Thursday, February 17, 2011

Winner-take-all publishing, and more...

The pattern of economic rewards shifting to small number of participants in a given sector is perhaps best illustrated in publishing. This has been noted before as technology allows a few authors to dominate sales.
In a winner-take all economy, however, small differences in skills can mean large differences in returns and we have moved towards a winner take-all economy because technology has increased the size of the market that can be served by a single person or firm.  Sherwin Rosen laid this out in a 1981 classic, The Economics of Superstars and Robert Frank and Robin Cook have a good popular account, The Winner Take All Society.  Here is how I explained it a few years ago in a post titled Harry Potter and the Mystery of Inequality.
J.K. Rowling is the first author in the history of the world to earn a billion dollars.  I do not disparage Rowling when I say that talent is not the explanation for her monetary success.  Homer, Shakespeare and Tolkien all earned much less.  Why?  Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening's entertainment.  Shakespeare did a little better.  The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn.  Shakespeare's words were leveraged.
Tolkien's words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year - more than have ever seen a Shakespeare play in 400 years.  And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)
Rowling has the leverage of the book but also the movie, the video game, and the toy.  And globalization, both economic and cultural, means that Rowling's words, images, and products are translated, transmitted and transported everywhere - this is the real magic of Ha-li Bo-te.
Rowling's success brings with it inequality.  Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component.  Thus, greater leverage brings greater inequality.  The average writer's income hasn't gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires.  The top pulls away from the median.   
The same forces that have generated greater inequality in writing - the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization - are at work throughout the economy.  Thus, if you really want to understand inequality today you must first understand Harry Potter. [More, and please not the excellent links in this extract as well]
 Well, it just got worse, as Borders falls into bankruptcy.
Or some publishers may just drop their midlist authors. The blockbuster mentality in which publishers concentrate their marketing and promotion on the books they perceive as guaranteed sellers has long made the midlist author's life difficult. The additional financial burden imposed on publishers by Borders bankruptcy may well be the tipping point for many writers whose sales numbers are less than stellar.

It's an understandable strategy in difficult financial times. But books are so much more than a product. Books help us gain insight or perspectives on issues that matter. They allow us to escape reality and delve into stories or worlds unknown. They inspire us, educate us, change us. Their variety enriches both our culture and our lives.

Which means that ultimately, Borders' bankruptcy makes us all poorer. [More]
As the book industry collapses, publishers will be reluctant to bet on anything but proven winners. So expect short racks with Grisham, Brown, etc. How they will identify the next wave of these proven winners remains a mystery.

This concentration of income to a few is all very curious for the publishing industry, but that couldn't happen in agriculture, of course.  Or could it?

Think about the accrual of economic advantages to large operations. There are the obvious economies of scale, which lower fixed costs. But in addition, those who sell to us and buy from us love working with a much smaller number of customers/suppliers and often sweeten the transactions for big players: deeper discounts for machinery, special grain contracts, etc.

This in turn adds to their ability to dominate arenas like cash rent, which closes the positive feedback loop to push us toward a tiny number of large operations in grain farming.

At this point you might be expecting a rant about why this is economically and morally wrong, but I don't share those convictions. Once consolidations left us facing a handful of buyers (ADM, Cargill, CHS, etc.) and sellers (JD, Case, Monsanto, etc.) on each side of our business it became imperative for farms to grow in order to muster any leverage at all.

Right now we are simply pipelines - a ways for Monsanto to get revenue from Cargill, for example. The corporate decision is to calculate how large a flow the pipeline can tolerate. Read closely the corporate stock guidance from such entities and it becomes obvious they are not pricing to generate specific margins or cover costs, but simply what the farmer (pipeline) can bear.  The correlation between corn prices and fertilizer is convincing evidence of our feeble power in the marketplace. It is even more pronounced for landowners via rents.

One major balancing factor is competition, but that seems to come and go. While I am not claiming collusion, there is eerie coincidence in machinery, fertilizer, seed pricing, etc. especially in good times like now.

This trend will continue until farming entities of some sort emerge with commensurate power in the market. Already a 10,000 acre corn grower can wrest concessions, but once we are down to a few thousand such operations, individual power in the marketplace will begin to reappear, simply because each customer will represent significant revenue/profit.

This means like publishing, a few will make virtually all the money. And like publishing, technology will fuel this growth and make it impossible, I think, to divert.  While there will still be lots of farms, essentially all the production will coalesce into the few.

Our question is how to become one of the few. And I think that answer has not been fully developed yet. As more pressure is applied, innovative farm entities could provide the vehicles necessary to secure a future in grain farming. We just don't know what they look like yet.


Anonymous said...

I am starting out the day on a real down note after reading this. Thanks John! I knew I was a welfare queen,[subsidies, ethanol, etc.], but now I'm a pipeline. Good thing I'm not in it for the glory!

Anonymous said...

I started to pick up where you were going about half way through. There is a certain magnetism in being a superstar.

The point you didn't illustrate that I thought you might is that superstar farming operations also have another point of leverage. That is, when the cash rent bid is equal, how many more times does the lease go to the superstar as the superstar also has the ability to offer the formerly farming (retired) owner participation in "Farm Progress Show" on his own land?


Anonymous said...

I have several farming "superstars" in my neighborhood. They "pressured" the banks in the '80's to write their debts down and because they were leveraged so far, they could and did, take banks for a superstar ride. And, many of them filed bankruptcies and hid assets from creditors. Bins full of grain in the next county magically reappeared after the smoke cleared. They are basically thieves and we are supposed to worship their "efficiency"?

Many of these same farmers also did the "hedge to arrive" marketing schemes that broke my local elevators in the '90's. Big IS better, for THEM, anyway. They'll see you in the front row in church on Sunday, too, as they peruse the congregation for their next rental opportunity.

Yup, they are the pinnacle of efficient business since they don't have to pay their bills when the going gets tough. Superstars? Do you smell something?

John Phipps said...

Anon 2: Good point, I guess I had overlooked that phenomenon. It does have attraction for some outside investors - i.e. it's easier to rent it all to one big guy than fool around with several small one.

Anon3: For every BTO bad actor I would suggest there are 10+ BTO good guys. They populate TP every month. In fact, I would suspect the ratio of ethical performers is pretty even across the size spectrum. I know some small guys I wouldn't trust to old my coat for ten minutes.

Equating big with bad is an easy way to assure ourselves we are in the right, and excuse our own ranking.

The larger point is, just like the much of the rest of our economy we are firmly attached to a system that grants enormous rewards to the very top layer. While we gripe about it, there is nothing we would change. In fact, watch how small operators rail against means testing farm program benefits in the next few months.

I will write more about this skew in our system after I have finished some research.

Thanks for the great comments.