Posts Tagged ‘economics’

Youtube makes about 50c per hour per user?

August 12th, 2010

Caveat emptor: this post only contains back-of-the-envelop calculations that are about as valuable as what you paid to read it.

Youtube has a revenue of nearly $1 billion. It also had 97,115,000 unique viewers in April who spends on average 94.4 minutes watching videos. Assuming the same months to months, that’s a total of 1.8 billion hours spent on youtube per year.

This means Youtube is making about 50c per hour per user.

What if the average Youtube user spent those 94.4 minutes per months working at $10/hour instead? $18 billion. Time is way undervalued for an nonrenewable resource.

The numbers for facebook is probably worse (or better depending on your values).

Comparative Advantage

March 10th, 2010

In economics, having comparative advantage is “having the the ability to produce a product most efficiently given all the other products that could be produce”. However, just because Andy can make 10 kilos of play dough a minute while Benny can only make 4 kilos, doesn’t necessarily mean that Andy has a comparative advantage at making play dough when they could also make other things.

Let me explain. Suppose that Andy and Benny can also make clay. Andy makes 8 kilos of clay per minute and Benny can make 6 kilos per minute. We say that Andy dominates Benny in the production of clay and play dough. If Andy needed both play dough and clay, the intuitive thing for him to do is to produce both products himself since he can produce both more “efficiently”.

That’s not so. The theory of comparative advantage says that “given all other goods”, in this case, clay, Benny is actually comparatively more efficient at producing clay than Andy. Hence, there’s a benefit for Andy to produce only play dough and trade with Benny for clay. This is because when Andy produces 8 kilos of clay, he could have produced 10 kilos of play dough in that minute. So his opportunity cost of producing one kilo of clay is 1.25 kilos of play dough. However, when Benny makes 1 kilo of clay, his opportunity cost is only 0.67 kilos of play dough, so it’s cheaper for Benny to produce play dough than it is for Andy.

Benny’s ability to produce clay at a lower opportunity cost than Andy means that he has a comparative advantage at producing clay. Assuming of course that in our imaginary economy, play dough and clay sell for the same amount of money, then it is better for Benny to make the clay because his opportunity cost is lower. Similarly, Andy should keep producing play dough.

You could apply this to life and say that everyone should do exactly what they’re good at: if maths is your best subject in school, you should become a mathematician, and if you were better at sports than anything else then you should become an athlete. On the face of it, this sounds like a good rule of thumb to follow, “do what you do best”, especially now that there seems to be an economic theory that proves you should. However, it makes the naive assumption as I did in the Andy and Benny example that everything that anyone does has the same value. That’s never the case. Instead of saying “do what you do best”, the theory of comparative advantage applied to life should say “do what makes you produce the most value”.

It doesn’t sound nearly as catchy as the naive rule of thumb, and value is subjective and can mean anything from economic value, to personal value, to social value, but it is something to think about when making decisions. Life is a series of decisions after all, but I’ll leave that thought for another post.

Why Is SMS So Expensive?

August 16th, 2009

It’s a 160 character string of information. Why does it cost me 25c to send? 160 bytes of data at 25c is $1638.40 per MB! A decent wireless data plan in Sydney costs about 2.5c per MB, so an sms message costs 65,536 times as much as a Internet message of the same size!

Ok, I’m not being fair here. There are sms headers involved that make the message more than 160 bytes. There will be packet losses along the way that might require retransmission, but even so, it certainly will still be more than 50,000 times as expensive per MB.

The major advantage of sms is that it uses a push protocol rather than the pull protocol used in email. This means that when Jannet sends an sms to Margaret, she can be sure that Margaret will receive the message and find out about her wonderful new pair of shoes. In a push protocol, Janet’s message gets sent to an sms server that will keep trying to send the message to Margaret until Margaret’s phone receives the message and notifies Margaret with that annoying message ring-tone that you hate. If she was using a pull protocol, then the message will still be stored on a server, but Jannet will have to wait until Margaret logs into the server and checks for the message.

This surely isn’t 50,000 times as valuable as normal Internet messages. Most modern phone can be programmed to check for messages periodically and automatically. To Margaret, a phone that can do that will be no different from a phone that gets notified of a new message by a server. In fact, a third party can easily set up a server that can offer a push message service at a far lower price than sms. There are already iPhone applications that do this.

Sms is way overpriced. Telcos are not making an effort to make it cheaper because the majority of consumers don’t know that it can be cheaper and are happy to pay the higher price. As soon as smart phones become more common and push message services become more prominent, sms will be dead.

Telcos And Price Descrimination

August 7th, 2009

Monopolistic Telcos in Australia like Optus and Telstra charge enormous rates for their plans. A typical call is almost a dollar a minute in addition to a 30c “flag fall” connection fee. They do this because it allows them to use “caps” to give the perception of value.

Pay $50 for $500 dollars of value!

Bullshit. $50 will get you $50 of value, that’s the definition of value. Furthermore, telcos will charge these overpriced rates if a careless consumer goes over her cap. If you go over your cap,  you lose; be prepared to pay another couple hundred dollars on your next bill.  If you go under you lose the “value” you paid for but didn’t use. At best you can break even, and the odds are against you.

Here is a snapshot of Optus’ ridiculous pricing.

pricing

Ridiculous pricing structure, Aug 2009

For anyone who is too accustomed to this kind of pricing structure for mobiles to notice the peculiarity, imagine a grocery store who said,

Buy up to $200 worth of oranges for $10! <smallfont>Oranges are $5 each.</smallfont>

You rarely see this anywhere else but a mobile company.

A small player in the mobile market, Exetel has more realistic rates. The kind of prices that you would expect to see at a supermarket.

exThere, simple. You pay 25 cents per minute, no flag fall, reasonable data rates, no bullshit “value”. This is much better value than Optus prepaid rates (after you do the math).

Here is the surprise, ready? This service from Exetel uses Optus as the underlying carrier. That is to say, Exetel is an Optus mobile reseller! This is price discrimination.

A Microeconomics 101 Explanation

Under a typical demand and supply graph, the point at which [consumers] demand meets [telcos] supply sets the price and quantity sold. The utility (or value, or surplus, whatever you call it) for the consumer is the area above the price line(p0) and below the demand curve. This is because there are consumers who are willing to pay more than the market price for the service, so the difference between the price and the demand is excess value. The total value is the sum of all those differences. Similarly, the value to the supplier is the area below the price line and above the supply curve. Intuitively, the total utility is maximized at the price where demand meets supply.

surplusNotice that with demand and supply curves of similar elasticity (gradient), the consumer surplus and supplier surplus are roughly equal. However, suppliers (usually monopolistic ones) can absorb consumer surplus by selling services at a higher price to those willing to pay more.

image004By selling different quantities (u,v,w,x,y) of the same product at different prices (p,q,r,s,t), the supplier can eat into the consumer surplus to maximize it’s own profits.

Searching For The Solution

This discrimination only works if those willing to pay more cannot get a better deal elsewhere, and are forced to pay the higher price. Thus, this works better for telcos if there are fewer competitors.

The solution then is not just more competition, but more competition on price. Businesses set themselves a part product differentiation where they sell services that are slightly different from one another which allow them to avoid competing on price and instead compete on those little differences.

Competing on price is expensive to business, but consumers win. We consumers have been losing against telcos for too long. The only way to win is to make decisions based on price to encourage price competition. The rediculous price structures allow telcos to compete with product differentiation by offering slightly different plans while making it a non-trivial task for us to work out the real value. This has to stop. Think, what can we do?

Best Place To Buy Computer Parts In Australia

August 1st, 2009

I’ve talked about Booko as the best place to buy books in Australia. For computer hardware and accessories, there’s staticice.com, a search engine that allows you to search for a computer parts across stores all over Australia and ranks the results by price. Unfortunately it doesn’t calculate shipping prices for you like Booko, but it lets you immediately find the cheapest in-store price. This is great for consumers because if this service becomes popular, then it puts pressure on computer hardware stores to compete in price resulting in lower prices.

I hope more of these price comparison search engines come up for different niches. Especially for the mobile phones market. It’s a mess in Australia with artificially complex price structures where call charges are much higher than the price you actually pay so advertisers can use phrases like, “pay $20 and get $80 of value”. It’s impossible for a consumer to compare plans across the mobile market, and mobile companies like it that way because they don’t have to compete on price.

UPDATE:

Commenters also mentioned www.shopbot.com.au, www.myshopping.com.au, www.myshopping.com.au, and pricecompare.com.au as good product comparison websites, although I haven’t used them enough to recommend them, so I won’t link them directly :)

The high cost of now

December 6th, 2008

As a follow up to ‘why I’m not an early adopter’ in the previous post, Seth Godin’s recent post, “The high cost of now” explains it most clearly.

http://sethgodin.typepad.com/seths_blog/2008/12/the-high-cost-o.html

“Sometimes, in our quest for the new, we overpay. Most of the time, moving down the curve will decrease your costs dramatically, without hurting your ability to make smart decisions.

I bet you are overspending on now. Not everywhere, just in the wrong areas. Worth an audit, probably.”

It’s common sense, but it’s an irrational thing that a lot of us do.