Spring Break #2 - I don't know anything about Instagram

Of course by now you've heard, read, or more likely seen a Facebook status update from someone with the news that social networking colossus Facebook has announced their intention to buy social photo-sharing service Instagram for a cool $1 Billion. That's with a 'B'. I have never used Instagram and don't know much more than what I picked up from the few pieces I read about the acquisition. But since this is a blog, I won't let that stop me from commenting.Artsy, right?

Most of the reaction to this announcement has fallen into three distinct buckets:

1. Wow, $1B for a new(ish) company with no revenue and no plan to actually earn any revenue? The DotCom bubble is back!

2. (from loyal Instagram users) - Wow, I hope big, bad Facebook doesn't screw up Instagram. I may have to delete my account. Editor's Note: No one cares, you big crybabies.

3. Smart move by Facebook. Photo sharing is the most popular feature on Facebook, and Instagram was becoming a real threat to Facebook's dominance in the space. Their mobile solution is miles ahead of Facebook's, and making the acquisition just killed their main competitor in the space.

All reasonable takes and fairly expected I suppose. But I'd like to offer a fourth take, one not about what a $1B valuation says for a company with $0 revenue - the revenue or lack thereof was not important to Facebook, the 30 million users were.  But rather what the $1B valuation for a company of a grand total of 14 employees says about technology, the labor market, and the new rules of the digital economy.

In some not-too-distant past, building a billion-dollar company would take years of toil, pain, sacrifice, risk, and ingenuity no doubt, but it would also typically take people, usually hundreds, maybe even thousands.  Instagram (and others like them, just not quite as valuable), are showing that not only is the need to build up and sustain a revenue and profit model not necessarily important in achieving a massive payday, but also that the traditional process of slowly building and growing a larger and larger staff of employees to manage and drive that growth may not be needed as well. In these digital businesses, plugging in to additional outsourced computing resources and programmatically rolling out a new feature or change to many thousands of servers and many millions of users is a job that can often be managed by just a couple of staff.  

The interesting metric to me in the Instagram deal isn't $1B for $0 revenue, it's 30 million users for 14 employees.

And that's a lot of sepia-wash pictures of your dog.

Happy Tuesday!

Labor Markets: Moving Parts and Search Friction

One of the best and most consistent sources of information and analysis of big picture data about the US Labor Market is the Federal Reserve Bank of St. Louis. The regional reserve bank was established in 1914, after the creation of the Federal Reserve System in 1913. The Eighth Federal Reserve District is headquartered in St. Louis and has branches in Little Rock, Arkansas; Louisville, Kentucky; and Memphis, Tennessee. Aside : Those cities sound like the stops on an epic barbecue tasting tour.

Recently the bank issued an updated version of its 2011 report titled Many Moving Parts: The Latest Look Inside the U.S. Labor Market, an examination of the dynamics of the labor market, the problems with “one size fits all” type recommendations to 'fix' the unemployment problem, and some of the challenges facing policy makers, businesses, and individuals who all are motivated and interested in getting more people back to work.

It is a really interesting, and not terribly long but probably a weekend-type read, and I'd encourage anyone that wants additional macro-perspective on US labor markets to give it a read. The key takeaway, I think, is that even though high unemployment rates have persisted for some time, it is erroneous to think of unemployment and the unemployed as a static state. The data in the report illustrate the incredible energy and transition in the labor market -  even in times of rising total unemployment many millions of people find jobs, and millions of others lose jobs, and still others exit the labor force entirely.

This chart from the report helps illustrate these labor market flows:

The charts show from Nov. 2007 until the end of 2011 that even while total Unemployment rose from 8M to 13M, and Nonparticipation also climbed by about 7 million, that in the last 4 years on average over 5M people per month actually found employment. In fact even in the depths of the recession, an average of 5.6M workers per month got jobs.

The report further examines the influence of highest level of worker education attained and the duration of unemployment and their impacts on the ability for workers to find jobs. As you'd expect two conclusions are apparent - one; the more education you have, the more likely you can find and keep employment, and two; the average time spent in unemployment is increasing, and feeding into a cycle that for many millions of people, is making a return to employment more difficult, as skills erode and optimism withers.

All told, while we mainly read and talk about unemployment, (especially in the popular media), in the context of one number - the rate of unemployment, the underlying market dynamics, the labor market flows, the 'search friction' between workers and openings, attitudes about risk from corporations, as well as national economic and political policy decisions all combine and conspire to make it difficult, in the opinions of the authors of the St. Louis Fed paper, to arrive at simple solutions to these problems. 

But I do think while simple answers simply don't exist for this problem, a good first step is understanding more about the data, the history, and how decisions about policy impact these markets. And the only way to get started is to do the homework.

So this week, if you are at all interested in these issues, your assignment is to read  Many Moving Parts: The Latest Look Inside the U.S. Labor Market, and let us know what you think.

Inside the iPhone: Biscuits and Tea

This past weekend the NY Times had an in-depth piece on some of the decisions and processes surrounding the manufacture of Apple's iPhone. The excellent piece is absolutely worth your time and attention, as it provides some fascinating insights into the requirements, expectations, and outcomes from a high-volume, high-tech, design, development, and manufacturing process today.

Suffice to say some of the commonly-held assumptions about United States firms inability to compete for most of the value-added supply chain and manufacturing processes for the iPhone are validated - US universities are not producing enough skilled engineering talent chief among them.  But some other assumptions, mainly the sheer cost advantage provided by outsourcing less skilled assembly tasks to lower wage locations like China, while not completely dismissed, are at least downplayed as a key decision driver for Apple in the Times piece.

In the piece the labor cost differential is estimated to contribute only a relatively small percentage of the iPhone's eventual market price stating: "However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense."

While $65 per phone is still relevant, it isn't necessarily enough on its own to drive decisions to outsource. So if the labor cost savings from assembly in China isn't the primary decision driver then why is the vast majority of the iPhone manufacturing process conducted outside of the United States?

Well if you believe the Times reporting it's almost completely about speed and flexibility. To me the most telling example comes from Apple's 2007 decision to re-design the device's screen just weeks before the launch date. A major change like this, so close to the delivery date would normally result in a missed product delivery, bad PR, unhappy customers, and perhaps even opened the door for a competitor to beat Apple to this market.

So what happened? From the Times piece:

One former (Apple) executive described how the company relied upon a Chinese factory to revamp iPhonemanufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Let that story sink in a bit. A veritable legion of workers, that were on-site 24/7, and that could be roused to work at a moment's notice to start cranking out the newly re-designed iPhones.  I am sure the former Apple executive is right that the speed and flexibility in this example can't be matched by any American firm.

And likely no American firm ever will, at least for the foreseeable future. Because having thousands of workers living on the manufacturing site, and that could be roused to work in the middle of the night with a biscuit and some tea doesn't align with any American's conception of what modern work should be. Does that sound like the kind of workforce your firm would want to assemble?

But when you think about it a little, the idea of thousands of people, all living together in very controlled circumstances, available to work at a moment's notice for extremely low wages, and lacking any real power to do much about their situation does sound a little familiar.  

It sounds a little like prison.

Labor Negotiations, Point Guards, and Genius Economists

So I am starting to get a little obsessed with the ongoing progress, or lack thereof, in the National Basketball Association's labor dispute between the owners, (billionaires that mostly didn't get to be billionaires by accident), and the players, (millionaires that also mainly did not get there by accident, unless you consider being 'tall' an accident).Who's that guy? That's not Metta WP.

For months the negotiations have dragged on, and last week the league announced the postponement of the start of team training camps and the cancellation of several early pre-season games. These developments, while not totally unexpected, act to raise the pressure on both sides to reach a settlement quickly, as the start of the NBA regular season, (and the point where players and owners actually start to feel the economic impact of the labor problems), is clearly in jeopardy of being postponed as well. Soon, each week the league and its players fail to come to an agreement means a week of games that will not be played, effecting players, team staffs, arena workers, media and broadcast partners, and all the extended ecosystem of stakeholders in the league. Not to mention me, and how I'll need to find a way to kill every Tuesday, Wednesday, and Friday night from November until June.

From the ESPN.com piece linked above, here's a short recap of the last set of negotiations between the league officials, and representatives for the player's union: (I've added some descriptors in parentheses for clarity).

(NBA Commissioner David) Stern celebrated his 69th birthday Thursday but didn't appear in a festive mood after meeting for about five hours with leaders from the union. He was joined by Silver, the deputy commissioner, Spurs owner Peter Holt, who heads the labor relations committee, and NBA senior vice president and deputy general counsel Dan Rube. (Los Angeles Lakers Point Guard Derek) Fisher, (Union chief Billy)Hunter, attorney Ron Klempner and economist Kevin Murphy represented the union.

 A description of a classic 'Management v. Union' negotiating meeting, right? High-ranking officials from the league, the Union Chief, the player's rep (Fisher), and of course a couple of lawyers and even an economist tossed in for good measure by the player's side. 

Typical unless you take a closer look at the one, 'sort of out of place but not really because I've never heard of him' Economist, Kevin Murphy.

Because Mr. Murphy is not just an ordinary economist - in fact he might be one of the smartest and most influential economists out there. From Mr. Murphy's Wikipedia page:

In 1997 Murphy was awarded the prestigious John Bates Clark Medal by the American Economic Association, given once every two years to the most outstanding American economist under the age of forty, and widely considered to be the second most prestigious prize in economics (after the Nobel Prize in Economics). Murphy was cited for his study of the causes of growing income inequality between white-collar and blue-collar workers in the United States and his research linking the growth in income inequality to growth in the demand for skilled labor. His other research has covered such topics as economic growth, income inequality, valuing medical research, rational addiction, and unemployment.

On September 20, 2005, he was named as one of the 2005 recipients of the MacArthur Fellowship, often referred to as the "genius grant."

So I can imagine the mindset of Commissioner Stern, (no dummy certainly), and the league owners in all this. They have (collectively), more money, more power, more control, and probably think more negotiating leverage in this situation. They usually sit across the table from union officials and player representatives and have to think - 'We're smarter than them.'. It would not be an irrational conclusion. 

But all of a sudden the meeting starts, and in walks the economic genius, Mr. Murphy along with the Union Chief and the Lakers point guard, and I wonder if Stern and the owners did a double take. Did they know who Mr. Murphy is? Did they have any idea about his history and reputation? Did they know they were sitting across a 'not quite but probably pretty soon Nobel prize candidate'?

You want to win your Beer League Friday night softball game? Easy. Bring in a ringer from the local college baseball team and claim he's the new guy in Accounting. 

Want to get an edge at the negotiating table? Drop a 'genius' economist next to your starting point guard.

Eventually a deal will be reached, and the games will be scheduled, and it is hard to know which side will 'win', but for me I'll give the players the halftime lead for their creative approach to stacking their team.

We're all in this together. Unless your Business Unit stinks...

I'm sure you have heard something in the news about the current strike at Verizon Communications, notable for not only the sheer numbers of workers involved (about 45,000), the seemingly irrational timing of calling a stike in this economic climate, but also for the nature and nuances behind the dispute.

The striking Verizon workers represent and support Verizon's landline business, a business that according to the company is in decline. Whether it is due to more consumers choosing to simply forego a fixed home landline in this age of mobile telephony, or the simplicity and low cost of services like Skype, the facts seem to be clear that the landline business is not where growth and increased profitability for the company will lie.

Most of us these days when we think of Verizon, see it only as a wireless/mobile company, with a national presence, constant broadcast advertising, (Can you hear me now?), and retail locations popping up all over the nation. In fact my local Krispy Kreme establishment was closed recently and now has re-opened as a Verizon Wireless store.  Sadly, the conveyor belt that used to carry the tasty donuts for their sugary glaze coating is gone as well.

But the 45,000 striking workers from the landline side of the business point to the overall growth and success of Verizon Communications (the consolidated landline and wireless sides), to argue against management's insistence on concessions and increased contributions to health care and retirement plans. Why should we, they argue, have to 'give back' when the organization overall is performing so well?

I don't really know enough about the details of the contracts and the proposals to come down on the side of either the striking workers or Verizon management as to the specifics of the dispute, but to me the interesting angle is the internal division at play here.  While most of us have not been caught up in a strike like this one, I bet we have all been part of organizations with variations in performance (and contribution to profits and growth), across lines of business, regions, product lines - whatever.

Once the enterprise achieves a bit of scale there are bound to be some parts of the organization that simply perform better than others. And while sometimes individual contribution to the success of these better performing business units is recognized (unit specific bonuses or awards), often it really isn't singled out, particularly when for many organizations it can be difficult to fairly and accurately allocate shared corporate overhead costs to product lines or business units.

So while compensation might be tied to business unit success, things like benefit plans, retirement programs, PTO policies and the like are almost never variable inside and across competing business units within a larger organization. Whether or not you are a high-flying sales rep in a growing product line, or a administrative support person in a declining business, most companies treat you the same way with respect to benefits. After all we're all in this together, right?

The Verizon situation is certainly complicated by the fact that the declining landline business is unionized, and the growing and more exciting wireless business is not, but the larger issue that seems to position one side of the business against another is certainly fascinating.

I am sure we have all had different times in our careers when we looked at a business line in our organizations and thought - 'Man those guys are killing us'. But I doubt we ever as HR or Talent pros advocated for whacking their benefits or PTO because of it. Seems kind of a tough position to defend.

What's your take - should non-compensation related items vary inside organizations according to contribution to success?