Reason Magazine - Topics > Consumer Issues

Class Action Lawyers Get Creative

jsullum@reason.com (Jacob Sullum) — Thu, 01 May 2008 17:09:00 EDT

The good thing about class action lawsuits is that they allow enterprising lawyers to consolidate many small claims, any one of which would not be worth pursuing on its own, and win settlements for consumers who may not even realize they've been injured. The bad thing about class action lawsuits is that they allow enterprising lawyers to consolidate many small claims, any one of which would not be worth pursuing on its own, and win settlements for consumers who may not even realize they've been injured. Which category does Vibhu Talwar and Patrick Finkelstein v. Creative Labs fall into?

According to the settlement agreement, the lead plaintiffs, who filed their federal lawsuit in California, alleged that Creative had misled consumers by exaggerating the capacity of its MP3 players. The fraud allegation hinged mainly on two different definitions of gigabyte. According to the decimal definition (the only one I knew until today), a gigabyte is 1 billion (10⁹) bytes. According to the binary definition, a gigabyte is 1,073,741,824 (2³⁰) bytes. While Creative used the decimal definition in its advertising, the settlement says, "certain computer operating systems report hard drive capacity using a binary definition." On those systems, a 20GB Creative Zen player would register as only 18.6GB or so, about 7 percent less than advertised.

I see the potential for confusion (I'm confused just trying to explain the grounds for the suit), but I'm not sure this amounts to fraud, or that consumers have suffered an injury, or if they have that the injury amounts to anything in practical terms. I've got 8,346 tracks on my 40GB Creative Zen Nomad Jukebox (which for some reason registers on my computer as 38.1 GB, 2 5 percent less than advertised), and I still have 18.4GB to spare. I suspect the machine will die before I fill it up.

Still, according to the email notice I received today, I'm eligible for "a 50% discount off the price of a new 1 GB MP3 player" (which I have no interest in purchasing) or "a discount certificate good for 20% off the price of any single item purchased at www.us.creative.com" (which I might actually use). I guess the measliness of the settlement, which few "class members" will bother to collect, matches the imperceptibility of the injury pretty well. As usual in this sort of class action, the real beneficiaries are the lawyers, Brian Strange and Barry Fisher of Los Angeles, who will collect $900,000 for their trouble.

At least Strange and Fisher have done a public service by encouraging companies to be more honest. Or maybe not. As of 2003, Creative has included in its packaging a notice informing consumers that "1GB = 1,000,000,000 bytes," that "available capacity will be less" than total capacity (because of the operating software), and that "reported capacity will vary." But Creative offered that clarification two years before Strange and Fisher sued the company. I wonder where they got the idea for the lawsuit.

Now Playing at Reason.tv: What We Saw at the Mortgage Bailout Demonstration

gillespie@reason.com (Nick Gillespie) — Tue, 22 Apr 2008 16:30:00 EDT

On April 16 in Washington, D.C., the Ad Hoc National Network to Stop Evictions & Foreclosures organized a demonstration outside a meeting of the Mortgage Bankers Associaton at the Washington Court Hotel.

reason.tv's Dan Hayes and Michael C. Moynihan checked out the demonstration and talked with some of the activists, who quickly changed the subject from home loans to Castro's Cuban paradise, the need to free Mumia Abu Jamal, forgiving student loans, the Rothschilds (!), Haitians eating a mixture of dirt and oil (!?!?), and much, much more. Approximately six minutes.

To view the video, click on the image below.

For the full song used in the intro and outro, go here.

I've Got Two Words for You: Lawn Darts

jsullum@reason.com (Jacob Sullum) — Wed, 16 Apr 2008 13:23:00 EDT

"Even outdated children's coats can pose risks, experts say." That warning nicely captures the spirit of this hysterical (in both senses) USA Today exposé of yard sales, those snakepits of recalled toys and no-longer-approved apparel. In what way can outdated children's coats pose risks? Health writer Kim Painter never quite gets around to telling us. Presumably she is not referring to the risk of taunts from peers who are scornful of your child's out-of-style hand-me-down clothes. Possibly she is thinking that an older coat might have a drawstring around the hood, which "can cause strangulation." Or maybe she means that the buttons could be attached with thread that the Consumer Product Safety Commission later deemed inadequately thick; after all, such buttons, if swallowed and lodged in a child's windpipe, can cause suffocation.

Painter also wants parents to be "extremely cautious" about "used cribs or other nursery gear," since "anything over five years old may not meet safety standards." The phrase "death trap" appears. Yet Painter is not talking about a crib that's so rickety it could collapse at any moment or so worn that your baby could be impaled by shards of wood; presumably you would notice such hazards. She is talking about a crib that's just like the one in which you, or even your older children, slept for years without injury, but that has been retroactively declared unsafe by government regulators. For Painter, who is dismayed by the fact that most people fail to return recalled products even though the government says they should, exercising independent judgment in assessing and addressing a putative hazard is unthinkable.

Some toys, for instance, have been recalled because they contain small, powerful magnets that, if removed and swallowed by a toddler, can cause internal injury. Upon hearing of this risk, you could a) immediately put the toy in a secure container and rush it back to the retailer before this lurking evil kills anyone in your family or b) decide to keep the toy away from little kids who might disassemble it and swallow the pieces. As far as Painter is concerned, only the first course of action is acceptable. Not panicking is not an option.

Painter is so mistrustful of your judgment and common sense that she warns you to "never buy or sell a used car seat or bike helmet [emphasis added]." Why? "If it has been in an accident," she explains, "it might not work properly." If you're the one selling a car seat or bike helmet, wouldn't you know whether it had been in an accident?

[Thanks to Jennifer Abel for the tip.]

Absolut Faux Pas

info@reason.com (Greg Beato) — Thu, 10 Apr 2008 16:26:00 EDT

Did you hear the one about the Swedish vodka company recently purchased by a French conglomerate marketing to Mexican consumers that pissed off U.S. bloggers? Ah, the perils of globalism! In early March, Absolut ran an ad in Mexican magazines as part of its "In an Absolut World" campaign. The ad featured a map of North America from the 1830s, when Mexico still controlled great portions of land it eventually coughed up one way or another to the United States. If the real world were as perfect as it sometimes seems when you're smashed on vodka, Absolut suggested coyly, the Dallas Cowboys would be Mexico's team, not America's, and the Beach Boys would've had to settle for Nebraska girls.

Apparently, Absolut's ad agency put too much faith in news stories that we gringos are so geographically illiterate we think maps are just promotional posters for globes. But as any border patrol vigilante worth his margarita salt can tell you, what happens in Mexico City doesn't always stay in Mexico City. The controversial Absolut ads crossed the Rio Grande via the Internet, and U.S. bloggers with anti-immigration leanings, already sensitive to the idea of being undermined by an army of dishwashers and day laborers, demanded a boycottini.

But do these angry patriots really believe drunken Mexicans fantasize about owning Salt Lake City? Do they really believe Absolut wants to decrease the size of its most lucrative market, America? It's just an ad, part of a campaign that portrays a glibly "idealized" alternate universe. In another ad in the campaign, men get pregnant instead of women. In a third, the Almighty Bartender reaches down from the heavens to dump ice cubes into an ocean that is presumably hot with the sweat of boiling dolphins. As much as Absolut may position itself as a light-hearted advocate for gender equality and the War on Climate Change, it's mostly a light-hearted advocate for selling as much vodka as possible—and it's not above sucking up to its many different constituencies to do so.

Indeed, over the last three decades Absolut has done a brilliant job of this. In 1980, vodka had a reputation as a cheap commodity that was so generic even Communists couldn't screw it up too badly. Then the Swedes began exporting Absolut in those chic medicinal bottles. And running ads in virtually every magazine big enough to earn a spot on your local newsrack. (Possibly the one thing Martha Stewart Living, The New Republic, Garden Design, Scientific American, and Hustler have in common is that they've all run Absolut ads.)

The spare but glamorous layouts of those initial Absolut ads transformed vodka's status from cheap commodity to yuppie status item: They were like a pair of designer jeans that got you drunk! Over the next 25 years, Absolut employed a strategy of versatile monotony, producing more than 1,500 ads that followed the same simple template as the first one—a depiction of the bottle plus a short phrase beginning with the word "Absolut."

As the campaign progressed, it grew more and more abstract, and thus more and more effective. The boastful language of the earliest ads ("Absolut Perfection," "Absolut Gem") gave way to puns that said nothing about the product itself. A bottle wrapped in chains was paired with the phrase "Absolut Security." A bottle turned on its head was paired with the phrase "Absolut Yoga." The company was no longer selling itself as a maker of vodka; it was selling itself as a maker of witty but empty advertising. In the same way that vodka is so tasteless, odorless, and colorless it can be mixed with just about anything, the Absolut brand was so meaningless it could be mixed with just about anything too.

Thanks to this chameleon-like ability to appeal to so many different kinds of consumers, Absolut is the most popular imported vodka in America. It's the third largest liquor brand worldwide. Two years ago, however, it decided to finally retire its traditional ads. Last year, it unveiled its first "In an Absolut World" ads; unlike their empty, eye-catching predecessors, these ones convey actual messages, often with a progressive slant. And that, Absolut has learned in the wake of its fantasy annexation of a sizable chunk of the American West and Southwest, is a recipe for trouble.

Still, is a single controversial ad grounds for boycotts and disownment? Last year, America drank approximately 1.68 billion shots of Absolut. Think of all the drunken hook-ups that represents! Think of all the business deals Absolut helped seal, the concerts and football games and slow Thursday afternoons it enhanced. Plus there's the question of whose "perfect world" Absolut's border realignment really represents. Ultimately, more Mexico would just mean less America; the net result would be fewer illegal immigrants invading the U.S. in search of a better life. That doesn't sound like a Mexican fantasy at all. Instead, it's a scenario nativists would toast.

Contributing Editor Greg Beato is a writer in San Francisco.

FCC Approves XM-Sirius Merger

rbalko@reason.com (Radley Balko) — Mon, 24 Mar 2008 16:01:00 EDT

That's the good news.

The bad news is that two companies had to grovel before a government panel to get the merger approved in the first place.

My dissection of the National Association of Broadcasters' asinine opposition to the merger here.

CORRECTION: It was the Justice Department that approved the merger, not the FCC. The FCC will issue its own ruling later.

I'm Not Going to Pay a Lot for That Gasoline

jsullum@reason.com (Jacob Sullum) — Thu, 20 Mar 2008 13:21:00 EDT

Suppose you pull into a gas station and notice that the price for a gallon of regular unleaded seems awfully high—more than $4, compared to the $3.30 or so you're used to paying. If you're in a hurry, you might decide to pay the premium. If you have a couple minutes to spare, you might go to the station down the street where prices are lower. In Indiana, you would have a third option: Buy the gas and call the attorney general:

Three Hendricks County gas stations agreed to refund customers after Attorney General Steve Carter's inquiries about excessive pricing last week.
A Speedway and two Marathon gas stations on U.S. 36 set prices at $4.09 a gallon for regular unleaded gasoline for a period of time last Friday, sparking complaints to the attorney general's office. The stations agreed to provide customers with refunds of the difference between the market price at the time and the higher price—70 cents a gallon.
"These prices stuck out like a sore thumb and were clearly excessive in the marketplace," Carter said. "Our inquiry into the matter has resulted in an outcome favorable to customers."

"The system has worked," Carter added. "The attorney general's office is regularly monitoring gasoline pricing and the market pricing to ensure a quick investigation and review of excessive pricing reports. The stations involved have cooperated with our inquiry and recognize the need to provide customer refunds."

How does Indiana's gasoline czar know a station is guilty of "excessive pricing"? When its competitors are charging less. Possibly Indiana motorists, even without a crack staff of taxpayer-funded investigators, are also capable of gathering this information. They could, say, consult those gas station signs with the prices displayed in big numbers. If that takes too much effort, here's a website where they can do gas price comparisons without even leaving home.

I don't quite understand where Carter gets the legal authority to dictate gasoline prices. His website explains the circumstances in which consumers should file an "incident report":

In 2002, the Indiana legislature adopted a law making it illegal to engage in excessive pricing during a state of emergency. The law is designed to prevent retailers from profiting at the expense of consumers should any emergency, like the September 11 tragedy, ever occur again. This law is triggered when the governor declares a state of emergency; the law can only be used while the state of emergency is in place and where there are insufficient cost factors to justify the increase. There is no specific percentage of price increase that is prohibited by the law. The law prohibits any price increase that "grossly exceeds" the price at which the gasoline was available before the emergency was declared.

Is Indiana under a perpetual state of emergency?

[Thanks to Nicolas Martin for the tip.]

There Oughta Be a Law

rbalko@reason.com (Radley Balko) — Sun, 09 Mar 2008 17:22:00 EDT

In a new report for the Competitive Enterprise Institute, Eli Lehrer looks at a series of dumb products and activities that the various states have banned. Here's a little taste:

Louisiana's unique-in-the nation florist licensing statute makes it illegal for anybody to arrange two or more types of flowers without passing a largely subjective state licensing exam. In theory, a child could face a fine for picking a bouquet of flowers and selling it at a roadside stand.

Whole thing here.

Is Anyone Torn Between the Troegenator Double Bock and Bud Light?

jsullum@reason.com (Jacob Sullum) — Wed, 05 Mar 2008 11:54:00 EST

The Pennsylvania legislature is considering a bill that would loosen restrictions on beer sales. Under current rules, you can buy one or two six-packs at a time from a bar or a specially licensed deli, convenience store, or supermarket. You can also buy beer from distributors, but only in cases. When I was living in Pennsylvania (where I grew up and got my first job after college), the upshot was that you could choose between the meager, relatively expensive selection at a retail outlet or the bigger, cheaper selection at a distributor, but that only made sense if you wanted a lot of a particular beer. You could not go to a store and, say, pick an interesting selection of three different six-packs, as people in other states routinely do. The proposed changes would allow people to buy any configuration up to a case from a distributor and any configuration up to 18 bottles from a retail outlet.

This seems like good news not only for consumers but also for microbrewers, since it allows people to more easily sample a wider variety of beers in smaller quantities. Yet according to The Philadelphia Inquirer, Pennsylvania's microbrewers (or some of them, at least) are worried about beer deregulation:

The Trogners [owners of Troegs Brewing, near Harrisburg], like many in Pennsylvania's community of 67 beer brewers, believe they could get slammed by what is termed a "beer reform" measure winding through the legislature.
It is intended to give Pennsylvania beer lovers more choice, including the ability finally to buy a six-pack conveniently.
But the proposal has sent waves of anxiety through state beer brewers—many of them family owned microbreweries—who fear it will give an edge to out-of-state brewing giants and cut into their much smaller profits.
In-state brewers, including the Trogners, don't mind the expanded access to six-packs.
The problem for many is the proposal to allow the sale of 12- to 18-packs of beer: Smaller breweries don't have the packaging equipment to produce those sizes. It would give larger breweries an even larger price advantage.

If you are a microbrewer trying to compete on price with flavorless, mass-produced swill like Budweiser, you might want to consider another line of work. Troegs produces a wide variety of tasty beers, so why should it worry about drinkers who buy 18-packs of Coors Light? Its competition is imported beers and other American microbrews, over which it does have a price advantage in Pennsylvania. Microbrewers, of all people, should be able to appreciate the virtues of greater consumer choice.

Jay Brooks considered the microbrew industry as a "long tail" phenomenon in the October 2006 issue of reason.

[Thanks to an anonymous reader whose email address I don't recognize for the tip.]

Elmo Knows Your Name...and Where You Live

jsullum@reason.com (Jacob Sullum) — Thu, 28 Feb 2008 12:52:00 EST

It should be said at the outset that Elmo utters his murder threat very sweetly, with a lilt at the end that makes it sound like a question: "Kill James?" Still, one can imagine that a toddler's parents would find it disconcerting. I myself am a bit puzzled as to how it could happen at all. James Bowman's parents said the doll, which is designed to incorporate its owner's name into various undoubtedly adorable phrases, started suggesting the boy's slaughter after they changed its batteries. But why would the word kill be in Elmo's vocabulary to begin with?

The incident reminds me of two pull-string dolls my sisters had when I was a boy: Matty Matel and his Sister Belle. They could not learn your name, and they came loaded with just a few fixed phrases, including "let's play cowboy," "it's time to eat," "let's play house," "I'm glad we're friends," and "I love you." Somehow (possibly through my rough handling), those phrases got mixed up, so that Sister Belle (if I recall correctly) started to say, "I'm glad we're house," while Matty Matel would say, "It's time to eat you," which was at least as disturbing as homicidal Elmo but easier to explain.

[via The Freedom Files]

Some Businesses Are Inherently Public, Says Washington State Supreme Court

bdoherty@reason.com (Brian Doherty) — Thu, 21 Feb 2008 13:11:00 EST

Some bad news from the Institute for Justice, in a press release ~~that does not yet seem to be on their website~~ that you can read here in its entirety:

The Washington Supreme Court today dealt a blow to civil liberties. In Ventenbergs v. City of Seattle, a divided Court decided that the city of Seattle could violate local entrepreneur Joe Ventenbergs' constitutional right to earn an honest living by creating construction waste-hauling monopolies for two multi-national corporations, making it illegal for Joe to practice his profession.

“The Court got the law wrong today and Washingtonians will suffer as a result,” said William Maurer, executive director for the Institute for Justice Washington Chapter (IJ-WA), which represents Joe Ventenbergs. “The Court ruled that our constitutional rights are less important than protecting two enormous, out-of-state corporations from competition. The sole good news from this decision, however, is that it is so narrow that it affects only hard-working entrepreneurs in the waste-hauling business and not other entrepreneurs throughout the state, who will be able to continue to rely on the protections of our state constitution to combat the creation of government monopolies.”

In a decision released this morning, the Court stated that hauling construction waste is not a private enterprise and “is in the realm belonging to the State and delegated to local governments.” The court found specifically that the provision of waste hauling service is a “government service” and constitutional protections do not apply to government-provided services.

Justice Richard Sanders, joined by Chief Justice Gerry Alexander and Justice Jim Johnson, dissented, arguing that today’s decision “presents a textbook example of governmental corporate favoritism to advance the profits of the privileged few at the expense, and the extinction, of any potential competitors. It flies in the face of the state’s privileges and immunities clause which was adopted to combat this exact sort of unholy alliance between government and big business, which ultimately not only disserves the excluded businesses but also the public in general.”

IJ's page dedicated to the Ventenbergs case. with a timeline and many links.

California Wine From Texas

jsullum@reason.com (Jacob Sullum) — Wed, 16 Jan 2008 15:24:00 EST

This week a federal judge ruled that a Texas law prohibiting out-of-state retailers from shipping wine directly to consumers while permitting in-state retailers to do so violates the Commerce Clause by creating a discriminatory barrier to interstate trade. You may have thought that issue was settled by Granholm v. Heald, the 2005 case in which the U.S. Supreme Court said discriminating against out-of-state wineries in this manner was unconstitutional. But liquor wholesalers, who are desperate to preserve the "three-tier system" that gives them a stranglehold on the distribution of alcoholic beverages in most states, argued that retailers did not deserve the same evenhanded treatment as wineries. Although U.S. District Judge Sidney Fitzwater disagreed, he handed the wholesalers a partial victory by agreeing that Texas has a legitimate regulatory interest in maintaining the three-tier system and may therefore require that out-of-state retailers buy the wine they ship directly to Texans from wholesalers in Texas. What that means, according to the Santa Rosa, California, Press Democrat, is that "a California retailer like Wine Country Gift Baskets would have to buy wine from a Texas wholesaler, ship it back to California and repackage it in baskets, and then ship it back to Texas."

That does not sound very practical, and it leaves Texas wholesalers with the same privileges they had before, controlling nearly all the alcoholic beverages sold to Texans (except for those sold directly by wineries, which are allowed to circumvent wholesalers under state law). The Specialty Wine Retailers Association is nevertheless calling this decision an important victory, since it undermines the arguments wholesalers throughout the country have been pressing in support of protectionist laws. The ruling also may put out-of-state retailers in a better position to ask the Texas legislature to endorse a more sensible and consumer-friendly system.

[Thanks to The Wine Commonsewer for the tip.]

Stuck in the Middle by You

jsullum@reason.com (Jacob Sullum) — Thu, 10 Jan 2008 13:29:00 EST

In a new report (PDF), the Specialty Wine Retailers Association (SWRA) notes that liquor wholesalers have been throwing money at state legislators in a largely successful effort to maintain their government-enforced monopolies on the distribution of alcoholic beverages. Those privileges were threatened by a 2005 Supreme Court decision overturning state laws that prohibited out-of-state vintners from shipping wine directly to consumers while allowing in-state wineries to do so. The Court found that such laws violated the Commerce Clause by erecting discriminatory trade barriers. Since then the wholesalers have been urging state legislatures to comply with the ruling not by opening up their markets but by imposing uniform bans on direct shipping. According to the SWRA (whose members want the freedom to buy directly from wineries), those lobbying efforts have been accompanied by a total of $50 million in donations to state political campaigns, an amount that "dwarfs that of any other sector of the American alcohol industry as well as numerous other groups." In Texas, for example, "alcohol wholesaler political contributions were greater than the political contributions of all gambling and casino interests, retail interests, food interests and all business services...combined." This generosity, says the SWRA, "coincides with the enactment of alcohol wholesaler-supported policies in nearly every state that protect the wholesaler." Examples:

• Between 2000 and 2006 Illinois alcohol wholesalers contributed $5,731,776 to political campaigns. In 2007 the Illinois Legislature passed a law that protected in-state alcohol wholesalers by prohibiting Illinois consumers from continuing to buy wine from out-of-state retailers. Wholesalers also convinced the Illinois legislature to force large Illinois wineries to sell only to state wholesalers, rather than direct to retailers has they had been able to do.

• Between 2000 and 2006 Texas alcohol wholesalers contributed $6,976,104 to state political campaigns. The Texas Legislature has passed prohibitions on out-of-state retailers shipping to Texans and limitations on in-state retailers shipping to Texans, both moves protective of and supported by state alcohol wholesalers.
• Between 2000 and 2006 California alcohol wholesalers contributed $4,296,304 to state political campaigns. In 2005 California passed legislation protecting wholesalers from competition by prohibiting Californians from purchasing wine from out-of-state retailers, policy California wholesalers pushed for.
• Between 2000 and 2006 Michigan wine wholesalers contributed $2,099,319 to state political campaigns. In 2005 the Michigan legislature passed a wholesaler-supported law that protected in-state wholesalers from competition by prohibiting Michigan consumers from purchasing wine from out-of-state retailers.
• Between 2000 and 2006 Virginia alcohol wholesalers contributed $2,580,161 to state political campaigns. The Virginia General Assembly passed a wholesaler-supported law prohibiting Virginia wineries from continuing to sell wine directly to retailers and forcing them to sell their wine to wholesalers.

[Thanks to The Wine Commonsewer for the tip.]

Big Box Panic

mmoynihan@reason.com (Michael C. Moynihan) — Wed, 02 Jan 2008 12:34:00 EST

On the corner of Newbury Street and Massachusetts Avenue in Boston sits one of the famed architect Frank Gehry’s least inspired creations. “360 Newbury” is a big box of a building—appropriate considering that its first three floors have long housed big-box record stores—famous only as Gehry’s sole multi-tenant office building in the U.S. But for the third time in 10 years, its retail space sits vacant. Its last tenant, the British-owned music giant Virgin Megastore, broke its lease in 2006 after four unprofitable years hawking CDs and DVDs to local college students. A company spokesman promised “to seek an alternative location in Boston.” It has yet to do so.

Virgin snapped up the space in 2002, when the failing music retailer Tower Records vacated the building ahead of its long, protracted descent into bankruptcy. Back in 1987, when Tower Records launched its single largest megastore in the Gehry building, the future of Boston’s independent record store business looked grim. Vinyl merchants and industry experts predicted that most independent retailers would feel the pinch of the big box; megastores like Tower would have more stock on hand and, it was presumed, would offer significantly discounted prices. The three-story Tower Records & Video would pose a direct challenge to small, local stores like Newbury Comics, a comic book merchant turned record shop specializing in independent music, hard-to-find imports, and 7-inch records by local bands. To make matters worse, the new Tower store would be situated on the very same block as Newbury Comics.

But it wasn’t just the specter of Tower that frightened small retailers like Newbury Comics. The music business was experiencing rapid growth in compact disc sales, and chain stores were expected to become the dominant players. Giants like Recordtown, Strawberries, Coconuts, Musicland, and Sam Goody—most of whom have now either disappeared or seen influence decline—would come to dominate the industry, The Boston Globe predicted. Among independent stores, the Globe wrote, a “panic” was precipitating Tower’s arrival. So ominous was the thought of a big box music store in Boston that The New York Times covered the store’s opening, suggesting that the independents might as well throw in the towel, since Tower “has virtually no competition in its league.”

At the time, Newbury Comics co-owner Michael Dreese told the Globe that he too was “worried,” and that when all the chains had settled in—the British giant HMV would soon open a megastore across the river in Cambridge and another in Boston’s Downtown Crossing shopping district—“there is going to be blood all over the place.” It would, presumably, be the blood of the independents. The Times spoke in the past tense, suggesting that the indies’ demise was a foregone conclusion. “On the block where a punk-rock record store, Newbury Comics, once held sway,” the Times sighed, “a new Tower Records sells that kind as well as more mundane music and a wide assortment of videotapes.” The store would stock, a spokesman said, “60,000 cassettes and close to 50,000 CDs,” versus the typical average of “12,000 CDs and 13,000 cassettes.” Who could compete with that?

Well, Newbury Comics, for starters. “We had a huge competitive advantage knowing the local market,” Dreese now says. Today Dreese and his partner, both MIT dropouts, preside over a mini-chain of their own, with 27 stores in five states, while HMV, Tower, and Virgin are all distant memories in New England. As the market changed, centrally controlled operations such as the Los Angeles–based Tower proved vulnerable to smaller, more localized competition. “Virgin and Tower were exceptionally poorly managed and made poor use of technology,” he says. “Combine that with Virgin and HMV’s very British arrogance when they entered the market.”

As the chains floundered in the face of declining music sales, Newbury Comics nimbly altered its business model without abandoning its core constituency of indie music fans. Today, compact disc sales account for just below 50 percent of Newbury Comics’ revenue. DVDs are approximately 20 to 25 percent, and pop culture and sports tschotchkes—Boston Red Sox caps, Ozzy Osbourne action figures—cover the rest. Hiring a platoon of tattooed hipsters added an extra patina of authenticity to the shopping experience—something Virgin, HMV, and Tower didn’t offer.

According to Dreese, who spent much of his youth in London hanging around the original Virgin Record Shop’s lunch counter, Newbury Comics challenged the big boxes by liberally borrowing from the big-box business model, making aggressive use of “loss leader” merchandise (pricing items below cost to entice customers into the shop), competitive pricing, and a refined distribution system that used vast online databases. It moved into the Internet early, selling merchandise through both its own website and third-party Web stores such as Amazon and eBay. Dreese doesn’t worry much about downloads (iTunes, he says, has helped his business), and, as he recently told Boston Magazine, his focus remains on how to “keep beating Wal-Mart.”

The inability to adapt to local tastes and the failure to anticipate technological market shifts have been the Achilles heel of many big box retailers. When Wal-Mart was forced to shutter its vast network of German stores, a mystified company spokesman told a reporter: “We thought everyone around the world loved Wal-Mart.” (The International Herald Tribune quoted a baffled Wal-Mart shopper in South Korea, where the company has also abandoned operations, wondering, “Why would you buy a box of shampoo bottles?”) The chain had made the mistake of assuming that full-spectrum retail dominance is achieved by virtue of size alone, without regard to cultural and regional difference.

That error is common not just among chains but among their critics. Market leaders do not always react in a timely and profitable manner to shifts in taste and technology. While big-box retailers have enormous competitive advantages—sui generis leverage with distributors and manufacturers, unparalleled capital resources, immense political influence—they also face a distinct disadvantage in adjusting themselves to local preferences.

‘Its presence had a magnetic effect on the caffeine crowd.’
Just ask Starbucks CEO Howard Schultz. In 1998 community activists in Harlem bemoaned the supposed retail segregation that concentrated so many Starbucks cafés in midtown and lower Manhattan while ignoring the traditionally minority-dominated neighborhoods north of 125th Street. “In my opinion,” one local activist told The New York Times, “people in this area do deserve to get the goods and services they would get in other areas.”

Starbucks responded to critics through its “urban coffee opportunities” program, opening a store in Hamilton Heights, a majority Hispanic neighborhood with a significant black minority population. But after a few years doing lackluster business, the chain’s Seattle headquarters determined that the store wasn’t worth saving and pulled the plug on the franchise. Elsewhere in the city, upper-middle-class New Yorkers were taking aggressive action against supposed corporate usurpation, staging protests and “direct actions” against Starbucks outlets that, they said, were homogenizing their neighborhoods. In Hamilton Heights, the protests went the other way. According to The New York Times, “residents mobilized to save their Starbucks,” pressuring corporate headquarters and community leaders because the store was providing jobs and, they hoped, would ultimately boost property values.

When the shop finally shuttered, a local community leader observed that Starbucks “was not attracting the neighborhood support because of a lack of cultural affinity. Most of the people [in Hamilton Heights] don’t go to hang out in a cafe. If they hang out, they hang out on the sidewalk. And it’s mostly old men talking about the old days.” Instead, residents preferred Dominican coffee from La Flor De Broadway Café, a hole-in-the-wall coffee shop with no seats, no Bob Dylan CDs on sale, no chrome espresso machines at $300 a pop. They do, however, serve a strong 80-cent cup of coffee.

In 1998 Jon Cates faced a similar challenge from Starbucks. Located in the bustling Westport neighborhood of Kansas City, Cates’ Broadway Café, a haunt of local hipsters, students, and artists, discovered that the Seattle coffee goliath was slated to open an outlet on the same block. The café’s supporters sprung into action, papering the windows of their new neighbors with leaflets and eventually appealing to the city zoning department to stop development. When that was unsuccessful, the shop’s owners collected thousands of signatures in protest. But that too failed, and Starbucks opened for business, confident in its ability to steamroll Cates.

Three years later, Cates reluctantly conceded to a Wall Street Journal reporter that his business was thriving. Rather than defeating the outsiders with zoning regulations, they won with old-fashioned competition: “Starbucks helped our business, but I don’t want to give them any credit for it.” Eight years after Starbucks invaded Westport, Cates has actually expanded his business, opening a coffee bean roastery in the neighborhood that supplies other independent cafés in the region.

Phoenix Coffee Co. in Cleveland Heights, Ohio, an independent café who battled Starbucks for five years, also found the Seattle competition a boon for business. Phoenix’s co-owners Carl Jones and Sarah Wilson-Jones told Cleveland’s Sun Press that “While Starbucks was there”—the store has since shuttered—“our business grew by 20 percent a year. We’ve been grateful the corporate giant moved in, since its presence had a magnetic effect on the caffeine crowd.”

By understanding local tastes, Newbury Comics, Phoenix Coffee Co., La Flor De Broadway Café, and Kansas City’s Broadway Café demonstrated that localization, customer care, and authenticity are far more effective means of fighting larger rivals than agitating for anti-chain legislation. Had Broadway Café owner Jon Cates initially looked at historical precedent, rather than petitioning city hall, he perhaps would have understood that David slays Goliath with encouraging frequency in the history of American business.

‘One third of the grocery business of the nation has been wrested from the independent store.’
Across two pages of the April 28, 1928, New York Times, reporter Evans Clark observed breathlessly that American corporations were engaged in a ruthless campaign of economic expansionism and were making “deep inroads into the retail store business” abroad. Lurking behind the ubiquitous Boots Pharmacy signs in England, Clark wrote, was the invisible hand of American capitalism: The chain was owned by the New York–based conglomerate United Drug Company, which, by 1928, operated 10,000 outlets in the United States and 800 in the United Kingdom.

American business reached far beyond the traditional trading boundaries of the Anglosphere: “the familiar red signs of a well-known domestic five-and-ten-cent chain appear both on London and Berlin street corners; the laboratories of a St. Louis chemical concern turn out American mouth wash in Madrid; the plant of a Detroit manufacturer assembles American autos in Osaka…fifty-four theaters in Brazil are now linked in a continuous chain of management with movie palaces in Manhattan, Brooklyn and Queens.” In certain areas of industry, the Times ruefully observed, “American companies have practically monopolized output and sales.”

Three months later Clark returned to the pages of the Times, this time to warn readers of big business’s domestic plot to “displace the neighborhood store” through predatory pricing and sweetheart distribution deals. Beneath an image of a cigar-chomping capitalist casting a malevolent gaze over a map of America, Clark signaled the death knell of the neighborhood enterprise, arguing that the “storekeeper of today is a corporate executive, who presides over chains of a thousand.

Yesterday the corner tobacconist’s was just a tobacco store and nothing more. Today chances are it’s one link in a chain of tobacco stores whose length is the breadth of the continent.…One third of the grocery business of the nation has already been wrested from the independent store around the corner…and is now in the hands of great corporations which claim the nation is their customer.”

The trade journal Printers’ Ink expressed similar concern for the neighborhood store: “Think a moment. What has become of the old corner tobacconist? Answer: United Cigar Stores. What has become of the old ‘home-cooking’ restaurants in so many cities? Answer: Child’s, $12,000,000 (backed by Standard Oil) and Thompson’s, $6,000,000—to say nothing of several others. Big Business (United Drug Company and Riker-Hegeman) already dominates the drug stores of New York, Boston and Chicago.”

If one excises the references to tobacconists and long-forgotten retail giants like Woolworth’s and Butler Brothers, the doom-laden rhetoric of the 1920s sounds strikingly familiar; the anti–big box activism of recent years—directed primarily against retail giants such as Wal-Mart and Barnes & Noble—has its antecedents in the activism of the 1920s, the apogee of the first wave of anti-chain fear. As the business reporter Anthony Bianco argues in his anti–Wal-Mart book The Bully of Bentonville: “For many people over thirty, the phrase ‘the corner store’ continues to be powerfully evocative of an establishment where the person across the counter knew you and would even extend credit if you were a bit short, a place that was as distinctively personal as its proprietor’s fingerprints.”

But this idealized view of the past isn’t entirely accurate, as the anti-chain crusaders of the 1920s would have been quick to point out. In Land of Desire, historian William Leach describes the small town of Marion, Ohio, in 1929. In “the town where both President Warren G. Harding and socialist leader Norman Thomas grew up and all the houses had front lawns,” writes Leach, “there were two Kresge’s, two Kroger grocery stores, three chain clothing stores, two chain shoe stores, one Woolworth’s, one Montgomery-Ward, and one Penney’s.”

By 1914, the burgeoning chain system boasted over 20,000 individual stores. An industry audit that year listed United Cigar Stores Company as the largest chain, with over 900 shops. The Great Atlantic & Pacific Tea Company (A&P) had 800; Woolworth’s 774. The Riker-Hegeman drug chain had 105 stores and, the auditors noted with alarm, was “growing at the rate of more than three a month.”

These numbers would expand dramatically in the coming decades. By 1929, over 25 percent of all retail sales were transacted in a chain store. As Clark wrote in the Times, “Competition [in the grocery business] is no longer between the chains and the independents—the independent grocer has ceased to exist as a real factor in the grocery market—but between the chains themselves. Over half the grocery business is done by chains in Boston, Baltimore, Washington, Chicago, Kansas City, Los Angeles, San Francisco and eight other leading American cities.”

By the 1930s, 10 percent of chain store grocery business was transacted through a single corporation (A&P), which at the height of its power controlled a massive 16,000 outlets. As the business journalist Charles Fishman, author of The Wal-Mart Effect, points out, “At its peak, A&P had five times the number of stores Wal-Mart has now (although much smaller ones), and at one point, it owned 80% of the supermarket business.” This alarmed not just the local competition, but manufacturers too, as large chains began producing their own branded products. In a letter to independent grocers, one breakfast cereal producer warned that “Any jobber is blind who shuts his eyes to the increasing menace of the chains, a menace to your business far more than to ours.”

Of the grocery chains considered “menaces” during the 1930s, few remain in business. Today A&P maintains just over 100 stores. They were swiftly replaced by even bigger goliaths, such as Kroger and Wal-Mart. In 2006, according to the research firm Retail Forward, Wal-Mart was the largest grocer in the country, transacting around 16 percent of all food and beverage sales.

‘The number of chain stores in any community should be limited by law.’
Industry groups mustered more than pressure campaigns in their battles against the chains of the past. They also called for laws to “defend” local stores—to stop the spread of Kreske’s, Sears, A&P, and various regional chain druggists. Recent legislation attempting to hinder the expansion of big-box retailers has roots in a long history of legislation—most of it nullified—against chains.

While anti–big business agitation has a long pedigree in America, it wasn’t until the 1920s when the chain became the prime target of both left- and right-leaning politicians. As early as 1922, the Los Angeles City Council tabled a resolution mandating that “the number of chain stores in any community should be limited by law.” Sen. Royal S. Copeland (D-N.Y.) bemoaned the influence of big business on the old neighborhood, urging lawmakers to pass legislation to protect small businesses: “When a chain enters a city block, ten other stores close up. In smaller cities and towns, the chain store contributes nothing to the community. Chain stores are parasites. I think they undermine the foundations of the country.”

Future Supreme Court member Hugo Black, then a Democratic senator from Alabama, told his upper-chamber colleagues in 1930, “Chain groceries, chain dry-goods stores, chain clothing stores, here today and merged tomorrow—grow in size and power. We are rapidly becoming a nation of a few business masters and many clerks and servants. The local man and merchant is passing and his community loses his contribution to local affairs as an independent thinker and executive. A few of these useful citizens, thus supplanted, become clerks of the great chain machines, at inadequate salaries, while many enter the growing ranks of the unemployed.”

By the late 1920s, politicians realized that populist rhetoric directed against chain stores was a political winner. In 1928, Sen. Smith Brookhart (R-Iowa) called on the Federal Trade Commission to investigate the “chain menace.” After a six-year investigation, the agency published its findings. While siding against the alarmists—there were no true monopolies in retail, the commission determined—the report’s complaints will sound familiar to today’s Wal-Mart critic: merchandise sold beneath cost, strong-arming manufacturers, employees paid low wages. The study also provided unintended advice for the local merchant, observing that “less service [is] given to customers by chains.”

In 1928, the Supreme Court struck down the Pennsylvania Drug Store Ownership Law, an anti-chain ordinance that required drug stores to be owned by pharmacists, not corporations. The court ruled that the law’s stipulation of who could own a business was “repugnant to the Constitution.” That year 13 states attempted to pass anti-chain legislation.

In 1938, Rep. Wright Patman (D-Texas) introduced legislation to tax any chains with over 10 outlets in a single state. Its provisions, one industry observer noted, “were drastic enough to have put many a chain out of business.” The chain tax, Chain Store Age editor Godfrey M. Lebhar calculated, would have a disastrous effect on large retailers. If Patman’s bill had passed, the Woolworth Company would owe approximately $81,000,000—in 1938 dollars—in taxes, even though the company’s net profits amounted to $28,000,000. “In the case of the A&P,” Lebhar wrote, “with approximately 12,000 stores in 40 states at that time, the tax would have totaled more than $471,000,000.” The bill never made it out of committee, but the stage was set for future legislative attacks on the chain system.

‘The retail book trade cannot live against the competition.’
Today’s independent booksellers and their supporters fret about an Axis of Evil consisting of Amazon, Borders, and Barnes & Noble—and with good reason. Today, independent bookstores account for just 15 percent of the market, down from 80 percent in the early 1970s. The American Booksellers Association (ABA), which represents over 3,000 independent stores, filed suit against publishers’ “unfair” use of volume discounting in 1995 (they settled out of court) and again in 1998 against Barnes & Noble (the ABA settled on a $16 million payment of its legal fees and dropped the suit).

But the ABA too could assuage their fears by looking to historical precedent, when both publishers and smaller shops attacked chain discounters with blind fury. As far back as 1872, Publishers Weekly argued that publishing houses selling directly to consumers—and often offering free shipping to boot—would sound the death knell of the local bookstore: “The retail book trade cannot live against the competition of manufacturers and either the competition or the retailers must cease to be.”

In 1900, the R.H. Macy’s department store sued the ABA for refusing large retailers the right to sell books below cost, which, the group contended, would “ruin the small bookstore.” Macy’s, which has long since left the bookselling business, used paperbacks as loss leaders—another way of enticing customers in the increasingly crowded Manhattan department store market. Fourteen years after filing suit, New York’s Supreme Court decided in favor of Macy’s, awarding the company $140,000 in damages.

But it was a pyrrhic victory for Macy’s, which would be repeatedly targeted by the ABA in decades to come. 1934 brought the National Recovery Administration’s “codes of fair competition,” including a “bookstore code” that disallowed discounting of books until six months after their release. In 1935, much to the ABA’s dismay, the U.S. Supreme Court ruled the codes unconstitutional.

Later that year, New York’s state legislature passed the Fair Trade Act, which would force Macy’s to abide by its resale price maintenance agreements with certain publishers and to cease loss-leader discounting. The New York State Supreme Court invalidated the legislation the following year, with a judge declaring, “The act attempts to give to private persons unlimited power over the property of others.” When the U.S. Supreme Court reversed the decision on appeal, finding that the state’s Fair Trade Act was indeed constitutional, Macy’s exploited a loophole in the law exempting book clubs from discounts. Thus, Macy’s Red Star Book Club was born.

During the 1930s campaign to punish stores selling below cost, a Carnegie Corporation report complained that the business of bookselling had inexorably changed—it had become a business: “The old-fashioned bookstore was a charming place, but charm alone will not solve the problem of modern book distribution.…Hard though it may be to face the fact, the bookstore of today cannot primarily be a place for those who revere books as things-in-themselves.” An ABA representative later complained to a Senate committee that “non-book-minded merchants” were killing the industry and “price-cutting, unless stopped, will ultimately eliminate the personal bookstore from the national scene and in turn will have a serious effect on the quality of our national literary production.”

This, of course, has yet to happen. Chain stores are still the undisputed kings of bookselling, but their sales figures have remained flat in recent years. Meanwhile, the ABA announced in 2004 that “independent bookstores’…sales increased, in terms of both dollars and number of units sold, capping a three-year period of sustained growth,” citing an Ipsos BookTrends study. In 2004, an ABA spokesman told The Wall Street Journal, “Even though there are fewer stores, the survivors are doing better.” As for our country’s literary production, 2005 saw 172,000 books published in America, a dramatic increase from the 39,000 released in 1975.

Today’s attempts at anti-chain legislation follow a similar pattern—and have, in most cases, met a similar fate. Maryland’s anti–Wal-Mart law, which mandated that the company spend at least 8 percent of its payroll on health care, was recently voided when a federal judge ruled that “state laws which impose employee health or welfare mandates on employers are invalid.” In 2006 the Chicago city council passed a resolution requiring stores of at least 8,300 square meters in floor space and earning at least $1 billion in revenue annually to pay a “living wage”—approximately $13 per hour—only to see the rule vetoed by Mayor Richard Daley. In California, Gov. Arnold Schwarzenegger vetoed a similar law that would have forced Wal-Mart and other big box stores to provide health care benefits for their employees, arguing that “singling out large employers and requiring them to spend an arbitrary amount” on insurance would have no appreciable effect on “the health care challenges we face.”

‘Wal-Mart’s growth formula has stopped working.’
But if legislation has done little to restrain the chains, the marketplace has regularly cut them down. Contrary to many activists’ assumptions, America has not been condemned to centuries of retail uniformity. Quite the contrary: The 21st century consumer has greater choice and access to a wider assortment of products than any time in American history.

In a country of such colossal wealth, price and convenience are not the only factors affecting consumer choice. Even among Starbucks executives, who single-handedly created a market for espresso drinks in the Unites States, there exists a deep fear that it won’t be an aversion to paying $5 for a cup of coffee that will inhibit the company’s growth but a backlash against the chain’s focus on standardization. In February 2007, Starbucks CEO Howard Schultz fretted in an internal email (later leaked to journalists) that “the automation that is helping to drive the company’s expansion is sucking the romance out of the Starbucks experience.” Starbucks isn’t going to disappear any time soon, but as Business Week recently pointed out, the chain “is suddenly besieged by tough competitors.”

The same is true of Wal-Mart, a dominant company showing signs of wear and overextension. In 2006 it posted a mere 1.9 percent growth in same-store sales—that is, sales in outlets that have been in operation a year or more. It was the slowest rate since the company’s inception. Writing in the Harvard Business Review, the retail analysts Darrell Rigby and Dan Haas suggested that the smaller chains “are managing to coexist and even thrive in the same forest with Wal-Mart.” Business Week recently reported that “Wal-Mart’s growth formula has stopped working,” arguing that “America’s largest corporation has steered itself into a slow-growth cul de sac from which there is no escape.” Richard Hastings, a senior analyst at the retail rating agency Bernard Sands, agreed, telling the magazine that we were seeing “the end of the age of Wal-Mart. The glory days are over.”

Maybe. But stores like Wal-Mart will always be with us, just as they were when they were called Woolworth’s or A&P. If Sam Walton’s creation disappears, it will doubtless be replaced by a more clever, more modern adaptation of the business model he popularized. It is likely true, as big-box critics contend, that stores like Wal-Mart will always dominate certain sectors, thus threatening the existence of many smaller competitors. But chain stores often create markets that didn’t previously exist, both by forging new trends (like the $10 new release CD, quickly adopted by Newbury Comics) and by provoking a backlash against the alienating experience of big-box shopping. There will always be those that find Wal-Mart inauthentic, those that prefer the punk rock ethos of a Newbury Comics to the Deep South values of Wal-Mart, with its habit of censoring CD covers and song lyrics.

360 Newbury, graveyard of Virgin Megastore and Tower Records, recently announced that it would be renting its first two floors to the electronics and CD retailer Best Buy. After years of doing combat with big boxes, Newbury Comics’ Dreese doesn’t betray the slightest worry about the latest competitor. “We’re the last man standing in Boston,” he says. It’s a safe bet that, sometime in the near future, he’ll be peering down the road, watching another megastore packing a moving van.

Michael C. Moynihan is an associate editor at Reason.

Wilhelm Reich: 50 Years in Hell and/or Heaven

bdoherty@reason.com (Brian Doherty) — Mon, 05 Nov 2007 12:08:00 EST

Psychoanalyst Wilhelm Reich had his books burned by the U.S. government in the 1950s and died in prison 50 years ago, in prison basically for refusing to agree with the FDA that his work and devices had no medical value. The Boston Globe notes the opening of his personal paper archives at Harvard, and a possible trend in revival of interest in and furthering of his research.

The Wilhelm Reich Museum.

A devotee's history, with links.

A skeptic's analysis of Reich, with links.

The FBI on Reich.

Robert Anton Wilson's harrowing and wonderful play, Wilhelm Reich in Hell.

I operated a cloudbuster once. I cannot authoritatively state whether it had any effect on the weather.

MoveOn.Org Lets Sen. Susan Collins be Sen. Susan Collins

bdoherty@reason.com (Brian Doherty) — Tue, 16 Oct 2007 10:09:00 EDT

MoveOn.org does the right thing. It had been using a dubious Google policy that allows owners of trademarks to ban use of their trademarked name in ads to quash ads from Sen. Susan Collins (R-Maine). Collins had been dropping the hated-by-conservatives MoveOn's name as a hook to rally supporters. MoveOn has decided to let Collins say what she wants in her ads. Read all about it at Wired.com.

The DEA's Regard for Safety

jsullum@reason.com (Jacob Sullum) — Wed, 26 Sep 2007 15:36:00 EDT

DEA Administrator Karen Tandy had this to say upon announcing the recent arrests of mom-and-pop steroid manufacturers in the U.S.:

Today, we reveal the truth behind the underground steroid market: dangerous drugs cooked all too often in filthy conditions with no regard to safety, giving Americans who purchase them the ultimate raw deal.

Nearly a century after the passage of the Harrison Narcotics Act, the DEA reveals that the quality of black market drugs is unreliable. Since it's the government that creates and maintains the black market by preventing people who want steroids from obtaining them legally, who is it again who gives no regard to safety?

The New York Times story about the steroid busts, which were part of a two-year, multi-agency, international investigation that fingered Chinese manufacturers for supplying the chemicals needed to make the steroids, included this strange interjection:

The drug case comes at a time when the quality of imports to the United States from China has become an issue between the two countries. Tens of thousands of toys made in China have been recalled in recent weeks on suspicion of having unacceptably high level of lead in paint and other hazards for small children. Some Chinese-made toothpaste was found to contain a chemical usually used in automotive antifreeze and not intended for human consumption.

Never mind that Mattel says many of the toys were recalled because of design flaws, not shoddy manufacturing. The Times offers no reason to believe there was anything wrong with the imported chemicals used to make the illegal steroids. Is it obligatory now to mention the toy recalls anytime a story deals with something made in China? As you'll see if you check out the labels on 10 randomly selected objects in your home or office, that rule will cover a lot of ground.

When Bad PR Happens to Good Economics

kmw@reason.com (Katherine Mangu-Ward) — Fri, 14 Sep 2007 14:57:00 EDT

Remember the halcyon days of summer 2007, when people camped outside Apple stores in order to be the first one on their block with the iPhone? It was a simpler time, when USA Today offered videos on iPhone "buying strategies," and people like Evan Herman, 28, were scouting out stores for the best crowd, saying "half the fun is the experience of the line."

Alas, as actual apples ripen on the trees and autumn descends, those days are gone. Last week, Apple dropped the price of the iPhone by $200, to $399. The early adopters who had been enjoying the frisson of exclusivity (and perhaps the attentions of the opposite sex) every time they pulled their iPhones from their pockets were suddenly aghast: "I just felt so used as a consumer. They hyped up the iPhone for six months and built up our expectations, and then they grabbed our extra $200 and ran."

Initially, Apple stood firm, offering consumers a shrug and the cold comfort of "that's technology." But CEO Steve Jobs soon caved and offered $100 vouchers to earlier purchasers, though his statement wasn't terribly apologetic. There's "always someone who bought a product before a particular cutoff dates and misses the new price of the new operating system or the new whatever," he said.

"This is life in the technology lane. If you always wait for the next price cut or to buy the new improved model, you'll never buy any technology product because there is always something better and less expensive on the horizon." He could have been even more succinct. "This is life" would have done just fine.

Apple was trafficking in very basic economics. The practice of offering different sets of buyers different prices is called price discrimination, and all the cool kids are doing it. And some, like Apple, have taken a lot of flack for it.

The classic example of price discrimination gone awry is the great Coke vending machine scandal of a few years back. Some pointy-head at HQ had the idea the price of a can of Coke from a vending machine should fluctuate with the temperature. Thermometer-equipped vending machines would allow the company to charge more for an icy Coke on a hot day at the beach, and less when the weather was cool and pleasant.

The outrage of the Coke-drinking public knew no bounds, and neither did Pepsi's glee. Coca-Cola was forced to deny that it ever seriously considered the proposal.

Meanwhile, how did all these infuriated soda guzzlers with an overdeveloped sense of justice get to those hot beaches in the first place? They bought tickets from airline companies setting their pricing using exactly the same model.

So what's the difference? Why do people cheerfully accept price discrimination when it comes to airline tickets, and become Internet activists when faced with the same phenomenon in vending machines and iPhones?

To say that someone was discriminating was once a compliment. It meant he was a man of taste, the sort of person who could see fine gradations in value and parse the good from the bad.

In later years, discrimination became a dirty word-inverted from it its original sense to mean someone who separated people into unfair and irrelevant categories and the treated some of them badly for no good reason at all.

Maybe that's why the idea of "price discrimination" is so alarming in this day and age. Perhaps those early iPhone purchasers feel themselves discriminated against-trapped by a form of latter day technological Jim Crow.

A few people are probably just acting in a rationally self-interested way: If you could whine a little and get a 100 dollars back on, say, your TV or a ridiculous designer handbag, you'd do it, right?

But most of the people who were whining seemed to feel genuinely wronged: "I feel totally screwed," they say. "My love affair with Apple is officially over." Unlike airline tickets, Cokes and iPhones are easily perceived as identical products, even under different demand situations. And as long as you're not clear on how the underlying economics works, it's easy to feel like you took a bath.

Econoblogger and author of Discover Your Inner Economist Tyler Cowen ranted (in a post sent from his iPhone) about whiny early adopters:

Who has pushed me over the edge? It is you people, you who resent Coase (1972), you people who induce wage and price stickiness and widen the Okun gap. You people, who don't know what it means to sit back and enjoy your consumer surplus. You beasts!
And to think you are all carrying around these wonderful icons of modernity in your pockets...
AAARRRGGGHH!

Economist Ronald Coase asks us to consider the case of a railroad that owns all of the land along its right of way. At first, the railroad will offer the land at a high price, and sell (say) half of it to people who urgently want the land. The next year, it will sell more of the land at lower prices, increasing its overall profits and making land available to people who were willing to wait out the initial sale in the hopes of getting a better deal. Everyone who wants land gets it, some people just pay more for the privilege of getting it sooner. Sound familiar?

Sure, it's good economics—even if it's bad PR, Apple did manage to sell 1 million iPhones in 74 days-but is it fair? Is it just? To find out, we need look no farther than question posed by rubber bracelets everywhere: WWJD? Not What Would Jobs Do?, of course, since we already know: he'd give in to the whiners and offer $100 credits good for Apple products in the future.

The parable of the workers in the vineyard is the Bible's final word on this point, and takes a much harder line than Steve Jobs. Jesus tells the story of a group of workers looking for employment. A few are hired in the morning for one denarius. As the day drags on, more and more workers were hired, with the last batch brought to the field only at the eleventh hour. Then it comes time to cash out:

The workers who were hired about the eleventh hour came and each received a denarius. So when those came who were hired first, they expected to receive more. But each one of them also received a denarius. When they received it, they began to grumble against the landowner. 'These men who were hired last worked only one hour,' they said, 'and you have made them equal to us who have borne the burden of the work and the heat of the day.'
"But he answered one of them, 'Friend, I am not being unfair to you. Didn't you agree to work for a denarius? Take your pay and go. I want to give the man who was hired last the same as I gave you. Don't I have the right to do what I want with my own money?"

As one writer put it: "if you're still upset about ‘paying too much' for your iPhone, take it up with the man upstairs."

Or maybe this is all just an extraordinarily elaborate PR strategy after all. Consider a customer we'll call "Katherine." She would never wait in line for a gadget. She's just not quite geeky/status-seeky enough. And she doesn't track consumer electronics prices, nor does she browse in Best Buy or the Apple store for fun. But thanks to the hullabaloo about the price drop, she now knows that Apple phones are "cheap." Hard to imagine the fact would have penetrated her consciousness so quickly or so thoroughly as it has without a controversy to reinforce the message.

Perhaps Steve Jobs did have the parable of the workers in the vineyard in mind after all. After all, the tale wraps up with that famous phrase, certainly applicable to iPhone prices today: "So the last will be first, and the first will be last."

Katherine Mangu-Ward is an associate editor for reason.

The Wired Age

jsullum@reason.com (Jacob Sullum) — Thu, 06 Sep 2007 14:21:00 EDT

Yesterday our 4-year-old daughter received a baby doll from her grandmother, a replacement for one that our (former) dog ate. Not for the first time, I marveled at what a pain in the ass it was to extricate the doll and all her accessories from the box: Everything was wired down, taped, and/or wrapped in plastic, and the box itself was difficult to open and disassemble (which was necessary to remove the contents). The process involved an unreasonable amount of cutting, pulling, untwisting, tearing, yanking, and cursing. Since I've encountered this problem many times before and never really understood why toy packaging is so much more complex and consumer-unfriendly today than it used to be, I did a little research and found a 2005 Philadelphia Inquirer article that purports to explain it all. Unfortunately, the story is locked up in the paper's pay-per-view archive (you can also find it on Nexis), but here's a summary.

Toy manufacturers recognize that they're pissing off their customers, not to mention spending a lot of money on all those extra bits of wire, tape, and plastic. But those costs are outweighed by a couple advantages:

1) The restraints keep toys not only intact but in place as they journey from China and other far-off places, so they can advertise themselves through the see-through fronts of their boxes when they reach stores.

2) The packaging that frustrates buyers also frustrates parents looking to replace lost, broken, or missing toy parts on the cheap.

I don't know whether parents have become more larcenous since I was a kid, but see-through boxes certainly are more common, as are long-distance journeys for toys, few of which are manufactured in the U.S. anymore. I could play up another factor mentioned by the Inquirer—"shipping and security regulations set by distributors and governments"—but I prefer to make the point that no one ever said the market was literally miraculous, giving everyone exactly what he wants at a price he likes. Even when there's plenty of competition, consumers still have to make tradeoffs. In this case, they are getting inexpensive toys they can examine in the store without opening the box, but at the cost of additional annoyance when they get the toy home. I will try to remember that the next time I'm unscrewing a plastic restraining strap or getting out the garden shears to cut through a rigid plastic bubble.

Bailout or Handout?

info@reason.com (Jeff Taylor) — Thu, 06 Sep 2007 12:15:00 EDT

You can tell the feds are bailing out mortgage lenders by the way no one wants to call it a bailout.

President George Bush made that clear last week when he announced his plan to rescue broke borrowers. "A federal bailout of lenders would only encourage a recurrence of the problem," Bush explained.

So this is not a bailout, you see, because it is for the borrowers, not the lenders. And if you believe that, then you'll also believe that the Federal Reserve has been shoving money at the banks by the billions in recent weeks in order to help borrowers, too.

In truth, what Bush has proposed is far worse than a bailout. Federal regulators and policies would supplant market discipline and price signals in the mortgage market. And all because a long-overdue correction in the domestic mortgage-making sector manifested itself this summer.

What is happening with real estate lending now is not unlike the dot-com bust. America survived that bubble. Then, as now, actual income-production became secondary to complicated financial constructs which obscured the underlying business. If there ever was a business. Recall that Enron invented entire energy-trading markets that ultimately dealt in nothing.

The mortgage industry is not quite that far along, but it is close. Although securitization of mortgages has overall been a great boon to both borrowers and lenders, spreading risk and allowing many more mortgages to be issued than otherwise be the case, it has also brought the derivative frenzy and the obsession with yield that has landed us in correction mode.

The very move into the subprime market—make that a stampede—was predicated on the notion that the added risk could spread thinly enough not to matter while collecting the massive bonus of substantially higher interest rate income streams. Those streams could then be further bought and sold, adding yet more margin to the endeavor.

And this worked, to some extent. Countless subprime borrowers got loans and homes and are not now facing foreclosure. This inconvenient bit of information has to be forgotten in the rush to condemn the "excesses" of subprime leading. Still, somewhere along the way, the vital link between a borrower who is making monthly payments and all the wheeling and dealing in securities was broken. Without those payments, you do not have mortgage to buy, sell, or trade. With dot-coms, it was the lack of income-producing products that triggered the correction. In past few weeks lenders—and traders downstream dealing in mortgage derived instruments—have rediscovered that is really does matter who you lend your money to, assuming you want any of it back.

There is another aspect of the current mortgage industry that is often overlooked, and it too is related to income streams. The streams are what lenders want, not the underlying real estate assets. In contrast to years past, there is no Dirk Dastardly down at the bank looking to swindle the widow out of the family farm. The banks do not want to own the assets that they themselves took as collateral for their loans—ever.

The correct federal response to this should be, "Too bad. You broke it, you bought it." Let the realtors, bankers, Wall Street sharpies, and—yes—the borrowers fight it out amongst themselves. Somewhere there is a market-clearing price for these assets.

Of course, the uber-nannies in the Bush Administration can't allow that. Instead they have opted to compound the problem by using federal assets to move in on the private mortgage insurance market and otherwise encouraging banks to forgive bad loans.

Worse, the White House intends to make the Federal Housing Administration the Federal Housing Administration by directly assuming responsibility for 80,000 underwater loans. Look for that number to double once Democrats in Congress are finished bidding it up.

In sum, we have the makings of the financial equivalent of Medicare Part D—a massive federal program in the place of a semi-private sector that more or less works. Not perfectly, but it is better than making Washington largely responsible for credit allocation in America.

The frustrating thing is that the White House and Congress are chomping to act, while the Fed's more targeted response to the credit crunch has just begun. By using the discount window to entice healthy banks to take on some of the rot, an immediate lockdown on all credit seems to have been averted. It will take time to digest the bad loans, and real estate prices might dip in some markets going forward as a result. California, for example, has a consensus 10 to 15 percent overvaluation to work through, and that may take a year or two to correct.

But that process will slam to a halt once Uncle Sucker begins assuming bad loans left and right.

reason contributor Jeff Taylor writes from North Carolina.

Mr. Fancy Pants May Lose His Job

jsullum@reason.com (Jacob Sullum) — Fri, 03 Aug 2007 14:52:00 EDT

Washington Post columnist Marc Fisher reports that Roy Pearson, the D.C. administrative law judge who unsuccessfully sued his dry cleaners for $54 million over a misplaced pair of pants, may lose his job as a result of his bizarre legal obsession, which attracted nationwide anger and derision. The commission that is deciding whether to reappoint Pearson for another 10-year term apparently has concluded that "Pearson's extraordinary zeal in pursuing the case against the Chungs was so frivolous and embarrassing to the judicial system that it should be taken as evidence of his lack of judicial temperment." Fisher says the panel will soon send Pearson a letter to that effect. "As satisfying as it would be to see Pearson lose his post over his obsessive pursuit of the Chungs," he writes, "the downside for the owners of the dry cleaners is that with Pearson out of a job, their chances of ever recovering the court fees that Pearson has already been assessed and the attorney's fees that he may yet be ordered to pay would be severely diminished."

[Thanks to Jim Gannon for the tip.]

Bad Credit, Missed Payments, Imminent Foreclosure? No Problem!

jsullum@reason.com (Jacob Sullum) — Thu, 12 Jul 2007 08:06:00 EDT

How sympathetic should you be to people who took advantage of bargain variable-rate mortgages and are having trouble making their payments now that their rates have risen? That depends, in part, on how much of a hard-ass you are when it comes to expecting people to read the fine print and understand what they're getting into before they sign a contract. (Leave aside, for the moment, the possibility of outright fraud by lenders, for which there should be some sort of legal remedy.) But even if you feel bad for families facing foreclosure now that the prospect they didn't want to think about has come to pass, does it seem like a good idea to encourage such carelessness? That's what the state of Massachusetts is about to do, by refinancing the mortgages of families who might otherwise lose their homes. Under the $250 million plan, variable mortgages would be converted into 30-year loans at a fixed rate of 7.75 percent. When the value of a home has declined since it was purchased, the state will force lenders to take the loss, covering an amount equal to the current market price. Unless I'm missing something, such strong-arming probably won't leave lenders worse off than they would otherwise be, since if they foreclosed they would have to take a loss too. But the state will be putting taxpayers on the hook for defaults by homeowners who are disproportionately bad credit risks and have already shown they have trouble making payments. Worse, it will be encouraging other would-be home buyers not to worry much about the fine print, since if worse comes to worse the state will bail them out.

[Thanks to Michael Graham for the tip.]

How to Convert a Chicken Into a Blood-Spurting Pistol in One Easy Step

kmw@reason.com (Katherine Mangu-Ward) — Tue, 03 Jul 2007 14:30:00 EDT

Read a review of Planet Chicken, an "odd bird’s-eye view" of the poultry industry, from a man with a chip on his shoulder and bird blood in his eyes. After recounting his summer farm job, which included chicken mass murder (“If you pull the neck too hard and the head comes off, chickens become blood-spurting pistols”), Spiked's Mick Hume gets into it:

An unsentimental attitude towards farm animals is actually sensible and human. Those who have to work with them for a living have always been the most clear-eyed about these matters – at least until the advent of hobby farmers who give their hens names like ‘Chickpea’.

His swashbuckling wrap-up:

The notion that the wonders of modern farming amount to ‘industrialised savagery’ is the product of a conveyor belt of overfed dull ideas in our Chicken Little society, where people who should know better rush like headless chickens from one food and health panic to another (as epitomised by the bird flu scare about UK poultry). It reflects a culture that not only fears the future, but has also lost faith in the achievements of its own past, so that a great stride forward for human nutrition can be dismissed as ‘inhumanity to animals’.
In the past it was said that you could judge the level of a society by its treatment of its prisoners. Frederick Engels argued that we should judge it by the way it treated the female half of its population. But only a society up to its own neck in misanthropic crap would accept that civilisation be judged according to how it treats its bloody chickens.

Side note: An Amazon search for this book yields the suggestion to "See our Chicken Seasonings selection in Grocery." Awesome.

Read more about life down on the farm from Ron Bailey.

ATMs Turn 40, Celebrate by Charging Me $2 For My Own Darn Money

kmw@reason.com (Katherine Mangu-Ward) — Thu, 28 Jun 2007 13:46:00 EDT

Forget about the 40th anniversary of the Summer of Love, this week marks a far more important milestone. In 1967, the first ATM was installed outside Barclay's near London. This marvelous invention freed us from teller lines, relieved the strain on many mattresses, and blessedly reduced the number of human interactions necessary in any given day. ATMs dispense $25 billion a day worldwide, so celebrate by grabbing some cash of your own.

Read a neat paper on the effects of surcharges on ATM convenience, which Tyler Cowen dubbed the Anti-Market Paper of the Month a while back.

FYI: This fact came to you courtesy of the fine trivia night hosted at Dempsey's in Manhattan, but was confirmed by the fine folks at CNET.

If you prefer love to cold hard cash, check out this month's cover story about "how left-wing hippies and right-wing fundamentalists created a libertarian Ameria."

Suitable End to Suit Suit

jsullum@reason.com (Jacob Sullum) — Mon, 25 Jun 2007 13:29:00 EDT

"The plaintiff is not entitled to any relief whatsoever," Judge Judith Bartnoff has ruled in response to Roy Pearson's notorious $54 million lawsuit over a pair of temporarily misplaced suit pants. Pearson will have to pay his dry cleaners' court costs, may have to pay their legal fees, and could be out of his job as a D.C. administrative law judge. Unlike Pearson's transaction with the cleaners, the outcome of this case is pretty satisfying.

Idiot Investors?

kmw@reason.com (Katherine Mangu-Ward) — Mon, 25 Jun 2007 12:30:00 EDT

Two things happened on Thursday: 1) A Newsweek poll was released, showing that approval ratings for Congress have fallen to Bushian levels, with only 25 percent of Americans giving Congress their favor. 2) The Blackstone Group, an enormous private equity firm, got the OK to go public, bringing its market value to $40 billion. Like all private equity firms, Blackstone's income is taxed as capital gains at 15 percent, instead of the standard corporate tax rate of 35 percent.

It doesn't take a public relations consultant to figure out what happened next. (Actually, it probably took at least a dozen, but who's counting?) With a whiff of desperation in the air, Congress took a flying leap onto the Blackstone-bashing bandwagon.

Leading the charge was the once and future presidential candidate and Ohio Democratic Rep. Dennis Kucinich. He shot off a letter to the SEC (along with Rep. Henry Waxman (D-Ca.)) asking the agency to hold up the Blackstone IPO while Congress puzzled out the best way to demagogue the issue.

Kucinich and Waxman fretted that small investors could be harmed, simultaneously worrying that trading Blackstone on the stock market was "exposing unsophisticated investors" to risk, while "depriv[ing] them of control over the management of the funds and of many of the protections provided by fiduciary duties typically owed to them by management."

To review: Investors are too stupid to know when they're getting screwed, but also deserve a chance to control the "management of the funds." In fact, the biggest hit small investors are likely to take is if they buy Blackstone and then Congress tanks the price by imposing a specifically targeted tax.

Of course, Blackstone's largest and most recently raised private equity fund raised more than $9 billion from public pension funds. The government is happy to put its money in Schwartzman's hands, but heaven forbid the rest of us do so. We might be exposed to risk.

The litany of (occasionally conflicting) reasons why Blackstone shouldn't be allowed to continue with its nefarious plan is telling. It's not about principle, it's about scapegoating.

Sen. James Webb (D-Va.) has opted for the national security angle, fretting about the $3 billion in non-voting Blackstone stock that eChina purchased in May. The Washington Post reports that "Webb said he was worried that China could get access to sensitive technology being developed by companies Blackstone owns." (I wish that all companies handed out free samples of their products to investors, national security be damned. If they did, I'd head out to pick up some Hostess and Harley-Davidson stock right now.)

Rep. Barney Frank (D-Mass.) jumped in to demonstrate his tenuous grasp on finance: "There's so much money involved that I don't believe the tax change would retard the [Blackstone] IPO," said Barney Frank, noting that the Blackstone principals stand to reap billions from the offering. "And even if it did, there's no great social loss. This is a financial transaction."

Jesse Jackson inveighed against "Wall Street apartheid," claiming that the IPO doesn't benefit enough minority-owned firms, and that big firms are "spiraling up, but not out to be more inclusive."

To be fair, Blackstone co-founder and chief executive Stephen Schwarzman has been cruising for a bruising and he knows it. He's not exactly keeping a low profile, recently throwing himself an A-list birthday party featuring Donald Trump, Patti LaBelle, Barbara Walters, two Harlem choirs, a marching band, and Rod Stewart-some as entertainment, and some as guests. Mr. Schwarzman, who made $400 million in 2006, is set to own a stake in the Blackstone Group worth about $8 billion if the company's initial public offering goes ahead as planned. He started the firm with just $400,000 in seed money.

But Gilded Age comparisons aside, it has been a long time since America passed legislation as targeted at a single business as was being entertained on the Hill this week.

As anti-Blackstone rhetoric swirled, the Securities and Exchange Commission found itself in the uncomfortable position of being the last bulwark for rule of law and equal treatment this time around. Spokesman John Nester said the SEC could only delay approval if Blackstone's filings contained "material misstatements or omissions."

On Thursday, despite increasingly high-pitched pleas from Congress, the SEC gave its OK, and issued a brief statement saying, "Congress has created the world's strongest investor protection laws, which the commission has rigorously applied."

Two weeks ago, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa) introduced a bill that would force private equity firms to pay taxes at the 35 percent corporate rate if they went public as limited partnerships. The bill would give Blackstone a five-year grace period. A similar bill without the grace period was introduced in the House on Wednesday.

Schwartzman might find solace and strategy from Wal-Mart's Lee Scott, who fought off an effort by the Maryland legislature to pass a law requiring the company to spend 8 percent of its payroll on medical benefits. The bill technically covered all companies with more than 10,000 employees, but was targeted at Wal-Mart. The legislation was eventually overturned by a judge.

Raising taxes on private equity firms as a form of populist demagoguery is slimy, but more or less within the course of normal conduct. But to go after this one company, this one man, is inexcusable.

Katherine Mangu-Ward is an associate editor of Reason.

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