• Australia's foolish encryption experiment

    The bits

    • Australia just rushed through anti-encryption legislation that is at best useless and at worst downright dangerous.
    • It seeks to do the impossible, providing secure access for police while keeping malicious actors out.
    • The people supposedly targeted by the legislation will be able to circumvent it relatively easily.
    • It will fall back on targeting points where information is not encrypted, something it already had the power to do.
    • However, it will still have very real, if difficult to calculate, economic and social costs.
    • If properly implemented, the Australian technology sector will suffer the most, but it will be largely unseen.
    • Every Australian is now exposed to unintended consequences, such as data theft.
    • What could possibly go wrong? I offer some predictions.

    I try not to dabble in day-to-day events, especially when politics are involved. But Australia’s parliament just passed legislation, with the full support of both major parties I might add, that is at best useless and at worst downright dangerous. It’s called the Assistance and Access Bill (AAB), and here’s why it’s so bad.

    It seeks to do the impossible

    According to TechCrunch:

    The bill, in short, grants Australian police greater powers to issue “technical notices” — a nice way of forcing companies — even websites — operating in Australia to help the government hack, implant malware, undermine encryption or insert backdoors at the behest of the government.

    The problem is that it’s impossible to provide a secure way to allow law enforcement in while simultaneously keeping malicious actors out. If the government goes ahead with mandating backdoors in encrypted software - one of the problems with the AAB is it’s ill-defined, so its reach could be tiny or enormous - it undermines the security of everything from your loyalty cards to your banking details.

    Pandoras iPhone

    While no one can be sure, I suspect the technical difficulties and security risks of mandating backdoors will be a bridge too far for Australia. More likely it’ll go with what I call the “wrench” strategy, whereby it’ll metaphorically beat people/corporates into backdooring specific people, or blocking access to popular encrypted applications entirely.

    The wrench strategy

    The people supposedly targeted by the AAB - the “criminals, the terrorists, the paedophiles”, as Home Affairs Minister Peter Dutton described them - will be able to circumvent it relatively easily. If you have something to hide, it’s not difficult to independently acquire or develop your own encryption without relying on a third-party. Sharing files could be done with something as simple as an AES-256 encrypted 7-Zip archive. For chats, a relatively easy option would be the XMPP protocol with off-the-record (OTR). Email communication could be secured with PGP via GnuPG.

    Even if it tried, the Australian government wouldn’t be able to compel foreign individuals or companies which derive little (if any) revenue from Australia, have their full source code available online (open source) and are generally privacy advocates, to backdoor their products. No number of local laws will change that fact. I already use several of these services (e.g. Signal, ProtonMail, Standard Notes) and I’m sure plenty of other “innocent” people, concerned about the privacy violations committed by the likes of Facebook, do as well.

    I admit it’s a different story for major corporations. End-to-end encrypted services may refuse to comply with the AAB (although I suspect Facebook will melt faster than a snowball in hell), forcing the government to lean on Apple or Google - through their App/Play Stores - to deny Australian users access based on their geolocation (or inject malware themselves). It wouldn’t be the first government to do so: a messaging app called Telegram was banned in Russia for refusing to turn over its private keys.

    XKCD on security

    But if all else fails - as it will for the vast majority of encrypted applications - the government will need to take its wrench to the end points where information is not encrypted (e.g. the user, or his/her device), something it already had the power to do.

    It was rushed

    Despite having nearly two years to debate and consider numerous issues relating to the AAB, it was rushed into law before Christmas to avoid an “egg on face” political moment. You see, if an attack occurred over the holiday season - regardless of whether the AAB would have done anything to prevent it - the governing Liberal party would be able to call the opposition Labor party “weak on national security”. 2019 is an election year, meaning as usual political incentives triumph over logic, reasoning and the people of Australia.

    The laws of Australia prevail in Australia, I can assure you of that. The laws of mathematics are very commendable but the only law that applies in Australia is the law of Australia.

    The above quote is from former Prime Minister Malcolm Turnbull, who was defending the AAB way back in the middle of 2017. It was a silly thing to say but it has also been taken out of context by privacy advocates, which did them no favours.

    What Malcolm Turnbull meant was people living in Australia have to obey the laws of Australia. The laws of mathematics always apply but if you’re heavily fined or even incarcerated for using them, then there’s a good chance Australians won’t be building or using products based on the laws of mathematics. Not only that, but foreign companies may not want to develop or launch their products in Australia if their and their clients’ data are at risk.

    Now that it’s law, the AAB will have very real, if difficult to calculate, economic and social costs.

    It leaves people exposed

    The target of the AAB (I think; it’s deliberately opaque) is end-to-end encryption, which works as follows (image courtesy of ProtonMail):

    End-to-end encryption

    The AAB was designed to circumvent the above without “breaking” encryption, which was its original intent. For example, the government may try to compel providers of encrypted services to inject a second, hidden public key right at the beginning of an encrypted conversation. In the above case, Bob would believe he’s encrypting his message only for Alice, but in reality he’d also be encrypting it for the government as well. It’s a strategy the British have publicly discussed, and the Americans have already tried (ibid).

    In a world of encrypted services, a potential solution could be to go back a few decades. It’s relatively easy for a service provider to silently add a law enforcement participant to a group chat or call… The service provider usually controls the identity system and so really decides who’s who and which devices are involved - they’re usually involved in introducing the parties to a chat or call. You end up with everything still being end-to-end encrypted, but there’s an extra ‘end’ on this particular communication.

    Businesses operating in Australia will have to comply with requests such as the one above and it will have unintended consequences. But practically none of the providers of encrypted communication have servers in Australia, meaning the AAB will be difficult if not impossible to enforce in the vast majority of cases.

    Fortunately, there is virtually no way to enforce this law outside of Australia because it has no foreign equivalent. ProtonMail, a Swiss company with datacenters only in Switzerland, is not under Australian jurisdiction. Any request for assistance from Australian agencies under the A&A [AAB] law would need to pass the scrutiny of Switzerland’s criminal procedure and data protection laws. Tech companies with a corporate presence in Australia however, are more likely to be impacted.

    My predictions

    I’m not a betting man but if I were, I think the following outcomes are most likely to occur:

    • The Australian technology sector will suffer, but it will be largely unseen. Just the existence of the AAB means clients outside of Australia cannot be sure their data are secure. Australian coders and tech entrepreneurs will increasingly have to move overseas.
    • Large foreign companies such as Facebook will fold and give the government secret access to their users’ conversations. Apple will refuse.
    • At some point in the future, a request made through the AAB and the subsequent security hole (e.g. poorly implemented malware) will result in the theft of hundreds of thousands of users’ private data.
    • Very few criminals, if any, will be apprehended as a direct result of the AAB, nor will any terrorist attacks be thwarted because of it.

    Benjamin Franklin wrote that “Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety”. The worst thing about the AAB is there is no demonstrable gain to safety, with Australia’s politicians almost unanimously trading their constituents’ liberty for a few magic safety beans.

    As a “nothing to hide” passive consumer of encryption, whether through WhatsApp or even TLS (the padlock next to a website’s name), you are the target of the AAB. Not from the Australian government but from criminals or foreign governments that will be able to, at some point in the future, exploit poorly implemented or undermaintained vulnerabilities injected into the numerous applications you use on a daily basis.

    The whole AAB debacle, from inception to implementation, reads like a bad joke. But I suppose it was to be expected from the same politicians under whose watch hundreds of top secret cabinet documents were found in two locked filing cabinets at a second-hand furniture store.

    What could possibly go wrong?

    Note: The festive season draws near and I will be travelling over the next two weekends. I hope to get at least one article out over that period but if not, now you know why.

  • The internet and the cost of free

    The bits

    • Much of the internet seems free, but there’s no such thing as a free lunch.
    • Some services have altruistic intentions, others sell their users’ attention and data.
    • People are generally happy with the trade-off, but I’m not.
    • There are other ways, such as the pay-to-surf model.
    • I’m not sure whether it’ll survive it’s a move in the right direction.
    • Amazon is on the blockchain, releasing its centralised Amazon Quantum Ledger Database.
    • I would love to see more decentralisation to reduce large data breaches.
    • Unfortunately, I think we’re still a while away from that model.

    The internet as we know it today is largely one where most things we encounter are provided for free. You can browse this website for free. When you search for something on Google, it doesn’t charge you. Facebook? Free. But as we economists are fond of saying, there’s no such thing as a free lunch. Someone is paying. In terms of this website, I provide the content for free because I enjoy writing about technology and want to share my thoughts on a platform where I have full creative control. GitHub bears the cost of hosting this site on the hopes that I’ll upgrade to a paid plan sometime in the future. But that’s not true for Google and Facebook, two very profitable public internet companies that directly charge their users very little.

    Google and Facebook net income

    I would have added EconByte to the chart but there’s not much point when it would only show as a flat line across the $0 intercept. Also, note that I’m singling out Google and Facebook only because they’re the largest companies with “free” products of which I’m aware. So how do Facebook and Google generate those profits? One word: advertising.

    Facebook revenue by segment

    Follow the money

    Google and Facebook charge companies for access to their users. The more people that use their services, the more companies are willing to pay for access to those users. But that model essentially removes prices from one side of the equation, meaning users of the “free” service - unable to weigh up the costs and benefits in dollar terms - have to decide whether or not to consume more through some other means. One way is through simple enjoyment. If Google and Facebook show too many adverts, or adverts that are too intrusive, people will leave the platforms for a competitor. That’s one reason why Google’s adverts are so discreet - if it plastered obnoxious advertising all over its homepage, people - and then advertisers - would quickly abandon it.

    Facebook’s adverts are a bit more intrusive and show up either directly as adverts (e.g. in the right column) or as “sponsored” posts, images and videos. Here’s an example Facebook advert from Neil Patel:

    Facebook advert example

    The sheer number of people who use Google and Facebook mean that they’re generally happy with the trade-off. I’m personally not a fan of the exchange; the price of using Facebook is too high for me and I eschewed the social network several years ago. Admittedly Google can be hard to avoid and I still rely on it for a couple of services, but I haven’t missed Facebook.

    There are other ways

    I recently started using Brave browser instead of Firefox (I’ll post a referral link at the bottom of this post). It calls itself “a free and open-source web browser developed based on the Chromium web browser and its Blink engine”. It’s a privacy-focused browser which blocks adverts and trackers, but with one big difference: a pay-to-surf business model. Users help to support content creators through microtransactions by either tipping or through the “Brave Rewards” mechanism, whereby you set aside a pool of funds that is distributed every month to websites that grab your attention.

    The whole thing is built on top of the Ethereum blockchain, using the “Basic Attention Token” or BAT. That means transaction fees are far lower than with traditional banking, allowing microtransactions to actually take place (PayPal and Stripe, for example, charge around 2.9% and 30c per transaction).

    The BAT triangle

    I’m not sure whether it’ll survive in the long run but I think it’s a move in the right direction. Advertising is obnoxious and always involves a breach of trust and privacy to some degree. At least with the Brave browser, you’ll be able to opt-in to advertising and be compensated for the inconvenience.

    Amazon is on board

    Well, kind of. Amazon just announced the Amazon Quantum Ledger Database, or QLDB, based on blockchain technology (the “AWS Managed Blockchain”).

    Amazon QLDB is a fully managed ledger database that provides a transparent, immutable, and cryptographically verifiable transaction log ‎owned by a central trusted authority. Amazon QLDB tracks each and every application data change and maintains a complete and verifiable history of changes over time.

    Amazon's QLDB

    For crypto enthusiasts such as myself it’s good news: finally one of the big tech companies has entered the blockchain space. I wasn’t sure which of the FAANGS would get there first but was pretty sure it would be Apple or Amazon, given neither of those companies rely on advertising for their revenue. It also makes sense for it to be Amazon over Apple; the company’s most profitable division is AWS (its on-demand cloud computing platform), whereas Apple is still in the device business.

    Amazon’s blockchain implementation looks to be centralised, with the AWS Managed Blockchain run only on Amazon’s servers. Amazon will charge a fee for the service based on usage, a step in the right direction - and the centralised solution is essential for corporates that need to tick all of their regulatory boxes - but it’s certainly nothing revolutionary.

    What I want

    What I would love to see is more decentralisation with data controlled by individuals, not corporates. Centralised solutions are always going to be more vulnerable to failure (e.g. hacking) than their decentralised equivalents. As I was writing this post, news broke that the Marriott hotel chain had been breached, exposing 500 million customers’ data, including names, addresses, phone numbers, email addresses, date of birth, gender, trip and reservation information and passport numbers.

    If a more robust, decentralised system had been available for the Marriott to store its data - for example, a distributed blockchain where user data are encrypted with private keys - there would have been nothing to steal in the first place. Hotel guests would verify themselves when booking or checking in using their private key, ideally secured with multi-factor authentication (e.g. a password and physical token such as a YubiKey). No backdoors or master key for hackers to exploit.

    Unfortunately, I think we’re still a while away from that model. The Marriott hack was no doubt a public relations nightmare, but I’d bet that from a purely financial point of view a centralised option would still be preferred. For if it had a fully distributed, decentralised database as described above, it wouldn’t be able to harvest its users’ personal information to sell to a third party or improve its own direct marketing ability. There’s also the fact that privacy and security are less convenient for the average user than more vulnerable, centralised alternatives, meaning some clients might be put off by having to take responsibility for their own data.

    People vote with their feet (or in the internet’s case, their hands) and so the evidence suggests we’re not yet at a point yet where the cost of “free” is greater than the inconvenience of having to pay a few dollars for an alternative. Facebook was hacked and has an awful history of abusing its users’ privacy, yet not only do people keep using it but its user base keeps growing. It’s not as if there aren’t alternatives.

    I think whatever model eventually triumphs, it won’t just have to equal the likes of Google and Facebook, but far exceed them. People can be reluctant to pay for something that they currently get for “free”, even if it’s not actually free.

    P.S. the referral code I mentioned earlier is here - https://brave.com/eco530 - if you install and decide to use Brave browser, EconByte will get 5 USD in BAT tokens.

  • When Apple's walls came down

    The bits

    • Steve Jobs built a mighty walled garden, now it’s under threat.
    • A couple of economists weigh in on why it worked, but was doomed.
    • Android and hardware manufacturers such as Samsung caught up.
    • The walls came down.
    • Apple will no longer report device unit sales.
    • Apple says services are its future as virtually all of its revenue growth is now there.
    • But Apple’s core business remains just as dependent on iPhone sales as it has been for years.
    • If you take away the iPhone, can Apple’s software compete on a level playing field?

    A hallmark of Apple over the past two decades (perhaps longer, my Apple history isn’t the best) has been its “walled garden”; the Apple “ecosystem”, where if you buy one Apple product you’re going to want to buy more because they don’t play well with others. As Steve Jobs used to say, if you had an Apple product, “it just works”. And one reason for that were the limitations that Apple placed on every device in its ecosystem: hardware; software; apps; even the accessories. It all had to be Apple, or it would become a major pain in your backside.

    I’m not sure if Steve Jobs was familiar with the path dependency literature, or whether he was just a smart guy who realised that once consumers had learnt how to use one of his products, if the switching costs were high enough then they would be more likely to just stay with Apple.

    A bit of background for those new to the concept: everyone who has used a computer probably did so with a QWERTY keyboard. Economists used to cite it as a clear example of “market failure”, where producers and consumers were “locked-in” to an inferior standard. A competitor, the Dvorak layout, was technically superior in terms of pure typing speed but people didn’t switch.

    The Dvorak layout

    Two economists decided to investigate the phenomena in more detail (Stan Liebowitz and Stephen Margolis). They concluded that the cost of retraining to get everyone using a Dvorak keyboard was not worth paying - that is, the efficiency gains from switching were not large enough to overcome the costs of switching. Even in a situation where a company has a monopoly as a result of network effects (e.g. everyone I know uses an iPhone, so having an iPhone is more important to me), there’s no coordination failure:

    These monopolies … are efficient outcomes in network industries, where the network effect, or scale economy, is strong. It is not our argument that such monopolies would never arise, but rather that these monopolies would not be locked in. Such industries are serial monopolies; one monopoly after another. … The stakes are always high in such industries. The new entrant seeks not to coexist with the incumbent, but rather to replace it. These high stakes, and the rivalry that they create, is apparently sufficient discipline to hold monopoly prices in check and to keep the rate of innovation very rapid.

    Steve Jobs’ time at Apple was all about lock-in, especially with mobile devices. If you used an Apple device your life would be a lot easier if you also used iTunes, iMessage, iCloud, Apple Mail, Apple Maps, the App Store, not to mention a myriad of Apple-specific accessories. You had to. Apple’s software either didn’t exist outside of the Apple ecosystem, or if it did, didn’t play well with non-Apple hardware. Steve Jobs essentially built digital walls that you would have to climb over to get out, a painstakingly time-consuming process that was often not worth the potential financial savings.

    But as Google’s Android developed into a legitimate competitor to Apple’s iOS operating system and third party hardware manufacturers such as Samsung caught up, that changed.

    Well they blew the horns And the walls came down They’d all been warned And the walls came down They stood there laughing They’re not laughing anymore The walls came down — The Call

    In 2016, faced with declining iPhone unit sales for the first time ever, Apple opened up Apple Maps, Siri and iMessage to third party developers with the idea being that it would boost revenue in its core business, iPhone sales. But it didn’t work as well as hoped, with sales continuing to plateau. So Apple took a different tack: services. To do so, Apple had to dismantle the wall even further by allowing developers even more access to its phones.

    iPhone sales and Apple revenue

    With device sales stagnating, Apple declared services to be the future, as virtually all of its revenue growth was coming from the App Store and licensing agreements (more on that later). And earlier this month, the company - to deflect investor attention from sales of its devices - announced that it would no longer report unit sales for three of its most important products, the iPhone, iPad and Mac. Investors weren’t impressed.

    Apple share price post-announcement

    Goldman estimates that Apple now generates almost $9 billion from its licensing agreements with Google. Google! A company upon which Steve Jobs once declared a “holy war”. $3 billion of that is so that Google is set as the default search engine on Apple’s devices. So for all of Apple CEO Tim Cook’s moral posturing about the importance of user privacy and the evil “data industrial complex”, his actions reveal that he’s more than happy to trade it for a cheeky billion or three. But that’s a story for another day.

    Essentially, the days of Steve Jobs’ walled garden and his “holy war” against Google are gone. Apple is now dependent on not just removing the wall’s remaining rubble, but paving a path into its ecosystem so that it can continue to grow services revenue. For while it’s all well and good to sell your users’ privacy to Google for a quick buck, Apple’s core business remains just as dependent on iPhone sales as it has been for years; its App Store commissions are directly related to the number of people using Apple devices. All else equal, fewer Apple devices translates into less App Store revenue.

    How Apple plans to move forward from here, I’m not sure. While Google has its entire array of applications on Apple’s App Store, I could only find Apple Music, Beats Pill+ and a “Move to iOS” app on Google Play. Incidentally, Apple Music - for which it charges a recurring $9.99 monthly fee - is one of the company’s fastest-growing services.

    Most of Apple’s software has thrived inside the walled garden. But with the walls coming down, will it be able to compete on a level playing field? Once you take away the iPhone, how does iCloud stack up against Dropbox and Google Drive? Can Apple compete with Microsoft’s Azure or Amazon’s AWS (Amazon’s most profitable division)? I’m not so sure.

  • Amazon borrows from the NFL's playbook

    The bits

    • Amazon recently announced the “winners” of its HQ2 competition, New York City and Washington D.C.
    • Seattle has struggled to keep up with Amazon’s rate of growth, and even tried to tax it.
    • Big businesses, especially NFL teams, have long held cities to ransom with the threat to relocate.
    • Amazon’s local spending multiplier will likely be higher than an NFL team. But the costs are similar.
    • The jobs Amazon is promising these new cities are not your run of the mill retail jobs.
    • Amazon wanted somewhere that would have clustering benefits; a city that was already ‘techie’.
    • Even without subsidies Amazon probably would have selected New York City and Washington D.C.
    • Amazon is the real winner and now has offices in populous cities with an abundance of skilled workers.

    Amazon recently announced the “winners” of its HQ2 competition, New York City and Northern Virginia (Washington D.C.). I put “winners” in inverted commas as while there are without a doubt winners and losers, it’s not a given that the chosen city is actually a winner at all. But look at Seattle, you might say. Amazon itself estimates that between 2010 and 2016, its local spending added $38 billion to the city’s economy, with every dollar invested worth about $1.40.

    Economic multipliers aside, it’s true that Amazon spends a lot of money. It also employs a lot of people. But so do other businesses, even in the technology sector. Facebook and Google have come out and said they took no state subsidies to develop their respective headquarters. Why is Amazon special?

    Home is where the heart is, until it becomes too expensive

    Amazon’s home - HQ1 - is in Seattle, where it has a huge presence. It employs over 45,000 people and owns 13.6 million square feet of real estate (nearly 1.3 million square metres), with:

    …the largest footprint by both raw area and percentage of any single company in any single city. Between 2014 and 2017, Amazon went from occupying 9 percent of the city’s prime office space to 19 percent.

    It received no subsidies, tax breaks or special laws to operate in Seattle. But therein lies the problem: while Facebook and Google may not have lobbied for special treatment, other companies certainly do. Taiwanese technology giant Foxconn, for example, will receive somewhere in the region of $3 billion to locate its new factory in Wisconsin, receiving a “state incentive package” that runs about 12 times higher than the national average. Yes, subsidising big business is so prevalent in the United States that someone built a database to track it all.

    By comparison, the cities hosting Amazon’s new headquarters offered up a paltry combined $2.4 billion in subsidies and investments, although that could rise if Amazon receives the federal tax benefit for which it’s currently applying (meant for economically distressed communities known as ‘Opportunity Zones’).

    But why didn’t Amazon just expand in Seattle, a city in which it already has a huge presence? For one, the city has struggled to keep up with Amazon’s rate of growth. Estimates put the number of direct Amazon and spinoff jobs at 100,000 since 2010 and Seattle is now the third-worst city in the United States in terms of “megacommutes”, commutes of more than 90 minutes, having expanded the number of them by 80% in seven years. Housing prices in Seattle have doubled in the last six years. I know from personal experience that accommodation anywhere near central Seattle is both (a) hard to find and (b) ridiculously expensive.

    But Seattle also tried to tax it:

    A month after Seattle leaders applauded themselves for landing a small blow against big business in the form of an “Amazon tax”, on Tuesday they hurriedly abandoned it to avoid what they called “a prolonged, expensive political fight”.

    Amazon and other large companies based in Seattle eventually defeated the proposal - a $275-per-employee tax for businesses making over $20 million per year - but why risk further expansion in progressive Seattle when other cities will literally throw cash at you? Relocating your corporate brand in exchange for benefits is as American as football!

    Amazon is not special

    Big businesses in the United States have long held cities to ransom with the threat to relocate. Perhaps the best, and most visible example of the phenomenon is the NFL (or any other North American sporting league). Take the Los Angeles Chargers, formerly of San Diego, which has received its fair share of public support over the years:

    The problem was the Chargers had already cut an ugly deal with the city in the mid-1990s, one that turned scenic Qualcomm Stadium into a concrete urn. It also forced the city to buy any unsold Chargers tickets for 10 years to guarantee sellouts and bypass a foolish league rule that pulled games off television in any markets where a stadium was not fully sold.

    And yet even with that sham, San Diego might have come through had California’s economy not fallen into near-ruin this century… No way was San Diego handing out $1 billion for a stadium that would sit empty for most of the year. Even assuming the special tax – which would have raised the city’s take on hotel bills to 16 per cent – wouldn’t have pulled money that could have gone to schools and roads, the effort to raise the tax would have taken energy away from tending those schools and roads. Giving Spanos $1 billion, regardless of where it came from, would have sent a terrible message.

    San Diego isn’t playing ball? Easy, move to a city that will. Similar moves by NFL team owners over the years have cost local taxpayers in the region of $6.7 billion since 1997, helping to finance 19 new stadiums and 3 major renovation projects (more than one a year!).

    Candidate cities for Amazon's HQ2 Source.

    Amazon’s ransom seems reasonable by comparison; at least having Amazon in your city may actually produce some net benefits, unlike sporting subsidies:

    …which cannot be justified on the grounds of local economic development, income growth or job creation, those arguments most frequently used by subsidy advocates.

    Remember the multiplier effect I mentioned earlier? Having Amazon open a headquarters in your city may plausibly pull in employment and investment from other parts of the United States, whereas a football team generally substitutes for other local entertainment spending. Its local spending multiplier will therefore be higher, although the opportunity cost of the government subsidies (e.g. potential public projects with higher rates of return) is likely similar for both.

    What makes Amazon odd

    Amazon is a technology company masquerading as a retailer. Most of its profits are derived from Amazon Web Systems (AWS), its cloud services division. It generates operating margins consistently above 20% and is therefore incredibly profitable, whereas its retail business - at least outside of North America - consistently loses money.

    Amazon profit by segment

    What that means is that the jobs Amazon is promising these new cities are not your run of the mill retail jobs. They’re high paying, with average salaries of $150,000, and are likely to be technology-focused, rather than logistical (Foxconn’s jobs, by comparison, only pay an average of $53,000). Business Insider had a look through Amazon’s Seattle-based occupations and salaries to see what kind of jobs might show up at HQ2. And guess what? They’re almost all technology-related, with titles such as Data engineer; Business intelligence engineer; Research scientist; Software engineer; Software development manager; Technical program manager; and Database administrator.

    With jobs like that, you’re going to want to locate somewhere that already has some form of clustering benefit; setting up in a city that is already ‘techie’ will make it easier to recruit and retain talent. It also helps when your Founder’s house is only a short drive away.

    Bezos' houses

    If you can tick the above boxes and get some subsidies and tax breaks thrown in to boot, you’d be foolish not to set up shop elsewhere.

    The real “winners”

    Amazon. Amazon, Amazon, Amazon. While the whole contest idea may end up costing it a bit in the long-run if it ever sends out another request for favours in the future, the company is the real winner, not the cities. New York and Washington D.C. already have the most people employed in computer and mathematical jobs in the United States. So, some of Amazon’s new jobs may come at the expense of smaller businesses that won’t be able to afford the inevitable higher wage demands as demand outstrips supply.

    Amazon now has three headquarters in populous cities with an abundance of skilled workers, places it probably would have wanted to open an office even without subsidies. So not only has it reduced its costs, but by diversifying across the United States it has reduced the risk of another city council attempting an “Amazon tax” in the future.

    Amazon essentially borrowed a play frequently used by NFL teams and executed it beautifully.

  • Why BlizzCon failed, again

    The bits

    • BlizzCon, an annual gaming convention held by Activision Blizzard, took place recently.
    • It didn’t go well. Instead of a new game, it announced the mobile-only Diablo Immortal.
    • This isn’t the first BlizzCon failure but it is the worst.
    • In the context of Blizzard’s development cycle, the timing was poor.
    • Investors were disappointed not because of Diablo Immortal, but because that was practically all there was.
    • It was only a matter of time before Blizzard decided to enter mobile gaming. And China!
    • Fewer users are playing its games. That’s a problem far worse than an ill-timed Diablo Immortal.
    • Blizzard’s loyal fanbase will only tolerate remakes, remastering’s and rehashes for so long.

    Activision Blizzard, the creators of popular gaming franchises such as Diablo, Warcraft, Starcraft and more recently Overwatch, held their annual BlizzCon event last week. For those unfamiliar, it’s essentially a big gathering of gamers that features Q&A panels with developers, announcements of new games (and playable demos), tournaments, and even costume and talent contests.

    But this year’s event didn’t go down well with fans. At all. Instead of announcing a new game, Blizzard decided to use the platform to launch a mobile-only version of Diablo 3, dubbed Diablo Immortal. The team was promptly booed by the crowd, a rarity at these kinds of events.

    Then it got worse.

    Every YouTube video Blizzard uploaded to promote Diablo Immortal was instantly pummelled with downvotes, despite Blizzard’s attempts to purge negative comments or simply relaunch the videos. A change.org petition appeared and quickly received over 40,000 signatories wanting to “Make Blizzard Great Again”, presumably by reducing its focus on Diablo Immortal. Activision Blizzard’s share price tanked.

    The share price tanked

    I’m personally a big fan of the Diablo franchise, having played all three versions (and their expansions). It’s an action role-playing, much like World of Warcraft, except without the “massively” part. It means you can get the full experience without having to sink too much time or money into it. But will I play Diablo Immortal? No. But then again, I don’t play any games on my mobile phone. Most of the Diablo fans at BlizzCon probably feel similarly, hence the negative reaction. But that’s not the only reason the share price fell.

    It’s not the first time.

    This isn’t the first BlizzCon failure but it is the worst. Looking at Activision Blizzard’s share price in the two days following the BlizzCon weekend, it has fallen in all of the past 5 years. Indeed, BlizzCon was only really a success in its first three iterations, with investors left either ambivalent or disappointed every year since 2008.

    BlizzCon has been more miss than hit in recent years

    My takeaway is that in the context of Blizzard’s development cycle, the timing of the Diablo Immortal announcement was poor. The last time it progressed one of its ‘core’ games - that is, released a new story-progressing game within its Diablo, Starcraft and Warcraft universe (excluding expansions) - was Diablo 3 back in 2012. Blizzard should have offered something else at BlizzCon. Investors were disappointed not because of Diablo Immortal, but because Diablo Immortal was practically all there was (the other ‘major’ announcement was a remastering of its popular real-time strategy game, Warcraft 3).

    Diablo Immortal itself won’t perform as poorly in terms of revenue as the hardcore fanbase will have you think. But it should be considered complementary to the ‘core’ line of games, not the sole focus. Thinking that it would go down well at a big gathering of hardcore, PC-gaming fans such as BlizzCon was foolish and naïve.

    BlizzCon is overhyped

    There’s also the fact that Blizzard doesn’t really announce major titles at BlizzCon. Starcraft 2 was announced in May 2007, three months prior to BlizzCon. Diablo 3 was announced in June 2008, four months prior to BlizzCon. World of Warcraft was announced in September 2001, before BlizzCon even existed (and expansions aren’t usually announced at BlizzCon, either).

    Essentially, Blizzard announces and releases games when it’s good and ready, not to line up with an arbitrary, pre-determined date in the calendar. That hasn’t stopped the faithful from attending, however, with the event sold out every year (the cheaper live streaming option attracts over 10 million viewers).

    Lots of people like Blizzard's games

    BlizzCon is a cash cow, a festival of sorts for people who prefer video games to, say, doing a lot of drugs and watching a giant wooden man burn. So while the event itself was underwhelming in terms of what was announced, that’s part and parcel at BlizzCon these days. A lacklustre BlizzCon isn’t going to break Blizzard, and Diablo Immortal will likely help the company in the long-run.

    Mobile is the future.

    The mobile gaming industry in 2017 accounted for nearly half of all global gaming revenue. Half! That’s huge, so it was only a matter of time before Blizzard, a gaming behemoth, decided to throw its hat into the ring. Allen Adham, executive producer and Blizzard co-founder, had the following to say about its decision to pursue Diablo Immortal:

    “The way I’ve been kind of looking at the mixed comments is what those folks are really saying is they desperately, passionately want the next big thing. So I actually think that those two items are being conflated … It’s pretty clear to us that there is a huge audience around the world that is gonna love this title. So hopefully we’ll get there.”

    For Blizzard to succeed with Diablo Immortal it will have to avoid harming the Diablo brand and not detract from Blizzard’s other products, and I think it can do both. For one, development of Diablo Immortal has been outsourced to a company in China, leaving the in-house staff to focus on new titles (Diablo 4?). Second, if anything it will bring the Diablo universe to a whole new generation who have probably never used a computer for gaming.

    I personally won’t be playing it, but then I don’t play mobile games at all; I’m not their target demographic. Diablo Immortal is a play for new markets, both millennials who dislike PC gaming as much as I dislike mobile gaming, and China, which is expected to have 768 million gamers by 2022.

    The real issue is fewer users

    As with Facebook and Twitter, investors are obsessed with the real money-maker: active users. Activision Blizzard on Friday reported its third straight quarterly decline in monthly active users (345 million, down from 352 million), sending its share price down 10%, a fall far more severe than last week’s BlizzCon backlash.

    The share price tanked

    People are rightly unsure if Blizzard still has its mojo, or if it has fallen out of touch with the gaming community. Is Diablo Immortal the best it can do? Wyatt Cheng, the lead developer on Diablo Immortal, certainly didn’t help matters when he responded to the crowd’s boos by quipping “do you guys not have phones?”. Ouch.

    Activision Blizzard is still an enormous gaming company with valuable intellectual property and a huge, loyal fan base. But unless it announces something other than a World of Warcraft reboot (“Classic”), yet another remastering of an old game, and the worst version of Diablo remade for mobile (1 & 2 were better on all fronts outside of the game engine), then even its most loyal fans will slowly abandon ship and its share price will continue to slide.