Renters are short housing

Josh Barro talks about turning renters into savers so that the one benefit he acknowledges for buying a house -- forced savings -- is captured via another mechanism.

I'm not going to talk too much about why saving can be a macro-economic mixed good -- for example, if higher savings are not coupled with higher deficits, you can get a recession -- but I would like to talk about a benfit of buying not listed by Barro or McArdle: namely that we are born short housing.

Housing, unlike stocks such as Coca-Cola, is something everyone needs at least one of. So, with Coke, you begin in a neutral position and can then choose to go long or short it if you want to make a bet on whether COKE will go up or down. However, with housing, you begin needing one but not having one which means you are short right out of the box. Being short by default means you are speculating on house prices, which may be something you are not interested in doing, in which case buying a house makes you neutral, and leveraging up to buy more house than you can afford or buying multiple houses makes you long. Renting a house leaves you in a short position.

Therefore, with some irony, getting into the housing market is what you need to do in order to get out of the housing market.

Apple and Beats

It's been a weekend since Apple announced it was buying Beats headphones for $3.2B. Some of the press remain skeptical, while others claim that the skepticism might be racially tinged.

Maybe.

What I think is true, though, is that Apple is a successful brand, and by that I mean that consumers tie their identity to Apple, Inc. Set aside whether it is wise to weave your conception of self into a corporation (or anything for that matter), but I think I'm a Mac and I'm a PC resonated because Mac people were (are) Mac people and that was something that was important to their identity.

And "Mac people" do not buy Beats by Dre, because Beats by Dre are "technically inferior", appeared on American Idle, and aren't Grado SR60s. The reaction would be much the same if Apple bought Skullcandy. No offense to either Beats or Skullcandy, but that brand image at odds with Apple.

I don't know how financially beneficial this deal is for Apple, it's not clear to me what strategic sense it makes (I know MOG, which seems to power the Beats service, and I don't think they are worth $3B for whatever that's worth) and there have certainly been worse tech acquisitions in recent years, but I think that most of the complaining is coming from a sense of betrayal. Which I understand. Moral of this story -- don't identify too closely with corporations.

Internet Advertising and Bubbles

Great article on Facebook's mobile business:

Significantly, the largest driver of Facebook’s mobile revenue is app-install ads -- that is, ads that encourage users to download an application rather than simply promote a product. According to AdKnowledge chief executive officer Ben Legg, whose company handles about 2 percent of Facebook’s ad sales, app-install ads make up well over half of Facebook’s mobile revenue. These ad units are largely purchased by free-to-play game publishers such as King (maker of Candy Crush Saga) and Big Fish Games (the Bejeweled series), which leverage Facebook’s incredible demographic data to target the small percentage of players who will spend hundreds of dollars on in-app purchases.

Ignore the mention of Big Fish games (which does not publish the Bejeweled series -- that's PopCap, now owned by Electronic Arts), the core dynamic is correct. Mobile game companies -- particularly King which is now public and under pressure to show growth -- will pay a great deal for acquisition looking for "whale" players who generate the bulk of their revenue. However, I'm pretty sure that the platform provider which handles the billing -- namely Apple and Google -- know much more about who the whales really are than Facebook and so are best positioned to sell them to the app companies. Therefore, Facebook's position here looks shaky, but also similar to when they first went public and were reliant on Zynga for the bulk of their revenues. Ultimately, Facebook will need more reliable legs to stand on than selling whales to game companies.

Would Warren Buffet buy Twitter?

A rhetorical question since the Sage of Omaha has already answered it by not buying Twitter. Still, as we read obituaries of the service, not yet 10 years old, plus hagiographies arguing it is a "must read", I think it's worth taking a step back and looking at this as an investor, and also welcoming Silicon Valley to Hollywood at long last.

First, Buffet assesses business by considering whether they will be around in 20 years (thus demonstrating sound management and a defensible market position) and then looking at whether the likes the price (all stocks go through ups and downs). I don't think Twitter does well in the 20 year test because, given how quickly markets change, and how easy it would be to replicate a Twitter like service (or even improve upon it! Twitter++ would be like Twitter was in the early days before it got "popular") the chance of it existing as a stand alone public company are pretty slim. Maybe Google or Facebook may buy it, and now you're playing M&A arbitrage, not investing, but from a pure value, DCF stand point, it's future looks pretty cloudy.

Secondly, many of these hot mobile B2C companies are essentially entertainment products: SnapChat, Facebook, Twitter, King (most obviously), and so are vulnerable to the same vagaries of fickle consumer sentiment as the rest of the entertainment industry. Not to say that great brands and businesses cannot be built in the entertainment space, they can, but the novelty sector is a difficult one and very far afield from the infrastructure and platform businesses that are currently funding, directly or indirectly, their more glamorous, consumer oriented brethren.

I overstate my case. Facebook is not Candy Crush Saga. But I can see the novelty wearing off, and/or something new and shinier coming along for people to go to for social entertainment.

RIP Gary Becker

I had the honor of spending a little time with Gary Becker while I was at Chicago. He was brilliant and curious then, and I'm very glad I have the chance to speak with him and learn from him. I still have my copy of Accounting for Tastes and the Economics of Discrimination, which blew my mind when I first encountered it.

Nice interview of him the New Yorker.