the software end.

However, some of the producers of the most popular games are still remarkably small businesses, with programming employees numbered in the dozens.

The complexity required to have an advanced game these days either means more money invested in the project and/or more time to complete a particular project. The organizational requirements and budget required for top-end games these days bears a closer resemblance to that of a movie than that of a couple guys banging out code.

Given the competitive environment, game developers are looking for any edge they can, and there’s someone willing to give them just that, the video card manufacturers.

For a price. That price is getting special attention and advance information from one and only one of the video biggies, so they can get their own edge.

It’s important to understand what the deal is for a game developers. The issue is not getting special help to optimize for one type of video card rather than both. The issue is choosing between getting special help to optimize for one type of video card, or neither.

A game developer can do the right thing and not accept special help from one over another, but that leaves them getting special help from nobody, and thus leaves them behind the curve from those who do.

If even the developers of the most popular games submit to such pressure, imagine what happens with those further down the food chain.

Nonetheless, the power of money (and technical innovation and assistance in using that innovation) has an enticing benefit, better performance at least sometimes.

I suppose you could stop it by passing a law, but geeks seem allergic to that.

Welcome to the marketplace.

Singing To An Empty Hall

When you listen to P2Pers, they often seem rather hellbent not only to keep doing what they’re doing, but to also destroy those opposing them.

At first glance, this seems rather odd. Shoplifters don’t want the store they shoplift from to close, parasites need a host on which to feed

Look into it a bit deeper, though, and you find the belief that if you destroy the big guys, the little guys will thrive. They believe that if you destroy the “monopoly” the big music producers have over radio time, record placements, etc.,etc., we’ll have the golden age of music.

To be kind, this belief is childish.

First, there is no “monopoly” of the music business in the sense that it is used in the adult world. If Microsoft or Intel decided tomorrow that they want to get into the music business, there would be nothing in the world to stop them. Indeed, given their track record elsewhere, one might justly be more afraid of them than any current music company.

All it would take is money. Lots of it. That’s the core problem, the real problem. To have a chance to be successful in the music business, you need a lot of money. The big guys have it, the others don’t.

When you are selling a product to a mass audience that needs to be expensively informed about the product, all other things being equal, those with money will beat those without money. Period.

The music industry in some ways behaves like the CPU industry. In accounting terms, it’s high fixed costs, low variable costs. If a record company spends a million dollars on publicity for an act, that’s a killer expense if the act only sells 100,000 copies. It’s a bargain if the act sells five million copies, everyone makes a mint.

The problem is, if you only spent $100,000 on publicity, you might only get 10,000 records sold.

Of course, money isn’t absolutely everything. A gangsta polka act probably wouldn’t do well no matter how much was spent on publicity, and once in a blue moon, a hit group comes out of nowhere, but exception tend to prove the rule.

Yes, I’m sure many acts have gotten a raw deal over the years (though maybe not quite as raw sometimes as you might think, musicians describing their finances develop absolute amnesia over the amount of money they get paid in advances). Nonetheless, the fundamentals remain the same; money is a requirement for success, but no guarantee of it.

You can’t buy something you don’t even know exists. That will remain such as true whether big record companies exist or not, and getting rid of them won’t change the power of money.

Killing the players in the game doesn’t change the game. Other people with money will move in to take their place.

A midget may kill a giant, but that makes him no taller.

If someone waved a magic wand and made the record companies go away, it wouldn’t significantly change the parameters of the game. Those with money to invest will triumph against those who don’t. The popular music environment would probably be more monopolistic, not less.

Those with money will continue to monopolize the record store shelves and the radio playlists. That’s not going to change. All that would change would be where the money comes from and how they make more.

Unfair? It’s no more unfair than it’s unfair that I can’t open up my own CPU company or automobile company or big store because I don’t have the cash.

Let’s go a bit father and assume we could abolish big money from the picture altogether. It doesn’t make a garage act’s $2,000 or $5,000 go any further. After you spend it, no one will still know who you are, post-RIAA era or not.

Some will say that taking the independent route is more profitable than selling out to the record companies. That could well be true much if not most of the time.

However, there’s two different kinds of bets going on here. The independent route is low-risk, low-return. The record company route is more like a lottery ticket (and one in which someone else is putting up the cash).

If you really are a gangsta polka act, odds are you’ll end up better most of the time going indie and selling a few thousand CDs over the Internet. Then again, your act might prove to be the next “Disco Duck.”

No matter what you might say about the record industry, though, money has a benefit. More people become more aware of more music because of it than if it weren’t spent. If there were no money being spent, there would be less music around. If there were less awareness of music, people would spend money on other things. If radio stations found they couldn’t make as much money from broadcasting music, many would find something else to do.

Conclusion

Money is like a gun. It can do good things. It can do bad things. It can do both, even at the same time.

It’s pretty safe to assume though, that good, bad or indifferent, it does do something.

And in human affairs, you can’t make it go away. No matter how much you’d like to. No matter how “fair” it would be.

I read so many posts these days from people who are, to put it bluntly, economically illiterate.

People who think it only costs a quarter to make a CD, and the other $12.74 is profit.

People who think revenues and profits are the same thing.

People who think paying the record companies a nickel a track for each song they download is being extremely generous.

People who ask or wish for things from other people without the slightest clue as to what they would cost.

People who think withdrawing their patronage will break the company they’re dealing with.

People who expect five hundred dollars’ worth of technical support for a four hundred dollar item.

I know a lot of these folks are young, and they’ll learn, but ignoring the facts of life for money and finances is like ignoring the existence of gravity. Or weather. You can say, “I can fly” until you’re blue in the face and even convince everyone else around you that you can, too, but step off the top of that skyscraper, and see how far your wishes get you.

Some financial “statements” I’ve seen are about as valid and real as “Siberia in January has great bikini weather.” How seriously would you take anybody who said that? Well, that’s what some people sound like when they talk about certain corporate finances.

It’s not like businesses do only good things. They do bad things, and we talk about that pretty frequently here.

But attacking an enemy by talking finances when you are financially illiterate is like attacking with no weapons. You can’t oppose something unless you understand it.

You can say, a hundred can say, a million can say, “2+2=20” a million times, but it doesn’t make it so.

Ed

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